For investors in Rosemead-based Edison International – the parent of the Southern California Edison electric utility – the question of whether they may have to forego billions of dollars in potential profits over the next several years could center on one word: prudent.

With each passing week since the Eaton fire of Jan. 7 and 8 destroyed thousands of homes and businesses in Altadena and killed at least 17, the odds are increasing that Southern California Edison’s transmission equipment may ultimately be found to have sparked the blaze.

If Edison is found to have acted imprudently, it may have to reimburse $3.9 billion to a newly established state wildfire fund; the sum could go even higher if Edison is found to have acted with “willful disregard” for safety. That money would have to come out of company profits.

Already, Edison is facing more than 40 lawsuits alleging Southern California Edison equipment started the Eaton fire. On March 5, the county of Los Angeles and the cities of Pasadena and Sierra Madre each filed lawsuits against Edison, also alleging Edison’s equipment sparked the blaze. The municipalities are seeking to recover costs for destroyed parks, infrastructure, roads as well as for cleanup and the rebuilding process.

The lawsuits have been filed months before several investigations into the fire’s cause – including one by Edison itself – wrap up. If and when one or more of those investigations concludes that Edison equipment triggered the fire, that would open the floodgates for thousands more lawsuits.

In response to the lawsuits, Edison spokeswoman Gabriela Ornelas said, “Our hearts are with the communities affected by the wildfires in Southern California. We are reviewing the lawsuits that were recently filed and will address them through the appropriate legal process.”

Investors have understandably been alarmed as this situation has unfolded over the past two months. On Dec. 31, Edison shares closed just under $80. Over the next six weeks, shares plunged 37% to close at $50 on Feb. 7, the day of a credit rating downgrade. Since then, Edison stock has climbed slightly, closing at $55.19 per share on March 5.

Edison hit with $9.9 billion in Thomas, Woolsey fire costs

Edison has faced this situation before, with the 2017-18 Thomas fire in Santa Barbara and Ventura counties and subsequent mudslides and the late 2018 Woolsey fire in Los Angeles and Ventura counties.

According to Edison’s latest quarterly filing, those two conflagrations resulted in more than 15,000 legal claims filed against Edison; through this past December, Edison recorded estimated losses of $9.9 billion from those fire/mudslide events.

Of that total, Edison has recovered roughly $2 billion through insurance and the California Public Utilities Commission in January authorized Edison to recover another $1.6 billion in costs from Thomas fire/mudslide claims through multi-year rate hikes. Edison had originally sought to pass on $2.7 billion in wildfire claims costs from that sequence of events to ratepayers.

An Edison petition to pass on $5.4 billion in Woolsey fire claims costs to ratepayers is still pending with the commission.

Is Edison equipment responsible for Eaton Fire?

The tally of destruction from the Eaton Fire is extensive. According to information late last month from Cal-Fire, the fire burned about 14,000 acres and destroyed more than 9,600 structures. Of those structures, about 6,018 were single-family residences, 96 were multifamily residences and about 158 structures were either mixed-use (residential and commercial) or entirely commercial. The remaining 3,146 destroyed properties were considered “minor structures,” such as storage sheds or horse stables. There have also been 17 confirmed fatalities and 9 confirmed injuries to firefighting personnel.

Before any claims against Edison for the Eaton fire can be adjudicated, the cause of the fire has to be established. And it is here that the picture has shifted most dramatically against Edison and its shareholders over the last eight weeks.

Within 48 hours of the fire, there were already claims from law firms representing owners of destroyed properties that Edison’s transmission equipment triggered the blaze. But Edison in public statements at that time said that while it was still investigating the role its equipment may have played, there were no anomalies in its logs that would be consistent with the ignition of a fire.

But over the last few weeks, multiple reports surfaced of flames immediately adjacent to Edison equipment within the preliminarily designated area of origin for the fire. Some of those reports came through law firms representing owners of destroyed properties.

In its most recent quarterly earnings filing with the Securities and Exchange Commission on Feb. 27, Edison dropped any reference to the lack of anomalies. Instead, Edison said this:

“SCE’s review includes ongoing inspections of its facilities and records and of third-party information, including analysis of concerning images and videos that suggest a possible link to SCE’s transmission facilities in the preliminary area of origin. As of February 27, 2025, based on the information it has reviewed, SCE has not determined whether its equipment was associated with the ignition of the Eaton Fire.”

Tapping into state wildfire fund

If Edison equipment is ultimately determined to have sparked the Eaton fire, how the loss scenario plays out for Edison and its shareholders will be quite different than for the Thomas and Woolsey fires. That’s because there is now in place a state wildfire fund that Edison will likely be able to tap to pay claims settlement costs. How much of that fund money it can tap – and ultimately keep – will be a central question in the months and years to come.

That Wildfire Insurance Fund, established through Assembly Bill 1054 that was signed into law in July 2019, currently has accumulated about $12 billion in “pay-ins” from Edison and the state’s two other investor-owned utilities: Pacific Gas & Electric (a unit of San Francisco-based PG&E Corp.) and San Diego Gas & Electric (a unit of San Diego-based Sempra Energy). The fund is authorized to hold $21 billion.

Before it can tap the fund, Edison must first pay out on its own – or through its insurance policy – $1 billion worth of claims settlement costs. If Edison’s equipment is determined to have sparked the Eaton blaze, then hitting that threshold is a virtual certainty, given the number of destroyed properties. Some reports put the total property damage from the Eaton fire in excess of $10 billion.

A big concern will be whether there will be enough money in the fund to pay all the claims settlement costs from this fire. Utilities had put roughly $12 billion into the fund, but PG&E has already taken out nearly $1 billion of that total and there are claims from other fires that are ahead of the Eaton Fire. (The Palisades fire is not eligible for payments from the fund because the preliminary point of origin lies in the territory of the Los Angeles Department of Water and Power and not one of the three investor-owned utilities.)

This concern over the fund’s current capacity was one reason New York credit rating agency S&P Global last month lowered its outlook on Edison International to “negative” from “stable.” S&P Global noted in its Feb. 3 rating of Edison that there is no inherent structural mechanism in the AB 1054 legislation to replenish the fund. If the fund is nearly or completely depleted by Edison’s tapping into it for the Eaton fire, then there will be little or no money left to deal with fires in the future, which poses a long-term financial risk for Edison and for the other two investor-owned utilities.

“If the fund is depleted, SCE loses the credit benefit of using the fund as a source of liquidity and more importantly, loses the credit protection of the liability cap,” the S&P Global report said.

Payout for ‘imprudent’ finding

Even if there is enough money in the state wildfire insurance fund, whether Edison gets to keep much of the money doled out from that fund will depend on its meeting the prudency standard. In the AB 1054 legislation, once the fund administrator pays out the claims to an investor-owned utility (including Southern California Edison), then the utility must go through a “catastrophic wildfire proceeding” before the Public Utilities Commission.

Among other things, that hearing will determine whether that utility acted “prudently” or “imprudently,” with respect to wildfire mitigation and preparation.

If the utility is found to have acted prudently, meaning it took all the reasonable steps that were expected – among them clearing vegetation, hardening power lines and shutting off power during red flag conditions – then the utility gets to keep all the money it was paid from the wildfire fund. But if the utility “is found imprudent, or partially imprudent, the IOU must reimburse the fund for the portion of the eligible claims covered by the fund to the extent of the IOU’s imprudence, up to a statutorily defined liability cap,” according to the website of the state Wildfire Fund Administrator. The cap is set at $3.9 billion. 

But that’s not all. The amount of money that the utility could be ordered to repay the fund could go higher than $3.9 billion “if the (fund) administrator finds that the IOU acted with conscious or willful disregard of the rights and safety of others.”

Edison and its executives have gone out of their way to stress that they believe the utility has acted prudently.

In its filing with the SEC, Edison said, “Based on the information it has reviewed as of February 27, 2025, SCE believes that it would be able to make a good faith showing that its conduct with respect to its transmission facilities in the preliminary area of origin was consistent with the actions of a reasonable utility.”

Edison International Chief Executive Pedro Pizarro reiterated this in the company’s conference call with analysts after its earnings release late last month.

“We believe that SCE is a reasonable operator of its electric system,” Pizarro said. “It’s really about the operations of the broad system as well as its application to the specifics of any given ignition,” he added.

He then went on to describe Edison’s program of insulating thousands of miles of transmission lines to prevent sparking that could ignite fires, as well as cutting back vegetation and instituting a plan of strategic power shutoffs during wind events.

As the Public Utilities Commission applies the prudency test, Pizarro said, “The commission has recognized the notion that the prudent standard does not demand perfection.”