What We're Watching

As of publication, the California Department of Forestry and Fire Protection reports that the Eaton and Palisades fires rank as the No. 2 and 3 most destructive California wildfires in recorded history, respectively. The agency estimates that the Palisades, Eaton, and Hughes fire have together caused 42 fatalities, burned more than 48,000 acres, and destroyed over 16,000 structures within Los Angeles County. As we continue to monitor the California not-for-profit public power utilities we rate that are exposed to increasingly frequent and severe wildfires, we have identified two utilities within, or proximate to, the areas affected by the Palisades and Eaton fires -- Clean Power Alliance (CPA) and Vernon Public Utilities Department (VPU) -- as having offsetting operational characteristics that we believe could stabilize their financial performance and credit quality. These characteristics differentiate CPA and VPU from other utilities in the region, such as Los Angeles Department of Water and Power, Glendale Water and Power, and Pasadena Water and Power, for which S&P Global Ratings lowered ratings or revised outlooks to negative in the wake of the fires. For more information, see "Credit Risks Associated With Wildfires Are Increasing For California Public Finance Entities," published Feb. 20, 2025 on RatingsDirect.

Why It Matters: CPA's Operational Structure Mitigates Risks

CPA is a community choice aggregator (CCA) that procures retail electric power on behalf of over one million customers across 33 member communities in Los Angeles and Ventura counties as well as the unincorporated areas of each county. CPA has an operational structure that we believe insulates it from direct liabilities associated with igniting a fire. Firstly, CPA does not own any distribution, transmission, or generation assets, but rather procures energy from various other entities while relying on the transmission and distribution networks owned and maintained by Southern California Edison (SCE). (For more information on SCE, see our report published Feb. 3, 2025 on RatingsDirect.) Secondly, although CPA could experience wildfire-related load disruption due to public safety power shutoffs or other outages and/or destruction affecting SCE's system, these risks are mitigated by the geographic diversity of CPA's customer base and by its flexible power portfolio, which could facilitate laying off portions of power supply commitments in the event of customer dislocations.

That said, CPA could face rate affordability challenges if SCE allocates costs for infrastructure reconstruction due to wildfire damage or wildfire liability assessments across all users of its transmission and distribution network. To date, authorities have not determined the ignition sources of January's fires, but if SCE is found to have been negligent, it could access the California wildfire fund to help defray potential wildfire costs, potentially alleviating rate increases to fund financial obligations. The wildfire fund was established to provide a pooled source of money to reimburse eligible wildfire claims, and was funded at $12.7 billion as of September 2024. However, the fund does not have a replenishment mechanism, and so costs exceeding the pooled amount could still be socialized through SCE delivery rates. In addition, SCE would likely be required to repay the wildfire fund, if it is found to have been imprudent, after all claims have been substantially settled. Such repayments are subject to a cap of about $4 billion over a rolling three-year period and are borne by shareholders. Should SCE pass on any direct or indirect costs from wildfire risks or liabilities, we will continue to assess the implications for CPA. CPA reported unrestricted cash of $394 million as of audited fiscal year ended June 30, 2024, equal to 114 days' liquidity.

Why It Matters: VPU's Geographic Characteristics Reduce Ignition Risk

VPU's electric system serves a small, overwhelmingly industrial enclave just south of downtown Los Angeles that does not have the interface between combustible vegetation and power lines that often sparks wildfires. S&P Global Ratings believes that these geographic features of VPU's service territory make the likelihood of liability for wildfire ignition remote. VPU reports that none of its transmission or distribution lines are located in CPUC Tier 2 Elevated or Tier 3 Extreme wildfire risk zones. Furthermore, the closest wildland interface area is approximately seven miles to the north of Vernon city limits, and there are cities with similar topography in all directions. Nonetheless, in the unlikely event VPU's equipment is determined to have contributed to a significant urban fire in the future, VPU reported unrestricted liquidity of $140 million as of audited fiscal year ended June 30, 2024, equal to about 419 days' worth of expenses. In addition, VPU reports wildfire damage liability insurance coverage of $268 million per occurrence as well as $43 million in business interruption insurance (deductible of 5% of total insurance value, with a minimum of $1 million per occurrence), which could act as a buffer to wildfire liability exposure.

What Comes Next

We will continue monitoring the investigations into the causes of the L.A. County wildfires as well as damage estimates, power-outage implications, and the resulting financial and operational effects for entities we rate in the region. As we evaluate how the increasing prevalence and severity of wildfire events influences our credit analysis for rated issuers across all of U.S. public finance, we will provide additional analytical insights, including consideration of the efficacy of adaptation and resiliency measures.