From the time of the onset of the Southern California fires to Friday, January 10, Edison International (EIX) stock fell 14%, meaning a $4.3 billion loss in market value. (EIX’s principal subsidiary, Southern California Edison, provides electricity in the region.) The loss in stock market value is even greater than the probable loss that the utility would have incurred under California rules if it is found responsible in some way for the fires. We should point out that Wall Street’s skittishness in this regard likely stems from the Pacific Gas and Electric 2019 bankruptcy filing following somewhat similar fire disasters. Wall Street’s attention to this number, however, misses some bigger issues.
Take the electric company. First, when will these repeated climate disasters in the service territory make insurance difficult if not impossible to procure at reasonable rates (compared to past prices) and cause many residents to leave the service area instead of rebuilding? Insurers currently estimate a possible $20 billion hit from the fires. Some have left the California market entirely. Utility customers can move. A utility company with a fixed service area cannot do this. Second, when will customers, suffering increasingly lengthy outages whenever the electric company turns off power to protect the network, start looking for alternatives that now range from solar to mini-nukes?
Barely mentioned, except by the fire chiefs, was the water shortage— that is where it was needed at sufficient pressure. (Did you know that water availability and pressure goes into the score for insurance rates?} The Los Angeles area water system was built up in the same era as Jack Nicholson’s character, Jake Gittes, investigated the bad guys in Chinatown. The situation has changed over a hundred years. Even worse, Southern California built its water system based on an apportionment of fictitious Colorado River water— that is, the states that signed the Colorado compact overestimated the river’s normal flow. California’s water authorities have their work cut out for them and it involves more than hydrants. But the water problem won’t be limited to the Southwest. Watch what happens when the new data centers in various parts of the country start to compete with locals for water.
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Meanwhile, storms buffet the middle part of the country and the TV coverage always shows lines down with comments that it will take so many days to restore service. In other words, we now regard the transmission system like bowling pins to be restored after each storm—without much appreciation for the possibility that they will fall down again soon. At least that’s the way we see it. Maybe consumers have been conditioned to believe that there is no alternative, and maybe the regulators don’t want to face up to the costs of building a reliable, twenty-first century network. But you can bet that the data center people won’t settle for utility-grade service.
Bottom line. You might make money investing in utilities that expand their rate bases in order to meet customer needs. But some big customers may decide that they might meet their needs without the help of the local utility. Probably, you’d make more investing in those who supply the needed equipment and services to either utility or private customer. Then again, you might argue that the pressure will be off once Donald Trump takes office. However, storms, fires, and other disasters produced global insurance losses of $320 billion last year, two-thirds in North and Central America and the Caribbean.
It doesn’t matter whether Donald Trump attributes these events to global climate change or a worldwide outbreak of hippopotamuses dancing in unison. Unless he can stop these natural events, the insurance companies will take steps to reduce their losses (raising rates or cutting off coverage) that will induce utilities and their consumers to act differently. We’d estimate that the water and electric industries and independent suppliers (now spending over $300 billion a year in the US) will have to double their spending to get their systems in shape. That’s an opportunity.
By Leonard Hyman and William Tilles for Oilprice.com