Unbound wildfire liability is a cost the US can’t afford

“We are all one spark away from bankruptcy,” said one utility CEO at the recent Western Conference of Public Service Commissioners meeting. 

He was speaking about wildfires: a topic under regular conversation at energy industry events and in utility board rooms. The business of providing electricity is being turned on its head, and all of us are paying a price.

California utilities, under the direction and oversight of regulators, have spent the past six years developing, refining and implementing data-informed wildfire mitigation plans that have successfully reduced risk. And regulators and utilities in other Western states including Oregon, Utah, and Washington have also been first movers. Their experience has shown that this can’t just be a box-checking exercise; real risk reduction requires meaningful operational changes. 

As catastrophic wildfires have become a reality in places that were previously considered to be relatively low-risk, like Hawaii and Texas, utilities and regulators across the central and eastern parts of the country are now actively working to learn from the experience of their peers as they prepare to conduct their own service territory-specific risk assessments and develop contextualized plans. But wildfire mitigation plans, even if required and approved by regulators, aren’t enough.

We must also address the untenable situation of unbound wildfire liability that exists in most states.

Utilities, regulators, credit agencies, insurance agencies and investors all see the dire need for limits on non-economic damages or some sort of backstop. The onus is on utilities and their regulators to take action to prevent the electric grid from causing wildfires that can destroy the homes, lives and livelihoods of their customers, but unlimited liabilities have the adverse effect of making utilities no longer economically viable. Given that electricity is the backbone of our economy, that is a cost we cannot afford.

As just one example, Berkshire Hathaway Inc.’s PacifiCorp currently faces a demand for $30 billion from victims of a wildfire in Oregon in 2020, which is two and a half times what the utility is worth. This is not the first utility to face wildfire damages in the billions of dollars. 

Some industry experts have pointed to the Price-Anderson Nuclear Industries Indemnity Act as a potential model to address utility wildfire liability. The Price-Anderson Act governs liability-related issues for all non-military nuclear facilities constructed in the United States before 2026. Its main purpose is to partially compensate the nuclear industry against liability claims arising from nuclear incidents, while still ensuring compensation coverage for the general public.

But whether this complicated federal solution is the right one for the case of wildfires remains to be seen. State-level action is another option. In March of this year, for instance, Utah legislators created a fund for supplemental wildfire coverage and capped damages for wildfire claims.

Wildfire liability has society-wide ripple effects. It of course puts the affordability of electricity at risk, but it also puts the energy transition itself at risk. If a utility is no longer credit-worthy because of wildfire issues, it will be unable to access the capital necessary for the transition from fossil fuels to carbon-free resources.

The Hawaiian Electric Company is a real-life example of this situation. To reach its goal of net zero carbon emissions by 2045, the utility needs to add one gigawatt of renewable energy by 2030. However, as a result of the Lahaina wildfires in August 2023, the utility is now struggling to sign power purchase agreements with renewables developers because of the fire’s negative impact on its credit rating.

Wildfires are already costing the United States between $394 billion and $893 billion each year, and this will increase if appropriate actions aren’t taken. And we will continue to see greater risk not just in the West during hot summer months but also throughout the year and across the country.

Wildfires are a national crisis. Now is the time for all stakeholders to come together with a sense of urgency to discuss these challenges and to identify solutions at the federal, state, and local level. We can't afford business as usual, and we can’t afford for utilities to go out of business.

Julia Hamm is a partner at The Ad Hoc Group and a board member of Puget Sound Energy. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.