A federal judge took Pacific Gas & Electric on a fiery trip to the woodshed in mid-February, accusing the utility of failing to follow through on risk-reduction efforts, such as trimming trees near power lines. “I’m going to do everything I can to protect the people of California from more death and destruction from this convicted felon,” thundered U.S. District Judge William Alsup, who is overseeing the utility’s criminal probation related to the 2010 gas pipeline explosion in San Bruno.
The judge was right to point out PG&E’s mismanagement. He could have added that Californians’ wallets as well as their lives need protection. Rather than assuming the costs of safely delivering electricity itself, PG&E imposes the burden on its customers — in the form of blackouts.
Last fall, PG&E preemptively shut off power to millions of its customers to reduce the risk of its equipment sparking a fire in hot, dry, windy conditions. It cut power nine different times, leaving some of its customers without electricity for as long as one week. (Southern California Edison and San Diego Gas & Electric also preemptively cut power last fall, but those shutoffs affected far fewer customers.)
This year, in its 2020 wildfire mitigation plan, PG&E anticipates “smarter, smaller and shorter” blackouts for the coming fire season. But, as Alsup pointed out, the company’s record on fulfilling its promises is “not even close to perfect.” And smarter, shorter blackouts would still be costly for Californians.
Exactly how costly? The utility has not made public any analysis showing that the benefits of last year’s shutoffs were worth the costs imposed on its customers (some of which are not unlike the effects of the coronavirus crisis): shuttered businesses, refrigerators full of rotted food, disrupted work and personal lives, and even health risks to individuals who rely on equipment such as dialysis machines.
In a just-published Manhattan Institute report, we fill the analysis gap. Our research shows that the costs of PG&E’s preemptive shutdowns have far exceeded the benefits of reduced wildfire risk.
For example, based on the economic value of electricity to Californians, we estimate that the Oct. 9-12, 2019, shutoff imposed costs of about $850 million to $1.7 billion on the 750,000 customers, mostly in Northern California, who were affected. As for the benefits, even if we consider all of PG&E’s service territory and not just the 35 counties where the power was shut off, and even if we assume that every piece of PG&E equipment was in poor condition and thus 10 times more likely to spark a fire than equipment in satisfactory condition, the expected benefits were just over $500 million. Looking just at the affected counties reduced those expected benefits to just over $100 million.
By our calculations, the low end of the range of costs PG&E imposed on its customers was eight times larger than the expected benefits from reduced wildfire risk. In fact, had PG&E not preemptively shut off power and had the company’s equipment caused a wildfire, the expected costs of that wildfire would still be less than the costs imposed on those 750,000 customers.
There are three reasons PG&E would adopt a policy that yields so little benefit for the public.
First, from a utility’s standpoint, a preemptive-shutoff policy makes perfect business sense. We estimate that the Oct. 9-12 shutoff set PG&E back between $15 million and $20 million in lost revenues. That sounds like a lot, but it’s a small fraction of the company’s potential multibillion-dollar liability should its equipment cause another Camp fire, which destroyed the town of Paradise. In other words, a preemptive shutoff is relatively cheap liability insurance. (Then again, because PG&E declared bankruptcy in January 2019, it’s not clear what additional claims could be recovered from the company, even if its equipment causes yet another wildfire.)
A second rationale for preemptive shutdowns is, somewhat ironically, public relations. The California Public Utilities Commission and state politicians, who allow the shutdowns, all appear to be terrified of the adverse publicity should another deadly PG&E-caused wildfire occur. The PUC may fear accusations that it has failed to oversee PG&E adequately. As for politicians, presumably they fear being voted out of office if they are perceived not to have “done something” to prevent PG&E-caused wildfires.
Finally, PG&E and state regulators appear to be basing their policy decisions on worst-case outcomes, such as the Camp fire. This has arisen, in part, from a flawed approach the utilities and the state have adopted for managing risks associated with utility operations. The horrific Camp fire was an outlier. And outliers, by definition, are rare events. On average, the damages from wildfires caused by PG&E’s equipment over the last 10 years has been much less severe. Imposing large and certain costs on PG&E customers to spare them from far lower expected costs of a wildfire makes no economic sense.
The destructive wildfires in 2017 and 2018 resulted from a confluence of circumstances, including weather conditions, questionably managed forests and deferred maintenance along PG&E’s power lines, which increased the likelihood that the utility’s equipment would cause a wildfire.
Although preemptive shutoffs will likely remain PG&E’s policy of choice, that policy ill-serves the company’s customers. At some point, state regulators and policymakers need to echo Judge Alsup in asking themselves: Haven’t PG&E’s customers suffered enough?
Jonathan A. Lesser is the president of Continental Economics and an adjunct fellow with the Manhattan Institute. Charles D. Feinstein, formerly an associate professor of management science and information systems at Santa Clara University, is the CEO of the consulting firm VMN Group. Their report, “Playing with Fire,” was released April 7.