Risk Tolerance and Attitudes in the Economics of Electric Power and Gas Utilities: Case of Wildfire for Community Resilience

Electric and gas investor-owned utilities operate in a regulated environment and are scrutinized by media and stakeholders for key strategic and operational decisions. Some decisions entail significant risk requiring a special attention to risk tolerances and attitudes. Utilities typically institute enterprise risk management programs to efficiently and effectively manage safety, reliability, and financial risks for their customers, employees, and communities in a changing climate with intensifying risks, such as wildfire. Consequences from such events could include human life and property losses, health effects, environmental damage, service loss, and other indirect financial and economic impacts. A spectrum of risk quantification and management methods are available for assessing these hazards. Varying risk tolerances and attitudes of stakeholders, typically ranging from neutrality to risk aversion, create situations that are central to decision-making where the safety, service delivery reliability, rate affordability, and the financial well-being of entities come together in a complex manner. This paper sets context, defines key terms, and develops an innovative approach for methodically reflecting risk tolerance and attitude in informing risk management decisions by offering flexibility to account for preferences by stakeholders in a structured manner. The proposed methods are illustrated in the context of wildfire risk management, including calibration and validation approaches.