Utilities Urge Shareholder Protection in CPUC?s Procurement Decision

By Published On: December 10, 2004

Utility shareholders must be protected from liability for cost overruns and stranded assets, utilities responded December 6 to a California Public Utilities Commission proposed decision adopting long-term resource plans. The three investor-owned utilities also urged that the credit risk factor known as debt equivalence be tripled, and that contract terms run longer than 10 years. Also, Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric were not enthusiastic about putting green power ahead of traditional sources of energy. At stake is the future of new power supplies needed to meet rising demand. Now that utilities are back in the black after the energy crisis, they want to build new power plants–much as in the old vertical power business days before deregulation. Competitors that entered under deregulation claim they can develop new supplies for less, but are hampered by their inability to finance projects. Also in the balance is the color of new power portfolios–that is, whether the amount of green power should be artificially supported by the state (Circuit, Nov. 19, 2004). Shareholder responsibility/stranded costs–PG&E notes that if cost overruns are assigned to shareholders, as administrative law judge Carole Brown’s proposed decision would require, and if utilities take the risk of stranded assets, it could “take the IOUs out of the generation owner business altogether because of the ‘no-upside; large-downside’ ratemaking structure.” PG&E maintains that the decision’s enforcement could ?blithely eviscerate” cost-of-service ratemaking. While recognizing that utilities are the ones capable of financing new projects, PG&E said that the treatment of cost overruns could make obtaining investment capital difficult. PG&E proposes regulatory prudence review of cost overruns. While Edison opposes requiring new utility projects to have to bid against contracts with third-party producers, the utility adds that if it did bid against independent generators for building new plants, it would have to bid extra to cover potential cost overruns?and thus bidding would trump true cost-of-service, according to Edison. Placing shareholders at risk “goes too far” and “should be eliminated,” according to San Diego Gas & Electric. Debt equivalence–The choice of a 10 percent debt equivalence factor proposed by the decision would skew a portfolio in favor of non-utility supplies, according to PG&E. Edison and SDG&E argue that a 30 percent adjustment is necessary to counter negative impacts to utilities? credit ratings from contracting with third-party power producers. A lower risk factor “will not reflect the actual impact of debt equivalence as evaluated by Standard & Poor’s,” SDG&E notes. Contract term–PG&E opposes a 10-year contract term because it could lead to stranded costs and/or higher costs to ratepayers due to short amortization periods. Edison agrees that cost recovery should last for the entirety of the project commitment, and not for only a decade. PG&E argues against regulatory pre-approval for three-year contracts. Edison agrees, maintaining that all contracts of five years or less need no pre-approval. Otherwise, Edison claims, utilities’ portfolios will be filled with very short-term contracts, leading them to spend inordinate time on re-contracting. Affiliate ban–Edison wants the ban on allowing affiliate businesses to bid for new power plant development lifted–not just the proposed lift of the ban for long-term transactions as proposed. PG&E agrees. Green power–While the proposed decision would require utilities to procure renewable power sources to the “fullest extent possible,” PG&E favors replacing the requirement with a “maximum feasible” level that has benefits for ratepayers. Both PG&E and SDG&E advocate a “least-cost, best-fit” approach that could favor fossil plants under certain circumstances. The decision goes before the commission December 16.

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