[BETA] Fortnightly

Each assumes a vertical breakup, but watch out for securitization.

It can prove difficult to detect any overt difference of opinion among financial credit rating agencies. That appears to be the case in today's electric utility industry, where Moody's, Duff & Phelps, and Standard & Poor's each predicts that a breakup of the vertically integrated utility is now virtually inevitable. The result, they say, will leave us with an industry made up of disaggregated high-risk power generators, and lower-risk companies engaged in transmission, distribution, and other related services.

Surprisingly, each firm also appears to agree that disaggregation by itself should not make any real difference in credit evaluation. Instead, disaggregation simply unbundles all of the risk factors and financial attributes that were already present (though hidden) within the consolidated credit rating of the vertically integrated utility. As a sculptor merely unearths the figure that already lies buried within the stone, disggregation only illuminates the strengths and weaknesses always inherent in each of the traditional utility functions: generation, transmission, and distribution.

Nevertheless, the rating agencies expect to see the industry credit profile become more diverse and unpredictable. In fact, their comments can reveal subtle differences, especially in the area of stranded investment, and the presumed effects of the various cost recovery and "securitization" schemes now under consideration.

Disaggregation:

Revealing What's Already There

Moody's Investors Service (Moody's) anticipates that the vertically integrated electric utility industry will evolve into a partially regulated energy and communications business, allowing a few low-cost, market-oriented companies to thrive. "These companies are likely to see their ratings improve and the gap between their ratings and those of their competitively weaker counterparts widen through the balance of the century," says Moody's Managing Director Susan Abbott.

These participants also will increase their numbers, expand their geographic influence, and increase the diversity of their credit profiles, according to Moody's.

"Until the transition to the new electric utility industry is complete, event risk will continue to be a factor, and ratings will remain volatile as individual companies reinvent themselves," says Abbott.

At Duff and Phelps Credit Rating Co. (D&P), Group Vice President Catherine E. Drake takes a somewhat more pragmatic view, seeing credit quality as hinging on the level of expected cash flows available to pay fixed obligations (em both principle and interest. Competition, says D&P, will contribute to cash-flow volatility, producing real declines in some cases.

Meanwhile, Standard & Poor's (S&P) is busy developing criteria for rating the discrete business functions of utilities, but is finding the process complicated by uncertainties, such as magnitude and time period for stranded investment recovery, potential federal legislation, and state rulings. S&P's Curtis Moulton says the company hopes to have the process completed sometime in February.

(S&P's first attempt to apply a new set of criteria to a disaggregated utility came when it recently assigned ratings to the restructured cooperative, Oglethorpe Power Corp., which had set its disaggregation date for January 1, 1997.)

Generation. In a fully competitive market, a largely unregulated generating company will exhibit the characteristics of a pure-play power marketer, says D&P.

S&P sees