Moody's lowers SDG&E to negative on uncertainty

Recent California legislation capping electric rates in San Diego has prompted Moody�s Investors Service to change the long-term debt ratings outlook to negative from positive for San Diego Gas & Electric Co. and its parent, Sempra Energy. Standard & Poor's ratings remain unchanged. At risk is an estimated $600-800 million in power costs that will not be collected from SDG&E customers during a period of 2-3 years. When and how the costs will be recovered is uncertain, Moody's says.


Ann de Rouffignac
OGJ Online

Recent California legislation capping retail electric rates in San Diego has prompted Moody�s Investors Service to change the long-term debt ratings outlook to negative from positive for San Diego Gas & Electric Co. and its parent, Sempra Energy.

Standard & Poor's ratings remains unchanged.

At risk is an estimated $600-800 million in power costs that will not be collected from customers by San Diego Gas & Electric (SDG&E) during a period of 2-3 years. When and how the costs will be recovered is uncertain at this time, Moody's says.

Under the legislation signed into law Wednesday by Gov. Gray Davis, the cap is in effect until December 2002, but the California Public Utilities Commission (CPUC) has the option to extend it through December 2003.

SDG&E, the first utility to fully participate in the deregulated California retail electricity market, found itself responsible for supplying its transmission and distribution customers with power, even though all its generating plants were sold as a condition of deregulation. Buffeted by scarce supply and hefty demand, temperatures and spot electricity prices both hit triple digits this summer in California. These costs were passed directly to consumers, who have been complaining loudly to elected representatives to �reregulate� electricity prices in southern California.

Even though the exact amount SDG&E will have to pay for power but not charge customers is unknown, Moody�s says the amount could end up being �large� by the time the cap expires. This means that debt coverage measures at the company will begin to weaken during this period. The deficit in cash flow could be funded with short-term debt, Moody�s says.

Collection Unsure
In addition, how the shortfall is finally collected from consumers is not known either. The California Public Utilities Commission will have to work out a mechanism to collect and return the money to SDG&E. The bill allows for the creation of a balancing account that will track and recover reasonable and prudent costs of providing electric service to customers in excess of the rate cap. The bill says the recovery of these costs will be over a �reasonable� period of time.

�Everyone�s at dinner and San Diego are the guys getting stuck with the bill,� says Fred Schultz at Raymond James &Associates, Houston. �They [legislators] are just delaying customer sticker shock.�

The bill caps the energy component of electric bills at 6.5�/kw-hr for residential, small commercial, and lighting customers of SDG&E through Dec. 31, 2002, and is retroactive to June 1, 2000. The bill also gives the commission the right to lower the cap during off peak times.

The ratings outlook change to negative from positive for the securities of SDG&E and to negative from stable for Sempra Energy�s securities reflects Moody�s view that deregulation in California is very �unsettled.� SDG&E now finds itself exposed to the risk of securing supply.

Moody's also suggests the legislation could have an indirect effect on the transition to competition for Pacific Gas & Electric Co. and Southern California Edison Co. It is possible the rate freeze under which they are operating could be extended, meaning the transition could take longer.

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