California's wildfire fund is positive for state and localities, Moody's says
A California wildfire fund created to provide a financial buffer to the state’s investor-owned utilities is credit positive for the state and its local governments, according to Moody’s Investors Service.
The fund, signed into existence by Gov. Gavin Newsom on July 12, will reduce the likelihood of utility bankruptcies and market uncertainty, Moody’s analyst Matt Butler wrote in Thursday’s report.
It will provide the state’s investor-owned utilities with a resource to pay claims for damages from fires caused by utility equipment.
PG&E entered bankruptcy in January after it was hit with an estimated $30 billion in claims from 2017 and 2018 fires.
“First, the liquidity made available to the utilities could assist them in paying claims without immediately raising the rate burden as much as they otherwise might,” Butler wrote. “Second, the fund should reduce the risk of a future utility bankruptcy and any ensuing uncertainty in the state’s power market.”
The legislation also requires that the first $5 billion of safety investments made by IOUs be financed without the ability to earn a profit on the investments.
“The act accomplishes these objectives without a significant reduction in the state’s own resources and without an immediate increase in cost to taxpayers,” Butler wrote.
The state’s fiscal 2020 budget authorizes an initial loan of $2 billion to establish the fund. The act authorized the Director of Finance to issue a loan of up to $10.5 billion from the state’s general liquidity pool to the fund. The investor-owned utilities could also contribute. The state anticipates the fund growing up to $21 billion.
The state’s use of its own liquidity would have raised red flags for Mooody’s except for two factors, Butler wrote.
First, California’s liquidity has never been stronger and the state can afford it. Second, the act authorizes the California Department of Water Resources to issue up to $10.5 billion dollars to repay the state’s loan within a year.
S&P Global Ratings also said in a July 17 report that they believe the state currently has more than adequate unused borrowable cash resources to cover a cash loan as high as $10.5 billion.
The bonds would be repaid by extending a utility bill surcharge implemented used to back bonds issued during the state’s energy crisis. The surcharge was set to expire next year.