Hawaii Is Bailing Out Its Wildfire-Causing Energy Company

After being found responsible for starting a deadly wildfire last summer, Hawaii’s for-profit energy utility is set to receive a public bailout. The episode makes a powerful case for bringing utilities under public ownership.

A volunteer surveys a charred apartment complex in the aftermath of a wildfire in Lahaina, Hawaii, on August 12, 2023. (Yuki Iwamura /AFP via Getty Images)

Last August, a deadly wildfire tore through Hawaii, erasing the town of Lahaina and killing over one hundred people. The state’s publicly traded utility corporation was found responsible; it is now facing a deluge of claims from residents seeking compensation for damages, as well as lawsuits from the insurance companies that have been paying out disaster claims.

Hawaii’s electricity is provided by a for-profit utility supplier that is granted monopoly power over energy distribution. In addition to its dominance of Hawaii’s power grid, Hawaiian Electric Industries, Inc., (HEI) enjoys almost complete autonomy in the physical management of its power lines on the islands of Oahu, Hawaii, Maui, Lanai, and Molokai. Only residents of the island of Kauaʻi maintain some semblance of control over their electricity, through a resident-owned energy cooperative.

When massive winds from Hurricane Dora blew into Maui, HEI subsidiary Maui Electric Company (MECO) refused to respond to early calls to shut down the grid. This came even as fire-safety officials warned that a flash drought put most of the state in a Red Flag Warning, the highest possible fire alert issued by the National Weather Service.

More than thirty power lines went down as winds battered the island, but MECO remained silent — apparently refusing to cut power to downed lines that were sparking fires. In the fallout of the fires, it came to light that MECO had not properly insulated wires or maintained poles and surrounding vegetation. These are standard precautionary measures in most states, especially ones with significant wildfire and windstorm risk. Many lines were bare — i.e., lacking any insulation at all — a direct violation of state regulations dating back to 2002 that significantly increased the probability of ignition in surrounding vegetation.

Now, as HEI struggles to pay for damages, state regulators look set to bail out the negligent utility company.

Who Pays?

Five months after the fire, legal fees, disaster relief bills, and settlements are piling up. A battery of personal claims against HEI prompted 142 insurance companies, including USAA, State Farm, Island Insurance, and Tradewind, to seek reimbursement for over $1 billion in claims they had paid to residents as of December 2023. The companies are following the lead of Maui County, which similarly filed suit against HEI on the grounds that the corporation’s negligence is to blame for property damage and loss of life.

Recent analysis estimates HEI could be on the hook for over $4.9 billion when the ashes clear. The corporation itself was only insured up to $165 million, a drop in the bucket compared to what they owe in damages combined with what insurers are seeking in reimbursement.

This scheme by insurance companies puts them in league with individual residents and the county in civil suits against HEI. This is not uncommon in catastrophe underwriting, as insurance companies will leave no stone unturned in trying to mitigate losses from natural disasters.

To that end, insurers often use gray areas in coverage to deny consumers’ claims related to flood or hurricane damage. But as the $1 billion in insurance payouts suggest, the insurance companies don’t seem to be fighting consumers’ claims. When it’s evident that a battery of claims cannot be denied, will not be sufficiently covered by reinsurance (the insurance that insurance companies themselves take out to protect against significant losses), and cannot be stalled in court, industry-wise lawyers will go after the next best offering: in this case, the utility company left holding the bag.

The State Comes to the Rescue

Soon after the announcement that the company had failed to de-energize its grid, the corporation’s long- and short-term bond ratings were downgraded by two of the “Big Three” credit-rating agencies, with Fitch lowering HEI’s grade to B on Rating Watch Negative and S&P lowering it to B-. The third of the Big Three, Moody’s, put HEI “under review for downgrade.” This means that lending companies would charge extremely high rates on anything HEI borrowed to pay its bills, whether those bills be to the people of Hawaii, state conservation efforts, insurance lawsuits, an infrastructure overhaul, or disaster relief funds.

But HEI has an important friend ready to help: the state of Hawaii. On January 23, state legislators introduced measures drafted by HEI to safeguard the company from bankruptcy by allowing it to raise costs to residents and issue a new bond covering the costly bill for starting the wildfire. Essentially, the state plans on issuing a low-APR, no-limit credit card that HEI can use to pay its bills, with minimal risk to the long-term financial health of the corporation. The monopoly’s survival is crucial to the state of Hawaii, which would lose 95 percent of its electrical coverage should HEI go bankrupt and cease operations. It is also crucial to the company’s boardroom.

Some supporters of the bailout say it is ultimately the best bet for residents of Hawaii, so long as the bonds are used to fund grid updates rather than lawsuits from insurance companies. The current deal would allow HEI to push the cost of the bonds — including interest — onto residents immediately; supporters argue that this would theoretically allow for avoidance of massive consumer rate hikes, which would inevitably follow in the long term should HEI be forced to borrow on the open market. Better to start paying a little bit extra over many years than a lot extra years down the road, when it comes time to pay back the high-rate bonds. But this crowd ignores the bigger picture — that the private debt of a for-profit company will be foisted on consumers regardless.

Whether in the short or long term, consumers are being made liable for the fire, the immediate costs, and the ensuing market fallout. Even if a resident receives an insurance payout, the insurance company is passing the ball to HEI, which is passing it to the state, which is ultimately turning it back over to the resident.

HEI vice president of corporate communications James Kelly claims that the utility doesn’t intend to use the bond proceeds to cover legal claims. But the state is not imposing any safeguards to ensure this, and there are no mechanisms to enforce transparency. In fact, legislators seem to have the opposite in mind — litigation and settlement costs are explicitly covered by the bonds.

An important question for Kelly, then, is how the utility does intend to process over $4.9 billion in legal claims if its current equity and insurance backing is so insufficient as to require a generous bailout by Hawaii residents. Why else would HEI directly include litigation and settlement contingencies in the legislative measure the company itself drafted, if not to use the bonds to cover those costs?

The Problem With Private Utilities

Pacific Gas and Electric Company — California’s energy utility — went through its own equity crisis following the 2018 Camp Fire. That fire resulted in at least eighty-five deaths and was found to be the result of similarly mismanaged power lines. A recent decision by the California judiciary hopes to save their for-profit energy corporation from the same type of bankruptcy facing HEI with big rate hikes, brought about by an $11 billion insurance settlement.

Both disasters might have been avoided with state-run utilities or publicly held energy cooperatives, which would be democratically accountable to residents. Had there been public, democratic oversight in place of a concern with profit maximization, HEI might have taken measures that prevented the wildfires from starting in the first place — like implementing the 2002 infrastructure regulation. Hawaii could take notes from the publicly owned New York Power Authority (NYPA), for instance. NYPA is the lowest-cost energy provider in New York State, which is theoretically bound by regulations set by the state comptroller.

Instead, Hawaiian consumers are not only bearing the burden of loss of life, land, and property caused by corporate negligence — they’re being forced to pick up the bill for the corporation’s negligence too. Here, utility deregulation has taken to such an extreme that the company at fault is allowed to build its own legislative life raft. This state of affairs is par for the course with private utilities: Hawaii needs HEI as the owner and operator of the vast majority of the state’s electrical grid. Yet the utility needs the state of Hawaii to help it avoid being eaten by the bigger fish it exposes itself to as a profit-generating corporation. Until utilities are publicly controlled, corporate boardrooms will dictate who ultimately pays utilities’ financial burden.