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Announcement:

Moody's: Rate Reform for Californian Utilities, a credit positive

10 Jul 2015

New York, July 10, 2015 -- The California Public Utilities Commission (CPUC) on July 3, 2015 approved a major rate design modification for residential customers of the three major investor-owned utilities in California, including Pacific Gas & Electric (PG&E; A3 stable), Southern California Edison (SCE; A2 stable) and San Diego Gas & Electric (SDG&E; A1 stable). Even though the changes to the rate design do not eliminate the risks and challenges posed by the growth of distributed generation to the Californian utilities, we view the decision as a credit positive for California utilities as it is an important indication that the regulators are proactive and addressing these issues while they are still small enough to be manageable.

Two of the most important elements of the rate reform in regards to distributed generation are the flattening of the tiered rate structure and the minimum bill requirement. Flattening the rate structure is important because the existing rate structure provide incentives for residential customers to install solar panels on their rooftops. The existing rate structure is a product of the California Energy Crisis to hold rates for essential low usage, while still collecting the utility revenue requirement. These structures have recently been thought to encourage conservation by charging higher marginal rates as the customer uses more electricity. However, high usage customers can install rooftop solar to reduce their net usage and pay a low usage customer rate,while at the same time, shifting their share of costs that support utility infrastructure to other customers. Ever higher prices for non-solar customers are ultimately unsustainable for the utilities' business model, though the current levels of rooftop penetration rate (~2% to 3%), is still very manageable. The current rate structure involves four tiers, with the top tier at above 30 cents/kWh. The new structure will be phased in between the fall of 2015 and 2019 and will only have two tiers plus a "Super User Electric Surcharge" for extreme usage, applyed to a limited group of high usage customers. The second tier is likely to be around 24 cents/kWh, and the surcharge will be nearly 220% of the first tier.

The minimum bill provision is also important because there is currently a gross mismatch between how utilities collect their revenues from their residential customers versus their cost structure. Residential customers' bills at most of the electric utilities are predominantly based on usage, while the majority of utilities costs are fixed. Solar customers present a particular problem for this mismatch because they could have a very low net usage because of self-generation from solar panels, thus a very low electric bill, but still use the grid heavily because as surplus power during the day is pushed back onto the grid and drawn back down at night when solar production is not available. A current solar customer that has zero net usage would only have an electric bill of less than a few dollars per month, yet would have full use of the electrical grid. This order allows utilities to establish a minimum bill of $10 per month ($5 for low income customers), a significant improvement from the minimal or non-existent fixed charge currently, but still vastly incongruent with utilities' cost structure. The decision allows the utilities to propose higher minimum bills or even fixed charges in the future, but the earliest an addition or increase to fixed charges can be implemented is one year after default time-of-use rates are implemented, beginning in 2019.

The rate reform in this order made a significant improvement in addressing the issues created by the rooftop solar phenomenon. It also left a plenty of room for the continued growth of rooftop solar. The revised tier rate structure is likely to have expanded the market for solar providers since the low usage customers (0 -- 100% of baseline quantity) will be paying a higher rates-- from around 15 cents/kWh or below in 2014 to an estimated 20 cents/kWh to 24 cent/kWh in 2018--rates that are well above the necessary levels for competitive offerings from solar providers. This approach, balancing the interest of utilities and the rooftop solar industry, we believe, is a positive development and sustainable strategy for Californian utilities.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Mihoko Manabe
Senior Vice President
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Rate Reform for Californian Utilities, a credit positive
No Related Data.
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