The wildfire liability issue still needs legislative solutions, but California Gov. Gavin Newsom said during a press conference Monday he has a "sell-by date," so he won't be here to solve it.
A drastically pared down version of Newsom's wildfire liability proposal was left on the Assembly cutting room floor.
The bill took heat from insurers, utility companies and lawmakers before Democratic leaders decided to scrap the effort entirely.
After three hours of discussion Tuesday, Assembly Speaker Robert Rivas, D-Hollister
The Tuesday meeting was an extension of the legislative session that was supposed to end Monday night. It was aimed at giving lawmakers an extra day to pass
The market weighed in this week with widening spreads on both Southern California Edison and Pacific Gas and Electric Company (PG&E) bonds — two investor-owned utilities facing litigation around wildfires.
PG&E's 6% bonds due 2056 traded at 91.3 Thursday compared to Tuesday's low of 90.6. It traded at 94.0 on Aug. 28. SoCal Edison's 4.875% bonds due 2049 traded a yearly low of 79.314 Thursday compared to 81.392 on Aug. 28.
Stocks for both PG&E and Southern California Edison
S&P Global Ratings managing director for North America Regulated Utilities, Gabe Grosberg said it didn't matter from a ratings standpoint if the pared down version passed or not because the changes it proposed weren't material.
The terms in Newsom's original proposal had the potential to be more credit supportive, Grosberg said. The original terms included a liability cap put in place to guard against depletion of the $21 billion Wildfire Fund.
The seed money for the
The state's municipal utilities have no wildfire fund because when the concept was raised, the public utilities who aren't at risk from wildfires did not want to pay into a fund they would likely never use, said David Bodek, S&P senior director and sector leader for public power and electric cooperative ratings.
"There is also some diversity in potential wildfire liability among public utilities compared to investor-owned utilities," Bodek said. "Some are highly urban and have no exposure to wildfires."
Compare that to PG&E in the Bay Area and SoCal Edison, which both have broad areas and are exposed to the wildfire-urban interface, he said.
Consequently, municipal utilities, such as the Los Angeles Department of Water and Power — which experienced credit rating downgrades following the destructive Palisades wildfire on Los Angeles' west side — lack access to this financial safety net, Bodek said.
The fate of SoCal Edison's ratings is tied to the wildfire fund. If the net present value of the wildfire fund drops below $14 billion, S&P could downgrade the company's bonds, Bodek said.
In July 2025, the Catastrophe Response Council's
"If that happens and the fund drops below $11 billion, then both PG&E and Edison could be downgraded," Bodek said.
Newsom's initial proposal included a liability cap and a maximum the utilities would have to pay if their actions were deemed "imprudent," a term used by regulators to determine if a utility's actions resulted in wildfires.
"The reforms in this bill, while important, did not address the underlying structural problems driving this crisis, as the initial market reaction this week demonstrates," Newsom said in a statement. "Simply put, this measure did not meet the gravity of the moment. The only solution is to return to fix the entire problem, not part of it."
Efforts to keep the utilities financially sustainable in the wake of the increasing frequency of wildfires will be left to the next governor, as Newsom leaves office in January.
S&P has been reflecting the risks to California's public power utilities from wildfires in its ratings for years, Paul Dyson, an S&P director.
A number of states have inverse condemnation laws, but judicial rulings in California have created a strict liability standard unique to California, he said.
Ratings analysts told The Bond Buyer for prior articles the rulings on inverse condemnation can result in utilities being found liable for wildfires even if there was no negligence.
"We have been monitoring wildfire risks in California for a long time," Dyson said. "We are seeing an increase in risks and seeing wind and drought grow in severity. Even though public power utilities have done a lot in terms of risk mitigation."
Dyson added, some elements are beyond their control.
"They can only underground a certain amount of utility wires, because of the cost," he said.
Moody's Ratings said in a credit analysis in July the state is at a crossroads in managing wildfire risk and allocating its costs.
"Regulated utilities and property and casualty insurers bear much of the financial burden from wildfires, with downstream effects to customers," Moody's analysts said.
Absent further legislative action, Moody's said, future wildfire-related costs could drive electricity rates higher and "weigh on the state's economic competitiveness."
"Both investor-owned and publicly owned utilities remain exposed to wildfire liabilities, but differently, while mitigation costs continue to pressure rates," Moody's said. "Further reforms could support utility credit quality and mitigate affordability challenges for ratepayers."
Newsom's initial proposal would have prevented insurance companies from suing utilities to recoup the cost of claims, a process known as subrogation; limited noneconomic damages for some wildfire survivors; and limited local governments' ability to recoup the full replacement cost of damaged infrastructure.
Critics, including wildfire survivors, called his original proposal a bailout for utility companies.
The revised bill, released on Saturday, made no mention of capping costs for wildfires in the event a utility is found liable.
Saturday's compromise bill would have created a program to fast-track wildfire-related claims from the state's existing wildfire fund, ban the sale of subrogation rights to private equity and hedge funds and place fee caps and limits on attorneys representing survivors.
Moody's analysts said Newsom's original proposal — which would have socialized the costs of catastrophic wildfires — would have been credit positive for local governments and utilities but also would have suppressed the true cost of living in high-risk areas. The latter could result in more housing growth in fire-prone areas.
Many of the states that tend to receive the "most federal disaster aid on average are also those that have experienced substantial growth over the past several decades, including Florida, North Carolina and Texas," Moody's said.
The danger for California as it looks to create state backstops is if not coupled with strong mitigation, zoning and building code funding and enforcement, it could lead to much more significant losses for the backstop mechanisms, all of which are still ultimately passed on to taxpayers, Moody's analysts said.
Jessica Lerner contributed to this report.
