Listen to article 5 minutes This audio is automatically generated. Please let us know if you have feedback. Detailed summary: Increased wildfire risks have contributed to credit rating downgrades for nearly 100 utility companies since 2020, according to a report from global consulting firm Charles River Associates. The report notes that lower credit ratings have made it harder for utilities to borrow money while insurance and wildfire mitigation costs have increased. These costs have been largely passed on to consumers in the form of price increases, according to Andrew Dressel, vice president of energy at Charles River Associates. However, wildfire mitigation practices appear to be effective in reducing the legal risks of public utilities. Credit downgrades have become less common in states that took early action to address wildfire litigation, Dressel said. Insight Diving:
The increasing risk of wildfires — and wildfire-related litigation — could 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 such as Moody’s, Fitch and S&P Global have recently downgraded a wide range of utility credit ratings, often citing wildfire risk as a key factor in these decisions. Initially, the cuts were applied only to Southern California utilities, such as Pacific Gas & Electric, which were directly impacted by catastrophic wildfires, Dressel said. But the Labor Day fires in Oregon and the Marshall Fire in Colorado sparked another wave of cuts across the West. He said more cuts are now expanding into the South Plains and Southeast after the Smokehouse Fire in Texas.
Overall, Charles River Associates has recorded 99 utility rating downgrades by S&P since 2020, compared to 72 downgrades from 2016-17 and just 34 from 2012-15.
“Even Warren Buffet was saying that utilities might no longer be a profitable business. Berkshire Hathaway has obviously made a significant investment over the years, so alarm bells were ringing,” Dressel said. Berkshire Hathaway owns both NV Energy and PacifiCorp.
Unlike other natural disasters, such as hurricanes or tornadoes, 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 started 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 have attempted to suppress wildfires across the West and have contributed to the buildup of high-risk dry fuels.
But there’s also reason to believe that actions to reduce wildfire risk 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 sign up for these groups to access wildfire insurance in cases where commercial insurance may not be available, or may be too expensive for utilities.
These and other states have also required utilities to implement wildfire mitigation plans, and these plans appear to reduce the frequency with which utilities are responsible for sparking large wildfires, Dressel added. Although California has seen more wildfires ignite this summer and fall due to hot and windy weather, the state has not yet seen any catastrophic fires caused by public utility infrastructure, Dressel said.
Dressel said these measures contributed to reducing increases in wildfire costs. 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 states and other utilities begin to be more proactive about wildfire risks, Dressel said.
“One of the key takeaways is that this is manageable. The sword of Damocles does not have to be over our heads.” “We can take practical measures to reduce this threat. “There are people across industries and across government working to solve this problem, and I think we are making progress.”
