With the risk of catastrophic wildfire growing in Nevada and across the West, NV Energy is seeking approval for a $500 million wildfire liability self-insurance policy.

The self-insurance, to be paid for by ratepayers over 10 years, would bring NV Energy’s wildfire liability coverage to about $1 billion. The company now has $405 million in commercial coverage and $100 million in existing self-insurance.

The Public Utilities Commission of Nevada (PUCN) has scheduled a hearing on the proposal for June 24.

NV Energy wants the additional self-insurance “in order to have adequate wildfire liability insurance in place in the event that a catastrophic wildfire in Nevada is alleged to be caused or exacerbated by utility equipment,” the company said in a filing with the PUCN.

The chance of a wildfire causing $1 billion or more in financial losses in NV Energy territory in the next 10 years is 18% or more, Nathan Pollak, of Scidan Consulting Group, testified as part of NV Energy’s application. And the chance of a wildfire causing $2 billion in financial losses in the next decade is 10%, he said.

Pollak recommended NV Energy have $1 billion to $1.5 billion in wildfire liability coverage.

But NV Energy said it is facing rising costs and reduced availability of commercial insurance.

“The products available are expensive and non-traditional – presenting drawbacks that make them less prudent than the self-insurance policy,” Mariya Coleman, NV Energy’s vice president of corporate insurance and claims, said in the application.

Striking a Balance

NV Energy would create a captive insurance company to administer its self-insurance, just as it did for its existing $100 million self-insurance policy.

The company said the 10-year period to fund the new self-insurance policy strikes a balance between avoiding rate shock to customers while completing the funding in a reasonable amount of time.

About three-quarters of the cost would be paid by customers of Sierra Pacific Power, NV Energy’s subsidiary in northern Nevada, with Nevada Power customers in southern Nevada picking up the remainder.

If there are any payouts from the self-insurance fund, NV Energy has proposed replenishing it with another customer rate hike.

Shareholders would commit to a 10% co-insurance payment on any claims, up to $50 million. The co-insurance payment wouldn’t depend on results of a reasonableness review.

“This co-insurance payment preserves a strong incentive on the part of the companies to mitigate wildfire risk and to settle third-party claims prudently,” Michael Behrens, NV Energy’s chief financial officer, said in the application.

The co-insurance share is greater than that of the self-insurance policies of two major California utilities, Behrens noted. The shareholder co-insurance payment in Pacific Gas and Electric’s self-insurance policy is 5%; for Southern California Edison, it’s about 2.5%.

Some stakeholders criticized NV Energy’s proposal, saying it is inefficient to have two separate self-insurance policies with different structures, rules and coverage.

Instead, NV Energy should expand and modify its existing self-insurance policy, said utilities consultant Bradley Mullins, who filed testimony on behalf of several gaming interests and other parties.

Mullins said it would be more appropriate for NV Energy to collect the self-insurance funding from ratepayers over 50 years, since a $1 billion wildfire is estimated to be roughly a 1-in-50-year event. And no costs from “imprudence, gross negligence or willful misconduct” should be borne by ratepayers, he said.

Capital Impacts

In his testimony, Behrens of NV Energy said catastrophic wildfires have had serious financial consequences for electric utilities throughout the West.

In cases where utility equipment was implicated in massive wildfires in California, Hawaii, Oregon and Texas, the respective utilities saw downgrades to their credit ratings, “in many cases to non-investment grade,” Behrens said.

“Even a utility that has not been alleged to have caused or exacerbated a catastrophic wildfire faces the risk of a lower credit rating and higher cost of capital if it is not perceived to have sufficiently prepared for the financial risks,” he said.

Behrens noted that utilities are a capital-intensive sector that use debt to finance the long-term assets needed to provide service.

The impact of wildfires on utility finances also was a topic of discussion June 2 during the Western Conference of Public Service Commissioners. Investment analysts said wildfire risk could hinder Western utilities’ ability to raise capital to fund infrastructure projects. (See Analysts to Western Regulators: Wildfire Risk is Issue du Jour.)