California wildfire rating risks spread to public utilities
The wildfire liabilities that sent investor-owned Pacific Gas & Electric into Chapter 11 are beginning to have a rating impact on California's public electric utilities.
PG&E filed for bankruptcy in January, facing billions of dollars in claims for property damage and loss of life from wildfires in its service area. Rating agencies have also downgraded California's two other large investor-owned utilities because of similar risks they face from operations in high-risk wildfire areas and California's inverse condemnation law.
Moody's Investors Service has now turned to public utilities, downgrading one small operation and shifting the outlook on three large public electric utilities to negative.
“There has been a focus on investor-owned utilities, rightfully so, but we wanted to point out that municipal utilities are exposed to some risk,” said A.J. Sabatelle, an associate managing director in Moody’s Global, Project & Infrastructure Finance Group.
Under California’s inverse condemnation law, if it’s determined that a company that provides services to the public is found responsible for property damage, whether or not it’s through negligence, it can be held liable for damages to affected property owners. Inverse condemnation typically holds government agencies responsible for compensating property owners for damage to property, but California applies the doctrine to privately-owned utilities as well.
The ratings agency zeroed in on the public utilities that had significant operations in areas described by the California Public Utilities Commission’s wildfire map as falling in tier 2, defined as having an elevated risk for a utility fire, or tier 3, defined as having an extreme risk, Sabatelle said.
Using that criteria, it reviewed seven of the 14 public utilities it rates in California.
Trinity Public Utilities was the only one to get a downgrade, falling to Baa1 from A2 and also getting an outlook revision to negative. The utility, which has $1.09 million in rated and $21.1 million in unrated debt, has substantial fire-related claims against it from the 2017 fire that struck Junction City, according to Moody’s. It operates in rural Trinity County.
The vast majority of areas in tier 3 are served by the investor-owned utilities, Sabatelle said. More than 50% of PG&E’s service areas are in tier 3, he said. But PG&E and Southern California Edison serve such vast areas, 70,000 square miles for PG&E and 50,000 square miles for SoCal Edison, that the two serve nearly 70% of the state, he said.
The rationale for changing the outlook on Los Angeles Department of Water and Power, Burbank Electric and Glendale Electric to negative was the uncertain magnitude of future wildfire liabilities under inverse condemnation and the lack of clarity around any legislative or regulatory fix, according to the reports.
Moody’s affirmed the ratings at Aa2 for LADWP and Aa3 for Burbank and Glendale. Their new negative outlooks affect $9.32 billion in debt for LADWP, $145 million for Burbank and $81 million for Glendale.
The Burbank and Glendale service areas primarily fall in tier 2, because of the mountain range that borders those cities, Sabatelle said. But those cities also have 15 fire departments between them. A portion of LADWP’s service territory is tier 2, but not a lot, Sabatelle said.
“None of these have near the risk of the IOUs, which is why the actions we took are more moderate,” Sabatelle said. “It is also a much more streamlined process for the municipal utilities to raise rates. The real issue for them is that if there was a big fire a rate increase might be a tough thing to get approved by the City Council.”
Both S&P Global Ratings and Moody’s analysts have said that the municipal utilities have the ability to “socialize” costs, meaning they aren’t profit driven, needing only to bring in enough money to cover costs. If there is a cost associated with inverse condemnation, it gets spread to all of a public utility's customers.
During Moody’s recent review, Anaheim Electric, Colton Electric Enterprise, Turlock Irrigation District and Walnut Energy Center Authority retained existing ratings and outlooks. The A3-rated Colton utility’s outlook was already negative, because large transfers to the general fund have reduced debt coverage levels, analysts wrote. The Aa3-rated Anaheim enterprise has $397 million in debt and A2-rated Turlock has $1 billion in debt.
The difference in how the public utilities and private power companies are structured leaves the public enterprises less exposed to liabilities from wildfires that have struck several areas in the state over the past two years and resulted in devastating loss for some communities, according to the rating agencies.
“S&P Global Ratings believes regulatory and operational factors temper the exposure of California’s public power utilities to potential wildfire-related liabilities,” its analysts wrote in a report.
“Overall, we believe these characteristics distinguish California’s rated public power utilities from the downward rating pressures S&P Global Ratings has identified for the state’s investor-owned utilities,” the report said.
“The public power companies face risk from wildfire claims under inverse condemnation, but we believe the public power companies are better able to recover costs, because they operate under a different regulatory framework and are better able to socialize the damage assessments to their ratepayers,” said David Bodek, a senior director of U.S. Public Finance during an S&P webinar.
S&P, however, doesn't "view the public power utilities autonomous rate making capacity as an absolute shield," Bodek said.
Like Moody's, S&P has been talking to the 30 public power credits it follows in California about fire mitigation efforts and any liabilities they might face.
The municipal utilities have until 2020 to provide the CPUC with their fire mitigation plans. The rating agencies have been watching to see what action public officials might take.
"California's regulatory process to recover fire costs is unpredictable, untested and lacks transparency in cost recovery," Gabe Grosberg, a senior director at S&P Global Ratings said during the webinar. "PG&E's situation heightens the risk for all investor-owned utilities. We could downgrade Edison and San Diego Gas & Electric to below investment grade if the regulatory situation doesn't improve prior to the next fire season."
California's interpretation of the legal doctrine or inverse condemnation effectively makes California's electric utilities the state's reinsurer — and the utilities are not large enough, sufficiently diversified or capitalized enough to be the reinsurer, Grosberg said.
Lawmakers have introduced two bills, Assembly Bill 235 and Assembly Bill 740, to create wildfire catastrophe funds to help cover losses. The proposals would create a fund that the private utilities would contribute to on an annual basis. Bonds could be issued through the California Infrastructure and Economic Development Bank.
During his State of the State speech in February, Gov. Gavin Newsom said he had convened a group of the nation’s best bankruptcy attorneys and financial experts from across the energy sector to work as his “strike team” to develop a PG&E strategy. Newsom set a mid-April time frame for his administration to present findings from the team.
“We see there is action coming from the governor’s office,” Sabatelle said. “But the proof is in the pudding. Clearly, there is the focus and attention needed to get something done, but there is a big difference between trying to get something done and getting something done.”
Moody’s also revised the outlook to negative on bonds supporting plants that provide power to the LADWP, Burbank and Glendale electric enterprises.
Those bonds include $659 million in revenue bonds issued by the Intermountain Power Agency, a Utah coal-fired generation facility that provides power to 35 municipalities, of which LADWP is the largest; and bonds supporting several Southern California Public Power Authority projects.
The SCPPA revenue bonds revised to negative were the Southern Transmission System, the Magnolia Power Project, the Milford Wind project, the Tieton Hydro Project, the Mead-Phoenix transmission line (LADWP interest), the Mead-Phoenix transmission line, the Mead-Adelanto transmission line (LADWP interest), the Mead-Adelanto transmission line and the Burbank Natural Gas Project.
SCPPA is a joint powers authority formed in 1980 by the state legislature. It issues tax-exempt and taxable revenue bonds to finance the construction or acquisition of generation, transmission, natural gas reserves, and renewable energy projects that cross borders into several Western states.