NEW YORK, NY, Aug. 20, 2002 — Standard & Poor’s Ratings Services said Tuesday that the FERC’s formal investigation into the energy trading practices of Avista Corp. (Avista; BB+/Negative/–), Portland General Electric Co. (BBB+/Watch Neg/A-2) and El Paso Electric Co. (BBB-/Stable/–) will not immediately affect the companies’ credit ratings.
In its orders, the FERC’s staff states that there exists preliminary evidence of various different failures in each company.
The FERC is investigating:
— Whether El Paso Electric and Enron Corp. violated open-access transmission requirements by possibly providing their merchant functions with preferential access to El Paso Electric’s transmission system;
— Whether El Paso Electric ceded control of some of its assets to Enron in a contractual relationship without appropriate notification to the FERC;
— Whether Avista and Enron have engaged in some of the trading strategies identified in the Enron memoranda;
— Whether Avista also acted as a middleman in transactions between Enron and Portland General that violated affiliate rules;
— Whether Avista has provided all relevant information in the investigation; and
— Whether Portland General and Enron knowingly engaged in transactions that may constitute violations of their codes of conduct and the FERC’s own standards of conduct.
If the charges are substantiated, various remedies could be applied under the Federal Power Act, including refunds of any profits made from such transactions and revocation of the companies’ market-based rate authority. Standard & Poor’s assessment that these developments will not immediately affect credit quality is based on the following:
— The profits that the companies have realized from deals that have specifically been disclosed in the FERC submissions so far are small, and a refund of these profits would not materially affect the companies’ financial profiles.
— Standard & Poor’s has determined that the revocation of market-based rate authority will not have a large negative effect on a utility’s finances that engages in wholesale transactions mainly to balance its load requirements with its power supply. In the absence of market-based rate authority, all three utilities can sell wholesale power according to the Western Systems Power Pool (WSPP) cost-based tariff or other similar agreements. The cost basis for power sold according to the WSPP tariff reflects the incremental cost of the power source (which includes wholesale power purchases) plus a small margin that varies by the type of trade. Thus, even if the utility must purchase power at potentially high market prices, it will either recover its costs through rates or, if some excess power is sold, the WSPP tariff provides for cost-recovery plus a small margin. What the utility will lose is its ability to participate in a run-up in wholesale prices when it has excess power to sell. However, if Avista Energy, Avista’s power trading arm, has its market-based rate authority revoked, it will be a serious setback and a credit event.
This assessment does not factor the following risks:
— While the companies will have market-based rate authority until the conclusion of the investigation, a serious lack of confidence in these companies on the part of counterparties or actions by other rating agencies could inhibit the companies’ ability to trade power and negatively affect their operations; and
— The FERC’s formal investigation may uncover other large transactions that violate rules and result in a refund order that materially affects the firms’ financial profiles.
Standard & Poor’s will closely monitor the progress of the investigation. The CreditWatch listing of Portland General’s ratings continues to reflect the utility’s vulnerability to parent Enron’s bankruptcy even as it attempts to implement a ring-fencing structure around Portland General. The negative outlook on Avista’s ratings reflects the utility’s strained financial profile resulting from the power crisis in the western U.S. Web site: http://www.standardandpoors.com/.
SOURCE Standard & Poor’s