In the past month there have been two very important dialogues pertaining to our utility companies and who should pay for losses due to wildfires. In one, the utilities are looking to avoid paying for any damages. In the second, the utilities are requesting to increase our rates for usage of electricity to cover future wildfire losses (even while they make every effort to be exempt from such costs). Talk about having your cake and eating it too.
It is now acknowledged that several California wildfires can be traced directly to utility company events. The utilities claim that they cannot afford to pay for the losses and are looking to the state or ratepayers to shoulder the burden.
To their credit, the utilities, with SDG&E leading the way, have (belatedly) accepted that power line incidents cause sparking that often ignites dry brush in the immediate vicinity of the power lines. And they have started taking remedial actions, a long overdue effort to incorporate risk management into their strategies. They are clearly dealing with known and definable risks. While we are caught up in determining who pays (in the long run, it will come out of consumers' pockets), the focus should be on how to mitigate the risks.
In every endeavor, such as managing an electrical power delivery system, there are multiple risks. The fundamentals of risk management suggest four basic steps. These are:
· Identifying possible risks;
· Estimating the probability of the risk incident occurring;
· Gauging the probable impact of the risk event, and
· Evaluating options to mitigate the risk.
There are three categories of risk. These are 1) known and definable risks, 2) suspect (difficult to quantify) risks and 3) unknown risks. In the case of utilities and wildfires, the elevated factors of probability and impact are known and deserve immediate and comprehensive mitigation. In a typical business, the burden of the risk falls completely on the company. The consumer is not saddled with the costs of failure. However, utilities have a special status – a government-sanctioned monopoly. As we consistently find in such operations, there is little incentive to mitigate risks. This needs to be corrected.
The question should not be who pays but rather, how do the utilities reduce the occurrence and impact of known risks? How do we incentivize the utilities to sensibly mitigate known risks? As currently established, the utilities can, in one way or another, avoid paying for the damages from risks they failed to address. They offer three bad choices: 1) add the costs to the rate base, 2) have the state pay for the losses, or 3) declare bankruptcy. The first two are the same in that the consumer picks up the tab. The third choice is not really an option. Since no reasonable replacement exists for such a monopoly, debts would have to be covered by a state bailout.
Utilities should not look to the state and the ratepayers for immunity from the cost of unprotected risks. Perhaps they should welcome a third-party, independent ombudsman to oversee the application of risk mitigation and management. An obvious candidate for this would be the California Public Utilities Commission – if it weren't for its history of acting in cahoots with the companies that it was charged to oversee.
The solution lies in the hands of the state. If a company is granted special monopoly-like status and produces an essential product or service, the state must establish firm oversight mechanisms and guidelines. The rule of unrestricted capitalism cannot apply to such public service entities. It is crucial that any such oversight commission be truly independent (which has not always been the case) so we cannot allow a governor to use appointments to these boards as rewards to cronies or donors.
The UC should reject any requests for risk-based rate increases until the utilities present a formal risk mitigation plan with projected costs for mitigating actions and potential offsetting savings from risk prevention.
In the ideal world, the UC would be a mediator, ombudsman and overseer. It would work to get what's best for the state, the ratepayer, and the utility, including providing incentives to mitigate risks. In this way, we promote the interests of all stakeholders, we avoid the costs of lawyers and the courts, and we all win.
A Rancho Bernardo resident, Levine is a retired project management consultant and the author of three books on the subject.
