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Fire-related risks for utilities higher in California than Australia, Fitch says

Electric utilities in the U.S. state of California and in Australia face similar challenges serving wildfire-prone regions, but Fitch Ratings has assigned a lower "exposure to environmental impacts" risk score to two utilities Down Under than it gave to three major electric companies in the Golden State. And it did so despite the historic levels of destruction currently resulting from bush fires sweeping across millions of acres in Australia.

Fitch uses that risk score — as well as other environmental, social and governance, or ESG, relevance scores — when evaluating the credit quality of utilities.

"The regional difference in credit relevance is due in part to variation of regulatory and legal regimes," Fitch said in explaining why it gave an exposure to environmental impacts score of 5 to California's investor-owned utilities Pacific Gas and Electric Co., Southern California Edison Co. and San Diego Gas & Electric Co. and a score of 3 to Australian distribution and transmission utilities Energy Queensland Ltd. and AusNet Services Ltd.

In Australia, financial and regulatory risk related to the current bush fires should be limited due to rules that were tightened following previous devastating fires, Fitch said in its Jan. 6 report. For example, AusNet was held liable after the fatal 2009 "Black Saturday" bush fires that resulted when high winds knocked down the utility's power lines. Since then, AusNet has been complying with a government mandate to install equipment designed to quickly cut current to any downed line, the cost of which will be passed through to customers, Fitch said.

The Victoria State Government required the technology, known as rapid earth fault current limiters, after concluding through extensive testing that the equipment could cut in half the risk of bush fires from utility lines, according to AusNet and government websites. The government said it also is requiring replacement of bare wire powerlines with insulated overhead lines or underground lines.

Moreover, Fitch noted that "[t]here has not been any indication that the recent wildfires in Australia were started by the region's transmission and distribution utility companies." Bush fires have resulted from lightning strikes and arson, according to media reports.

In contrast, recent wildfires in California — including the 2018 Camp Fire, which caused widespread injuries, deaths and property losses in Pacific Gas and Electric's service territory — have been tied to malfunctioning utility equipment. The Camp Fire played a large part in that utility and its parent, PG&E Corp., filing for Chapter 11 bankruptcy as they faced estimates of $30 billion in potential liabilities.

Fitch said one of the regional differences it took into account was utilities' ability to recover fire-related costs on a timely basis. While California passed Assembly Bill 1054 in 2019 to provide a fund for helping utilities pay wildfire damages, the state still applies strict liability under inverse condemnation to investor-owned utilities if their equipment ignites fires.