Jury Out on SDG&E?s Otay Mesa Financing

The California Public Utilities Commission is expected to vote May 6 on two competing plans that would approve San Diego Gas & Electric?s proposal to buy output from the 485 MW Otay Mesa plant?one of which would approve SDG&E?s unusual financing approach, known as ?equity adjustment? or debt equivalency. Administrative law judge Carol Brown?s proposed decision would deny the utility?s financing plans, instead deferring them to an ?appropriate cost-of-capital proceeding.? CPUC president Michael Peevey?s alternate plan would approve them. The scheme is meant to protect the utility?s credit profile by offsetting debt from the long-term contract with Calpine?the owner of the plant that would send SDG&E its capacity for 10 years?by increasing the rate of return on the deal. The commission considered and rejected a debt equivalency proposal similar to SDG&E?s in 1993 (see Circuit , March 26, 2004). Peevey asserted that SDG&E?s financing proposal would ?mitigate the negative credit impact? caused by debt equivalency from the Otay Mesa power purchase. But Standard & Poor?s is not yet convinced. While adding cash flow is beneficial, S&P ?needs to look at the numbers? before gauging whether SDG&E?s rating would go up or down, according to Swami Venkataraman, analyst for the firm. Venkataraman said S&P introduced the debt equivalency mechanism in the 1980s. The concept is aimed at putting utilities that bought power or built power plants on equal footing by adding debt to the balance sheets of utilities that signed long-term contracts. Contract costs between SDG&E and Calpine for Otay Mesa break out to $9.75/kW-month for capacity payments and $2/MWh for variable operation and maintenance payments, according to Kent Robertson, Calpine spokesperson. The partially built plant is expected to go on line by 2008. SDG&E parent company Sempra?s 555 MW Palomar plant is also part of the package of five proposals up for the CPUC vote.

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Jury Out on SDG&E?s Otay Mesa Financing

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