Hello!
I’m very excited to share with you the product of many months of research and writing. It’s a report called Rewiring Risk: How to Bring Down Electricity Bills and Increase Wildfire Resilience in California, and it offers a framework for understanding and addressing the state’s intertwined wildfire, home insurance and electricity unaffordability crises.
For the launch of this report, we decided to try something a little different: a podcast! Above you can find a conversation between me and my colleague Eric Biber, a professor of environmental law at UC Berkeley who was an incredibly helpful reviewer of my report. I hope you take the time to listen, but if you just want the highlights, you can find a heavily abridged transcript of our conversation below.
Thanks, Lauren.
Inverse Condemnation with Strict Liability: A Boring-Sounding Doctrine that Is Actually Really Important
Lauren
So maybe we can just start with what exactly this is. “Inverse condemnation with strict liability,” It’s a bit of a mouthful. People’s eyes glaze over as soon as you utter it.
Eric
Inverse condemnation is the flip side of what’s called eminent domain. Eminent domain is the power of the government to take someone’s property, with or without their consent, as long as compensation is paid for it. Say the government wants to build a highway. You can sell to the government if you want, but if you choose not to sell, the government can go to court, force the title of the property that’s covered by the route of the highway and have that transferred to the government in return for a court adjudicated amount of money that is supposed to be just compensation—which is the federal constitutional term for this and it’s the standard practice in most states.
Inverse condemnation is the opposite of eminent domain. The government does something to your property, and they don’t go through the eminent domain process, and the property owner alleges that the government action was effectively taking title, or affecting the property in a way that required compensation, and so I’m going to court to force the government to pay that compensation.
The concept of strict liability is a concept out of what’s called tort law. Tort law is basically the law of accidents or intentional actions—where someone does something that hurts someone else, either in their body, in their property rights, in their reputation, range of possible ways, and you know, if you purposely do something to hurt someone, that’s pretty obvious. But most of the time, this is unintentional, right? You run into someone’s car with your car, and we adjudicate who owes what for that accident through a concept usually called negligence. So that’s the standard for much tort liability in the U.S.
Strict liability is a different standard. It basically says if you’re doing a certain kind of action and you harm someone else, you’re liable. Doesn’t matter if you took reasonable precautions. Doesn’t matter if you were negligent or not. You are liable. So to put it back together, what we have here is inverse condemnation with strict liability – if you do something that harms someone else, we will hold you strictly liable for it because it is a form of eminent domain for which compensation is required.
So that raises the question: Why is this applying to electric utilities? These are not highways. These are not public entities. These are private companies. Well, as it turns out, California, like basically all other states, applies this concept of eminent domain and publicness to activities besides constructing public roads. It has long historically applied for railroads and electric transmission and gas pipelines and other pipelines. Even if it’s operated by a private company, those entities have eminent domain power, and the theory here is that they’re providing a public utility, a public use. The whole point is that anyone should be able to access electricity if you can pay the fee. They have an obligation to hook you up and connect you to the system. They can’t discriminate against you.
Okay, so now you can see that the electricity system could be seen as something that’s for public use, and that the utility company would be seen, even if it’s a private company, as a public utility. And that’s basically how the California courts put it together. It’s like, okay, these are public utilities doing a public use; if they damage private property in the course of their operations, compensation is owed.
Why strict liability? So this concept is not unique to California, as you note in your report. A bunch of other states have this possibility of an electric utility being liable for damage to private property. California is basically an outlier here because of the strict liability standard. In other states, it tends to be a negligence standard.
Lauren
So why does California apply strict liability where all the other states only apply a fault-based or negligence-based standard?
Eric
Basically, the California Supreme Court concluded this is what the standard should be. There’s, I think, a theory that the public is benefiting from this infrastructure, so the public, in the form of the public entity that causes the damage, right, should compensate the members of the public who are harmed as a result of that infrastructure, right? So it’s sort of a risk spreading concept. If you are harmed by this public infrastructure, the public should be supporting it. Balanced against, are you making it too expensive for us to construct or operate this infrastructure? It’s not clear to me that the California courts would come to the same result, knowing what they know now about the implications of this doctrine.
Lauren
You just alluded to the consequences of strict liability, and I guess I should be clear about what I think those are and what I think probably you agree those are, which is: one, it’s been disastrous for electricity affordability because it incentivizes electricity utilities to mitigate to the point of diminishing marginal returns, often with extremely expensive capital expenditures.
But strict liability for utilities has been around for 25 years. So, why did these affordability effects become pronounced only quite recently? Well, it turns out the collision of growing wildfire risk with this doctrine produces it, which leads us to the question of why wildfire risk has apparently grown in California over the past 10 years. Most wildfire people who study it have an agreed upon story of what these factors are. The first is fuels management, and Eric, maybe you can talk a little bit about this because you go into quite a bit of detail about it in your Fixing Wildfire Law article. What is the history of fuels management specifically in California, and how has it led to the situation we have now?
How Forestry Practices Provided Fuel for the Fire
Eric
Basically, starting in the 1920s, there’s a huge push for fire suppression. The Forest Service starts a policy of putting fires out on its lands by 10 a.m. of the next day as a basic policy. Fire was seen as a risk to property. Part of this was a response to a very large series of fires in the 1910s that caused tremendous damage throughout the Western U.S. But it was also seen as damaging a resource that should be used by people. Like we don’t want trees to burn; we want to use them for timber, for instance.
And the problem, of course, is that many, though not all, the ecosystems in Western forests historically burned. Whether it’s from Native American burning or natural sources. A chunk of it’s natural lightning. These are species, for instance, that require fire to reproduce. Pine trees whose cones need fire to burst open and sprout, but also that if you don’t burn, if you’re in a dry western pine forest, the fuels just accumulate. It’s not wet year round, like in much of the eastern U.S. such that you can get the fuel to decompose. It’s going to burn, and so the forests will burn one way or another, and of course, if you decide to put out the fires for 50 years, the result is the fuels accumulate.
And exacerbating that was a range of practices of industrial logging that tended to emphasize treating forests like plantations, creating large single age stands of forests that also can be vulnerable to fire in sort of the way they structure and are managed. So you put those two together. Those happen for several decades, and eventually, the result is at some point things are going to give, and then that gets exacerbated by climate change. Things are warmer. Things are drier. Those are things that make fires go bigger. They can also interact, for instance, making wind events like we have in California particularly stronger and more dangerous.
So again, one of the challenges is that fire is particularly a risk in particular weather events that will occur, but are hard to predict in the aggregate. And so, most of the worst fire events get started during these extreme wind events. So you put that together, as you say, you have a doctrine sitting around that allows for recovery, and then you get a dramatic explosion and fire, and in particular, expansion in the intensity and size of the fires and the damage they do.
You know I reference the big burn in the 1910s in northwestern U.S. that burned out whole towns, but it’s different today in part because there’s more people, property is a lot more valuable. There’s a lot more development and a lot more development in places that might burn, and so you get events like the Camp Fire that burns out Paradise. You get fires in the Napa and Sonoma counties and wine country in Northern California that burn in urban areas, and one of the things we’re starting to see now, and again—this has happened historically—you’re getting fires entering in or starting on the edge of urban areas that turn into structure-to-structure fires.
This is what happened in the Palisades in LA, Altadena in LA as well, and it turns out there’s actually a lot more fuel in a house than in a tree. So if you overwhelm urban fire suppression, it can become extremely difficult to restore control in a high wind event. So you put all that together, and you get the possibility of much higher losses economically and at levels that are just not sustainable by even very large corporations like California public utilities, which are companies with tens of billions of dollars of assets, but you know they’re not going to sell off the transmission system to pay the judgment. They have to have cash, and they don’t.
How We Subsidize the Expansion of the Wildland-Urban Interface with Fire Policy
Lauren
This brings us to the other element of growing wildfire risk, which is growing exposure. The fact is, more people are living in dangerous proximity to wildfire than ever before. I think we probably have a pretty similar account of why this is. What’s your understanding of why we have this growth in the WUI, the so-called WUI, the wildland urban interface?
Eric
Wildland urban interface, one of the worst acronyms ever invented.
So why? Well, some of it is just a story of urban sprawl, cars, lots more income. People want to live in beautiful places, right? So that’s a chunk of it. There have always been rural communities in these places, but a lot of the population boom is driven, you know, by tourism, by people wanting second homes, by people wanting to travel and visit these places or retire to these places because they’re beautiful, wonderful places to live, and I don’t think that that demand is not going to be there.
Another component of it is that land use regulation, which has its pros and cons, tends to be stricter in urban areas than it tends to be in some, but not all of these exurban or rural areas. That varies a lot by place, but I think it’s fair to generalize that rural areas in the Western U.S. tend to have less strict land use regulation, which makes it easier to build things again for better or for worse. And so the result is you can get a lot of development scattered over the landscape, which makes it harder to protect. Isolated houses are harder to protect than contiguous core areas from fire coming in. Makes it harder to have fire on the landscape. One of the prime ways you deal with fuel loads is to try and restore fire, low intensity or even medium, higher intensity fire, depending on the ecosystem, to reduce the fuel loads. It’s hard to do that if you have people living out there.
So that’s another chunk of it, and another chunk of it is that we effectively, in our fire policy, at least subsidize development in these spaces, right? So we provide public fire suppression and fire protection, and that disproportionately benefits the people who are more at risk, right? Which is going to be people living in the WUI as a general rule. And related to that, the insurance system can provide that cross subsidization as well, depending on how policies and rates are structured.
And California is particularly susceptible to this because it has, for a long time, strictly regulated the rates that can be charged for homeowners’ policies to protect against losses like from fire, and that restriction on rates mutes the ability of using insurance to send economic signals about where higher risk exists, right? And so that’s another form of cross subsidization. Just because you have cross subsidization doesn’t make it bad, right? We may think that you know, rural communities are poor. They need support, things like that. But talking about a bunch of second homes in Tahoe, or you know, down in the Sierra Nevada, or somewhere like maybe you’re less sympathetic to cross subsidization. But those are the basic concepts.
Development in the WUI’s exploded. It’s going to continue to explode. There’s demand there. We don’t have a regulatory system that consistently constrains it. And from an insurance and public policy perspective, there are components that significantly subsidize it. I could back out and sort of say, if we were thinking about rural development more broadly, there are other ways in which rural areas are more expensive to live and harder to live in. So I don’t want to say that this is all determinative, but within the scope of what we’re talking about for fire, there’s definitely a cross subsidization component.
Prop 103: The Root of All Evil?
Lauren
Yes, this is the great bugbear of my paper. The mechanism by which rates are tightly regulated is the dreaded Proposition 103, which I mention a lot in my paper, and I doubt we will ever see rolled back in our lifetime. Which essentially, yeah, Eric’s shaking his head. Proposition 103 was originally a response to, I guess people thought auto insurance was too high, and like many things in California, it was put to ballot initiative. People were saying, “Do you think the prices are too high? Then vote for this ballot initiative.” And people said, “That sounds good to me.” And it turned out what that did is it subjected rate increases to the whims of an elected official, the insurance commissioner, who being elected has political reasons to not approve rate increases that are high enough, and by high enough I mean to let the insurance market clear and send actuarial signals about where it is safe to live. To me this is the root of all evil. I don’t know if you feel the same way exactly, but this is the original sin to me.
Eric
Yeah, yeah. I mean, I think the framing you give is, I think, a key, an important part of it. I think the best responses, if I was to sort of play the devil’s advocate on the other side, is, you know, without the elected accountability, the insurance companies would dominate as the larger repeat players relative to consumers, and you would get crappy products with poor claim service that would just take money from people and not actually give them good services, right? And there is, you know, I think a reasonable argument for consumer protection in the insurance context because of the possibility that you could pay in and not get out, because insurers could use policy provisions and claims services to effectively deny what you thought you were paying for.
That being said, there is a large range between good consumer protection and rate freezes, right? And so I think it is fair to say that I would agree with the position you’re putting out there, which is that the current system is not allowing insurers to recoup the funds they believe they need to be economically viable to provide protections in high risk parts of the state.
And part of that is that they can’t differentiate based on that risk to the level they think they should be able to, and also differentiate between policyholders who take various steps to reduce risk. Right, so you can harden your home or clear what’s called defensible space, removing vegetation around your house to reduce those risks, and part of it is also just the inability to increase rates in response to new information, and so that can effectively turn into, as you note, a cross subsidization in which low risk parts of the state pay for high risk.
Some Cross Subsidies Are Better Than Others
Eric
Now I’m going to step back. Like, insurance is sort of by definition cross subsidization in that way, right? It’s risk spreading. I think the problem comes in when it gets to an extreme level where it raises questions about what policy goals we’re trying to achieve. And so, again, this I think is a hard problem to solve, in part because some of that cross subsidization you could make plausible equity claims for, right? Poor rural communities. Think of communities like in Northern California that were historically logging dependent, natural resource extraction dependent. Those industries have declined substantially. They’re relatively low income, looking for some kind of economic boost, and setting insurance at much higher rates would be just yet another economic burden to what are already very burdened communities.
But like I said, it’s hard to have much sympathy for someone buying their second home in a resort area in California. So separating out who we’re supporting and what the equity claims here are is tricky and may not always be feasible. But I agree with you, the current system is not functional, and it does effectively produce substantial cross subsidization that, at least in part, is benefiting people that we probably don’t think have good equity claims, and is also in part facilitating further development in areas that are higher risk for fire, which exacerbates the problem to begin with.
Lauren
We should get into what exactly the cross subsidies are that I complain about in my report. So there’s quite a few of them. The first is the one relevant to the utilities, and this is a somewhat complicated one. There’s kind of two ways in which the utilities cross subsidize people in high risk areas. The first is, of course, by taking excessive grid mitigation measures to avoid setting a fire in a high risk area.
The second is this really interesting—and maybe you can explain more about this—it’s an interesting kind of mechanism called insurer subrogation, by which the insurer can sue the utility to recover the claims that had to pay out to the person whose house burned down. Why can they do that?
Eric
Subrogation is the idea that you can step in the shoes of someone else to assert their claims because you compensated for them. So, if you actually ever read your policy, you’ll see this comes up, right? Like if the insurer comes out and pays a claim for you, they’re going to reserve the right that you had a claim against someone else for the harm that they compensated you for, they will assert that claim to get their money back. As an example, I once turned my ankle playing basketball in a gym, and the health insurance company called me up a little later and said, “Hey, do you think there was something fishy about the gym that led you to turn your ankle? It’s like, “No, no, I just misplaced my foot on the basketball court.” But they were looking to see, “Did I have a claim?” Right, a negligence claim against the owner of the court, such that they could recoup the money they had paid on my behalf for my medical care, right?
Lauren
And that would be awesome for them, right?
Eric
Yeah, well, I mean, insurers budget based on this, right? They’re going to take into account that they are going to assert claims for a certain proportion of our asserted legal claims and the certain proportion of claims, insurance claims, made by our policyholders, and use that to recover some of the funds we pay out. And you know, if you take that into account, then you’ll take into account what capital reserves do we need to pay claims, what rates do we need to charge to pay claims, and so on and so forth.
So, as you know in the report, what has essentially happened for the insurance industry in California is they have made up for the lower rates they can charge, which may not be sufficient to support the claims they believe they will need to pay out because of wildfire risk. They have made that up by asserting claims against utilities under strict liability, so essentially, what has happened is strict liability for utilities for fire risk in California has been a way to help prop up the insurance industry in California, and as you know, that that does produce another form of cross subsidization because the rate payers are not just paying for the capital expenditures to reduce.
But all the utilities self-insure or contribute to the state pool funding, and what happens is that ratepayers in general are paying for the claims payouts by the utilities to these insurance companies, and again, that’s going to go from low risk to high risk as a general rule, right? Because there’s going to be more claims in high risk than low risk areas, and so that is a key part of supporting the insurance industry in California. The insurance companies make arguments that you do that [get rid of strict liability], we’re out of here.
Lauren
So this is to me one of the worst cross subsidies. Because it essentially subsidizes people to live in dangerous places indefinitely, and it delays an insurance crisis that is going to need to happen. Well, it’s already happening essentially. This is what’s happening right now. You know, State Farm pulled out of the state a couple years ago [editor’s note: State Farm didn’t actually pull out but they stopped writing new policies and non-renewed a bunch].
Eric
I think I see it as the same as the others, right? It’s still low risk to high risk. I think maybe it’s the capriciousness of it is what you’re maybe referring to. It’s just like who suffers losses that their insurance companies claim that then have the happenstance of being connected to utilities that result in payments, as opposed to a more systematic way of understanding, you know, who was harmed? Who took reasonable risks in where they lived, and reasonable precautions in hardening their homes or managing fuels on their property, and paid reasonable, or paying into rates that were reasonable to cover an insurance pool, for instance, and it’s also going to be totally capricious in terms of who who’s compensated. You could have a very expensive second home versus, you know, the only place you live. It’s all your assets in a rural town, and either one, it’s treated the same.
Lauren
Yes, the capriciousness is part of why I don’t like it. I would say the other reason is that as opposed to a cross subsidy, like say general fire protection and suppression, it is funded regressively. So when something is funded through the rates, everyone famously pays the same rate for electricity. That is going to affect lower income consumers more than higher income consumers, especially because in California, low income people are more likely to live in our very hot Central Valley and require more air conditioning. So I think it’s a very bad way to do it. It obviously creates a ton of moral hazard, and I think that if you’re going to create a ton of moral hazard, at least have it funded progressively through the tax base.
Eric
The capex, to be clear, would also be regressively funded. That is, at least arguably, that’s providing a public good in the sense that you’re reducing fire risk that will benefit the broader landscape and society.
Lauren
Yes. So yeah, the capex benefits people in high risk areas more than low risk areas, but at least it benefits the people in low risk areas some.
Eric
Sure.
Lauren
Whereas subsidizing people’s insurance really only benefits them and makes the wildfire exposure worse in the long run, in my opinion.
The Radioactive Politics of Home Insurance and Electric Utilities
Lauren
There’s also the famous cross subsidy of the FAIR plan that’s slightly outside of the scope of my paper. But we should talk about it.
Eric
It actually is essential because the FAIR plan is the backup insurance plan if you can’t get homeowners insurance in California, and let us emphasize: like, if you do not have homeowners insurance, the average person is screwed because you can not have a mortgage without homeowners insurance. Set aside that your most important asset is at risk of going poof with no compensation. No one’s going to write you a mortgage without homeowners insurance for obvious reasons. The bank wants to be able to get its security back if something happens, and so the FAIR plan is a state mandated insurance program that’s the insurer of last resort. It is not unique to California. Florida, Texas, many states have similar systems. All of them are prone to similar risks. They get all bad risks, so it’s a terrible risk pool, which means it is extremely susceptible to losses. Historically, these have also not been good at setting rates commensurate with their risk, in part because they’re often publicly run or publicly supervised, and in part because you can tell equity stories about why you’re not going to dump giant rates on poor people who need to get insurance to protect their limited assets.
The result is that you need a backfill somewhere, and so this happened in the FAIR Plan, which got hit with a bunch of claims out of the LA fires. I believe it was a billion dollar backfill that all the other insurers in the state had to give the FAIR plan, and half of that comes from the admitted insurers putting an assessment on their ratepayers. So all the policyholders in the state are cross subsidizing those people who are on the FAIR plan as well. And again, that is going to be low risk to high risk, and again, within the high risk pool, there’s going to be a range of people we may feel more or less sympathetic to in terms of whether we want to be supporting them.
You can see these dynamics happen in other states. It is extremely politically popular to ensure people have access to homeowners insurance, and insurance companies, like utilities, are hard to make politically popular. Let’s put it that way.
Lauren
So people hate insurance, and this is kind of your, I would say, reasonable critique of my report, is that people hate insurance, people hate utilities. It’s politically popular to rail against them.
Right, and you see that dynamic, like you see this down in L.A. after the fires, right? Like it’s not a left-right thing. It’s a range of people who are really pissed at their insurance company for not paying out the way they think they should be paid, and wanting to get back at them about that. And again, like there are times when insurance companies don’t do what they should do. It’s a difficult contractual problem to solve, right? And so that’s why you have the public intervention. But the result can be, as you say, that the insurance companies can’t charge what they need to make the risk pooling work.
So is it politically feasible [Lauren’s idea to reinstate actuarial pricing]? I don’t know. I mean, it’s also going to be infeasible if no one wants to write policies. And one interesting dynamic you have seen is there have been efforts at reform or change by the current Insurance Commissioner [Ricardo Lara, who implemented the Sustainable Insurance Strategy in late 2024, which seeks to take pressure off the FAIR plan by allowing insurers to charge higher rates]. One can debate the merits of them as well as the underlying politics of how much he’s helping insurance companies versus rate policyholders. But there have been changes that have happened, and there’s been, I think, surprising levels of political support for those changes, from what I’ve observed. Partly because of the shock waves of non-renewals and people getting non-renewals across the state does change the political tenor some.
Utilities are harder in part because there’s definitely examples of bad behavior by some of the utilities along these lines in the past, including deferred maintenance. So those memories are present in a way that I think makes it hard for people to have sympathy for what you’re talking about, but again, you know the question is when, if utility bills go up enough, does that change the political dynamic enough? And one other thing– you flag the progressivity or regressivity of those rate increases, which I think is really important. It also interacts with the state’s climate goals because a lot of those are focused around electrification. Transportation, heating, home heating, and things like that. And if electric rates are high enough, those become much less feasible for people to do, and also increase the regressivity of the increased electricity rates even more because transportation and heating are pretty fundamental activities for people, and so that is an additional reason. And I think those dynamics are one reason why . I think you would potentially see traction in the state legislature to make changes. I’m more skeptical you get changes through the ballot process because I think with the politics around utilities and insurance companies, it’s just really hard to get the broader public on board. Well, let’s make those entities better, let’s help them – it’s not an easy pitch to make, right?
