Shares of California utility companies PG&E and Edison International experienced significant drops on Friday after state lawmakers blocked Governor Gavin Newsom’s plan to prevent insurers from suing investor-owned utilities to recover wildfire losses. PG&E’s stock, particularly hard hit, plunged by over 10% before recovering slightly to close down 7.62%. Edison International fell as low as 5.93% before ending the day down 4.76%, while Sempra, the parent company for San Diego Gas and Electric, traded down 1% before closing down 0.52%.
The selloff occurred after late-night negotiations broke down on Thursday between Newsom's office and Democratic lawmakers regarding proposed changes to California's wildfire liability system. Newsom had aimed to end subrogation, a process allowing insurance companies to recoup losses from utilities after paying wildfire claims. The governor's concern was that a future utility-caused wildfire could drain the state's wildfire liability fund and potentially lead to bankruptcy for investor-owned utility companies.
However, major insurance company CEOs had warned that eliminating subrogation would cause premiums to skyrocket and risk destabilizing the state's insurance market. Lawmakers ultimately rejected this key proposal, opting instead for a narrower package of wildfire policies that did not substantially alter how much utilities must pay after fires they cause. The failure to reach an agreement on the larger liability overhaul leaves significant financial uncertainty for PG&E and Edison shareholders.
Analysts had previously offered constructive coverage for PG&E, with a consensus "Buy" rating and an average 12-month target of approximately $22.72. This target, roughly 37% above Friday's close, reflected the operating base case rather than a "liability shock." The $6.12 gap between the average target and the ~$16.60 price at close represents the "wildfire discount," indicating the market's repricing of the tail risk associated with wildfire liabilities.
