How much will utilities invest
in energy service companies to boost earnings beyond the normal growth rate?Going on the "defensive-offensive."
In the early 1990s, flush with...
exposures in the context of confidence intervals of likely load and price outcomes. This process is presented in Figure 2.
Credit Risk: Betting the Company
For each of these alternative supply portfolios, a list of creditworthy suppliers must be identified and credit risk evaluated. The lowest expected cost options may have a high degree of credit risk if supply is concentrated among suppliers with poor credit ratings. We explicitly consider how much the utility is willing to risk in its portfolio lower credit suppliers. Historical data on failures can be correlated with the credit ratings of the suppliers. In this way, the risk of contract abrogation can be evaluated for different supply portfolios.
All portfolio options are valued using the metrics defined in the objectives (earnings, costs or rates) and are characterized by a probability distribution. The ultimate portfolio provides the best outcome distribution over a wide range of outcomes and avoids the disastrous outcome.
The optimal reconfigured supply portfolio will both reduce the basis of the VaR for operational risk management over time, but also provide the best alternative across a range of potential market and regulatory outcomes. Figure 3 shows how these earnings or rates at risk might be represented graphically for each portfolio alternative.
The final step is to attain its future state portfolio and manage its long-term effectiveness in a dynamic marketplace. Through this process, we provide: (a) an outline of the data requirements necessary for monitoring the electric and gas markets, and a white paper assessment of the drivers that affect the initial energy portfolio; (b) an interim report on the tradeoffs of risk and market opportunities among the portfolio combinations; and (c) a final report that documents the desired portfolio reflecting both cost and risk tolerance parameters and a means of achieving the desired strategy. This last identifies system needs to manage the portfolio on an on-going basis.
Case Study: The Wires Utility and the Duty to Serve
Consider a typical utility today. Utility A sold off its generation several years ago, but it has a provider of last resort (POLR) requirement to fulfill for its residential and commercial customers. As it considers its options in a standard integrated resource planning framework, it must address the following complications:
- Its load is not only a function of demand growth, but also the stickiness of its customers, and the possibility that if market prices exceed the price it can charge to its POLR customers, a large volume of customers will suddenly return to the POLR utility;
- Predictions of gas prices are more uncertain than ever before. The range of market prices is from $2/MMBtu to $10/MMBtu and gas price volatility is likely to remain high. Figure 1 shows both power and gas prices over the past several years;
- While forward power market prices exist, the lack of liquidity of these markets makes them more volatile than one might expect. A few deals can change long-term market perceptions dramatically;
- A few years ago, merchant suppliers were considered reliable sources to supply load requirements, but now many of those suppliers