California wildfires have grown in intensity, size, and frequency over the past several years. Many such fires have been sparked from electric utility power lines, causing billions of dollars in property damage, forestry loss and even loss of life. We believe that primary causes are climate change, California's hot and dry summers, poor infrastructure stewardship for some utilities, weak timber and vegetation management practices, and citizens' migration into more fire-prone exurban and rural areas in response to the state's high housing costs. In our credit ratings, we are placing an even greater emphasis on the growing risks of wildfires and the corresponding impacts to credit quality than we have historically. While we see the risks as meaningful, wildfire risks have directly affected only three ratings within the public power portfolio to date. We believe the specter of liability for utility-caused wildfire damage will continue to be a significant credit risk for several--but not all--of the public power utilities we rate in the state, limiting upward rating potential and perhaps leading to additional rating downgrades. While the state has responded with various regulatory mandates, including the requirement for utilities to develop wildfire mitigation plans, in our view many of the risks are beyond management's direct control, politically unpalatable, or are too costly to address, such as placing all or even a portion of power lines underground. Other positive regulatory measures, including the creation of a wildfire liability fund, apply only to investor-owned utilities (IOUs). Nonetheless, we believe wildfire risks are either minimal or manageable for most of the public power utilities we rate.

Inverse Condemnation Or 'Strict Liability'

For public power utilities, California's legal standard for assigning liability to utilities for wildfires compounds the physical threats. Whereas utilities in any state could be subject to lawsuits for wildfires they directly or indirectly cause because of negligence, the laws are significantly stricter in California in the favor of property owners (and insurers). Under California law, courts can apply the doctrine of "inverse condemnation" to both IOUs and public power utilities. The doctrine provides that if a state actor or a company providing services to the public, like an electric utility, is the substantial cause of property destruction, whether or not through negligence, it can be held liable for damages to affected property owners. In many cases, electric utility power lines or other related infrastructure has either been proven or alleged to be the cause, with damages in some cases in the billions of dollars, not to mention the human toll. The resulting significant personal and property damage has led many affected to bring substantial legal claims for damages against some of the state's electric utilities, most notably Pacific Gas & Electric Co. in relation to the devastating 2018 Camp Fire in Paradise, Calif. Although there has been considerable discussion surrounding legislatively reigning in the financially onerous inverse condemnation doctrine, we believe it will be politically difficult to legislatively compromise legal remedies available for personal and property damage.

Environmental, social, and governance

We believe that California public power utilities are significantly more exposed to environmental risks compared to their peers in other states. As climate change has intensified the severity and frequency of wildfires in California, environmental factors have become an integral part of our credit analysis on the state's electric utilities. These environmental factors in the state include the cyclicality of wet and hot, dry seasons on a more extreme basis, severe droughts, high winds (especially in the fall after the summer dry spell has dried out vegetation), and increasing tree mortality in forests. California also has a high number of properties in high fire threat areas. Inverse condemnation exacerbates the operational and financial risks that climate change introduces for utilities in the state. Some public power utilities in the state have caused or have been alleged to have caused destructive wildfires that have resulted in claims, some of them sizeable, which demonstrates California's public power utilities' susceptibility and exposure to wildfires and climate change.

In our view, social risks are high reflecting California's communities' susceptibility to wildfires and the potential for higher customer bills in the future due to the need to invest in wildfire mitigation, system hardening, and technology, and even potentially to support higher debt service if wildfire claims are significant enough to require the issuance of debt. We also view the risk of citizen displacement and/or death due to wildfires a social risk.

We believe governance factors for virtually all public power utilities in California are in line with peers, including the benefits reaped from full ratemaking autonomy, cohesive boards and generally good asset stewardship. One exception to this is our view of the negative governance factors for Los Angeles Department of Water and Power (LADWP) given our view of the uncertainties and fallout with regard to the department's billing system and ongoing FBI investigation. We believe the result of such investigation could negatively affect public perception of the department's governance and hence support for the department for future rate increases. For more information on LADWP, see our full analysis published March 3, 2020.

Wildfire Risk Analysis: Public Power Utilities

S&P Global Ratings believes regulatory and operational factors temper the exposure of California's public power utilities to potential wildfire-related liabilities, limiting downward pressure on ratings. That said, in our view, we believe some public power utilities have meaningful wildfire risks despite generally strong governance, with some of these risks beyond utilities' control.

The state's public power utilities do not need regulatory approval to raise rates or issue debt to fund claims to the extent they are liable for wildfire-related liabilities resulting from the application of inverse condemnation. This ability to set rates and issue debt as needed supports our view that, within limits, public power utilities are in a good position to address wildfire-related liabilities including recovering from ratepayers amounts paid as judgments. In short, the credit quality of the public power utilities we rate does not hinge on the constraints of California's regulatory framework. However, in our view, even with public power utilities' additional flexibility, wildfire claims could potentially be in the hundreds of millions or even billions of dollars, such that no reasonable rate increase or amount of debt issuance would be sufficient to amortize extraordinary claims.

There are also geographic attributes of California's public power utilities that limit wildfire risks. The public utilities' transmission and distribution lines are principally within smaller, urban service territories in low fire threat areas, which we believe are less prone to power lines sparking catastrophic wildfires. With small geographic footprints, public power utilities' local fire departments' response time is generally short, which can limit the ultimate size and destruction of the wildfires. Also, the transmission and distribution lines of the primarily urban public power utilities we rate typically fall outside the areas designated as Tier 2 "elevated" and Tier 2 "extreme" fire-threat areas on the California Public Utilities Commission's (CPUC) fire threat map, including the transmission assets of Southern California Public Power Authority. There are some exceptions to this, including especially the LADWP power system and Glendale Water & Power's electric utility, who have over 158,000 and 12,000 customers, respectively, in either Tier 2 or Tier 3 fire-threat areas. But, many of the utilities we rate are entirely in urban areas surrounded by other urban cities, with little to no wildland-urban interface, and even, in some cases, no distribution or transmission lines extending into Tier 2 or Tier 2 threat areas (Vernon Public Utilities, for example). Notwithstanding what we view as characteristics that limit wildfire risk for many of California's rated public power utilities, the potential for liability under inverse condemnation remains an integral component of our analysis of public power utilities, and we will continue to conduct case-by-case assessments of utilities' management of this risk and financial capacity to cover wildfire-related liabilities.

Legislative And Regulatory Developments And Requirements

California has enacted several pieces of wildfire-related legislation over the past few years aimed to limit wildfires and resulting liabilities and to aid IOUs in meeting wildfire claims. SB-901, signed into law in 2018, requires IOUs and public power utilities to submit annual wildfire mitigation plans that disclose each utility's unique risk factors and procedures for mitigating these risks. CPUC section 8387 required all electric utilities to prepare a Wildfire Mitigation Plan by Jan. 1, 2020 and submit annual updates. The legislation also requires that an independent consultant vet the wildfire mitigation plans.

In April 2019, the governor's "strike force" published a report, "Wildfires and Climate Change: California's Energy Future," containing several proposals for action by the state, its IOUs, and its public power utilities to reduce wildfires attributable to electric system infrastructure and to better manage related financial liability. While the report disclosed the state's commitment to spend $1 billion over five years for forest management and fire crews, the report lacked definitive solutions for shielding electric utilities from onerous financial liabilities. The report identified California's application of the "inverse condemnation" doctrine, coupled with a strict liability standard, as a threat to the financial viability of all utilities. As a response, the report recommended that the state's Commission on Catastrophic Wildfire Cost and Recovery evaluate concepts for equitably allocating wildfire liability costs among ratepayers, utilities, and insurers.

In July 2019, California enacted AB 1054, which among other measures, directed the state's IOUs to fund up to half of a $21 billion wildfire fund that IOUs can tap if their equipment ignites a wildfire leading to significant damages. The other half of the fund will be funded by a 15-year extension of an existing bond charge by the California Department of Water Resources on IOU retail accounts. While credit supportive for IOUs (even though the fund lacks a replenishment mechanism), the public utilities have been unable to agree to setting up a similar fund, in part because public power utilities, especially those with negligible risks, did not wish to indemnify other utilities. As a result, all public power utilities must rely on internal liquidity and wildfire insurance, if available and affordable, which increases exposure, especially to public power utilities with material wildfire risks.

S&P Global Ratings' Enhanced Wildfire Risk Analysis

While we have always factored in wildfire risk in our analysis of utility credit quality, our approach to analyzing wildfire liability risk gained considerable momentum in 2019 as the state endured yet another significant wildfire season in 2018 and various electric utilities, including public utilities, reported actual or the potential for wildfire claims. At that point, some public power utilities had already voluntarily crafted wildfire mitigation plans, but all were in the process of revising these plans to meet the new CPUC standards required by Jan. 1, 2020. Our review of wildfire risk factors against the backdrop of mitigation measures in 2019 resulted in a multi-notch rating change for Trinity Public Utility District (which faces claims related to the 2017 Helena Fire) and outlook revisions (negative) for four others, including Sacramento Municipal Utilities District, Transmission Agency of Northern California, Glendale Water & Power, and LADWP. In November 2019, we placed our 'AA' rating on Los Angeles Department of Water and Power's power system bonds on CreditWatch with negative implications to reflect our assessment of the power system's ongoing exposure to wildfires, as demonstrated by the October 2019 Getty Fire and our view of potential limitations to mitigate these risks, relative to peers. The Getty Fire as well as the 2013 Powerhouse Fire and the 2017 Creek Fire illustrate the LADWP's exposure to recurrent wildfire risks, regardless of final liability findings.

From November 2019 through February 2020, we performed a comprehensive review of the newly revised wildfire mitigation plans submitted prior to Jan. 1, 2020, by the 20 public retail electric utilities that we rate as well as those of the few S&P Global Ratings-rated wholesale electric utilities in the state. This comprehensive view took note of the various risk factors facing the utilities, and the mitigation measures reported or planned by the utilities. We supplemented the information from these plans with additional data obtained from the utilities by way of questionnaires, meetings, conference calls and from financial statements and disclosures. Once the information on risks and mitigation measures was compiled, we performed a detailed peer comparison of each public power utility's "net wildfire risk exposure," which detailed each utility's risk factors offset by various mitigation measures. The resulting wildfire risk assessment analysis has been used since March 2020 to inform our analyses and rating committees, and we continue to update the analysis as circumstances change with regard to changing risk factors and mitigation measures. Of note, our review of public power utility credit quality against the backdrop of wildfire risk takes into account utilities' current rating level; in our view, utilities with higher ratings should have materially less net wildfire risk than those with lower ratings, other things equal. Over the March through July 2020 time period, as a result of our refined view on wildfire net risk exposure, two ratings were lowered, each by one notch, and two utilities' outlooks were revised back to stable from negative.

See table 1 below for a detailed timeline of our rating actions over the past 16 months.

Table 1

Wildfire Risk Factors

Our analysis of wildfire risk factors facing electric utilities in the state focuses on several areas, including geographic and property risk, infrastructure risk and wildfire experience risk.

Geographic risk

Geographic and property risk considers whether there are utility customers within high fire threat areas, because, in the event of a wildfire, those related structures could risk damage or total loss, or there could be loss of life, leading to wildfire claims. Environmental factors are also considered, but, we put greater weight on the presence of customers in high fire threat areas because, by definition, Tier 2 and Tier 3 classification would already inform us of the terrain.

Infrastructure risk

Infrastructure risk is also a key consideration, and our focus here is on the number of overhead linear line miles of power lines (distribution and transmission) in high fire threat areas. There are a few utilities, such as Anaheim, Roseville, and Merced Irrigation District, that report having a very high percentage of power lines underground, which significantly reduces their exposure in this analysis. In many cases, public power utilities' exposure to infrastructure risk is not direct but indirect, because of utilities' partial ownership of a transmission asset through a joint powers authority (JPA), such as the TANC's California-Oregon Transmission Project. While some retail utilities have taken the position that they would likely not be liable for claims resulting from wildfires of a JPA-owned asset, that position is not court-tested and we believe it is possible the retail JPA members could face liabilities on a pro-rata basis as the JPA allocates the claims to its participants.

Wildfire historical experience

A third factor we place significant weight on is the utility's historical experience with wildfires in its service territory, especially in terms of wildfires deemed or alleged to have been caused by that utility's power lines. Most public power utilities have had no wildfires or claims in recent history, but there are a few public power utilities that have had wildfires and/or claims and one, LADWP, has seen a few wildfires attributed to utility assets. While future events may be independent from historical experience, we believe utilities that have experienced claims historically are relatively more exposed to future claims.

Table 2 below details the key wildfire risk factors studied for each utility.

Table 2

Wildfire risk mitigating factors

Some wildfire risk factors are often out of utility management's direct control, such as the geographic footprint of the service area. Nevertheless, most utilities have various tools at their disposal that can materially offset their exposures.

De-energization

From a policy standpoint, one measure we view as significant in terms of reducing wildfire risk is preemptive de-energization of power lines during threatening wildfire conditions. With improvement over the years in weather-forecasting and other technology, electric utilities can often predict the timing and severity of weather conditions conducive to the ignition of wildfires, including high winds, hot temperatures and low humidity. At the same time, we understand that the decision to de-energize lines can sometimes be difficult from a political and/or reliability standpoint; nonetheless, we believe the benefits could often far exceed the costs and result in the avoidance of significant wildfire claims, including loss of life. In our analysis of wildfire mitigation plans and from discussions with utilities, we found that five of the 20 retail utilities do not or are unlikely to de-energize power lines during threatening conditions, although four of these utilities cite their lack of material exposure as the basis for this policy. One of the risks that comes with public safety power shutoffs are negative consequences, including significant health (e.g. those who rely on powered medical equipment) and safety (e.g. traffic accidents due to non-functioning street signals) risks. Nevertheless, in our view, the utilities that maintain the most comprehensive and flexible menu of fire mitigation options will be best positioned to manage wildfire risk.

Vegetation management and fire department relations

Other policy decisions that can materially mitigate wildfire risk, in our view, include policies and practices regarding tree-trimming and brush clearance (including, importantly, the frequency thereof), line inspections both by ground and air, pole replacements, blocking of reclosers and other system rehabilitation practices. We believe that utilities that inspect their vegetation less than annually are relatively more exposed. We note that some utilities have minimal wildfire risk due to the majority of power lines being underground. We understand that efforts to reduce wildfire risk by investing in power line undergrounding or insulating overhead lines is typically cost-prohibitive for most utilities. Many utilities, especially those with heavily urban service areas, have strong relations with their local city or county fire departments and benefit from quick response times; this can also materially reduce risk, although wildfires often ignite in remote areas with rugged terrain where firefighting capability is limited, if not impossible by ground. And firefighting by airdropping fire retardant is not always possible or safe, especially during the initial windy conditions that caused the wildfire in the first place.

Blocking automatic reclosers

Most utilities' power line infrastructure include reclosers, which are automatic, high-voltage electric switches. These switches automatically shut off power when a problem occurs, such as a short-circuit or when a tree branch breaks and damages a power line. While these switches normally attempt to "reclose" or restore power seconds later, the problem might still exist and could lead to worse outcomes, including the ignition of wildfires. In our view, utilities that have strict protocols for deactivating automatic reclosers are better positioned to manage wildfire risk.

Advanced technology

Other considerations that would fall under the policy analysis includes our view of each utility's level of sophistication with regard to the use of modern technology to prevent or limit the size of wildfires. This includes the use of remote cameras and other monitoring equipment such as drones, weather forecasting and real-time reporting, algorithms to detect and turn off broken or damaged power lines, GPS scanners, high-resolution satellite imagery and other artificial intelligence. We regularly receive updated information about utilities' use of advanced technology when assessing wildfire risk as part of our overall credit analysis of California public power utilities.

Liquidity

Other than these policy decisions, a public power utility's liquidity position and insurance coverage can be critical in mitigating wildfire risks. Our net wildfire risk exposure analysis considers each utility's nominal level of reserves and unrestricted cash combined with the level of wildfire insurance coverage. These combined figures were then compared against the potential for losses or claims from property damage. For purposes of this analysis, we did not consider Federal Emergency Management Agency (FEMA) reimbursements given it is uncertain what FEMA would cover in the event of a wildfire not to mention the timeliness of the reimbursements. We also did not include any general fund support in cases where the utility is an enterprise fund of a city or similar parent government, since general fund support, even if available, is often unpredictable. To derive the potential for losses and claims, we examined each utility's service area in terms of property values. To simplify the analysis, we assumed residential structures are the victims of wildfire losses, as commercial structures are less likely to be directly in high fire threat areas of a utility's service territory, and since commercial property valuation is not available. We used median home price data from Zillow.com to determine, based on a utility's level of reserves and insurance coverage, the number of destroyed homes a utility could withstand without resorting to borrowing and/or rate increases. The analysis indicates that some utilities hold reserves and insurance coverage sufficient to cover a few thousand homes destroyed, with others unable to cover more than 30 destroyed homes--a significant range. Of note, wildfires often spark in rural, higher elevation zones of a utility's service area, which may contain premium, larger homes with values that exceed the median for the geography as reported by Zillow. Because of this, the number of destroyed homes a utility's level of liquidity and insurance would cover in the event of a wildfire might be materially lower.

While some utilities may be able to cover sizeable wildfire claims, the use of all or a large portion of liquidity would likely still have negative rating implications (and insurance premiums might skyrocket). Likewise, utilities that are unable to meet wildfire claims with liquidity or insurance coverage, absent external aid or legislative changes, would likely have to resort to significant rate increases and/or increased debt, which could also have significant rating implications, especially since high property values in California translates to potentially high claims. While we acknowledge the lack of precision in terms of this particular mitigating factor, we nonetheless feel it provides a valuable input to our overall assessment of wildfire risk mitigation measures.

See table 3 below for a summary of mitigation measures and weights.

Table 3

S&P Global Ratings' Net Risk Exposure Analysis

The final step of our study analyzed the utilities' wildfire risk factors netted against the backdrop of wildfire risk mitigation measures, and we have summarized the results below in tables 4, 5 and 6, below. We note that several of the utilities we rate have negligible or very low wildfire risk factors due to their geographic location, lack of customers or power lines in high fire threat areas, and no history of wildfires caused by the utility. For those utilities, wildfire risk mitigation measures are less important in our analysis. Conversely, several utilities have significant wildfire risks whereby the mitigation measures in place are critical in our analysis of net wildfire risk exposure. Those exposed utilities with, in our view, weak wildfire risk mitigation measures in place, have the highest net wildfire risks and the greatest potential for negative rating implications.

Table 4

Table 5

Table 6

The Forward View

While we have already factored wildfire risks into our current ratings, as indicated earlier our analysis of wildfire risk is ongoing as circumstances change, including state regulatory developments, annual review of wildfire seasons and related wildfire damage, and utilities' changing wildfire risk exposures and mitigation measures. In addition, wildfire risk is only one component of our overall rating criteria for retail and wholesale public electric utilities. For retail utilities in particular, we take wildfire risk into account mostly within our operational management assessment and this assessment is 40% of the enterprise risk profile assessment. When a wildfire claim arises, we may consider including its impact on financial metrics, too. To date, we have seen wildfire risk influence some ratings and additional rating actions are possible as conditions merit. Nonetheless, we believe wildfire risk is currently manageable for most public power utilities that we rate in California, which supports our current modal and median retail electric utility rating of 'AA-' and mean rating of 'A+'.

Related Research

• California Public Power Utilities Are Better Able To Temper Wildfire Related Liability Exposures Than IOU Counterparts, Feb. 28, 2019.
• For California’s Public Power Utilities Facing Wildfire Liability, The State Recognizing The Issue Is A Step Forward, April 17, 2019
• California Wildfire Legislation Excludes, And Is Credit Neutral For, Public Power Utilities, July 16, 2019