Los Angeles fire reveals limits of California's $21 billion utility fund

(Bloomberg) -- The economic toll from devastating Los Angeles wildfires that have scorched entire communities and destroyed thousands of homes is growing. Now investors are growing concerned that a $21 billion state fund set up to support utilities will fall far short of what's needed if companies are found responsible.

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The cause of the fire has not been determined so far, but some traders are already concerned about the impact on utilities given the state's history of electrical equipment fires. Edison International, which operates Southern California Edison, the region's largest utility, has seen its shares fall about 20% this month.

Wells Fargo and Goldman Sachs Group estimate that insured losses from major fires in Los Angeles could be as high as $30 billion. Analysts at Keefe Bruyette & Woods expect the fires to cost as much as $40 billion, and S&P Global Ratings expects the fires to be the most expensive ever.

But the state fund, designed to protect investor-owned utilities from losses, currently has more than $12 billion in liquid assets and $21 billion in total reserves, below most estimates of the potential costs.

If these resources are depleted, other utilities will also be vulnerable should another disaster occur elsewhere in the state. That's why investors also sold shares of PG&E Corp. and, to a lesser extent, San Diego Gas & Electric owner Sempra, even though both utilities have operations near the fires.

“The fund is providing this support to ensure that utilities are not on the verge of bankruptcy in the event of a fire,” said Jay Rame, CEO of Reaves Asset Management, which manages the Virtus Reaves Utilities ETF. “Otherwise, You have to build that risk into stocks."

California legal doctrine holds that if a utility company is found to have caused a fire, it can be held liable for damages even if the company acted cautiously.

The fund was established under California Gov. Gavin Newsom and was established after PG&E went bankrupt in 2019. The utility faces more than $30 billion in fire damage claims, prompting California lawmakers to pass a series of wildfire safety reforms in part to help protect its investor-owned power companies from another financial loss. The legislative package includes the creation of a $21 billion insurance fund -- half funded by utility shareholders and the other half provided by customer rates -- that utilities could use to pay third-party damage claims.

If Edison is found to be responsible for the Eaton fire and acted imprudently, it would be required to repay the fire fund, but would only be able to repay a maximum of $3.9 billion under a liability cap.

Lawsuits are already pouring in.

Edison was charged Friday in the death of a woman whose home burned down in a catastrophic fire. This appears to be the first wrongful death lawsuit filed against Southern California Edison as a result of the fire. The owner had made numerous complaints before this case occurred. Edison's decision to keep some power lines running during the historic storm is coming under scrutiny as the investigation gathers pace.

The company said it is reviewing the lawsuits and is working to safely restore power to customers. Edison Chief Executive Pedro Pizarro said on Bloomberg Television that the company has not seen data indicating problems with its transmission lines, which are close to where the Eaton fire occurred.

Meanwhile, credit ratings firms Standard & Poor's, Moody's and Fitch warned that wildfires could test California's liability reforms and state wildfire funds, putting investor-owned utilities at financial risk.

Edison, PG&E and San Diego Gas & Electric declined to comment.

A statement from Newsom's office said state legislation passed in 2018 and 2019 "focused on strengthening utility wildfire prevention, providing certainty for wildfire survivors, and improving the solvency of utility companies that provide essential electric services." , but did not provide further details on the prospects. Utilities or funds.

A spokesman for the California Earthquake Agency, which oversees the wildfire fund, said the agency has not been notified of wildfires in Los Angeles caused by any utility company participating in the fund. The spokesperson said the fund has more than $12 billion in liquid assets and if the agency needs more liquidity to pay claims, the legislation allows for the remaining monthly customer bill charges to be securitized through the issuance of revenue bonds.

S&P Global Ratings analyst Gabe Grossberg said the fund is "very important" to the state's utility credit rating. He added that California currently has no way to replenish the fund if it is withdrawn.

"This is an age-old risk," Grossberg said. But "now that you have a huge wildfire in front of you, it becomes even more amplified and discussed," he said.

Asked about utility funds Thursday at the fire response staging area at the Pasadena Rose Bowl, California Assembly Budget Committee Chairman Jesse Gabriel said he “didn’t want to Get Out Before You Ski,” lawmakers first addressing the immediate needs of fire victims and cleanup efforts.

“A lot of us are still trying to get through this initial phase,” said Gabriel, whose home is in an evacuation zone. "People are aware of all these issues. We start thinking about them and talking about them."