California Utilities Face Dim Financial Future

As California utilities Pacific Gas & Electric and Southern California Edison continue to spend more to generate power than they collect in revenues, they are headed for financial insolvency within a matter of weeks, according to analysts at Standard & Poor's.

What's more, any possible rate increases will not appear on customers' bills until it’s too late, says Standard & Poor's credit analysts Richard W. Cortright Jr., Ronald M. Barone, and David Bodek.

If no meaningful and sustainable actions are made by decision-makers within the next few days, Standard & Poor's is prepared to take action, which could cause the utilities to fall below investment grade, reflecting the likelihood of imminent default, according to Cortright.

Cortright also says the two utilities are shouldering a severe financial burden as their unrecovered purchased power balances balloon—literally minute by minute. As of the end of October, these balances had reached $4.5 billion for Pacific Gas & Electric—double its size from August—and $2.6 billion for Southern California Edison. Since then, these numbers have significantly increased as prices during the anticipated low-usage winter months have increased.

Cortright says the recent adoption by the Federal Energy Regulatory Commission of price remedies, including steps toward the elimination of the Power Exchange's buy/sell requirement and the use of longer-term bilateral power contracts, were encouraging as far as future market structure goes.

"Unfortunately, these steps do nothing to secure the immediate financial viability of the state's utilities, which are running out of cash as they continue to spend more for power than they can collect," Cortright says. "It is representative of the absence of remedial action by decision-makers with respect to the potential for imminent default by Pacific Gas & Electric and Southern California Edison."