New Power Plant Accounting Plans Seek to Please Financiers

The quest for stability in the eyes of financial institutions is leading to several unusual ratemaking concepts. For San Diego Gas & Electric, it?s dusting off an old ?equity adjustment? strategy. For private generators, it?s the idea of getting their power contracts counted as a utility ?asset.? Generators are also looking into ways around the ?liability? of long-term contracts with utilities as they are faced with a can?t-live-with-them, can?t live-without-them deal. All these are aimed at keeping credit-rating agencies satisfied and financial institutions secure?and easing power plant financing. SDG&E?s proposal to buy the output from the Otay Mesa project for 10 years is conditioned on the premise that the utility will be allowed to increase its return on equity to placate credit-rating agencies. The California Public Utilities Commission is expected to issue a proposed decision on this new ratemaking any day now, and the matter could be voted on next month. Because this is not an SDG&E project?the utility will be buying the output from developer Calpine?the supply would be tied up in a long-term power contract. Such contracts count as debt on the books. To keep its debt-to equity ratio balanced to credit-rating agencies? liking, SDG&E hopes to get approval for an ?equity adjustment,? also known as debt equivalency. The adjustment would offset the power-purchase agreement debt by increasing the rate of return on the deal, said Lee Schavrien, SDG&E vice president of regulatory affairs. The proposal, if approved by the CPUC, would benefit ratepayers because it would avoid a lower credit rating on issued debt that would come with higher costs, he added. ?This is a gilded lily that is completely unjustified,? countered Bill Marcus, a principal with JBS Energy. The ?equity adjustment? concept has been around for more than 10 years and continues to be pushed by credit-rating agencies ?to make the world safer at all costs for bondholders,? he added. Boosting the amount of utility equity to achieve a slightly better rating is not cost-effective, Marcus added, because it comes with higher taxes. Matt Freedman, an attorney with The Utility Reform Network, said SDG&E?s complicated debt-equivalency proposal entails setting aside some additional equity pursuant to a formula developed by Standard & Poor?s?specifics of which were not released. Freedman, who has been on the committee reviewing closed-door deals between utilities and generators, said the proposal before the CPUC involves ?highly controversial ratemaking which will slow things down.? This includes SDG&E?s plan to buy the Palomar project outright in exchange for a premium on its return on equity. Also, Marcus said that the utility is attempting to collect its construction costs on the plant ahead of time to build up its equity?in violation of a long-standing principle, ?the used and useful? rule. That rule allows utilities? power plant costs to be included in rates only when they are on line. However, in the past, there has been some ?allowance for funds used during construction? to be passed on in rates. Schavrien pointed out that unlike Southern California Edison?s deal to buy the Mountainview power project, the Palomar facility deal, if approved, would remain under CPUC jurisdiction. The CPUC reviewed and rejected a debt equivalency similar to SDG&E?s current proposal in1993. Ideas for getting debt off the utility books are being kicked around in and outside CPUC proceedings. One notion being floated involves categorizing power contracts between investor-owned utilities and generators as a ?regulatory asset??along the lines of the $2.2 billion phantom asset created in the approved Pacific Gas & Electric bankruptcy reorganization plan. This asset, however real, would still not be built and operated by a regulated utility. The cost of a regulatory asset, be it a paper asset or a long-term power deal, would be off the balance sheet, so investor-owned utilities? debt-to-equity ratio would not be affected. CPUC member Geoffrey Brown said rating agencies have expressed concerns about utility credit ratings but added that any accounting measures along these lines ?must be looked at very carefully.? The attraction of such an arrangement for developers is that financial institutions would see that private developers have a guaranteed rate of return for a number of years, thus easing financing for new construction. The political drawback is that ratepayers would be on the hook for a power plant that is owned by a developer and not a regulated utility. In the more standard concept of a utility contracting out for power, as SDG&E wants to do with Otay Mesa, developers are faced with a dilemma?they say they need the long-term contracts with utilities for financial stability, but are squeezed economically by those same needs. The hit from long-term contracts? liability ?is a pervasive problem,? said Gary Ackerman, Western Power Trading Forum executive director. Utilities receive a rate of return when they build their own power plants, so they will enter into power agreements with generators only if that is cheaper. ?What stands between us and the customers are the investor-owned utility?s shareholders,? Ackerman said. ?The reality is that ratepayers are frozen out of the debate.? WPTF will be putting together a roundtable to discuss ?innovative debt equivalency? strategies in the near future, Ackerman said.

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New Power Plant Accounting Plans Seek to Please Financiers

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