A simplified procedure for costing the financial risks of purchased power contracts
- Brattle Group, Cambridge, MA (United States)
Purchased power contracts entail financial risk to electric utilities because their inflexible payment mechanisms involve debt-like obligations. Of course, building additional utility plant also involves risk. The cost of these risks must be netted out to arrive at a true avoided cost, or ratepayers may pay too much for purchased power. There is increasing interest in calculating the impact of power purchases on a utility`s credit rating and the resultant effect on the calculation of avoided costs. The contracting disasters of the interstate natural gas industry undoubtedly contributed to these concerns. More recently, this interest was heightened by Section 712 of the Energy Policy Act of 1992, which required each state regulatory authority to conduct an inquiry into the potential for increases or decreases in the cost of capital and retail rates that may result from the purchases of long-term purchase power agreements. The Federal Energy Regulatory Commission has recently overturned actions by states that require power purchases in excess of avoided cost, increasing attention on proper measures of avoided cost. In any event, good management will require that utilities know their avoided costs when negotiating and renegotiating purchased power contracts. However, there is a problem in estimating the dollar effects of financial risk transfer that is inherent in purchased power contracts. To fill this void, this article suggests a simplified approach to taking purchased power risks into account in estimating avoided costs.
- OSTI ID:
- 535281
- Journal Information:
- Electricity Journal, Journal Name: Electricity Journal Journal Issue: 3 Vol. 10; ISSN ELEJE4; ISSN 1040-6190
- Country of Publication:
- United States
- Language:
- English
Similar Records
Making the grade: Credit ratings and purchased power
Financial impacts of nonutility power purchases on investor-owned electric utilities