WSJ reports that energy price volatility may harm utility credit ratings

12/14/2000 According to a report in yesterday’s Wall Street Journal, nascent volatility in wholesale energy markets is undermining the credit ratings and may eventually crimp the borrowing ability of some of the nation's largest power companies. The situation is most severe in the Western U.S, 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, which compares with $30 a year ago said the Journal.

However, the WSJ added that even utilities in the East, like GPU and ConEd 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. Moody's Investors Service this week put Seattle City Light on "negative outlook," even though it is one of the lowest-cost generators in the U.S. The lack of rain in the Northwest this year had the city-owned going to the wholesale market this month to buy 100 to 200 megawatts of electricity each day. With prices that have gone as high as $1,000 per megawatt hour this week the company has been hard hit. The WSJ reports that 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," according to Seattle City Light Superintendent Gary Zarker. "I know others are looking at significant rate increases too."

Credit-rating agencies contend that 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 determine which of the companies that are forced to buy on the spot market will be allowed to pass on higher costs says the WSJ.

"You have the makings of a credit crunch when utilities are required to buy power but aren't allowed to pass the cost through," claims Steven Fetter, managing director of the global power unit at Fitch.

This year SCE and PGE have already accumulated deficits of over $7 billion buying power on the open market. Further, the companies had to pay higher rates and offer unprecedented guarantees to investors when they last issued bonds. According to the WSJ, both companies are still making money from the power plants they own, but it is not sufficient to make up for the losses. Credit for both SCE and PGE were lowered this week.

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-- Martin Thompson (mthom1927@aol.com), December 14, 2000