Global Wildfire Risk Illustrates ESG Factor Relevance for Credit

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Tuesday, January 07,  2020 /3:12 PM / By Fitch Ratings / Header Image Credit: France 24

 

Recent catastrophic wildfires in Australia and the US state of California underscore the importance of environmental considerations when evaluating the credit quality of utilities globally, says Fitch Ratings. Financial and credit implications for utilities if found liable will vary across regions due to differences in the legal and regulatory regime in which the utilities operate and their ability to recover fire-related costs on a timely basis.

 

The size, intensity and destructive power of wildfires in Australia and in California over the past several years have been linked by some groups to climate change. Australian wildfires have intensified over the past week due to the combination of very dry weather conditions, hotter than average temperatures and strong winds. More than 130 fires were burning across the country on Sunday with about 60 fires still not contained by firefighters, destroying significant infrastructure and posing risk to humans and wildlife.

 

There has not been any indication that the recent wildfires in Australia were started by the region's transmission and distribution utility companies. However, California's two most destructive wildfires, the 2018 Camp and 2017 Tubbs wildfires, caused widespread property loss, injury and death across Pacific Gas and Electric Company's (PG&E) service territory, and resulted in the utility's and its parent PG&E Corporation's Chapter 11 bankruptcy filing last year. PG&E cited $30 billion of potential liabilities.

 

Fitch publishes Environmental, Social and Governance (ESG) relevance scores for issuers that measure the relevance of ESG factors to credit ratings on a scale of 1-5, with a score of '1' indicating low relevance for ratings and '5' high relevance. Within the 'E' score, the sub-factor 'Exposure to Environmental Impacts' is '3' for Australian distribution and transmission utilities Energy Queensland and AusNet Services. Conversely, environmental relevance is considered high with a score of '5' for California investor-owned utilities (IOU) Edison International, Southern California Edison and San Diego Gas & Electric. Fitch assigned a score of '5' for PG&E prior to its bankruptcy filing due to liabilities stemming from the California wildfires in 2017 and 2018.

 

The regional difference in credit relevance is due in part to variation of regulatory and legal regimes. California, unlike many other jurisdictions, applies strict liability under inverse condemnation to privately owned utilities if their equipment is deemed to have ignited a wildfire as a means to socialize wildfire costs. California enacted a number of new laws designed to mitigate the frequency and destructive force of wildfires. The passage of Assembly Bill 1054 last year was a constructive credit development for California's IOUs. The law provides the IOUs with a financial buffer, via an insurance fund, and time to implement strategies to mitigate wildfire frequency and severity, and modifies the burden of proof with regard to prudence.

 

Precedence exist for Australian utilities being held responsible for wildfires but financial and regulatory risk related to the current bushfires should be limited due to the tightening of regulation following the fatal 2009 Black Saturday bushfires in Australia. AusNet was held liable for the 2009 wildfires due to its powerlines falling under high winds. Since that time, the company has been installing Rapid Earth Fault Current Limiters, as mandated by the government, which should cut current to any downed line very quickly and thereby reduce risk for the utility. Installation remains underway with the cost ultimately being passed through to customers.


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