California utilities could face long-term impact from fires and blackouts: Fitch

Houston — California utilities, community choice aggregators and renewable developers are not expected to see a hit to their credit ratings due to ongoing wildfires and recent rolling blackouts, but a "potential decline" in ratepayers coupled with increased costs "could pressure utility cash flows in the longer term," credit ratings agency Fitch said Aug. 27.

In a report titled "California Wildfires, Blackouts Highlight Utility Operating Risk," Fitch analysts said the occurrence of these two events simultaneously, although unrelated, underscores the "challenging utility operating environment in a state prone to natural disasters," which is already incorporated in their credit ratings.

However, Fitch said that wildfires that are currently burning thousands of acres of the state's land, in concert with "power interruptions driven by heat-related, supply-demand and other issues" earlier in the month, "diminish customer satisfaction while increasing political risk."

According to the California Department of Forestry and Fire Protection, otherwise known as CAL FIRE, there are at least three major groups of fires that effectively surround the San Francisco peninsula area that have already burned over 806,000 acres of land.

According to CAL FIRE, as of the morning of Aug. 27, those fires are 21% to 33% contained.

A record of almost 1.4 million acres has burned across California since last week, leading to the declaration of a state of emergency by Governor

Wildfires triggered by investor-owned utility equipment in 2017 and 2018 led to the bankruptcy of Pacific Gas and Electric. In 2019, the three largest California IOUs initiated public safety power shutoffs designed to prevent additional fires in 2019.

Fitch noted that the cause of the current fires has been "an usually large number of lightning strikes related to intense thunderstorms and extreme heat, are not expected to expose utilities to third-party liabilities and financial harm."

It noted that under the doctrine of inverse condemnation, California utilities are held strictly liable if their equipment is determined to have sparked a wildfire.

Wholesale power prices spike

The blackouts earlier this month, which occurred primarily in some IOU service areas, were first called for by the California Independent System Operator on Aug. 14. The ISO did not have access to a sufficient amount of power in the latter part of the day to meet high demand caused by extreme heat.

On Aug. 17, California Governor Gavin Newsom, Democrat, called for an investigation into the blackouts.

Wholesale electricity prices in California spiked due to the recent energy shortfall.

IOUs meet supply needs through a mix of in-house generation and long-term purchase power contracts. When demand is high and IOU supply is insufficient, they may need to purchase higher cost power on the spot market to help meet demand, which could temporarily pressure cash flow until such costs are collected in rates.

To derate could hit credit quality

Fitch noted that public-owned utilities, or POUs, did not experience blackouts.

"The POUs own generation assets and, in some cases, high-voltage transmission lines that permit energy to be imported from other states. Generation assets and transmission capacity provided a physical and financial hedge against the capacity and energy shortages," Fitch said.

The analysts said that the POUs had sufficient resources to serve their own loads when energy supply became scarce and market prices spiked. A number of POUs also sold energy into the wholesale market, augmenting revenue when prices rose.

Fitch argued that some renewable projects are at risk of unreimbursed curtailment if Cal-ISO directs them to derate, or decrease the availability for emergencies, such as wildfires.

This has not yet occurred, but "could erode credit quality if it were to become a persistent issue," Fitch said.

If, however, there are increasing periods where power prices "jump by many multiples above average pricing, some renewable projects may be able to capitalize on those opportunities and receive a short-term revenue boost," said the ratings agency.