Morningstar | California Governor's Wildfire Plan a Positive for Utilities, but Risks Still Abound for PG&E
California Governor Gavin Newsom's wildfire task force issued recommendations on April 12 that were in line with our expectations. We're reaffirming our fair value estimates for California utilities PG&E, Edison International, and Sempra Energy.We think it's too early for investors to assume the report or the governor's support will increase PG&E's post-bankruptcy value beyond our $12.50 per share fair value estimate. We think the 21% jump in PG&E's stock price April 12 was an overreaction. We continue to think the market is too optimistic and underestimates the many hurdles that PG&E still faces before exiting bankruptcy.
We do consider the report a positive step for PG&E because it seeks to spread wildfire risks and costs among many stakeholders. We would consider raising our fair value estimate if the report and the governor's call for quick action leads to new laws, regulations, or policies that reduce utilities' risk of facing large disaster liabilities. This would be a relief for shareholders--both current and future--who now bear nearly all disaster costs.
Changes that could boost shareholder value include reforming inverse condemnation, creating a disaster insurance fund, or allowing utilities to charge customers for disaster costs. We think politicians will have a difficult time meeting the governor's call for action this summer.
Implementing the governor's recommendations or new legislation also will take support from the bankruptcy court, including the powerful creditors' committee, the district court overseeing PG&E's probation, and state utility regulators, who have final say on customer rate changes. It's unlikely the courts or regulators will act expeditiously.
Any political, legal, or regulatory changes meant to help PG&E should continue to represent upside for Edison International and Sempra. We consider Edison and Sempra fairly valued after their recent rallies.
For more detail on our analysis of California utilities, see our report, "California Utilities: Gold Rush or Fool's Gold?"
Edison International is a holding company. Through its subsidiary, Southern California Edison Company (SCE), which is an investor-owned public utility, the company is primarily engaged in the business of supplying and delivering electricity to southern California. The company is also the parent company of Edison Energy Group, Inc., a holding company for Edison Energy, LLC, which is engaged in the business of providing energy services to commercial and industrial customers. SCE supplies electricity to its customers through transmission and distribution networks. Its transmission facilities include sub-transmission facilities and are located primarily in California but also in Nevada and Arizona.
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