Tokyo-based Electric Power Subsidiary partners with AP Solar in 400 MW Texas Solar Project

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Industry News

Fitch Says California's Public Power in Good Shape

LCG, Sept. 8, 2000-California's municipal electric utilities are generally faring well, largely due to their ownership in generating resources and long-term power purchase contracts, Fitch IBCA said yesterday.

While customers of San Diego Gas & Electric Co. have seen substantial electric bill increases, municipal utility customers are enjoying relatively stable electric rates and adequate power supply, the credit rating service noted.

California's electric restructuring law, passed in 1996, exempted public power agencies from most of its provisions, but left them vulnerable to market forces. There was widespread concern that they would not be able to compete in the deregulated market, Fitch observed.

Public power utilities had to develop individual businessstrategies to reduce debt burden and improve rate competitiveness. Unlike their corporate counterparts, municipal utilities retained ownership in generating resources and strove to reduce production costs. By lowering expenses, holding rates stable, and refinancing debt, most public power systems generated considerable cashflow--frequently used to pay down debt on an accelerated basis.

When demand for power outstripped supply this summer, spot market electricity prices soared and, in the case of SDG&E, were passed directly on to consumers. The result has been the imposition of political remedies in the form of price caps.

Paradoxically, to use Fitch's word, the high electricity prices effectively boosted the competitiveness of the municipals'generating facilities, and in cases such as the Los Angeles Department of Water and Power and the Northern California Power Agency, provided an opportunity for the sale of surplus power at favorable prices which added to the coffers of these systems.

Not all public power systems are immune to the higher power prices, particularly those withshort-term purchased power exposure. The Sacramento Municipal Utility District, for example, purchases approximately 30% of its power supply requirements on a short-term basis. During the early part of summer, SMUD was impacted negatively. However, with improved nonfirm sales and cooler than normal temperatures later in the summer, SMUD considerably offset the increase in purchased power costs.

In addition, Fitch placed Merced Irrigation District on Rating Watch Negative due to the distribution system's short power supply position. Overall though, Fitch says most municipal electric utilities are performing well financially.

Fitch sums up: While the competitive power supply market's growing pains are providing the municipal electric systems additional time to prepare for full retail competition, the current California power market conditions are temporary. Therefore, public power providers need to continue to reduce generating costs--particularly strandable debt- related costs--if they are to be long-term players in theCalifornia power market.

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