On January 14, 2025, a week after the Palisades fire started, S&P Global Ratings cut its rating on the power system bonds of the Los Angeles Department of Water and Power by two notches, from AA- to A. It cut the water system's bonds two notches as well, from AA+ to AA-, and put both on watch for a further downgrade.

LADWP is the city's public water and power utility. A credit rating is a grade for how reliably a borrower can repay its debts. In general, a lower grade means investors demand more interest to lend, and borrowing costs more.

What's notable to me is the reason S&P gave.

What S&P actually said

S&P did not say LADWP caused the fire. Its January report says the utility's infrastructure "has so far not been implicated" as a cause. Instead, S&P wrote that the downgrade reflected "the increasing frequency and severity of highly destructive wildfires within LADWP's service territory and recent spread into more urban areas," which highlighted the utility's potential exposure to liability claims "that could eclipse its liquidity and insurance coverage."

The legal backdrop matters here. S&P points to California's inverse condemnation doctrine, under which courts can hold a utility liable for wildfire damage whether or not negligence contributed to the fire. Under that doctrine, the risk to a utility's credit isn't only whether it did something wrong. It's whether its equipment is found to be involved in a fire that destroyed a great deal of expensive property.

So this was a rating action about physical risk in a place, translated into a judgment about money. In April 2025, S&P affirmed the lower ratings, took them off watch, and kept a negative outlook.

The agencies have been building toward this

Rating agencies have been preparing to make this kind of call for years. In July 2019, Moody's took a majority stake in Four Twenty Seven, a firm that scores physical climate risks such as heat stress, water stress, extreme rainfall, hurricanes and sea-level rise for listed companies, real estate trusts, US counties and countries. Moody's said at the time that the deal would strengthen its research on incorporating climate risk into economic modeling and credit ratings.

My read is that the LADWP downgrade is what that work looks like when it reaches a real rating: physical hazard sitting inside the credit analysis, not in an appendix.

What the market charged

A rating cut isn't just a label, and the market did react — though the fire, the liability questions and the downgrade all arrived within days of each other, so the price moves can't be pinned on the downgrade alone.

By late April 2025, as LADWP prepared to return to the bond market with a roughly $1 billion power revenue offering, Bloomberg data showed its bonds due in 2045 trading about 137 basis points over benchmark securities, up from as little as 95 basis points in December. That's roughly 40% wider, measured from December's low. A basis point is a hundredth of a percentage point; on a large borrowing, a few dozen of them add up.

On fixed-rate bonds sold at a wider spread, the extra interest is locked in until those bonds are repaid or refinanced. LADWP's power bonds are repaid from the power system's net revenue, which comes from its customers' bills.

Not only utilities

This isn't confined to one utility. Economists at ETH Zurich have been studying whether projected wildfire risk shows up in what local governments pay to borrow. In the latest version of their work, published in June 2026, they find that municipalities facing more future wildfire exposure already pay more: a one-standard-deviation increase in projected risk goes with spreads about 7 to 8 basis points higher, more than 15% of the sample average. The effect was larger in places with more minority residents and heavier reliance on local revenue.

An earlier version focused on school districts, whose bonds are mostly backed by property taxes, and estimated a larger effect — 14 basis points on new issues. I'm using the smaller, later number. Where the debt is secured by property taxes, the added cost lands on the tax base: the local owners whose parcels repay it. I wrote about that mechanism in What's Holding Up the Bond.

The other side of the ledger

The agencies don't agree, and that disagreement is part of the story. KBRA, another rating firm, rated the same power system bonds AA with a stable outlook in April 2025, and has kept that rating through new issues into 2026. That's three notches above S&P's A. Moody's and Fitch also rate the power bonds in the AA range. One firm's cut is a read, not a final verdict.

Some analysts also saw the liability risk as unlikely to materialize. In April 2025, a Fitch analyst told The Bond Buyer that the power system had sustained about $78 million in damage, which she called manageable, and that while potential liability "could be large," the probability of it was "probably low."

And spreads didn't stay wide. When LADWP sold power bonds in January 2026, its banker told The Bond Buyer that five-year spreads had narrowed from 52 basis points over the benchmark in October to 20 at the sale. Markets that reprice quickly can also unprice.

Who pays

My view is that the rating agencies are openly doing something the wider market was slow to take up: pricing physical climate risk location by location. The disagreement among them and the later tightening are reminders that the number is still being argued over.

But where a downgrade holds and the spread stays wide, the cost doesn't disappear into the market. It's paid by a utility's customers on revenue debt, and by property owners on tax-backed debt. I wrote in The Fire Was in Los Angeles. The Bill Is on Your Policy. about one route the January fires took into household budgets statewide. This is a quieter one, closer to the fire.

The fire was the event. The bill arrived as a downgrade, and it falls on the people who stayed.

Sources

Figures current as of October 2026.