S&P analysts weigh wildfire risks and credit stability for California utilities

Los Angeles Department of Water and Power

California's recurring wildfire crises continue to test the financial resilience of the state's utilities, insurers, and public balance sheets. 

During a Thursday webinar, S&P Global Ratings analysts evaluated how legislative measures, capital reserves, and ongoing litigation shape credit ratings for investor-owned utilities and municipal providers alike.

A cornerstone of credit support for major investor-owned utilities remains the state's legislative backstop, according to the rating agency's analysts.

Gabe Grosberg, managing director and sector lead for North America investor-owned utilities at S&P, highlighted the role of 2025's Senate Bill 254 in securing necessary liquidity. 

"SB 254 established a wildfire fund continuation account, granting access to an incremental $18 billion for future wildfire-related liabilities," Grosberg said. 

The money comes from utilities and from ratepayers, through surcharges they are required to pay.

During his presentation, Grosberg referenced a chart in the slide show that showed the Wildfire Fund, first established in 2019, had $18 billion available. The new infusion adds an additional $18 billion to cover what has been used, and to try to account for future liabilities. Even with the additional infusion, S&P has an assumed net present value of $11 billion for the fund, he said.

The chart estimates payments of $15 billion to cover Edison's potential liabilities in the 2025 Eaton Fire in Los Angeles County, which would leave a balance of $17 billion in the fund.

He explained that without such protections, rating actions would look starkly different. 

"In the absence of credit protection, the ratings [of California's investor-owned utilities, most exposed to wildfire risk] would be lower and likely in the single-B category," Grosberg said.

The link between creditworthiness and the wildfire fund remains exceptionally tight, Grosberg said.

"The risk around these credit protections is if the wildfire fund fully depletes, the utility not only loses its source of liquidity but credit positions of the liability cap," he said. "If it depletes, the credit quality of these utilities will weaken at the same time."

Meanwhile, the state's municipal utilities navigate a different environment, lacking direct access to the IOU wildfire fund. 

Paul Dyson, director and lead analyst for U.S. not-for-profit utilities, emphasized that municipal providers must rely primarily on internal liquidity, self-insurance, and debt issuance. 

"We believe affected utilities' risks are significant and prior ratings were no longer commensurate," Dyson said, pointing out that ratings were lowered for select providers, including the Los Angeles Department of Water and Power, due to wildfire exposure, emergency preparedness, and potential litigation liabilities.

Dyson also addressed whether prominent IOUs, like SoCal Edison, could eventually see ratings drop into speculative grade territory. 

"It would be unusual," Dyson observed regarding potential speculative-grade downgrades, noting that only about 2% of utilities nationwide hold such ratings. 

He added that California's IOUs – specifically PG&E and Edison – have higher risks than the rest of the industry and investors expect to be compensated for taking on that risk.

PG&E has filed for bankruptcy twice this century already, most recently in 2019 because of liabilities for wildfires caused by its equipment.

On the fiscal side, state budget dynamics remain crucial for ongoing response efforts. 

Oscar Padilla, director for U.S. states and transportation and lead analyst for California, pointed out that emergency response consumes the lion's share of disaster funding. 

"Eighty to 90 percent of the California Department of Forestry budget is responding to events," Padilla said, underscoring that maintaining robust balance-sheet flexibility will remain paramount as California faces ongoing structural budget headwinds.

California's political appetite to enact further reforms may be uncertain, because Gov. Gavin Newsom's term ends on Jan. 4.

Senate Bill 1153, a bill that would protect water utilities in the event of fires, still hasn't been signed or vetoed by Newsom.

It would clarify that public water agencies do not have a duty to design, build or maintain a water system for wildfire defense or suppression, and that the inability to maintain water supply or water pressure during a wildfire is not a "substantial cause" of fire damages, Padilla said.

LADWP came under fire in the 2025 Palisades wildfire because water pressure declined amid firefighting efforts.

The bill also would require urban retail water suppliers in high or very high fire hazard zones to include specific response procedures for wildfires as part of their disaster preparedness plans, including equipment and actions that can lessen the impact of a fire on the water system.

"Whether the courts would allow it is a complicated question," Padilla said. "It doesn't completely eliminate liability when an agency is found negligent and certain water suppliers would have to respond with the steps they would take in the event of wildfire to keep water flowing."