California’s Electric Utilities Are Becoming Uninvestable

Climate change has lengthened California’s wildfire season by several months. The state’s wildfire politics season, meanwhile, has become perpetual. Sacramento just botched another opportunity to bring it to an orderly close, making a chaotic outcome for the state’s power grid and how the costs of wildfire damage are spread more likely.

California’s utilities are held liable for wildfires caused by grid-equipment regardless of negligence, due to the state’s especially strict interpretation of the legal concept of “inverse condemnation.” This allows victims there, or their insurance providers, to sue the utilities to recover costs and damages, which then flow to either shareholders through a loss of profits or ratepayers via higher bills.

The constitutional quirk flew under the radar until about a decade ago, since regulators routinely allowed utilities to recover relatively small wildfire-related costs through bills. It snowballed into a crisis as the extent, and costs, of California’s wildfires exploded, eventually leading to PG&E’s bankruptcy in 2019 in the face of enormous claims and penalties.

California hurriedly created a Wildfire Fund in response, essentially an insurance pool to reassure financiers that the state’s utilities were still investable and creditworthy (PG&E reemerged from chapter 11 in 2020). Then just one set of wildfires, in Los Angeles in early 2025, showed that the fund wasn’t big enough.

Governor Gavin Newsom led an effort this summer to essentially curb the utilities’ open-ended wildfire liability, in large part by blocking insurers from suing utilities to recoup their payouts to victims, a process called subrogation. Insurance companies were understandably nonplussed and pushed back, successfully. State Senate Bill 492 had much of Newsom’s agenda stripped out — and then even that amended version didn’t get voted on. On news of the amendments, shares of two big Californian utilities, PG&E Corp. and Edison International,1plunged.

It is not easy to argue, as Newsom did, that the utilities need a break. These are large corporations that have presided over huge increases in power bills; California’s residential tariffs are now almost double the national average. Plus, these companies are linked to some of the worst disasters in recent memory. In 2020, PG&E pleaded guilty to 84 counts of involuntary manslaughter arising from the Camp Fire of 2018.

Yet California needs investment in its power grid: To meet growth, to achieve ambitious climate goals and to attract business. While some may cheer the drop in utilities’ share prices as karma, it isn’t just investors who pay.

The whole point of regulated utilities is that their low risk and high dividends attract long-term shareholders at a low cost of capital to fund the grid. When that balance is disrupted, households must foot more of the bill or needed investments languish. That’s the direction California is headed in when PG&E and Edison are rollercoasters. The current set-up means an investor could see their stock wiped out by a wildfire, whether it resulted from corner-cutting by the utility — where a loss would be justified — or just a high wind launching a dry branch into a power line.

Unless utilities are released from “the obligation to act like insurers with uncapped liability,” it is hard to see a solution, says Michael Wara, Director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment and co-author of a recent study on the topic. Besides the impact on capital costs, Wara points out the regressive nature of funneling wildfire liabilities through bills, since people living in, say, California’s Central Valley have little choice but to run their power-hungry air conditioners full blast, effectively subsidizing homes in higher-risk areas. It also acts as a tax on electricity, blunting efforts to address climate change.

But California’s insurance market has not weathered the wildfires well, either. State regulation of insurance premiums under Proposition 103 effectively prevents them rising to levels commensurate with risk, pushing major providers to either pause or otherwise restrict new policies there. The number of homeowners resorting to the state-run FAIR program has surged. Closing off subrogation would likely cause more insurers to curb business there.

Controls on the price of insurance have also encouraged construction in fire-prone areas without incentivizing home-hardening. On balance, an insurance premium provides a more useful signal to managing that risk than inflated charges buried in the cost of electricity.

Transitioning more of the burden toward insurance premiums would involve a shock for homeowners that the state would need to manage with temporary support, Lauren Teixeira, senior analyst at the Breakthrough Institute, argues in a recent report. She also argues for a state catastrophe reinsurance fund to underpin the insurance industry and even modifying the interpretation of inverse condemnation to protect utilities when they aren’t at fault.

Rex Frazier, president of the Personal Insurance Federation of California, is no fan of shifting liabilities to the industry he represents. But he acknowledges that the state needs investable utilities and suggests that draws on the state Wildfire Fund be capped at a certain level, beyond which they are funded by a temporary increase in the sales tax.

Good luck with all that, one might respond. But such suggestions, different as they are, reflect the same goal of trying to make electricity affordable in California, while tying incentives around wildfires more closely to homeowners’ decisions. They also recognize that the ballooning impacts of climate change are a statewide threat, not just localized misfortunes.

The message from those yo-yoing share prices is that unlike California’s residents, insurance providers, power companies and politicians, the investors and creditors funding the grid can easily walk away.