Creation of a catastrophic wildfire risk pool is emerging as the most likely option as California lawmakers seek to protect the solvency of investor-owned utilities from record payouts for fire damages.

PG&E filed for a bankruptcy reorganization this year, saying it needed the court’s protection because it cannot count on the California Public Utilities Commission to allow it to recoup its costs through rates. The legislature last year created the Commission on Catastrophic Wildfire Cost and Recovery, which is due to recommend ways of mitigating wildfire risks by July 1. Gov. Gavin Newsom is also drafting plans to respond to wildfires more broadly and is expected to release a proposal late next week.

One potential solution would be to change laws that California courts have interpreted to assign strict liability to investor-owned utilities inverse condemnation actions, which are lawsuits against public entities. The courts have assigned liability to insurers irrespective of fault if their equipment causes fires. But legislation to reform inverse condemnation rules failed to pass the state legislature last year.

Moody’s on Wednesday issued a report saying that creation of a state catastrophe fund “appears to be the reform that is most likely to happen.” Analyzing several possible remedies, the ratings house said an independent fund could provide an “immediate source of liquidity for utilities addressing wildfire claims and allow for financial stability during times of crises.”

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