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Edison International shares plunge over wildfire concerns

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Edison International shares plunge over wildfire concerns

Edison International shares were down nearly 13% in about 10 times normal trading volume on Dec. 5 after wildfires erupted in its utility service territory in Southern California, but one analyst believes that anyone saying the sell-off is excessive is "egregiously over-simplifying" the issue.

The company's utility, Southern California Edison Co., has a service territory that includes Ventura, Calif., where wildfires started the evening of Dec. 4 and have since burned more than 70 square miles, according to the California Department of Forestry and Fire Protection.

In late October, markets were wary of possible regulatory repercussions for PG&E Corp., as its utility, Pacific Gas and Electric Co., was under scrutiny by the California Public Utilities Commission for equipment failures that could have sparked a major blaze in the Napa Valley area.

For both SoCalEd and PG&E, even if they are not found to be negligent in having started the respective wildfires, California has a unique inverse condemnation policy under which investor-owned utilities can still be held liable.

According to Guggenheim Securities analyst Shahriar Pourreza, Edison International's share price deterioration has eroded at least $3 billion of its market cap, "which could be viewed as damages implied by the market that [Edison] could be on the hook for, implying upwards of [$4 billion] of damages if we assume they're deductible, but too soon to make an educated assessment of whether or not that amount is excessive," he wrote in a Dec. 5 note.

SoCalEd said in a statement that initial indications are that its equipment did not contribute to the start of either the Thomas Fire affecting Ventura and Santa Barbara, Calif., or the Creek Fire affecting Sylmar, Calif. It said the California Department of Forestry and Fire Protection would be conducting an investigation. Pourreza said Guggenheim called company officials midday, and they conveyed a sense of being in an emergency management mode. SoCalEd said it initiated "proactive measures" over the weekend as forecasts indicated increased fire risks.

"[I]t wouldn't be fair to expect them to have much more to offer in our view, but we would just note that this one may require some time to play out, as we saw was the case for [PG&E] when wildfires devastated their service territory in Northern California earlier this year," he wrote.

About 260,000 customers initially lost power because of the fires, and some transmission lines were threatened. SoCalEd was able to restore service to all but about 20,000 customers overnight by rerouting circuits, but some customers continued to experience intermittent outages, according to company spokeswoman Mary Ann Milbourn. By 11 a.m. PT on Dec. 5, about 15,000 customers were without power in Ventura and Santa Barbara counties, she said.

"We have crews out there, but we haven't been able to get access. They are standing by until authorities say they can do the damage assessments," Milbourn said.

High-voltage transmission lines in some cases trip off automatically and in other cases are de-energized due to high winds, fire and smoke, Milbourn said. Typically, fire will not burn through the lines, which are at high elevations above the brush fires beneath and around them, but the Thomas Fire has been moving along the transmission paths and could cause further interruptions, she said.

Bear, bull cases

In general with California wildfires, Pourreza said, a bear case of investors "selling first, asking questions later" in response to news of a blaze might just be contained to those in the Golden State. "The circumstances are fundamentally broken," he wrote.

"At the end of the day, regulators even recognized the disconnect between their responsibility to review prudency vs. the court's interpretation of inverse condemnation as it applies to regulated utilities, effectively holding them liable for damages irrespective of cause, and without commensurate rate relief," Pourreza continued. "But they stop short of offering a solution or even a visible path toward one.

"Wildfires aren't new for [California], and if something doesn't give, we will likely only find ourselves in the same situation over and over again," he added. "[A]t the end of the day we believe the utilities' case against inverse condemnation is only getting stronger and stronger, but our bear case essentially entails hoping and waiting for some constructive resolution that may likely take years to get through courts/legislature, not months."

Several PUC members recently suggested the state legislature and courts should limit the liability exposure investor-owned utilities face as wildfire risks to residents increase. But a state senator who has spoken out against electric utilities said he would be introducing legislation to prevent power companies found culpable in fires from passing uninsured liabilities along to customers.

According to Pourreza, the bull case would be "an interesting entry opportunity for investors that are able to weather the multiyear volatility we describe above, with eyes on a longer-term resolution."