PG&E (PCG) and Edison (EIX) Sink After California Wildfire Liability Deal Falls Apart

PG&E Corporation (NYSE: PCG ) and Edison International (NYSE: EIX ) plunged on August 31 when California lawmakers introduced a bill that would update the state's wildfire response, but would not shift liability away from publicly traded utilities. Investors reacted to the omission of Governor Gavin Newsom's proposal that would have prevented insurers from suing utilities to recover wildfire-related losses.

PG&E Corporation and Edison International had both gained by double digits this year on the expected rise in power demand from AI data centers and on the hopes of favorable California legislation. However, the stocks took a beating after wildfire liability negotiations broke down and several Wall Street analysts lowered their respective outlooks on them.

PCG and EIX have both been downgraded at Mizuho and BofA on the lack of liability protection, while JP Morgan has also cut its price targets on both stocks.

The impact of the legislation is already being felt. PG&E announced a strategic review of its businesses on September 2, including plans to cut its 2027 capital investment plan by $2 billion. According to the utility, the move will "reduce the need for higher-cost borrowing while maintaining critical safety investments and compliance obligations".

That said, PG&E reaffirmed its adjusted core earnings guidance range of $1.64-$1.66 per share for FY 2026 and initiated guidance for adjusted core earnings of $1.78-$1.82 per share for FY 2027.

Investors should keep in mind that the recent selloff could ultimately prove excessive if California lawmakers return to the negotiating table and create a more sustainable framework for wildfire liabilities. The Golden State depends on its utilities to maintain and expand critical infrastructure, especially amid the ongoing AI boom, so a system that exposes these utilities to potentially unlimited catastrophic liabilities could undermine investments and drive up costs across the sector.

The severity of the negative market reaction could therefore create upside if California eventually adopts liability reforms that are more favorable towards its utilities.

Moreover, both PG&E and Edison International have taken concrete steps to minimize their wildfire risk, ranging from moving high-risk overhead distribution lines underground to addressing existing wildfire liabilities through compensation programs and financing transactions.

The latest legislation leaves utilities exposed to significant liability claims. The risk is particularly significant for PG&E, since the company already filed for Chapter 11 bankruptcy in 2019 after facing billions of dollars in wildfire liabilities. If the state's wildfire liability fund is exhausted, the utility would be required to cover nearly 48% of the fund, with no ability to recover those costs from ratepayers.