California’s multi-billion dollar wildfire fund is at risk of running dry because of the carnage caused by the Eaton Fire and the possibility that utility equipment may be linked to the blaze’s ignition.
S&P Global Ratings (S&P) downgraded its outlook on Edison International and Southern California Edison (SCE) from “stable” to “negative” this week, citing significant potential liabilities resulting from January’s wildfire, which damaged or destroyed more than 10,000 structures and resulted in the deaths of as many as two dozen people.
“We believe that the California wildfire fund, designed as a material source of liquidity and financial support for participating California investor-owned utility is at risk of a material depletion,” S&P said.
The fund, created in 2019, has a claim-paying capacity of about $21 billion and can be tapped into by any California utility. S&P maintained the Edison companies’ “BBB” credit ratings despite revising its outlook.
how did the eaton fire start?
The Los Angeles County Fire Department, the lead agency investigating the Eaton Fire, preliminarily determined it started in an area where SCE has three transmission towers. The plaintiffs in several recently filed lawsuits point to supposed evidence of SCE’s liability, including statements and photographs allegedly showing a fire sparking up near the base of one of those transmission towers and satellite images that purport to reveal the fire’s origin area near SCE’s overhead circuit lines.
SCE has confirmed the Eaton Fire began in its service area. On January 27, the utility submitted an interim update to the California Public Utilities Commission (CPUC) following up on its previously filed Electric Safety Incident Report (ESIR) pertaining to the Eaton Fire (SCE also filed an ESIR for the Hurst Fire). SCE’s initial analysis showed a fault was detected on a line far from where the fire started. That triggered “a momentary and expected” increase in the current on SCE’s transmission system, including on four energized lines. The increase remained within the utility’s design limits, therefore not triggering system protection on the lines.
Pedro Pizarro, president and CEO of Edison International, told a national audience on Good Morning America on January 13 that the utility did not yet have any indications that its equipment was involved in starting the Eaton Fire.
“Typically, when there’s a spark created by equipment, you will see that kind of electrical anomaly. We haven’t seen that,” Pizarro said.
the dangers California utilities face
In addition to fearing the depletion of the state’s emergency wildfire fund, S&P Global Ratings said its decision to downgrade the utilities reflects the potential for a more challenging operating environment for Edison and SCE due to wildfire risk, which could weaken credit quality.
The agency analyzed cases from two previous fires in SCE territory, the Thomas and Woolsey Fires, considering factors like the number of damaged structures, the total plaintiffs involved in resulting lawsuits, the total amount of damages demanded by claimants, and the total amount paid by SCE to settle claims. S&P’s preliminary analysis indicates that the value of potential liabilities related to the Eaton fire could be “significant.”
S&P noted that investigations into the cause of the Eaton Fire are ongoing, and SCE has not been determined to be at fault.
“That said, if SCE is found to have contributed to the wildfire, third parties would likely file significant claims against the utility because of the inverse condemnation doctrine in California – whereby a California utility can be financially responsible for a wildfire if its facilities were a contributing cause of the fire irrespective of negligence, putting the sufficiency of the fund at risk,” S&P argued. “Furthermore, the $21 billion wildfire fund does not have an automatic replenishing mechanism and is fully available to other participating California investor-owned utilities, including Pacific Gas & Electric and San Diego Gas & Electric.”
If the fund is depleted, S&P asserted, SCE loses the credit benefit of using the fund as a source of liquidity and more importantly, loses the credit protection of the liability cap. As such, as the wildfire fund materially declines, Edison and SCE’s credit quality could become more exposed to risk, supporting the negative outlook on both entities.
other S&p global ratings findings
S&P views the Thomas Fire, Koenigstein Fire, and Montecito Mudslides (TKM) cost recovery approval as positive for Edison’s credit quality: The CPUC approved SCE’s settlement agreement with the California Public Advocates Office on its cost recovery application related to the 2017/2018 TKM events. SCE will be authorized to recover 60%, or approximately $1.6 billion of approximately $2.7 billion of losses incurred related to these events and will seek to recover such amounts by issuing securitized bonds. Overall, S&P views this development as supportive of credit quality because it potentially sets a precedent for how the CPUC may approach recovery of prudent third-party wildfire claims in the event the wildfire fund is depleted. Furthermore, the agency expects Edison’s consolidated funds from operations (FFO) to debt to improve by about 70 basis points because of this CPUC decision. SCE has since similarly filed a cost recovery application for the Woolsey Fire (2018), requesting recovery for approximately $5.4 billion. The outcome of this application is pending.
Edison’s business risk profile remains strong: S&P said its assessment of Edison’s business risk profile reflects the company’s larger size, lower-risk, rate-regulated electric utility business, and effective regulatory risk management, incorporating several constructive cost recovery mechanisms. These include the use of a forward-looking test year during rate-setting, attrition rates, decoupling, and various balancing accounts that support cash flow recovery. Partially offsetting Edison’s business risk is its physical risk exposure due to wildfires, and California courts’ interpretation of the legal doctrine of inverse condemnation, which is partially mitigated by the availability of the $21 billion wildfire fund, and Edison’s approximately $1 billion wildfire-specific insurance coverage. On other regulatory matters, SCE filed for its 2025 general rate case (GRC) in May 2023 with the CPUC, requesting a rate increase of approximately $1.9 billion effective Jan. 1, 2025. As part of this GRC, the company also requested increases of approximately $600 million for 2026, $700 million for 2027, and $700 million for 2028. The CPUC decision for this rate case is pending.
Edison’s financial risk profile as significant: S&P determined Edison’s financial risk profile using its medial volatility financial benchmark table, reflecting the company’s lower-risk, regulated utility business and effective regulatory risk management. The agency expects Edison’s FFO to debt to improve in 2025, reflecting increased cash collections from several balancing accounts, new rate increases, and an expectation of constructive regulatory decisions on SCE’s 2025 rate request. Under S&P’s base-case scenario, it expects annual capital expenditures to average just about $7 billion annually over its forecast period. The base case also assumes manageable operating expense levels, steady use of SCE’s regulatory mechanism that supports cash flow, manageable litigation risk exposure, and dividends averaging about $1.4 billion over our forecast period. Furthermore, the agency’s base case assumes negative discretionary cash flow, reflecting the company’s capital spending and dividend payments. Overall, S&P anticipates Edison’s financial measures will reflect FFO to debt of 16%-18% for the 2025-2027 period.
S&P said it could lower its ratings on Edison and SCE if:
- Edison’s consolidated financial measures weaken, reflecting FFO to debt of less than 14%
- It believes California’s wildfire fund will deplete at an accelerated pace, without sufficient countermeasures, if SCE or another participating investor-owned utility in the fund experiences wildfire-related liability payments that prompt material drawdowns from the fund.
- It concludes that the company’s wildfire mitigation strategies are insufficient to consistently protect the company against severe wildfire losses.
