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California Wildfire Legislation Excludes, And Is Credit Neutral For, Public Power Utilities

California Wildfire Legislation Excludes, And Is Credit Neutral For, Public Power Utilities

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;

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