Climate Change Adaptation Tradeoffs and Property Rights

The Los Angeles Times has published an interesting article focused on electricity tradeoffs.  To lower wildfire risk, the state’s major electric utilities may choose to cutoff grid power access at certain risky times (such as when it is very hot and dry).   By cutting off grid access, the elderly and disabled face greater risks because their health and quality of life is directly tied to constant access to affordable electricity.

“This is a really tough situation,” said Karen Relucio, a public health officer in Napa County. “If they don’t shut off the power, you may have a county that catches on fire. But if they do shut off the power, you may have someone who dies because their respirator shuts off.”

What is the efficient allocation of resources in this case?  The starting point is to declare who has property rights.  Let’s assume that the elderly and disabled have the property rights to affordable electricity every day of the year.  Let’s assume that the elderly and the disabled can be identified and their electric utility knows who they are.

With these two assumptions, each utility will now have an incentive to hire a “resilience team” who pays careful attention to whether the subset of their consumers who are in the elderly and disabled category have access to backup power generators so that if the grid fails these individuals who rely on electricity continue to have access.  By having this legal mandate, the utility will invest in the human capital and managerial capital to guarantee continued access.

Now, there is no free lunch.  All of the other utility customers and shareholders (for the private utilities) will bear the economic incidence of these costs. The California PUC will face decisions over whether rates will rise to cover this new cost.  If electric utilities have geographic service monopolies, then they will lower losses from this legal property rights mandate.  If electric utilities face increased competition for keeping consumers, then consumers who live in safer areas may choose to enter a power agreement with suppliers who are not required to supply power to a group of disadvantaged consumers.  In this case a type of adverse selection issue will arise.  The PUC will need to make a decision (similar to health insurance reform) on whether utilities in a given service area must guarantee power access to all elderly and disabled customers in their service area.

An important dynamic innovation point arises.  As the electric utilities install backup power batteries and perhaps even solar panels on these homes, this creates a new demand for green power and decentralized generation.   The key here is the clear and enforced property rights. Once these are in place, the market handles the resilience challenge.