S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Electric Utility Ratingsits viability. A utility whose fixed obligations causerates to be above market levels is unlikely to beable to fully recover these costs in a competitiveenvironment, which will have negative implicationsfor both the utility’s business profile and rating.Transmission access is vital to a utility system’soperations, and credit and business risk. In determiningstrength in this area, Standard & Poor’s will lookat the number of interconnections with which theutility in question has access, the cost profiles andsupply and reserve characteristics of these other interconnectedutilities, and the price paid for wheeling ofpower. Importantly, Standard & Poor’s will evaluatethe extent to which these interconnections and potentialpower diversity arrangements provide a utilitywith enhanced operating and competitive flexibility.The Federal Energy Regulatory Commission (FERC)is authorized to impose market rules regarding transmissionoperations, and the impact on a utility assuch rules evolve will also be evaluated.Operating efficiency and operational strength aremeasured with reference to the cost of producing aunit of energy. Historical and projected trends inaverage and marginal production costs on anabsolute and relative basis are reviewed. A utility’sgenerating costs relative to industry averages willindicate the economics of its power supply and thepotential for stranded costs.The efficiency of a utility’s services and operationsis evaluated according to ratio analysis,including production cost per kWh, debt per kWhand debt per customer. A utility’s efforts at managingits load curve—and therefore its costs—throughdemand side and resource management programswill be viewed positively to the extent that they areeconomically reasonable and practically achievable.Some utilities with below average load factors maybe less able to control the associated inefficienciesand costs, but they also may be less susceptible tocompetitive forces.Favorable operational characteristics include:■ Diverse supply sources;■ Favorable fuel supply arrangements coupled withcost containment strategies;■ Widespread transmission access that does notdepend completely on a single entity to wheelpower;■ Production costs that are competitive and reflectreasonable operating and maintenance costs; and■ Manageable environmental or regulatoryexposures.Some public power entities are active in, orplanning to provide new services, such astelecommunications services, chilled water, andsteam, in addition to their core businesses inorder to diversify their revenue streams.Standard & Poor’s will evaluate whether or notsuch additional ventures, which can increasefinancial risk, will be detrimental to the utility’score business. Important components of suchanalysis are the relative share of operating expendituresattributable to, and the amount increasedleverage associated with such enterprises.Competitive PositionCompetitiveness is important to the retention ofnative load and the preservation of the revenuestream pledged to debt repayment, for both systemsoperating in open access environments or in thosethat are currently protected. Competitive positioningremains important, even for utilities in statesthat have yet to advance deregulation due to heightenedawareness of retail choice among even captiveelectricity customers.Overall system average rates, as well as rates ofa customer class, are at the center of Standard &Poor’s review of a utility’s relative competitiveposition. The analysis is extended to include anassessment of the rates that a utility charges specificloads and rates levied on its largest customersrelative to potential alternative suppliers.Standard & Poor’s explores each utility’s ratedesign, use of contract rates, and rate affordability.Affordability is measured relative to income levelsand usage patterns. The commitment of policymakers to provide equitable rates that reflect thecosts of providing service without subsidies is crucialin the changing environment. The presence ofautomatic power or fuel cost adjustments, whichlimit or avoid the political influence over timelyrate adjustments geared to recapturing fluctuatingcommodity costs, is viewed favorably.A discussion of rates also includes the issue of autility’s rate-setting process, whether regulated by athird party or through self-determination.Strong competitive positioncharacteristics include:■ A rate design that equitably apportions costsbetween and among system customers;■ Unit rates by customer classification that displaya competitive advantage;■ Projections of rates that will continue to display acompetitive advantage, preserve the revenuestream associated with native load, fund capitalexpenditures for system maintenance and growthand help attract new load;■ Ability to establish rates free from state regulatorybodies; and■ Flexibility to adjust rates quickly and frequentlyto match potentially volatile cost structures.www.standardandpoors.com123