What We're Watching

California wildfires have been increasing in intensity and frequency, occurring in all seasons, and spreading into more densely populated areas, resulting in more structural and infrastructure damage than in the past. Notably, 15 of the top 20 most destructive wildfires (in terms of the number of structures destroyed) in California's history have occurred in the past 10 years, according to the California Department of Forestry and Fire Protection (Cal Fire). As of this publication, Cal Fire estimates the Eaton and Palisades fires were, respectively, the second- and third-most destructive in the state's history (table 1).

Table 1

Why It Matters

The January 2025 Los Angeles region's wildfires highlight the changing nature of wildfire risks in California due to shorter rainy seasons, hydrological volatility, frequent severe wind events, and increasing vulnerabilities in urban-wildland interfaces. Although the fires are contained, environmental conditions remain that present risk for additional events. As a result, we are assessing the near- and long-term credit implications associated with wildfires for U.S. public finance issuers in California.

We believe that among U.S. public finance entities in California, NFP electric utilities are exposed to the greatest financial risk from wildfires because of the nature of their services: providing electricity to customers in high-wildfire-threat zones or running overhead power lines through these zones (among customers and power lines in low wildfire risk zones, as well). We acknowledge there is uncertainty around how the state's "inverse condemnation" legal doctrine (under which a utility that has contributed to the ignition of a wildfire can be held liable in the absence of negligence) may be interpreted and applied in the future. Nevertheless we believe that the current interpretation of the doctrine could lead to the imposition of substantial financial costs on NFP electric utilities.

In our view, demographic shifts that extend residential and commercial development to the interface between urban and wildland areas increase potential liabilities from wildfire events and create other financial and operational exposures. This leads us to re-evaluate the extent to which wildfire risks are reflected in our electric utility ratings as well as those on water utilities and local governments.

Water utilities could also be increasingly exposed to liabilities and litigation, including inverse condemnation-related claims involving wildfire mitigation and response. The magnitude of potential financial liability for water utilities remains uncertain given the relatively limited incidence of litigation and claims; however, we believe claims could be significant and could lead us to revise our view of potential credit vulnerability and liquidity impairment if water utilities' operations are found to be at fault for frustrating wildfire containment.

Although we believe local governments have less direct financial risk related to wildfires than utilities, local government issuers might be indirectly exposed through component utilities subject to significant liability claims. At the same time, local governments' exposure to increasingly destructive wildfires raises the risk of significant damage to infrastructure, taxable property values, and economic activity, not to mention higher costs for fire suppression.

How S&P Global Ratings Factors Wildfire Event Exposure Into Various Rating Methodologies

Retail electric

Under our methodology for rating NFP retail electric utilities, the operational management assessment, liquidity analysis, and peer comparison sections of our criteria are where we incorporate credits risks associated with vulnerability to wildfires. Where relevant, these risks can be captured in other aspects of our criteria as well; for example, by pressuring rate affordability following liability payouts or rising insurance costs, which we factor into our market position assessment. Key metrics for evaluating wildfire risks include:

• The number of customers and miles of owned overhead power lines within high-wildfire risk zones; and
• Offsetting risk management factors, including utilities' de-energization policies, vegetation management, liquidity, and wildfire liability insurance.

If an electric utility faces wildfire liability claims, we could compare these claims against the utility's liquidity and insurance coverage, and examine whether and to what extent the utility could raise rates to cover the costs for these liabilities (including absorbing additional debt service, if any, if the utility finances the liability with debt). If we believe a utility's wildfire risks are elevated, we may expect commensurate increases in wildfire risk management, including improved wildfire mitigation such as higher liquidity or insurance coverage, as fully or partially offsetting factors.

Retail water

For the NFP water utilities we rate, we are reviewing asset adequacy and emergency preparedness, given some of the fire-suppression problems rated NFP water utilities faced during the recent fires. Similar to the retail electric criteria, the operational management assessment for retail water utilities is where we can evaluate vulnerability to wildfires as well as any related mitigation and adaptation efforts. Asset adequacy, for example, evaluates climate vulnerability and infrastructure stewardship, among other operational aspects. Furthermore, organizational effectiveness directly assesses emergency preparedness, including policies and practices related to vegetation management, interconnections, redundancies, water quality testing, and communication, as well as the utility's overall strategic approach. We believe robust and codified policies and practices enhance risk management while also reducing the likelihood of litigation and liability exposures. Finally, we review liquidity and insurance relative to that of peers and wildfire exposure and assess whether the financial capacity exists to absorb necessary resiliency and recovery costs without pressuring affordability.

Local governments

S&P Global Ratings maintains ratings on local governments, such as cities, that have both rated and non-rated companion electric and/or water utilities. In assessing the creditworthiness of local governments, we focus on understanding any interdependencies and interrelationships that could introduce credit contagion risks. We capture local governments' vulnerability to wildfire and other physical environmental risks in several areas within our U.S. governments criteria, including our view of a government's liability profile, management's ability to successfully evaluate and mitigate such risks, and an entity's economic and revenue performance, to the extent that taxable property and population centers are within fire-affected areas. In our view, local governments with smaller and more concentrated tax bases could face greater credit pressure from heightened wildfire risk compared with those with large, stable, and diverse tax bases.

For local governments with related electric and water utilities (both rated and not rated), our credit analysis of the government's general creditworthiness might incorporate financial performance and liabilities from these component utilities. As our view of utilities' risks evolves to incorporate their heightened exposure to--and management of--wildfire risks, we could reflect these risks in our view of their related governments' creditworthiness. We will analyze the risk management approaches taken by local governments and their respective utilities to mitigate wildfire risk, including fire prevention practices and policies, investments in resilient infrastructure, and insurance coverage (as well as the costs of these risk management efforts). We will also consider how these practices fit in within the organization's overall financial and risk management strategy.

U.S Public Finance Rating Actions Related to Recent Wildfires

As of this publication, table 2 shows a comprehensive list of rating changes and/or outlook revisions on entities in the affected area, reflecting our evolving view of wildfire risks and significant damage to properties.

Table 2

In addition, on Feb. 3, 2025, S&P Global Ratings revised the outlook to negative from stable and affirmed its 'BBB' long-term issuer credit rating on Southern California Edison (SCE) and its parent company Edison International, reflecting the possibility that the California Wildfire Fund could materially deplete given the number of structures damaged or destroyed (more than 10,000) due to the Eaton fire; and the possibility that SCE's equipment may be linked to the fire. The investigations are still ongoing, and SCE has not been determined to be the cause of the Eaton wildfire.

What Comes Next

We continue monitoring the investigations into the causes of the L.A. area wildfires, damage estimates, and the resulting financial and operational effects for entities we rate in the region. Beyond rated entities in the Los Angeles area, we believe the heightened exposure to wildfires could have longer-term credit implications for rated issuers across all of U.S. public finance. We will continue to assess how these events affect our analysis as well as how issuers measure the efficacy of adaptation and resilience measures.

Related Research

• CreditWeek: How Could U.S. Public Finance And Insurance Issuers Be Affected Post-L.A. Wildfires?, Feb. 6, 2025
• Edison International And Subsidiary SoCalEdison Outlooks Revised To Negative From Stable On Potential Risk For WildFire Fund Depletion; Ratings Affirmed, Feb. 3, 2025
• Pasadena And Glendale Water & Power, CA Electric Revenue Bonds Rating Outlook Revised To Negative Amid Wildfires, Jan. 28, 2025
• Altadena Library District Community Facilities District No 2020-1, CA Bond Rating Placed On CreditWatch Negative, Jan. 16, 2025
• Los Angeles, CA General Obligation Bond Rating Placed On CreditWatch Negative Due To Risks Associated With Wildfires, Jan. 15, 2025
• Los Angeles Department Of Water & Power Ratings Lowered Two Notches To ‘A’ (Power) And ‘AA-’ (Water) On Increased Risks, Jan. 14, 2025
• Wildfire-Exposed U.S. Investor-Owned Utilities Face Increasing Credit Risks Without Comprehensive Solutions, Nov. 6, 2024