Although it acknowledged political and regulatory factors that continue to be uncertain, Standard and Poor’s Ratings Services reported last Thursday sighting “signs of life” in California’s private-sector utilities. The uncertainties that still cloud the state’s energy picture go well beyond the outcome of the proposed new settlement plan for bankruptcy-bound Pacific Gas and Electric Co., according to S&P brief analysis, “California’s Utilities: Another Step Forward?”

S&P published a report on the energy situation in the state that was released a week after state regulators and the state’s largest utility announced a proposed settlement of their prolonged and profound differences. The report is available on S&P credit research/analysis system, “RatingsDirect.”

Currently, the new surge of optimism is driven by the proposed settlement between PG&E’s utility and the California Public Utilities Commission, along with the unsecured creditors’ committee in the bankruptcy proceeding. Parallel, but separate, hearing processes in the federal bankruptcy court and the CPUC in San Francisco get underway next month.

While S&P said “on balance, progress is being made,” its report cited at least four completely separate issues that could affect the quality and timing of the California utilities’ eventual recovery. Those other challenges are:

“The resolution of the appeal also might have implications for PG&E, which has also accumulated large cash balances,” S&P said in its report.

“The potential disparity caused the governor and (CPUC) commissioners to express the dissatisfaction with the proposed CPUC-PG&E settlement,” S&P said. “Consequently, the question remains whether the projected disparities between the utilities’ rates will have political implications that might frustrate the compromise plan.

“Gov. (Gray) Davis’ quick criticism of the proposed settlement underscores the strong political influences that still remain a factor in California’s management of its energy sector.”

Ultimately, the rating agency noted that if the political process frustrates the settlement proposal, “a cloud will likely hang over” the prospects for California’s utilities to achieve the improved credit quality that they so desperately want and need to gain investment-grade status again.

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