As wildfires continue to wreak havoc in Los Angeles, investor confidence in the financial stability of Edison International (NYSE:EIX) is waning. The concern stems from the possibility that the company's equipment may have sparked the fires.

What Happened: Southern California electric utility's stock price plummeted by 10% on Wednesday, as per Benzinga Pro, in the wake of the wildfires. The exact cause of the fires is yet to be determined, with investigations likely to span weeks or even months, The Wall Street Journal reported on Thursday.

California's "inverse condemnation" law holds utilities strictly liable for property damage caused by their power lines and equipment, irrespective of fault. This law has previously driven major utilities, such as PG&E (NYSE:PCG), into bankruptcy following a single wildfire.

Pedro Pizarro, CEO of Edison, has in the past conceded the company's susceptibility to wildfires. In a 2019 interview with the Los Angeles Times, Pizarro stated that the company's solvency was partly due to luck and risk mitigation efforts. He also cautioned that Edison could face bankruptcy in the aftermath of a major fire.

Despite legislative efforts to reduce utilities' liability risk, including laws allowing utilities to recoup wildfire costs from customers and the establishment of an insurance fund, the financial risk posed by wildfires remains substantial. The insurance fund's total assets of $11.4 billion are overshadowed by the potential costs of a major wildfire, as evidenced by the $16.5 billion in damage caused by the 2018 Camp Fire.

Edison's financial stability remains precarious, with negative free cash flow and the looming risk of its $18.1 billion equity being wiped out by a single catastrophic event.

Meanwhile, the company's market capitalization is valued at $27 billion.

Edison International has yet to respond to Benzinga's queries.

Why It Matters: The recent wildfires have already caused significant damage in the Los Angeles area. A destructive wildfire swept through the Pacific Palisades neighborhood, burning over 3,000 acres and forcing 30,000 residents to evacuate. The National Weather Service had issued warnings for extreme fire conditions, including wind gusts up to 80 mph, which exacerbated the situation.

The ongoing fires have also sparked ethical debates, as multiple betting contracts emerged on the Polymarket platform, allowing users to wager on the outcome of the disaster. This has raised questions about the morality of profiting from such tragic events.

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.

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