Electric utilities incur indirect financial costs when they turn to unregulated generators (NUGs) to buy power. These indirect costs can lead to lower bond ratings and undermine competitive advantage, depending upon the type of contract.
In this case we analyzed the combined effects of NUG power purchases on generating and capital costs for a representative utility (Utility A) with a relatively large amount of NUG purchased power. We compared cost effects for four different types of purchased power contracts: 1) flat rate pricing, 2) on/offpeak energy pricing, 3) dispatchable energy pricing, and 4) actual cycle energy pricing (ACEP) (see sidebar on page 37 for definitions). We evaluated the total incremental costs with each contract as the exclusive means of purchasing NUG capacity, based on Utility A's existing and planned capacity and energy purchases from NUG resources. We addressed incremental differences in variable energy production costs but did not include or depend upon optimal capacity expansion choices by the utility.
Our findings showed the ACEP contract to be the most advantageous (em the one that draws the desired balance between efficient power contracting and management of financial risk. By including a capacity component based on plant availability, plus an energy component based on the plant's actual heat rate curve, the ACEP contract appears to allow for a dynamic price structure that addresses both the direct savings from dispatchability and the indirect effects on the cost of capital.
Bond Rating Adjustments
Bond rating firms typically adjust utility bond ratings by allocating a portion of the capacity obligations as a liability without a corresponding entry as an offsetting asset.