Wildfire Resilience Is Becoming a Water-Utility Finance Problem

The economics of wildfire protection in the United States are usually discussed through the budgets of fire departments, insurers, forest agencies and homeowners. Drinking-water utilities occupy a much less visible position in that conversation. Yet the January 2025 Los Angeles fires exposed a difficult question that is becoming more important across fire-prone communities: who should pay when a drinking-water system is expected to provide infrastructure and water capacity for an extreme wildfire that it was never designed to fight?

A major April 2026 study from the UCLA Luskin Center for Innovation and University of California Agriculture and Natural Resources (UC ANR) puts that question at the center of wildfire policy. The report, Water Supply Systems, Fire, and Finance, was authored by Gregory Pierce, Jennifer Gorman, Faith Kearns, Edith de Guzman, Erik Porse, Camilo Salcedo, Megan Mullin and Ahmed Rachid El-Khattabi. It synthesizes a January 2026 workshop involving 54 representatives from water systems, fire agencies, regulators, researchers, engineering consultants, industry associations and nonprofit organizations. The report's central finding is not that water systems should simply build more capacity. Instead, it exposes a financing mismatch between the increasingly broad public expectations placed on water utilities and the much narrower mechanisms available to pay for them.

The UCLA Luskin Center's April 2026 report ([UCLA Luskin Center for Innovation][1]) describes water systems as operating under three simultaneous pressures: reliable and safe drinking water, long-term financial viability and household affordability. Wildfire adds another demand that can collide with all three.

The Infrastructure Was Built for a Different Kind of Fire

There is an important distinction between ordinary structural firefighting and a fast-moving wildland-urban interface fire. Water systems routinely incorporate fire-flow requirements into their infrastructure planning. Pipes, reservoirs, tanks, pumps and hydrants may therefore be designed to deliver substantial short-term volumes for localized structure fires.

That does not mean the same infrastructure can economically or technically support a large urban conflagration. UCLA's 2026 report notes that water systems were primarily designed for drinking water, domestic supply and routine structure fires, while there are no comparable standards governing the amount of water a system must provide for large-scale wildfires or urban conflagrations.

This distinction matters financially because infrastructure built for an extreme event is expensive even when it is rarely used. Increasing reservoir capacity, installing larger mains, reinforcing pumping systems, improving electrical backup, adding redundant connections and protecting treatment facilities all create capital costs. The utility must then operate and maintain those assets for decades.

Gregory Pierce, senior director of the UCLA Luskin Center for Innovation, summarized the problem bluntly: “Water systems are being asked to do more than they were ever designed to do.” ([UCLA Luskin Center for Innovation][2])

The unusual feature of the problem is that the infrastructure can produce a broad public benefit while the water utility has a geographically limited customer base. A stronger water system may protect homes, businesses, roads and emergency operations throughout an area, including people who are not necessarily the customers responsible for paying for that system.

The Ratepayer Problem: A Local Bill for a Regional Public Good

This creates the central economic tension. Water utilities generally recover their costs through customer rates, connection charges, taxes or other dedicated revenues. Those mechanisms are designed around providing water service to identifiable customers. Wildfire protection is different.

Suppose a utility serving 20,000 customers is asked to build additional storage primarily because the surrounding region faces a low-frequency but potentially catastrophic wildfire. The reservoir benefits the utility's customers, but it may also help protect neighboring communities, emergency responders, public facilities and regional infrastructure. The risk is therefore broader than the utility's customer base.

That creates a classic public-finance problem: the entity capable of making the investment is not necessarily the entity that captures the full benefit.

The UCLA workshop found that this mismatch is particularly difficult in California because Proposition 218 constrains how local governments can establish property-related charges. The 2026 report explains that water rates must be connected to the cost of service to individual parcels, which can make it difficult to recover costs associated with broader public benefits such as wildfire-risk reduction.

This does not mean water utilities cannot invest in resilience. Rather, it means that the justification for charging existing customers can become complicated when the investment is intended partly to provide a community-wide emergency benefit.

California's regulatory experience illustrates how sharply different public-benefit financing can look in another utility sector. The California Public Utilities Commission's wildfire framework for investor-owned electric utilities includes a statewide Wildfire Fund financed through a nonbypassable charge on eligible electricity customers. For 2026, the California Department of Water Resources projected a wildfire charge of $0.00588 per kilowatt-hour, producing approximately $904.6 million in revenue. ([California Public Utilities Commission][3])

There is no directly equivalent nationwide financing mechanism for drinking-water systems facing wildfire response expectations. That difference is important. Electricity customers can be charged through a regulatory mechanism designed explicitly to spread wildfire-related costs. A local water utility often has to operate inside a much more conventional cost-of-service framework.

The Cost Is Not Just the Reservoir

It would be easy to frame the issue as a question of building larger tanks and pipes. The UCLA research suggests that would miss much of the financial problem.

Wildfire resilience can require backup power, redundant pipelines, emergency interconnections, improved communications, protected treatment facilities, additional storage, watershed protection and post-fire water-quality monitoring. Some investments are physical; others are operational.

The financial exposure also changes dramatically once a fire actually occurs. A utility can lose customers if homes are destroyed or residents are displaced. That means its revenue base can shrink at precisely the moment when emergency operations, repairs, water-quality testing and infrastructure replacement become more expensive.

The April 2026 report specifically identifies this asymmetry as a major vulnerability for small and medium-sized systems. They have fewer customers across which to distribute fixed costs and less financial capacity to absorb a sudden decline in revenue.

This produces an uncomfortable sequence. Before a fire, the utility may be criticized for not having sufficient resilience. After a fire, the same utility can face higher costs, fewer paying customers and pressure to restore service rapidly. The system is therefore financially stressed from both directions.

Los Angeles Demonstrated the Problem at the System Level

The January 2025 Los Angeles fires provided an unusually clear demonstration of this interaction. UCLA researchers examining the aftermath identified 11 community water systems affected by the Eaton and Palisades fires. The damage included impacts on water infrastructure and service, while the aftermath introduced additional concerns involving smoke, ash, chemicals, debris and drinking-water quality. ([UCLA Luskin Center for Innovation][4])

Importantly, the California Department of Water Resources later reported that Southern California's regional water supplies were robust when the fires began. Reservoirs providing water to local systems were generally between 81% and 97% of capacity. The agency's assessment therefore distinguished between having water in the broader regional system and being able to deliver enough water at the right pressure and location during an extreme fire. ([California Water Resources][5])

That distinction is financially significant. Water security is not simply a question of how much water exists in a reservoir. A utility must also have sufficient local storage, conveyance capacity, pumping capability, power supply, pressure and physical redundancy. Building all of those capabilities for a rare catastrophic event can be extraordinarily expensive.

The Hidden Cost of Fire-Flow Capacity

Even ordinary firefighting requirements already influence water-system design. A 2021 UCLA research and policy report noted that water systems are engineered to meet everyday fire-flow requirements and that the associated costs can represent a substantial portion of a system's budget, even when those costs are not separately identified in utility accounts. ([UCLA Luskin Center for Innovation][6])

The wildfire problem essentially asks whether the same principle should be extended much further. If communities expect water utilities to provide substantially greater capacity for catastrophic wildfire, then the infrastructure could begin to resemble a form of emergency-service infrastructure.

But water utilities are not normally financed like fire departments.

A fire department is explicitly funded to provide public protection. Its tax base can reflect the wider geographic area benefiting from its services. A water utility generally charges for water service. When it begins financing infrastructure principally justified by wildfire protection, the boundary between these two public functions becomes blurred.

This is the core reason the UCLA report does not simply recommend bigger water systems. The authors argue that the underlying roles, responsibilities and funding arrangements need to be clarified first.

Why Small Systems Face a Disproportionate Risk

The economics become even more difficult in small water districts. A large metropolitan utility can spread the fixed cost of a new reservoir, pipeline or treatment upgrade over hundreds of thousands or millions of customers. A small district cannot.

Yet small systems can occupy some of the most fire-exposed locations, including mountain communities and wildland-urban interface areas. Their infrastructure may also have fewer redundant connections and less financial capacity to absorb sudden capital expenditure.

This creates a potential feedback loop. A high-risk community needs more resilience, but its small customer base makes resilience expensive on a per-customer basis. Higher rates can create affordability problems, while inadequate investment leaves the system exposed to greater losses when a fire occurs.

The UCLA report therefore identifies the financial vulnerability of small and medium-sized systems as a central concern rather than a secondary issue.

Disaster Funding Helps After the Fire but That Is Not the Same as Paying Before It

Federal programs can support drinking-water resilience and disaster recovery, but their structure creates another mismatch. EPA administers the Drinking Water State Revolving Fund and related programs that can support infrastructure and, under certain circumstances, disaster preparedness and recovery.

More recently, Congress appropriated substantial supplemental water-infrastructure funding following Hurricanes Helene and Milton and the Hawaii wildfires. EPA's current accounting of the 2025 American Relief Act includes $1.77 billion for Drinking Water State Revolving Fund programs and $60 million for water emergencies under the Safe Drinking Water Act and Clean Water Act. ([US EPA][7])

EPA has also continued to fund resilience directly. In August 2026, the agency announced $11.75 million for ten midsize and large drinking-water-system projects intended to improve resilience to extreme weather and other threats. EPA explicitly listed wildfires among the risks facing water-system operations. ([US EPA][8])

These programs demonstrate that federal assistance exists. They do not necessarily solve the underlying financing problem, however. Disaster funding is often triggered by particular events or structured around eligible projects. A utility planning for a hypothetical catastrophic wildfire may need to spend money years before a disaster occurs, without knowing whether the project will qualify for future federal assistance.

The UCLA workshop identified precisely this uncertainty: external disaster funding cannot necessarily be assumed to arrive in sufficient amounts or quickly enough to support a utility's financial planning.

Wildfire Can Also Turn Water Infrastructure Into a Liability Question

There is another financial dimension that receives less attention: liability.

If public expectations grow that a water utility should have maintained sufficient pressure, storage or fire-flow capacity during a major wildfire, questions can arise about whether infrastructure failures contributed to losses. The UCLA report notes that water systems are increasingly confronting legal and financial liability questions associated with fire events, and that a significant liability finding could be financially catastrophic for some small systems.

This creates a paradox. A utility may be unable to economically build infrastructure capable of supporting every conceivable extreme event, yet expectations can increase after a disaster has demonstrated what the existing system could not do.

From a financial-management perspective, that changes the nature of the risk. The issue is no longer simply whether a reservoir or pump is adequate. It becomes a question of whether the utility can demonstrate that its infrastructure, operating procedures and emergency agreements were reasonable relative to its formally defined responsibilities.

The More Interesting Question Is Who Benefits

The debate over water and wildfire is often framed around engineering: how much storage should exist, how large should a pipe be, and how much pressure should hydrants maintain?

The more consequential question may be economic: who benefits from the additional capacity, and therefore who should finance it?

If a water-system upgrade protects only the utility's customers, conventional rate financing may make sense. If it also protects a broader community from catastrophic wildfire, the economics look more like public infrastructure. If the investment primarily benefits emergency-response agencies, there is an argument for a different funding arrangement again.

This suggests a potential shift in how wildfire resilience is classified. Rather than treating every water-system improvement as a utility expense, governments could distinguish between ordinary service reliability and infrastructure that provides an explicitly recognized regional emergency benefit.

Such a distinction could also make financing more transparent. Customers could see whether a portion of a proposed rate increase is paying for drinking-water reliability, routine fire flow, catastrophic-wildfire resilience or another public purpose.

A Possible New Model: Shared Resilience Financing

The research does not establish a single financing model, and there is no evidence that one national solution would fit every community. But the emerging evidence points toward a shared-cost approach in places where wildfire resilience produces benefits beyond a water utility's customers.

One possibility would be dedicated state or regional funds supporting qualifying water-system resilience projects. Another could involve formal financial agreements between water utilities and fire agencies for specific services or infrastructure. Regional authorities could also help finance projects that protect multiple jurisdictions.

Mutual-aid agreements are another relatively low-cost tool. UCLA research on Los Angeles-area systems has documented the value of interconnections that allow neighboring systems to share water during emergencies. In one example discussed in UCLA research, existing interconnections allowed one system to supply a neighboring utility after the latter lost a reservoir during the fires. ([UCLA Luskin Center for Innovation][9])

That points toward an important alternative to simply building bigger individual systems: regional redundancy. A network of interconnected utilities may be able to provide resilience more efficiently than every small utility independently constructing enough capacity for the worst possible event.

The Affordability Question Cannot Be Separated From Resilience

There is an understandable temptation to conclude that utilities simply need to spend more. But water affordability is itself a resilience issue.

If wildfire-related capital projects produce large rate increases, low-income households may struggle to remain current on their bills. If utilities suppress rates to preserve affordability, they may lack the revenue required to maintain infrastructure. If a disaster destroys a substantial number of homes, the remaining customers can face the additional burden of financing a system with fewer ratepayers.

The California Public Utilities Commission's water regulatory framework illustrates the tension. Investor-owned water utilities must justify their expenses and investments through formal rate proceedings, while regulators examine whether proposed revenue requirements are reasonable. The CPUC's current schedule includes general rate cases for major investor-owned water companies through 2029. ([California Public Advocates Office][10])

That process is designed around ordinary utility economics. Catastrophic wildfire introduces a much more difficult problem because the relevant benefit may be rare, uncertain and distributed beyond the utility's normal customer base.

Wildfire Resilience May Need to Become a Separate Public-Infrastructure Category

The most significant insight from the 2026 UCLA work is therefore not that American water systems are underprepared. It is that the institutional boundaries surrounding them may no longer match the risks they are being asked to manage.

Water utilities provide an essential public service, but they are not general-purpose wildfire agencies. Their infrastructure can be indispensable during fires, yet the economic benefits of strengthening that infrastructure may extend well beyond drinking-water customers.

Megan Mullin, faculty director of the UCLA Luskin Center for Innovation, summarized the broader financing issue as follows: “We need to rethink how we finance resilience so costs and benefits are shared more equitably.” ([UCLA Luskin Center for Innovation][2])

That framing shifts the debate away from a simple question of whether utilities should build more capacity. The more useful question is whether the United States has created the right financial institutions for a world in which water systems increasingly sit at the intersection of drinking-water service, emergency response and wildfire resilience.

The answer may not be a larger water bill. It may instead require a clearer separation between what customers are paying for as consumers of water and what communities are paying for as beneficiaries of regional disaster protection.

As wildfire risk grows and the boundary between wildland and urban areas becomes increasingly consequential, that distinction could determine whether resilience investments strengthen water systems or unintentionally make financially fragile utilities even more vulnerable.