Nearly 100 utilities’ credit ratings downgraded since 2020 as wildfire risk grows

On By Littum

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Diving card:

  • Increased wildfire risk has contributed to nearly 100 utility credit downgrades since 2020, according to a report by global consulting firm Charles River Associates.
  • Lower credit ratings have made it harder for utilities to borrow money, while insurance and wildfire costs have risen, the report said. Those 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.
  • But wildfire mitigation practices appear to be effective in reducing utility companies’ legal risks. Credit downgrades have become less common in states that have taken early action to resolve wildfire cases, Dressel said.

Diving Insights:

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

Credit rating agencies such as Moody’s, Fitch and S&P Global have recently downgraded a number of utilities’ credit ratings, often citing wildfire risk as a key factor in those decisions. Initially, the downgrades only applied to Southern California utilities, like Pacific Gas & Electric, that had been directly affected by 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. Additional downgrades are now being extended to the southern Plains and Southeast following the smokehouse fire in Texas, he said.

In all, Charles River Associates has counted 99 downgrades from S&P since 2020, compared to 72 downgrades from 2016 to 2017 and just 34 from 2012 to 2015.

“Even Warren Buffet said utilities may no longer be a profitable business. Obviously, Berkshire Hathaway has made a big investment over the years, so the alarm bells were ringing,” Dressel said. Berkshire Hathaway owns both NV Energy and PacifiCorp.

Unlike other natural disasters, such as tornadoes or hurricanes, wildfires pose a particular risk to utilities because utilities have been found liable for billions in damages when their equipment is found to have ignited the fire, Dressel said. The frequency and severity of wildfires is believed to be increasing as a result of a warming global climate and historical forest management policies that attempted to suppress wildfires throughout the West and contributed to a build-up of dry, high-risk fuels.

But there’s also reason to believe that efforts to reduce the risk of wildfires in states like California have had a measurable impact on utilities’ bottom lines. California has created a public wildfire insurance pool for utilities, for example, as has Utah, Dressel said. Utilities can buy into these pools to access wildfire insurance in situations where commercial insurance may not be available or may prove too expensive for the utility.

Those and other states have also required utilities to implement wildfire mitigation plans, and those plans appear to reduce the frequency with which utilities are found responsible for igniting large wildfires, Dressel added. Although California has seen more wildfires this summer and fall due to hot, windy weather, so far the state has not seen any catastrophic fires sparked by utility infrastructure, Dressel said.

Those actions have helped offset the cost increases of wildfires, Dressel said. PG&E and Southern California Edison have seen credit upgrades in recent years, while San Diego Gas & Electric has held steady, and that trend could spread as other states and utilities begin to take more proactive action on the risk of wildfires, Dressel said .

“One of the most important things is that this is manageable. 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 governments working to solve this problem, and I think we’re making progress.”