NEW YORK (S&P Global Ratings) July 16, 2019--On July 12, 2019, California enacted legislation directing the state's investor-owned electric utilities (IOUs) to jointly select one of two forms of state-managed funds for recovering some or all of wildfire liability attributable to utility assets. Of importance, the legislation's financial protections will apply exclusively to IOUs. Also, recovery hinges on an affected IOU's demonstration that it operated and maintained assets cited as triggering a fire in a manner consistent with those of a reasonable utility under similar circumstances.
While the credit protections under the legislation are not available to the state's public power utilities, the legislation adds another layer to those utilities' earlier legislative requirements for preparing fire mitigation plans. The legislation adds a requirement that public power utilities file their plans with the state's California Wildfire Safety Advisory Board for review and comment. It also requires public power utilities to prepare comprehensive plans updates every three years. S&P Global Ratings views this new requirement positively, because it further codifies fire hardening and mitigation in the state. As recent fires demonstrate, preventative fire hardening and containment are critical to lessening the potential devastation of wildfires. We continue to observe and assess the success of fire mitigation in changing climate environments. Good asset stewardship cannot eliminate wildfire- or climate-related risks, but we believe this planning materially lessens the risk, which the ratings reflect. Recent findings related to Pacific Gas & Electric Co. (PG&E) demonstrate the potential vulnerabilities that stem from weak infrastructure maintenance. We observe that many of the state's public power utilities are strong stewards of their assets, have robust fire mitigation plans and, as city departments, collaborate with local fire departments to reduce fire risk. (For more information, see, "For California's Public Power Utilities Facing Wildfire Liability, The State Recognizing The Issue Is A Step Forward," published April 17, 2019, on RatingsDirect.)
This legislation does not change our opinion that California's public power utilities are exposed to wildfire liability claims. For all utilities in the state, whether publicly or privately owned, the California courts' application of a strict liability standard in conjunction with the inverse condemnation doctrine exacerbate their exposure to fire claims. Nevertheless, in our view, the public power utilities are generally less exposed to wildfire-related claims than their IOU counterparts.
We view the public power utilities' autonomous ratemaking authority as helping shield public power utilities from the potentially protracted and unpredictable proceedings in which the IOUs must demonstrate prudent conduct a precondition to recovering liability costs from ratepayers. However, if the magnitude of a potential liability will negatively affect a public power utility's market position or pressures affordability to deem it politically unpalatable, there may be limits to passing the obligation through to the rate base. In these cases, we would expect significant rating impact.
Despite the mitigation that ratemaking flexibility and sound asset generally provide, some California public power utilities are vulnerable to fire liability claims. In May, we lowered our rating on Trinity Public Utility District to 'A-' from 'AA-' because of sizable liability claims that might exhaust its balance-sheet reserves and insurance capacity if the claimants prevail. In June, we also revised our outlooks to negative on Sacramento Municipal Utility District, the Transmission Agency of Northern California, and the city of Glendale's municipal electric utility, to reflect the significant portions of their service territories that are within regions designated by Cal Fire and the California Public Utilities Commission as posing elevated wildfire exposure. In our analysis of these utilities, we are assessing the capacity of their existing and proposed fire mitigation activities to shield them from damage claims. These rating actions also reflect our view that prospects for municipal utilities to achieve legislative relief from wildfire liability claims in California are remote.
We continue to observe and evaluate the impact of climate change on the frequency and devastation of wildfire. Exposure to elevated fire risk areas alone is not sufficient to suggest a utility has a potential material financial liability. In fact, many of the largest fires in California's history were not in areas designated by the state as the highest risk. This might be in part due to the higher mitigation and inspection requirements in such areas, underscoring the importance of asset management. We therefore take a more nuanced approach. Our credit analysis includes a comprehensive evaluation of the geographic factors that might contribute to exposure as well as each utility's infrastructure management to mitigate this risk. Our ultimate view of the effectiveness of fire mitigation plans will evolve as we observe the outcome of the new state requirements and the evolution of technological and operational advancements. Finally, we look at the ratemaking authority, liquidity, insurance, and market position to assess whether the utility could support a significant liability.
This report does not constitute a rating action.
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;|
|Secondary Contact:||Jenny Poree, San Francisco (1) 415-371-5044;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.