Investing.com -- Edison International shares fell as much as 4% on Tuesday before recovering all losses after short seller Muddy Waters Research published a report alleging the utility could face more than $20 billion in liabilities related to the January 2025 Eaton Fire.

The report argues that Southern California Edison, an Edison International subsidiary, knowingly disregarded wildfire risks and failed to shut off transmission lines despite severe wind forecasts before the fire that killed 19 people.

Muddy Waters claims Edison used a Fire Potential Index that capped wind-speed input at 29 mph, preventing the model from distinguishing between modest winds and more dangerous conditions. The short seller says Edison identified problems with the model in 2019 and documented them in its 2022 wildfire mitigation plan.

The National Weather Service forecast winds of up to 50 mph sustained with gusts reaching 80 to 100 mph before the fire. Edison's historically disclosed activation thresholds for the four relevant transmission circuits were 40 mph sustained or 58 mph gusts, according to the report.

The short seller notes Edison shut down three nearby distribution circuits two to three hours before the fire ignited but left four high-voltage transmission circuits energized.

Under California's wildfire liability framework, ordinary imprudence would limit Edison's reimbursement obligation to approximately $4.3 billion. A finding of conscious or willful disregard for public safety could eliminate that protection, potentially exposing shareholders to liabilities exceeding $20 billion, Muddy Waters estimates.

Fire investigators concluded that electrical arcing on an out-of-service Edison tower caused the fire. Muddy Waters describes the leading explanation as electrical induction, where energized nearby transmission lines transferred electrical energy to an idle line that had not carried power since 1971.

Edison has maintained that its transmission operations were consistent with those of a reasonable utility and that the transmission lines did not satisfy relevant shutdown criteria.

Muddy Waters disclosed it was short Edison International but intended to begin closing a substantial majority, possibly all, of its short positions upon publication of the report.

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