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For California's Public Power Utilities Facing Wildfire Liability, The State Recognizing The Issue Is A Step Forward


For California's Public Power Utilities Facing Wildfire Liability, The State Recognizing The Issue Is A Step Forward

NEW YORK (S&P Global Ratings) April 17, 2019--On April 12, California Governor Gavin Newsom's "strike force" published a report, "Wildfires and Climate Change: California's Energy Future," containing several proposals for action by the state, its investor-owned utilities (IOUs), and its public power utilities to reduce wildfires attributable to electric system infrastructure and to better manage related financial liability.

From a credit perspective, S&P Global Ratings views the report as a positive first step that signals the state's awareness of and willingness to address the financial exposures facing electric utilities in California. At the same time, we view the report as preliminary. Beyond disclosing the state's commitment to spend $1 billion over five years for forest management and fire crews, the report lacks definitive solutions for shielding electric utilities from onerous financial liabilities. Of note, the report acknowledges the specter of heightened wildfire activity and the related financial threats to the viability of the state's electric utilities. It cites increasing fire risks attributable to weak timber management practices, climate change, Pacific Gas and Electric Co.'s (PG&E) poor stewardship of its infrastructure, and citizens' migration into more fire-prone exurban and rural areas in response to the state's high housing costs.

The report identifies California's application of the "inverse condemnation" doctrine, coupled with a strict liability standard, as a threat to the financial viability of all utilities. As a response, the report recommends that the state's Commission on Catastrophic Wildfire Cost and Recovery evaluate concepts for equitably allocating wildfire liability costs among ratepayers, utilities, and insurers. We expect that political wrangling over this could continue for some time before stakeholders coalesce around a solution.

In our opinion, an initiative to alter California's approach to the doctrine of inverse condemnation, as interpreted and applied by state courts, is complicated. This doctrine derives from the state's constitutional requirement that property owners be justly compensated when their private property is taken. Therefore, we believe the state faces formidable challenges if it plans to pursue legislative changes to its constitution in addressing electric utilities' exposure to inverse condemnation claims. Constitutional amendments require either a two-thirds vote of the legislature, a vote of the electorate following a constitutional convention, or a broadly supported ballot initiative.

S&P Global Ratings believes both California's public power utilities and IOUs face exposures to wildfires associated with climate change and, in turn, liability claims under the inverse condemnation doctrine. Although our analysts view all of the state's electric utilities as exposed to climate change and inverse condemnation risks, we believe public power utilities are relatively better-positioned on this front than their investor-owned counterparts.

We see significant distinctions between California's IOUs and public power utilities because they operate under different regulatory frameworks for recovering costs, including for liability.

We view the autonomous rate-setting authority available to public power utilities as providing latitude, within limits, to recover liability costs from their ratepayers and socialize damage assessments among those ratepayers.

We consider the public power utilities as better able to recover liability costs than their IOU counterparts because the IOUs lack autonomous ratemaking authority and are subject to regulatory oversight. This oversight has led to disallowances for IOUs. The strike force report recognizes the regulatory hurdles facing IOUs and lays out proposals for improving the regulatory process.

Although we consider California's public power utilities as better able to respond to wildfire claims than IOUs, we do not view public power utilities' autonomous ratemaking authority as an absolute shield. For example, we recently placed our ratings on Trinity Public Utilities District on CreditWatch with negative implications to reflect the potential that fire claims could weigh on its credit quality (for more information, see the analysis published March 29, 2019, on RatingsDirect). If we conclude that other public power utilities are likely to face claims that could exhaust their ratemaking capacity, insurance limits, and liquidity, negative rating actions would follow.

In discussing PG&E, the report makes clear that good asset stewardship is critical to public safety. To that end, we continue to assess public power utilities' infrastructure management and fire mitigation plans to determine where there are emerging exposures.

We are continuing to work with the approximately 30 California public power issuers we rate as part of our ongoing surveillance efforts to assess these utilities' fire mitigation measures, the efficacy of those measures, and any potential obstacles they might face in a bid to recover assessments of liability through rates.

RELATED RESEARCH

  • How Will The PG&E Bankruptcy Play Out For Suppliers, Lenders?, April 9, 2019
  • California Public Power Utilities Are Better Able To Temper Wildfire Related Liability Exposures Than IOU Counterparts, Feb. 28, 2019
  • Will California Still Have An Investment-Grade Investor-Owned Electric Utility?, Feb. 19, 2019

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst:David N Bodek, New York (1) 212-438-7969;
david.bodek@spglobal.com
Secondary Contact:Jenny Poree, San Francisco (1) 415-371-5044;
jenny.poree@spglobal.com

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