Selling bonds an option: Credit downgrades to deepen debt of PG&E, Edison

National Post

SACRAMENTO, Calif. – California legislators are discussing ways to resolve the credit crisis of PG&E Corp. and Edison International, owners of the state’s two biggest utilities.

The two companies have warned of bankruptcy filings and blackouts if the state doesn’t provide them with more help in paying soaring power prices and refinancing US$11.9-billion in debt.

State legislators are considering allowing utilities to issue bonds to refinance the debt. Some state officials also are proposing creation of a state power authority that would buy power plants or transmission lines. An emergency session of the legislature on the power crisis ended yesterday. The regular session begins Monday.

The California Public Utilities Commission granted PG&E and Edison an overall electricity rate increase of 10% on Thurday. Both companies say the increase is inadequate to pay current power prices or reduce their power-purchase debt.

The debt is preventing the utilities from borrowing money in short-term markets needed to purchase power and is driving up the cost of borrowing money in long-term markets.

Moody’s Investors Service yesterday became the third credit-rating company to downgrade the two companies’ debt. Moody’s cut ratings on PG&E and Edison‘s senior unsecured debt to Baa3 from A3 and downgraded the secured debt of the companies’ utilities to Baa2 from A1.

Yesterday, Fitch Inc. cut its ratings on the utilities’ debt to below investment grade. Standard & Poor’s downgraded Edison‘s senior debt to below investment grade and cut PG&E‘s commercial paper rating, taking it out of the short-term borrowing market.

California legislators will consider letting PG&E and Edison sell bonds to refinance their debt, a state assemblywoman said.

‘There was a discussion in our caucus, the Democratic caucus, of issuing bonds as a possibility,’ said Helen Thomson, Assistant Speaker of the California Assembly. ‘It’s one thing we are looking at.’

Other state officials have proposed creating a power authority to take over the state’s power plants or generating lines. Philip Angelides, the Treasurer, is expected to propose such an authority and the move has backing on the PUC as well.

‘I think the legislature needs to immediately establish a California power authority,’ said Richard Bilas, a PUC member. The authority should use condemnation powers to take power plants, while paying the owners market prices, he said.

Both power and natural gas prices for utilities have soared this winter in California. Average power prices last year were four times as high as the year earlier, and gas prices surged to as much as 25 times year-ago levels this winter.

While PG&E and Edison have seen their power costs surge, they have been unable to pass the expense on to customers because regulators refused to end a rate freeze.

After approval of the 10% rate increase yesterday, Loretta Lynch, the PUC‘s chairwoman, said the next step is to find some way to help the two utilities ‘securitize existing liabilities,’ a reference to refinancing the power purchase debt with bonds.

With legislative approval, the two companies could use bonds similar to those issued to refinance nuclear plant debt in many states that have adopted deregulation laws. Such bonds are paid off with fees charged to anyone moving electricity over utilities’ lines.

A state power authority also could issue bonds at low, tax-free rates to refinance the debt.

One consumer group said it will oppose any plan that lets utilities refinance the debt with bonds that must be paid off by the state’s homeowners and businesses.

‘There will be a bloodbath in the legislature before such a thing could occur,’ said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights. ‘These bonds will be dead on arrival. We will undo them in the courts or at the ballot box.’

Most legislators said they want to help the utilities avoid bankruptcy.

‘Bankruptcy is not in the interest of consumers because it shifts control over utilities to courts, whose primary concern is creditors,’ said Assemblyman Fred Keeley, a Democrat from Monterrey who is chairman of the Joint Legislative Audit Committee.