The economic toll of the California wildfires

The economic toll of the California wildfires

Estimates are various, but the key debate surrounds who will foot the bill.

How to measure the cost of the damage caused by the deadly wildfires that have swept through California in recent months–the most destructive wildfire season in the state’s history?

It is a cost that’s still growing, and given the immense personal losses experienced by many residents, surely cannot be measured in economic terms alone.

Since June, a total of 7,579 fires spanning 1,667,855 acres of land have torched 13,000 buildings, taken at least 71 lives, and left hundreds more people missing, with the losses to private property caused by the Carr Fire alone estimated at $253 million.

The 2017 fires that ravaged parts of Northern California Wine Country may end up exceeding $2.5 billion in insurance claims, with property damages alone possibly topping $10 million.

Meanwhile, Fortune reported that the state of California has exhausted its fire agency budget of $442.8 million for 2018 and currently requires an additional $234 million to continue fighting the fires.

Yet the disaster has also spread beyond the woodland to financial markets. Shares in the California electricity giant PG&E had fallen by more than half in recent days on investor concerns that the utility would be held responsible for some $30 billion in damages from the past 18 months’ worth of fires, many of which began last year.

Yet this past Friday, those same shares jumped by nearly 40% on the news of a potential bailout. A day earlier, Michael Picker, president of the California Public Utilities Commission, indicated that regulators had no interest in seeing PG&E go bankrupt and were interested in working with the utility to spread the costs across its ratepayers in the form of higher electricity bills rather than focusing it into selling bonds or other capital market fundraising.

Many believe that taking the pressure off PG&E is a good idea. A paper published in August by the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania outlined key policy steps that California could take to better allocate risks. They include prohibiting the rate of building in areas of “Wildlife-Urban Interface” and adopting initiatives used in the National Flood Insurance Program.

Those Californians who choose to live in riskier areas could not only be charged more for their electricity, but also suffer more outages because utilities will purposely de-energize lines during times of high wind and other weather dangers related to fire risks.

Another suggestion has been reforming inverse condemnation by eliminating strict liability for wildfires whereby Californians who suffer property damage from a fire caused by power company equipment can seek compensation regardless of whether the utility in question was negligent or at fault, passing the burden of risk from the companies to taxpayers and insurance companies–a move that PG&E inevitably supports.

“Under inverse, energy companies face massive, essentially uninsurable risks, even when they have followed established safety and compliance rules,” PG&E spokeswoman Jennifer Robison said.

In the meantime, for many Californians, the tragedy is far from over, and the debate over how the state responds to such a sweeping catastrophe has only just begun.

2018-12-11T19:04:52+00:00

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Paul Imison
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