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WEIL, GOTSHAL & MANGES LLP 

Stephen Karotkin (pro hac vice) 

(stephen.karotkin@weil.com) 

Ray C. Schrock, P.C. (pro hac vice) 

(ray.schrock@weil.com) 

Jessica Liou (pro hac vice) 

(jessica.liou@weil.com) 

767 Fifth Avenue 

New York, NY 10153-0119 

Tel: 212 310 8000 

Fax: 212 310 8007 

CRAVATH, SWAINE & MOORE LLP 

Paul H. Zumbro (pro hac vice) 

(pzumbro@cravath.com) 

Kevin J. Orsini (pro hac vice) 

(korsini@cravath.com) 

Omid H. Nasab (pro hac vice) 

(onasab@cravath.com) 

825 Eighth Avenue 

New York, NY 10019 

Tel: 212 474 1000 

Fax: 212 474 3700 

KELLER & BENVENUTTI LLP 

Tobias S. Keller (#151445) 

(tkeller@kellerbenvenutti.com) 

Jane Kim (#298192) 

(jkim@kellerbenvenutti.com) 

650 California Street, Suite 1900 

San Francisco, CA 94108 

Tel: 415 496 6723 

Fax: 650 636 9251 

Attorneys for Debtors and Debtors in Possession

MILBANK LLP 

Dennis F. Dunne (admitted pro hac vice) 

Samuel A. Khalil (admitted pro hac vice) 

55 Hudson Yards 

New York, New York 10001-2163 

Telephone: (212) 530-5000 

Facsimile: (212) 530-5219 

and 

Gregory A. Bray (SBN 115367) 

Thomas R. Kreller (SBN 161922) 

MILBANK LLP 

2029 Century Park East, 33rd Floor 

Los Angeles, CA 90067 

Telephone: (424) 386-4000 

Facsimile: (213) 629-5063

Attorneys for the Official Committee

of Unsecured Creditors

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

In re: 

PG&E CORPORATION, 

 - and – 

PACIFIC GAS AND ELECTRIC COMPANY, 

Bankruptcy Case No. 19-30088 (DM) 

Chapter 11 

(Lead Case) (Jointly Administered) 

JOINT BRIEF OF DEBTORS AND THE 

OFFICIAL COMMITTEE OF UNSECURED

CREDITORS AND SUPPLEMENTAL 

STATEMENT OF THE PG&E 

SHAREHOLDERS CONCERNING THE 

APPLICABILITY OF INVERSE 

CONDEMNATION 

Date: November 19, 2019

Time: 10:00 a.m. 

Place: United States Bankruptcy Court 

 Courtroom 17, 16th Floor 

 San Francisco, CA 94102 

Debtors. 

 Affects PG&E Corporation 

 Affects Pacific Gas and Electric Company 

Affects both Debtors 

* All papers shall be filed in the Lead Case, No. 19-

30088 (DM). 

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PG&E Corporation (“PG&E Corp.”) and Pacific Gas and Electric Company (the 

“Utility”), as debtors and debtors in possession (collectively, “PG&E” or the “Debtors”) in the abovecaptioned chapter 11 cases (the “Chapter 11 Cases”) hereby submit this Brief on the Applicability of 

Inverse Condemnation. As set forth herein, as a matter of law the application of inverse condemnation 

to investor-owned utilities such as PG&E is inconsistent with both California Supreme Court 

precedent and the Takings and Due Process Clauses of the U.S. Constitution. In support of this 

submission, the Debtors respectfully submit the Declaration of Kevin J. Orsini (the “Orsini 

Declaration”), filed contemporaneously herewith. The Debtors reserve the right to raise other 

defenses to inverse condemnation as a part of the estimation proceedings before the District Court, in 

connection with the claims objection process or otherwise. 

The Official Committee of Unsecured Creditors (the “UCC”) joins in this submission 

and reserves the right to participate in oral argument thereon, including by responding to any 

arguments made in opposition. 

The PG&E Shareholders set forth their separate statement herein. 

A proposed form of order granting the relief requested herein is annexed hereto as 

Exhibit A (the “Proposed Order”). 

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TABLE OF CONTENTS 

TABLE OF AUTHORITIES ............................................................................................................... iv 

MEMORANDUM OF POINTS AND AUTHORITIES .......................................................................1 

I. PRELIMINARY STATEMENT ...............................................................................................1 

II. BACKGROUND .......................................................................................................................4 

A. The Regulation of Private Utilities in California ...........................................................4 

B. The CPUC Has Stated That Private Utilities Cannot Automatically Raise 

Rates To Recover Inverse Condemnation Costs ............................................................5 

C. The 2017 and 2018 Wildfires ........................................................................................7 

D. Procedural History .........................................................................................................8 

III. ARGUMENT .............................................................................................................................9 

A. Applicable Law ..............................................................................................................9 

B. Inverse Condemnation Claims Are Unenforceable Against PG&E Because 

Inverse Condemnation Should Not Be Extended to Private Utilities Under 

California State Law. ...................................................................................................10 

1. Under Existing California Supreme Court Precedent, Inverse 

Condemnation Does Not Apply to PG&E. ......................................................10 

2. Lower and Intermediate California Court Decisions Do Not Compel a 

Different Result. ...............................................................................................13 

C. Inverse Condemnation Claims Are Unenforceable Because Application of 

Inverse Condemnation to Private Utilities Violates the United States 

Constitution. .................................................................................................................17 

1. The Application of Inverse Condemnation to PG&E Violates the 

Takings Clause of the Fifth Amendment of the United States 

Constitution. .....................................................................................................17 

2. The Application of Inverse Condemnation to PG&E Violates PG&E’s 

Substantive Due Process Rights.......................................................................21 

IV. CONCLUSION ........................................................................................................................23 

STATEMENT OF PG&E SHAREHOLDERS ...................................................................................24 

I. THE CALIFORNIA SUPREME COURT WILL CONCLUDE THAT LOWER COURTS 

ERRED IN APPLYING INVERSE CONDEMNATION TO INVESTOR-OWNED 

UTILITIES ...............................................................................................................................25 

II. THE CALIFORNIA SUPREME COURT WILL CONSIDER THE DISASTROUS 

CONSEQUENCES OF THE ERRONEOUS LOWER COURT DECISIONS ......................28 

A. The Erroneous Lower Court Decisions Significantly Raise The Cost Of Capital For 

California’s Investor-Owned Utilities..........................................................................29 

B. Increased Cost Of Capital For California’s Investor-Owned Utilities Harms 

The State In Critical Ways. ..........................................................................................32 

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TABLE OF AUTHORITIES 

 Page(s) 

Cases 

Action Apartment Ass’n v. Santa Monica Rent Control Bd., 509 F.3d 1020 (9th Cir. 

2007) ........................................................................................................................................21, 22 

Albers v. County of Los Angeles, 62 Cal.2d 250 (1965) ............................................................1, 10, 11 

Am. Tower Corp. v. City of San Diego, 763 F.3d 1035 (9th Cir. 2014) ..........................................9, 16 

Anchor Lighting v. S. California Edison Co., 142 Cal.App.4th 541 (2006) ..........................................5 

Bacich v. Bd. of Control of California, 23 Cal.2d 343 (1943) .............................................................11 

Baker v. Burbank-Glendale-Pasadena Airport Auth., 39 Cal.3d 862 (1975) ................................10, 12 

Barham v. Southern California Edison Co., 74 Cal.App.4th 744 ...........................................13, 14, 15 

Belair v. Riverside Cty. Flood Control Dist., 47 Cal.3d 550 (1988) .............................................11, 14 

Bd. of Regents v. Roth, 408 U.S. 564 (1972) .......................................................................................22 

City of Oroville v. Superior Court, 250 Cal.Rptr.3d 803 (2019) .........................................................11 

Customer Co. v. City of Sacramento, 10 Cal.4th 368 (1995) ..............................................................11 

Duquesne v. Light Co. Barasch, 488 U.S. 299 (1989) .........................................................................18 

E. Enters. v. Apfel, 524 U.S. 498 (1998) ..............................................................................................18 

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) ........................................................................................9 

Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591 (1944) ........................................................5 

Gay Law Students Assn. v. Pac. Tel. and Tel. Co., 24 Cal.3d 458 (1979) .....................................15, 16 

Gutierrez v. Cty. of San Bernardino, 198 Cal.App.4th 831 (2011) ...............................................13, 15 

Harrison v. PG&E Corp., No. CGC17563108, 2018 WL 2447104 (Cal. Super. Ct. 

May 21, 2018) ............................................................................................................................8, 15 

Holtz v. Superior Court, 3 Cal.3d 296 (1970) ...........................................................................1, 10, 11 

In re Basave De Guillen, 604 B.R. 826, 836 (B.A.P. 9th Cir. 2019) ...................................................13 

In re Foamex Int’l, Inc., 491 B.R. 100, 106 (Bankr. D. Del. 2013).....................................................13 

Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005)................................................................18, 21, 22 

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Locklin v. City of Lafayette, 7 Cal. 4th 327 (1994) ..............................................................................11 

McAlister v. Essex Prop. Tr., 504 F. Supp. 2d 903 (C.D. Cal. 2007) ....................................................8 

Mercury Cas. Co. v. City of Pasadena, 14 Cal.App.5th 917, 925-26 (2017) ......................................13 

Moreland Inv. Co. v. Superior Court, 106 Cal.App.3d 1017, 1022-23 (1980) ...................................16 

N.Y. Times Co. v. Sullivan, 376 U.S. 254 (1964) .................................................................................17 

Orkin v. Taylor, 487 F.3d 734 (9th Cir. 2007) .......................................................................................9 

Pac. Tel. & Tel. Co. v. Pub. Utils. Comm’n, 62 Cal.2d 634 (1965) ......................................................5 

Pacific Bell Tel. Co. v. S. Cal. Edison Co., 208 Cal.App.4th 1400 (2012) ...............................8, 13, 14 

Pasillas v. Agric. Labor Relations Bd., 156 Cal.App.3d 312, 348 (1984)...........................................16 

Penn. Coal Co. v. Mahon, 260 U.S. 393 (1922) ..................................................................................19 

Ponderosa Tel. Co. v. Pub. Utils. Comm’n, 197 Cal.App.4th 48 (2011) ............................................18 

Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15 (2000) .....................................................................9 

S. Cal. Edison Co. v. Pub. Utils. Comm’n, 20 Cal.3d 813 (1978) .........................................................5 

Shelley v. Kraemer, 334 U.S. 1 (1948) ................................................................................................17 

Sinaloa Lake Owners Ass’n v. City of Simi Valley, 864 F.2d 1475 (9th Cir. 1989) ............................22 

State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003) .....................................................21 

The Estate of Betty Beauchamp v. Dorothy Beauchamp Campbell, No. BC419839, 

2010 WL 7366697 (Cal. Super. June 23, 2010) ..............................................................................8 

Varjabedian v. City of Madera, 20 Cal.3d 285 (1977) ........................................................................11 

Statutes & Rules 

28 U.S.C. § 157(b)(2) ............................................................................................................................3 

Bankruptcy Code Section 502(b)(1) ......................................................................................................9 

Cal. Civ. Code, § 3333 .........................................................................................................................23 

Cal. Pub. Util. Code, §§ 701-853, 1001-02 and 2101 ............................................................................4 

California’s Torts Claims Act, Gov’t Code §§ 810 et seq. ............................................................13, 23 

Other Authorities 

Butte Fire Cases, No. JCCP4853, 2018 WL 3371780 (Cal. Super. Ct. Apr. 26, 2018) ..............8, 9, 15 

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Cal. Const., Art. 1, § 19 ...........................................................................................................10, 11, 17 

Cal. Const., Art. XII, §§ 3, 6 ..........................................................................................................4, 5, 6 

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MEMORANDUM OF POINTS AND AUTHORITIES 

I. PRELIMINARY STATEMENT 

Under the doctrine of inverse condemnation, a private party is entitled to compensation from 

a public entity if its property is “damaged” for public use. The California Supreme Court has 

consistently explained that the “underlying purpose of [inverse condemnation] is . . . to socialize the 

burden . . . that should be assumed by society.” Holtz v. Superior Court, 3 Cal.3d 296, 303 (1970)

(internal citations and quotation marks omitted). Inverse condemnation is a strict liability doctrine 

that applies regardless of negligence and thus serves as a form of social insurance, intended to be 

financed by the general public, based on the premise that the costs of damage from a public good 

“can better be absorbed, and with infinitely less hardship, by the taxpayers as a whole.” Albers v. 

County of Los Angeles, 62 Cal.2d 250, 263 (1965). In formulating the doctrine of inverse 

condemnation, the California Supreme Court was “most fundamentally influenced by th[e] ‘loss 

distribution’ premise”. Holtz, 3 Cal.3d at 304. 

The way that the inverse condemnation doctrine is supposed to work is thus very simple: if 

members of the community suffer a loss from a public improvement, those individuals are 

compensated for the loss by the community as a whole. The idea is that if the entire community 

benefits from an improvement (such as an electric grid), then it is not fair for a subset of those 

people whose property is taken or damaged by that improvement (such as by a fire caused by that 

grid) to bear a disproportionate share of the cost for that improvement. Inverse condemnation was 

developed to facilitate the socialization of losses through the public entities that construct, own and 

operate the public improvements at issue. The true public entity, such as a municipality or 

government utility, serves merely as a conduit for loss-spreading. Although the public entity pays 

the inverse condemnation damages to the impacted individuals, it does not itself bear the loss. 

Instead, it socializes those damages by recouping them from the public at large through taxes or 

utility rate increases. 

To state the most fundamental point, PG&E, an investor-owned utility, is not a public entity. 

It cannot levy taxes. It cannot levy special assessments. And, unlike a true public utility that is not 

subject to any regulatory limits on its ability to raise rates, PG&E does not control the rates it can 

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charge its customers. Instead, PG&E’s ability to raise rates and spread inverse losses is expressly 

limited by the authority of the California Public Utilities Commission (“CPUC”). Critically, the 

CPUC made clear in 2017 that whether a private utility has incurred costs related to inverse 

condemnation is not relevant to whether that utility will be able to socialize those losses through 

rate increases. In other words, the CPUC has plainly stated that private utilities such as PG&E are 

not guaranteed any ability to spread inverse condemnation losses and may be left bearing the 

financial consequences themselves. This risk that the utility will be precluded from spreading 

inverse losses amongst the benefitted public led directly to these Chapter 11 Cases. 

The whipsaw now facing California’s investor-owned utilities is untenable. On the one hand, 

certain lower state court decisions discussed below have extended inverse condemnation to investorowned utilities on the express assumption that the CPUC would allow private utilities to shift inverse 

condemnation costs to the public through increased rates. On the other hand, the CPUC has 

explicitly rejected that critical assumption. It is therefore no surprise that there is a broad consensus 

that inverse condemnation law in California is broken: 

 The Governor’s Strike Force regarding wildfires and climate change found that “[w]hile a 

utility faces strict liability for all damages caused by its equipment, it can recover those 

costs through rates only by proving to the CPUC that its conduct was prudent. This 

regime—strict liability for wildfire damage coupled with uncertain ability to recover 

those damages in rates—increases the risk of bankrupt utilities, which in turn drives up 

costs for consumers, threatens fair recoveries for fire victims, undermines the state’s 

ability to mitigate and adapt to climate change, and creates uncertainty for utility 

employees and contractors.” (Wildfires and Climate Change: California’s Energy 

Future: A Report from Governor Newsom’s Strike Force (the “Strike Force Report”), 

dated April 12, 2019 at 28, attached as Orsini Decl. Ex. A.) 

 CPUC Commissioner Rechtschaffen has stated that “the doctrine of inverse 

condemnation, as its [sic] been developed by the courts and applied to public utilities, 

may be worth re-examining in a sense that the courts applying the cases to public utilities 

have done so without really grappling with the salient difference between public and 

private utilities, which is that there’s no guaranty that . . . private utilities can recover the 

cost from their ratepayers, so this is an issue that the legislature and the courts may wish 

to examine and may be called on to examine in the future”. (Nov. 30, 2017 CPUC Hr’g 

(“CPUC Hearing”) at 4, attached as Orsini Decl. Ex. B.) 

 Former CPUC President and Commissioner Picker and Commissioner Guzman Aceves 

have expressed similar concerns: “the logic for applying inverse condemnation to 

utilities—costs will necessarily be socialized across a large group rather than borne by a 

single injured property owner . . . is unsound. . . . [T]he application of inverse 

condemnation to utilities in all events of private property loss [fails] to recognize 

important distinctions between public and private utilities and that the financial pressure 

on utilities from the application of inverse condemnation may lead to higher rates” 

resulting from “increase[s] in the cost of capital and the expense associated with 

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insurance.” (Concurrence of President and Commissioner Michael Picker and 

Commissioner Martha Guzman Aceves on Item 40, Decision Regarding Application of 

(“SDG&E”) for Authorization to Recover Costs Related to the 2007 Southern California 

Wildfires Recorded in the Wildfire Expense Memorandum Account (“WEMA”) (the 

“CPUC Concurrence”) at 5-6, attached as Orsini Decl. Ex. C.) 

These statements from the California Governor and the CPUC Commissioners are a clear invitation 

to this Court to fix the misapplication of the law of inverse condemnation by lower California courts. 

This Court has the authority to disallow claims based on inverse condemnation as a matter of 

law. 28 U.S.C. § 157(b)(2) (“Core proceedings include, but are not limited to . . . allowance or 

disallowance of claims against the estate.”) The applicability of inverse condemnation materially 

impacts the value of claims arising out of the 2017 and 2018 Wildfires because, among other things, 

without strict liability, a claimant would have to prove that PG&E was negligent. In determining 

whether claims for inverse condemnation should be disallowed as a matter of law, this Court must 

look to state law. If the claim cannot survive under state law, it cannot be allowed. Where, as here, 

the California Supreme Court has not ruled on the issue presented, this Court must predict what the 

state’s highest court would say. The fundamental guarantee that a public entity can spread inverse 

condemnation losses across the entire community has been present in every single inverse 

condemnation case ever decided by the California Supreme Court. That guarantee is absent here. 

As a result, this Court will be unable to square the nearly 100 years of California Supreme Court 

jurisprudence espousing cost-spreading as the sine qua non of the doctrine with the continued 

application of inverse condemnation to a private utility such as PG&E. This is particularly the case 

following the CPUC’s controversial 2017 decision. 

In addition, the application of inverse condemnation to PG&E is unconstitutional. Because 

PG&E has “no guaranty” that it can spread any losses it is forced to pay as a result of inverse 

condemnation claims, the application of inverse condemnation to PG&E is nothing more than the 

transfer of private property from one private entity (PG&E) to another (the inverse plaintiff) without 

any compensation, let alone just compensation. This uncompensated taking of PG&E’s property 

violates the Fifth Amendment of the United States Constitution (as incorporated against the states by 

the Fourteenth Amendment) and the California Constitution. In the alternative, the application of 

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inverse condemnation to PG&E would be arbitrary and irrational, and violates PG&E’s substantive 

due process rights protected by the Fourteenth Amendment and the California Constitution. 

In sum, inverse condemnation is a strict liability doctrine that was developed by the 

California Supreme Court to spread losses among the community at large regardless of whether a 

public entity has been negligent. It works in the context of public entities because they are not left 

bearing the losses themselves. It does not work with respect to an investor-owned utility, which is 

most aptly demonstrated by the fact that the Debtors are in Chapter 11. A ruling that inverse 

condemnation does not apply to investor-owned utilities is compelled by the existing California 

Supreme Court doctrine.1 

II. BACKGROUND 

A. The Regulation of Private Utilities in California 

PG&E is a privately owned utility. (Amended Declaration of Jason P. Wells (Dkt. 263) 

(“Wells Decl.”) 7:9-10.) PG&E provides natural gas and utility services to approximately 16 million 

customers, including both individuals and businesses. (See id. at 7:11-12.) PG&E raises the capital 

necessary to fund ongoing operations largely by receiving payment for the provision of its electric 

and gas services. (See id. at 7:25-27.) In the ordinary course of business, PG&E must also raise 

significant amounts of capital to finance investments needed to provide safe and reliable gas and 

electric service to its customers. (See id. at 3:23-4:2; id. at 8:8-16.) PG&E has typically turned to 

the debt and equity markets to raise the additional capital needed for such expenditures. (Id. at 8:8-

16.) 

In California, private utilities such as PG&E are regulated by the CPUC. See Cal. Const., 

Art. XII, § 3; Cal. Pub. Util. Code, §§ 701-853, 1001-02 and 2101. (Wells Decl. 7:20-22.) The 

CPUC provides service and safety standards by which the utilities must abide, oversees markets to 

inhibit anti-competitive activity, resolves complaints by customers and, importantly, sets customer 

1

 To be clear, a ruling that inverse condemnation does not apply to investor-owned utilities will have 

no impact on the Debtors’ potential liability under negligence theories. To the extent the Debtors (or 

any other investor-owned utility) negligently start a fire, they will be held liable regardless of the ruling 

on this submission, which addresses only the strict liability doctrine that applies regardless of fault. 

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rates. See Anchor Lighting v. S. California Edison Co., 142 Cal.App.4th 541, 547-48 (2006). The 

CPUC does not regulate publicly owned utilities, i.e., those operated by government agencies. 

The United States Supreme Court has long recognized that a public utility’s rates must 

“enable the company to operate successfully, to maintain its financial integrity, to attract capital, and 

to compensate its investors for the risks assumed.” Fed. Power Comm’n v. Hope Nat. Gas Co., 320 

U.S. 591, 605 (1944). The CPUC rate-setting process is intended to serve those purposes by 

allowing private utilities to recover operating expenses, capital costs and a reasonable rate of return 

on invested capital. Thus, a utility is entitled to recover its expenses on a dollar-for-dollar basis as 

part of its rates, along with a reasonable rate of return on the value of its property devoted to public 

use. S. Cal. Edison Co. v. Pub. Utils. Comm’n, 20 Cal.3d 813, 818-19 (1978); Pac. Tel. & Tel. Co. 

v. Pub. Utils. Comm’n, 62 Cal.2d 634, 644-45 (1965). 

Private utilities such as PG&E cannot unilaterally raise their rates. When a private utility like 

PG&E wants to raise its rates because, among other reasons, it has incurred costs related to its 

provision of electric service, it must apply to the CPUC to approve a rate increase after adjudication 

in an administrative proceeding. See Cal. Const., Art. XII, §§ 3, 6. In evaluating whether a rate 

change should be approved, the CPUC applies a “prudent manager” standard, under which it 

examines whether the costs incurred are “reasonable.” (See Decision Denying Application of 

[SDG&E] for Authorization to Recover Costs Related to the 2007 Southern California Wildfires 

Recorded in the [WEMA] (the “SDG&E Decision”) at 10, attached as Orsini Decl. Ex. D.) If the 

CPUC deems the costs unreasonable, it will not approve the increase. (Id.) Until recently, private 

utilities assumed that if they incurred costs related to strict inverse condemnation liability, those 

costs could be recouped via rate increases, which would be approved by the CPUC. 

B. The CPUC Has Stated That Private Utilities Cannot Automatically Raise Rates 

To Recover Inverse Condemnation Costs 

A decade before the wildfires that gave rise to these Chapter 11 Cases, several wildfires 

spread throughout portions of Southern California. After the fires, the California Department of 

Forestry and Fire Protection (“Cal Fire”) and the CPUC’s investigative division attributed the 

ignition of three of these wildfires (the “2007 wildfires”) to electrical facilities owned and operated 

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by SDG&E. (SDG&E Decision at 2.) In connection with those wildfires, SDG&E established a 

WEMA to track costs associated with the three fires.2 The WEMA account grew to $2.4 billion in 

costs and legal fees incurred primarily to resolve third-party inverse condemnation claims arising 

from the 2007 wildfires. (Id. at 3.) In September 2015, SDG&E applied to the CPUC to recover, 

through rates, $379 million of the WEMA account for unreimbursed costs that SDG&E paid due to 

inverse condemnation. (Id.) 

On August 22, 2017, the CPUC Administrative Law Judges issued a proposed decision 

denying SDG&E’s application. On November 30, 2017, the CPUC issued a final decision, denying 

in full SDG&E’s application for recovery of costs related to the 2007 wildfires. (See SDG&E 

Decision.) In the decision, the CPUC applied its administratively created “prudent manager” 

standard, under which it examines whether costs incurred are “reasonable.” (Id. at 65.) The CPUC 

also announced for the first time that the principles of inverse condemnation are not relevant to rate 

setting because the CPUC has exclusive jurisdiction over cost recovery: “Inverse Condemnation 

principles are not relevant to a Commission reasonableness review under the prudent manager 

standard. . . . Even if SDG&E were strictly liable, we see nothing in the cited case law that would 

supersede this Commission’s exclusive jurisdiction over cost recovery/cost allocation issues 

involving Commission regulated utilities.” (Id.) 

Concurrently with the SDG&E decision, the CPUC Commissioners held a hearing in which 

they affirmed the CPUC’s policy but called upon the courts and legislature to reconsider the doctrine 

of inverse condemnation. Commissioner Rechtschaffen stated: 

“[I]t is worth noting that the doctrine of inverse condemnation, as its [sic] been developed by 

the courts and applied to public utilities, may be worth re-examining in a sense that the courts 

applying the cases to public utilities have done so without really grappling with the salient 

difference between public and private utilities, which is that there’s no guaranty that private 

utilities can recover the cost from their ratepayers, so this is an issue that the legislature and 

the courts may wish to examine and may be called on to examine in the future. But having 

said that, it doesn’t change our obligation to rule that the utility can’t recover unless they 

acted prudently . . . .” 

2

 A WEMA is a tracking mechanism used by a regulated utility to segregate costs that it may later seek 

to recover through rates in an application to the CPUC. 

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(CPUC Hearing at 4) (emphasis in original). Other Commissioners agreed. For example, 

Commissioner Peterman remarked: “I also appreciate the revisions to the proposed decision, 

clarifying that the legal doctrine of inverse condemnation does not displace the Commission’s 

reasonableness review of whether SDG&E was a prudent manager in this case.” (Id. at 3.) On 

December 26, 2017, Former President and Commissioner Picker and Commissioner Guzman Aceves 

filed a joint concurrence where they directly urged the courts to reconsider the rationale for applying 

inverse condemnation to private utilities, specifically because “the logic for applying inverse 

condemnation to utilities—costs will necessarily be socialized across a large group rather than borne 

by a single injured property owner, regardless of prudence on the part of the utility—is unsound.” 

(CPUC Concurrence at 5.) The Commissioners also stated in their concurrence that “the application 

of inverse condemnation to utilities in all events of private property loss [fails] to recognize 

important distinctions between public and private utilities and that the financial pressure on utilities 

from the application of inverse condemnation may lead to higher rates” resulting from “increase[s] 

in the cost of capital and the expense associated with insurance.” (Id. at 6.) As noted in the 

Governor’s Strike Force Report, it can lead to increased risk of bankrupt utilities. (Strike Force 

Report at 28.) 

C. The 2017 and 2018 Wildfires 

In 2017 and 2018, a series of catastrophic wildfires raged across Northern California. On 

October 8 and 9, 2017, multiple wildfires began at different locations throughout Northern 

California. Fanned by extreme winds, these fires spread at a catastrophic pace and ultimately 

impacted at least a dozen counties (the “North Bay Fires”). These fires were the result of a 

confluence of unprecedented weather events, including: five years of record-breaking drought and 

bark beetle infestations that led to an extreme tree mortality crisis; exceedingly heavy rainfall during 

the winter of 2016-2017, causing new vegetation growth; the hottest summer on record in 2017 for 

the Northern California area, killing and drying that new growth to create additional fuel; extremely 

low humidity throughout the Northern California area; and high-wind events, before the first rains 

had come through to soak the vegetation and ground. Similar conditions contributed to the rapid 

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spread of another devastating fire which began on November 8, 2018, and became the largest 

wildfire in the state’s history (the “Camp Fire”).3 

D. Procedural History 

Prior to PG&E filing for chapter 11 protection, thousands of individuals sued PG&E seeking 

compensation for damage incurred during the 2015 Butte Fire, the 2017 North Bay Fires and the 

2018 Camp Fire. The plaintiffs in those cases alleged that PG&E was liable under a theory of 

inverse condemnation. 

On May 18, 2018, PG&E filed a demurrer in the North Bay Fires coordinated proceeding in 

San Francisco Superior Court on the basis that inverse condemnation should not apply to private 

utilities for the reasons set forth herein and that, if it did apply, it violated the Takings and Due 

Process Clauses of the United States Constitution. Harrison v. PG&E Corp., No. CGC17563108, 

2018 WL 2447104, at *2-4 (Cal. Super. Ct. May 21, 2018). The court overruled PG&E’s demurrer, 

primarily on the ground that it was bound by a California Court of Appeal decision in Pacific Bell 

Telephone Co. v. Southern California Edison Co., 208 Cal.App.4th 1400 (2012), a case decided 

before the CPUC rejected automatic loss-spreading under inverse. Harrison, 2018 WL 2447104, at 

*3-4. As an interlocutory order, the North Bay Fire decision was not appealable as of right. PG&E 

petitioned the California Court of Appeal and California Supreme Court for leave to appeal. Both 

petitions were denied.4

In the state court coordinated proceeding concerning the 2015 Butte Fire, PG&E filed a 

similar motion for a legal determination that inverse condemnation did not apply to PG&E. See 

Butte Fire Cases, No. JCCP4853, 2018 WL 3371780, at *10 (Cal. Super. Ct. Apr. 26, 2018). On 

April 26, 2018, the Superior Court denied PG&E’s motion, similarly noting that it was bound by the 

3

 Also at issue in this case are inverse condemnation claims related to a wildfire that started on 

November 9, 2015, in Amador County, California (the “Butte Fire”). 

4

 As interlocutory orders subject to appeal, the North Bay Fire and Butte Fire decisions are not final 

and do not have preclusive effect on this Court. McAlister v. Essex Prop. Tr., 504 F. Supp. 2d 903, 

911 (C.D. Cal. 2007) (“A judgment is not final [for the purposes of collateral estoppel] while there is 

time to appeal or while an appeal is pending.”); The Estate of Betty Beauchamp v. Dorothy Beauchamp 

Campbell, No. BC419839, 2010 WL 7366697 (Cal. Super. June 23, 2010) (finding “no case in which 

collateral estoppel has been applied to a denial of summary adjudication/judgment”). 

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California Court of Appeal decisions in Pacific Bell and Barham. Id. As an interlocutory order, the 

Butte Fire decision was not appealable as of right. PG&E petitioned the California Court of Appeal 

and California Supreme Court for leave to appeal, but those petitions were also denied. 

There has been no briefing or decision regarding inverse condemnation in the Camp Fire 

coordinated proceeding in San Francisco Superior Court. 

Whether PG&E, as an investor-owned utility, may be held strictly liable for inverse 

condemnation is a threshold legal issue that has a material impact on the District Court’s estimation 

of the Wildfire Claims. In the Court’s recommendation to withdraw the reference of the Section 

502(c) of Title 11 of the United States Code (the “Bankruptcy Code”) estimation of unliquidated 

claims, the Court ruled that it would retain the inverse determination issue to assist the District Court 

in its estimation of the Wildfire Claims. (See Dkt. 3648 at 8 n.4.) Given the significance of this 

critical issue, the Court ordered the parties to submit briefs prior to commencement of the estimation 

proceedings. 

III. ARGUMENT 

A. Applicable Law 

Under Bankruptcy Code Section 502(b)(1), a bankruptcy court shall not allow a claim if it “is 

unenforceable against the debtor and property of the debtor, under any agreement or applicable law”. 

11 U.S.C. § 502(b)(1). Whether inverse condemnation applies to a private utility debtor such as 

PG&E is a matter of state law. Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 20 (2000) (“The 

‘basic federal rule’ in bankruptcy is that state law governs the substance of claims . . . .”). When 

deciding matters of state law, federal courts must apply “the law of the state” as “declared by its 

Legislature in a statute or by its highest court in a decision”. Erie R. Co. v. Tompkins, 304 U.S. 64, 

78 (1938). If the law is unclear, federal courts must predict what the highest court in the state would 

say. Orkin v. Taylor, 487 F.3d 734, 741 (9th Cir. 2007) (“If the state’s highest appellate court has 

not decided the question presented, then we must predict how the state’s highest court would decide 

the question.”). Federal courts may reject judgments of state appellate courts or other lower state 

courts if they are “convinced by other persuasive data that the highest court of the state would decide 

otherwise”. Am. Tower Corp. v. City of San Diego, 763 F.3d 1035, 1047 (9th Cir. 2014) (concluding 

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that “the text of the [relevant] statute is ‘persuasive data’ that the California Court of Appeal 

misinterpreted” the statute). 

Critically, the California Supreme Court has never ruled on the key question presented in this 

submission: whether inverse condemnation applies to an investor-owned utility, particularly given 

the CPUC’s confirmation that there is no guarantee of cost recovery. To the contrary, as described 

below, the cases that have been decided by the California Supreme Court confirm that, if presented 

with this question, existing precedent would compel a finding that inverse condemnation does not 

apply to investor-owned utilities such as PG&E. 

B. Inverse Condemnation Claims Are Unenforceable Against PG&E Because 

Inverse Condemnation Should Not Be Extended to Private Utilities Under 

California State Law. 

Under California law, only a public entity is subject to inverse condemnation. See Baker v. 

Burbank-Glendale-Pasadena Airport Auth., 39 Cal.3d 862, 866-67 (1975) (holding that a “public 

entity” is liable for inverse condemnation when “damage result[s] from an exercise of governmental 

power while seeking to promote the general interest”) (quotation omitted). The California Supreme 

Court has never held that a private utility such as PG&E is a public entity for purposes of an inverse 

condemnation claim. Because the CPUC’s new policy restricts the ability of private utilities to 

spread inverse condemnation costs among their customers, PG&E cannot be treated as a public 

entity for inverse condemnation purposes. 

1. Under Existing California Supreme Court Precedent, Inverse 

Condemnation Does Not Apply to PG&E. 

As the California Supreme Court has articulated, the “underlying purpose” of inverse 

condemnation is to distribute losses suffered by an individual due to a public improvement 

throughout the community that benefits from that improvement. Holtz, 3 Cal.3d at 303; Albers, 62 

Cal.2d at 263. The California Supreme Court has reiterated this cost-spreading rationale for the 

imposition of inverse condemnation liability for more than 75 years,5 including as recently as earlier 

this year: 

5

 Article I, section 19 of the California Constitution sets forth the State’s eminent domain provision 

and provides that “[p]rivate property may be taken or damaged for a public use and only when just 

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 “[T]he policy underlying [inverse condemnation] is to distribute throughout the 

community the loss inflicted upon the individual by the making of public improvements.” 

Bacich v. Bd. of Control of California, 23 Cal.2d 343, 350 (1943). 

 “[T]he policy underlying [inverse condemnation] is to distribute throughout the 

community the loss inflicted upon the individual by the making of the public 

improvements.” Varjabedian v. City of Madera, 20 Cal.3d 285, 296 (1977) (citation and 

quotation omitted). 

 “The relevant ‘policy’ basis of article I, section [19] . . . is ‘to distribute throughout the 

community the loss inflicted upon the individual by [the public enterprise].’” Customer 

Co. v. City of Sacramento, 10 Cal.4th 368, 409 (1995). 

 “[T]he underlying purpose of our constitutional provision in inverse—as well as 

ordinary—condemnation is ‘to distribute throughout the community the loss inflicted 

upon the individual . . .’” Belair v. Riverside Cty. Flood Control Dist., 47 Cal.3d 550, 

558 (1988). 

 “[T]he underlying purpose of our constitutional provision in inverse—as well as 

ordinary—condemnation is ‘to distribute throughout the community the loss inflicted 

upon the individual by the making of public improvements.’” Locklin v. City of 

Lafayette, 7 Cal. 4th 327, 365 (1994).

 The purpose of inverse condemnation is to “distribute throughout the community the 

losses resulting from the public improvement.” City of Oroville v. Superior Court, 250 

Cal.Rptr.3d 803, 811 (2019).

Every inverse condemnation defendant in the seminal cases that have developed the State’s 

inverse condemnation law was a government or other public entity that had the unilateral power to 

fund inverse condemnation liability through compulsory taxation, rates or fees. See, e.g., Bacich, 

23 Cal.2d at 345 (Board of Control, California Toll-Bridge Authority and State Department of Public 

Works); Customer Co., 10 Cal.4th at 395 (City of Sacramento and Sacramento County); Locklin, 

7 Cal.4th at 340 (City of Lafayette, County of Contra Costa, Contra Costa County Flood Control 

District, California Department of Transportation and Bay Area Rapid Transit District); Belair, 

47 Cal.3d at 554 (Riverside County Flood Control District and State of California); Varjabedian, 

20 Cal.3d at 288-89 (City of Madera); Holtz, 3 Cal.3d at 299 (San Francisco Bay Area Rapid Transit 

District and the City and County of San Francisco); Albers, 62 Cal.2d at 254 (Los Angeles County). 

compensation . . . has first been paid to . . . the owner.” Cal. Const., Art. 1, § 19(a). Cal. Const. Art. 

1, § 19(a). Inverse condemnation is the “inverse” of eminent domain, i.e., it provides the private 

property owner with a mechanism to seek just compensation when a public entity has taken or 

damaged his or her property. 

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Each of these entities was therefore guaranteed the right to spread the costs of an inverse 

condemnation damages judgment among the public at large rather than bearing these public benefit 

costs themselves. Consistent with this rationale, the California Supreme Court has only ever 

extended inverse condemnation beyond the state or the government to other “public entities” that can 

engage in automatic cost-spreading. For example, the California Supreme Court found that an 

airport was a “public entity” only after it was acquired by three cities and was thus able to spread the 

costs for inverse condemnation liability using the cities’ taxing authority. Baker, 39 Cal.3d at 865-

68. 

Unlike traditional public utilities, PG&E does not have the power to automatically spread the 

costs of inverse condemnation. PG&E has no taxing authority. And since its rates are subject to 

CPUC approval, PG&E has no guarantee that it will be able to raise rates to recover costs incurred as 

a result of inverse condemnation liability. Instead, the CPUC has made clear that inverse 

condemnation is not relevant to the reasonableness review it undertakes with respect to ratemaking 

applications. (SDG&E Decision at 65 (“Inverse Condemnation principles are not relevant to a 

Commission reasonableness review under the prudent manager standard.”).) PG&E, a private 

utility, is thus fundamentally different from the public entities on which the inverse condemnation 

case law was based. (See, e.g., CPUC Hearing at 4 (noting “the salient difference between public 

and private utilities . . . is that there’s no guaranty that private utilities can recover the cost from their 

ratepayers”).) 

PG&E’s provision of utility services benefits not only its customers but also the entirety of 

Northern California, which benefits from the economic activity that electric and gas utility service 

allows. There is a disconnect between this critical public benefit and PG&E’s inability to socialize 

among the public it serves the costs inherent in providing this benefit. Because private utilities such 

as PG&E cannot engage in the cost-spreading that is fundamental to the imposition of inverse 

condemnation as articulated by the California Supreme Court, they should not be subject to inverse 

condemnation.6 

6

 Inverse condemnation liability also is unnecessary with respect to private utilities because damages 

are otherwise recoverable under applicable tort law. Public entities often have immunity or other 

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2. Lower and Intermediate California Court Decisions Do Not Compel a 

Different Result. 

As described above, the California Supreme Court has never extended inverse condemnation 

to private utilities. It has instead repeatedly held that the constitutional basis for inverse 

condemnation is the guarantee of loss-spreading that is fundamentally absent with respect to private 

utilities (particularly following the CPUC’s 2017 decision). Intermediate appellate courts in 

California also have repeatedly affirmed that the fundamental policy underlying inverse 

condemnation is the loss-spreading principle outlined above. For example, in a recent case, the 

California Court of Appeal noted that “the fundamental policy ‘underlying the concept of inverse 

condemnation is that the costs of a public improvement benefiting the community should be spread 

among those benefited.’” Mercury Cas. Co. v. City of Pasadena, 14 Cal.App.5th 917, 925-26 

(2017); see also Gutierrez v. Cty. of San Bernardino, 198 Cal.App.4th 831, 485 (2011) (referring to 

the loss distribution premise as an “important policy underpinning inverse condemnation damages”). 

In pressing the argument that inverse condemnation applies to private utilities such as PG&E, 

the claimants will rely on two California intermediate appellate decisions: Barham v. Southern 

California Edison Co., 74 Cal.App.4th 744, and Pacific Bell Telephone Co. v. Southern California 

Edison Co., 208 Cal.App.4th 1400. In both cases, which were decided long before the CPUC’s 

November 30, 2017 decision, the courts extended inverse condemnation to private utilities based on 

the cost-spreading rationale.7 Those decisions were incorrect when issued and are even more 

obviously wrong in light of the CPUC’s subsequent rejection of loss-spreading in connection with 

the SDG&E 2007 wildfires. 

protections from tort liability such as those afforded by California’s Torts Claims Act, Gov’t Code 

§§ 810 et seq., making inverse condemnation a means of socializing the costs not otherwise 

recoverable under the tort system. By contrast, investor-owned utilities such as PG&E are not immune 

from tort liability.

7

 This Court is not bound by the decisions of lower California courts. In re Basave De Guillen, 604 

B.R. 826, 836 (B.A.P. 9th Cir. 2019) (rejecting interpretation of California intermediate appellate court 

on question of state law where the California Supreme Court had not yet decided the issue); see also 

In re Foamex Int’l, Inc., 491 B.R. 100, 106 (Bankr. D. Del. 2013) (recognizing that “the decrees of 

lower state courts are not binding” on the bankruptcy court for “issue[s] grounded in state law”). 

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In Barham, the California Court of Appeal made new law by extending inverse 

condemnation to a private utility for the first time in California history. In so doing, the court 

expressly acknowledged that “the fundamental policy underlying the concept of inverse 

condemnation is to spread among the benefitting community any burden disproportionately borne by 

a member of that community.” Barham, 74 Cal.App.4th at 752 (emphases added) (citing Belair, 47 

Cal.3d at 558). The Barham court cited to cases holding public entities liable for inverse 

condemnation under similar circumstances and found that Southern California Edison (“SCE”) was 

liable for inverse condemnation because no “significant differences exist regarding the operation of 

publicly versus privately owned electric utilities.” Id. at 752-53. The court failed to consider 

situations in which the private utility cannot act as a conduit for cost-spreading and simply assumed 

it always would be able to socialize losses the same way a public utility can. 

In Pacific Bell, the court relied on Barham to once again extend inverse condemnation to 

SCE. 208 Cal.App.4th at 1408. As in Barham, the Pacific Bell court cited Belair for the proposition 

that the “loss spreading rationale” for inverse condemnation should apply to both publicly and 

privately owned utilities. Id. at 1407. Presuming that the loss-spreading rationale justified 

extending inverse condemnation to SCE, the court rejected SCE’s argument that it differed from 

public entities because it had no power unilaterally to raise rates and entirely depended on the 

CPUC’s regulatory discretion. Id. at 1407-08. Indeed, the Pacific Bell court found that SCE “ha[d] 

not pointed to any evidence to support its implication that the [CPUC] would not allow [it] 

adjustments to pass on damages liability during its periodic reviews.”8 Id. at 1407. 

In the Butte Fire and North Bay Fire cases, the state superior courts concluded that, as lower 

California courts, they were bound by the California Court of Appeal decisions in Barham and 

8

 In a footnote, the Pacific Bell court noted that it did “not believe” that if public utilities were subject 

to the oversight of the CPUC that this “would immunize [government] utilities from inverse 

condemnation liability under the theory that they were no longer able to spread the cost of public 

improvements.” 208 Cal.App.4th at 1407 n.6. But this statement preceded the CPUC’s recent policy 

articulation. That statement also has no bearing here, as even a regulated public entity would be 

supported by public tax funds and would not, in any circumstance, be required to rely on private funds 

and private property to satisfy an award of inverse condemnation damages. The opposite is true for a 

private utility such as PG&E. 

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Pacific Bell, and therefore had to conclude that inverse condemnation applied to PG&E, an investorowned utility. Butte Fire Cases, 2018 WL 3371780, at *9-10; Harrison, 2018 WL 2447104, at *3. 

The fundamental problem, however, is that the reasoning of Barham and Pacific Bell was 

flawed because it assumed that private utilities, like public utilities, would be able to spread inverse 

condemnation costs among the entire rate-paying population. As stated above, the Barham court 

wholly failed to examine whether a private utility could actually engage in cost-spreading—which 

the court acknowledged was the “fundamental policy” underlying inverse condemnation and instead 

simply assumed that no “significant differences” existed between public and private utilities. 

Barham, 74 Cal.App.4th at 752-53. Likewise, in Pacific Bell, the court found that, because SCE had 

not actually provided evidence that the CPUC would not allow SCE to socialize its inverse 

condemnation costs through rate adjustments, SCE must be able to do so. The CPUC’s 2017 

decision declaring inverse condemnation “not relevant” to cost recovery through the rate-setting 

process provides the evidence that the Pacific Bell court found lacking. It likewise proves that the 

assumption made by the Barham and Pacific Bell courts that private utilities will be able to spread 

the costs of inverse condemnation liability is false. 

Those decisions also cannot be salvaged based on the notion, adopted by the California 

Superior Courts in the North Bay and Butte Fire cases, that Pacific Bell turned on the “quasimonopolistic authority” of private utilities. See Butte Fire Cases, 2018 WL 3371780, at *9; 

Harrison, 2018 WL 2447104, at *3. According to the California Supreme Court, it is not the 

monopoly status of any public entity that provides the basis for inverse condemnation liability. It is 

instead the cost-spreading rationale that is the sine qua non of inverse condemnation. Whether 

PG&E is a quasi-monopolist or not is entirely beside the point given the constitutional and “policy 

underpinning” of inverse condemnation. Gutierrez, 198 Cal.App.4th at 837. 

The reliance in Pacific Bell on the quasi-monopolistic status of private utilities was also 

based on a misreading of a single case, Gay Law Students Assn. v. Pacific Telephone and Telegraph 

Co., 24 Cal.3d 458 (1979). In Gay Law Students, the question presented was whether the Equal 

Protection Clause, which applies only to state or governmental entities, could apply to a private 

utility such that the private utility could be prohibited from engaging in discriminatory employment 

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practices. 24 Cal.3d at 466. In ruling in the affirmative, the California Supreme Court reasoned that 

the State’s grant of quasi-monopoly power on the private utility limits competition that might 

otherwise discourage a private utility’s discriminatory practices and also enlists taxpayers in indirect 

support of the discriminatory practices. Id. at 470-72. 

In Pacific Bell, the court failed to realize that Gay Law Students was context-specific and that 

the California Supreme Court’s decision had no relevance to any issue other than the applicability of 

the Equal Protection Clause. See Pasillas v. Agric. Labor Relations Bd., 156 Cal.App.3d 312, 348 

(1984) (noting that Gay Law Students “must be read in context, as addressing only the problem of 

arbitrary discrimination in employment (or membership) criteria affecting an individual’s 

fundamental right to work”) (emphasis omitted). Indeed, in at least one other context, the California 

Court of Appeal has made clear that a private utility is not a public entity. See Moreland Inv. Co. v. 

Superior Court, 106 Cal.App.3d 1017, 1022-23 (1980) (holding that a private utility is not a 

governmental agency under California Code of Civil Procedure section 397, in part because it cannot 

directly pass on eminent domain costs to ratepayers). 

What Gay Law Students and Morehead therefore illustrate is that whether a private utility 

should be considered a public or private entity depends entirely on the particular context in which 

the question is raised. Here, the context is whether PG&E, a private utility, should be treated the 

same as a public utility for purposes of inverse condemnation liability, where the public utility—but 

not PG&E—has the unilateral ability to spread the associated costs among the community at large, 

thereby satisfying the underlying rationale of the inverse condemnation doctrine. The answer is 

plainly no. 

In short, the attempts by the two California trial courts to justify why Pacific Bell and 

Barham were correctly decided even after the CPUC confirmed that cost-spreading is not guaranteed 

to an investor-owned utility simply cannot be squared with the years of California Supreme Court 

jurisprudence regarding the doctrine. Unlike those lower state courts, this Court is not bound by 

Pacific Bell or Barham. Instead, it must predict what the California Supreme Court would say on 

this issue. See Am. Tower Corp., 763 F.3d at 1047 (rejecting decision of California Court of Appeal 

because federal court was “convinced by other persuasive data that the highest court of the state 

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would decide otherwise”). Every single California Supreme Court case that concerns inverse 

condemnation explicitly recognizes that the entire premise underlying inverse condemnation liability 

is to spread the costs of a public improvement among the entire benefitted community. They say 

nothing about monopolist or “quasi-monopolistic” status, and they certainly do not support the 

notion that the strict liability inverse condemnation standard can be used to shift the cost of a public 

improvement from the benefitted public to a private entity that provides that benefit. 

C. Inverse Condemnation Claims Are Unenforceable Because Application of 

Inverse Condemnation to Private Utilities Violates the United States 

Constitution. 

Even if this Court were to find that California law permits the application of inverse 

condemnation to private utilities such as PG&E, that would not be the end of the analysis. Instead, 

any such ruling would compel the conclusion that California state law concerning inverse 

condemnation violates the United States Constitution as applied to investor-owned utilities such as 

the Debtors.9 Without a guarantee that PG&E can recover inverse condemnation costs, the 

imposition of such strict liability through a doctrine premised on socialization of losses constitutes 

an unlawful taking without just compensation, and an arbitrary and irrational process that violates 

the Debtors’ substantive due process rights. No California state court has ever reached these Federal 

Constitutional questions that are now directly within this Court’s jurisdiction. 

1. The Application of Inverse Condemnation to PG&E Violates the 

Takings Clause of the Fifth Amendment of the United States 

Constitution. 

The Takings Clause of the Fifth Amendment provides: “[N]or shall private property be taken 

for public use, without just compensation”. U.S. Const., amend. V.10 The United States Supreme 

Court has explained that the purpose of this clause is to “prevent the government from forcing some 

people alone to bear the public burdens which, in all fairness and justice, should be borne by the 

9

 A California Superior Court’s ruling on inverse condemnation constitutes state action subject to the 

constitutional limitation. See N.Y. Times Co. v. Sullivan, 376 U.S. 254, 265 (1964); Shelley v. 

Kraemer, 334 U.S. 1, 14-18 (1948). 

10 Similarly, Article I, Section 19 of the California Constitution provides: “Private property may be 

taken or damaged for a public use . . . only when just compensation” has been paid. Cal. Const., art. 

I, § 19. 

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public as a whole.” E. Enters. v. Apfel, 524 U.S. 498, 522 (1998) (internal quotations omitted). If 

PG&E were subject to strict liability for inverse condemnation, but could not recover its inverse 

condemnation costs, the application of inverse condemnation would be a naked transfer of property 

from one private party to another without just compensation. This is an unconstitutional taking. 

In Eastern Enterprises, the United States Supreme Court held that the following factors are 

significant in determining whether an unconstitutional taking has occurred: “[t]he economic impact 

of the regulation, its interference with reasonable investment backed expectations, and the character 

of the governmental action.” Id. at 523-24 (citation omitted). In assessing the “character of the 

governmental action”, courts look to whether the governmental action “amounts to a physical 

invasion or instead merely affects property interests through ‘some public program adjusting the 

benefits and burdens of economic life to promote the common good’”. Lingle v. Chevron U.S.A. 

Inc., 544 U.S. 528, 539 (2005) (citation omitted). The application of inverse condemnation to 

PG&E meets each of these requirements of an unlawful taking. 

First, the application of inverse condemnation creates a considerable financial burden on 

PG&E by requiring the company to absorb inverse condemnation costs without any guarantee of 

recovery from its customers. Courts have recognized that forcing companies to take on considerable 

costs without the possibility of reimbursement is an unconstitutional deprivation of property. See E. 

Enters., 524 U.S. at 529-32 (finding considerable financial burden was imposed where the Coal Act 

required plaintiff to make substantial payments and where the Act did not guarantee a right to 

reimbursement).11 

The economic impact of the potential liabilities due to inverse condemnation is readily 

apparent. PG&E has reached an agreement with entities representing insurance subrogation claims 

11 Courts have recognized that limiting a utility’s rate-setting ability can, in some circumstances, 

constitute a taking. See Duquesne v. Light Co. Barasch, 488 U.S. 299, 308 (1989) (“If the rate does 

not afford sufficient compensation, the State has taken the use of utility property without paying just 

compensation and so violated the Fifth and Fourteenth Amendments.”); Ponderosa Tel. Co. v. Pub. 

Utils. Comm’n, 197 Cal.App.4th 48, 59 (2011) (holding that the CPUC had engaged in impermissible 

appropriation by failing to permit a rate increase). These cases acknowledge that even though utility 

companies may exercise a unique quasi-monopolistic function, their revenues are ultimately controlled 

by rate-setting agencies and that the government may not impose liabilities on private utilities in a 

manner that unjustly deprives utilities of those revenues. 

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for $11 billion to resolve all such claims arising from the 2017 North Bay Fires and the 2018 Camp 

Fire. The Official Committee of Tort Claimants (“TCC”), on behalf of individual wildfire 

claimants, has asserted that the value of individual wildfire claims in the aggregate is somewhere 

between $30 to $40 billion (Aug. 14, 2019 Hr’g Tr. at 136:23-137:1). As the Court is aware, the 

TCC is now the joint proponent of a plan that values the individual wildfire claims and public entity 

claims together at $14.5 billion. (Dkt. 4257 at 7.) Because the CPUC will not consider inverse 

condemnation liability in assessing rate applications by private utilities, there is no guaranty that 

PG&E will be able to recover these considerable costs. 

This dynamic has already caused PG&E to lose billions of dollars of market value and led 

directly to these Chapter 11 Cases. As stated in its “first day” papers filed with its Chapter 11 

petition, in light of the thousands of claims asserted against PG&E with respect to the 2017 and 2018 

Wildfires, PG&E no longer has the ability to access the capital necessary for the proper discharge of 

its public duties—duties that include providing safe and reliable gas and electric service to its 

millions of customers, and properly investing in its infrastructure. (Wells Decl. 8:8-16.) PG&E’s 

stock price fell 21% after reporting to the CPUC that there was an equipment failure near the area of 

the Camp Fire, from which the market inferred that PG&E’s equipment may have caused the fire. 

This decline occurred prior to any reports regarding what role, if any, negligence may have played in 

the ignition. 

Second, applying inverse condemnation to PG&E interferes with PG&E’s reasonable 

investment-backed expectations in the use of its revenues and the operation of its business. Penn. 

Coal Co. v. Mahon, 260 U.S. 393, 415-16 (1922) (state action that defeats intended use of property 

and makes operations commercially impracticable is unconstitutional). As a private entity, PG&E 

has relied for nearly two decades on the premise in Barham and Pacific Bell that imposition of 

inverse condemnation liability would be offset by the ability to spread the costs through the rate 

recovery process. PG&E and its debt and equity investors never expected that, on the one hand, 

PG&E would be held strictly liable for inverse condemnation costs, while, on the other hand, it 

would be unable to recover those costs through rates. PG&E and its debt and equity investors 

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assumed—as did the California courts—that private entities would be able to automatically spread 

inverse condemnation costs the same way that publicly owned utilities can. 

The uncertainty inherent in whether a private utility will be able to recover billions of dollars 

in inverse condemnation costs affects that company’s ability to develop a sound business plan and 

raise the much-needed capital on which it depends. Former CPUC President and Commissioner 

Picker and Commissioner Guzman Aceves correctly noted in their concurrence to the CPUC’s 

decision that one of the dangers of applying inverse condemnation to private utilities is that “the risk 

profile of the investor-owned utility may be questioned by investors and insurance providers alike.” 

(CPUC Concurrence at 6.) 

They were right. In September 2018, the credit ratings of PG&E and other major private 

utilities like Southern California Edison and SDG&E were downgraded by Moody’s, a major credit 

rating agency, which cited inverse condemnation as a primary reason behind the downgrade.12 And, 

only two months after the Camp Fire, PG&E’s bonds were downgraded to junk status by S&P 

Global,13 largely as a result of the strict liability inverse condemnation costs the company faced in 

the wake of the California wildfires. S&P Global later downgraded the rating of two of California’s 

other leading utilities in a similar fashion.14 S&P Global commented that a significant factor 

affecting the investor-risk profile of private utilities in California is inverse condemnation: 

“[T]he legal doctrine of inverse condemnation effectively makes California’s 

electric utilities the state’s reinsurer, which creates new risks that were never 

envisioned when investor-owned utilities were established. We don’t believe that 

an electric utility is large enough, sufficiently diversified, or adequately 

12 Rob Nikolewski, “Credit ratings agency downgrades SDG&E and other California utilities over 

wildfire concerns”, The San Diego Union Tribune, Sept. 30, 2018, available at

https://www.sandiegouniontribune.com/business/energy-green/sd-fi-moodys-sdge-20180919-

story.html. 

13 “S&P downgrades PG&E ratings to ‘junk’ status”, Reuters, Jan. 7, 2019, available at

https://www.reuters.com/article/pge-ratings-sp/sp-downgrades-pge-ratings-to-junk-statusidUSL3N1Z81RE. 

14 David Baker, “Another California Utility One Wildfire Away From Ruin”, Bloomberg, Feb. 11, 

2019, available at https://www.insurancejournal.com/news/west/2019/02/11/517298.htm; see also 

Garrett Hering, “S&P Ratings: Other Calif. utilities could join PG&E in junk status, bankruptcy”, 

S&P Global Ratings, available at https://www.spglobal.com/marketintelligence/en/newsinsights/trending/Kl2LNodp5Eh88H1VIw4lTA2. 

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capitalized to be a reinsurer. Overall, in our view, the combination of climate 

change, frequent and severe wildfires, and California’s interpretation of inverse 

condemnation, if unaddressed, significantly raises the risk for California’s electric 

utilities to a level inconsistent with any other North American utility.”15

This financial pressure has effects far beyond those felt by the private utility, as private utilities such 

as PG&E are facing increased insurance costs, decreased rates of return and diminished interest from 

investors in the capital markets. These consequences can be expected to have ripple effects 

throughout the state economy. 

Third, the application of inverse condemnation to PG&E does not “adjust[] the benefits and 

burdens of economic life to promote the common good.” Lingle, 544 U.S. at 539. Under inverse 

condemnation, PG&E has to pay landowners for damage to their property caused (without fault) by 

PG&E’s power lines. In this circumstance, PG&E—and not the customers who benefit from its 

power lines—is left to bear the costs alone. This disconnect threatens the private utility’s financial 

stability, as evidenced by PG&E’s decision to file for chapter 11 protection.16 

2. The Application of Inverse Condemnation to PG&E Violates PG&E’s 

Substantive Due Process Rights. 

The Fourteenth Amendment protects against government deprivations of life, liberty or 

property that are arbitrary and irrational. See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 

408, 416-17 (2003) (“The Due Process Clause of the Fourteenth Amendment prohibits the 

imposition of grossly excessive or arbitrary punishments on a tortfeasor.”); Action Apartment Ass’n 

v. Santa Monica Rent Control Bd., 509 F.3d 1020, 1025-26 (9th Cir. 2007) (“[A]n arbitrary and 

irrational deprivation of real property . . . might be ‘so arbitrary or irrational that it runs afoul of the 

15 “S&P Global Ratings: Will California Still Have An Investment Grade Investor-Owned Electric 

Utility?,” Feb. 19, 2019 available at 

https://www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=2168627&Sct

ArtId=467165&from=CM&nsl_code=LIME&sourceObjectId=10866063&sourceRevId=14&fee_in

d=N&exp_date=20290218-21:25:39 (emphasis added). 

16 Again, to the extent the Debtors (or any other investor-owned utility) negligently start a fire, they 

will be held liable regardless of whether this Court finds that the strict liability doctrine of inverse 

condemnation does not apply to investor-owned utilities such as PG&E, and the Debtors will have to 

pay the damages associated with any negligence liability. 

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Due Process Clause.’” (citing Lingle, 544 U.S. at 542)).17 Because inverse condemnation rests on 

the premise that losses from public improvements should be spread throughout the community, 

applying inverse condemnation to PG&E when it cannot engage in such loss-spreading is arbitrary 

and irrational. 

As a threshold matter, inverse condemnation liability deprives PG&E of its property because 

PG&E is required to pay money damages. Cf. Bd. of Regents v. Roth, 408 U.S. 564, 571-72 (1972) 

(“property interests protected by [ ] due process extend well beyond actual ownership of real estate, 

chattels, or money”). Contrary to the typical inverse condemnation cases, PG&E is not entitled to 

retain the “condemned” property in exchange for its payment and thus receives no benefit in 

exchange for compensating the landowner. The only question, therefore, is whether this deprivation 

is arbitrary and irrational. Action Apartment, 509 F.3d at 1025-26. It is, for at least two reasons. 

First, taking PG&E’s property without a showing of fault and without automatic rate 

recovery is not substantially related to the stated cost-spreading justification for inverse 

condemnation. See Sinaloa Lake Owners Ass’n v. City of Simi Valley, 864 F.2d 1475, 1484-87 (9th 

Cir. 1989) (“To establish a violation of substantive due process, the plaintiffs must prove that the 

government’s action was ‘clearly arbitrary and unreasonable, having no substantial relation to the 

public health, safety, morals, or general welfare.”) (citation omitted). To the contrary, under the 

CPUC’s policy, PG&E cannot spread its costs without satisfying the CPUC’s “prudent manager” 

standard. According to the CPUC, the “fundamental point” is that “[e]ven if the fire would have 

started anyway, a reasonableness review looks at whether [the utility] acted reasonably and 

prudently.” (CPUC Decision 18-07-025 at 10, attached as Orsini Decl. Ex. E.) 

But it is arbitrary and irrational to deny PG&E the opportunity to spread its losses based on a 

prudent manager standard administered by the CPUC. Because inverse condemnation was 

developed as a form of social insurance for public utilities subjected to no-fault liability, it is 

arbitrary and irrational to hold private utilities to a prudent manager standard for rate recovery of 

costs incurred by those private utilities under a strict liability regime predicated on the ability to 

17 A California Superior Court’s ruling on inverse condemnation constitutes state action. See supra

n.10. 

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spread costs. The CPUC has expressed concerns with the application of inverse condemnation to 

private utilities for exactly this reason. (CPUC Concurrence 5-6.) 

Second, inverse condemnation is irrational as applied to PG&E. Sovereign immunity and the 

Tort Claims Act, Cal. Gov’t Code §§ 810 et seq., protect government entities from private claims. 

Inverse condemnation therefore allows private property owners an opportunity to recover damages 

from government entities when otherwise no remedy may be available. PG&E, however, is a private 

corporation and is subject to general tort liability premised on the showing of negligence. Private 

individuals do not need inverse condemnation to recover for harm allegedly caused by PG&E. See 

Cal. Civ. Code, § 3333. 

IV. CONCLUSION 

For the reasons stated above, the Court should rule that inverse condemnation does not apply 

under a proper application of California law to PG&E as an investor-owned utility and grant such 

other relief as just and proper. 

 

Dated: October 25, 2019 

 

WEIL, GOTSHAL & MANGES LLP 

CRAVATH, SWAINE & MOORE LLP 

KELLER & BENVENUTTI LLP 

 /s/ Kevin J. Orsini 

 Kevin J. Orsini 

Counsel for the Debtors and Debtors in Possession 

MILBANK LLP 

/s/ Andrew M. Leblanc 

Andrew M. Leblanc 

Counsel for the Official Committee 

of Unsecured Creditors

 

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STATEMENT OF PG&E SHAREHOLDERS 

The Court asked for briefing on whether the California Supreme Court would apply the statelaw strict liability doctrine of inverse condemnation to investor-owned utilities like PG&E. The 

PG&E Shareholders18 agree with the Debtors that the California Supreme Court is highly unlikely to 

do so and hereby join the Debtors’ accompanying brief. 

The PG&E Shareholders submit this statement to highlight market forces that are likely to 

factor heavily in the California Supreme Court’s consideration of the issue. The erroneous decisions 

of two lower courts have created an untenable situation in California. Those courts applied the 

doctrine of inverse condemnation – developed as a way to spread the cost of government works 

among taxpayers – to the State’s private, investor-owned utilities (PG&E, Southern California 

Edison, and San Diego Gas & Electric). The courts reasoned that, like governments, investor-owned 

utilities can spread inverse condemnation liabilities by raising electricity rates. In 2017, however, 

the CPUC upended that reasoning and called into question the utilities’ ability to pass liabilities to 

ratepayers even in circumstances where they have not acted negligently. 

The market reaction to the CPUC’s decision was swift and severe. Facing the specter of 

strict inverse condemnation liability for catastrophic wildfires of unprecedented size and scope, 

combined with the highly uncertain ability to recover some or all of that liability from customers, the 

equity markets began to demand higher cost of equity capital from the California investor-owned 

utilities. Because the CPUC obligates investor-owned utilities like PG&E to rely on equity for a 

majority of the capital needed for wildfire mitigation, implementation of California’s aggressive 

renewable energy standards, and other critical expenditures, it is no exaggeration to say that the 

18 The PG&E Shareholders are the entities identified on Exhibit A to the Fourth Amended 

Verified Statement Of Jones Day Pursuant To Federal Rule Of Bankruptcy Procedure 2019

[ECF 4366]. The PG&E Shareholders are acting in their individual capacities but authorized the 

filing of this single submission for the purpose of administrative efficiency. Each of the PG&E 

Shareholders is expressing its independent views, and counsel does not have the actual or apparent 

authority to obligate any one entity to act in concert with any other entity with respect to PG&E 

equity securities. The PG&E Shareholders have not agreed to act in concert with respect to their 

respective interests in PG&E equity securities. 

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lower courts’ misguided application of inverse condemnation now threatens the reliability, safety, 

and affordability of the State’s electricity grid. 

Indeed, Governor Newsom’s wildfire strike force, convened in the wake of PG&E’s 

bankruptcy, recently concluded that “[t]his regime – strict liability for wildfire damage coupled with 

uncertain ability to recover those damages in rates – increases the risk of bankrupt utilities, which in 

turn drives up costs for consumers, threatens fair recoveries for fire victims, undermines the state’s 

ability to mitigate and adapt to climate change, and creates uncertainty for utility employees and 

contractors.”19 California’s Commission on Catastrophic Wildfire Cost and Recovery, formed in 

response to the devastating 2017 wildfires, agreed that “[t]he current interpretation of inverse 

condemnation, holding utilities strictly liable for any wildfire caused by utility equipment regardless 

of standard of care or negligence, imperils the viability of the state’s utilities, customers’ access to 

affordable energy and clean water, and the state’s climate and clean energy goals; it also[] does not 

equitably socialize the costs of utility-caused wildfires.”20

But “neither the [California] Supreme Court nor the legislature has ever opined on this 

subject and, of course, has not opined on this subject in response to the unique wildfire emergency 

the State now faces.” WILDFIRE COMMISSION REPORT, Appendix I at 7 n.19. When the California 

Supreme Court does consider whether to reject the application of inverse condemnation to PG&E 

and other investor-owned utilities, it is sure to take note of the havoc wrought by the lower court 

decisions. 

I. THE CALIFORNIA SUPREME COURT WILL CONCLUDE THAT LOWER 

COURTS ERRED IN APPLYING INVERSE CONDEMNATION TO INVESTOROWNED UTILITIES 

Article I, section 19 of the California Constitution provides that “[p]rivate property may be 

taken or damaged for a public use and only when just compensation, ascertained by a jury unless 

waived, has first been paid to, or into court for, the owner.” Cal. Const. art. I, § 19. “[A]rticle I, 

19 Governor Newsom’s Strike Force, Wildfires And Climate Change: California’s Energy 

Future (Apr. 12, 2019) (“STRIKE FORCE REPORT”), at 27, attached as Orsini Decl. Ex. A. 

20 Final Report Of The Commission On Catastrophic Wildfire Cost And Recovery (June 17, 

2019) (“WILDFIRE COMMISSION REPORT”), Executive Summary at 4, attached as Orsini Decl. Ex. F. 

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section 19 provides the basis for two kinds of actions: a conventional eminent domain proceeding, 

instituted by a public entity to acquire private property for public use; and an inverse condemnation 

action, initiated by a private property owner seeking compensation for a taking or damage to his or 

her property.” City of Oroville v. Superior Court of Butte County, 7 Cal. 5th 1091, 1102 (2019). 

To prevail on an inverse condemnation claim, a plaintiff need only prove “a sufficiently 

meaningful causal relationship between the damage to private property and the inherent risks posed 

by the public improvement as designed, constructed, or maintained.” Id. at 1108. Because the 

plaintiff need not establish negligence or other tortious conduct, inverse condemnation is a form of 

strict liability. As such, it provides a mechanism “to socialize the burden” of losses from public 

works without regard to fault. Holtz v. Superior Court, 3 Cal. 3d 296, 303-04 (1970) (quotations 

omitted); see Customer Co. v. City of Sacramento, 10 Cal. 4th 368, 409 (1995) (en banc) (“the 

underlying purpose of [inverse condemnation] is to distribute throughout the community the loss 

inflicted upon the individual by the public enterprise as deliberately conceived”) (quotations 

omitted); Albers v. Los Angeles Cty., 62 Cal. 2d 250, 263 (1965) (“the cost of such damage can 

better be absorbed, and with infinitely less hardship, by the taxpayers as a whole than by the owners 

of the individual parcels damaged”). 

Because inverse condemnation is intended to spread the cost of public improvements to the 

taxpayers who benefit from them, the doctrine logically does not apply to losses caused by a private, 

non-governmental entity. Unlike governments, private entities cannot raise taxes to distribute 

inverse condemnation liabilities among those who benefit from their services. Despite this, 

however, two of California’s intermediate appellate courts have extended the doctrine to investorowned utilities. In Barham v. Southern Cal. Edison Co., the Fourth District held that a private utility 

“may be liable in inverse condemnation as a public entity,” 74 Cal. App. 4th 744, 753 (1999), and in 

Pacific Bell Telephone Co. v. Southern Cal. Edison Co., the Second District agreed that a private 

utility “may be liable under inverse condemnation for the damage [it caused to private] property.” 

208 Cal. App. 4th 1400, 1404 (2012). 

Consistent with the cost spreading rationale of the inverse condemnation doctrine, both 

courts assumed that the CPUC would allow private utilities to pass on inverse-condemnation 

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liabilities through rate adjustments “during its periodic reviews.” Pacific Bell, 208 Cal. App. 4th at 

1407; Barham, 74 Cal. App. 4th at 752-53 (noting that the purpose of inverse condemnation is to 

“spread among the benefiting community any burden disproportionately borne by a member of that 

community” and concluding that no “significant differences exist between publicly versus privately 

owned electric utilities” in this regard). 

Unfortunately, that critical assumption turned out to be wrong. In 2017, the CPUC refused to 

allow San Diego Gas & Electric to raise rates to recoup settlement amounts it had paid to wildfire 

victims who had asserted inverse condemnation claims for wildfire damages.21 The CPUC 

determined that strict liability in inverse condemnation simply was “not relevant” to the rates a 

utility may charge. Id. 

The potential ramifications of this conclusion (described below) were alarming enough that 

CPUC President Picker and CPUC Commissioner Guzman Aceves wrote separately to criticize the 

Barham and Pacific Bell decisions: “the logic for applying inverse condemnation to utilities – costs 

will necessarily be socialized across a large group rather than borne by a single injured property 

owner, regardless of prudence on the part of the utility – is unsound.”22 The Commissioners thus 

“urge[d] the California Courts of Appeal to carefully consider the rationale for applying inverse 

condemnation in these types of cases.” Id. at 6-7. 

California’s Commission on Catastrophic Wildfire Cost and Recovery similarly concluded 

that Barham and Pacific Bell “are suspect” because they are “based on the factually disproven 

assumption that the utility could pass its liability onto ratepayers.” WILDFIRE COMMISSION REPORT, 

Executive Summary at 7 n.7. That Commission therefore recommended that the State “[r]eplace the 

current strict liability interpretation of inverse condemnation for electric and water utilities with a 

fault-based negligence standard.” Id., Appendix I at 7. 

21 Cal. Pub. Utilities Comm’n Dec. 17-11-033, at 64-65 (Nov. 30, 2017), attached as Orsini 

Decl. Ex. D. 

22 Concurrence of President Michael Picker and Commissioner Martha Guzman Aceves 

Regarding Dec. 17-11-033 (Dec. 26, 2017), at 5, attached as Orsini Decl. Ex. C. 

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These criticisms are sound. Barham and Pacific Bell improperly sever inverse condemnation 

from its legal mooring of cost spreading and apply the doctrine to a scenario it was never intended to 

cover: damage caused by privately owned firms that lack the ability to spread losses to those who 

benefit from the services provided. Given this, the California Supreme Court is likely to conclude 

that Barham and Pacific Bell were wrongly decided. 

II. THE CALIFORNIA SUPREME COURT WILL CONSIDER THE DISASTROUS 

CONSEQUENCES OF THE ERRONEOUS LOWER COURT DECISIONS 

The misapplication of inverse condemnation to investor-owned utilities, coupled with the 

CPUC’s determination that inverse condemnation liability is “not relevant” to the question of 

whether utilities can recover inverse condemnation losses in rates, has resulted in a crisis. As the 

Governor’s strike force summarized: 

[T]he current system for allocating costs associated with catastrophic 

wildfires – often caused by utility infrastructure, but exacerbated by drought, 

climate change, land-use policies, and a lack of forest management – is 

untenable both for utility customers and for our economy. Multi-billion 

dollar wildfire liabilities over the last several years have crippled the financial 

health of our privately and publicly owned electric utilities. Pacific Gas & 

Electric Company (PG&E) filed for bankruptcy in the face of massive 

potential liability for wildfire damages. Other investor-owned and public 

utilities have experienced recent credit ratings downgrades, with San Diego 

Gas & Electric (SDG&E) and Southern California Edison Company (SCE) 

now precipitously hovering just above junk status. Utilities rely on credit to 

finance ongoing infrastructure investments, including fire mitigation. As 

utilities’ credit ratings deteriorate, their borrowing costs increase and those 

costs for capital necessary to make essential safety improvements are passed 

directly to customers. These downgrades, and the prospect of additional 

utility bankruptcy filings, directly impact Californians’ access to safe, 

reliable and affordable electricity. 

STRIKE FORCE REPORT at 2-3 (emphasis added). The Commission on Catastrophic Wildfire Cost 

and Recovery likewise found that “[t]he increasing costs of capital and the risk of bankruptcy 

associated with the strict liability interpretation of inverse condemnation doctrine for . . . investorowned utilities is harmful to wildfire victims, ratepayers, and the utilities themselves.” WILDFIRE 

COMMISSION REPORT, Executive Summary at 4. 

Because the California Supreme Court applies inverse condemnation in light of the policy 

concerns that animate the doctrine, it is likely to consider these unintended consequences of the 

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erroneous lower court decisions when it takes up the issue. Customer Co., 10 Cal. 4th at 378 

(“section 19 never has been applied in a literal manner, without regard to the history or intent of the 

provision”). 

A. The Erroneous Lower Court Decisions Significantly Raise The Cost Of Capital 

For California’s Investor-Owned Utilities. 

The Governor’s strike force observed that “[c]limate change has created a new wildfire 

reality for California.” STRIKE FORCE REPORT, Executive Summary at 1. “The state’s fire season is 

now almost year round. More than 25 million acres of California wildlands are classified as under 

very high or extreme fire threat. Approximately 25 percent of the state’s population – 11 million 

people – lives in that high-risk area.” Id. “Climate change, forest management practices, and real 

estate development patterns in the [wildland urban interface] have dramatically increased the risk 

and magnitude of wildfire damage.” Id. at 27. As a consequence, “[w]ildfires are not only more 

frequent but far more devastating. Fifteen of the 20 most destructive wildfires in the state’s history 

have occurred since 2000; ten of the most destructive fires have occurred since 2015.” Id., 

Executive Summary at 1. 

Unfortunately, these wildfires frequently and unavoidably ignite as a consequence of normal 

operation of electrical utility service, such as when high winds propel a tree limb into a live power 

line. Simply put, “[a]s long as electrical lines run through tinder-dry forests, California can mitigate 

but not eliminate utility-sparked fires.” Id. at 27. The risk is particularly acute for PG&E, which has 

the largest service territory in the State (70,000 square miles), half of which has been designated as 

high fire threat. 

Because the inverse condemnation doctrine imposes liability regardless of negligence, PG&E 

and California’s other investor-owned utilities face the prospect of colossal damages no matter 

whether they are at fault. Indeed, given the strict liability inverse condemnation regime, utilities are 

now subject to massive claims even for wildfires that may not have been caused by their equipment. 

Case in point: PG&E is subject to $10 billion or more in claims relating to the Tubbs fire even 

though CalFire determined that PG&E equipment did not ignite the blaze. 

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This legal landscape has turned California investor-owned utilities into de facto insurers of 

much of California’s existential wildfire risk. See Credit FAQ: Will California Still Have An 

Investment-Grade Investor-Owned Electric Utility?, S&P GLOBAL RATINGS (Feb. 19, 2019) 

(“California’s interpretation of the legal doctrine of inverse condemnation effectively makes 

California’s electric utilities the state’s reinsurer, which creates new risks that were never envisioned 

when investor-owned utilities were established. We don’t believe that an electric utility is large 

enough, sufficiently diversified, or adequately capitalized to be a reinsurer. Overall, in our view, the 

combination of climate change, frequent and severe wildfires, and California’s interpretation of 

inverse condemnation, if unaddressed, significantly raises the risk for California's electric utilities to 

a level inconsistent with any other North American utility.”).23 

As a result, investment in California investor-owned utilities is objectively riskier than 

investment in other state’s utilities. Since the CPUC determined that inverse condemnation was “not 

relevant” to rate recovery of wildfire liabilities, PG&E’s credit ratings steadily deteriorated24 and, 

even though they did not face anywhere near the same level of wildfire liability as PG&E, Southern 

California Edison and San Diego Gas & Electric similarly saw their credit ratings fall until they were 

“precipitously hovering just above junk status.” STRIKE FORCE REPORT at 3. 

The California utilities therefore must provide a greater return in order to attract investor 

capital that just as easily may be deployed in favor of less-risky alternatives, including utilities in 

states that do not impose strict inverse condemnation liability. Indeed, PG&E, Southern California 

Edison, and San Diego Gas & Electric each have asked for substantial increases in their authorized 

return on equity in order to account for the potential of material wildfire liabilities.25 WILDFIRE 

23 Attached as Orsini Decl. Ex. G. 

24 Nephele Kirong, S&P Downgrades PG&E Over Calif. Wildfire Risks, S&P GLOBAL MARKET 

INTELLIGENCE (Feb. 26, 2018), attached as Orsini Decl. Ex. H. Nephele Kirong, Moody’s 

Downgrades PG&E, Pacific Gas And Electric Ratings On Wildfire Risks, S&P GLOBAL MARKET 

INTELLIGENCE (Nov. 16, 2018), attached as Orsini Decl. Ex. I; Molly Smith & Natalya Doris, PG&E 

Bonds Reach New Lows As S&P Cuts Five Notches To Junk, BLOOMBERG (Jan. 8, 2019), attached as 

Orsini Decl. Ex. J. 

25 PG&E requested a 12% ROE (up from 10.25%), Southern California Edison requested a 

11.45% ROE (up from 10.3%), and San Diego Gas & Electric requested a 12.38% ROE (up from 

10.2%). See Opening Brief of Pacific Gas and Electric Company, Application 19-04-014, at 1-2 

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COMMISSION REPORT, Appendix II at 7 (“More recently, all three utilities proposed large increases in 

the allowed return on equity, which they believe will be required to attract new equity investment. 

While that proceeding is ongoing and its outcome is far from clear, what is clear is that a 

substantially higher return on equity (the ‘cost’ of equity) – reflecting the same risks that have led to 

higher debt costs – will likely be required to attract new investment in California utilities.”); see 

What is Cost of Capital (CoC)?, CAL. PUBLIC UTILITIES COMM’N (“The Commission attempts to set 

the authorized ROE at a level that is adequate to enable the utility to attract investors to finance the 

replacement and expansion of its facilities so it can fulfill its public utility service obligation. In 

practice, this level is determined by estimating market returns on investments for other companies 

with similar levels of risk.”).26

Notably, the perception of risk has persisted even in the wake of AB 1054, the legislation 

enacted this Summer to create a statewide wildfire insurance fund for wildfires ignited in 2019 and 

beyond. Since the passage of AB 1054, credit ratings of the State’s investor-owned utilities not in 

bankruptcy have stabilized but not rebounded.27 As one expert noted, “[t]he rating agencies are still 

concerned about the residual risk over the long term from inverse condemnation as applied in 

California, uncertainties surrounding the effectiveness of wildfire reform implementation, and that 

the operational challenges of heightened wildfire risk could act to impair future utility credit quality 

in the state. The credit rating agencies have made clear that AB 1054 alone is not sufficient to 

restore credit quality to its former level.”28

(Sept. 30, 2019), attached as Orsini Decl. Ex. K; Opening Brief of Southern California Edison 

Company, Application 19-04-014, at 2 (Sept. 30, 2019), attached as Orsini Decl. Ex. L; Opening 

Brief of San Diego Gas & Electric, Application 19-04-014, at 1 (Sept. 30, 2019), attached as Orsini 

Decl. Ex.M. 

26 Attached as Orsini Decl. Ex. N. 

27

 See Testimony of Todd Shipman, Application 19-04-017, at 6 (Aug. 1, 2019) (“The wildfire 

reform legislation has stemmed the credit quality deterioration caused by the development of 

wildfire risks in California. But it has not reversed it.”), attached as Orsini Decl. Ex. P. 

28

 Id. at 7. 

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B. Increased Cost Of Capital For California’s Investor-Owned Utilities Harms 

The State In Critical Ways. 

The increase in cost of capital of California’s investor-owned utilities is just not a question of 

the profitability – or lack thereof – of the firms, an issue about which the California Supreme Court 

might not concern itself. To the contrary, as California’s policymakers have observed, increased 

cost of capital has severe and far-reaching negative repercussions on numerous important policy 

objectives as to which the Supreme Court certainly would take notice. 

To start, increased cost of capital results in higher rates: “Because utilities must attract new 

capital – generally a 50/50 mix of debt and equity – in order to construct new infrastructure, with the 

interest (debt) and return (equity) paid for out of rates, increases in risk perception have direct 

implications for rates. . . . Credit downgrades lead to increases in the cost of borrowing for utilities 

that ultimately will be reflected in customer rates.” WILDFIRE COMMISSION REPORT, Appendix II at 

7; id. at 7 n.13 (“[A] 1% increase in the cost of debt occasioned by a ratings downgrade, coupled 

with an ensuing 3% increase in the cost of equity, would result in a 6.5% increase in the average 

monthly bill of PG&E customers. Customers of Southern California Edison and San Diego Gas & 

Electric would suffer similarly.”) (citing estimates of PG&E Shareholders). As the concurring 

CPUC Commissioners noted, “[i]nvestor owned utilities are partially dependent on the capital 

markets to raise money and the insurance market to mitigate financial risk. If strict liability is 

imposed for damage associated with wildfires caused in whole or in part by utility infrastructure, the 

risk profile of the investor-owned utility may be questioned by investors and insurance providers 

alike. The increase in the cost of capital and the expense associated with insurance could lead to 

higher rates for ratepayers, even in instances where the investor-owned utility complied with the 

Commission’s safety standards.”29

Rising cost of capital also limits the utilities’ ability to invest in infrastructure projects, 

including critical wildfire mitigation efforts. Utilities deploy a variety of techniques to avoid and 

contain wildfires, including “vegetation management” and “system hardening such as widespread 

29 Concurrence of President Michael Picker and Commissioner Martha Guzman Aceves 

Regarding Dec. 17-11-033 (Dec. 26, 2017), at 6, attached as Orsini Decl. Ex. C. 

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electric line replacement with covered conductors designed to lower wildfire ignitions.”30 They also 

are developing new technologies, including “situational awareness technology such as weather 

stations, high definition cameras, and use of computer modeling, weather and wind data and 

machine learning to predict where wildfires are most likely to strike.” Id. 

These projects are extremely expensive. PG&E, Southern California Edison, and San Diego 

Gas & Electric project that they will spend more than $4.2 billion on wildfire mitigation efforts in 

2019 alone. STRIKE FORCE REPORT at 51. “[T]he costs of proposed projects in utility Wildfire 

Mitigation Plans could result in increases of up to seven percent in monthly bills for residential 

customers, not accounting for any adverse change in the cost of capital for the utilities.” WILDFIRE 

COMMISSION REPORT, Appendix II at 6. As the cost of capital rises, the utilities’ ability to undertake 

mitigation efforts naturally will be constrained, particularly given that CPUC approval for rate 

increases respecting safety and fire prevention expenditures is necessary but not always forthcoming. 

Id. at 7 (“These correlated changes [in cost of capital] dramatically raise the costs of any future 

utility infrastructure projects for wildfire safety or other reasons.”); STRIKE FORCE REPORT at 3 

(“Utilities rely on credit to finance ongoing infrastructure investments, including fire mitigation. As 

utilities’ credit ratings deteriorate, their borrowing costs increase and those costs for capital 

necessary to make essential safety improvements are passed directly to customers.”). 

Similarly, increased cost of capital threatens California’s clean-energy goals. “The state’s 

greenhouse reduction goals are also dependent on healthy utilities that are able to support renewable 

energy markets, energy efficiency programs, and technology advancements. As utilities face a 

higher cost of capital and the risk of bankruptcy, these programs will suffer.” WILDFIRE 

COMMISSION REPORT, Appendix I at 4; see STRIKE FORCE REPORT at 17 (“To continue the state’s 

progress in reducing greenhouse gas emissions in the energy sector, California needs investmentworthy IOUs.”). 

30 Cal. Public Utilities Comm’n Dec. 19-05-036, at 3 (May 30, 2019) (Guidance Decision on 

Wildfire Mitigation Plans Submitted Pursuant to Senate Bill 901), attached as Orsini Decl. Ex. O. 

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Application of the inverse condemnation doctrine to PG&E and other investor-owned 

utilities has created an “untenable” situation in California, something the California Supreme Court 

is likely to consider when determining whether the lower courts erred. 

Dated: October 25, 2019 

JONES DAY 

 /s/ Joshua M. Mester 

 Joshua M. Mester 

Attorney for PG&E Shareholders 

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