S&P doubts credit ratings will improve soon for SoCal

By Ann de Rouffignac
OGJ Online

HOUSTON, Apr. 11, 2001— Standard & Poor’s will maintain a “junk” bond rating on Southern California Edison Co. until California Gov. Gray Davis’s proposed multibillion dollar rescue package for the utility becomes definitive, the credit ratings agency said.

One of the stated goals of the agreement was to return the utility to financial health and an investment grade credit rating. Davis agreed Monday to buy the utility’s transmission system for $2.7 billion. The cash infusion is intended to stabilize the company.

“The timing of a review of the ratings is uncertain,” said David Bodek, analyst with S&P on a conference call.

Many hurdles still must be cleared. The agreement with the governor is subject to extensive negotiations and actions by regulators and legislators. Several are not bound by the provisions of the agreement, including the Federal Energy Regulatory Commission, California Independent System Operator, California Public Utilities Commission, and the California Legislature, S&P said.

“There are some political hurdles, including having the PUC reverse itself on issues just ruled on,” said Bodek. “This is a highly politicized environment.”

The legislature must approve an 11.6% rate of return for the utility for 10 years. It must also approve the transmission purchase by the state and nonbypassable charges to fund bonds backing that purchase. California lawmakers also must approve revenue bonds backed by a dedicated rate component that will pay Southern California Edison’s past due power bills. And the PUC also must alter a recent decision that changed how the utility accounts for recovery of past power expenses.

“If all this happens, then ratings will be raised,” said Bodek. “But they won’t be the same ratings as before.” S&P questioned if existing retail rates are high enough to implement the governor’s plan, even though rates were increased by the PUC a month ago.

Bodeck noted the California Department of Water Resources (DWR) has to be paid for its power purchases out of Southern California Edison’s rate structure, the bonds securitizing the transmission sale will have to be paid, and last the utility’s own costs of operation. The company said the rate increase still will not cover its wholesale power costs and what it owes the DWR.

The agreement supposedly allows for delayed or deferred power procurement costs to accumulate in a balancing account that could be recovered through rates later. The agreement says the PUC will permit “reasonable” amounts to be recovered in a “timely” manner.

Making the PUC the arbiter of reasonableness of expenses and deciding when to raise rates does not enhance credit quality, said Bodeck. “How large will the PUC permit that account to grow,” said Bodeck.

Additional risks include the potential for a California ballot initiative that might overturn the rate increases or the arrangement with the DWR, S&P said. Finally, S&P said impatient Southern California Edison creditors could still force the utility into bankruptcy.