You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
A new report by Moody's Investors Service, Northeast Break-Even Analysis, finds that wide variations in the cost structures of investor-owned, municipal, and state electric utilities in the Northeastern United States will disadvantage the majority under deregulation in relation to their peers in contiguous regions. If full competition is introduced, Moody's concludes that the credit quality of Northeastern utilities with above-average costs would likely deteriorate because some investments are unrecoverable from ratepayers. Moody's estimates $43 billion in stranded costs in this region alone (em about one-quarter of all U.S. stranded costs.
Moody's defines the Northeast competitive arena as all major rated utilities within two transmission interconnects of Consolidated Edison Co. of New York. This area includes 25 investor-owned utilities in 9 states as well as 2 public power and 2 Canadian utilities. These entities represent over $153 billion in
combined assets, $29.7 billion in combined equity, and over $48 billion in annual revenues.
Moody's notes that most of these utilities have the highest "break-even" prices in the nation. (Moody's defines "break-even" as the price a utility must charge for each unit of capacity to cover its fixed charges after applying all profits or margins from its energy sales. The residual analysis Moody's uses in generating its cost model magnifies differences in relative cost position, enabling meaningful comparisons among utilities.)
Based on average price assumptions, Moody's found that only Hydro-Québec would be able to cover all fixed costs and earn a profit through energy sales alone. Hydro-Québec and the New York Power Authority fell at the low end of the scale, with negative break-even prices, reflecting much hydro generation. The high end of the price scale includes United Illuminating, Long Island Lighting Co., and Massachusetts Municipal Wholesale Electric Co-op. Moody's expects downgrades to continue for utilities in the Northeast, due to negative transition-cost decisions and definitive moves toward open access. (em LB
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