California’s latest battle over wildfire liability may appear to be a dispute between electric utilities, insurance companies and wildfire victims. But the implications extend well beyond those groups. The outcome could ultimately affect the broader credit environment surrounding California’s electric power industry, including the state’s rapidly growing Community Choice Aggregators (CCAs).
Governor Gavin Newsom had proposed significant changes to California’s wildfire liability system, including limiting the ability of insurance companies to recover wildfire losses from utilities through lawsuits known as subrogation. His administration argued that potentially enormous wildfire liabilities threaten the financial stability of California’s investor-owned utilities and could ultimately result in higher borrowing costs and higher electricity rates.
California lawmakers rejected most of those protections. The compromise legislation, Senate Bill 492, preserves insurers’ ability to pursue utilities for wildfire losses while creating a faster claims process for victims and adopting several other reforms. Newsom himself acknowledged that the agreement falls short of the structural reform he believes is necessary to ensure the long-term stability of California’s Wildfire Fund and electricity rates.
Financial markets reacted quickly. Shares of PG&E and Edison International fell sharply following the announcement, and analysts expressed concern that California utilities remain exposed to potentially enormous wildfire liabilities and higher financing costs.
That matters beyond the utilities themselves.
California’s CCAs purchase electricity on behalf of millions of customers, but they operate within the same electric system as the investor-owned utilities. They share many of the same customers, transmission and distribution infrastructure, regulatory environment and, ultimately, the same challenge of keeping electricity affordable.
The concern is therefore less about whether yesterday’s legislative decision suddenly makes individual CCAs poor credit risks. It does not. The larger issue is systemic and correlated risk.
Another catastrophic wildfire could simultaneously place pressure on utility balance sheets, the state Wildfire Fund, electricity rates, insurance costs and household affordability. Under such circumstances, credit markets could become more cautious about California electricity-sector exposure generally. CCAs purchasing large quantities of power could face increased collateral requirements or tighter credit terms precisely when financial stress elsewhere in the California electricity system is increasing.
This illustrates an important distinction in evaluating credit risk. Looking at the financial strength of an individual CCA is necessary, but it may not be sufficient. Credit analysis should also consider what happens when multiple organizations are exposed to the same underlying economic and regulatory risks at the same time.
California has built one of the most innovative and complex electricity markets in the country. But the unresolved question of who ultimately pays for catastrophic wildfires remains one of its largest financial uncertainties.
The Legislature’s latest decision did not create that risk. It simply demonstrated that California has yet to find a durable solution for it.