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Credit Rating Firms Savor Restructuring, Search for a New Formula

Fortnightly Magazine - February 1 1997

dedicated to the recovery of specified stranded costs or assets?

D&P examines the legislation that allows the tariff, and the true-up mechanisms that adjust the tariff. It looks for two conditions: 1) certainty that the tariff is legally enforceable (and will recover the requisite costs regardless of shifting demographics or usage patterns), and 2) assurance that the obligation to pay stranded costs, if sold to a trust, will be judged a "true sale." %n4%n

Although the rating of the issuing utility does not directly affect the rating of the securitization, D&P will consider the rating to assess commingling of risk, because the payment of the tariff is generally included with the payment of the monthly electric bill.

Metros believes the New York securitization proposal also could "enhance overall credit quality." On December 30, however, Moody's released a report stating that California's plan for recovery of about $21 billion in potential stranded assets was not exportable to most other states. %n5%n The reasoning was that in California the three major investor-owned utilities have similar risk profiles, and their stranded cost exposures originate largely in high-cost, state-mandated purchased power contracts.

Moody's explained that as those contracts start to expire in 1997 and 1998, the California companies will be able to apply the difference between new, lower power costs and rates that have been frozen just below present levels to pay down a substantial portion of above-market fixed obligations. But in other parts of the country, says Moody's, generating costs are not likely to decline, so there would be no excess cash flows available to pay down stranded investments. t

Lori A. Burkhart is an associate legal editor of PUBLIC UTILITIES FORTNIGHTLY.

Cities and Counties

An Unwelcome Tax Cut

George Leung, Moody's Managing Director for State Ratings, sees electric utility deregulation as placing additional fiscal stress on local city and county governments, especially in California, where tax assessments on utility property will fall after 1999, with the allowance of accelerated depreciation on uneconomic power plants.

Nuclear Power

More Bad News

The investor-owned electric utilities most vulnerable to ratings pressure are those "for which nuclear investments represent a significant portion of the asset base and that are suffering form poor operating performance, with attendant repair and replacement power costs, earnings penalties, and the threat of early retirement," according to Moody's Vice President Mo Ying W. Seto, and Senior Analyst Kevin G. Rose.*

"The cash costs tied to nuclear power production remain high and may not be recoverable in the rates dictated by an open market."

Seto and Rose conclude that while the average rating for the U.S. electric utility industry is likely to decline to "Baa1," the average rating for utilities with significant nuclear investments will decline further, to "Baa2."

Making things worse, notes Curtis Moulton of Standard & Poor's, is the recent emphasis at the Nuclear Regulatory Commission (NRC) on compliance with detailed procedures, which Moulton says has negative implications for nuclear electric utilities. The tougher stance by the NRC is attributed to the poor performance at the Millstone nuclear plant in Connecticut, as well