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Policy, not markets, will compel utilities to address climate change: report

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Policy, not markets, will compel utilities to address climate change: report

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Strong policies are likely necessary to compel utilities to address risks from climate change since various market indicators do not indicate significant investor climate concern in the sector, according to a new report, even despite Pacific Gas and Electric Co.'s bankruptcy.

Researchers with Columbia University's Center on Global Energy Policy found that neither equity nor debt markets have strongly reacted to the utility known as PG&E and parent company PG&E Corp.'s joint bankruptcy.

One point of evidence supporting this is that borrowing rates for PG&E Corp., Southern California Edison Co. parent company Edison International, and San Diego Gas & Electric Co. corporate parent Sempra Energy rose following the November 2018 wildfires and in May 2019 when PG&E's grid equipment was found to be the cause of the 2018 Camp Fire, despite that fire being limited to PG&E's service territory. But during that time, utility bond spreads in the U.S. also experienced a modest uptick and soon returned to normal levels.

Meanwhile, the Utilities Select Sector SPDR ETF showed that while PG&E's stock price had suffered from growing concerns over California's wildfires, the utility sector's price-to-earnings has traded up to 12% higher than the S&P 500 index in recent months. Columbia University researchers said that though this is one of several factors to influence valuations, "this market reaction does not appear to reflect widespread investor concern that the recent wildfires and subsequent PG&E bankruptcy are an indicator of a new systematic risk across the sector."

"[T]hese analyses suggest that the capital markets do not view the California wildfires and PG&E's subsequent bankruptcy as indicative of a widespread imminent climate risk for utilities," the report's authors, John MacWilliams, Sarah La Monaca and James Kobus, wrote in the Aug. 15 report. "Though there has been some impact to the financing costs of the other investor-owned utilities in California, the effect has not been borne out in aggregate utility indicators."

PG&E and its ultimate parent filed for bankruptcy in January as they potentially faced $30 billion in liabilities from 2017 and 2018 wildfires. While questions related to equipment and vegetation management issues have come up during California's investigations into the Camp Fire and other wildfires, many groups have called PG&E's bankruptcy the first climate change-related bankruptcy.

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Still, MacWilliams, La Monaca and Kobus noted that while more utilities will likely face natural disasters fueled by climate change, investors may believe that the fallout is "too far in the future" to impact current investments. The utility finance community may also expect the costs of climate change in the utility sector to be primarily a burden borne by ratepayers, insurance companies and taxpayers.

"Even if investors believe that climate change risks are material to valuation, they may also believe that such risks will not be considered by other investors for some time," the report authors wrote.

Instead, policy measures are necessary to push utilities and other companies to allocate capital into mitigating financial risks from climate change. An example of this is California's recently created $21 billion wildfire insurance fund. The framework's requirements include more intense wildfire mitigation planning, mandated preventative investments and defining financial exposure to boost investors' confidence.

That said, California's efforts may or may not serve as an example for subsequent governments, researchers wrote, particularly since ratepayers will contribute $10.5 billion to the fund and will see a higher charge on their bills as well as concerns that $21 billion may not be enough to cover future fire damage.

"The California proposal provides a first, if imperfect, example of an explicit regulatory road map for allocating climate costs," the authors said.