California’s Wildfire Fund, a state pool created six years ago to keep utilities out of bankruptcy if they are found responsible for massive property losses, could be headed into uncharted territory with the Eaton fire.
State lawmakers established the fund in 2019 after Pacific Gas & Electric filed for Chapter 11 bankruptcy in the face of tens of billions of dollars in damages from a series of catastrophic fires triggered by the utility in Northern California, including the inferno that tore through the town of Paradise.
If Southern California Edison is found to have ignited the Eaton fire, which destroyed more than 9,400 structures and killed 17 people, the utility would be eligible to tap the state fund to avoid the same fate.
“This (Eaton) fire is going to be the first pressure test for the California Wildfire Fund,” predicted attorney Alexander Robertson, whose firm is suing SCE, alleging a power line sparked the fire. More than 40 such lawsuits have been filed against SCE in the Eaton fire since a video surfaced that implicated high-voltage lines in starting the blaze.
“Everyone is curious to see how this is going to work because we’ve never been here before,” Robertson said.
Asked whether SCE is considering using the fund, spokesperson Kathleen Dunleavy responded by email, “This is too early to speculate.”
$12 billion in liquid revenue
The state fund has $12 billion in liquid revenue but has been approved for up to $21 billion to help pay for damages from any wildfires sparked by its three investor-owned members: PG&E, SCE and San Diego Gas & Electric. The utilities’ shareholders are responsible for half of the $21 billion and ratepayers will be slowly charged the balance in their monthly bills through 2035.
The Los Angeles Department of Water and Power is not eligible to tap into the wildfire fund because the publicly owned utility did not contribute to it and their ratepayers don’t pay into it. That means the LADWP would be on its own to cover any liability from a similar wildfire disaster if the utility was deemed at fault.
The wildfire fund, created by Assembly Bill 1054, is non-replenishing — that is, it cannot be refilled or replaced once used. It has been previously tapped for $250 million by PG&E in the aftermath of the 2021 Dixie fire in Northern California, but the fund has not faced the kind of potential liability as that presented by the Eaton fire.
Experts say damages from the Eaton fire, which devastated Altadena, could hit at least $10 billion, leaving a large chunk of the state fund vulnerable if Edison was found liable and sought reimbursement. A state investigation remains ongoing into the cause of the fire.
“The Eaton fire is likely to consume at least half of the fund and possibly more. It’s certainly the first fire where a large number of structures (were) lost,” said Michael Wara, a lawyer specializing in climate and energy policy at Stanford University and a former member of the panel that manages the wildfire fund, the California Catastrophe Response Council.
What about ‘next time’?
Wara and others said the question now looming is how well the fund could respond to future fires if its coffers are largely depleted.
“If you use up half or more, how confident can you be that there will be enough money for next time, if there is a next time?” Wara said.
Seth Hilton, an energy development partner at the Stoel Rives law firm, added: “This is what the wildfire fund was intended to address. We will see whether it will be able to weather this challenge.”
Ted Kury, director of energy studies at the Public Utility Research Center at the University of Florida, said the state Legislature could intervene to find a way to cover any shortfall. “That essentially means everybody is paying,” Kury said.
The California Earthquake Authority, which oversees the fund, added it has the ability to issue revenue bonds to achieve liquidity.
Why bankruptcy is bad
So why is the state trying so hard to keep utilities out of bankruptcy?
“The big problem with bankruptcies is that you spend a lot of time trying to figure out who gets paid from the company’s limited resources,” Kury said. “Figuring that out takes time, accountants, lawyers, and many other professionals, and they all cost money. Since the utility is a regulated entity with the right to recover all of their expenses through the rates they charge, any costs the utility incurs will ultimately be passed through to customers.”
While the fund could help SCE avoid bankruptcy, the utility could take a hit among investors if found to be liable for the Eaton fire.
In early February, credit rating agency Standard & Poor’s lowered its outlook on Edison International and SCE from “stable” to “negative,” citing the potential “material depletion” of the wildfire fund. By downgrading Edison’s outlook, S&P is forecasting a weaker financial performance.
Other exposure
Member utilities, if judged to be responsible for the damages, must pay the first $1 billion before they can seek money from the fund. Additionally, if the state Public Utilities Commission determines the utility acted “imprudently” in causing the fire, the utility could have to pay back up to $3.9 billion, Kury said. However, the utility might have to pay more if the commission finds it acted with willful disregard for the safety of others.
“That uncertainty is already going to have an impact on investors,” Kury said. “Investors are going to take that risk into account.”
Edison Chief Executive Officer Pedro Pizarro, in an earnings call with investors last week reported by Bloomberg, said SCE believes it “would make a good faith showing that its conduct with respect to its transmission facilities in the Eaton Canyon area was consistent with actions of a reasonable utility.”
