Wildfires, ride-sharing, community choice aggregation, and more bring increased regulatory risk.

The California Public Utilities Commission (CPUC) has tremendous influence on public utility regulation in California and beyond. The CPUC has the biggest staff of any state utilities commission and has issued fines and penalties well in excess of US$2 billion. The CPUC has been very active with new rulemakings and proceedings that will impact utilities and a range of industries. Because of the CPUC’s outsize influence, many of these new regulatory developments may well be adopted by public utilities or public service commissions in other states. Below are summaries of five key developments at the CPUC.

1. Wildfire Risks — Who Carries the Heavy Cost of Inverse Condemnation?

Until recently, scant attention was paid to the obscure and rarely invoked doctrine of utility inverse condemnation. Now, investor-owned utilities (IOUs), their investors and lenders, and California Governor Gavin Newsom are seeking to manage the fallout from increasingly frequent and harmful wildfires, and the resulting damages. The risks threaten the basic IOU business model. People ask: Where did this all come from?

Originally, inverse condemnation involved situations in which government agencies with the power of eminent domain damaged or diminished the value of private property. In 1999, California courts extended the doctrine to IOUs because they also have the power of eminent domain, in addition to a large customer base to spread out the costs of property damage. But for the next decade, the application of inverse condemnation was rare and limited in dollar value.

However, after massive wildfires in San Diego County in 2007, San Diego Gas & Electric Company (SDG&E) applied to the CPUC to recover uninsured costs from its ratepayers. The CPUC rejected SDG&E’s application because it found the costs to be non-recoverable. The CPUC determined that the fact that the costs were the result of the inverse condemnation doctrine was irrelevant because the CPUC has a statutory obligation to ensure that ratepayers only pay costs that are just and reasonable.

Since then, a steady stream of ever more severe wildfires has demonstrated the catch-22 that IOUs face between the courts and the CPUC. On the one hand, IOU facilities have been found to be a source of the fire in certain instances; once this finding is made, their civil liability for property damage is established. On the other hand, the CPUC may well conclude that the IOU should have found and corrected the condition that led to the start of the fire, leaving investors (rather than ratepayers) to absorb the costs. Utility insurers have taken note and either withdrawn from the marketplace or offered limited coverage at high premiums. Stopgap legislation (SB 901) was passed in September 2018, but it still left utilities exposed at both ends. Following massive additional wildfires that fall, PG&E Corporation (PG&E) filed Chapter 11 bankruptcy in January 2019.

The legislature and the Governor responded to the crisis with AB 1054, which became law in July 2019. It provided enough promise of utility viability in the form of a Wildfire Liability Fund (with ratepayer and shareholder funding) and protection against CPUC cost disallowance to avoid downgrading Southern California Edison (SCE) and SDG&E debt and to give PG&E a path out of bankruptcy. PG&E faces a deadline of June 30, 2020, to exit bankruptcy if it is to have access to the fund, and the CPUC must approve the plan.

2. CPUC Drives Utility Regulation of Ride-Sharing Companies

Transportation network carriers (TNCs), otherwise known as ride-sharing services, presented uncharted regulatory territory for the CPUC, as well as assertions of regulatory authority by city- and county-based taxi commissions. In 2013, the CPUC seized regulatory control from taxi authorities by classifying the services as TNCs, rather than taxis. Specifically, the CPUC defined a TNC as a company that uses a web-based program to connect passengers with drivers operating their personal vehicles, as opposed to commercial taxis.

The CPUC has taken several actions to exercise its jurisdiction over TNCs, including issuing a decision on background-check requirements for TNC providers, requiring TNCs to submit periodic reports of data about their businesses, and closely monitoring TNC service performance, especially in low-income areas and with regard to customer complaints.

3. Community Choice Aggregation Brings Renewable Power to the People and Away From IOUs

The CPUC first implemented community choice aggregation (CCA) in 2004. CCA is an energy service provider (ESP) program through which a city, a county, or a collection of cities and counties can qualify as an ESP. Once the relevant government body authorizes a CCA, then all electricity end users within that jurisdiction are considered part of the CCA unless they affirmatively opt out. Since 2010, CCAs have grown dramatically throughout California. To date there are 19 CCAs in operation in the state that are projected to serve over 2.5 million customers.

From the outset, the CPUC established the principle that the departure of load from electric utilities should not create any negative impact on those customers who continue to buy their power from the utility rather than from a CCA. This gave rise to the calculation of the indifference charge, which was assessed on every customer departing the utility and buying CCA power. While the indifference charge can be essential in determining whether a CCA’s business plan is viable or not, the prospect of annually recalculating the indifference charge is becoming unrealistic, due to the active debate between utilities, customers, CCAs, and their proponents. Nevertheless, CCA remains enormously popular, and the CPUC is now wrestling with how it should regulate these entities, which collectively may soon serve as many customers as the IOUs.

4. Public Records Act Requests Facilitate Public Scrutiny of Commission’s Utility Communications

The CPUC’s new effort to promptly comply with Public Records Act (PRA) requests has led to the release of communications between the CPUC and the utilities it regulates that were cited by ratepayer advocates and the press as evidence of the CPUC’s lack of independence. The CPUC had a long tradition of considering itself entitled to determine PRA compliance on its own terms, and often turned away requestors by noting that the utilities had designated the material as confidential. For its own documents, the CPUC regularly invoked investigatory and work product privilege. One of the categories of requests thus never produced to the public was that of documents referencing communications between CPUC commissioners and utility executives that might call into question compliance with the ex parte rules.

The CPUC’s ex parte rules have already received much attention as traps for the unwary. These rules are largely self-executing. In the past, if the utility considered a communication to be not reportable or not prohibited as an ex parte communication, that was the end of the matter. The 2010 San Bruno gas explosion set the PRA on a collision course with the ex parte rules. Plaintiffs’ counsel sued the CPUC and uncovered a trove of communications between PG&E and commissioners and staff raising compliance issues. In the aftermath, the CPUC issued a general order detailing how it would deal with PRAs in the future, deciding to err on the side of disclosure going forward. Now, utilities submitting information are required to identify the material they wish to keep confidential and provide support for this request on a sentence-by-sentence basis.

5. Regulators RAMP Up Risk Assessment in Utility Rate Cases

The CPUC recently issued a series of decisions aimed at formally incorporating quantitative, risk-based decision-making and safety risk assessment as part of energy utilities’ general rate cases (GRCs). Known as the Risk Assessment Mitigation Phase (RAMP), the process was born out of legislative criticism of the CPUC for its lack of safety oversight following the 2010 PG&E gas pipeline incident in San Bruno. RAMP requires energy utilities to articulate and prioritize the safety risks they face and propose control and mitigation measures that are quantifiably cost-effective. The CPUC’s Safety Enforcement Division (SED) reviews the RAMP filings of each utility; if approved, the RAMP analysis and programs are incorporated into the subsequent GRC. The utilities are also required to file periodic spending accountability reports to permit CPUC staff to compare risk mitigation costs authorized in a GRC to actual spending and make an assessment as to benefits achieved.

RAMP is a major new regulatory undertaking for both the utilities and CPUC staff. However, RAMP filings may also risks of their own. Utilities now will have to defend any spending deviations related to authorized safety mitigation and control measures. In addition, plaintiffs’ counsel may find the risk and mitigation filings useful when safety incidents occur. And if the risk is not identified, plaintiffs’ counsel may argue that shows indifference or negligence in safety planning.

Conclusion

The CPUC continues to find new ways to regulate the utilities that fall within its jurisdiction, as well as to expand that jurisdiction to new areas, all while the state legislature continues to place more authority with the CPUC. Latham & Watkins will continue to monitor the CPUC’s regulatory actions going forward.