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AB 1054 establishes two fund options

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Houston — Instead of a credit downgrade many in California feared if new wildfire legislation was not passed by July 12, Moody's Investors Service reaffirmed the investor grade ratings of Southern California Edison and San Diego Gas & Electric after legislation was signed that it said would "mitigate wildfire risk for the state's utilities."

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In investor notes released Friday evening, Moody's affirmed the ratings of Edison International, including its Baa3 senior unsecured rating, and the Baa2 senior unsecured rating of its principal utility subsidiary Southern California Edison. It also affirmed San Diego Gas & Electric's Baa1 issuer rating. All three ratings are just notches above Moody's non-investment grade ratings scale.

The ratings agency said, however, that the outlook for all three entities "remains negative."

The ratings affirmations followed the passage by the California state legislature of AB 1054 which establishes a wildfire fund to enhance liquidity and included other measures to mitigate wildfire risk for the state's utilities.

"The legislation is credit positive because it helps address the more contentious political and regulatory environment that emerged in California over the past twenty-four months," Moody's said.

The analysts said that AB 1054 provides the investor-owned utilities with two options to participate in a catastrophic wildfire fund -- the liquidity fund option or the insurance fund option -- in order to reduce their financial exposure to wildfires.

"The insurance fund option is more credit supportive of Southern California Edison's and SDG&E's credit profile than the liquidity fund, by a wide margin," said Natividad Martel, a Moody's vice president and senior analyst.

The credit analyst said that the negative outlook "reflects the existing uncertainty as to which option is chosen."

The report said that for the insurance fund to be created, both SDG&E and neighboring utility SoCal Edison have to elect this option "in about two weeks."

It said that SDG&E has a smaller contribution requirement to the insurance fund than SoCal Ed, but the two utilities are "somewhat tied together" with respect to their decision making.

While both fund options would give the two IOUs access to immediate liquidity in the event of a wildfire, the insurance fund would provide a "higher level of near-term risk reduction" because it caps the amount of cost disallowance associated with catastrophic wildfires and "applies a more credit supportive prudency standard," Moody's said.

"We believe the size of the insurance fund will account for all but the most extreme downside scenarios. Assuming Pacific Gas & Electric also participates, the fund will be capitalized with $21 billion of capital and a gross claim paying capability of more than $40 billion," said Moody's.

It noted that according to Filsinger Energy Partners, a consultant to California Governor Newsom's office, "this funding level has only a 0.9% chance of being exhausted by 2030."

The consultant's calculation assumes the wildfire experience of the past five years continues.

NEWSOM NAMES POSSIBLE NEW HEAD OF CPUC

Also on Friday, Newsom announced he wants Marybel Batjer to be the new president of the five-member California Public Utilities Commission.

If approved by the state Senate, Batjer would replace Michael Picker, who said in late May he would step down from the position later this year after leading the five-member commission for five years.

The CPUC was given increased oversight duties under AB 1054, including forming the California Wildfire Safety Advisory Board that will review all local, publicly owned electric utilities and cooperatives regarding the sufficiency of their wildfire mitigation plans, as well as becoming responsible for issuing safety certifications to IOUs and determining whether a wildfire qualifies as a catastrophic event.

Newsom noted that Batjer currently serves as the first-ever secretary of the California Government Operations Agency, a role in which she has led efforts to revamp the way the state approaches the use of data and technology.

Before that job she was the vice president for Public Policy and Corporate Social Responsibility at Caesars Entertainment. Between 2003 and 2005, Batjer served as cabinet secretary to then California Governor Arnold Schwarzenegger.

-- Jeffrey Ryser, jeffrey.ryser@spglobal.com

-- Edited by Rocco Canonica, newsdesk@spglobal.com