 Welcome to today's masterclass. Our topic is wildfires as a people problem and wildfires as a utility finance problem. My name is Katie Kaplan-Sternakka. I'm a program manager at the Precourt Institute for Energy. And I'm just gonna quickly introduce our speakers and then we'll take a quick gallery screenshot and then get started. So today we have with us Bruce Kane. He's a professor of political science and director of the Bill Lane Center for the American West. He has a BA from Bowdoin College, a B-Phil from Oxford as a Rhodes Scholar and a PhD from Harvard. And his areas of expertise include political regulation, applied democratic theory, representation and state politics. And then we also have Michael Wara with us. He's a lawyer focused on climate and energy policy. And he is the director of the Climate and Energy Policy Program and a senior research scholar at the Stanford Woods Institute for the Environment. And his legal and policy scholarship focuses on carbon pricing, energy innovation and regulated industries. And he has a JD from Stanford and a PhD in Ocean Sciences from UC Santa Cruz. So I will now hand it over to Bruce to share his screen. All right. So let's get started. I'm happy to be here to talk about this topic and it couldn't be a more timely topic as you are here at the tail end of our most recent set of fires. And I've titled this, it's not just a nature problem but also a people problem. So as we speak, we're finishing up. This is from today's Cal Fire site. The two pink areas here and here are the two fires that are closest to where we are. We're up here in Palo Alto and the two fires are to both the east and west of us. There are actually fires to the north of us as well. And according to Michael, that's what's generating a lot of the smoke. That's what he told us yesterday. And it could be because a lot of depends on which way the wind is blowing. But at any rate, these fires are almost 74% contained, which is why we still are not past the whole event. But it's pretty much getting close to being totally contained. And if you go to the site, you can get a list of all the fires that major fires in the state that are still either still burning or the ones that have been put out completely. So by the way, this is just the beginning of the season. And for reasons I'll explain in a minute, the fires that we'll get later are the ones that in many ways are scarier because of the nature of the wind. So this is a social scientist explaining science. So you want to take it with a grain of salt. I co-teach with a number of hydrologists. And over the years, I've learned about the very distinctiveness of the climate in the US West. So I want to talk a little bit about that. I want to talk about eridity, seasonality, eridity being the lack of precipitation and the high rates of a Vapo transpiration, seasonality being the fact that we have periods, long periods, months that go by without any precipitation and months where we do get precipitation, which causes the vegetation to grow and then dry out and become the source of fires. We have a lot of variability across the year. Some years are very wet years. Some years are not so wet. We have the Diablo Santa Ana winds. And these produce three interrelated phenomena, the drought, which you'll see in a second, the wildfires and the mudslides. The mudslides will come after the wildfires because a denuded, if you like, denuded from vegetation, hillside can easily develop into mudslides when we have heavy rains in the winter. And all of this is going to be exacerbated in ways by climate change. And that's not a topic I'm going to be able to get into, but we can certainly bring it up in Q&A if you'd like to. So you're in the West. And the West is defined in many different ways, but the most frequent way it's defined and the way we do it for the purposes of the Bill Lane Center, is to take the demarcation at the 100th Meridian, which was basically the line that was defined by an expedition in the mid to late 19th century, which determined that the line of aridity, that is where the precipitation patterns changed dramatically started somewhere along this line, the 100th Meridian that goes from North Dakota down into Texas. So parts of Oklahoma, Texas, Nebraska, and North and South Dakota are all in the West. Parts are on the other side of the aridity line. But aside from the aridity and the evapotranspiration, that is the fact that the heat in, particularly in the Southwest causes the vegetation to dry out quite rapidly and thoroughly. We have the fact that we have distinctive seasonality. So here I've taken two shots of the precipitation and you can see that in Sacramento, which is way here in California, you can see the precipitation is pretty much very minor to trivial from about May all the way to about October, okay? There's just not much rain. And those of you who grew up in the East or in other countries will recognize that actually in the summer, there's often a lot of rain in the East. And here I took the other side, which is Oklahoma City, which is just on the other side of the 100th Meridian, although by the way, now people believe that the line of precipitation really starts the 98th Meridian. So we'll see how that pattern changes in Oklahoma City. Which you can see the precipitation in the summer is still pretty heavy, quite heavy in even in Oklahoma, let alone on the East Coast. So it's the seasonality that is extremely distinctive of the Western climate. We also have a lot of year-to-year variation in precipitation. So you can see the darker colors represent where the ratio of the, if you like the variants or standard deviation of precipitation is highest. And you can see that that's particularly true as you get into the Southwest. Those are areas down there, San Diego, Imperial County, which rely very heavily on water from Colorado River. Now, what this produces, of course, is a pattern of droughts. And this is one drought index that you can find. And the severity of the drought ranges from sort of just dry periods, that's the yellow to the exceptional drought. And you can see that just recently in 2011, 12, we started the drought. And then for a period between 2012 and 2017, substantial parts of the state. So the fraction of the state is on the vertical axis and on the horizontal is the year. You can see that for a period of about four or five years, substantial parts of the state were at least in serious drought. And particularly when you got to 2015 and 16, we had really, really, really serious drought. And that produced the potential for the wildfires that we got in 2017 and 18, okay? There's other things that have created the fuel, namely the suppression policies that the Forest Service and the era when I was growing up, Smoky the Bear era, if you like, that has also contributed, but we'll get into that if somebody wants to know. The last and distinctive feature that those of you from the East Coast would not be familiar with is this one about the Diablo winds as we call them up here in Northern California or the Santa Ana winds. And they're basically winds that come in off the desert and then through the compression of going up and down through the sort of hills and valleys and mountains, coastal ranges of California, they pick up speed and they pick up warming and a drying. And that's what we really had trouble with in 2017-18, not so much in this most recent, in fact, not at all, we didn't have Diablo winds, the winds for the most part were more North-South. And I don't think we really had focused as much on the dry lightning problem. We certainly have always had dry lightning, but it was more out into the remote areas. What was exceptional about this storm was the number of the dry lightning hits and also the fact that they occurred in these urban areas where we had not had many fires before. And so the dry lightning is particularly problematic. If you follow this chart, this shows you the number of strikes, just an incredible 9,000 strikes practically. And you can see the yellow ones are the continuous lightning strikes, something I had never really thought about, but I looked it up and apparently there's a lot of different types of lightning, but the continuous current ones are the ones that really start the fires because they had the longer contact with the ground, between the ground and the clouds and the electrical current. And that tends to generate more heat and cause more of the fires. So it was not just the number of these strikes, but it was the nature of the strikes as well. And as I said, the accumulation of the fuel that had happened both over the years and as a result of recent variation in between precipitation and dry years. So, but I'm a social scientist, I wanna focus more on the people problem because while it's true that this is getting worse because of climate change, the reality is that wildfires have a long, deep history with humans in the American West. This is not a new problem. It was when I moved, took a job at Caltech in 1976, we dealt with wildfires all the time down in California. I remember the hills burning quite frequently. So I wanna say that this is a people problem, not just a nature problem. And a lot of it has to do with the increasing population in areas that we know to be prone to wildfires which are called wooey areas, wildland urban interface areas. And basically the presence of people causes wildfires, okay? I'll do these two points fairly quickly, but then I wanna spend a lot more time on what the hell's going on with people's decision-making and how does that make it worse? So you can study this map, I'm gonna leave the slides have been posted and you can take a look at it, but the dark colors indicate where people are living very close to areas that or types of vegetation that are likely to catch fire. And so there are basically two different types of interfacing. One is to be close to a national forest or an area that potentially could burn. And so when I was living in Southern California, Altadena is a good example of that. That's where JPL is. Altadena is literally a but the forest that goes up to the mountains. And people that live there have to experience the terror of the fires on the hills. But the kinds of fires that the other kind of fires that we see a lot in Northern California are communities like, if you wanna just see it, just go up into the Santa Cruz Hills here, just go up and see Portola Valley, places like that, Woodside. And you can see communities that are very much embedded in the vegetation. And they're basically what the fire marshals will tell you is those people are very much exposed to these fire risks. And it just, there happens to be a retirement home up in that area behind us. And they've been briefed by the fire department. They've been told that if indeed a fire did start up in those hills, very few of the residents of that retirement home, many of whom are former Stanford professors would basically not be able to escape and would be incinerated, much as what happened in Paradise. Now, that's not the only area. I mean, you can go around the West and you can see the same kind of interspersing. Again, the dark red of the areas which is most likely to be affected by these fires because they're intermingling between the vegetation and the development, the urban and suburban development. And these areas have continued to grow in population. This is just an example of all these Western states are still growing. In California, we have a housing shortage. The governor wants to build more housing. It's not easy for people your age and maybe 10 to 15 years older to buy a home. It's extremely expensive. So there's a lot of pressure to build no homes. But where are you going to build those new homes? Well, people want to build them in areas that are pretty and beautiful, which means they want to be closer to nature, which means they want to be closer to danger. And so the coincidence of what people want in terms of demand of housing, combined with the fiscal incentives that urban areas have to build more housing because that generates more revenue that pays for services, means that people are making riskier and riskier decisions every year, right? So you can study these statistics a little bit more closely on your own, but basically a lot, 43% of the new homes are built in these wooey areas, okay? So we're continuing to make the same mistake. Just as the wooey areas continue to expand because of the drying and the climate change, the reality is that we're continuing to build in these areas, okay? And when we do the polling on this, we find that this is what people want. People say, hey, if somebody wants to go live in a risky area, that's on them. It's not on us. As Michael will point out, actually it is on us, all of us, because of the fiscal implications, but I will leave him to explain that to you, okay? So let me talk about their flawed decisions and then finish, okay? So people make a lot of very flawed decision-making. First of all, and foremost, and this is the one that I think we really need to attack, people are rebuilding in areas that have previously had fires. And I think the idea is that lightning can't strike twice in the same place or something, and that's simply not true. So this is up in the Napa area and all these colored areas, and you can see the various decades that are in the box there. These are all fires that occurred in previous decades and yet now we've continued to rebuild in those areas, okay? So we keep rebuilding in the same damn places, okay? Now, why do we do it? Well, we do it because a lot of people underestimate the damage. They think to themselves, well, what are the odds that that fire is going to affect me? Or maybe they think, oh, it doesn't matter. I'll get out of there and I will pay my insurance and I'll just rebuild. Or they think, well, with new materials and vegetation management, I'll decrease the risk of fire damage to myself and that's true to some extent. But all of it still underestimates both the social and individual dangers that people face. So one of the reasons people decide to do it is they think, well, I can, with new building materials, I can harden my home with various vegetation management strategies. I can create a defensible space. And if we do more prescriptive burns, we can take care of the outlying areas. And all of those things are true, but it doesn't eliminate the risk that you will still lose your property, that you will still put your life at risk. So you can make all these wonderful choices about what kind of shingles to have. You can replace the wood with fiber cement board. You can treat the windows differently. You can make sure that the eaves and the deck are taken care of in various ways to be more resistant to flames. But you got to remember that there are all kinds of little things that you can do that will, particularly if we get one of these Santa Ana winds or Diablo winds that bring in lots of sparks that are traveling at 50 or 60 miles an hour and beating up against your home, you leave your garage door open or you leave gaps in various places. This is, I believe, why there was a warehouse, as I recall, in Santa Rosa that burned, largely because somebody left the door open, okay? So number one, when you're fleeing, you may not remember to do everything you're supposed to do. But the reality is that no matter what you do, there are some fires that are gonna burn so hot, no matter what, you're going to be incinerated. So we try, and again, I'm not saying that it isn't worth doing these things because this is our second best strategy because no matter what we do, people are gonna continue to wanna live in these woowy areas. So a lot of us are spending time thinking about, well, what do we do not only to figure out what in terms of evidence base is the best way to do fuel management and vegetation management, but also how do you enforce any regulations? How do you make sure that people are doing what they're supposed to be doing? The good example, which I'm gonna let Michael explain if he wants to, is that Mill Valley put a fairly modest proposal forward on hardscaping of property. And people, and he has many more stories about the insanity of it all, but this is one of the ads that Rebecca Miller, one of my graduate students focuses on in her lecture on this topic. And basically people were saying, well, which place would you rather live? And you'd rather live in the place that has that vegetation all around. It's much more appealing, much more inviting, but the safer one is the one that doesn't have all that. And so people make these decisions about their lives and their property on, I don't wanna call them irrational, but they refuse to see the importance of safety and tend to make choices which should we say are problematic. Not to mention the fact that really when you put in new regulations, most of it applies to new construction. So if you go into Santa Rosa as we did in our class and you look at the houses that are being rebuilt, you realize that there's gonna be a scattering back in the community that burned between some houses that survived no matter what, they're gonna have the same old vegetation, the same old construction materials next to homes that will be built up to code. So not to mention the fact, none of them will have a hundred feet of defensible space between them. So one thing that I wanna say is that we do believe that quite possibly the smoke may be a wake up call for us. And the parallels are to secondhand smoke with respect to tobacco. And here is a poll that we did. And you can see the level of concern with wildfires after 2017-18 was very high in California. And that basically people had read about fires, over 50% had read about fires throughout the state. And close over 50% had experienced some degree of smoke or new themselves or new family members. That's the personal one who had actually been involved in the fire. So the reason, and you can see by the way that the smoke travels throughout the West at one of our sophomore colleges we were out in Utah around the time that the fire smoke from California was polluting the air in Utah. So it has the political advantage that brings people in to the discussion who might not otherwise be afraid of the fire itself. The other way that risk is underestimated is with respect to insurance. I won't spend a lot of time on it, but people systematically in Santa Rosa did not buy the right level of insurance, partly because of the surge prices, but partly just they just didn't have the right kind of coverage. And that creates a real problem for the community trying to rebuild. So let me finish lastly with partisanship which is a big topic in political science. You'd like to think the Democrats and Republicans see the reality, but the partisanship in this country is so great that in a variety of these extreme weather circumstances, whether we're talking about drought, heat, and in this case, wildfires, Democrats are much more likely to acknowledge the same extreme weather that they experience with the Republicans, okay? So there is a partisan screen that seems to be working even on the experience of extreme weather. And one of the things we've done is we've tried to test, well, what if we were actually taking to account the real experiences of people? Does that close the gap in terms of these subjective biases? And this is an example where we took in the actual measurement of how close you were to the smoke or how many fires you actually saw over a period of time. You can see the error bars as you get out to the extreme are very, very wide. So you don't really only wanna look at the first part of the graph, but you can see that while these biases exist, there is no question that experience even erodes the unwillingness of Republicans to recognize that there are real serious extreme weather and climate change problems. It does so, it takes more experience to change their views, but they are witnessing it. So let me just finish by saying we have as much a people problem as we have a nature problem. That is to say, when we deal with this problem, we have to, if we're gonna live resiliently in the West, we have to be aware of the wildfire risk and we have to adapt ourselves so that we can live there in a way which is safer and does not impose the serious social costs that these recent wildfires have. We can't sustain that for very long. Okay, I'll hand it over to Michael. Bruce, we have two questions, one from Pratik and one from Benjamin. Do we wanna do questions now or do you wanna wait until then? I think to be fair to Michael, we should just go ahead with Michael and just save those questions. I was just saying, actually Bruce, it's fine with me if we take these questions now because they're pretty focused on what you just spoke about and it'd be better to just talk about it. It's okay. I don't mind. Okay, it's your call, Mike. Okay, Pratik, you wanna go first? Sure. Yeah, thanks for the presentation. And I was just wondering, I heard about this wildfire buffer zone that Paradise is thinking of building and I'm sure you've maybe heard about it as well. I'm just wondering what you thought about the effectiveness of that solution. I think they're calling it like a green belt to essentially surround the whole town with defensible space. So I didn't know if you thought that was an effective way to go about adaptation or if that was just people still insisting on staying put. Well, I'll give an answer and Michael, feel free to jump in as well. Mike was on the governor's commission and is quite knowledgeable about all these things. I would say it depends upon what the word effective means. If you mean by effective, which I think you do, it lowers the risk, then yes. Just as all the defensible space measures and the home hardening measures lower the risk, yes. Does it mean it eliminates the risk that you will burn? The answer is no, particularly when you get these fires that have the winds behind them and they're blowing a torrent, a virtual river 60 miles an hour of sparks that are hitting these homes. And when we were up in Santa Rosa and talking to the Stanford people that live up there, they were questioning what the insurance companies and the regulatory authorities were telling them to do because they were saying, well, hey, if we have indoor sprinklers and we maintain the hundred feet or in this case a zone, what happens if you get these fires that are coming with sparks at 60 miles an hour and are beating onto our property or is the indoor sprinkler system really gonna work? And the answer is, first of all, I doubt that anybody, there are people doing the science on this. I don't know whether the insurance companies are listening to those people or they're doing industry science, but I can tell you for sure that everything I've read is that there's no guarantee when you get certain conditions and that's the kind of heat and wildfire storms that we have seen recently that any of these measures will give you 100% guarantee. There's a great example of this from another part of the country after Hurricane Andrew, Florida instituted new building codes for roofing to keep the roofs on the houses. A big source of damage in hurricanes is that the wind will blow the top off the house and then the water gets in. And so these so-called super roofs protect structures in hurricanes from up to like a cat three hurricane. But if it's a cat four or a cat five, all bets are off. And I think that's a great way to think about, we don't have categories of wildfire, but things like what Paradise is proposing will protect paradise from a cat one or a cat two or a cat three wildfire, but not what happened in 2018. And that's good point. And we should have a category system for wildfires. All right, what's the second question? Benjamin, you wanna ask your question? Hi, yes. My name is Ben. I'm an MBA one at the GSB. I was curious, you mentioned, and we'll sort of discuss at length the issue of developing residences or just developing generally in WI's. And I was just curious, what, I know this is probably a question of folks have been trying to solve for a long time and there might not be a simple answer, but how do you solve for a housing crisis? How do you solve for population go throughout the West while doing so safely with regard to wildfires? Like, are there any existing urban areas that are wildfire safe or maybe you could push past the NIMBYism and try to encourage densification? Well, it's a constant battle to push against the NIMBYism. And in fact, we're gonna do an environmental governance class in the spring on precisely that. And I do think housing and land use are absolutely critical issues. And the state doesn't really have control over that because of the nature of local government having sovereignty over a lot of these issues and having fiscal incentives as a result of things that have to do with property tax and the need to sort of fiscalize land use in order to generate revenues, that accounts for why developers are extremely powerful in the cities. So, we have made progress in getting communities to be more fire aware and to take certain steps, but it is a struggle because it's not unlike the COVID thing where there's what you can do to maximize your chances of not getting sick and then there's the economic consequences of those measures. And there's a similar kind of trade-off with respect to the cities as they think about housing because if they can get affluent people to buy beautiful homes in the middle of Woodside, by the way, I will point out that Stanford is planning to put a housing project in Woodside and the people in Woodside are concerned about that for a variety of reasons. So, we're continuing to do it too. People want to live in these beautiful areas surrounded by vegetation, but okay. I point to Mill Valley as an example of a community didn't want to do it. Michael, you want to tell them a couple horror stories? Yeah, well, I just say, I think you're pointing at an issue that gets to deep politics in California and it also gets to the economics of housing development because of that politics. So, it costs a lot to build a structure in California. A lot of that is regulatory costs associated with all kinds of different things, most of which are well-intentioned. But what that means is that if you can amortize your regulatory costs over larger numbers of structures of units, it's a much more profitable enterprise. And that's also part of what drives the big developers out of the city because they can get big plots of land, build 2,000 houses instead of building one building and they can amortize their regulatory costs and risk over a larger number of units. And so there's really like, it's a very complicated problem and one that California is struggling to resolve effectively. And the status quo is we build in the wooey or more of our units get built in the wooey. So, you know, look outside Palo Alto. Mill Valley is a great example. Palo Alto is notorious for limiting development. There are all kinds of communities in the inner area that really need to change in order to solve this problem of avoiding risk, avoiding putting new homes in Hotshawak. Yeah, what Michael means is Palo Alto resists having high density homes and Mill Valley. And so a lot of communities just allow the expansion on them in the zones, right? That's what you meant, right? Exactly, exactly. Yeah, thank you both. Shall we shift gears and talk about utilities? Yep. Are there more questions about bristles? Okay. So, you know, when I started out working on this issue of wildfire and electric utilities, I had a particular idea of what a utility was. But I think, you know, it's sort of like, I was trying to think of examples of things that just sort of work and you don't really know what they are until they break. And, you know, one example that comes to mind for me is like a toilet, right? You just push the button, the bad stuff goes away. You know that like gravity is involved, maybe some water pressure, but you don't have to like know anything about it until it breaks. And then you lift up the lid and there's this like Rube Goldberg contraption in the tank that somehow is doing the things and there's a lot more there. There's a lot of complexity. There are many things in life we don't understand that are essential kind of until they don't work anymore. And I think the crisis that's occurred in California over the last several years, particularly with Pacific Gas and Electric, but definitely not limited to PG&E, the utility in Northern California is a great way to learn about like, what is it that makes utilities tick? It's like, what is a utility? And I'd ask all of you, like what do you think, what is the most fundamental essence of a utility? Whether it's an electric utility or a water utility or a gas utility, what's it doing that makes it special? It's the reason we call it a utility. Does anyone have a thought about that? Feel free to unmute and just jump in. What's a company that's providing goods that society has decided that people need over a service territory, because if you had two companies doing the same thing, it's not economically viable for competition, so. Okay, so I just wanna get your name. Fletcher, is that correct? Fletcher sort of has two answers. One is it's something people need, right? It's an essential good. And I think it's fair to say that things like electricity and water and sewer and gas, are essential needs. Maybe gas is, we're trying to shuffle that to the shadows in California, but it's still something that people need to live in a modern way. He also makes the point that it's a monopoly. We don't want two companies providing a lot of these goods. And that's another important clue, right? A lot of the utilities that we think about are network industries where we decided that we don't wanna build two networks. And so, unlike for many other types of companies, we actually give them an exception, a pass on being a monopoly, right? You're not allowed to be a monopoly in most areas of business. But certainly like for utilities, that's kind of, that's an important defining element of what a utility is. They get an exemption from antitrust law in the United States. So they're allowed to, in fact, they're supposed to monopolize. And if anyone tries to compete with them, they'll go straight to their regulator and start trying to shut that person down. Does anyone have other thoughts about what a utility is? I wanna share them. What makes a utility a utility? Looks like we have a response in the chat here. Oh, great. Okay, sure. A service that allows us to do things. It's useful. Yeah, I think that's another important way to think about this. A utility enables all these other activities, right? It's so fundamental to kind of how we live our lives, that it enables all the other activities that we wanna pursue, whether they're economic or purely for pleasure. Netflix doesn't work without electricity and it doesn't work without some sort of broadband internet service. That's kind of another sort of utility. So a utility is a business that provides us essential good and it's generally a monopoly, although not always, there can be some competition. I'm gonna provide another, I'm gonna inject another element into this. We wanna have these businesses providing us these essential goods at minimum cost, right? We wanna try to see, and usually how do we get to lower costs? What's the way to lower costs in an industry? Competition. Yeah, competition, exactly. You get a bunch of companies fighting for market share and they reduce costs by competing with each other, by lowering prices to attract customers. But since we've decided that we don't wanna have multiple sets of poles and wires and pipes and all that across the landscape, we have to find another way. And so this gets to utilities who are gonna have to operate differently. And I would just say, I'm gonna add one final dimension to this. And I think this is fundamental, but this is the one that's not obvious. This is the one that kind of requires lifting up the hood to look underneath. Another element of what a utility does is create a mechanism for very cheap finance for long-lived infrastructure, right? So the thing about the poles and wires and the pipes and all of that is that it lasts a long time, right? It's stuff that is supposed to last 30 years, maybe 40. Sometimes if you're talking about gas infrastructure, natural gas infrastructure, 60 years. And so it is financed over very long time scales, right? So the loans and the investments that are being made are paid off essentially by customers over long time frames. And in order to do that inexpensively, right? You have to have a mechanism that creates a lot of certainty for the bank, right? For the person that's gonna loan the money. They need to believe that this company is gonna be around in 40 years, that it won't default essentially on its mortgage, right? On its bonds for those of you who are more financially oriented. But we need to have a lot of confidence that bankruptcy won't occur, that the customers won't go away, right? The customers won't find a better way to do whatever the company does. And a lot of that desire for certainty is actually what drove and certainty in order to reduce finance and costs in order to make costs lower for customers is what drove the creation of regulated utility industries in the United States. The utilities themselves actually sought regulation. They went to the States and said, pass laws to regulate us so that they could lower, they could increase their credit worthiness, the confidence of banks to loan the money. And so lower their financing costs, the interest rate they pay on their loans, which the interest rate matters a lot. You guys probably are not in a position to buy homes right now. But if you can go from a 6% rate to a 3% rate, that may not sound like a lot, but over 30 years, it makes a tremendous difference in terms of the overall cost of building something. So all of these answers are right. None of them are wrong, right? Utilities provide essential services. They create infrastructure that we need without competition, right? And that's mostly intended. And they also are structured in a way to reduce risk, right? To be sure that the monopolization, the kind of lock-in that's created, the regulatory oversight that occurs lowers risk or it's supposed to. So I wanna ask a related question is, what's a utilities role in the energy transition? So what I mean by the energy transition is building in California, what it has meant over the last decade or so is a radical transformation of generation, right? So we used to depend on coal and natural gas and hydro and now we depend on a lot less natural gas, still the hydro, but a lot of wind and solar. How have we, what is the utilities role in building that wind and solar? Does anybody know? Does anybody, it's okay if you don't. This is more subtle, but it relates to that credit-worthiness as well. Create a market, right? You have a buyer for a new form of energy. Yeah, they're the buyer, exactly. And what renewable portfolio standards, like the one that California has, which is really where a lot of the reductions and emissions for California have come from, what they do is force the utilities to buy power from these new clean energy providers. Picture a big 700 megawatt solar, utility-scale solar power plant, say in the Central Valley of California or in the Mojave Desert. The utilities role is as a buyer. The form that that purchase takes is like a 20-year contract called a power purchase agreement, right? Now, why sign, the value of that contract is that it turns a solar farm into a solar power plant into like a cash-generating machine and a cash-generating machine with very low risk. Once the plant is built, then the person that owns it knows, they have a guarantee that they can sell power to a utility for 20 years. And long enough to pay off what? What is the solar power provider have to do in order to construct a solar farm? Do you think they have money in the bank or are they doing something else to actually purchase all of those panels and pay all of the workers to do the grading of the land and all of that and install the panels and interconnect it to the grid? You've got, Alessandra said loans in the... Loads, yeah, that's right. You know, they need to convince a bank to loan them the money. And you know what's a great way to convince a bank to loan you money? If you show up at the bank with a signed power purchase agreement for 20 years for all of the output from your solar power plant with someone who is not gonna go bankrupt that the bank can say, oh, you've contracted with a company that we think under no circumstances will default on its obligations which is what bankruptcy is. Bankruptcy means you can't fulfill all of your financial obligations including contracts to purchase things. And so in California and actually really around the country utilities are incredibly important because they're the low risk buyer that allows for the finance of these power plants. You can't build large power plants like this. You can't get loans anyway to build large power plants without an offtake agreement like this under most circumstances because they're incredibly capital intensive and the economics of them don't make sense without the ability to borrow at low costs. So why is this all important? Well, the strategy for California decarbonization is basically clean up the electricity sector which means sign a lot of power purchase agreements between utilities and new renewable generators, electrify buildings and electrify transport. That is the roadmap to deep decarbonization in California. So when wildfires in 2017 and 2018 were caused by utilities and the fires did enough damage to put utilities into risk of bankruptcy, it basically broke this chain because the first link in the chain is an agreement between a company that banks can be sure will purchase the good being produced electric energy for a very long period of time at an agreed upon cost. And anyone else in that chain that might help to create that reality of a giant solar power plant, say in the Westlands Water District in the Central Valley. And so many of us got interested in this problem. We had never really lifted up the hood on a utility. Never really thought about the relationship between the utility balance sheet and the ability to build new solar under the requirements of the RPS until all of a sudden, the balance sheets of the utilities had to take on this new liability, the obligation to pay for the damages caused by wildfire. So, and I should just say, I just talked about this. The utilities in California have a very special role and I think it's worth noting also that the California targets for decarbonization put utilities like PG&E kind of in a leadership role in the United States. Just to cite one number that's rather striking, 25% of the rooftop solar in the country is in PG&E service territory. 50% of the rooftop solar is in California. Half of that is PG&E. So, California utilities are way out ahead of pretty much anyone else in the country and they have traditionally worked hand in hand with the state to try to achieve California's targets which essentially pushed the ball forward on climate policy at the national level. So, what happened? What went wrong? Bruce mentioned and showed some pictures of Santa Rosa and of the Napa fire that occurred in 2017. But in October 2017, we had historically unusual conditions that led to utility power lines starting enormous numbers of fires in Napa and Sonoma counties to the north of Stanford. And this was combined with a legal regime in California that's longstanding that basically says if utility power lines start fires, the utility has to pay for the damages. There's no question of negligence. It's a strict liability regime. It's called inverse condemnation. But the basic idea is that utilities are able to socialize the costs of accidents that occur due to utility infrastructure over their entire rate base. And so, it's a sort of efficient way to get those damages paid for. The problem that occurred in 2017 was that there was real uncertainty about whether the utilities could actually charge customers for the damages costs. They were so large, you know, the 2017 fires caused about $10 billion in insured losses. And that's such a big number in terms of how much money, how much the revenues of PG&E in particular that it seemed implausible that the utility commission would allow those charges to be passed through in rates. Then, in just a year later, the campfire was caused by age, by ancient, I would say, transmission infrastructure up in Butte County that, and Bruce mentioned the consequences, you know, and I'm sure you're all familiar with what happened in Paradise. Shortly after that fire, PG&E was essentially cut off from all access to credit, not just these long-term loans, but even short-term lending. And shortly thereafter, they had to declare bankruptcy because utilities are really dependent, even just for doing the kind of routine maintenance, like if a pole falls over or there are woodpeckers in it and they need to replace it, right? That pole is the capital expense of replacing that pole is financed with bonds and issuance of new shares, new shares in utility company. And so once bond investors said, no more, we're not buying any more PG&E debt because we don't know if we're gonna wake up in fall of 2019 and PG&E will have burned down more of California, right? And once equity investors, shareholders decided that they didn't wanna own PG&E and that happened very rapidly. The share price in October of 2017, just prior to the fires was $70. By December of 2018, the shares were trading at less than $10. And basically all of the kind of normal investors in utility shares had gotten out. But once that happens, the utility basically has cash on hand and they have to try to maintain this very expensive and distributed system of poles and wires with the cash that's coming in and that's just not possible. They need to be able to issue long-term debt and shares. So in January, the utility declared bankruptcy. And the key question was how do we reassure these folks that are the kind of crucial source of finance to utilities that provide the source of demand for utility bonds and utility shares that they should invest in California. When California utilities are causing tens of billions of dollars of damage that they are strictly liable for. It's seemingly every fall or at least two falls in a row. And the solution was to create an insurance fund. Well, the solution was multifaceted. But the financial solution was to create an insurance fund that provides much greater certainty for the utilities in terms of their ability to recover costs on fire. So, and the fund was created as part of this legislation 1054, AB 1054 that did a whole bunch of other things that basically tried to reduce are aimed at reducing the risks that the insurance will actually be needed. So there's sort of a combination, reduce the physical risk and then create a mechanism so that the utility, it becomes low risk again and can be that source of certainty at the heart of this very long-lived infrastructure that we want to build as inexpensively as possible. And that would really, without the creation of the wildfire fund, not only would PG&E not have been able to exit bankruptcy but Edison, the Southern California, two major Southern California utilities, Southern California Edison and San Diego Gas and Electric would now not have investment rate credit ratings. So it was a very important kind of risk reduction measure. So the fundamental steps were better management of the physical risk, right? Reducing the chance that the utilities catch fire but also better management of the financial risk so that there was greater certainty that the utility investors could have in investing in California essentially, taking a long-term bet on California. The challenge moving forward is going to be better management of the political risks because you may have heard and you'll probably experience this fall or you may experience this fall, the situation where the best, one of the best physical risk management strategies, right? The best way to reduce fire risks during dangerous time is actually just to turn off the power right now. And that creates enormous political blowback. And obviously the governor and the commission really do not want to see power turned off. And so there's this tension between minimizing physical risks, minimizing the chance that PG&E will burn down another community and the political risk, minimizing the chance that PG&E has an acceptable relationship with the state that regulates it. And both of those are strongly connected to the financial risk. So I think there are hopeful paths forward but it's a very narrow path and it's gonna be very interesting to see whether PG&E can actually navigate this as we move through this year and the next several years.