California Wildfires Are Taking A Toll On Electric Utility Stocks

california wildfires

The horrific blazes sweeping through California have not only forced thousands to evacuate but are also torching stocks of utility companies.

On Friday, shares of PG&E Corp. hit their lowest level in five months, losing $7.88, or 16.49% to close at $39.92. Edison International, another utility company based in the state sank $8.41, or 12.12%, to end the session at 61.00.

So why are the deadly wind-whipped fires triggering a sell-off in stocks of such companies? Well, the blazes have led to hundreds of thousands of evacuations and left behind a trail of destruction. At least 31 people have been killed so far as the fires continue to ravage the state. It goes without saying that California utilities could be liable for significant damages even if they followed the required safety practices.

That could happen through inverse condemnation court doctrine, a concept within federal and state constitutions and one that is closely related to eminent domain. Under the rule, utilities are liable for damages if officials deem infrastructure such as power lines played a role, even if the companies were not negligent. Private property owners can file inverse condemnation charges against public utilities that fail to compensate them for damages.

Companies like PG&E and Edison International might try to argue that inverse condemnation damages ought to be passed to customers as part of the broader expenses of offering electric service. However, investors do not expect the companies to pass the expenses fully to ratepayers; otherwise, we would not witness any huge sell-off in their shares.

Earlier this year, lawmakers in California passed a bill regarding the vulnerability of investor-owned utilities to wildfire damage. The bill would allow the California Public Utilities Commission (CPUC) to carry out a stress test when determining how much utilities can pay for damages caused by wildfires.

Large investor-owned utilities like Edison International and PG&E support the proposal as it could reduce their liabilities if they are not found to have been negligent. PG&E is reportedly considering restructuring in order to protect its assets from wildfire debt. The utility is currently facing up to 17 billion in potential liability.

Bad weather is expected to accelerate the fires, according to officials in California. Shares of PG&E extended their losses in premarket trading on Monday, falling 10.82% to $35.60. Edison International also edged lower to change hands 58.61.