Dive Brief:
- Increased wildfire risk has contributed to nearly 100 utility company credit downgrades since 2020, according to a report by global consulting firm Charles River Associates.
- Lower credit ratings have made it more difficult for utilities to borrow money while insurance and wildfire mitigation costs have increased, the report states. These costs have largely been passed on to consumers in the form of rate increases, according to Andrew Dressel, vice president of energy at Charles River Associates.
- However, wildfire mitigation practices seem to be effective in reducing utilities’ legal risks. Credit downgrades have become less common in states that took early action to address wildfire litigation, Dressel said.
Dive Insight:
The increased risk of wildfire — and wildfire-related litigation — could significantly erode the financial stability of utilities in fire-prone areas, according to Charles River Associates. But emerging evidence suggests that public policy and utility-led wildfire mitigation efforts are effective in reducing these risks, Dressel said.
Credit rating agencies like Moody’s, Fitch and S&P Global have recently downgraded a raft of utility credit ratings, often citing wildfire risk as a key factor in these decisions. Initially, the downgrades applied only to Southern California utilities, like Pacific Gas & Electric, that had been directly impacted by catastrophic wildfires, Dressel said. But the Labor Day fires in Oregon and the Marshall Fire in Colorado triggered another wave of downgrades throughout the West. Further downgrades are now expanding to the Southern Plains and the Southeast following the Smokehouse Fire in Texas, he said.
All in all, Charles River Associates tallied 99 utility downgrades by S&P since 2020, compared with 72 downgrades from 2016 to 2017 and just 34 from 2012 to 2015.
“Even Warren Buffet was saying utilities may no longer be a profitable business. Obviously, Berkshire Hathaway has made quite an investment over the years, so the alarm bells were ringing,” Dressel said. Berkshire Hatahway owns both NV Energy and PacifiCorp.
Unlike other natural disasters, like tornadoes or hurricanes, wildfires pose a particular risk to utilities because utility companies have been found liable for billions in damages when their equipment is found to have ignited the blaze, Dressel said. Wildfire frequency and severity is believed to be increasing as a result of a warming global climate and historic forest management policies that tried to suppress wildfire throughout the West and contributed to a buildup of dry, high-risk fuels.
But there is also reason to believe that actions to reduce wildfire risk in states such as California have had a measurable impact on utilities’ bottom line. California has created a public wildfire insurance pool for utilities, for example, as has Utah, Dressel said. Utilities can buy into these pools to gain access to wildfire insurance in situations where commercial insurance may not be available, or could prove too costly to the utility.
These and other states have also required utilities to implement wildfire mitigation plans, and these plans seem to reduce the frequency with which utilities are found liable for igniting large wildfires, Dressel added. Although California has seen more wildfire ignitions this summer and fall due to hot, windy weather, the state so far has not seen any catastrophic fires triggered by utility infrastructure, Dressel said.
Those actions have contributed to a leveling-out of the wildfire cost increases, Dressel said. PG&E and Southern California Edison have seen credit upgrades in more recent years, while San Diego Gas & Electric has held steady, and this trend could spread as other states and utilities begin to take more proactive action on wildfire risk, Dressel said.
“One of the key takeaways is that this can be managed. It doesn’t have to be the sword of Damocles over our heads,” he said. “We can take practical measures to reduce this threat. There are people working across industries and across government working to resolve this issue, and I think we are making progress.”