Looking Ahead At California’s Shifting Wildfire Liability Landscape

California’s legal and regulatory landscape for wildfire liability is on the precipice of a potential massive shift. As mandated by Senate Bill 254 (Becker, 2025) (SB 254) from last year, both the California Public Utilities Commission (CPUC) and the California Earthquake Authority (CEA) released critical reports recommending significant modifications to the State’s wildfire liability regime. The consensus across both agencies is stark: the current trajectory of utility liability and the corresponding financial burden on California ratepayers is unsustainable.

Here is a look at the groundbreaking recommendations from the SB 254 reports and other significant wildfire legislation introduced for the 2026 legislative session, which could fundamentally alter wildfire liability in California.

I. SB 254 REPORTS: A FUNDAMENTAL OVERHAUL OF WILDFIRE LIABILITY

Pursuant to Executive Order N-34-25 issued by Governor Newsom and SB 254, the State was tasked with evaluating alternative structures to equitably socialize the risks of natural catastrophes. The resulting CPUC and CEA reports (collectively, “SB 254 Reports”) tackle the issue from multiple angles, but their most notable proposals target the legal doctrines that govern utility liability in the State of California:

• Reassessing Inverse Condemnation Strict Liability: For decades, under Article I, Section 19 of the California Constitution, public agencies and investor-owned utilities (IOUs) have been targeted for recovery of property damages if their equipment ignites a fire — regardless of whether they were negligent. More recently, lawsuits have also targeted water utilities under a theory of “failure to protect” – essentially, that the water utilities should be responsible for property damage if their public facilities fail to provide adequate water to stop the spread of wildfires. Because such facilities serve a public use, courts have historically reasoned that the costs of damages should be socialized among ratepayers. The CEA report introduces a recommendation to change this: proposing an amendment to the State Constitution to significantly modify inverse condemnation for wildfires. Shifting to a fault-based (negligence) standard would align California with the rest of the nation, potentially stabilizing utility credit ratings and halting the soaring costs currently borne by ratepayers.
• Modifying and Harmonizing Damages: Acknowledging that modifying the State Constitution via voter approval would face fierce litigation and political hurdles, the SB 254 Reports also offer alternative liability reforms. Key proposals to moderate utility exposure include capping Additional Living Expenses to standard timeframes (e.g., a five-year maximum), eliminating punitive damages against IOUs to match the protections currently afforded to publicly owned utilities, potentially limiting or prohibiting recovery of attorneys’ fees and removing insurance subrogation. The CEA report states that eliminating insurance subrogation alone could slash total utility settlement payments by an estimated 35% to 40%, substantially lowering the costs ultimately passed onto ratepayers.
• Transitioning from a “Wildfire Fund” to a “Catastrophe Fund”: The CPUC report emphasizes that while utility equipment accounts for roughly 6% of annual ignitions, the overwhelming majority of catastrophic fires stem from climate change, historical land-use policies and vegetative fuel buildup. To more equitably socialize this risk, the CPUC recommends expanding the existing, narrowly-tailored Wildfire Fund into a broader “Catastrophe Fund.” This would widen the contributor pool beyond just electric ratepayers to include local governments, publicly owned utilities and non-ratepayer sources like Cap-and-Invest proceeds and the State’s General Fund.

II. BEYOND SB 254: PROACTIVE MITIGATION IN THE 2026 LEGISLATIVE SESSION

While the SB 254 Reports tackle the legal and financial mechanics of post-wildfire recovery, the California Legislature is also expected to advance numerous bills this year addressing wildfire issues, some of which should be closely monitored by water providers. For example, Assembly Bill 2013 (Bennett) (AB 2013) introduces new emergency preparedness obligations for community water systems operating in wildfire-prone areas. Under AB 2013, water suppliers serving more than 100 customers in designated moderate, high, or very high fire hazard severity zones must develop and file an annex to their disaster preparedness plans. The annex must include a comprehensive assessment of system resilience during extreme weather, red flag warnings and major power outages like Public Safety Power Shutoffs. 

Under AB 2013 as currently written, water systems will be required to inventory their pumps, identify those lacking emergency backup generation and establish operational plans regarding minimum water tank levels to balance continuous customer service with the sudden, high-capacity flow demands of firefighting operations. Crucially, compliance pathways will vary depending on the provider. CPUC-regulated water utilities will be expected to integrate these new resilience assessments into their existing CPUC emergency response filings. Meanwhile, public water agencies and municipal districts will need to submit their plans to county emergency authorities. Additionally, as the Legislature reviews and evaluates the SB 254 Reports, it possible one or more of the specific proposals and recommendations therein could be introduced as legislation. Governor Newsom’s proposed 2026 – 27 budget reflects a cautionary approach thus far. While revenues have improved over the previous year, the state is still solving for a $2.9 billion deficit and prioritizing the replenishment of its reserves as a “Rainy Day Fund.” These budget constraints will almost certainly have a direct impact on the implementation of recommendations contained in the SB 254 Reports, likely leaving local agencies and utilities to continue to shoulder the financial burden of wildfire response and resilience for now.

III. LOOKING AHEAD

The primary message from both the CPUC and the CEA is clear: California cannot solve its climate-driven wildfire crisis squarely on the backs of utility ratepayers. The transition away from strict inverse condemnation liability would be a paradigm shift for public agencies and IOUs in California.

We will continue to closely monitor the progress of these agency recommendations and the evolving legislation throughout the 2026 session, keeping you informed on how these shifts may impact public agencies and IOUs across the state. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.