Third-party generators are increasingly concerned that utilities will eclipse their ability to offer competitive generation because of new utility projects and financing disparities. They point to the recent approval of Southern California Edison?s Mountainview power plant as well as San Diego Gas & Electric?s Palomar and Otay Mesa proposals pending at the California Public Utilities Commission?as well as AB 2006 pushing through the Legislature. Also working against them is that utilities have no trouble ?financing? new power plants because regulators promise ratepayer backing for investments. With utilities in the catbird seat for building new power plants, investors? risk in financing private power plants is stymieing large fossil-fuel plant building by private developers. ?If everything goes right? for a banker lending to a third-party builder, ?they can make 7 percent to 8 percent. If it goes wrong, they can lose hundreds of millions,? said Jeff Bodington of Bodington & Co., a firm that puts together deals for developers. Still, some think the market will balance out the competition between utilities and private generators for new power plants. ?There?s not enough capital for utilities to build out to a total cost of service as before,? said CPUC member Geoffrey Brown. He believes there will be mix of regulated and privately owned new power plants. In the early days of deregulation, generators were thrilled by market prospects while utilities were forced out of the market. Several years later the tables have turned?investor-owned utilities are reestablishing their hold on vertical integration. Utilities have been getting quite a boost from lawmakers. A return to utility cost-of-service generation, embodied in AB 2006, is currently winding its way through the Legislature. This would solidify utilities? recent moves back into the power plant business?the business third-party generators thought was theirs after deregulation. Generators find no small number of flaws in utilities? return to the power plant business. ?Utilities have an inherent conflict between shareholder and ratepayer interests,? maintained Steve Schleimer, Calpine regulatory affairs director. ?There?s a misalignment of incentives? that cut out competitive prices from third-party generators, he said. Utilities, such as Southern California Edison, say they support third-party power production. ?Only 25 percent of the capacity needed? for its customers would be built by Edison, according to its long-term procurement plan, spokesperson Marion Walker said. However, the recent arrangement for an affiliate to build the Mountainview power plant for Edison would escape that plan. In order to get capital to build new plants, third-party developers have to have long-term contracts with utilities for power output. They can no longer rely on gambling in the spot market. Having a contract reduces investment risk, as there is a guaranteed payment stream. Private developers have 1,806 MW of new plants in California under construction. Another 6,123 MW are in late development stages with major regulatory approvals issued, according to Bodington. Generators say there?s plenty of supplies in the wings at competitive prices if they could get commitments from utilities for long-term contracts to appease financiers. ?Within the next 10 years, we won?t get lenders to loan until the market risk is taken away with power sales and fuel supply contracts,? Bodington said. ?It?s going back to the PURPA model when utilities and ratepayers took a lot of risks associated with power costs and with fuel costs.? PURPA, the Public Utility Regulatory Policies Act, loosened up the market to allow outside generators to contract with utilities. While a small amount of energy found its way into utilities? portfolios, for the most part, utilities fought vigorously and successfully to keep third-party producers out. With utilities back in the power plant business, they?re showing scant interest in bequeathing contracts to third parties because a utility or its affiliates can make returns on investments instead of profits going to private generators. Edison?s Mountainview, for instance, was bought from a third-party generator at an undisclosed price and is being completed by a new Edison affiliate. That affiliate in turn has a contract with the utility?a no-risk situation. Sempra Energy Resources, a subsidiary of Sempra, of which SDG&E is also a subsidiary, developed the Palomar plant. SDG&E wants to buy Palomar from the subsidiary, negating any financial risks for its sister company. PG&E, the last utility to consider building its own generation, signaled in its recent shareholder meeting that it is interested in getting back into the power plant building business. There is informal discussion among regulators and generators about requiring utilities to contract for power with third parties. ?There are problems associated with that,? noted commissioner Brown. The concern is that the contract would create a ?debt equivalency? that could bring down utilities? credit ratings, thus boosting the cost of money they have to borrow ?not to mention the CPUC?s promise in PG&E?s bankruptcy to keep the utility creditworthy. A contract could be considered a liability instead of an asset, making the balance sheet weaker. When a utility builds a plant it is an ?asset? (see <i>Circuit<\/i>, March 26, 2004). Although debt equivalency is a concern, a utility contract with generators is not always considered ?debt? by analysts. There is no black-and-white formula for adjusting credit ratings in light of such contracts. ?We don?t start with the presumption that a power-purchase agreement is debt,? said Ellen Lapson, Fitch analyst. That agency takes into consideration the pass-through mechanism for paying off the contract as well as whether the cost of the contract is above, at, or below market prices. ?The PUC?s got to come up with a way of dealing with that problem?to the extent it exists,? Calpine?s Schleimer said. ?Standard & Poor?s does it one way; Moody?s and Fitch do it another way. We all need to understand it better.? Generators are trying to figure out how to structure contracts so they make utilities ?indifferent? about whether they own their own long-term generation facilities or contract with privately owned power plants, according to Gary Ackerman, director of the Western Power Trading Forum. ?A great deal of this will be decided politically, not economically,? Brown warned. ?There?s tremendous amounts of political money? trying to influence the ?future of independent energy producers versus utilities.?