its viability. A utility whose fixed obligations cause
rates to be above market levels is unlikely to be
able to fully recover these costs in a competitive
environment, which will have negative implications
for both the utility’s business profile and rating.
Transmission access is vital to a utility system’s
operations, and credit and business risk. In determin-
ing strength in this area, Standard & Poor’s will look
at the number of interconnections with which the
utility in question has access, the cost profiles and
supply and reserve characteristics of these other inter-
connected utilities, and the price paid for wheeling of
power. Importantly, Standard & Poor’s will evaluate
the extent to which these interconnections and poten-
tial power diversity arrangements provide a utility
with enhanced operating and competitive flexibility.
The Federal Energy Regulatory Commission (FERC)
is authorized to impose market rules regarding trans-
mission operations, and the impact on a utility as
such rules evolve will also be evaluated.
Operating efficiency and operational strength are
measured with reference to the cost of producing a
unit of energy. Historical and projected trends in
average and marginal production costs on an
absolute and relative basis are reviewed. A utility’s
generating costs relative to industry averages will
indicate the economics of its power supply and the
potential for stranded costs.
The efficiency of a utility’s services and opera-
tions is evaluated according to ratio analysis,
including production cost per kWh, debt per kWh
and debt per customer. A utility’s efforts at manag-
ing its load curve—and therefore its costs—through
demand side and resource management programs
will be viewed positively to the extent that they are
economically reasonable and practically achievable.
Some utilities with below average load factors may
be less able to control the associated inefficiencies
and costs, but they also may be less susceptible to
competitive forces.
Favorable operational characteristics include:
■Diverse supply sources;
■Favorable fuel supply arrangements coupled with
cost containment strategies;
■Widespread transmission access that does not
depend completely on a single entity to wheel
power;
■Production costs that are competitive and reflect
reasonable operating and maintenance costs; and
■Manageable environmental or regulatory
exposures.
Some public power entities are active in, or
planning to provide new services, such as
telecommunications services, chilled water, and
steam, in addition to their core businesses in
order to diversify their revenue streams.
Standard & Poor’s will evaluate whether or not
such additional ventures, which can increase
financial risk, will be detrimental to the utility’s
core business. Important components of such
analysis are the relative share of operating expen-
ditures attributable to, and the amount increased
leverage associated with such enterprises.Competitive Position
Competitiveness is important to the retention of
native load and the preservation of the revenue
stream pledged to debt repayment, for both systems
operating in open access environments or in those
that are currently protected. Competitive position-
ing remains important, even for utilities in states
that have yet to advance deregulation due to height-
ened awareness of retail choice among even captive
electricity customers.
Overall system average rates, as well as rates of
a customer class, are at the center of Standard &
Poor’s review of a utility’s relative competitive
position. The analysis is extended to include an
assessment of the rates that a utility charges specif-
ic loads and rates levied on its largest customers
relative to potential alternative suppliers.
Standard & Poor’s explores each utility’s rate
design, use of contract rates, and rate affordability.
Affordability is measured relative to income levels
and usage patterns. The commitment of policy
makers to provide equitable rates that reflect the
costs of providing service without subsidies is cru-
cial in the changing environment. The presence of
automatic power or fuel cost adjustments, which
limit or avoid the political influence over timely
rate adjustments geared to recapturing fluctuating
commodity costs, is viewed favorably.
A discussion of rates also includes the issue of a
utility’s rate-setting process, whether regulated by a
third party or through self-determination.
Strong competitive position
characteristics include:
■A rate design that equitably apportions costs
between and among system customers;
■Unit rates by customer classification that display
a competitive advantage;
■Projections of rates that will continue to display a
competitive advantage, preserve the revenue
stream associated with native load, fund capital
expenditures for system maintenance and growth
and help attract new load;
■Ability to establish rates free from state regulato-
ry bodies; and
■Flexibility to adjust rates quickly and frequently
to match potentially volatile cost structures.Electric Utility Ratingshttp://www.standardandpoors.com 123