Purchased power is not a riskless strategy
Purchased power may allow utilities to delay or eliminate plant construction, but our review of credit agencies and impacts on bond yields indicates added risk to the utility that enters into purchased power commitments. The electric utility industry currently is in a state of flux. The traditional relationship of a vertically integrated electric utility providing generation, transmission and distribution of electric power to its customers has changed. Through the Public Utilities Regulatory Policies Act of 1978 (PURPA) and the National Energy Policy Act of 1992 (EPAct), electric utilities now face business competition in electric generation and transmission segments. While the precise risk implications associated with the gradual deregulations of the electric utility industry are still uncertain, electric utilities have begun to feel the negative impact of purchased power through credit rating agency downgradings. The primary purposes of this article are: (1) to highlight the increase in investment risk caused by purchased power contracts in order to demonstrate that purchased power is not a riskless alternative to building, and (2) to attempt to quantify the added cost of purchased power. When discussing the risk implications of purchased power, it is important to understand how the risk of a firm is evaluated. The investment risk of a firm is composed of business risk and financial risk. The business risk of a firm includes all factors that affect its pre-tax operating income (EBIT). The financial risk of a firm is caused by the use of leverage, or borrowed funds, in its capital structure. Purchased power can increase both business and financial risk of an electric utility.
- OSTI ID:
- 41686
- Journal Information:
- Electricity Journal, Journal Name: Electricity Journal Journal Issue: 10 Vol. 7; ISSN ELEJE4; ISSN 1040-6190
- Country of Publication:
- United States
- Language:
- English
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