The legislature that flinched

The New York Post reports that California Democrats have punted on a bill to hold utility companies accountable for deadly wildfires caused by their equipment. I am not surprised. I have observed, across the whole history of commerce, that the merchants and manufacturers who stand most loudly in defense of the public interest are precisely those who have arranged for the public to absorb their losses.

Consider the structure of the situation. A utility company operates under a government-granted franchise — a territorial monopoly, protected by law from the competition that would otherwise discipline its conduct. In exchange, the public expects that the company will maintain its equipment, manage its risk, and answer for its failures. When a legislature declines to enforce that accountability, it has quietly transferred the cost of negligence from the shareholder, who bore the risk of ownership, to the ratepayer and the taxpayer, who bore no such risk and gave no such consent. This is precisely the mercantile arrangement I spent much of the Wealth of Nations describing: private profit sheltered by public authority.

The argument against accountability, I may infer, is that liability exposure would raise borrowing costs, slow infrastructure investment, or — the evergreen threat — raise rates. This argument deserves a direct answer. If a business cannot be conducted profitably while paying for the harm it causes, then the business, as presently conducted, is not genuinely profitable. It is profitable only because a portion of its true costs have been quietly socialized. The consumer who pays a utility bill is also, through taxes and insurance premiums and the destruction of his neighbor's home, paying a second, invisible bill. Accountability does not create costs; it merely makes visible the costs that already exist.

There is also a moral foundation at stake, and here I draw on The Theory of Moral Sentiments as much as on the Wealth of Nations. Commerce depends on the reasonable expectation that those who cause harm will make it good. This expectation — call it the moral infrastructure of contract — is not enforced by the invisible hand. It is enforced by courts, by legislation, by the sovereign. When the sovereign declines to enforce it, not because the case is unclear but because the interested party has made its preferences known to the legislature, the entire framework of honest exchange is weakened. Every contract written in that jurisdiction becomes slightly less trustworthy.

The institutional question, then, is this: what mechanism disciplines a monopoly franchisee that cannot be disciplined by competition? The answer, historically and logically, is legal liability and regulatory oversight with genuine teeth. California has, it appears, filed the teeth down. The corrective is not complicated. Restore the liability. Let the utility price the risk into its operations, carry insurance against it, or restructure its equipment maintenance accordingly. The market, given an honest accounting of costs, will do the rest — but the accounting must first be made honest, and that is the legislature's job, not the market's.