(Bloomberg) — There’s a truism in municipal debt: Bonds rarely move on natural disasters. That long-tested concept had held up until fires destroyed thousands of properties in Los Angeles last week.
The Los Angeles Department of Water and Power — the biggest American municipal utility — has seen its bonds drop and credit rating downgraded as the blazes continue to burn. A planned debt sale this week is in limbo. While there hasn’t been anything to establish a connection between LADWP’s power lines and the Palisades Fire in its territory, the investor concern is clear.
The disaster has exposed LADWP’s fire preparedness as vulnerable and perhaps inadequate. It didn’t turn off electricity in the Pacific Palisades before the massive blaze erupted Jan. 7 — the type of move power giants PG&E Corp. and Edison International frequently make when extreme winds are forecast. The utility has already been sued by homeowners faulting it for not supplying enough water to fight the flames.
LADWP, with about $18 billion in power and water system debt in the muni market, stands to be one of the biggest tests of bond investors over the risks of climate change. The utility’s bonds used to trade better than even pristine AAA credits. But the scope of the catastrophe — the Palisades Fire has destroyed more than 2,000 structures and claimed at least eight lives — has raised the prospect it will be facing substantially higher costs, threatening both debtholders and rate payers.
“This is a tipping point,” said Tom Doe, founder and president of Municipal Market Analytics, an independent research firm. “This is exactly the type of event that will be a wake-up call to the muni bond industry, if not more broadly, about the climate issue and extreme weather events.”
Regardless of the fire’s cause, the utility will likely need to spend more on infrastructure as Angelenos grapple with a future where damaging conflagrations are more common. And a scenario where LADWP is found liable for the Palisades Fire could mean it’s on the hook for billions of dollars in damages.
Additionally, there isn’t an insurance fund for publicly owned utilities to share financial risks, unlike the state fund created in 2019 for investor-owned power companies such as Edison, which operates in the area of the nearby Eaton Fire.
Edison has seen its shares plunge more than 20% since the blaze and is facing at least three lawsuits over its failure to de-energize all electrical equipment in Eaton Canyon. The utility has acknowledged that its transmission lines near the start of the Eaton Fire were energized, but says no issues were detected.
LADWP didn’t respond to requests for comment about the fires. The utility has pushed back against criticism of its water system, saying a low percentage of its hydrants lost water pressure in the Palisades due to the unprecedented and extreme demand needed to fight the blaze.
Ultimately, it could be ratepayers who are going to be paying for potential liabilities and funding the necessary infrastructure improvements, according to Ron Galperin, who served as controller of Los Angeles for nearly a decade. Such an increase would only add to affordability strains in the region, already home to one of the country’s most expensive housing markets.
“The only way that you pay for it is from raising rates,” said Galperin. “You can raise money with bonds, but bonds carry interest, and the interest ultimately will be paid for by ratepayers.”
A 2019 audit by Galperin found that LADWP could face an average of $42 million in losses yearly for the next 100 years due to wildfires. He now thinks that figure will be larger due to climate change and aging infrastructure.
Risk to Ratepayers
In recent decades, LADWP has made efforts to improve its customer ties. Its history, though, is checkered: Its dogged pursuit of water from well beyond city limits helped shape the sprawling metropolis, which was the inspiration for the 1970s classic Chinatown.
“LADWP has been littered with scandals going back a decade and a half or more, and never seemed to get clear of them,” said Jamie Court, president of Consumer Watchdog, a Los Angeles-based consumer advocacy group. Those include an excessive billing incident that resulted in the utility’s former general manager pleading guilty to a federal corruption charge in 2022.
While LADWP is required by California to develop a wildfire prevention plan, the utility doesn’t proactively shut off its power lines during windstorms. Its plan says that the effects on customers’ health, safety and quality of life outweigh benefits of preemptive blackouts. The utility also described its wildfire risk as “minimal” because of its “highly urbanized service territory.”
Municipal utilities, unlike investor-owned utilities, are afforded wider immunity protections when it comes to their response to fires, particularly when it concerns issues such as government resource and planning decisions, Court said.
Costs for ratepayers will inevitably rise if the municipal utility needs to spend to increase the resiliency of its electric and water system, Court said. And if LADWP is somehow determined to be liable for the fires, all customers would be affected, he said.
“If they are the hook, then every single Angeleno is on the hook for this,” he said.
Bond Impact
For municipal-bond investors, it’s getting harder and harder for investors to shrug off natural disasters. The Federal Emergency Management Agency, which is usually relied upon to partially pay for cities’ rebuilding costs, has grappled with funding issues and a surge in the number of calamities. President-elect Donald Trump has also previously threatened to withhold recovery aid to California, criticizing its fire-prevention measures.
By Friday of last week, it was clear that investors were worried this time. Credit spreads, or the amount of additional yield to compensate investors for credit risk, surged. Spreads on the power system bonds jumped about 30 basis points on Friday and another 49 basis points on Monday, according to JPMorgan Chase & Co. analysts.
“This one is different,” said Patrick Strollo, head of credit research at Los Angeles-based Bel Air Investment Advisors, which has been selling the bonds. Beyond the potential liability for the blaze, “you just have the traditional capital project that’s going to be associated with this credit following the rebuild. You’ve had a disruption of a massive area. The Palisades isn’t just a typical East Coast subdivision.”
LADWP’s bonds are widely held given the debt was so well-rated and the utility is a large borrower. California debt is especially popular among the market’s wealthy investor base – the bonds pay interest that’s tax-free in one of the highest taxed states in the US. The disaster also hit close to home for the municipal market, given a number of asset managers are based in the Los Angeles area or have personnel there.
An LADWP bond due in 2033, for example, on Tuesday traded at a yield of 3.51%, compared with as little as 2.83% on Jan. 2.
S&P Global Ratings downgraded the LADWP’s power and water system revenue bonds by two notches on Jan. 14. The power system bonds are now rated A, still investment-grade, but the firm said more downgrades could be ahead.
And Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence, cautioned that some investors may be rushing to judgment.
“Being that we do not know what caused the fire, and it could be potentially human accident, the market can never adequately price the risk of these types of events,” he said.
–With assistance from Shruti Date Singh, Martin Z. Braun and Elizabeth Campbell.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.