Wildfires Ravage Los Angeles, Investors Worry About Utility Fund
The devastating Los Angeles wildfires have left a trail of destruction, incinerating entire neighborhoods and destroying thousands of homes. As the financial losses mount, investors are growing increasingly concerned about the ability of a $21 billion state fund to backstop utilities if companies are found liable.
Utilities Under Fire
Edison International, which operates the region’s largest utility Southern California Edison, has seen its shares drop about 20% this month. Wells Fargo & Co. and Goldman Sachs Group Inc. estimate insured losses from the major Los Angeles fires could reach as much as $30 billion. Analysts at Keefe Bruyette & Woods peg the costs at as high as $40 billion, and S&P Global Ratings expects the fires to be the most-expensive ever.
State Fund Falls Short
The state fund, designed to shield investor-owned utilities from losses, currently has more than $12 billion in liquid assets and a total allowance of $21 billion. However, this falls short of most estimates of potential costs. If the fund is drained, it will leave other utilities vulnerable in the event of another disaster elsewhere in the state.
Investors Worry About Liability
California’s legal doctrine holds utilities liable for damages if they are found to have started a fire, even if the company was found to have acted prudently. Investors are worried that if Edison is found liable for the Eaton fire, it would be required to reimburse the fire fund, but only up to $3.9 billion under a liability cap. Lawsuits are already piling in, with Edison being sued over the death of a woman whose home burned in one of the catastrophic fires.
Credit Rating Companies Sound Alarm
Credit rating companies S&P, Moody’s, and Fitch have warned that the wildfires could test California’s liability reforms and the state wildfire fund, putting the investor-owned utilities at financial risk. The California Earthquake Authority, which oversees the wildfire fund, said it hasn’t received any notification that a utility participating in the fund has caused any of the Los Angeles wildfires.
Replenishing the Fund a Concern
California doesn’t currently have a way to replenish the fund if it gets drawn down. Gabe Grosberg, an S&P Global Ratings analyst, said the fund is “highly critical” to the state’s utility credit ratings. “This is an old risk,” Grosberg said. “But now you have an enormous wildfire in front of you, it gets much more magnified and discussed.”
Lawmakers Weigh In
Jesse Gabriel, chair of California assembly’s budget committee, said lawmakers are first approaching the immediate needs of fire victims and disaster clean up. “A lot of us are still just trying to get through this initial stage,” said Gabriel, whose home is in the evacuation zone. “People are aware of all of these issues. We’re starting to think and talk about them.”
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