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July 25, 2001

California Lawmakers Must Reform Utility Regulation, Says S&P

New York,California lawmakers have to revamp the state’s utility regulation before Southern California Edison can get its investment-grade credit rating back, Standard & Poor’s said.

The state’s second-largest utility defaulted on more than $930 million of maturing debt since Jan. 16. Standard & Poor’s Corp. downgraded its credit rating 12 notches to “D” from “BBB-.” Company officials said the utility won’t be able to resume its responsibilities as a utility — namely buying and selling power — until it is investment grade.

California legislators are debating how much they are willing to do to keep the utility subsidiary of Edison International out of bankruptcy. S&P says they must reform the regulatory system that led to the problem in the first place, and in particular the role of the state’s Public Utilities Commission.

“The overriding issue is to get the legislation right, so that the California Public Utilities Commission has very little discretion in reviewing rate increase requests,” said Richard Cortright, an analyst at S&P.

“Once they” — the utilities — “get the energy procurement responsibility back, we have to be sure that they won’t get caught the way they did in 2000 and 2001,” waiting for regulators to approve rate increases, Cortright said.

The California Public Utilities Commission is an independent agency set up by the legislature in 1912 to regulate the state’s privately held utilities. The five commissioners are appointed by the governor and confirmed by the senate. The commission decides what rate increase requests are reasonable.

`Risky Structure’

The current “underlying structure is highly risky,” Ted Craver, chief financial officer of Edison, said on a conference call with investors holding the utility’s defaulted debt.

“There are fixed prices for revenues and floating prices for costs and no ability to adjust revenues to meet those costs without” approval of the utilities commission, said Craver.

In the fall of 2000, state energy regulators gave Southern California Edison and Pacific Gas & Electric Co. permission to increase short-term borrowing to finance energy purchases. By Jan. 16, the two utilities had racked up more than $14 billion to pay for power, whose price was spiraling higher.

The commission didn’t consider how the utilities would repay those debts, and refused requests to increase customer power rates until after the State stepped in to assume the energy buying function. To conserve their cash, the utilities chose to default on maturing debt. PG&E Corp.’s utility filed for bankruptcy protection on April 6.

`Limited Role’

An April 9 agreement between California Governor Gray Davis and Edison to keep its utility out of bankruptcy didn’t include “legislation changing PUC responsibility in this matter,” said Joe Fichera, an adviser to the governor, who did say that “the utilities need to have assurances that their legal” and prudent costs will be recovered.

Southern California Edison officials want the Public Utilities Commission to approve an “automatic rate trigger” that kicks into place if wholesale power costs rise, said Steve Pickett, a vice president and general counsel for Southern California Edison.

That may not be good enough for S&P. To avoid a repeat of the current situation, the commission has to play a “very, very limited role in rate setting in the future,” S&P’s Cortright said.

Last week, the state Senate passed its own version of a rescue package for Southern California Edison, and it doesn’t include changes to the state’s regulatory structure.

–Liz Goldenberg in the New York newsroom at (212) 893-3940 or at egoldenberg2@bloomberg.net with reporting by Daniel Taub in Los Angeles, Dennis Walters in Ojai, California) and David Ward in (Sacramento, California/jm)


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