RESILIENCY MEASURES SHOULD ALSO FACTOR INTO THE CREDIT STRENGTH OF MUNICIPAL UTILITIES WHEN EVALUATING THE POTENTIAL OF FUTURE IMPACTS OF CLIMATE CHANGE
I obviously do not know the extent of the damage from extreme weather that communities will face in the future. But it is very clear that resiliency measures are being taken, and actions and plans should be considered in evaluating the credit strength of municipal utilities.
The recent downgrade by a rating agency of the Los Angeles Department of Water and Power(LADWP) from AA- to A made it clear that while the immediate financial impact to LADWP was not expected to be an issue, the rating agency assessment was the lingering threat of climate change, and the extreme weather makes the future risks unmanageable. Specifically, the increasing frequency and severity of wildfires was of concern. From that logic, however, it is my opinion then, every credit rating should now be lowered due to unknown risks of future extreme weather, and the insurance industry should pack it in as a going concern.
While certainly there are risks ahead for Los Angeles such as litigation exposure, LADWP has a strong balance sheet; access to liquidity and the debt markets; a cost recovery process that provides some certainty; and an institutional management capability to mitigate risks. Additionally, federal disaster programs and the role of FEMA have been an important source of support that managed past disasters. It appears unlikely the new federal administration in 2025 will curtail FEMA’s role. LADWP is already looking at burying the rest of its power lines in the burn area that could be funded with federal support.
Financial recovery through federal disaster assistance is typically on a 75% federal and 25% local funding basis. In fact, for catastrophic disasters, the aid can reach as high as 100% reimbursement. The two major sources of federal financial assistance available to support recovery from disasters involve the Robert T. Stafford Disaster Relief and Emergency Assistance Act, P.L. 93-288, which is administered by FEMA, and the Community Development Block Grant program (CDBG), which is administered by the Department of Housing and Urban Development (HUD).
It is important to consider the impact and response to past major weather extremes to inform us how we might look at the management of future risks. For example:
Long Island Power Authority (LIPA) along with PSEG Long Island put forward a Climate Change Resiliency Plan in September 2024 to continue to strengthen the service area from extreme weather. Superstorm Sandy in October 2012 was the second costliest hurricane-like disaster and LIPA since invested $730 million of federal funding for storm hardening and $430 million for transmission upgrades including placing vulnerable lines underground. The sound management of LIPA’s response and the important role FEMA assistance has played were factors in several rating upgrades to LIPA’s credit rating during the past decade. The recent LIPA and PSEG resiliency plan continues to work on ways to adapt to the future storm uncertainty. While future storms may be severe, aggressive mitigation actions are also taking place.
San Antonio CPS Energy’s management and financial strength was on display during and in the aftermath of Winter Storm URI in February 2021. The winter storm that was not forecasted resulted in record breaking demand, higher than expected generation outages and limited natural gas supplies. Extreme cold temperatures and the dangerous conditions tested CPS Energy. Since, many changes have been made to ensure the utility was prepared for future extreme weather conditions. An advantage CPS Energy had was its access to liquidity and debt markets; a sound cost recovery process; and a focus on the impact of severe weather on low-income ratepayers. Transmission upgrades and sufficient dependable capacity position the utility well.
Adaption plans continue to take place to better position the municipal sector to manage risk. It will be hard to prove LADWP for example was negligent given much of its power infrastructure was already buried. Litigation risk is real but has to be subjected to a sober test of LADWP’s operational strengths. Maybe credit rating changes and insurance rates should also be based on the seriousness and extent of adaption and adjustments to changing weather conditions.
Dan Aschenbach
AGVP Advisory
Agvpadvisory.com
