Incendiary assets: Risk, power, and the law in an era of catastrophic fire

In California, wildfires caused by electrical infrastructure have left the state’s investor-owned power utilities with major and growing liabilities. But even in such an incendiary environment, the financial industry has demonstrated that it can profit from disaster. This paper uses the 2019-2020 bankruptcy of Pacific Gas & Electric to explain how. In it, I show how “risk” in California’s electricity industry is legally constituted, mediated, and allocated. First, I explain how financial perceptions of wildfire risk in California’s electricity industry are shaped by the state’s legal and regulatory environment, and how the law is used to manage this risk. I then turn to PG&E’s bankruptcy to show how litigation functions as a financial strategy. In court, risk is endogenous to legal-financial practice. I develop the concepts of “legal arbitrage” and “leverage” to explain how law mediates the relationship between risk and finance. I adapt the concept of legal arbitrage to show how financial assets (like those in a utility with unprecedented wildfire liabilities) can possess both legal and market value, which can and often do diverge in circumstances of distress. I use the term leverage to refer to a particular kind of legal-financial power which enables actors to transfer risk away from themselves and onto others. In working through these concepts, I argue that that mainstream perceptions of risk in the financial industry are inadequate, especially in an era of increasing climate insecurity.