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The three U.S. debt-rating agencies like the improved stability of California's electricity market and expressed that approval by raising the rating assigned to the Department of Water Resources power supply bonds. Although each of the three-Standard & Poor's, Moody's, and Fitch-expresses the change in different terms, the result is the same: the promise of lower interest rates on the $2.59 billion of revenue bonds the department plans to sell next month. "The raised rating reflects a series of recent developments that have substantially improved DWR's" risk, explained S&P credit analyst Swami Venkataraman. "Specifically, the combination of a planned rate increase, the introduction of hedging policies and the use of gas prices that are more reflective of current market prices overcome past deficiencies that constrained the rating," the analyst wrote. He specifically cited DWR?s late-October upward revision of next year's revenue requirement to include $738 million in additional power charges, an increase of 19 percent from this year's requirement. The requested increase, which the California Public Utilities Commission is expected to approve next month, will address the sharp increases in natural gas prices and stem the ongoing negative operating cash flow the DWR power program has exhibited, Venkataraman stated. According to Moody, the positive outlook reflects the department's now well-established cost-recovery process and the improved credit standing of California?s investor-owned utilities-Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric-as well as the more stable California energy market and DWR?s conservative financial management. DWR got into the power supply business in January 2001 when soaring electricity prices outpaced the capped rates charged by the state?s three utilities, rendering two of them-PG&E and Edison?-ncreditworthy and compromising the ability of all three to deliver power. The department initially financed its power purchases with advances from the state's general fund and a loan from financial institutions. The advance and loan were repaid from proceeds of $11.3 billion of bonds issued in October and November 2002. Next month's offering will refund a portion of those bonds, producing projected savings of $145 million, according to Moody's. Fitch traces its improved rating back to February 2005, when it revised DWR's outlook to positive, citing the transfer of responsibility for fulfilling the net-short position of investor-owned utilities back to the three companies. It also pointed to the resolution of most legal challenges, and the fact that additional power contracts were no longer needed. Credit concerns now include risks to operating cash flows associated with price volatility and potential delays in CPUC approval of the department's new rates, Fitch stated. Moody's cited the "still evolving structure of the California electricity industry" as a concern. It stated that increased electricity bills due in part to DWR's rate increase represent a potential challenge. "High California industrial and commercial customer power prices when compared to the U.S. average subjects the electric industry in California to potential political pressure to lower rates or to reform the market structure," the agency explained.

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