Sunday, April 14, 2019

Higher ROE and lower debt ratings: California's "precarious state"

Articles from this past week on California's utilities include one on utilities seeking rate hikes with rather large Return-on-Equity (ROE) figures, one on a bond agency downgrading the same utilities, and another on the rookie governor's effort to address the issues driving these actions.

Southern California Edison requests higher ROE, citing wildfire risks (Utility Dive)

  • ...Southern California Edison (SCE) on Thursday asked the Federal Energy Regulatory Commission to significantly raise its return on equity (ROE) due to "dramatic, material changes" to its regulatory and financial conditions.
  • SCE is requesting an overall ROE of 17.12%, plus incentives...
"We do not believe a higher return on equity is a long-term solution to the urgent situation utilities in California are facing," Caroline Choi, senior vice president of corporate affairs for SCE and Edison International, said in a statement. "However, this is what is needed in the near term in order to attract the capital required to provide safe, reliable electricity."
 The request come following months of warnings from debt rating agencies.

S&P downgrades SDG&E, SoCalEd, Edison International on wildfire, climate risk
S&P Global Ratings on Jan. 21 downgraded Edison International, its subsidiary Southern California Edison Co. and San Diego Gas & Electric Co. to reflect that the companies "will continue to experience catastrophic wildfires because of climate change and without sufficient regulatory protections due to California's common law application of the legal doctrine of inverse condemnation."
...S&P Global Ratings said it could downgrade the ratings on SDG&E, SoCalEd and Edison International further if lawmakers and regulators do not take concrete steps to address the financial risks facing the companies.
California's Governor Newsom did take a step this past week.

PG&E Caps Best Day Since Going Bankrupt as California Offers Help | Bloomberg
The governor issued a report Friday outlining possible solutions for how costs for destructive wildfires will be covered ...
The wide-ranging report gave Wall Street optimism that California will work with utilities to solve an intractable problem: who pays for wildfires as climate change threatens to make them deadlier and more frequent. Now, the task of developing a concrete approach falls to lawmakers...

Does this situation display the error of thinking laissez-faire governance is possible in the utility sector, or should regulators simply allow ever higher ROE margins for utilities?

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