San Diego Gas & Electric received a downgrade this month from one of the nation’s top credit ratings agencies but SDG&E was not alone, as California’s two other investor-owned utilities — Southern California Edison and Pacific Gas & Electric — also got nicked.
Moody’s Investors Service cited the same reason in all three cases — concerns over financial liabilities utilities face due to the increasing volume and intensity of wildfires in the Golden State.
“We believe that no California utility is fully immune to the risks,” Moody’s wrote in a credit opinion that downgraded SDG&E’s issuer rating, or credit rating, one notch from A1 to A2. In Moody’s ratings, A2 obligations carry a low risk of default.
SDG&E’s rating outlook was listed as stable.
On the same day, Moody’s also downgraded Southern California Edison and Pacific Gas & Electric. SCE’s issuer rating dropped from A2 to A3 and PG&E slipped one spot from Baa1 to Baa2. Obligations rated Baa2 are subject to moderate credit risk.
The rating outlook for SCE was revised from negative to stable but PG&E’s rating outlook remained negative.
“While Moody’s downgraded SDG&E one notch,” SDG&E’s vice president of state government affairs and external affairs, Eugene “Mitch” Mitchell, said in a statement, “SDG&E is retaining strong, investment-grade credit ratings and its financial position is strong.”
The lower a company’s credit rating, the more it pays when borrowing to make investments. In the case of a utility, that typically means the higher costs are passed on to ratepayers.
Why did it happen?
In all three reports, Moody’s cited the legal doctrine known as “inverse condemnation” as a primary reason for the downgrades.
As inverse condemnation has been interpreted in California, utilities can be held liable for damages caused by wildfires linked to their own equipment — even if the companies followed accepted safety procedures.
According to a Stanford researcher, Alabama is the only other state that applies inverse condemnation to private companies but California’s interpretation leads to much higher levels of financial damages. Moody’s called it “a unique risk factor affecting all California investor-owned utilities.”
In the recently completed legislative session in Sacramento, utilities lobbied to eliminate inverse condemnation, saying it is unfair and threatens to bankrupt them.
The effort fell short, but in the wake of devastating Northern California wildfires in PG&E’s service territory last year, the Legislature passed Senate Bill 901.
The bill’s provisions include:
- for fires ignited in 2017, utilities can issue bonds to help pay wildfire damages, with a surcharge paid for by customers to help cover interest payments,
- having the California Public Utilities Commission (CPUC) conduct a financial “stress test” for 2017 fires to determine the maximum amount of damages a utility can absorb without going bankrupt or harming ratepayers, and
- in cases in which electrical infrastructure started a fire, starting next year, the CPUC would determine whether a utility acted reasonably, given the circumstances. If so, costs can be passed along to ratepayers.
Should Gov. Jerry Brown sign SB 901, labeled by critics as a bailout to utilities, the bill will become law. Brown has until Sept. 30 to make a decision. Update: Brown signed SB 901 on Friday, Sept. 21.
While Moody’s vice president Nati Martel called SB 901 “a net credit positive” that improved financial prospects for utilities, “SB 901 failed to address the most important risk factor, inverse condemnation.”
Mark Toney, executive director of The Utility Reform Network, has called on Brown to veto the bill.
“All these different Wall Street firms basically camped out the last couple of weeks in the halls of Sacramento, lobbying hard for their investors,” Toney said. “And that’s really why I believe (SB) 901 took the direction it did — to appease the fears and demands of Wall Street.”
Toney said his organization is not philosophically opposed to making changes to inverse condemnation but wants to make sure it is replaced with something better. Florida, for example, instituted a Hurricane Catastrophe Fund in 1993 that provides reimbursements to insurers for a portion of their losses in cases of severe hurricane losses.
“Unless you talk about a proposal that looks at protecting everybody, then maybe people are willing to talk about doing something,” Toney said. “But simply getting rid of (inverse condemnation), taking away a safety net that people depend on and replacing it with nothing? I just don’t know if that’s right in this environment.”
In addition to ratings agencies, investors have concerns about the long-term financial health of California’s utilities.
Before a string of deadly wildfires broke out in PG&E’s service territory in Northern California last fall, PG&E stock was trading at $70 a share. In February, it dropped to $38. Today it is trading in the $46 range.
It’s been estimated PG&E faces up to $15 billion in liabilities from last year’s fires. In more than a dozen instances, investigators found PG&E equipment either started the fires or contributed to them spreading.
In its report downgrading PG&E, Moody’s said it “expects wildfire-related matters will not be resolved for several months, if not years, and PG&E’s financial metrics will gradually decline as the company resolves wildfire claims.”
Since the 2007 catastrophic fires in San Diego County that killed two people, destroyed more than 1,300 homes and forced more than 10,000 to seek shelter at Qualcomm Stadium, SDG&E has spent more than $1 billion on fire safety.
The measures funded by ratepayers include putting more power lines underground, replacing wooden power poles with flame-resistant steel poles and creating the nation’s largest utility-owned weather network in fire-prone areas.
“That’s why this wildfire liability matter needs to be fixed so customers don’t pay more for projects they want,” SDG&E’s Mitchell said.
Moody’s attributed SDG&E’s wildfire prevention programs and its smaller service territory in comparison to SCE and PG&E as reasons for its credit quality. SDG&E also has a lower amount of debt securities affected than the other two utilities — $5 billion, compared to $17.3 billion for SCE and $18 billion for PG&E.
SDG&E spent $2.4 billion to resolve more than 2,000 lawsuits related to 2007’s Witch, Guejito and Rice wildfires and wanted to pass onto ratepayers $379 million in remaining costs but the utilities commission rejected the request last November. SDG&E, however, has fought the ruling and taken its case to a state appeals court.