State officials overseeing California’s wildfire fund urged the Legislature on Thursday to regulate hedge fund investors who buy insurance claims as a way to make money from catastrophic fires.

Administrators of the $21 billion fund are concerned that those investing in subrogation claims would pull “California money out of California” and have an outsized impact on the fund if Southern California Edison is found liable for the Eaton fire.

Officials from the California Earthquake Authority, which administers the fund, have said damage claims from the monstrous Eaton fire could exhaust the account.

The fund is a state pool created to keep Edison and two other utilities out of bankruptcy if they are found responsible for massive fires. It is managed by the nine-member California Catastrophe Response Council, which expressed concern about the hedge funds at the meeting Thursday, July 24.

Council members talked about potential ways to spur insurance companies to settle subrogation claims with utilities without selling those claims to investors.

State lawmakers established the wildfire fund in 2019 after Pacific Gas & Electric filed for Chapter 11 bankruptcy in the face of billions of dollars in damages from a series of catastrophic fires triggered by the utility in Northern California, including the inferno that tore through the town of Paradise.

If Southern California Edison is found to have ignited the Eaton fire, which destroyed more than 9,400 structures and killed 19 people, the utility would be eligible to tap the state fund to avoid the same fate.

The fund has been approved for up to $21 billion to help pay for damages from any wildfires sparked by its three investor-owned members: PG&E, SCE and San Diego Gas & Electric. The utilities’ shareholders are responsible for half of the $21 billion and ratepayers will be slowly charged the balance in their monthly bills through 2035.

The Los Angeles Department of Water and Power, blamed in lawsuits for part of the Palisades fire, is not eligible to tap into the wildfire fund because the publicly owned utility did not contribute to it and their ratepayers don’t pay into it. That means the LADWP would be on its own to cover any liability from a wildfire disaster if the utility is deemed at fault.

The Palisades and Eaton fires are estimated to be the costliest blazes in the nation’s recorded history.

The wildfire fund, created by Assembly Bill 1054, is nonreplenishing — that is, it cannot be refilled or replaced once used. It has been previously tapped for $250 million by PG&E in the aftermath of the 2021 Dixie fire in Northern California, but the fund has not faced the kind of potential liability as that presented by the Eaton fire.

The question now looming is how well the fund could respond to future fires if its coffers are depleted.

SCE, if judged to be responsible for the damages, must pay the first $1 billion before it can seek money from the fund. Additionally, if the state Public Utilities Commission determines the utility acted “imprudently” in causing the fire, the utility could have to pay back up to $3.9 billion. And the utility might have to pay even more if the commission finds it acted with willful disregard for the safety of others.

On Wednesday, SCE announced it is establishing a compensation fund for victims of the Eaton fire, saying details would be coming in the fall. SCE did not admit it is liable for the devastating blaze and a state investigation into the cause of the fire is not complete. However, attorneys suing the utility said the fund amounts to a tacit admission.

They also alleged Edison’s fund is an attempt to persuade victims to settle their damage claims for pennies on the dollar while forfeiting their right to litigation.

“Experience suggests that these direct payments for victims are neither quick, nor easy, nor equitable. PG&E offered a similar program and wildfire victims ended up receiving inadequate compensation, and it didn’t happen fast,” said Doug Boxer, an attorney with LA Fire Justice, in a written statement.