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Diving certificate:

• Increased wildfire risk has contributed to nearly 100 utility credit rating downgrades since 2020, according to a report from global consulting firm Charles River Associates.
• Lower credit ratings have made it harder for utilities to obtain loans, while the costs of insurance and wildfire suppression have risen, the report said. According to Andrew Dressel, vice president of energy at Charles River Associates, these costs were largely passed on to consumers in the form of rate increases.
• However, wildfire mitigation measures appear to be effective in reducing utilities’ legal risks. Credit downgrades have become less common in states that took early action against wildfire litigation, Dressel said.

Insight into the dive:

According to Charles River Associates, the increased risk of wildfires – and wildfire-related litigation – could significantly impact the financial stability of utilities in fire-prone areas. But new evidence suggests that public policy and utility-led wildfire mitigation efforts are effective in reducing these risks, Dressel said.

Ratings agencies including Moody’s, Fitch and S&P Global have recently downgraded a number of utility credit ratings, often citing wildfire risk as a key factor in those decisions. Originally, the downgrades only applied to Southern California utilities like Pacific Gas & Electric that were directly affected by the catastrophic wildfires, Dressel said. But the Labor Day fires in Oregon and the Marshall Fire in Colorado triggered another wave of downgrades across the West. After the Smokehouse fire in Texas, additional downgrades are now expanding to the Southern Plains and the Southeast, he said.

Overall, Charles River Associates has recorded 99 utility downgrades by S&P since 2020, compared to 72 downgrades from 2016 to 2017 and just 34 from 2012 to 2015.

“Even Warren Buffet said that utilities may no longer be a profitable business. “Obviously Berkshire Hathaway has invested a lot over the years, so that raised alarm bells,” Dressel said. Berkshire Hatahway owns both NV Energy and PacifiCorp.

Unlike other natural disasters such as tornadoes or hurricanes, wildfires pose a particular risk to utilities because utilities are liable for billions of dollars in damages if their equipment is found to have started the fire, Dressel said. Wildfire frequency and severity are believed to have increased due to the warming global climate and historical forest management policies that attempted to suppress wildfires across the West, contributing to the accumulation of dry, high-risk fuels.

But there is also reason to believe that measures to reduce wildfire risk in states like California have had a measurable impact on utilities’ bottom lines. California, for example, has established a public wildfire insurance pool for utilities, as has Utah, Dressel said. Utilities can buy into these pools to gain access to wildfire insurance when commercial insurance may not be available or may prove too costly for the utility.

These and other states have also required utilities to implement wildfire mitigation plans, and those plans appear to reduce the frequency with which utilities are held liable for starting large wildfires, Dressel added. Although California has seen more wildfires this summer and fall due to hot, windy weather, there have been no devastating fires sparked by utility infrastructure in the state so far, Dressel said.

These measures helped offset the increase in costs caused by wildfires, Dressel said. PG&E and Southern California Edison have seen credit ratings improve in recent years while San Diego Gas & Electric has remained stable, and that trend could expand as other states and utilities begin to take more proactive measures against wildfire risk, Dressel said.

“One of the key findings is that this can be managed. It doesn’t have to be the sword of Damocles hanging over our heads,” he said. “We can take practical steps to reduce this threat. There are people across sectors and across government working to solve this problem and I think we are making progress.”