Fixing The Profitability of Negligence for California Fires

California is currently suffering its largest wildfire in history, with over 59 dead, 52000 people evacuated from their homes, and property damages likely to exceed $20 Billion.

The likely cause was PG&E negligence surrounding high-risk power lines, as suggested by this pending lawsuit and their tumbling stock price.

This isn’t the first time PG&E has been to blame for a major fire, and so we should know the problem hasn’t been solved yet. Most of the solutions I’ve heard so far sound like the same old problem again, like a revolving door of corporate negligence.

Let’s look at what we really want out of our energy infrastructure in terms of fire protection, and see if we could design a solution that gives us those results.

What We Want

Safety, and fair prices!

I know we aren’t going to get perfect safety. The climate is getting drier, and California is full of trees, and we keep experiencing low-rain years, so we can’t expect our utility to be responsible for all possible fire damage, but they should be particularly responsible for demonstrable instances of their own negligence.

The problem with a corporation running our energy infrastructure is that they have a constant perverse incentive: Whenever they get a dollar that they could spend on prevention, they could also just pocket it. We wouldn’t know, because we have no oversight. And if there is a fire, they’re a corporation, so their individual liability is limited, so the risk for that kind of negligence to any individual in the company is much lower than the possible upside of misallocating funds. This isn’t a problem with the individuals in PG&E, this is a problem with having a corporation with shareholders getting to decide how careful to be, without enough skin in the game to care if it goes bad!

I believe we can solve this, with government policy and economics! As tax payers, the energy company is our employee, and we can set the terms we demand!

Raising The Stakes for Prevention

If the problem is that today it’s too easy for an economical energy company to accept the externalized risk of fire over the guaranteed reward of misallocating funds, what we need to do is tip the scales.

A simple cost-benefit analysis that might go through an energy company employee’s mind.

Since it’s far more profitable to pocket the money today, we need to either:

  • make maintenance more profitable
  • make negligence more expensive
  • a mix of both

Making Maintenance Profitable

The naïve approach is to throw more money at the energy company, but we’ve tried that, and they just pocket more of it. If we want to pay for more maintenance, we need to ensure that maintenance is completed, with a third party.

The usual problem with third party oversight is that they become entangled in the industry they’re regulating, and end up just getting a share of the pocketed funds, and so I would advise against simply creating a new oversight organization for that role.

Making Negligence Expensive

Another common approach to industries with public impact is to regulate their impact, and fine them for negligence. Again, this usually falls on an agency, and that agency becomes a target for both bribery and potentially lobbying to appoint an industry leader (a lame duck) to lead it.

Financial penalties are a tool that could solve this, but you can’t apply financial penalties to create skin in the game if the people applying those penalties don’t have skin in the game either.

Bounty Hunter Regulation

One possible solution to this would be a sort of bounty-hunter based regulation. We could pass a law that says:

  • Any energy company that works in our state is subject to fines initiated by public bounty hunters.
  • Any citizen who can find an instance of dangerous negligence by an energy company will be awarded $100,000 from the company’s funds.
  • In addition to awarding the bounty hunter, the company could be fined an additional sum that goes towards public fire prevention, firefighter organizations, and fire insurance.

You might think $100,000 is high. I think this number actually only needs to not be too low. If it’s high enough, the company will adopt policies that are strict enough to not be exposed to this kind of risk. If the fine were ten million dollars, do you think they would risk a single infraction?

If the fine were lower, there might be more instances of negligence, but that would just mean there could be a more vital economy of bounty-hunting regulators looking to catch infractions in the act.

The Hybrid Approach

Putting an energy company at this kind of liability may increase their costs, but an ounce of prevention is worth a pound of cure, and as a state we should be willing to pay slightly more for energy to pay less for active fires, killing our people and wildlife, destroying our homes, and poisoning our air.

An ounce of prevention is worth a pound of cure

However, as long as the energy company is a singular monopoly, like PG&E has been, there is no easy way to ensure they are still minimizing their costs, which is why it is also important that the company be spit up into smaller companies that can compete with one another.

Open Questions

This is not at all a complete solution. For one thing, there would still need to be oversight and approval of bounty hunter claims, which again becomes a nexus of power for bribery and corruption. Longer term, the problems of centralized power need to be addressed, possibly in dramatically different ways.

In the short term, our state needs to keep our lights on and continue operating, while doing what we can to reduce the risk of this kind of disaster happening again, so I beg all California citizens to think seriously about the perverse incentives of businesses, and how to reconcile that with the responsibilities of our public utilities.