S&P threatens to slash credit ratings on California utilities

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The Associated Press

Raising the stakes in California’s energy crisis, Standard & Poor’s warned Wednesday 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, told investors that Pacific Gas and Electric and Southern California Edison will need substantial customer rate increases to avoid going bankrupt early next year.

The rating agency is hoping a solution will emerge either from a California Public Utilities Commission meeting scheduled Thursday or from ongoing negotiations involving Gov. Gray Davis, U.S. Energy Secretary Bill Richardson, federal regulators and governors from other Western states.

“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, said S&P analyst Richard Cortright.

A drastic downgrade would harm the financial reputations of PG&E and SoCal Edison by putting them on the same tier as junk bonds and making it difficult, if not impossible, to raise money from investors.

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.

The utilities say they have lost about $8 billion between them on these electricity purchases so far this year because the cost of the energy is dramatically higher than the prices them can collect from customers under a 3-year-old rate freeze.

Although the utilities agreed to the rate freeze in exchange for a deregulated energy market, the companies have been lobbying Davis and regulators for the right to raise their electricity prices.

Besides mulling rate increases, Davis and Richardson are pushing for a $100 per-megawatt-hour rate cap on all wholesale electricity sold in the Western states, but S&P said that proposal won’t solve the problem. “That’s like putting a Band-Aid on a bullet wound” said S&P analyst Ron Barone.

S&P’s analysts said a 20 percent hike over three to five years would be viewed positively and help preserve the utilities’ credit ratings. The utilities have been fighting for rate increase in the 20 percent range during closed-door meetings with Davis and regulators.

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

Gordon Smith, who runs PG&E‘s utility business, welcomed S&P’s stern warning. It “sends a message to Gov. Davis and California’s leadership that now is the time for action.”

Consumer activists likened S&P’s warning to a form of financial blackmail designed to scare Davis and the PUC into approving higher rates to protect the interests of investors.

“Wall Street seems to think that every time a big company gets into trouble, there has to be a bailout by the customers or taxpayers,” said Harvey Rosenfield, executive director of the Foundation for Taxpayer and Consumer Rights, a Santa Monica, Calif.-based watchdog group.

Utility critics contend that the companies aren’t as bad off as they claim. The skeptics say utilities have made billions off their own power plants since 1998 while also profiting from energy market conditions that worked to their advantage until this year.

In 1998 and 1999, for instance, PG&E‘s electricity revenues exceeded its electricity costs by $9.6 billion. So far this year, PG&E has paid $4.6 billion more for electricity than it has received from customers.

Consumer Watchdog
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