California lawmakers stripped key wildfire liability protections for utilities from Senate Bill 492 over the weekend, triggering a sharp selloff and a wave of Wall Street downgrades for PG&E, Edison International, and Sempra.
As SB 492 is structured, it improves wildfire prevention, creates a faster claims-payment program, and allows additional bonds to support the state's wildfire fund. What it doesn't do is protect utility investors from open-ended wildfire liability.
Gov. Gavin Newsom had pushed for a broader version that would've capped what utilities owe insurers per incident at $6B and blocked insurance companies from suing utilities outright. However, that effort failed to gather enough legislative support.
The liability question Wall Street was watching
At the core of this fight is a legal concept called subrogation. As the bill framing explains, insurers pay out wildfire claims and then sue the utility whose equipment caused the fire to recover those costs.
Insurers have also been selling those rights to private equity and investment firms, which then pursue utilities directly. SB 492 limits the sale of those rights but doesn't eliminate insurer lawsuits altogether.
The amended bill also bars utility executives from receiving bonuses in years their companies cause wildfires that destroy 500 or more structures.
Mizuho analyst Anthony Crowdell was direct in his assessment after the vote.
"We view this bill as insufficient in shifting liability from utilities, more focused on victim protections without any new investor protections."
Anthony Crowdell, Mizuho Securities
Mizuho downgraded all three utilities to Neutral from Outperform. BMO cut PG&E to Market Perform from Outperform and slashed its price target to $21 from $28, warning the bill leaves investors exposed to open-ended wildfire-related tail risk. Wells Fargo also downgraded PG&E to Equal Weight from Overweight.
The wildfire fund problem
Morgan Stanley analyst David Arcaro flagged a separate but connected risk. California operates a $21B wildfire fund, paid for by utility shareholders and ratepayers, to cover liability.
The January 2025 Eaton Fire, which caused an estimated $8B to $10B in losses, could deplete that fund sooner than expected. Arcaro warned there's no ongoing funding source to replace it.
PG&E is scheduled to hold an investor call on Wednesday to discuss capital-allocation changes. Citi analysts expect the company to cut capital investment, redirect money toward dividends and buybacks, and re-engage California lawmakers next year.
BMO cautioned that even a revised strategy may not be enough to restore investor confidence. Newsom's term ends in January and the legislature wrapped up its session on Monday, leaving the path forward genuinely unclear.