What does that mean for investing in California utilities? We sold down our position in PG&E towards the end of 2017 as the risks to the company became clear but have by no means abandoned California outright. We maintain a core position in Sempra Energy, which we feel is diversified enough that wildfires don’t pose an existential threat. The increased costs stemming from the policy of inverse condemnation still does pose an operational risk though. The uncertainty of a disaster imposing huge costs in any given year will certainly affect the utilities ability to plan for the long term. In the extreme case, these costs may impact a utility’s ability to convert to 100 percent renewable energy, thereby unintentionally quashing one of California’s energy dreams.
Investors look to utilities to provide them with stability and safety in their retirement years. Strict liability unfortunately detracts from that stability. Until there’s a legislative fix to inverse condemnation, California utility stocks will remain problematic.
Jay Rhame is a portfolio manager at Reaves Asset Management. He has more than 10 years of experience as a utilities analyst. (Disclaimer: Reaves Asset Management’s clients have holdings in Exelon and Sempra Energy.)