MOODY'S VIEWS TEXAS ELECTRIC RESTRUCTURING LEGISLATION AS MODERATE
Moody's Investors Service confirmed the ratings on seven investor-owned utilities, one electric cooperative, and five publicly-owned municipal power agencies serving the state of Texas after examining the initial impact of restructuring legislation that brings choice of generation supplier to Texas retail electric customers by January 1, 2002. The legislation was signed by Republican governor George W. Bush on June 18. Utilities and agencies whose ratings are confirmed are:
Central Power and Light Senior Secured A3, Outlook Stable
El Paso Electric Company Senior Secured Ba1, Outlook Positive
Entergy Gulf States Senior Secured Baa3, Outlook Stable
Reliant Energy, Inc. Senior Secured A3, Outlook Negative
Southwestern Electric Power Senior Secured Aa3, Outlook Stable
TXU Electric & Gas Senior Secured A3, Outlook Positive
West Texas Utilities Senior Secured A2, Outlook Stable
Pedernales Electric Cooperative Senior Secured Baa1, Outlook Stable
City of Austin Senior Secured A2, Outlook Stable
Lower Colorado River Authority Senior Secured Aa3, Outlook Stable
Sam Rayburn Municipal Power Agency Senior Secured Ba3, Outlook Stable
San Antonio CPS Senior Secured Aa1, Outlook Stable
Texas Municipal Power Agency Senior Secured A2, Outlook Stable
Two utilities' ratings remain on review for possible downgrade due to factors outside of the legislation: Southwestern Public Service (senior secured Aa2) and Texas-New Mexico Power (senior secured Baa2). The legislation offers a balanced approach to competition in Moody's view for these utilities, too.
The legislation establishes a firm legal footing for the transition to competition under a moderate process, a path which Moody's has assumed in its ratings in recent years. Texas, particularly through its regulatory commission, has been among the earlier states to press for competition in its electric generation sector. The state's wholesale electric markets have been deregulated since passage of the Public Utility Regulatory Act in 1995 (PURA) with the subsequent Public Utility Commission of Texas (PUCT) directives as authorized under PURA. The commission had sought other ways to impose lower rates in the retail sector in the absence of legislation, such as Central Power and Light's series of rate cuts over 1997 through 1999 along what the commission termed a "glide path". Three utilities had negotiated bilateral agreements with the commission, which also contained measures to mitigate stranded costs. The bill now reduces much of the uncertainty about the state's market structure over the next few years.
The bill's support of stranded cost recovery provides a positive credit influence that offsets the modest 6% small customer rate reduction required on January 1, 2002. Rates are frozen at September 1, 1999 levels during the interim transition period, allowing stranded cost mitigation through accelerated and/or redirected depreciation and absorption of environmental compliance costs. The bill's mechanisms in this regard differentiate between those utilities which have stranded costs and those which do not have them. Securitization is permitted in three stages. Regulatory assets measured at year-end 1998 10-K values can be fully securitized after September 1, 1999, with the PUCT's approval. The PUCT must issue its order 90 days after the request to issue is filed. 75% of estimated generation-related stranded costs can also be securitized at the same time with PUCT approval, but most utilities expect this issuance to take longer and perhaps be completed in several pieces due to the complexities of the estimation process, which will be subject to public hearings. Remaining stranded costs can be securitized after a PUCT true-up proceeding two years into competition in 2004.
Utilities are also required to at least functionally unbundle their electric operations into a generation entity and a transmission and distribution entity by the same date. Some utilities read this as a requirement to legally unbundle, but the bill is not clear on this point. The companies must also create a new entity called a Retail Electric Provider (REP) that will perform the same aggregation and supply role that has developed in the UK and Victoria, Australia deregulated markets. The REP will market electricity to the end user, whereas the T&D entity will be purely a wires business as of January 2002. Tariff proposals for the T&D rates must be filed with the PUCT by April 2000, whereas unbundling proposals must be filed sooner - by January 10, 2000. Moody's will evaluate the credit impact of potential legal disaggregation as the legislation's requirements become more certain to the utilities and as each company develops its unique plan to prepare for the changes.
Market power has been a concern in the political process due to the state's large electric utilities and its generally isolated transmission grid that limits competitive supply from outside the state. The bill addresses this issue from two angles. First, the bill prevents a company's REP from offering competitive prices to its historic service area until the REP has shed 40% of the company's historic retail load. However, the 6% rate cut (called "the price to beat") for small customers, which is intended to provide benefits of competition to those least likely to exercise choice, may make the bill's load-shedding incentive tough to meet for those already-competitive companies with low rates such as Southwestern Public Service and Southwestern Electric Power. As a second step, market power mitigation plans must be filed by each company in 2001. However even those whose generation market share exceeds the 20% threshold may find that their share has decreased below the threshold due to addition of new capacity and the results of the load-shedding incentive. Market power mitigation, if needed, can be addressed through several alternatives including the auction of assets or capacity. The bill does not require divestiture, and to date none of the large utilities has expressed a strong interest in reducing its commitment to the generation sector.
Electric cooperatives and municipalities may elect to offer retail competition after January 1, 2002. This group may also determine their own stranded cost estimates and recovery periods and are not subject to the unbundling provisions and rate decreases imposed upon the investor-owned utilities. The bill offers securitization to these types of issuers, too, and it provides them a great deal of flexibility to prepare for a changing marketplace.
Several utilities received unique provisions in the bill appropriate to their individual rate histories and situations, especially as some utilities are members of other power pools which may not have independent system operators of the transmission grid as does the Electric Reliability Council of Texas. Entergy Gulf States is exempted from the reduction, having faced a recent rate reduction. The utilities in the Panhandle (particulary SPS, which is affected by other power pool rules) are empowered to negotiate a separate transition plan and rate decrease. El Paso Electric was allowed to continue along its 10-year rate agreement, which expires in August 2005, at which time it too will reduce its small customer rates 6%. El Paso had negotiated a modest rate reduction in Texas prior to the bill's passage. It must meet the environmental requirements of the bill, which will entail modest capital investment.
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