When Governor Arnold Schwarzenegger campaigned on repealing the car tax, his advisers apparently failed to consult Moody?s credit-rating service. Moody?s, Standard & Poor?s, and Fitch are getting to be like Mom?forget to clean your room, and wham! Not only is your allowance docked, but the domino effect throws the universal space-time continuum out of whack. Only with Moody?s, your credit is docked; 100,000 people skirt car assessments while 13 million people in the state face higher taxes. (Moody?s downgraded the state?s debt rating December 9, citing rollback of the vehicle license fee as a primary cause.) Unlike Schwarzenegger, Pacific Gas & Electric and the California Public Utilities Commission have been consulting ratings services?PG&E specifically for what it will take to make it creditworthy once out of bankruptcy; the commission, in more general post-energy-crisis terms, to create financial health for utilities in general. With somewhere between six and nine proposals to get PG&E out of bankruptcy?depending on whether you count two in federal court and The Utility Reform Network?s persistence in its outside plan?ratings agencies should be picking plans like so many racehorses. But they?re not. At least, not publicly. Privately, most said that there appears to be an acceptable deal between commissioner Geoffrey Brown?s proposal and commission president Mike Peevey?s backup plan. Both plans leave the phantom regulatory asset at $2.2 billion. Peevey?s amortizes it at the nine-year mark, Brown?s at five years or less. ?Ultimately we?re going to wait for the commission?s decision,? averred David Bodek, Standard & Poor?s analyst. Once that decision is made, the credit-rating company will check whether the outcome can live up to its financial forecast. ?Then we go back and say what the prospects are for [PG&E].? Fitch Global Power Group director Phil Smith added, ?The obvious problem is can [the CPU] come up with a plan that deviates from the settlement that PG&E finds acceptable?? Just when PG&E Corp.?s chief executive officer will walk away from the table might be the subject of more office pool bets this week than which alternate the CPU will approve. Even though credit rating agencies are unwilling to bet on one plan over the next, they would talk off the record. With that, it?s useful to explore some of the plans? effects. <b>Commitment and future commissions:<\/b> Should any plan bind the commission beyond its current vote? Traditionally, the commission can change earlier decisions given different circumstances or even different political inclinations. The proposals range from not binding future commissions to binding them to a deal for four years or five years to committing them for nine years to a multibillion-dollar deal. At the beginning of 2005, it?s likely that there will be two Republicans on the commission. The next governor?s political stripes are unknown, but for four years the lineup looks like two Republicans and three Democrats, with current commission president Mike Peevey as the swing vote. If the credit agencies? crystal ball visualizes PG&E?s comeback in a couple of years, with guaranteed payback on shorter amortization, then the binding issue doesn?t matter. If the crystal ball is cloudy about future commissions implementing deregulation to unknown effect, then the only plans that make a difference to the credit agencies are the ones that bind the commission for nine years. The duration of binding does not appear to be a deal breaker with analysts. <b>Deregulation redux:<\/b> Here?s where no amount of binding obligation on the part of the commission and PG&E can matter. Here?s where the vagaries of the economy, the political winds, and fiscal popularity come in. Schwarzenegger indicates he wants some version of deregulation?so far, direct access. If that will be the case, and if the dire warnings of consumer groups representing retail customers about cost shifting are borne out, then utilities will be in trouble again. Conversely, if direct access allows for economic prosperity and business is booming, then utilities are fine. What?s inevitable in the short term is that the energy crisis strangely made utilities stronger. At least for the next few years, wobbly wholesale providers will be standing back while utilities get back in the new-generation saddle. They have the funds to build new power plants and are guaranteed cost-of-service ratemaking. Hard to go wrong here for investors. <b>Amortization:<\/b> PG&E creditors get most of the money they?re owed no matter what payback period is chosen. What comes into question here is the fairness of the payoffs. None of the plans is fair to PG&E customers. By accepting a fiction of accounting?whether it?s a $2.2 billion regulatory asset or something else?regulators implicitly burden consumers with paying for something that?s not ?fair? in the traditional sense. There used to be a commission adage that only ratepayers who receive benefits have to pay?the precedent of the ?used and useful.? This precedent held that ratepayers did not have to pay for a power plant that wasn?t on line and providing a useful service. That concept has mutated in the last decade to fit new circumstances where ratepayers now pay for benefits for ratepayers later and vice versa. But nearly all the bankruptcy plans put a final kibosh on it by simply accepting the idea of a phantom regulatory asset. The benefit here is that PG&E keeps providing energy. Forget the price, we need the juice. Think of it like President Bush?s call for patriotic shopping to help the economy. In this case, it?s ratepayers? duty to pitch in and save the utility. Amortization length shouldn?t matter to the ratings agencies as long as ratepayers don?t, en masse, stop paying their bills. The duration of amortization matters little to analysts as long as the funds are forthcoming and the total amount of the regulatory asset?whether $2.2 billion or something less?is high enough. <b>Dividends:<\/b> Except for the ?as-is? settlement proposal, none would guarantee dividends for PG&E?s and its parent company?s shareholders. Regulators aren?t willing to bet that someone at PG&E won?t make some stupid mistake?a poor choice of diversification, an investment in coal, a little nuclear accident?that puts the utility in bad financial condition, with ratepayers once again left holding the bag. In one sense, this is the very gist of what credit-rating agencies want. They want no surprises. They don?t want to leave anything, PG&E executives included, to chance. They want ratepayers to make up for any mistakes. Total ratepayer carte blanche is a political impossibility because politicians will never be able to sell it in the public arena. In reality, analysts don?t see the dividend requirement as a deal breaker. They appear to be sanguine that dividends will reappear in any event. <b>No fear of ratings:<\/b> Some of the proposed PG&E plans, primarily the one backed by the utility, bow and scrape to ratings agencies. Two of the nine plans blew off ratings agencies altogether. ?Why this commission, or the bankruptcy court, should put approval by a rating agency as the sine qua non of PG&E emergence from bankruptcy escapes us,? administrative law judge Robert Barnett said and commissioner Loretta Lynch?s plan repeated. In the end, either bowing to ratings agencies or blowing them off doesn?t much matter. It could be that ratings agencies will find something that no one thought about?like Moody?s made the connection between car taxes and the state?s credit rating. And no matter what, that unintended consequence will be the thing that passes muster or not. For instance, one thing that all the plans have is a respect for PG&E?s environmental plans for watershed lands. It could be that ratings agencies will discover that, in the long run, the value of the deal lies in the environment because the environment will outlast commissioners, will outlast the vagaries of the wholesale market, will outlast many an amortization period. It might keep water, forests, and wildlife in abundance to strengthen the north state?s economy. I wouldn?t bet that Wall Street would have such a long-term view. I?ll clean my room just in case; I don?t want to interrupt the space-time continuum.