This week, host Daniel Raimi talks with Judson Boomhower, an assistant professor of economics at the University of California San Diego and a faculty research fellow at the National Bureau of Economic Research. Raimi and Boomhower discuss the recent public safety power shutoffs that affected over one million people in northern California, the economic factors that contributed to the shutoffs, the economic impacts of the shutoffs, and how planned shutoffs may become increasingly common in the future. Boomhower offers unique expertise on many facets of the issue, including California’s electricity system, wildfire, and—crucially—the economics of liability.
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The Full Transcript
Daniel Raimi: Hello and welcome to Resources Radio, our weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week we talked with Dr. Judson Boomhower, assistant professor of economics at UC San Diego and faculty research fellow at the National Bureau of Economic Research. Judd and I will talk about the recent public safety power shutoffs that affected over 1 million people in Northern California; what led to them, what their effects were, and how they might become more common in the future. The shutoffs have gotten a lot of attention lately, but Judd brings unique expertise to the issue, including a deep understanding of the electricity system, wildfire, and crucially, the economics of liability. So stay with us. Alright, Judd Boomhower from the University of California San Diego. Thank you so much for joining us today on Resources Radio.
Judd Boomhower: Thanks for having me.
Daniel Raimi: So Judd, we're going to talk today about the public safety power shutoffs, the PSPS in Northern California that happened last week, or a little over a week ago. But before we talk about that really fascinating issue, we always like to ask our guests how they got interested in energy and environmental issues in the first place. So how did you start working on this stuff?
Judd Boomhower: You know, I'm one of those people whose interest in environment kind of predates my interest in economics, to be honest. I think probably because I grew up in a relatively rural part of Oregon, I've just always found natural resources and environment issues to be inherently interesting. In college, I focused on biology. I worked, among other things, after college I spent a year doing field work on a small group of islands north of Venezuela, studying coral reef fishes. And that was a tremendous life experience. But I think I also, somewhere along the line in there realized, I was having a lot of fun studying a coral reef that was dying, and it wasn't dying for lack of scientific understanding. That set of experiences reminded me that economics and policy were important. And I thought a little more about it and found that those issues were also intellectually interesting to me. And I ended up in graduate school, and had some really great mentors who helped me learn to love applied microeconomics and you know, here I am.
Daniel Raimi: So now that we have some sense of how have you got interested in, and how you got to where you are in the world of energy and environmental economics, let's talk a little bit about how Northern California got to where they were, a little over a week ago, when they had several days of widespread power outages that were intentional and affected over 700,000 customers, I believe. So that's probably over a million people because a customer is a home or a business. Can you give us a little background on the sort of set of events over the last several years that led us to the point where the utility, Pacific Gas and Electric, felt the need to do these widespread power outages.
Judd Boomhower: Sure. Well, I think as you and everyone listening probably knows, the problem of wildfire has been getting worse for the past several decades, especially in the Western US. And that's for a combination of reasons; that's probably due to climate change, that’s due to greater construction of homes and other valuable assets in places that burn frequently, it's probably also due to the way that we manage forests. There's a whole combination of issues and problems that have caused wildfires to become more frequent and more severe. And that's been a trend that's existed for a long time. And more recently, you know, in 2017 and 2018 we had some of the most damaging fires in the history of the United States. We had the Napa-Sonoma fires in 2017 and we had the Camp fire in 2018, which did something like $10 billion of damage and killed more than 80 people.
So wildfires have been an incredibly salient issue recently. And some of these fires, not every big wildfire, but some big wildfires are caused by electric generating infrastructure, by power lines, and other pieces of equipment that exist in the electric grid. So in the past couple of years there has been a move, at PG&E and other electric utilities, to shut off electric service during periods of time when the fire risk is really elevated. People probably know that the risk of a fire on any given day is very highly affected by weather and other day-to-day factors. And when forecasters suggest that the winds are going to be just right and the humidity is going to be just right and other factors are going to be just right, utilities are considering basically shutting off power service to avoid the possibility that electric lines could cause a large fire.
Daniel Raimi: Right. And a big part of that is because they have enormous financial liability, if and when it does, as we're seeing now with PG&E, which is currently in bankruptcy.
Judd Boomhower: Exactly. Yes. So PG&E's past wildfire liabilities have exactly, as you said, pushed it into bankruptcy and [have] been an incredible financial problem for the company. And that's absolutely at the center of this.
Daniel Raimi: Yeah. I want to say just very quickly that PG&E has been a financial supporter of Resources for the Future in the past. So I want to make sure that people know that we did not talk to PG&E about this episode. We didn't consult with them at all and they don't have any input into our conversation, but I just want people to know that they have supported RFF in the past. So moving on to my next question, it's about PG&E and clearly the benefit-risk calculation that they are considering when they're deciding to make these power-offs, they are different from those that the benefits and risks that society as a whole experiences when you have such a widespread power outage. So do you have a sense of whether the incentives for a utility, any utility, whether it's PG&E or another one, but whether the incentives for utilities are well-aligned with those of the public? So another way of saying that is, you know, this could have been the right decision for PG&E, but it could have been harmful one for society as a whole. So how do we think about those different sets of incentives?
Judd Boomhower: That's a great question, and it just happens to bring together some of my favorite topics in economics. So I think we can have a really fun discussion of that. You know, there's a very long literature in economics, particularly in the field of law and economics, about liability for accidents. And the main ingredients of that model are basically, you know, we have an entity, a person or a company, that's involved in some activity that's valuable for society. It provides something that people want, but it's also dangerous. So there's a risk in the course of providing this thing that people want, that some awful big, bad thing can happen. Right? And in the case of utilities and wildfire, of course, the big bad thing is a damaging wildfire that destroys homes and injures people.
But you know, this could be, if the activity is me driving my car to get to work, the big bad thing is me getting in an accident and hurting other people. If the activity is drilling for oil, then the big bad thing might be causing an oil spill. So there's a bunch of different dangerous activities to which this model applies. And then the other sort of key ingredient of the classic story of liability is that there's some set of things that the person or the company can do to reduce the likelihood of that big bad thing happening. But these precautionary investments are costly. So those are sort of the two key ingredients of the liability model, right? Like a bad thing that can happen in the course of doing something that people want, and some things that can be done to make the bad thing less likely.
So generally, at a high level, the overall best outcome for society is going to be for the person engaged or the company engaged in the dangerous activity to do things that make the big bad thing less likely, as long as the benefits, in terms of reduced accident likelihood, are greater than the cost of the precautionary investment. So that sounds sort of obvious, but it's also kind of deep, right? It tells us—in a simple economic framework, we don't necessarily want to do everything that can possibly be done to drive the risk of an accident to zero. Because on the margin, some of those precautionary investments may be incredibly expensive. You know, if I need to line my wastewater pits with gold in order to prevent groundwater infiltration, that may be so expensive or it may have such a little effect on the actual probability of the bad thing happening that it may not be worth doing. But generally, that the whole goal of the liability system is to align the incentives of the person or the company undertaking the activity so that they bear the full costs, both of anything bad that happens, and things that can be done to prevent the bad thing. And simple economics suggests, as long as they bear all those costs, then they'll have the incentive to choose the right combination of preventive activities.
Daniel Raimi: Yeah, that makes a lot of sense. And that's a great—really helpful conceptual framework to think about all of this stuff. And as you said, we're going to come back to some of the policy measures that might be taken to, again, try to find that alignment between where it makes sense for the utility and where it makes sense for society for investments to occur. But let's talk briefly about the specifics of this case, which is outages in Northern California. Can you give us a sense, and I know we don't have precise numbers for these things at this point, but what do we know at this point about the effects of the power outages in terms of, you know, big concerns like public safety or public health or economic impacts?
Judd Boomhower: Sure. So, as you said, we don't have great numbers there. I've seen some dollar estimates floating around ranging up to 2.6 billion. We can talk about how those are calculated, but it's worth, before we dive into the numbers, just to kind of talk about some of the anecdotes. So what are some of the things that we've all been reading in the news? You know, UC Berkeley canceled classes, various people ran the risk of losing frozen food. The loss of refrigeration in general was a potentially big issue here. Scientists may have lost frozen research specimens, which can be, you know, very, very costly to replace, [and] require a lot of time to redo experiments. There are stories of traffic accidents at intersections where traffic lights were depowered. There are stories of people who need electricity to run medical equipment who had health problems as a result of the inability to use that equipment.
So there are tons of ways that the loss of electricity service creates costs for individuals and for companies. Electricity is just this profoundly important thing in our day-to-day lives that we don't think about until it goes away. And so it's sort of obvious that this was an enormously disruptive few days. It's a little hard, it's a lot harder actually, to put a number in terms of dollars on how disruptive it was. So the standard approach here is to use something called “the value of lost load,” which are basically estimates that engineers and economists have come up with for a given megawatt hour of electricity that's not delivered; What's the average value, the average harm caused to the person who would have used that electricity? So how much would they have been willing to pay to have that unit of electricity service? And you know, those numbers are pretty crude.
It's just a very hard thing to be able to estimate. We don't go around running auctions minute by minute asking people how much they would like to pay for electricity. And because we don't do that, it's very, very hard to see their willingness to pay. The numbers that I've seen, you know, are around nine or ten thousand dollars per megawatt hour. And if you just take that number and apply it to what seems to be the amount of load or the amount of electricity that was not delivered during the blackouts, then you can get really big numbers. You can get like one or two billion dollars, which are some of the numbers that I've seen floating around out there. But honestly, I think we need a lot more work to really nail down exactly the right costs here.
Daniel Raimi: Right. Yeah. I mean, definitely one could imagine interesting experiments being run on this, but it would be hard to do because nobody wants to live without electricity, or be subject to those constraints in any kind of real-world setting. So extrapolating a little bit from what happened a little over a week ago in California, and thinking about the future as climate change exacerbates wildfire risk—as you mentioned earlier, is this—like one phrase that people use a lot is—is this the new normal in Northern California, or maybe in Southern California where you live? Is this the type of thing that we are expecting to see more frequently? You know, every year, multiple times a year. What do we know about the future likelihood of these types of events?
Judd Boomhower: If you want to understand how policy is going to evolve here, how maybe policy perhaps should evolve, and you want to understand what utilities are going to want to do, it's just worth taking another minute to kind of think about the incentives that are created by liabilities. So economists and lawyers have thought of a ton of creative ways to try and use the liability system to cause people to bear the cost of their actions. It happens, in this case, that utilities, at least in California, are regulated under basically what's called a “strict liability standard.” So a strict liability standard says, essentially, if you break it, you buy it. If you’re PG&E and you cause a large wildfire, you are responsible for the damages related to that fire. It doesn't matter how hard you were trying to prevent the fire from happening, it doesn't matter whether you are negligent.
If the fire happens and it was caused by your company, then you're responsible. And you know, the economics district liability are super interesting. Usually as economists, we are worried about what can happen under strict liability when companies are able to avoid some of the costs that we try to assign to them by going bankrupt. And of course, PG&E is in bankruptcy right now. And bankruptcy is potentially an important issue for fire incentives, but it's not the way that liability incentives play out that I think is most important for outages. So I think that these outages are really interesting because in some ways they're basically the mirror image of the traditional problem that environmental economists are worried about with liability. We're usually worried that the company is going to go bankrupt, and that's going to allow them to avoid having to pay for the big bad thing that they caused.
In this case, I think it's reasonable to be worried that maybe PG&E isn't fully accountable for the costs that they're creating, trying to avoid fires from happening. So that that sort of goes to the fact that PG&E is a regulated monopoly, which means they're the only company that provides electricity service in the areas where they provide service. They don't have much of a concern that their customers are going to leave them for another company, which makes them, on some level, less accountable to their customers than they would be in some kind of idealized competitive market. And that basically means, on a given day when they're thinking whether or not to provide electricity service, they might not think so much about the cost that that's going to create for the people who are losing service just because in a very narrow financial sense, that doesn't affect them as much as it would if they had to worry about angering their customers and their customers leaving them for another company. So, on the one hand we have this liability standard that forces them to internalize all the costs if something big goes wrong. On the other hand, they don't pay that much of a cost for shutting people service off. It's sort of, you know, to an economist, that gets your attention. It looks like maybe that's going to cause them to err potentially a little too much on the side of shutting people off, because why not? You know, why not try to avoid this really big liability.
Daniel Raimi: Yeah, that's super interesting. And when we think about the options that a utility like PG&E has to reduce these liabilities in the future, right—obviously one option is shutting off the power. Another option is, you know, taking other measures, preventative actions to reduce the risk of wildfires. Can you talk a little bit about what some of those options are, and what their cost implications would be for both consumers as well as a provider [like] PG&E?
Judd Boomhower: Yeah, absolutely. So I'll just caveat this by saying I'm not an engineer. But your listeners know that. So there are a really interesting set of things that can be done to minimize fire risks. Some of them are things that the utility can do, and some of them are things that other parties can do. And you know, let's come back and talk about that, because that creates interesting incentive issues as well. One that you hear talked about a lot recently is, well, why don't we just bury these transmission lines underground? And the answer to that is, maybe, but my understanding of the costs of undergrounding electric lines is that it's very expensive. I saw some estimates recently that were something like three to five million dollars per mile, which is substantially more than the cost of overhead lines. But on the other hand, that does presumably lower fire risk.
So that's one costly investment that can be undertaken. There are lots of other things that can be done, as I understand it, there are ways to increase the flexibility of the grid so that it's more, what they call, sectionalizable. In other words, right now, one of the things you hear about PG&E’s grid is that it's difficult to shut off relatively small areas because they're all connected to other areas in this very complicated electric grid. And I think there are things that can be done to increase the ability to shut off relatively narrow sectors of the grid where the risk is really high, without having to turn off as many people in neighboring areas. And then there are of course, lots of things that can be done to improve our weather forecasting, our detection of fires.
We have some researchers here at UC San Diego that are working on using drones and satellites to detect where fires are happening, are likely to happen, in order to increase our ability to put those fires out before they get started or before they grow big and can do a lot of damage. So there are lots of interesting technologies that can make the grid safer or more resilient. And I'm very interested to see how those technologies develop and to see cost estimates as they become more mature and start to get implemented. And that's one potentially promising direction here. There are also sort of basic things that non-utility agents can do to minimize this risk. So, I'm going to keep my academic hat on and use some more jargon, because that's my right as a university professor.
So let's go back to our model of liability, right? Another way that the wildfire problem is a really interesting example of the economics of liability is that wildfires are what we would call a bilateral accident, or a bilateral hazard. And that's a super jargony term, but all it means is that the cost of the incident depends not only on what the utility does, but it also depends on what homeowners do. So there are lots of things that homeowners and other people can do to try and protect their home in the event of a fire. If you live in California or the West, you've probably heard about the concept of creating defensible space, which basically means clearing vegetation and other items around your home to prevent, to create a little gap that makes it harder for the fire to burn up right into your structure.
There are fire resistant building materials that we can use, you know, we can make sure that people don't have wood roofs. And a lot of this stuff can be achieved also through building codes, which are the province of states or cities or counties. So, I think we're appropriately focused on the incentives of the utility, but it's also worth thinking about the other entities that are involved in this problem. And the best policies here are going to have to address those other incentives as well, not just, narrowly, the technology of the grid.
Daniel Raimi: Yeah. Those are great points. And two quick thoughts before I ask the next question. The first one is that, you rightly put on your professor hat to help us understand the framework, and I think you used the longest word that has ever been used on our Resources Radio podcast, which is sectionalizable, so you win for that. And then, the other thought is—that at least it wasn't heteroskedasticity. The other thought is that, if people want to learn more about some of these wildfire issues, both in terms of climate change as well as, you know, landowner issues. The first podcast episode that we did for the RFF podcast, it was actually with Matt Wibbenmeyer, who's a fellow at RFF, and he's an expert on wildfire. So I'd refer people to go back into the archives and check out that episode.
Judd Boomhower: I'm a fan of Matt's work as well, so that's great.
Daniel Raimi: Yeah. All right. So Judd, now the last question before we go to our Top of the Stack segment, which is; you've already alluded to public policies and you know, liability laws, and other important issues. But can you talk a little bit more about what role you think public policies could play in trying to strike the balance between keeping the lights on, and at the same time, minimizing wildfire risk?
Judd Boomhower: Yeah, absolutely. So hugely important question right now obviously. And in Sacramento, in California, which is the state that I live in, we have, you know, giant ongoing discussion of lots of different aspects of that problem. The thing that seems reasonable to me as an economist, is that maybe this is a setting where we should be thinking about a little more direct government regulation. That's not always something you'll hear an economist say. We tend to be a little skeptical of direct regulation, but because of all the complicated incentive problems that exist for the utility, and for other individuals here, I think it's reasonable to at least think about a model where the public utility commission, or some other government body, actually has a more direct role in deciding when public safety power shutoffs should happen and should not happen. Of course, that's not a perfect model either, in that it requires the government to have a lot of information, but it does potentially smooth over some of these other incentive problems. I'm far from making it a direct recommendation here, but just kind of looking at it from the outside, it seems like that's at least worth considering.
Daniel Raimi: Yeah, that makes sense. I mean, given all the complexities we've talked about today and potentially misaligned incentives, it seems like one of the places where government could step in and play a useful role. So let's close it out now with the same question that we ask all of our guests, which is; What's at the top of your literal or metaphorical reading stack? And I will start us off with a quick website that I came across recently. I've read about this in the Axios Generate newsletter that Ben Gaiman and Amy Yarder send out each morning, which I love by the way. So it's this really, really cool website from the US Geological Survey, it's called Earth As Art, and there are six volumes of this publication. Basically it's a bunch of satellite images of the Earth, but they look like abstract paintings.
They're like, you know, unusual algal bloom patterns, or unusual wind swept deserts with amazing colors and, you know, blooms of flowers and deserts and things like that. And it's kind of hallucinogenic, a lot of these images. But I downloaded a bunch of them and now they're all, you know, my screensavers on all my computers along with my pictures of my kid. But yeah, these pictures are just really fantastic. So if you're anywhere near your computer, go check it out. USGS, Earth As Art, highly recommend that. But how about you, Judd? What's at the top of your stack?
Judd Boomhower: So I'm going to stay pretty on theme with our podcast theme today. And I'm going to say one of the things that's been really fun for me, as I've worked on fire recently, has been reading about the history of wildland fire and fire management in North America. So the, the authoritative figure here is Stephen Pyne at Arizona State University. He's a historian of fire who's written a ton of really great books about fire management in North America. The one that I want to go back to that I haven't looked at in a while is called Between Two Fires. It was written in 2015, and it's just this great history of the entire 20th century and how the Forest Service originally sort of pioneered wildland firefighting in the United States. And then how firefighting policy developed and changed, and how California invented this sort of particularly aggressive, interventionist form of fire management, and the implications that that has had for fire and urban development. And then more recently, attempts to live, kind of more in balance, you might say, with with fire. It's just a fantastic book and I totally recommend it.
Daniel Raimi: Yeah, that's so great. That sounds like such a good book. You know, we had a conversation a few months ago with Robert Bonnie who's a forestry expert. He's now joined RFF, he works with us now, but he also recommended Between Two Fires. So two recommendations from people that you should definitely listen to. I'll have to pick that one up cause I haven't read it yet. So we'll stop it there. Judd Boomhower, thank you so much for joining us today on Resources Radio, talking to us about wildfires, utilities, incentives, and so many other interesting things. We really appreciate it.
Judd Boomhower: Thanks for having me. This was super fun.
Daniel Raimi: You've been listening to Resources Radio. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent nonprofit research institution in Washington DC, our mission is to improve environmental energy and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org. The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason with music by me, Daniel Raimi. Join us next week for another episode.