Financial losses from the recent devastating Los Angeles wildfires are escalating, raising concerns among investors about the sufficiency of California’s $21 billion wildfire insurance fund for utilities. The massive blazes have destroyed thousands of homes and incinerated entire neighborhoods, leaving a trail of destruction and uncertainty in their wake.
While the cause of the fires remains undetermined, the historical precedent of power equipment igniting wildfires in California has triggered anxieties among traders regarding potential liabilities for utility companies. Edison International, the parent company of Southern California Edison, the region’s largest utility provider, has experienced a significant stock decline of approximately 20% this month.
Leading financial institutions like Wells Fargo & Co. and Goldman Sachs Group Inc. estimate insured losses from the fires could reach a staggering $30 billion. Keefe Bruyette & Woods analysts place the potential cost even higher, at $40 billion. S&P Global Ratings anticipates these fires will be the most expensive in history.
However, the state’s wildfire insurance fund, designed to protect investor-owned utilities from such catastrophic losses, currently holds just over $12 billion in liquid assets, with a total capacity of $21 billion. This falls significantly short of most cost estimates, raising serious questions about its ability to cover potential liabilities.
Furthermore, if the fund is depleted, other utilities across the state would be left vulnerable in the event of future disasters. This concern has contributed to the sell-off of shares in PG&E Corp. and, to a lesser extent, Sempra, the parent company of San Diego Gas & Electric, despite neither utility having operations near the current fire zones.
“The fund was intended as a backstop to prevent utilities from facing bankruptcy in the wake of a major fire,” explains Jay Rhame, CEO of Reaves Asset Management, which manages the Virtus Reaves Utilities ETF. “Without this protection, the risk must be priced into the stock.”
California law holds utilities liable for damages if their equipment is found to have started a fire, regardless of whether the company acted negligently. This legal doctrine, known as inverse condemnation, places significant financial burden on utilities in the event of wildfires.
The current fund was established by Governor Gavin Newsom following PG&E’s bankruptcy in 2019, triggered by over $30 billion in fire-damage claims. The subsequent legislative reforms included the creation of this $21 billion insurance fund, financed equally by utility shareholders and customer rates, to cover third-party damage claims.
Should Edison be found liable for the Eaton fire and deemed to have acted imprudently, it would be required to reimburse the fund, but only up to a liability cap of $3.9 billion.
Numerous lawsuits have already been filed, including a wrongful-death suit against Edison filed on Friday. The company’s decision to maintain energized power lines during extreme wind conditions is under scrutiny as investigations progress. Edison has stated it is reviewing the lawsuits and prioritizing the safe restoration of power to customers. CEO Pedro Pizarro stated on Bloomberg TV that there is no current data suggesting issues with their energized transmission lines near the Eaton fire’s origin.
Credit rating agencies, including S&P, Moody’s, and Fitch, have cautioned that these wildfires could severely strain California’s liability reforms and the state wildfire fund, potentially exposing investor-owned utilities to substantial financial risks. While Edison, PG&E, and San Diego Gas & Electric declined to comment, Governor Newsom’s office released a statement emphasizing the 2018 and 2019 legislation’s focus on strengthening wildfire prevention, supporting survivors, and improving utility solvency.
The California Earthquake Authority, which manages the wildfire fund, confirmed it hasn’t received any notification of utility-caused fires and highlighted the fund’s current liquidity and the option to securitize remaining customer bill charges through revenue bonds if necessary. S&P Global Ratings analyst Gabe Grosberg underscored the fund’s critical role in maintaining utility credit ratings, noting the current lack of a replenishment mechanism. Assembly Budget Committee Chair Jesse Gabriel acknowledged the awareness of these issues among lawmakers but emphasized the current priority of addressing the immediate needs of fire victims and cleanup efforts. The long-term financial implications of these devastating wildfires and the future of the state’s utility insurance fund remain uncertain.