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PG&E investors remain wary of liability risk for Calif. wildfires


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PG&E investors remain wary of liability risk for Calif. wildfires

As the investigation continues into what sparked ongoing deadly wildfires in Northern California, the potential for PG&E Corp. to face liability risk has prompted a steep drop in the company's stock price amid investor concerns.

A spokeswoman for the California Department of Forestry and Fire Protection, or Cal Fire, said investigators are "absolutely looking into power lines" and other electrical equipment owned by PG&E subsidiary Pacific Gas and Electric Co. as a potential spark for blazes that have killed at least 40 people and caused billions in damages. If utility infrastructure is found to have played a role in causing some of the massive wildfires that have torched thousands of acres in California's wine country, PG&E could face significant liability, analysts warned.

The California Public Utilities Commission in April fined PG&E $8.3 million for its part in a 2015 wildfire after regulators found that the utility had not taken all the necessary precautions to safeguard its equipment and did not report issues in a timely manner.

Wells Fargo Securities LLC on Oct. 15 lowered its price target on PG&E to $67 per share from $79 per share to "reflect substantial uncertainty" tied to potential liability for the ongoing fires.

PG&E's stock closed Oct. 13 at $57.72, down 10.5% on the day to end a tough week. The stock closed at $53.43 on Oct. 16, down 7.4%.

"While it remains unclear whether [PG&E's] infrastructure in any way caused some of the fires, we believe it is prudent for investors to assess a meaningful probability to causality," Wells Fargo analyst Neil Kalton wrote in the report.

California has a unique inverse condemnation policy under which investor-owned utilities may be liable for property damages without a finding of negligence.

"The theory underlying inverse condemnation is that if a utility's infrastructure causes property damage then the costs should be socialized across that utility's customer base (the customers who benefit from the infrastructure)," Kalton wrote, noting that theoretically PG&E should be able to recover these costs through the regulatory process. However, there are concerns that damages could be approaching $5 billion, making recovery difficult.

"Bottom line: we are concerned that [PG&E's] shareholders could incur substantial liabilities even if [PG&E] is not found negligent," Kalton wrote.

Morgan Stanley Research sees risk for partial liability and potential causation under California's inverse condemnation rule but also believes that the market has likely overreacted to the potential damages to PG&E's shareholders.

"We see a material risk that PG&E will be held to be a cause of at least a portion of the fire damage in Northern California, in which case PG&E would be held strictly liable for damages, though we caution that there are many unknowns at this point and an investigation by Cal Fire will take many months to complete," Morgan Stanley analyst Stephen Byrd wrote in an Oct. 16 research report.

Still, Morgan Stanley believes that given a low probability of punitive damages, the $5.6 billion in fire-related liability reflected in PG&E's stock price likely exceeds the cost to shareholders.

In an Oct. 13 filing with the SEC, the utility said it was unknown if it would face liability associated with the fires but indicated that it has about $800 million in liability insurance for potential losses.