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December 13, 2000

Energy Price Volatility May Hurt Utilities' Credit

By REBECCA SMITH
Staff Reporter of THE WALL STREET JOURNAL

Recent volatility in wholesale energy markets is
undermining the credit ratings and may eventually crimp
the borrowing ability of some of the nation's biggest
utilities, long regarded in the credit markets as some of
the safest bets around.

It is the worst out West, where the price of power to be
delivered Wednesday hit a new high of $1,182 per megawatt
hour on California's state-sanctioned auction, a benchmark
for the entire region. That compares with $30 a year ago.

But even utilities in the East, such as GPU Inc. of
Parsippany, N.J., and Consolidated Edison of New York,
also are at risk because they are paying higher prices
than ever for spot-market electricity purchases and aren't
always able to pass along that cost to their customers.

As an indication of just how bad things are getting,
Moody's Investors Service Tuesday put Seattle City Light
on "negative outlook," even though it is one of the
lowest-cost generators in the nation. There hasn't been
much rain in the Northwest this year and the city-owned
utility has been forced to go to the wholesale market this
month to buy 100 to 200 megawatts of electricity each day.
That isn't much energy, but with prices that have gone as
high as $1,000 per megawatt hour this week, compared with
the $24 per megawatt hour that the municipal utility pays
for power from the federal hydroelectric system, costs add
up fast. The utility, which issued $100 million in bonds
this week, is raising rates 10%, effective Jan. 1, and
will keep the rate increase in effect as long as it takes
to dig its way out.

"Prices are at absurd levels," says Seattle City Light
Superintendent Gary Zarker. "I know others are looking at
significant rate increases too."

Credit-rating agencies say they are going through their
utility portfolios and separating those with exposure to
wholesale markets from those that have enough in-house
generation to meet customer demand. Then they are trying
to figure out which of the ones that are forced to buy on
the spot market will be allowed to pass on higher costs
and which ones won't.

"You have the makings of a credit crunch when utilities
are required to buy power but aren't allowed to pass the
cost through," says Steven Fetter, managing director of
the global power unit at Fitch, the New York credit-rating
agency.

That is exactly the position California's biggest
investor-owned utilities are in. Southern California
Edison Co., a unit of Edison International, and Pacific
Gas and Electric Co., a unit of PG&E Corp., have incurred
deficits in excess of $7 billion buying power on the open
market since June and were forced to pay higher rates and
offer unprecedented guarantees to investors when they last
issued bonds.

While they are still making money from the power plants
they own, it is nowhere near enough to make up for the
shortfall. Credit ratings of both utilities were lowered
this week.

Blown the Lid Off

There is no cost relief in sight. California's grid
operator last week lifted a price cap for power it buys
each hour to keep supply matched with demand. That helped
reliability because more generators came forward and
offered energy through an orderly market, instead of
waiting for harried engineers to call them at the last
minute trying to strike a deal.

But it has really blown the lid off prices in the West.
The average cost of power sold in the day-ahead market
jumped from $250 a megawatt hour last week to $611 on
Monday, $904 Tuesday and to $1,182 for power to be
delivered Wednesday.

This has a huge impact because it applies to roughly
two-thirds of the power consumed in the state and
influences prices elsewhere. The situation differs
markedly from Eastern markets where only a small
proportion of the power consumed comes out of a daily spot
market because most utilities have long-term
power-purchase contracts that supply most of their needs.

Some of the utilities in the Northwest being slammed by
high prices will be in the position of selling power back
in May or June, provided there is enough spring-thaw
runoff to give them surplus hydropower.

Financial Pain

But utility managers worry it won't be enough to cancel
out the financial pain they are currently suffering.

Distribution utilities that deliver the power that others
generate were regarded as the safest part of the utility
business only a few months ago. Wall Street assigned them
the lowest valuations because they face regulated rates of
return.

"Sadly, we now see they chose the part of the business
with a lower upside potential and higher risk," Mr.
Fetter, of Fitch, says.

Write to Rebecca Smith at rebecca.smith@wsj.com