Will we hamstring climate change mitigation to pay for adaptation?
Our lush California spring has turned to a hot and dry summer. Fire season is upon us, and this has me on edge. I’m not the only one. Last week, my neighbor burned a bagel in her toaster and half the neighborhood ran outside to investigate the hint of smoke.
Lawmakers are also on edge about wildfire season, and eager to make progress on a policy response. In May, regulators rushed to approve utility wildfire mitigation plans. Last week, Sacramento rallied to pass a major piece of legislation that will change how the electricity sector pays for escalating wildfire costs.
AB 1054 will help bring financial stability to some unstable California utilities. That’s good news. It provides incentive for regulated utilities to implement fire risk mitigation. Also good news. But it continues the practice of recovering a significant share of wildfire costs in higher electricity bills. It’s time to think seriously about reaching outside the power sector to cover some of these costs.
Wildfire costs and the electricity sector
Before digging into the details of how these wildfire costs should be recovered, it’s important to be clear about what costs we’re talking about. Wildfire costs passed through to electricity ratepayers fall into two main categories.
Let’s call the first “climate change adaptation costs”. In a hotter and drier California, running electric power lines through parched forests is an increasingly risky business. To adapt, we need to up our fire prevention game. Regulated electric utilities are now required to develop mitigation plans (e.g. tree trimming, new weather stations, disaster response services) that will cost several billions of dollars to implement. Utilities will recover these costs in higher electricity rates. We’re already starting to see these cost increases in rate cases.
The second cost category is potentially much larger. Call these damage compensation costs. In California, utilities are on the hook for any damage caused by fires started by their equipment, even if the equipment was operated responsibly. If the utility is not at fault, these costs can be passed on to electricity consumers. The idea that the utility should take on all damage liability, guilty or not, has been controversial. One rationalization is that inverse condemnation serves to “socialize the burden” of costs “that should be assumed by society”.
The landmark bill signed last week establishes a $21 billion fund to help utilities cover future wildfire liabilities. Shareholders will contribute $10.5 billion to this fund (some would like to see a larger contribution, but if the PG&E stock price is any indication, there are limits to that option). Proponents say that the contribution from ratepayers would amount to only a few dollars each per month. But critics warn that the utilities have unlimited authority to use bonds to finance large liability costs (and these financing costs would ultimately be passed on to ratepayers).
We’ve all done our part in accelerating climate change, so it makes sense to me that some of the adaptation costs – and damage costs caused by fire versus negligence – should be borne by everyone. The question is: how to allocate this cost burden? Electricity rates offer one vehicle. But I think we’ve driven this vehicle too far. Here are three reasons to start looking for another option:
- California’s electricity prices are too high already
Retail electricity prices in California have been rising faster than inflation since 2013. The graph below shows historical and projected average rates for California’s largest utility (PG&E). Projections reflect cost recovery (including some fire risk mitigation) that was requested by PG&E in 2018.
A recent paper by Severin and Jim compares retail electricity prices in 2014-2016 against the social marginal cost (think fuel costs + pollution damages + climate impacts). In California, average retail prices over this period were more than twice as high as the social cost per kWh. Retail electricity prices have increased by more than 25% since 2016. In other words, we’re driving retail electricity rates in the wrong direction.
- California’s climate change mitigation strategy hinges on electrifying nearly everything.
Different people have different ideas on how to chart a course to de-carbonization. But many (most?) see electrification – getting as much of our energy consumption hooked up to a green grid as possible – as a central pillar.
If this is our course, California’s climate change mitigation strategy hinges on millions of households trading their gas-fueled cars/appliances for electric-fueled alternatives. Fuel prices matter when consumers choose their cars and appliances. If electricity prices are sky high, who’s going to choose to electrify?
- Demand charges/fixed charges are already broken
Of course, there’s more than one way to recover climate change costs from electricity consumers. Rather than dial up the price per kWh, we could alternatively increase the fixed cost component. But last week’s blog reminds us that demand charges are no silver bullet. Demand charges and fixed monthly fees are an inefficient and/or inequitable way to raise revenues to cover fixed costs of electricity supply. Adding climate change costs to that bill makes these matters worse.
Taxing up the wrong margin?
I’m really hoping that investments in wildfire mitigation will make for a less eventful fire season this year. May all our smoke come from campfires, contained forest regeneration and burned bagels. But if wildfire costs continue to escalate at an alarming rate, recovering these costs from ratepayers will push too-high electricity prices even higher. This has important equity implications. And we risk crippling the most promising climate change mitigation options we’ve got.
This begs the question: Why not socialize these costs some other way?
In the lively discussion of Severin’s blog last week, some commenters dismissed the idea of using taxes to recover the fixed costs of electricity supply as politically untenable. But this week, the cost components we are talking about can be construed as public goods and social services. These include fire prevention, disaster preparedness, and picking up the pieces following a natural disaster. When it comes to covering these kinds of costs in other contexts – flood walls, hurricane emergency services, storm damages – we routinely ask taxpayers (not electricity consumers) to pay the price.
If you’re still choking on the tax word, let’s be clear. Recovering these wildfire costs in higher electricity bills is a form of taxation. It’s a sales tax on electricity consumption. Moving this tax onto a broader base would offer more degrees of freedom. For example, a targeted income tax could better address equity concerns. A tax on choices that drive fire damage liabilities (e.g. new housing developments in the WUI) could raise revenues while reducing damages.
It’s true that these alternatives would bring their own unintended consequences and inefficiencies. But at some point – we might be there already – they could offer an improvement over our current approach. We need to start thinking outside the electricity sector box to find a better way to negotiate climate change adaptation *and* mitigation (and cost-effectiveness and income inequities) in California.
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Suggested citation: Fowlie, Meredith. “What Wildfire Costs Will Depend On How We Pay”, Energy Institute Blog, UC Berkeley, July 15, 2019, https://energyathaas.wordpress.com/2019/07/15/what-wildfire-costs-will-depend-on-how-we-pay/