Citing credit uncertainties stemming from impending deregulation, Moody's Investors Service has posted negative ratings outlooks for the U.S. electric, telecommunications, and natural gas industries (with the exception of the pipeline segment). Moody's acknowledges, however, that the impact of deregulation will depend on market maturity, relative cost structure, degree of integration, and regulatory flexibility. According to Douglas Watson, Moody's managing director of regulated utilities, the electric industry faces the highest risk because of its maturity, limited domestic growth opportunities, heavy integration, and high average costs. Watson adds that the industry likely will bear most of the estimated $200 billion in transition costs.
Moody's recently downgraded the senior debt of California's three largest investor-owned electric utilities (IOUs): Pacific Gas and Electric Co. (PG&E) dropped from A1 to A2, Southern California Edison Co. (SCE) from Aa3 to A2, and San Diego Gas and Electric Co. from Aa3 to A1. Although the three utilities own competitive generating capacity, they are burdened with large, high-priced, purchased-power obligations. In addition, Moody's notes that the "competitive transition charge" (CTC) they proposed to the California Public Utilities Commission (CPUC) estimates their stranded investment at $16 billion on a present-value basis. Moody's finds it unlikely that the utilities will fully recover the CTC charges, but believes the CPUC will grant significant recovery of the uneconomic purchased-power obligations.
Telephone companies receive a slightly rosier outlook because they are ahead in streamlining their operations and have greater bargaining power with regulators. But Watson balances that by noting that telcos face substantial technological risks, huge capital expenditures, and aggressive competition from the cable industry and competitive access providers.
Order 636 has reduced local gas distribution company operating and regulatory risks, but Watson cautioned that such good fortune may not continue if there is a severe winter in the Gulf. Moody's assigns diversified gas transmission companies a "moderately positive" ratings outlook. Watson notes that pipelines are less vulnerable to alternative service options than other utilities, but that attempts to pursue growth through noncore investments may increase risk. (em LB
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