Risk Tolerance, Aversion, and Economics of Energy Utilities in Community Resilience to Wildfires
Publication: ASCE-ASME Journal of Risk and Uncertainty in Engineering Systems, Part A: Civil Engineering
Volume 10, Issue 2
Abstract
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 special attention to risk tolerances and attitudes including risk aversion. 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 creates situations that are central to decision-making where the safety, service delivery reliability, rate affordability, and the financial wellbeing of entities come together and interact in a complex manner. This paper sets context, defines key terms, and develops an innovative approach for methodically reflecting risk tolerance and attitude with a focus on risk aversion in informing risk management decisions by offering flexibility to account for preferences by stakeholders in a structured manner. The concept of risk-aversion amplification factors is proposed to reflect attitudes and preferences of decision makers in typical economic models used in benefit-cost analysis. Such amplification factors can be calibrated by applicable markets, such as insurance and catastrophe bond markets and used to estimate certainty-equivalent valuations of risks, costs, and benefits. The proposed methods are illustrated in the context of wildfire risk management for communities and utilities using two examples from these domains for enhancing resilience.
Formats available
You can view the full content in the following formats:
Data Availability Statement
All data, models, and code generated or used during the study appear in the published article.
Acknowledgments
The authors acknowledge the input of T. Brown and A. Tzamaras; and reviews by A. Maranghides, Dr. S. W. Gilbert, and T. Ibn Faiz; the guidance of R. Ito and A. Mani; and input of S. Elsibaie, C.C. Gore, and Ryan Flynn-deOnis. The financial support of Pacific Gas and Electric (PG&E), KPMG LLP, the National Institute of Standards and Technology (NIST), and BMA Engineering, Inc. is acknowledged.
Disclaimer
Statements in the paper are those of the authors and do not represent views of sponsors nor a consensus that the method constitutes the best practice. The information in the paper shall not be used without securing competent advice with respect to its suitability for any general or specific application, and assuming all liability arising from such use. The opinions, recommendations, findings, and conclusions do not necessarily reflect the views or policies of NIST or the United States Government.
References
ARTEMIS. 2023. “Catastrophe bonds, insurance linked securities, reinsurance capital & investment, risk transfer intelligence.” Accessed July 14, 2023. https://www.artemis.bm/about/.
ASTM. 2021. Standard guide for developing cost-effective community resilience strategies. ASTM E3130-21. West Conshohocken, PA: ASTM.
Ayyub, B. M. 2001. Elicitation of expert opinions for uncertainty and risks. Boca Raton, FL: Chapman & Hall.
Ayyub, B. M. 2014. Risk analysis in engineering and economics. Boca Raton, FL: Chapman & Hall.
Ayyub, B. M., and G. J. Klir. 2006. Uncertainty modeling and analysis in engineering and the sciences. Boca Raton, FL: CRC Press.
Ayyub, B. M., A. A. Pantelous, and J. Shao. 2016. “Toward resilience to nuclear accidents: Financing nuclear liabilities via catastrophe risk bonds.” ASCE-ASME J. Risk Uncertainty Eng. Syst. Part B: Mech. Eng. 2 (4): 041005. https://doi.org/10.1115/1.4033518.
Ayyub, B. M., and L. Parker. 2011. “Financing nuclear liability.” Science 334 (6062): 1494. https://doi.org/10.1126/science.334.6062.1494-a.
Boardman, A. E., D. H. Greenberg, A. R. Vining, and D. L. Weimer. 2018. Cost-benefit analysis: Concepts and practice. 5th ed. Cambridge, UK: Cambridge University Press.
Cal Fire. 2020. “California fire hazard severity zone viewer.” Accessed June 13, 2023. https://gis.data.ca.gov/datasets/789d5286736248f69c4515c04f58f414.
Charness, G., U. Gneezy, and A. Imas. 2013. “Experimental methods: Eliciting risk preferences.” J. Econ. Behav. Organ. 87 (Mar): 43–51. https://doi.org/10.1016/j.jebo.2012.12.023.
CPUC (California Public Utilities Commission). 2022. “Decision D2212027. Risk-based Decision Framework, Appendix A.” Accessed April 1, 2023. https://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M500/K043/500043720.PDF.
CPUC (California Public Utilities Commission). 2023. “Risk assessment mitigation phase.” Accessed February 19, 2024. https://www.cpuc.ca.gov/Home/About-CPUC/Divisions/Safety-Policy-Division/Risk-Assessment-and-Safety-Analytics/Risk-Assessment-Mitigation-Phase.
CPUC (California Public Utilities Commission) and Boston Consulting Group. 2020. “Reducing utility-related wildfire risk.” Accessed January 3, 2023. https://energysafety.ca.gov/wp-content/uploads/docs/strategic-roadmap/final_report_wildfiremitigationstrategy_wsd.pdf.
Emerson, P. M. 2023. “Intermediate microeconomics.” Accessed July 8, 2023. https://open.oregonstate.education/intermediatemicroeconomics/.
EO (Executive Order). 1993. “Regulatory planning and review.” Presidential Documents. Accessed February 19, 2024. https://www.archives.gov/files/federal-register/executive-orders/pdf/12866.pdf.
EPA. 2022. “Climate change indicators: Wildfires.” Accessed January 3, 2023. https://www.epa.gov/climate-indicators/climate-change-indicators-wildfires.
Foerch, A. 2020. “Shutdown costs Reagan library $150,000 a week in lost revenue.” Accessed June 13, 2023. https://www.sfvbj.com/news/2020/mar/31/shutdown-costs-reagan-library-150000-week-lost-rev/.
Friedman, M. 1976. Price theory. New York: Aldine Publishing.
Gilbert, S., and B. M. Ayyub. 2016. “Models for the economics of resilience.” ASCE-ASME J. Risk Uncertainty Eng. Syst. Part A: Civ. Eng. 2 (4): 04016003. https://doi.org/10.1061/AJRUA6.0000867.
Gilbert, S. W., D. T. Butry, J. T. Helgeson, and R. E. Chapman. 2015. Community resilience economic decision guide for buildings and infrastructure systems. Gaithersburg, MD: NIST.
Haine, S. 2015. “As low as reasonably practicable (ALARP) risk-informed decision framework applied to public utility safety.” Accessed July 10, 2023. https://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M157/K359/157359431.PDF.
Helgeson, J. F., D. Webb, and P. Lavappa. 2020. EDGe$ (Economic Decision Guide Software) online tool, software. Gaithersburg, MD: NIST.
Helgeson, J. F., and P. Zhang. 2020. Economic decision guide software (EDGe$) online tutorial: Wildland-urban interface (WUI) case study. Gaithersburg, MD: NIST.
Hertwig, R., D. U. Wulff, and R. Mata. 2019. “Three gaps and what they may mean for risk preference.” Philos. Trans. R. Soc. London, Ser. B 374 (1766): 20180140. https://doi.org/10.1098/rstb.2018.0140.
Hillson, R., and R. Murry-Webster. 2016. Understanding and managing risk attitude. 2nd ed. New York: Taylor & Francis.
HSE (Health and Safety Executive). 1992. The tolerability of risk from nuclear power stations. London: HSE.
HSE (Health and Safety Executive). 2023. “ALARP at a glance.” Accessed March 5, 2023. https://www.hse.gov.uk/managing/theory/alarpglance.htm.
IAA (Institute of Actuaries of Australia). 2015. Developing the risk appetite framework of a life insurance business. Sydney, NSW, Australia: IAA.
ISO. 2009a. Risk management: Principles and guidelines. ISO 31000. Geneva: ISO.
ISO. 2009b. Risk management: Vocabulary. ISO Guide 73. Geneva: ISO.
Kahneman, D., and A. Tversky. 1979. “Prospect theory: An analysis of decision under risk.” Econometrica 47 (2): 263–292. https://doi.org/10.2307/1914185.
Kind, J., W. J. Wouter Botzen, and J. C. Aerts. 2017. “Accounting for risk aversion, income distribution and social welfare in cost-benefit analysis for flood risk management.” Wiley Interdiscip. Rev. Clim. Change 8 (2): e446. https://doi.org/10.1002/wcc.446.
OMB (Office of Management and Budget). 2023. “Circular A-4 OMB (draft for public comments) guidance to federal agencies on the development of regulatory analysis as required under Section 6(a)(3)(C) of Executive Order 12866 of September 30, 1993.” Accessed July 14, 2023. https://www.whitehouse.gov/wp-content/uploads/2023/04/DraftCircularA-4.pdf.
Polacek, A. 2018. “Catastrophe bonds: A primer and retrospective.” Accessed September 23, 2023. https://www.chicagofed.org/publications/chicago-fed-letter/2018/405.
PPD (Presidential Policy Directive). 2013. Critical infrastructure security and resilience. Washington, DC: White House.
Rodríguez Mega, E. 2019. “The battle to rebuild centuries of science after an epic inferno.” Nature 571 (7765): 312–315. https://doi.org/10.1038/d41586-019-02141-2.
Sanchez, R., and S. Chan. 2019. “Wildfire caused $500,000 in damage at Reagan Presidential Library.” Accessed June 13, 2023. https://www.cnn.com/2019/11/19/us/california-easy-fire-reagan-library-damage/index.html.
Schindler, S., and S. Pfattheicher. 2017. “The frame of the game: Loss-framing increases dishonest behavior.” J. Exp. Soc. Psychol. 69 (Mar): 172–177. https://doi.org/10.1016/j.jesp.2016.09.009.
Shao, J., A. A. Pantelous, B. M. Ayyub, S. Chan, and S. Nadarajah. 2017. “Nuclear catastrophe risk bonds in a Markov-dependent environment.” ASCE-ASME J. Risk Uncertainty Eng. Syst. Part A: Civ. Eng. 3 (4): 04017018. https://doi.org/10.1061/AJRUA6.0000923.
Siemens. 2015. “Fire protection in historical buildings and museums.” Accessed June 13, 2023. https://www.downloads.siemens.com/download-center/Download.aspx?pos=download&fct=getasset&id1=A6V10562738.
Tengs, T. O., M. E. Adams, J. S. Pliskin, D. G. Safran, J. E. Siegel, M. C. Weinstein, and J. D. Graham. 1995. “Five-hundred life-saving interventions and their cost-effectiveness.” Risk Anal. 15 (3): 369–390. https://doi.org/10.1111/j.1539-6924.1995.tb00330.x.
Thomas, D. S., D. T. Butry, S. W. Gilbert, D. H. Webb, and J. H. Fung. 2017. The costs and losses of wildfires. Gaithersburg, MD: NIST. https://doi.org/10.6028/NIST.SP.1215.
TRB (Transportation Research Board). 2018. Designing safety regulations for high-hazard industries. Washington, DC: TRB.
US Department of Treasury. 2022. Annual report on the insurance industry. Washington, DC: US Department of Treasury.
US Supreme Court. 1980. “Indus. Union Dept. v. Amer. Petroleum Inst., 448 U.S. 607 (1980).” Industrial Union Department, AFL-CIO v. American Petroleum Institute, No. 78-911. Accessed February 19, 2024. https://supreme.justia.com/cases/federal/us/448/607/.
Varian, H. 1992. Microeconomic analysis. New York: W.W. Norton.
Information & Authors
Information
Published In
Copyright
This work is made available under the terms of the Creative Commons Attribution 4.0 International license, https://creativecommons.org/licenses/by/4.0/.
History
Received: Oct 12, 2023
Accepted: Dec 13, 2023
Published online: Mar 9, 2024
Published in print: Jun 1, 2024
Discussion open until: Aug 9, 2024
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.