Short Contracts, Debt Equivalence Perks Emerge in Utilities? Long-Term Plans

Utilities have marked their return to integrated resource planning by betting heavily on energy efficiency over the next ten years. Some of the other highlights of long-term resource-adequacy plans filed with the California Public Utilities Commission July 9 include Southern California Edison?s plan to severely limit the length of power-purchase agreements, Pacific Gas & Electric?s proposal to have half of its new supplies built by others but owned by the utility, and San Diego Gas & Electric?s strategy to make 20 percent of its portfolio green by 2007. Preparing for new supplies was suspended in favor of deregulation a decade ago when the market was expected to decide what new facilities were to be built. After the energy crisis intervened, leaving markets ill suited to fill the planning gaps, the Legislature returned that obligation to utilities. Several completely new and different issues are covered in these filings, issues that were never considered in the last round of long-terms plans circa 1985. New issues include the effect of direct-access customers leaving the system, along with utilities? requirement to provide supplies for customers who could participate in direct access; whether utilities should build their own new power plants or buy from outside developers; the potential creditworthiness impacts of contracting for outside generation; having new renewables account for one-fifth of utilities? energy portfolios; and the effects of global warming. One of the surprises in the filings is Edison?s claim that it will not sign long-term contracts. It proposes to sign only contracts with a duration of three years?at least initially. That undermines third-party generation, according to developers, because they cannot get project financing with only a three-year contract. ?Three to five years doesn?t cut it,? said Dan Douglass, Western Power Trading Forum attorney. ?One has to wonder whether the right incentives exist for new construction or whether the commission is being forceful enough in its direction to the utilities that long-term contracts should be pursued.? Edison did not respond to requests for comment. Fears of mass customer defection to direct access led utilities to demand nonbypassable fees in the filings. They want assurances that if they commit to new supplies, those resources are paid for by remaining bundled customers as well as those exiting utility systems. For instance, PG&E foresees 4,000 MW of direct-access accounts leaving its system by 2014?a chunk of load that would be supplied by at least four large power plants. Utilities are invoking their still-teetering creditworthiness status in order to get premiums for their potential risk of credit downgrades. They are asking regulators to preapprove new contracts and programs?thus alleviating potential risk to investors. In addition, the concept of taking on new contracts that result in ?debt equivalence? is addressed in the plans. Debt equivalence, a perception held by ratings agencies about utility investment, holds that long-term contracts with outside providers affect utilities? debt-to-equity ratios because outside pacts are not considered assets (as utilities? own power plants are). Edison proposes to contract only for three-year power purchases to avoid debt equivalence. San Diego Gas & Electric recommends adding 65 percent equity to the debt equivalence of contracts. PG&E proposes an offset by increasing common equity, which would increase revenue requirements. ?Unless the commission...compensates utilities for the increased risk of long-term contracts...procurement plans PG&E has developed will not result in an improving credit profile, and depending on the actual turn of events, could instead result in diminished credit quality,? said PG&E. More details of the utilities? plans include: Pacific Gas & Electric: The utility wants 50 percent of new generation through contracts and 50 percent through utility ownership of projects developed by others. New energy-efficiency programs would cost the utility $1 billion in the next decade. PG&E has no plans to accelerate green power procurement in advance of the state-mandated goal of a 20 percent renewables portfolio by 2017, but assumes that by 2010 the percentage will be met by renewables and repowering existing wind projects. Southern California Edison: Edison plans on having no long-term power-purchase agreements other than for renewables. The utility will not consider contracts for nonrenewables in excess of three years. Edison wants to spend $237 million a year on energy efficiency and expects to make its portfolio 20 percent renewable by 2007. San Diego Gas & Electric: SDG&E proposes that new plants to be competitively solicited with utility ownership are a ?viable? alternative. The utility plans to spend $118 million in the next two years on energy efficiency, already approved by regulators, then continue with the current level of funding. The company hopes to achieve a 20 percent green portfolio by 2010 and reach 24 percent by 2014. Along with demand response, efficiency, and new power plants, utilities? plans also call for increased transmission development. Currently, the southern part of the state is facing the most severe transmission problems, with new supplies available across the Mexican border and the Southwest but little capacity to import the energy to customers in urban areas. SDG&E proposes additional major transmission projects by 2010, a 500 kV line connecting to the Imperial Valley substation and another 500 kV line connecting to the Lake Elsinor Municipal Water District. Edison plans on two 500 kV projects that would increase access to supplies across state and international borders by 1,700 MW?the Devers?Palo Verde No. 2 line and the East-of-River capacitor upgrades. Edison is also identifying upgrades required to bring in wind resources from the Tehachapis. PG&E, which is not facing such dire constraints except for the San Francisco area, plans to investigate additional capacity from the Pacific Northwest. The company said it would also look into lines from the northeastern portion of Edison?s territory for potential wind and solar imports. The comprehensive plans will be vetted by a collaboration between CPUC and California Energy Commission staff. In a related ruling July 8, administrative law judge Mark Wetzell invoked the April policy suggestion letter from Governor Arnold Schwarzenegger in which the governor suggested a more rapid phase-in of the commission?s plans for new supplies. Wetzell asked for comments on accelerating implementation from 2008 to 2006 (R04-04-043) .

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Short Contracts, Debt Equivalence Perks Emerge in Utilities? Long-Term Plans

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