What the Eaton fire could mean for Edison’s bottom line
- Share via
- The Eaton fire could deal a significant economic hit to Edison, a fixture in California for well more than a century that has grown into a Wall Street behemoth. But industry experts say the utility is all but certain to avoid what could have been a fatal blow.
- Some estimates put the insured damages from the Eaton fire at $10 billion, but experts say the final tally could be higher. If Edison is found to have started the blaze and ends up tapping into a state emergency fund, the company will have to repay the fund several billion dollars.
As Los Angeles grapples with the fallout of last month’s destructive wildfires, one question looms: What does it mean for Southern California Edison, the giant utility that has been accused of sparking a blaze?
The answer will hinge on whether state agencies determine Edison’s equipment ignited the deadly Eaton fire that destroyed a huge swath of Altadena in the foothills north of Los Angeles. If the fire did start with Edison, and the company is found to have failed to take reasonable steps to prevent the blaze, it will be on the hook for billions of dollars in losses suffered by fire victims, insurance companies and others.
The economic hit to Edison, a fixture in California for well more than a century that has grown into a Wall Street behemoth, could be significant. But industry experts say the utility is all but certain to avoid what could have been a fatal blow thanks to an emergency fund California lawmakers created in 2019 in the wake of earlier wildfires.
Designed to protect utilities from bankruptcy, the fund will cover as much as $21 billion in losses should Edison be forced to pay out.
Still, as damage estimates from the Eaton fire climb and Edison’s market cap tumbles, skittish investors have been left wondering how big an effect the blaze will have on the utility’s bottom line.
“How prepared is Edison to handle an expense like what may be generated if they’re liable for the Eaton fire? And is Edison investable, after they handle that expense?” said Michael Wara, director of the Climate and Energy Policy Program at Stanford University and a former California wildfire commissioner.
More than 40 lawsuits have been filed against Southern California Edison, as law firms launch their own investigations into the cause of the Eaton fire.
Edison officials expressed confidence in the fund’s ability to shield the company if it is found liable for the Eaton fire.
The state law that created the fund “did a number of things to really support and enhance the financial stability of investor-owned utilities,” said Maria Rigatti, chief financial officer for Edison’s parent company, Edison International. “It set a cap on the liability that a utility would have to deal with. We are at the very early stages of this whole analysis, but we are confident in the framework.”
Southern California Edison, which is based in Rosemead, is an investor-owned public utility that provides electricity to about 15 million people across a 50,000-square-mile area in Southern California. Along with the utility, which is one of the largest in the country, Edison International also owns an energy advisory company, Trio. In all, Edison International
employs more than 14,000 people.
Edison International had a valuation of around $30 billion before last month’s wildfires, but has lost about a third of that value as its share price has fallen more than 35% since the Eaton fire. Shares closed Monday at $50.17, down from a 52-week high of nearly $89.
Profit has been growing. Edison reported net income of $516 million, or $1.33 per share, in the third quarter, up from $155 million, or 40 cents, a year earlier.
The Eaton fire, which laid waste to a large section of Altadena and killed at least 17 people, has led to more than 40 lawsuits against Edison filed by residents. Although state investigators have not determined a cause for the fire, video of flames at the base of an Edison transmission tower in Eaton Canyon the night the fire began has raised suspicions that the utility’s equipment was at fault.
Eaton and Palisades fires
The devastating fires killed at least 28 people, destroying and damaging more than 18,000 buildings valued at more than $275 billion and leaving a burn zone 2½ times the size of Manhattan.
The flames destroyed nearly 10,000 structures and will cost insurers billions of dollars. If Edison is found responsible, insurance companies will demand reimbursement from the utility.
Some estimates put the insured damage from the Eaton fire at $10 billion, but experts say the final tally could be higher and losses other than those covered by insurance will further raise the total.
Utilities come with inherent risks for investors, said Shahriar Pourreza, an analyst at Guggenheim Partners. Edison was found to have caused the 2017 Thomas fire and paid $2.7 billion to more than 5,000 victims. The utility also was responsible for the 2017 Koenigstein fire and 2018 Woolsey fire, and has since settled claims with hundreds of individual plaintiffs and 23 public entities affected by the fires, totaling more than $6 billion.
Some of those losses were passed on to customers last month, when the California Public Utilities Commission approved a rate hike Edison sought to cover $1.6 billion of the damages from the Thomas fire.
Investors in public utilities know they’re at the mercy of Mother Nature when it comes to wildfires, but still choose to invest because electricity is a universal need. Utilities in California are typically able to maintain profit margins of about 10%, said Shon Hiatt, a professor of management and organization at the USC Marshall School of Business.
With investors now trying to game out how the recent wildfires will affect Edison, Hiatt said a general benchmark for determining whether a company is headed for bankruptcy is whether the liability the company faces is more than twice its valuation.
Edison is far from that tipping point with a market cap of about $20 billion and potential liabilities estimated at around $10 billion.
But if state investigators blame Edison for the Eaton fire, the company’s valuation will almost certainly drop further, Hiatt said. At the same time, costs associated with the fire are growing. The company could also face additional costs from the Hurst fire, a smaller blaze in January that the company acknowledged may have been started by its equipment.
“I don’t think Edison will go bankrupt, even if they are on the hook,” Hiatt said. “The Legislature will try to forestall that.”
Nonetheless, the association with the fire has been enough to unsettle investors. As Edison’s stock drops, another utility in the state, Pacific Gas & Electric, also has seen shares fall more than 23% over the last month.
“That’s a signal about how investors are feeling about California utilities in general, given what has happened or what may have happened,” Wara said.
When the California Legislature created the wildfire fund with the passage of AB 1054, it also established stricter safety and oversight standards for utilities in an effort to prevent future fires and ultimately protect the companies.
Legislators created the fund after PG&E was held responsible for the Camp fire in 2018 and subsequently filed for bankruptcy. The Camp fire destroyed the community of Paradise and killed more than 80 people.
A part of each customer’s monthly bill and contributions from the utilities are used to build up the fund, which has amassed only $14.7 billion as of December 2024 despite having a maximum capacity of $21 billion. It eventually will reach $21 billion as customers contribute their share over time, experts said.
Under state law, a utility does not have to reimburse the wildfire fund after using it to cover damages if a review finds it acted prudently to prevent a fire, such as by shutting down power to transmission lines amid high winds. But if Edison is found to have been imprudent, it will have to pay back $4 billion to the fund.
California officials voted to let Southern California Edison raise electric rates to cover payments it made to victims of the 2017 Thomas wildfire.
And regardless of whether the review concludes that Edison took appropriate action, if its equipment ignited the fire, Edison will have to pay the first $1 billion in claims before being able to access the state fund. The three utilities that have permission to draw from the fund — Edison, PG&E and San Diego Gas & Electric — are required to have $1 billion in insurance for such circumstances.
How the fund protects Edison — if it’s found to be responsible for the Eaton fire — will shape the company’s future and guide investor attitudes towards public utilities. Although some experts worry that the fund would not cover the entire cost of the fire, or that it would be depleted and defunct in the future, Edison sees the sum as a crucial lifeline.
“It’s not the PG&E days because there’s a liquidity backstop,” Pourreza said. “I think what investors have in their minds is, what if the fund dries up?”
The L.A.-area fires may pose the first big test of California’s wildfire fund, which was set up in 2019 to protect utilities from bankruptcy.
Since the passage of AB 1054, Edison has made an effort to educate investors on the safety net that’s available in case the company sparks a fire, Rigatti said.
The fallout from last month’s wildfires has changed the landscape for utility investors, regardless of the outcome of official investigations.
“You can make an assumption that Edison is in much better shape than before the wildfire fund was created,” Pourreza said. “The problem with this whole structure is that investors have very little appetite for it.”
Inside the business of entertainment
The Wide Shot brings you news, analysis and insights on everything from streaming wars to production — and what it all means for the future.
You may occasionally receive promotional content from the Los Angeles Times.
