NIPPC Board Meeting December 9, Meg Meal 120 Jersey Street San Francisco, CA Ph

Transcription

1 NIPPC Board Meeting December 9, 2008 Meg Meal 120 Jersey Street San Francisco, CA Ph

2 PPA debt equivalence what is it? Recent developments California Colorado Status in the Pacific Northwest Looking ahead 1

3 A measure of one of several utility procurement risks A PPA represents a long term financial obligation the utility is obligated to pay for power delivered Rating agency concern: will the PPA payment obligation mean less cash available to make payments to bond holders? Depends on: First and foremost: Cost recovery assurances from regulators Cost of power over the long term; likely rate impacts Assurances provided by the procurement process itself In some circumstances, rating agencies adjust credit ratios for PPA debt equivalence or imputed debt Not a new development rating agencies started these methodologies in the early 1990s 2

4 Shareholder, stricken by an excess of debt-like purchases. From The Electricity Journal, Vol. 6, No. 7, August/September

5 S&P Assigns imputed debt to a PPA portfolio using a formula Includes imputed debt amounts in its reports Moody s and Fitch s methodologies allow for imputed debt in specific circumstances Moody s: Regulatory assurances (rate adjustment mechanisms) can and do result in no imputed debt (RF=0%) Fitch: PPA cost relative to market is important consideration All three: other utility procurement risks are assessed qualitatively, recognizing that PPAs fill a procurement need CA and CO examples: S&P imputes debt (25% risk factor) Moody s and Fitch do not assign any imputed debt 4

6 Imputed Debt = NPV of PPA fixed pmts x Risk Factor Risk Factor based on assessment of likelihood of recovery of PPA costs in rates 25% with purchase power adjustment mechanism Could/might be lower with legislative support So far, no clear template for legislation that has resulted in a risk factor of <25% Could/might be higher without automatic true ups Spring 2007 revisions energy only contracts to be assigned a capacity component Implementation has not been transparent so far Imputed debt result is used to adjust credit ratios 5

7 S&P s formula has larger impact for Utilities with higher risk factors Utilities with greater reliance on PPAs Utilities with lower credit ratings (greater risk of below investment grade ratings) PPAs with longer terms PPAs with higher capacity payments relative to total costs Example: 20 year PPA, 25% Risk Factor: Cost to rebalance = ~13% of PPA capacity payment 6

8 Risk for Utility Bondholders Allocation of Utility Procurement Risks, PPA vs. UOG PPA Options Utility Owned Options Highest risk exposure Development risks Utility Construction risks Utility Operating risks Utility Technology risks Utility Supplier concentration risks Utility Capital market risks Utility Commodity price risks PPA financial risk as measured by imputed debt BUT substantially overstated if measured using S&P s formula; minimized with regulatory assurances regarding cost recovery Generally equal for the same technology OVERALL UTILITY PPA 7

9 PPA debt equivalence does or will necessarily increase the utility s cost of capital As a result, a penalty or adder should be imposed on PPA bids For comparison against each other (PPA v. PPA) and vs. UOG bids The penalty should be based on the S&P Formula In some cases, PPA debt equivalence concerns (and claims of potential ratings downgrades) are used as a rationale for PPA limits or prohibiting PPA bids entirely Claim PPAs limit the utility s ability to sufficiently grow earnings Claim credit support provided by PPA for seller s financing as evidence of PPA financial risk borne by utility 8

10 Other procurement risks are largely ignored, particularly the risks of embarking on large construction programs Extent of transmission and distribution construction spending is often ignored Increases pressures of additional construction spending on generation Provides opportunities for rate base growth Other unrelated pressures on credit ratings are often ignored Mergers, affiliate activities, rate case and other proceedings Credit rating process is overly simplified, relying on credit ratios S&P is over weighted vs. Moody s and Fitch Bias built in to return on rate base ratemaking is not addressed Arguments are often utility specific 9

11 Much more to PPA impacts on utility risk profile and cost of capital than imputed debt alone PPAs allow several procurement risks to be allocated away from the utility and away from ratepayer More complete explanation of the credit rating process Utility specific analyses quantitative and quantitative As a result, proposed adders using S&P formula unfairly penalize PPAs Further, the utility will be compensated for PPA impacts on cost of capital (positive or negative) in cost of capital proceedings 10

12 Recent decisions in CA and CO IRP proceedings rejected several of the utilities debt equivalence arguments Many similarities across the four IOUs involved: Significant use of PPAs while all four have strong credit ratings S&P imputes debt, Fitch and Moody s do not Each of the utilities proposed to impose DE adders on PPA bids based on S&P s formula The good news: CaPUC and CoPUC both limited or prohibited the use of DE adders Driven by recognition of risk profile differences between UOG and PPAs for the utility and ratepayers Commissions found it unfair to impose risk score for PPA DE and no similar risk score for the risks of UOG 11

13 Initial Decision (Dec. 2007) eliminated the use of DE adders for PPAs in bid evaluations Previously had allowed DE adders using a reduced risk factor Decision on petitions for modification (Nov. 2008) affirmed no DE adders for PPA vs. UOG But allows DE adders for PPA vs. PPA evaluations The actual impact of any DE adders that are applied to PPA bids will likely remain confidential Utilities can raise DE concerns for consideration in cost of capital proceedings 12

14 In allowing DE adders for PPA vs. PPA: appropriate to consider DE in cases in which the bids are sufficiently similar that a comparison of relative DE effects would not in turn suggest the need to consider other, potentially countervailing riskrelated effects of selecting one bid over another. ensure that in head to head competition, the use of the DE adder does not disadvantage bids for renewable and innovative low carbon resources that may have higher capital costs than traditional gas fired generation In rejecting DE adders for PPA vs. UOG: As pointed out by IEP there are a number of both risk creating and risk mitigating effects associated with an IOU signing a PPA rather than building UOG [followed by an S&P list of PPA benefits and risks] The complexity of the risk related pros and cons associated with PPA versus UOG ownership suggests that it would be inappropriate to single out one specific risk related effect [DE] when comparing PPA and UOG bids. 13

15 PSCo proposed prohibitions on PPA bids due to debt equivalence and capital lease concerns these restrictions were rejected PSCo s proposed imputed debt adders for PPA bids were rejected; No imputed debt adders are allowed in evaluation of PPA bids Confirms CoPUC practice to address PPA impacts on cost of capital in cost of capital proceedings 14

16 We do not agree that imputed debt impacts significantly alter utility finances, and do not warrant a guaranteed ownership percentage. We agree with CIEA and CEC that IPP ownership significantly reduces risk to ratepayers. The rationale for examining a financial issue such as imputed debt in a revenue requirement/ratemaking proceeding is that all the moving parts of the issue will be examined at the same time By this decision, we endeavor to foster a robust competitive bidding environment. We question whether an imputed debt adder placed on PPA bid evaluations will detract from other benefits of having a competitive supply market. 15

17 Issuer Ratings/ Outlooks Moody s S&P Fitch S&P Rank July 2008 PacifiCorp Baa1/Stable A /Watch Neg BBB/Stable 44/183 Portland General Baa2/Positive BBB+/Stable n/r 71/183 Idaho Power Baa1/Negative BBB/Stable BBB/Negative 119/183 Avista Baa3/Stable BBB /Stable BB+/Positive 157/183 Puget Sound Energy Baa3/Stable BBB /Watch Neg n/r 166/183 Much more here than PPA imputed debt: recent/pending mergers and rate cases, extent of construction spending plans, regulatory mechanisms for cost recovery 16

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19 Oregon/Utah No bid adders for DE until after short list is selected Can apply DE adder in final selection Subject to IE review Commissions can require an advisory opinion PGE 2008 RFP April 2008 has selected initial short list; IE report to OPUC is pending (?) PacifiCorp 2008 RFPs issued Oct 2008; responses due Dec 2008; short list/ie reports in 2009 Remains to be seen how IOUs will apply DE, whether rankings will change, or if results will be transparent 18

20 Washington Financial impacts can be considered Puget 2008 RFP included a PPA imputed debt adder Implementation and impact on selection is not transparent Puget results: Wind PPAs and gas acquisitions Puget and Avista ratings are pressured by other factors Idaho Rating agencies have cited concerns about cost recovery mechanism for PPAs revisions pending Also: Multi state issues fixing one state may not help RPS requirements; renewables cost concerns 19

21 Addresses the underlying issue earnings growth requires rate base (ownership) growth Creates a utility bias to own rather than purchase UM 1276 attempt to develop a performancebased mechanism to offset this bias What level of incentive is appropriate? Should incentive be added to the cost of PPA bids? Docket closed in 2008 with no decision rendered 20

22 Two methods to address potential cost of capital impacts: Cost of capital proceedings Adders for PPA bids Findings State policies regarding debt equivalency vary substantially and continue to evolve both in terms of how to account for potential inferred financial impacts and the quantitative measure of such impacts..caution against assessment of debt equivalency, or any risk factor, outside of a comprehensive evaluation that accounts for all of the various risks posed by alternative utility obligations and commitments. evaluations should aim to capture differences in the financial risks associated with different types of proposed agreements (e.g., PPAs and self build proposals) 21

23 Accounting rules Capital lease treatment FIN 46 / VIE treatment Credit and collateral Bottom line: How do the terms of the PPA allocate risks? 22

24 PPA debt equivalence is easily isolated and taken out of context The overall impact of a PPA as a means to meet resource requirements requires an assessment of numerous factors, of which potential debt equivalence is only one Whether a PPA will affect a utility s cost of capital cannot be answered with a formula, and is utility, regulatory jurisdiction, and PPA specific The utility can be made whole in cost of capital proceedings As long as a utility needs to grow rate base in order to grow earnings, this debate is likely to continue Next steps in the Pacific Northwest 23