MOODY'S CONFIRMS OHIO UTILITY RATINGS
Moody's Investors Service confirmed the ratings on 11 utilities serving electric customers in the state of Ohio. The state passed its electric restructuring bill on June 22, 1999, after intense and lengthy negotiations. The bill's final form garnered tremendous support, as evidenced by the House's 87-to-9 vote and the Senate's 29-to-3 vote. The bill makes choice of generation supplier available to all customers on January 1, 2001, with a modest rate reduction for residential customers. The Ohio legislature left details regarding stranded cost recovery and other aspects of the transition to the Public Utilities Commission of Ohio (PUCO), but reduced uncertainty about many aspects of the transition. Moody's regards the structural features established by the bill as neutral for the Ohio companies, noting that the significant financial implications will result from the PUCO proceedings. The rating agency continues to anticipate at least moderate amounts of stranded cost recovery in current ratings.
The legislation's major tax policy changes removed what had been significant hurdles to electric sector restructuring. Utilities will now collect taxes based upon kilowatt-hour customer usage rather than utility revenue dollars. Also, utility electric generation property will now be taxed at the 25% corporate property tax rate while the transmission and distribution property will continue to be taxed at 88%. The bill's tax revenue reimbursement provisions minimize the impact of the property tax change on counties and other localities which are dependent upon these taxes, particularly for school funding.
Municipal utilities are excluded from the bill's provisions, and co-ops can elect to retain their certified service areas with some flexibility, thus also being excluded from its provisions. While they may not be directly affected by its provisions if they choose to be excluded, they none-the-less will be influenced by the changing market structure within the state. Moody's will examine this impact as the market and management strategy evolve.
The ratings and outlooks confirmed for the investor-owned utilities are:
Cincinnati Gas and Electric, Senior Secured A3, Outlook Stable;
Cleveland Electric Illuminating, Senior Secured Ba1, Outlook Stable;
Columbus Southern Power Company, Senior Secured A3, Outlook Stable;
Dayton Power and Light Company, Senior Secured Aa3, Outlook Stable;
Monongahela Power Company, Senior Secured A1, Outlook Stable;
Ohio Edison Company, Senior Secured Baa2, Outlook Stable;
Ohio Power Company, Senior Secured A3, Outlook Stable; and
Toledo Edison Company, Senior Secured Ba1, Outlook Stable.
The ratings and outlooks confirmed for the large joint municipal power agency, municipal utility, and co-op within the state are:
American Municipal Power (AMP - Ohio), Project One Revenue Bonds A1, Outlook Stable;
Cleveland Public Power, Revenue Bonds A2, Outlook Stable; and
Buckeye Power, Senior Secured A1 and Commercial Paper P-1; Outlook Stable.
The fact that stranded cost details have been delegated to the PUCO is probably one major reason the bill was passed this year. Political wrangling over the details of stranded cost recovery might otherwise have proved too contentious to allow passage. The state's utilities have widely diverse exposures to potentially stranded costs - those historical costs that might not have been recoverable in competitive markets. The utilities must file a request for stranded cost recovery with the PUCO within 90 days of the bill's effective date, and the PUCO is required to respond with a final order by October 31, 2000. The bill allows stranded cost recovery over a period of up to 5 years, and possibly 10 years for regulatory assets, beginning January 2001. Stranded costs will be recovered either through frozen rates for those customers who prefer to stay with the incumbent utility as their generation supplier, or through a competitive transition charge (CTC) determined through the PUCO filing.
The restructuring bill sets January 1, 2001, as the date all customers will be able to choose their electric generation supplier. That date is also the commencement of what the state is calling the five-year market development period. All residential customers will receive a five percent reduction in their generating cost portion of their bills on that date to ensure that they also see some of the benefits of competition. Bilateral contracts negotiated previously between utilities and their large customers are preserved during the market development period. FirstEnergy's utilities (Cleveland Electric Illuminating, Ohio Edison, and Toledo Edison) will continue their current rate reduction plans through the market development period. Rates are otherwise frozen at levels reflecting the modest residential generation rate cut.
The bill designates electric generation, aggregation service (called "supply" in the UK and Australia), power marketing, and power brokering as services that will be fully subject to competition on January 1, 2001. Certain other services will be subject to competition once certain conditions are met. The utilities will be required to legally separate competitively offered services from the regulated transmission and distribution services when competition arrives, unless a plan justifying cost allocation under functional separation is approved by the PUCO. Moody's expects utilities to pursue functional separation at this point and to present their cost-allocation plans as part of the PUCO filing. However, they may choose to legally separate transmission and distribution from generation and other competitively offered services at some point, which may have negative implications for fixed income investors.
To deal with potential market power issues, the bill requires membership in an independent regional transmission organization (RTO) for any utility owning or controlling transmission. The state's utilities are pursuing two separate types of RTO, the Alliance and the Midwest Independent System Operator. Both the Federal Energy Regulatory Commission, which regulates wholesale transmission, and the PUCO prefer to see one, broad RTO, but currently allow some flexibility as differences between the two approaches are ironed out. The legislation does not require generation asset divestiture.
A summary of the bill can be found on the web at www.lsc.state.oh.us/analyses/s0003-rh.pfd.
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