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Moody's Sees Negative Credit Implications from CPUC Wildfire Ruling

California's refusal to allow San Diego Gas and Electric Co. (SDG&E) to recover from ratepayers millions of dollars related to wildfires a decade ago leaves other utilities susceptible to the even higher costs of more recent wildfires that have ravaged the state, Moody's Investors Service said on Tuesday.

A decision by the California Public Utilities Commission (CPUC) last month rejecting SDG&E's request to recover $379 million in costs related to three 2007 wildfires has negatively impacted the credit of the Sempra Energy affiliate, its parent, and other utilities seeking to recover similar costs in the future, Moody's said.

Calling the 10-year process for SDG&E to recover the rest of the costs of the Witch, Guejito and Rice wildfires "credit negative," Moody's noted that the utility recorded a $351 million impairment charge against regulatory assets related to the 2007 fires in 3Q2017, which cost SDG&E roughly $2 billion. Most of that has been recovered through insurance, third-party settlements and Federal Energy Regulatory Commission jurisdictional rates.

In its Nov. 30 decision, the CPUC found that SDG&E's equipment caused at least one of the fires and that the combination utility did not "reasonably manage and operate" its facilities before the fires, and therefore could not be allowed to recover its costs with ratepayer dollars.

In California, under case law known as inverse condemnation, utilities can be held strictly liable for damages caused by wildfires, regardless of fault. Utilities can only recover the costs in rates when regulators determine that they managed their infrastructure to prevent fires.

Moody's said the latest events at the CPUC have direct relevance to ongoing investigations related to Northern California wildfires earlier this year that involve Pacific Gas and Electric  Co. (PG&E). "Even if found not negligent, PG&E may be liable for several billions of dollars of damages," Moody's analysts said.

PG&E's service territory and infrastructure was hit by 32 wildfires in September and October that scorched 245,000 acres, resulted in 43 deaths and destroyed 8,500 structures. Those were substantially larger events than the 2015 Butte wildfires, for which the San Francisco-based utility has reserved at least $11 billion.

During a 3Q2017 earnings conference call, PG&E Corp. CEO Geisha Williams said "it is too early to make assumptions about liability." Williams said that when wildfire sites potentially involved utility facilities, PG&E provided incident reports to the CPUC. "The incident reports are factual in nature and do not reflect a founding, defining cause," she said. Twenty of those reports were submitted to the CPUC.

The known financial impact of the fires is limited to the cost of the utility response and restoration efforts, liability insurance costs and some legal expenses, Williams said.

The inverse condemnation legal principle in California is applied to utilities involved in natural disaster responses. If utility facilities are found to be involved in a wildfire, the utility is considered liable for property damage and attorneys' fees, even if the utility did nothing wrong and followed all the applicable rules. The doctrine allows utilities to recover in rates all of those costs as long as they are not found negligent in the case of their facilities’ involvement in the fires.

In SDG&E's case, two investigations of the 2007 fires found the utility's equipment "had caused the fire, and the regulatory proceedings found that the utility did not reasonably manage and operate its facilities before the fires, and therefore should not be allowed to recover costs," Moody's noted.

Thus, under inverse condemnation, Moody's noted that even if found not to be negligent, "PG&E may be liable for several billions of dollars of damage due to the 32 wildfires in its service area." The rating agency noted that its "credit positive" or "credit negative" assessments do not connote a rating or outlook change. "It is indicative of the impact of a distinct event or development."

During the recent fires, PG&E assembled a response team of more than 4,300 workers and dealt with 360,000 electrical outages and another 42,000 natural gas shutoffs. Nevertheless, it is currently the subject of an investigation by state regulators and is subject to a detailed root cause investigation by CAL FIRE, the state agency that responds to wildfires.

Meanwhile, powerful Santa Ana winds continued to batter Los Angeles, fanning a wildfire in the foothills 20 miles northwest of downtown and leaving thousands of electrical customers without power. Initial reports from Southern California Gas Co. (SoCalGas) indicated no major outages on the area system.

A SoCalGas spokesperson confirmed that its Los Angeles-based gas-only utility had crews working with fire departments to keep the public safe and minimize service interruptions from the latest blaze, as well as another fire that had developed earlier near the city of Ventura.

On Tuesday morning, crews shut off service “to about 1,100 customers impacted by the fire in Ventura County,” the SoCalGas spokesperson said. “We are working to minimize service interruptions to our customers, and our crews will restore service as soon as it is safe to do so.”

Los Angeles County firefighters are battling the 2,500-acre Creek Fire that broke out off of Little Tujunga Canyon Road in the Sylmar residential section of the city. Authorities ordered evacuations in parts of the Sylmar and Lake View Terrace areas, and at least eight water-dropping helicopters were being deployed in an attempt to slow the fire's progress amid the intense winds.

The winds earlier sparked the Thomas Fire, which swept into Ventura, about 60 miles northwest of Los Angeles, burning 31,000 acres, destroying homes and forcing 27,000 people to evacuate.

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