Continued uncertainty surrounding the recovery of record highwholesale prices for electricity prompted the Fitch rating serviceTuesday to lower its rating outlook from “stable to negative” forCalifornia’s three major investor-owned electric utilities. Themove came in the midst of another week of late summer heatthroughout the state that is pushing up power prices and squeezingsupplies.

The lower ratings were applied to Pacific Gas and Electric Co.,Southern California Edison Co., and San Diego Gas and Electric Co.,each of which is in a slightly different position, but all of whichare paying millions of dollars more for power supplies than theycan recover in retail rates given rate freezes in effect forPG&E and Edison, and a recently adopted stabilization programfor SDG&E.

The situation causes an increase in the utilities’ financialcosts and risks, Fitch noted, absent regulatory or legislativerelief and/or a large drop in electricity prices.

California regulators have not “clearly defined (their) positionon a mechanism or timing for recovering power supply costs fromconsumers after the utilities’ frozen tariff periods end,” Fitchnoted in its announcement on the ratings outlook change. It listedthree alternatives for regulators: (1) extending the currenttransition period to full market-based rates; (2) ending the ratefreezes; and (3) giving the utilities’ wide latitude to signbilateral contracts and to hedge in forward markets. The CaliforniaPublic Utilities Commission is scheduled Thursday to considergranting the latter to SDG&E.

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