Making the grade: Credit ratings and purchased power
The California Public Utilities Commission last November denied a request by the state's largest electric utilities to increase ratemaking equity ratios to account for alleged financial risk associated with significant levels of purchased power obligations. The decision provides an excellent framework to analyze the debate over treating purchased power obligations as debt equivalents. The California case involved an annual cost-of-capital proceeding in which Pacific Gas and Electric Co., joined by Southern California Edison Co. and San Diego Gas and Electric Co., pointed out that the major credit rating agencies viewed purchased power contracts as debt equivalents. That is, the financial ratios used by the credit rating agencies to gauge each utility's strength were adjusted for obligations that did not appear as debt on balance sheets, namely the boligation to make capacity payments under long-term purchased power agreements. The utilities asserted that unless the Commission acted to support the utilities through ratemaking adjustments, bond ratings would slip. The Commission acknowledged that the rating agencies treat purchased power agreements as debt equivalents, but said the utilities had failed to establish that bond ratings would go down without the requested relief. It described the equity ratio adjustments as premature, but advised that it would recognize an incremental increase in financial risk to investors because the rating agencies were doing the same thing. The Commission added it currently was investigating regulatory changes in two areas that, according to credit analysts, would lower risk for power purchase agreements: (1) transmission access for independent power producers (IPPs), and (2) current ratemaking mechanisms that favored the build over the buy option.
- OSTI ID:
- 6406438
- Journal Information:
- Public Utilities Fortnightly; (United States), Journal Name: Public Utilities Fortnightly; (United States) Vol. 131:4; ISSN PUFNAV; ISSN 0033-3808
- Country of Publication:
- United States
- Language:
- English
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