TODAY’S STUDY: Wildfire Costs And Utilities
Wildfire Costs In California: The Role Of Electric Utilities
Carolyn Kousky, Katherine Greig, Brett Lingle, and Howard Kunreuther, August 8, 2018 (Wharton Risk Management and Decision Processes Center)
Context: A Growing Risk
Wildfires are currently raging across the west, once again devastating families and communities. The California legislature is considering a range of policies to improve wildfire risk management in the state. While the current fires were not started by an electric utility, one aspect under consideration is how the costs of utility-started wildfires are distributed. This Issue Brief takes up this topic.
It is clear that wildfire risk is increasing. 2 Development has pushed into the wildland-urban interface (WUI), where structures intermingle with fire-prone vegetation, leading to greater property damage from blazes and a greater risk of fire. Decades of fire suppression3 has led to a buildup of fuel, leading to worse conflagrations. Climate change is causing longer fire seasons due to increased drought and heat.4 Invasive species and insect and disease infestations are contributing to the higher risk, as well. All these factors are leading to an increasing number of large wildfires5 and commensurately higher costs of fighting them.6
This trend is particularly apparent in California, where firefighting costs have escalated significantly over the last four decades (Figure 1) and wildfire related losses are predicted to grow.7 In 2017, wildfires in California destroyed more structures – at least 9,300 – than in any other previous year (Figure 2). As of 2010, California had more than 4.4 million homes in the wildland-urban interface, the largest number of any other state, representing an increase of 36 percent since 1990.8 Nationwide, the WUI is less than one tenth of land area in the conterminous United States, yet recent research finds that 43 percent of all new homes were built in the WUI.9
Electric Utilities And Wildfire Risk
Wildfires start for a number of reasons. Some are ignited naturally by lightning. Most are started by people.10 Escaped campfires, debris burning, vehicle sparks, and intentional acts of arson are some of the main human causes. Electric utilities may also cause wildfires when high winds bring down power lines or conductors or when animals, trees, or other vegetation make contact with power lines.
Only 5 percent of wildfire ignitions in California are from power lines,11 but when these fires start, they are larger, accounting for just under 11 percent of acres burned. This is because the probability of ignition from a power line increases with wind speed. Greater wind speed means conditions more favorable to the spread of wildfire, conditions where suppression is less effective, and conditions in which firefighters are likely to be spread thin.12 Put simply: the conditions that cause power lines to start wildfires are the exact same conditions that make them spread rapidly and make them hard to contain. In Southern California, data on ignition source and acreage burned shows that utility-started fires cluster in the autumn months and are associated with Santa Ana wind conditions.13 Data from the California Department of Forestry and Fire Protection (Cal Fire), the agency responsible for fire protection in California, indicates that power lines caused 3 of the 20 largest wildfires in the state’s history.14
The Costs Of Wildfire
Wildfires cause extensive damages. Scholars of disasters often divide impacts into direct costs—those that result as a direct cause of the fire—and indirect costs—follow-on costs from the immediate destruction. The direct costs can stem from burning, heat, firebrands (burning or glowing pieces of material carried beyond the fire by wind), or smoke. A list of the potential direct and indirect costs from wildfires is detailed in Table 1.
Wildfire costs are borne by a number of different parties, including residents of impacted areas, property owners, insurance companies, electric utilities, and taxpayers at all levels of government. The costs emanating from a wildfire can be broad and impact many sectors. Depending on legal and regulatory regimes, costs can shift across different groups. In this brief, we focus on electric utilities and the share of wildfire costs that they pay in California for utilityignited wildfires.
What Wildfire Costs Do Utilities Pay?...Ratepayers And The Cpuc…Evaluating The California Regime…
Improving Wildfire Risk Management
Reducing future losses from wildfires through cost-effective mitigation measures and providing financial assistance to those harmed from these disasters presents challenges to the different interested parties including utilities, insurers, property owners, communities, Cal Fire, the California state legislature, and the federal firefighting agencies. All these stakeholders have a role to play in managing this risk.
When a wildfire has many possible causes, it can be characterized as an interdependent security problem. 35 Multiple actors contributing to a risk characterize such problems. 36 The decisions of one stakeholder can impact the harm experienced by another and influence their economic incentives for undertaking protective measures to reduce future risks. The increase in wildfire risk observed recently and projected for the future, as we have stated earlier, stems from climate change and decades of land management decisions. Local and state governments make decisions about building codes and zoning that determine the number of structures in high-risk areas and their susceptibility to wildfire. Property owners make decisions about defensible space and fire-resistant building. All these actions could lower the risk of property damage from wildfires but are beyond the control of the electric utility. More generally, all of these actors need to own a share of the wildfire risk so they undertake cost-effective measures under their control to limit the risk.
We suggest the following policy reforms that will be examined in more detail in future work:
Define proper mitigation levels ahead of wildfires. An economic analysis of the costs and benefits of various mitigation measures should be undertaken. Each utility should have an approved wildfire mitigation plan that is agreed upon by all stakeholders in advance of any fire. If the utility demonstrates continued compliance with the agreed upon wildfire mitigation plan, its actions should be deemed prudent for cost recovery proceedings.
Reform inverse condemnation by eliminating strict liability for wildfires. The application of inverse condemnation to wildfires ignited by power lines or electric utility equipment is ill-founded. Requiring utilities to pay for wildfire property damages should require a finding of negligence.
Ratepayers contributing a greater share to the risk should pay a higher cost. A case could be made that utilities be allowed to recover wildfire mitigation costs that are found to be reasonable and prudent. 37 Utilities should be permitted to create a separate class of ratepayers in the WUI and charge them higher fees due to the higher contribution to wildfire risk of their location choice. This will help send appropriate price signals about the riskiness of development in the WUI.
Develop tools that better incorporate current and future risk into land use decisions. One significant driver of escalating wildfire damages is the increasing number of structures in the WUI. As risk increases, land use planers need tools to understand and incorporate current and future risks to minimize the threats of wildfire to property, and, more importantly, human lives. CPUC and Cal Fire could work together to develop risk maps.
Harness insurance programs to promote risk reduction. Several models from other perils are available to link insurance to risk reduction through community and landowner mitigation measures. For instance, regulations and incentive programs developed under the National Flood Insurance Program might hold lessons for California’s FAIR plan. They suggest approaches for incentivizing communities to take more proactive measures to lower risk and in return receive lower insurance premiums.