Scorched Earth, Scorched Trust: Wildfires and the Fight for Accountability

Key Concepts

• Investor-owned utilities (IOUs)
• California Public Utilities Commission (CPUC)
• Operations and Maintenance (O&M)
• Wildfire liability
• Undergrounding power lines
• Public Safety Power Shutoffs (PSPS)
• Distributed generation
• Microgrids
• Rate making
• Wildland-Urban Interface (WUI)

Wildfires and the Human Role

• Wildfires have increased in intensity and scale, burning nearly double the acreage annually compared to the 1990s.
• While climate change and drought exacerbate the problem, human factors, particularly the role of utilities, are significant.
• Utilities' infrastructure, especially high-voltage power lines, can cause wildfires when failures occur in heavily forested areas.
• The expansion of the wildland-urban interface (WUI) increases the potential for destruction and loss of life.

Utility Structure and Regulation

• Utilities are often regulated monopolies, granted exclusive operating rights in specific territories in exchange for regulatory oversight.
• The California Public Utilities Commission (CPUC) regulates utilities in California, allowing them to earn a regulated rate of return on investments that improve the system's value.
• Utilities make money by investing in capital projects (e.g., new power lines) and recouping day-to-day operations and maintenance (O&M) expenses.
• A key issue is the incentive structure: utilities are incentivized to minimize O&M costs to free up capital for investments that generate a guaranteed return.

The Camp Fire as a Case Study

• The 2018 Camp Fire, which destroyed Paradise, California, and killed 84 people, was caused by a 50-cent hook that broke after a century of wear.
• PG&E (Pacific Gas and Electric) was found to have neglected inspections in the remote area where the failure occurred.
• The incident highlighted the dangers of prioritizing capital investments over essential O&M, especially in high-risk areas.

Viability of the Traditional Utility Model

• The traditional investor-owned utility (IOU) model is facing challenges due to increasing wildfire liability costs.
• Alternatives to the IOU model include municipal utilities and cooperatives, but each has its own drawbacks regarding liability and cost allocation.
• A key question is how to value O&M in the context of avoided liability, incentivizing preventative measures.

PG&E's Undergrounding Initiative

• PG&E, under new leadership, announced a plan to bury 10,000 miles of power lines to reduce fire risk.
• Undergrounding costs approximately $3 million per mile, making it a capital-intensive undertaking.
• The CPUC has questioned whether undergrounding is the most cost-effective approach to risk reduction, suggesting alternatives like insulating wires.
• The initiative faces rate pressure, as electricity costs in California are already high.

Rate Increases and Public Perception

• PG&E has applied for and received rate increases to cover the costs of undergrounding and other initiatives.
• Some rate increases have been allocated to lobbying and public relations efforts, which has drawn criticism.
• The company's advertising, including claims that ads are not paid for by ratepayers, has been met with skepticism.

Capital Allocation and Investor Confidence

• Shareholders bearing the downside risk of wildfire liability may drive capital away from equity and towards debt.
• Warren Buffett has expressed concerns about the investment potential of utilities in the West due to uncapped uneconomic damage costs.
• The Edison fire in Altadena caused a drop in both Edison's and PG&E's share prices, highlighting the interconnectedness of wildfire risk.
• The California wildfire fund was established to help utilities manage liability costs, but concerns remain about its long-term viability.

PG&E Bankruptcy and its Aftermath

• PG&E filed for bankruptcy in 2019 due to an estimated $30 billion in liability costs from the 2017 fires and the Camp Fire.
• The company reached settlements with governmental agencies, insurance companies (subrogation claims), and fire victims.
• Fire victims received a settlement partially funded with shares in PG&E, creating a situation where they indirectly owned shares in the company that burned their houses down.
• The bankruptcy process was criticized for prioritizing the interests of hedge funds and insurance companies over those of fire victims.
• PG&E emerged from bankruptcy with more debt than it had before, and its infrastructure remains in a weakened state.

Alternative Funding Models

• PG&E has been exploring "creative financing alternatives" to fund infrastructure improvements.
• The company's credit rating was downgraded after bankruptcy, increasing borrowing costs.
• Options such as leasing space on towers for telecom and spinning off generation assets have been considered.
• The possibility of nationalizing PG&E has been discussed but faces challenges related to cost and state management capacity.

Proactive Power Shutoffs (PSPS)

• Proactive power shutoffs (PSPS), also known as Public Safety Power Shutoffs, involve proactively shutting off power during high-wind events to prevent fires.
• San Diego Gas and Electric pioneered this approach, and PG&E has since adopted it.
• While PSPS have been effective in reducing ignitions, they have also led to reliability issues and challenges for customers who rely on electricity for medical reasons.
• PG&E has been working to make PSPS more surgical, minimizing the number of affected customers and improving restoration times.

Risk Offloading and Insurance

• Utilities have insurance coverage for fire risk, but premiums have become more costly.
• The general insurance market in California has been affected by wildfire risk.

Rate Making and Incentives for O&M

• There is a need to change rate making to incentivize O&M and vegetation management.
• Regulators should consider the value of preventative measures in avoiding costly liabilities.
• Land management and controlled fires are also important factors in wildfire prevention.

Underground Wiring Incentives

• There may be incentives or tax subsidies for land developers to use underground wiring in new developments.
• Building lines overhead was more common when the grid was built out at the turn of the 20th century.
• Underground wiring can make maintenance more difficult, as it requires digging to access the lines.
• Europe has more underground wiring than the US, partly due to rebuilding efforts after World War II.
• The cost of undergrounding remains a significant barrier to widespread adoption.

Technological Innovation and Adoption

• PG&E and other utilities are engaging with startups and exploring new technologies to address wildfire risk.
• AI and data analytics have the potential to improve situational awareness, predictive maintenance, and preventative measures.
• Utilities are working to better process the vast amounts of data they collect to identify potential risks and prevent failures.

Reflections and Takeaways

• The energy sector, particularly the power side, is extraordinarily complicated and faces significant challenges.
• People are increasingly aware of the importance of grid reliability and safety.
• There is no easy or perfect solution to the wildfire problem, and it will take a long time to fix.
• The space is of great interest from a business standpoint, and there is a need for innovative solutions.
• Cybersecurity risks are also a growing concern for utilities.

Conclusion

The discussion highlights the complex challenges facing California's utilities, particularly PG&E, in mitigating wildfire risk. The traditional IOU model is under strain due to increasing liability costs, and innovative solutions are needed to ensure grid reliability and safety. Undergrounding power lines, proactive power shutoffs, and technological advancements offer potential pathways forward, but require careful consideration of cost, equity, and long-term sustainability. The PG&E bankruptcy serves as a cautionary tale about the need for accountability and the importance of prioritizing the interests of fire victims. Ultimately, addressing the wildfire crisis requires a multi-faceted approach involving utilities, regulators, policymakers, and the private sector.