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Enron Mail |
Read last quote from Steve Fetter.
---------------------- Forwarded by Richard Shapiro/NA/Enron on 12/13/2000 09:10 AM --------------------------- "Dick S George" <dsgeorge@firstworld.net< on 12/13/2000 09:06:18 AM To: "DS George" <dsgeorge@firstworld.net< cc: Subject: WSJ:Utility Credit Squeeze. CC list suppressed... December 13, 2000 Energy Price Volatility May Hurt Utilities' Credit By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL Recent volatility in wholesale energy markets is undermining the credit ratings and may eventually crimp the borrowing ability of some of the nation's biggest utilities, long regarded in the credit markets as some of the safest bets around. It is the worst out West, where the price of power to be delivered Wednesday hit a new high of $1,182 per megawatt hour on California's state-sanctioned auction, a benchmark for the entire region. That compares with $30 a year ago. But even utilities in the East, such as GPU Inc. of Parsippany, N.J., and Consolidated Edison of New York, also are at risk because they are paying higher prices than ever for spot-market electricity purchases and aren't always able to pass along that cost to their customers. As an indication of just how bad things are getting, Moody's Investors Service Tuesday put Seattle City Light on "negative outlook," even though it is one of the lowest-cost generators in the nation. There hasn't been much rain in the Northwest this year and the city-owned utility has been forced to go to the wholesale market this month to buy 100 to 200 megawatts of electricity each day. That isn't much energy, but with prices that have gone as high as $1,000 per megawatt hour this week, compared with the $24 per megawatt hour that the municipal utility pays for power from the federal hydroelectric system, costs add up fast. The utility, which issued $100 million in bonds this week, is raising rates 10%, effective Jan. 1, and will keep the rate increase in effect as long as it takes to dig its way out. "Prices are at absurd levels," says Seattle City Light Superintendent Gary Zarker. "I know others are looking at significant rate increases too." Credit-rating agencies say they are going through their utility portfolios and separating those with exposure to wholesale markets from those that have enough in-house generation to meet customer demand. Then they are trying to figure out which of the ones that are forced to buy on the spot market will be allowed to pass on higher costs and which ones won't. "You have the makings of a credit crunch when utilities are required to buy power but aren't allowed to pass the cost through," says Steven Fetter, managing director of the global power unit at Fitch, the New York credit-rating agency. That is exactly the position California's biggest investor-owned utilities are in. Southern California Edison Co., a unit of Edison International, and Pacific Gas and Electric Co., a unit of PG&E Corp., have incurred deficits in excess of $7 billion buying power on the open market since June and were forced to pay higher rates and offer unprecedented guarantees to investors when they last issued bonds. While they are still making money from the power plants they own, it is nowhere near enough to make up for the shortfall. Credit ratings of both utilities were lowered this week. Blown the Lid Off There is no cost relief in sight. California's grid operator last week lifted a price cap for power it buys each hour to keep supply matched with demand. That helped reliability because more generators came forward and offered energy through an orderly market, instead of waiting for harried engineers to call them at the last minute trying to strike a deal. But it has really blown the lid off prices in the West. The average cost of power sold in the day-ahead market jumped from $250 a megawatt hour last week to $611 on Monday, $904 Tuesday and to $1,182 for power to be delivered Wednesday. This has a huge impact because it applies to roughly two-thirds of the power consumed in the state and influences prices elsewhere. The situation differs markedly from Eastern markets where only a small proportion of the power consumed comes out of a daily spot market because most utilities have long-term power-purchase contracts that supply most of their needs. Some of the utilities in the Northwest being slammed by high prices will be in the position of selling power back in May or June, provided there is enough spring-thaw runoff to give them surplus hydropower. Financial Pain But utility managers worry it won't be enough to cancel out the financial pain they are currently suffering. Distribution utilities that deliver the power that others generate were regarded as the safest part of the utility business only a few months ago. Wall Street assigned them the lowest valuations because they face regulated rates of return. "Sadly, we now see they chose the part of the business with a lower upside potential and higher risk," Mr. Fetter, of Fitch, says. Write to Rebecca Smith at rebecca.smith@wsj.com
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