(Bloomberg) — Financial losses from the devastating Los Angeles wildfires are mounting after the blaze burned entire neighborhoods and destroyed thousands of homes. And now, investors are growing concerned that the $21 billion in government funds designed to roll back the companies will fall far short of what is needed if companies are found liable.
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The cause of the conflict is not yet known, but given the state’s history of electrical equipment fires, some traders are beginning to worry about the implications for utilities. Shares of Edison International, which operates the region’s largest Southern California Edison utility, have fallen nearly 20 percent this month.
Wells Fargo & Co. Analysts at Keefe Bruyette & Woods have estimated the cost as high as $40 billion, and S&P Global Ratings expects the fire to be costliest ever.
But the state fund, designed to protect investor-owned utilities from bankruptcy, currently has more than $12 billion in liquid assets and a total allowance of $21 billion — putting it below most estimates of potential costs.
And if those resources are depleted, it puts other resources at risk in the event of another disaster in the state. That’s one reason investors sold shares of PG&E Corp. and Sempra, which owns San Diego Gas and Electric, even though neither utility was close to the fire.
“The fund provides this backstop to prevent a utility from going bankrupt in the event of a major fire,” said Jay Ram, CEO of Reaves Asset Management, which manages the Virtus Reaves Utilities ETF. “Otherwise, you have to assign this risk to the stock price.”
California legal doctrine holds the company liable for damages if facilities are found to have caught fire, even if the company is found to have taken reasonable steps.
Created by California Governor Gavin Newsom, the fund was established after PG&E filed for bankruptcy in 2019. The utility has faced more than $30 billion in fire claims, prompting California lawmakers to pass several wildfire safety reforms designed in part to help. Protect investor-owned electric power companies from another financial meltdown. The legislative package includes the creation of a $21 billion insurance fund — half financed by utility shareholders, half by customer rates — that utilities can use to pay third-party damage claims.
If Edison is found responsible for the Eaton fire and found to have acted negligently, it will be required to pay back the fire money, but only with a liability limit of up to $3.9 billion.
Charges are already piling up.
On Friday, Edison was charged in connection with the death of a woman whose home was destroyed in a horrific fire. It appeared to be the first wrongful-death lawsuit against Edison in Southern California. The case comes after several complaints by property owners in the past. Edison’s decision to leave some power lines running during the historic storm is under scrutiny as investigations intensify.
The company said it is reviewing the outage and is focused on safely restoring power to customers. Edison CEO Pedro Pizarro said on Bloomberg TV that the company has not seen any data indicating issues with its power lines related to where the Eaton fire started.
Meanwhile, credit rating firms S&P, Moody’s and Fitch have warned that the wildfires could test California’s liability reforms and the state’s wildfire fund, putting investor-owned utilities at financial risk.
Edison, PG&E and San Diego Gas & Electric declined to comment.
In the year State legislation passed in 2018 and 2019 “focused on strengthening utility wildfire prevention, providing certainty for wildfire survivors and improving utilities that provide essential electrical services,” according to a statement from Newsom’s office. facilities or the fund.
The California Earthquake Authority, which oversees the wildfire fund, has not received any notification that a utility participating in the fund caused any of the Los Angeles wildfires, a spokeswoman for the agency said. The fund has more than $12 billion in liquid assets, and if the agency needs more liquidity to pay claims, the law allows it to guarantee the remaining monthly customer bill payments by issuing revenue bonds, the spokesman said.
Gabe Grossberg, an analyst at S&P Global Ratings, said the money is “very critical” to the state’s consumer credit ratings. California currently has no way to make up for it if the funding is cut, he added.
“This is an old accident,” Grossberg said. But “you’ve got a big wildfire in front of you right now, it’s just going to get bigger and bigger,” he said.
“I don’t want to get out of my skis early,” said Jesse Gabriel, chairman of the California Assembly’s budget committee, when asked about utility funding at the Pasadena Rose Bowl firehouse on Thursday, and lawmakers are. First, the immediate needs of fire victims and disaster clearance.
“Many of us are still trying to get through this first phase,” said Gabriel, whose home is in a residential area. “People are aware of all these issues. We started to think and talk about them.
