Utility Financial Stability Concerns Come to Fore

8 Feb 2018

In an unusual move, four members of the California Public Utilities Commission Feb. 8 answered written questions submitted by the so called “public” concerning the financial stability of the state’s investor-owned utilities in the face of regulatory policy and the growing impacts of climate change, particularly wildfires.

The one-hour webinar—called an experiment in communications by commissioners—came after what they called an increase in requests over the past several months to meet with financial and credit rating firms.

Commissioner Carla Peterman noted that she has effectively quit meeting with financial industry representatives one-on-one, particularly in response to enactment by the Legislature of SB 215. The law, which took effect Jan. 1, sets tight standards on ex parte communications in commission proceedings, including disclosure requirements.

While the questions posed in writing were general policy inquiries, rather than involving specific proceedings, insurance and utility representatives who spoke at the meeting painted a deteriorating financial portrait of the state’s utilities. They particularly raised questions about their future ability to purchase liability insurance.

“The market for risk is becoming untenable,” Steve Kempsey, managing director of Marsh Inc. insurance, told the commission. He predicted that “if wildfires repeat there will be a collapse of the insurance market.”

Dave Heller, Southern California Edison vice president, told the commission that fire risk is eating into the company’s financial stability.

Since Dec. 4, he said, Edison’s stock has dropped in value by more than 21 percent. “This equates to a $6 billion market cap loss,” he said.

Pacific Gas & Electric Corp. stock also has fallen about 30 percent over the past three months and Moody’s Investors Service placed the company under review late last year for a possible credit rating downgrade.

The move came in light of the October wildfires in Northern California and after the company suspended dividend payments.

“We view the decision to suspend the dividends as materially credit negative because it signals how management views the company’s potential exposure to the Northern California wildfires,” said Jeff Cassella, Moody’s vice president.

Meanwhile, Moody’s also late last year yanked Sempra Energy’s “stable” outlook rating and replaced it with a “negative” outlook rating. The change, said Moody’s, reflects the company’s increasing its indebtedness to purchase Texas electric distribution company Oncor last summer.

Sempra purchased Oncor when it was on the auction block in the bankruptcy proceeding of its parent company Energy Future Holdings. Sempra beat out billionaire investor Warren Buffet and “vulture” fund magnate Paul Singer, whose company Elliot Management vied for Oncor.

Singer has been dubbed a “vulture capitalist” largely for his role in purchasing bad debt in nations like The Republic of the Congo and then seizing assets. In Congo, BBC reported that he purchased bad debt for $10 million and then seized $400 million worth of public assets.

At home, Elliot Management last year teamed up with Charles John Wilder and his company Bluescape Energy Partners to gain control of NRG last summer, where they set the independent generator on a path to sell off renewable generation assets. NRG announced a major divestment Feb. 7.

Their strategy is to focus on gas generation and retail sales of energy, as well as future acquisitions.

Elliot Management representatives were perhaps the last from the financial industry to meet with commissioners on an ex parte basis last November, just ahead of SB 215 becoming effective.

Even though the company at that time was not required to disclose the meeting, which occurred in the context of the commission’s cost of capital proceeding for Southern California Edison, it did so out of “an abundance of caution,” according to the firm’s attorney Nancy Saracino.

In the disclosure, Saracino said that Elliot representatives shared with CPUC President Mike Picker and other officials “a general description of the firm as well as an overview of its historical investments in the regulated utility and merchant power sectors.”

She noted too that Elliott provided “its current broad views of power and regulated utility companies across various states and at the federal level.”

Picker said at this week’s webinar that he expects that commission will be conducting “an intense dialog” with utilities and legislators in the latter part of this year on the future of the utility business model in California after completing a report to the Legislature.

It comes after several commission meetings over the past year to discuss retail choice when it comes to power.

William J. Kelly

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