Power firms’ credit rating hinges on rise in rates

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Stockton Record

SACRAMENTO — Bad news from Wall Street on Wednesday stepped up a public relations battle over California’s electricity crisis that is giving middle-of-the-road Gov. Gray Davis a hard time finding any middle ground.

Standard & Poor’s, one of three major credit-rating agencies, warned that it will downgrade the state’s two major utilities’ debt ratings to the status of junk bonds if the state doesn’t find a way to stem a multibillion-dollar stream of red ink flowing from the companies.

”Absent meaningful and sustainable actions by the decision makers in the next 24 to 48 hours,” the firm will slash the utilities’ credit ratings to below investment grade, S&P analyst Richard Cortright said.

A drastic downgrade would harm the financial reputations of Pacific Gas and Electric Co. and Southern California Edison by putting them on the same tier as junk bonds and making it difficult, if not impossible, to raise money from investors.

”These companies, as big and strong as they used to be, are on the brink now,” Cortright said.

The utilities currently have strong credit ratings in the ”A” to ”AA” range.

The credit ratings are critical because both utilities will likely have to raise more money from investors to buy high-priced electricity for their customers early next year.

Davis is negotiating a deal to rescue the companies. But that has gotten him into hot water with consumer activists who are trying to portray a pending electricity rate hike as a bailout for monied interests at the expense of common folk.

Today, the state’s Public Utilities Commission may begin a process that could cause a 10 percent to

20 percent increase in electric bills.

The Utility Reform Network, Foundation for Taxpayer and Consumer Rights and Consumers Union depicted the Standard & Poor’s warning as a ploy by Wall Street to protect its own.

They held a joint press conference Wednesday to blast Davis for negotiating with the utilities behind closed doors.

Davis’ press secretary, Steve Maviglio, said outside parties aren’t involved because Davis is negotiating a settlement of lawsuits that the utilities filed against the PUC.

That technicality, however, did not dampen the activists’ main message that Davis is caving in to pressure by utilities when he should be standing up for his constituents.

Harvey Rosenfield, director of the Foundation for Taxpayer and Consumer Rights, even came up with a pithy epithet to throw at the governor should the rate hike pass: “Giveaway Gray.”

Rosenfield’s organization also started a Web site where angry citizens can join the cause, fittingly addressed: ratepayerrevolt.org.

Nettie Hoge, director of The Utility Reform Network, said the utilities are exaggerating their losses. But even if they were real, Hoge said, bankruptcy might not be so bad.

Under a Chapter 11 proceeding, PG&E and SoCal Edison could get protection from creditors without passing along to consumers the exorbitant costs charged by power-plant owners and energy-marketing firms, she said.

Rosenfield suggested that the governor use his emergency powers to protect the public’s health and safety to seize private power plants, if necessary, to make sure they stay online.

The California Public Interest Research Group and the California Congress of Seniors joined the chorus of critics with their own press releases.

Even Assemblyman Anthony Pescetti, usually an ally of utility interests, questioned whether an immediate rate hike is necessary.

The Rancho Cordova Republican, who serves as vice chairman of the Assembly’s utilities committee, said his staff has been unable to determine whether the $10 billion in undercollections claimed by PG&E and Edison have been offset by profits they made by selling power in the wholesale market.

Both utilities have sold their fossil-fuel-burning power plants, but still own nuclear and hydropower generators.

While the activists try to sway public opinion in their direction, the utilities are doing their best to portray themselves as the innocent victims of price-gouging power generators and a deregulation scheme gone terribly awry.

Gordon R. Smith, PG&E Co. president, said in a statement Wednesday that his company has “virtually exhausted its financial resources” and is borrowing $1 million an hour to buy electricity for its customers.

He said the failure of the Federal Energy Regulatory Commission to impose price controls has forced the state to come up with its own solution.

“The time for pointing fingers has passed,” Smith said. “This challenge requires the utmost leadership from all parties in order to find a solution.”

Notwithstanding the activists’ attacks on its credibility, the Standard and Poor’s warning does give PG&E some ammunition as it presses its case for a rate hike before the PUC today.

S&P’s proposed downgrade would make it difficult, if not impossible, for the utilities to continue borrowing money to pay for electricity that was selling for more than $300 per megawatt hour Wednesday. The utilities are allowed to charge only $54 per megawatt hour under the rate freeze that was imposed by the state’s 1996 deregulation law.

The utilities aren’t likely to get an immediate rate hike at the PUC hearing in San Francisco today, PUC spokeswoman Kyle DeVine said. The commission may, however, begin a process that could make Wall Street investors breathe a little easier.

The first step toward ending the rate freeze is determining whether the utilities have collected enough money from their customers to reimburse shareholders for noncompetitive investments that were made before the deregulation law was passed. The PUC had previously insisted on an accounting method that could have left the rate freeze in place until March 31, 2002.

But the commission has since reconsidered that decision and might adopt an accounting method that’s more generous to the utilities today. DeVine said the PUC still would have to crunch numbers before deciding whether conditions for ending the rate freeze have been met, so approval of an actual rate hike will likely have to wait for a later meeting.

What’s more, Davis has said through his spokesman, only the Legislature can end the rate freeze.

That’s why Senate President John Burton and Assembly Speaker Robert Hertzberg were included in negotiations with the utilities’ top executives Tuesday.

Davis has already convened a special session on the energy crisis to begin when the Legislature reconvenes Jan. 3.

Perhaps appropriately, the fallout from California’s experiment with deregulation will now go back to state lawmakers who set California on that path.

* To reach Capitol Bureau Chief Jim Sams, phone (916) 441-4078 or e-mail [email protected]

Energy developments

* IN SAN FRANCISCO: Standard & Poor’s warns that it will cut off the financial lifelines of the state’s two largest utilities unless electricity rate increases are approved by the end of the week. S&P, one of Wall Street’s major credit-rating firms, said Pacific Gas and Electric and Southern California Edison needs to charge customers more to avoid going bankrupt early next year.

* IN WASHINGTON: Energy Secretary Bill Richardson issues a one-week extension to his directive requiring Western power plants to supply electricity to California. Richardson also asked governors to support regional limits on wholesale electricity prices. Consumer groups are being invited to federal talks over setting long-term commitments to electricity prices in California.

* IN SACRAMENTO: Gov. Gray Davis speaks with President Clinton about California’s electricity crisis and offers him the names of three San Diego Republicans to serve as temporary members of the Federal Energy Regulatory Commission. Earlier, Davis held his first personal meeting with the executives of Southern California Edison and Pacific Gas and Electric Co. No decisions were announced.

* IN FOLSOM: The Independent System Operator, which manages the state’s electricity grid, announced a Stage 2 power alert, urging homes and businesses to conserve power. The ISO said it was particularly concerned about congestion on a line known as ”Path 15,” the 500,000-volt link between Northern and Southern California that has been running at capacity.

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