While legislation recently signed into law by California Gov. Gavin Newsom does not change the view of S&P Global Ratings that the state’s public power utilities are exposed to wildfire liability claims, the rating agency nevertheless believes that public power utilities in California are generally less exposed to wildfire-related claims than their investor-owned utility counterparts.
Newsom on July 12 signed into law legislation that aims to reduce wildfire risks while establishing a system to lower the exposure investor-owned utilities have for liabilities from wildfires.
In its July 16 report, “California Wildfire Legislation Excludes, And Is Credit Neutral For, Public Power Utilities,” S&P noted the law directs the state's 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,” the report notes. In addition, 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.
S&P said that 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 plan updates every three years. S&P “views this new requirement positively, because it further codifies fire hardening and mitigation in the state.”
The rating agency went on to say that as recent fires show, 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.”
S&P observed 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.”
The legislation does not change S&P’s 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,” the rating agency said.
“Nevertheless, in our view, the public power utilities are generally less exposed to wildfire-related claims than their IOU counterparts,” S&P said.
“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 ratebase. In these cases, we would expect significant rating impact.”
S&P continues to monitor impact of climate change
“We continue to observe and evaluate the impact of climate change on the frequency and devastation of wildfire,” S&P said.
Exposure to elevated fire risk areas alone is not sufficient to suggest a utility has a potential material financial liability, it pointed out.
“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.”
S&P’s 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.”
Public power, co-op groups seek wildfire liability reforms
Groups representing public power and cooperative utilities in April urged the state to change its strict liability rules for wildfires caused by utility infrastructure and take other steps to reduce the risks of wildfires and their financial fallout.
Last year, then-Gov. Jerry Brown signed a bill that directed the governor’s office to create the Commission on Catastrophic Wildfire Cost and Recovery, partly to make recommendations on legal changes to ensure wildfire costs are fairly spread among affected parties.
The commission received initial comments on April 22 from dozens of parties, including joint comments from the California Municipal Utilities Association, the Southern California Public Power Authority, the Northern California Power Agency and Golden State Power Cooperative. The groups represent 46 public power utilities and four cooperatives that serve about a quarter of California.
“The new law is a major step forward toward reducing the possibility of future wildfires, and we applaud the legislature and Governor for their leadership,” said Barry Moline, executive director, California Municipal Utilities Association. “Unfortunately, electric and water utilities remain exposed to inverse condemnation liability. We think that needs to be addressed in the near future.”