S&P warns on California electric utility risksPosted On: Feb. 20, 2019 2:58 PM CST
A lack of regulatory and legislative reform to reduce risks for California’s electric utilities could leave the state without an investment grade investor-owned utility ahead of the 2019 wildfire season, according to a briefing released Tuesday by S&P Global Ratings Inc.
In its report, S&P said that California’s utility liability laws effectively force utilities to act as the state’s reinsurer, creating new risks they were never meant to take on.
“We don’t believe that an electric utility is large enough, sufficiently diversified, or adequately capitalized to be a reinsurer,” said S&P in the report answering investors’ most frequently-asked questions relating to California-based utility, PG&E Corp.’s voluntary bankruptcy filing.
As a result, S&P said it could lower the ratings on Edison, Southern California Edison Co. and San Diego Gas & Electric Co. by one or more notches within the next few months.
“This indicates that the issuer credit ratings for these entities could be below investment grade before the start of the 2019 wildfire season, which could begin as early as June,” it said in the report.
PG&E filed for bankruptcy due to the risk of incurring significant liabilities following the 2017 and 2018 wildfires and the uncertainties surrounding its recoveries through the regulatory process, said the report.
“We believe that potential liability risks are significant in California and that the regulatory mechanism to resolve these risks are unclear at best. Consequently, we believe California electric utilities face ongoing and unresolved risks related to future wildfires,” said S&P in the report.
Due to this lack of clarity, each of the other California utilities could potentially follow PG&E’s lead if faced with a catastrophic wildfire in 2019 or beyond, it said.
Under California’s law of “inverse condemnation”, if a utility’s facilities are determined to be the substantial cause of a wildfire, the utility could be liable for all of the wildfire’s property damage and other associated costs without the utility being negligent, said the report.