The Consequences of Wildfire Liability for Firm Precaution: Evidence from Power Shutoffs in California
70 Pages Posted: 1 Apr 2024
Abstract
This study examines firm responses to the entire distribution of potential liability by studying power line-ignited fires in California’s electric utility sector. In this setting, when a power line-ignited fire damages a structure, the owner of the power line assumes the cost. The unique setting allows me to estimate how firm precautions vary across the entire distribution of liabilities they face. Using exogenous variation in the replacement cost of structures that lie downwind of power lines, I show that firms increase their precaution by 100% in response to a $690 millionincrease in liability. Furthermore, I show that firms’ precautionary responses weaken as the likelihood of bankruptcy from expected liability increases. In the short run, the estimates from this study imply that firms’ consideration of liability has heterogeneous welfare consequences across California.
Keywords: Energy, Liability, Wildfire Ignition, Electricity Distribution, Power Lines
Suggested Citation: Suggested Citation