Hawaiian Electric/wildfires: old business models are no longer viable

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The securities of US energy utilities are supposed to be safe investments. Consumer prices for power are set by regulators with the aim of producing solid returns. In parts of the US, climate change has upended that bargain. 

Shares of Hawaiian Electric Industries have fallen nearly 70 per cent this month. Investors fear electricity transmission equipment may be implicated in wildfires claiming more than a hundred lives and causing property damage running into billions of dollars.

For the moment, the focus should be on how to best help survivors. Soon enough, questions about the viability of old business models will need answering.

Serious litigation could result in a settlement that leaves alleged victims as shareholders in Hawaiian Electric. Just such an equitisation happened a few years back when northern Californian utility PG&E settled a $13.5bn liability for wildfires. Half was in the form of shares handed to a victims’ trust. 

PacifiCorp, a utility owned by investor Berkshire Hathaway, recently lost a lawsuit over a 2020 wildfire. It could be on the hook for several billions of dollars in claims. Colorado utility Xcel Energy is in the same boat.

Climate disasters were previously events utilities could withstand. They now risk becoming annual events that dictate expensive remediation and retrofitting. These may be beyond the capacity of any private business. 

Northern California is prosperous. Multiple investors, including private equity, were interested in funding the restructuring of PG&E. The state of California itself supported the creation of a specialised insurance fund to socialise risk.

Claims against Hawaiian Electric may be trickier to resolve. The population is smaller. Rebuilding costs will be exorbitant. The Hawaiian average price for electricity is already steep, at 44 cents per kilowatt hour.

Hawaii’s wildfires may therefore prove a tipping point in how the US apportions the costs of an increasingly unstable climate.

The Lex team is interested in hearing more from readers. Please tell us how you think wildfires will impact business in the comments section below.