The California Department of Forestry and Fire Protection (Cal Fire) estimates that the multiple destructive wildfires in Southern California have burned more than 40,000 acres, destroyed more than 12,000 structures, and caused 23 fatalities as of this publication. We expect these estimates will likely increase as the extent of the wildfire damage is fully assessed.

S&P Global Ratings expects that these wildfires will likely be the costliest ever, and some media reports have suggested that the total economic damage will surpass $250 billion.

Without significant mitigation initiatives, more of our ratings on investor-owned utilities with substantial wildfire exposure will face pressure in the coming years.

What's Happening?

Southern California Edison Co. (SCE), the subsidiary of Edison International, filed an electric safety incident report (ESIR) related to the Eaton fire that, according to Cal Fire, has burned more than 14,000 acres and may have damaged or destroyed more than 7,000 structures based on aerial imagery overlay. We assess the Eaton fire as catastrophic.

SCE stated that it filed the ESIR out of an abundance of caution because the incident may meet the California Public Utilities Commission's (CPUC) technical reporting criteria. Furthermore, SCE's preliminary analysis of electrical circuit information for the energized transmission lines in the area for the 12 hours prior to the reported start of the fire shows no interruptions or electrical or operational anomalies until more than one hour later.

Despite the magnitude of the wildfire, SCE's ESIR filing, and lawsuits that have since been filed against SCE, our ratings and stable outlook on SCE and Edison are unchanged. We are actively monitoring the risks to Edison and SCE and could update our view on the ratings or outlook as this situation develops.

For now, S&P Global Ratings' view of SCE's exposure to financial losses incorporates the progress that California has made to reduce wildfire risk, despite its investor-owned utilities operating in one of the most challenging environments and most susceptible to wildfire risk. In 2019, California established an approximately $21 billion wildfire fund (about $12.7 billion as of September 2024) to support investor-owned utilities, which was funded by electric ratepayers and the state's investor-owned utilities. In addition, the utilities have a predetermined cap that limits their liability (approximately $4 billion for SCE).

California also revised the standard for determining a utility's reasonable conduct, which places the initial burden of proof on the intervenor. We have consistently assessed all of these measures as supportive of credit quality.

Why It Matters

Climate change is an increasing risk for North America's investor-owned utilities because of the rising frequency of devastating physical events, including wildfires. Rising temperatures have dried vegetation and bolstered fuel supply, which has increased the environment's susceptibility to the rapid spread of wildfires. Adding high winds significantly escalates the probability of a catastrophic wildfire. Areas designated as high fire risk have expanded across the U.S., and about 4% of the utility industry has already been named in wildfire-related lawsuits.

Late 2024 wildfires in Massachusetts, New Jersey, New York, and Vermont lead us to believe that risk has spread, potentially affecting nearly every utility across North America. Only about 15 years ago, wildfire risk was primarily limited to Southern California.

During 2023 and 2024, S&P Global Ratings downgraded several investor-owned utilities related to wildfire events, including Hawaiian Electric Industries Inc., Xcel Energy Inc., Southwestern Public Service Co., and PacifiCorp. For many exposed investor-owned utilities, we have already adjusted business risk profiles, negatively adjusted rating modifiers to fine-tune our analyses, and raised downgrade and upgrade thresholds to require more financial strength to support ratings.

The scale of potential liabilities, unpredictable nature of exposure, and frequency of events have materially increased wildfire risk for many utility stakeholders.   From a credit standpoint, litigation risk is more problematic than the risk of damage to a utility's infrastructure assets. Wildfire litigation is difficult to predict or to quantify and is so far without sufficient mitigation or containment. Also, wildfire-related litigation payments are typically not recoverable in rates or through other regulatory mechanisms, making them more problematic than damages to a utility's assets from a physical event.

Additionally, the magnitude of the recent wildfires across North America has increased the industry's insurance cost and even the availability of insurance, which further pressures the industry's exposure to wildfire risk.

What Comes Next

We expect the industry will develop plans that reduce the likelihood of causing or contributing toward a wildfire, minimize litigation risk, and expand capabilities for cost recovery. We note that while these strategies will likely reduce wildfire risk, they certainly will not eliminate it. We also believe the industry can implement many of these strategies quickly because most are not predicated on developing new technologies or products.

Because the industry operates in many different service territories and topographies, we expect each utility's mitigation plan will be customized to meet its unique exposure. Chart 1 details a compilation of wildfire mitigation strategies that have been implemented by many utilities across North America.

Chart 1

Why have investor-owned utilities so far not done more to mitigate wildfire risk?  Explanations over the years include a lack of material exposure, a primarily urban service territory, operations in a low fire threat area, a significant percentage of the power lines being underground, pathways of high voltage power lines through areas with scant vegetation, sound vegetation management programs, and generally short local fire department response times. Given the extreme wildfires experienced in recent years, we believe these explanations are generally no longer sufficient. To reduce wildfire exposure, utilities with wildfire exposure will have to implement more comprehensive wildfire mitigation plans.

Our evaluation of prospective wildfire exposure is ongoing, and in the face of further climate deterioration and elevated wildfire risks, financial protections in legislation or utility regulation are becoming an increasingly important factor in our analysis. The severity of the Southern California wildfires suggests that because of climate change, the operating environment for many utilities may become increasingly challenging.

A persistent increase in the frequency of wildfires of this scale may lead us to reassess some of the industry's credit quality. Without implementing significant mitigation protections, ratings on more utilities with substantial wildfire exposure are likely to come under pressure in the coming years.

Related Research

• Bulletin: Edison International And Subsidiary Southern California Edison Actively Monitored Amid Wildfire-Related Incident Reports, Jan. 13, 2025
• Wildfire-Exposed U.S. Investor-Owned Utilities Face Increasing Credit Risks Without Comprehensive Solutions, Nov. 6, 2024