One of the less obvious outcomes of the Great Blizzard of 1888 was that, by the following year, crowds of New Yorkers were following workers around yelling "timber!" as they chopped down wooden utility poles. The ferocious winter storm pushed the city to get serious about burying the growing network of power and telegraph lines strung over its streets. Climate change wasn't part of the conversation back then. But a dose of extreme weather helped tip the balance in a continuing tussle about the hazards of overhead lines and the costs of putting them underground.
New Orleans lost power this weekend as Hurricane Ida put all of the transmission lines that feed the city out of action. One giant tower that withstood Hurricane Katrina in 2005 crashed into the Mississippi. Entergy Corp., which supplies power in much of Louisiana, said the hardest hit areas may experience outages for weeks. As is usually the case after a catastrophic storm, we can expect calls to bury the region's power lines along with the swift response that doing so just costs too much.
The big difference between now and 130-odd years ago is that climate change has not only entered the conversation, it is inescapable. Gauging the exact links between climate change and Ida will take time. But as the latest report from the Intergovernmental Panel on Climate Change makes it clear, rising temperatures resulting from man-made emissions are fueling extreme weather events and, left unchecked, will make them more frequent and more intense.
That changes the cost-benefit analysis for vital infrastructure. Only last month, PG&E Corp., the wildfire-prone utility in Northern California, raised eyebrows by announcing a plan to bury 10,000 miles of wires, an enormous undertaking. Meanwhile, Texas' freeze in February unmasked critical weaknesses across both its power and gas networks, spurring legislation to harden at least some of them against harsher weather.
The whole point of energy networks is to defray their costs across as many customers as possible. Hooking up a remote village to the grid usually costs much more than connecting a new city subdivision per capita. But the social and financial compact holds, with some occasional grumbling, because costs remain manageable.
Will that hold with climate change? A couple of years ago, I looked at how much more Californians could afford to pay for their power to cover growing wildfire-related costs because the state has some of the highest power prices in the U.S.
Luckily, Californians also tend to use less power and earn more money than others elsewhere, so utility bills take a smaller bite from personal income — on average. The problem is, though, averages only get you so far in a state that's home to both Silicon Valley and the Central Valley. The fact that the state had to come up with a wildfire insurance fund and that San Francisco keeps threatening to defect from PG&E's grid illustrates how much pressure the grid's compact faces already.
Louisianans pay the second-lowest electricity tariff in the country, at just 9.8 cents per kilowatt-hour on average in 2019. Unfortunately, they also use more electricity — lack of air conditioning will compound Ida's misery in the blacked-out days ahead — meaning average monthly bills are actually higher than in California. Disposable personal income is also lower than that for the U.S. as a whole. So the cost burden of electricity in Louisiana is already higher than average.
Paying a few cents of every dollar for the miracle of on-demand electricity hardly seems crazy — although, as with California, averages mask disparities in Louisiana.
The bigger issue is that today's bills don't yet internalise much of the growing costs of climate change. Apart from repair bills like those taking shape in Louisiana, there are also the costs of mitigation. In the power sector alone, these range from investing in renewable energy to electrifying transportation and buildings. While such investment generates long-run savings, especially when factoring in avoided disaster-related costs, it still has to be paid for now.
It is perhaps unsurprising that Entergy was the worst-performing major utility stock on Monday, down almost 4% at one point. As it has previously in Louisiana and Texas, though, it will seek to recover the costs of fixing Ida's damage by spreading them across customers' power bills. This is how it works with utilities.
Yet Andrew DeVries, an analyst at CreditSights, points out that Entergy's stock and bonds have long traded at a small discount to the sector, which he puts down to "hurricane fatigue." Even if the costs are recoverable, the repetition of the recovery process, seeking relief through state regulators, begins to wear thin.
At about 11%, Entergy's discount to the regulated utilities on price-to-earnings multiples is nothing compared with PG&E's 56%.
California's damages of recent vintage are much bigger and, because of a quirk in its state constitution, tend to fall squarely at the utility's door. But something like "hurricane/wildfire/insert disaster here" fatigue will keep encroaching. That's not just a problem for investors and lenders; after all, citizens rely on the low cost of capital that utilities traditionally enjoy to keep the cost of the grid manageable. As climate change raises those costs, expect the arguments about what to do, and who pays, to intensify.
Liam Denning is a Bloomberg Opinion Columnist.
Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement