Corporations and Climate Risk in the Real World: The Case of PG&E
On November 16th, the Corporations and Society Initiative (CASI) and our co-sponsor, Stanford Doerr School Sustainability Accelerator, brought together reporters, former regulators, and experts in law, finance, insurance, and energy to analyze the issues and challenges surrounding PG&E, and explore ideas on governance in the future.
Anat Admati, The George G.C. Parker Professor of Finance and Economics; Faculty Director for Corporation and Society Initiative (CASI)
Michael Wara, Policy Director, Sustainability Accelerator, Stanford Doerr School of Sustainability
On November 16th, the Corporations and Society Initiative (CASI) and Stanford Doerr School Sustainability Accelerator brought together reporters, former regulators, and experts in law, finance, insurance, and energy to analyze the issues and challenges surrounding PG&E, and explore ideas on governance in the future.
CASI’s Faculty Director Anat Admati opened the conference by saying, “The issues we will be taking up this afternoon are top of mind everywhere, but particularly in California and western states, which are now experiencing the impact of climate change in some very real ways as catastrophic fires and smoke ravage large areas of the state on a regular basis. Utilities, insurance companies, as well as governments and people, must face the challenge of how to deal with the risk of fires and other impacts of climate change, and more broadly, how to make sure we have reliable, clean and affordable energy.”
Jonathan Levin, Dean of Stanford Graduate School of Business (GSB), spoke next, emphasizing the importance of understanding the climate and sustainability issues confronting people running businesses and other institutions. He observed that we are much better positioned to address these issues given the new and deepening collaboration between the GSB and Doerr School of Sustainability.
“One of the things that we have recognized at the GSB in recent years, is the way that the landscape for corporations and for business leadership has changed. People are calling on business to play a larger role in addressing and finding solutions to some of the societal challenges that we face, and in a sense, that raises all kinds of fundamental questions about what is the purpose of corporations? What is the role of business leaders?”
Arun Majumdar, Dean of Stanford Doerr School of Sustainability had recently returned from the COP27 Global Climate Change Summit in Sharm El-Sheik, Egypt. He appeared on Zoom to give his remarks, saying, “Every corporation, government, and institution should ask the question, are we prepared for climate change? Is there a team that should be in place to evaluate the risks and take urgent measures to address them? And do they have the right incentives to actually go out and do it?” “As we have seen in the PG&E case, the cost of inaction can be much greater than the cost of action, and I think that's an important lesson. That's not just for PG&E, but for every organization that will face some level of risks, due to climate change.”
The first panel included journalists and experts with a long and varied association with PG&E.
Session 1: PG&E’s History and Recent Challenges
Lily Jamali (Moderator), Senior Reporter, Marketplace, American Public Media (APM)
Will Abrams, Community Advocate
Katherine Blunt, Reporter, Wall Street Journal; author of "California Burning: The Fall of Pacific Gas and Electric and What it Means for America’s Power Grid"
Michael Picker, Former President, California Public Utilities Commission (CPUC)
Lily Jamali opened the discussion with a simple question—how did we get here? She posed the question first to Wall Street Journal Reporter Katherine Blunt, who spent considerable time researching the case of PG&E for her book, California Burning.
Blunt suggested that “to really understand the story of what happened to PG&E, you need to have some understanding of 100 years of history, because the component on the transmission line that failed and ultimately ignited the Camp Fire, which just killed 84 people in 2018, was original equipment. It was 100 years old. It hadn't been replaced. It had been hanging there, wearing down little by little with every windstorm for a very long time.”
Blunt then focused on the last 20 years of PG&E, when things started to break down for the company.
“Its first bankruptcy came after the California energy crisis of 2001 and when the company emerged from that bankruptcy, one of the dynamics that played out was that it was very intent on re-establishing itself with Wall Street and pleasing shareholders. There was a drive to grow earnings, and it was discovered later on that (it) did come at the expense of certain safety investments and safety, spending that should have been done to maintain the health of the infrastructure.”
“They ultimately sort of addressed it on the gas side, after a devastating natural gas pipeline explosion in San Bruno in 2010, but the electric division didn't get the same amount of attention.”
Will Abrams, a community advocate whose family was personally impacted by the wildfires, and Michael Picker, former President of the California Public Utilities Commission, both spoke about the potential for the CPUC to address the issues that plagued PG&E.
Abrams said, “this really brought viscerally home to me that corporate responsibility affects us all in lots of different ways … We understand that without accountability we're going to have more fires, and so, it is something that I'm really concerned about. We’ve got to figure out how we address the regulatory space, the legislative space and elsewhere.”
Picker said, "This is a question I asked myself the whole time I was there, and I continue to ask it, and I still don't have really good answers. The whole time I kept asking myself things like, is an economic regulator really the place where you really get at safety? Our job was to allow the utility to adequately charge for the infrastructure that they were putting in place. We never had that discussion of what is truly the role of the CPUC.”
The panel discussed the issues surrounding an investor-led utility company versus one that is publicly-owned. They also debated the special interests and circumstances surrounding the legislative actions that produced the California Wildfire Fund (AB 1054), as well as California’s Inverse Condemnation liability law, which allows property owners to seek financial compensation in a civil action “if the government or a public entity, including a utility company, damages your property while using it for public use or governmental interests.”
Katherine Blunt closed the first panel with a final comment about PG&E’s governance challenge.
“Should the profit motive be removed? Can an investor-owned utility properly thread the needle between, you know, satisfying private interests and serving the public good? PG&E historically has failed to do this well, and I mean there's something to be said for removing the profit motive."
“An enormous utility serving 15 million people with a service territory covering 70,000 square miles is suddenly owned by the state. That requires an enormous amount of state resources. I mean, that's a really expensive proposition. And who are you going to get to run the utility? You (have to) operate it and make decisions, look at the lines … and you still have inverse condemnation to contend with when inevitable accidents happen. So, there's no perfect solution from an ownership standpoint, in my view, and any sort of model that you look at has benefits, but it also has drawbacks.”
“The board had a big role to play,” she said, “and as some of these risks were emerging, they probably weren't nearly as engaged as they needed to be. We'll see with this new board, what they're able to affect and think about. And I think, in some of the conversations I have, there are strong indications that they're much more engaged on this.”
The second panel was moderated by CASI Co-Faculty Director Anat Admati and included conference co-organizer, Michael Wara, from Stanford Doerr School of Sustainability.
Session 2: Governing PG&E and Corporate Climate Risk into the Future
Anat Admati (Moderator), Professor, Stanford Graduate School of Business and Stanford Doerr School of Sustainability; Faculty Director, Corporation and Society Initiative (CASI)
Michael Wara, Policy Director, Sustainability Accelerator, Stanford Doerr School of Sustainability
Marybel Batjer, Former President, California Public Utilities Commission (CPUC); Partner, CA Strategies
Eric Borden, Principal Associate, Synapse Energy Economics
Nancy Watkins, Principal, Consulting Actuary, Milliman
In opening the second session, Professor Admati explained, “PG&E is an investor-owned utility, a public corporation whose shares are traded in the exchange. Financial markets are supposed to mobilize investment for worthy projects and innovation, and to allocate and share risk efficiently. The fact that managers and investors have been able to generate effectively guaranteed, and often, outsized returns for themselves while endangering and causing enormous harm to others with little accountability, is the symbol of failed governance and injustice.”
Admati went on to say, “the fire victims now own a quarter of the company, which, from (my) perspective, that's just not where the risk should be going forward. This outcome was unjust, that is clear, and inefficient as well. Now the fire victims are still waiting, and everybody else, meaning people who themselves are lawyers, or who have good lawyers, came out ahead of this process. That is not good governance.”
Michael Wara, a lawyer and scholar whose focus is on climate, energy and wildfire policy, identified two major issues, the first concerning low-income residents who struggle to pay their utility bills, and the second involving the cost of transitioning to clean energy.
“There's something like 3.5 million ratepayers in California that are behind on their utility bills. That's a lot of ratepayers who can't pay their bill on time, and so affordability is a huge issue. And the creation of these liabilities that ratepayers might ultimately have to face is a primary concern.”
“California is a leader in the clean energy transition. All that is predicated on credit-worthy counterparties that can sign long-term contracts. Power plants are built when a power purchase agreement is signed between the product developer and the utility, and then the project developer can take that agreement to a bank and get project finance to build the facility.”
“If we don't have a credit worthy counterpart on the other side of that contract,” Michael argued, “there's no solar that's getting built in the Mojave or in the Westlands Water District, or wherever. And so those two issues for me, really leading with the affordability concern, and secondarily, the clean energy transition that we all want to see happen led me into this space.”
Wara then took up the issue of allocating risk and laid out why the case of PG&E is a challenging one.
“It's an unusual situation where you have a large bankrupt corporation that is bankrupt because of committing torts, because it is acting in a way that is negligent, perhaps grossly negligent, and during the dependency of the bankruptcy it is still committing those torts and there is no way to stop it, because the torts are a part of it, providing an essential service to society. So, this is a unique situation.”
“In a normal case, if a company commits those kinds of acts it would shut down and the assets of the company would be liquidated, and hopefully the victims would get something. A lot of the other creditors would get maybe cents on the dollar, but we can't shut down our electric utilities. We need electric service.”
“I think this question about public ownership, particularly for the parts of the system that generate the risk and the costs that are very hard to bear, is really undecided.”
Marybel Batjer, who stepped down from her position as CPUC President at the end of 2021, spoke next. After acknowledging that she is pessimistic by nature, she pointed to some serious issues that are unresolved.
“Going forward, we still have some terrible maintenance issues. We still have some tough equipment issues. We still have a tremendous amount of people living in tier three wildfire danger areas in California.”
Her biggest concern centered on the cost of wildfire mitigation.
“Wildfire mitigation costs are absolutely unsustainable. The cost in this last year of wildfire mitigation was around $24 billion. And who pays for that? The ratepayers? Yes, in the (federal government’s) Infrastructure bill, there’s some money that is going to be flowing into the state, thankfully. And yes, there are some general fund dollars that Governor Newsom put in the budget last year, and again this year. But this is unsustainable, and it's a huge issue we have to figure out.”
Eric Borden is an energy industry expert with a deep understanding of PG&E’s issues. He offered his thoughts on PG&E management and funding.
“I totally sympathize with why people are saying, well, the problem before was this profit motive. Get rid of the profit motive and you solve the problem. But I think for those of us who have looked into this more deeply, at the end of the day, this is us running it. If we were to municipalize PG&E, who do you think is running that company? Well, it probably looks a lot like the same utility staff and CPU regulators who already today have full regulatory authority over PG&E. So, I don't see it as the magic bullet.”
“Electricity and energy is actually the most regressive way to tax people. It hits lower income people hardest, and those low-income people are already hit the hardest. And, in fact, those are the people who are leaving California, so that's not really the society I think that we want to be headed towards. I do think there are solutions here.”
Nancy Watkins, an expert in risk modeling who works as a consulting actuary at Milliman, then helped explain the nature of the increased risks created by climate change.
“Climate change is giving us new risks that nobody has ever seen before that will never, ever be dealt with properly unless we start talking across the silos of information,” she told the audience. “Wildfire is really tricky, more so than hurricanes and floods, because fires can be started by people or non-natural causes. Eighty-five percent of wildfires, something in that range, are human caused, and that's very different than a hurricane. The other thing about wildfires is that people can stop them. You can't really stop a flood. You can't really stop a hurricane. But fire protection personnel can minimize or stop a fire, so that is good, but it also makes it very hard to model.”
Watkins said from a risk measurement perspective, the main focus today is on ignition, either the human or the utility that caused fires. “But when you're thinking about mitigation, you need to be thinking about (different) ways, and we have touched on vegetation a little bit in home hardening. You need to think about the ways to prepare the environment for when the ignitions happen, and then prepare the fire service professionals to be as equipped as possible with resources and information to stop the fires earlier in their spread, so that they are not overrun, (and) we don't have the Camp Fire situation.”
Watkins concluded by saying, “It’s not good enough to just argue over who owns the risk; we have to actually do a better job measuring the risk and try to come up with a common language.”
The panel then considered how expertise from various sectors can best flow through the system. Michael Wara commented, “we need to do much better integration as a state, and as a society, in getting the expertise that's happening in the utility space to talk to the fire and landscape managers. We need to better balance our spending and investment. That's a hard problem.”
For Nancy Watkins, the answer lies in better data analysis. “I would say a much greater attention to models; what they are, what they do, how you evaluate a model, not just the need for models, because models are only as good as the people who are evaluating the inputs and the outputs of the model, and figuring out what they mean in a given context. They're just a tool, they're not magic, they’re not the answer. There's a skill set around modeling. There are no standards for evaluating catastrophe models. We're creating courses to teach people how to do it, because the courses don't exist.”
The panelists discussed PG&E’s latest push for increased funding for its undergrounding program. Eric Borden emphasized the costs involved as well as the time table for burying electric power lines.
“Affordability has to be a consideration. Frankly, there are only finite resources … maybe you've heard it cost $20 billion, $30 billion dollars. Those should be alarming.”
“In reality it costs more like $100 billion, because they're not including all the costs of profit and debt and taxes, and all those things that you're actually paying for on your utility bill. You're not going to hear that number from PG&E. But that will be the number if even using their lower cost assumptions, and it's actually more expensive than you think.”
Professor Admati concluded the discussion by asking each of the panelists for one or two priorities that could create positive change:
- long-term incentives for the management
- greater coordination and investment in fire mitigation strategies
- figuring out how we pay for wildfire mitigation as ratepayers and as taxpayers
- a back-to-basics approach to safety that includes thicker, insulated wires, conductor covers and undergrounding in targeted, high risk areas
- robust, independent regulation with third-party verification
- increased reliance on science and experts for decisionmaking
- more courage from political and corporate leaders to face up to the bad news, even when it hurts
Both sessions featured questions and answers from audience members. In closing, Professor Admati mentioned that although she did invite an executive from PG&E to the conference to speak for a few minutes at the end, “they didn't end up coming.