Santa: Is R&D justified?

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Cries and Whispers Fitch: Major Firms Will Win

A

lthough the Federal Energy Regulatory Commission

has

NEWS

IN

FOCUS

of power marketers, as it an-

competitive advantage in the

nounced it would do in March.

name of shared collaborative re-

Fitch says it will apply a crossdisciplinary approach to power

search.” The current system, Santa said,

marketer debt, using teams of ex-

is premised on “the inability of in-

perts from its various specialist

dividual electric companies to

groups. The analysis will focus on

capture the benefits of research.”

approved some 200 applications

corporate and capital structure,

He says that there are some areas

of power marketers, the business

business performance, resources

where this still makes sense, such

and delivery capabilities, risk

as EMF research. But in other ar-

will gravitate to a handful of majors, according to Fitch Investors Service. These players-firms such as Enron, Citizens Lehman, LG&E Power Marketing, Electric Clearinghouse,

Louis Dreyfus

and Koch Power Services-“will

management and internal con-

eas, the old way no longer stands

trols, and management and staff-

up to serious scrutiny. “For federal policy makers,”

ing.

Santa said, “a logical approach

Santa: Is R&D Jus tfied?

would be to ask the following question: With respect to what in-

be able to operate on a large enough scale to diversify portfolio risks and establish needed risk

W

ith competition coming in

dustry functions can we rely on

electricity the rationale for

the marketplace to provide ade-

the current energy research and

quate incentives for R&D? And,

management systems,” says Fitch.

development model of collabora-

conversely, with respect to what

tive research and federal support

functions is there a lack of ade-

These muscular majors, says Fitch in a seven-page report re-

may change, Commissioner Don-

quate market incentives and a

leased in May, “Credit Perspective

ald Santa of the Federal Energy

public policy justification for en-

on Power Marketers,” will have

Regulatory Commission told a

couraging collaborative research

capital to match the risks they in-

Washington technology meeting

and government-supported

cur, and will use risk limits and

in late May Santa noted that “in

R&D?”

controls extensively. Smaller play-

any area where technology is per-

Santa said R&D in generation is

ers will specialize in retail market

ceived to be the source of a poten-

probably an area where the mar-

niches, serving as load aggrega-

tial competitive advantage in the

ketplace will “provide the proper

tors and service resellers.

marketplace, it is increasingly un-

incentive” for development. “In

The new report provides the cri-

likely that electric companies will

fact, beyond a competitive domes-

teria Fitch will use to rate the debt

forfeit the opportunity for such a

tic market, the global market for

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these technologies is booming. Isn’t that enough incentive? In most cases, the answer probably is ‘yes.’ Still, it’s conceivable that a convincing public policy rationale can be constructed for the federal government fostering the development of some technologies in this area.” He cited renewables as a case where government support might make sense “as a matter of national energy policy and environmental policy”

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NEWS

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Competition Prompts S&F to Ckange Muni Rating Criteria

S

tandard & Poor’s is changing its rating criteria for public

power utilities in order to reflect the changes brought on by increased competition in the marketplace. As a result of deregulation, S&P believes, “utility management becomes more complicated. Some

0

c

u

1

s

ture, and regulatory environment. But S&P says the new criteria should not create any rating or business position changes. ‘With the announced criteria refinements, Standard & Poor’s will more closely and deliberately correlate a utility’s business position with its financial stature in arriving at a debt rating,” says the rating agency. S&P anticipates that regulatory issues will be the most influential rating factor over the next five

Also, Santa said, “there are parts of the industry that, for the

years. Given regulatory restructur-

foreseeable future, are likely to re-

ing initiatives that are afoot in the

main regulated monopoly func-

states, the raters say, “it has be-

tions and where there may not be

come critical to recognize the intri-

the market incentive for industry

cacies of the specific regulatory

research and development. An ob-

environments that influence indi-

vious example is transmission

vidual public power systems.” While these new rating criteria

and distribution.”

mimic the matrix approach S&P

But before concluding that the current R&D paradigm is appro-

uses with IOUs, the analysis of

priate for the wires business,

public power utilities will not re-

Santa said, “we ought not be

quire the same level of definition

lulled into thinking ‘once a mo-

with regard to financial targets.

nopoly, always a monopoly’ For instance, a breakthrough in dis-

“The lack of reporting standardization and the great heteroge-

tributed generation could alter our perception of the wires busi-

public power systems are enter-

neity among public power systems precludes the application of

ness.” Air pollution control technol-

ing uncharted territory, engaging

a strict matrix approach any time

in financial and operating swaps,

soon,” says S&I?

ogy is similar, said Santa, noting

hedges, and other risk manage-

that the market has not histori-

ment tools; issuing debt in the tax-

cally put a value on the air pollu-

able markets; and studying how

tion externality. “Consequently,”

to cope with stranded assets. The

he said, “one can argue that, be-

criteria modifications reflect this

EV with Ovonic Battey Sets Record 373 Mi. on a Ckarge

cause the industry lacked the

increasing complexity and indi-

A

proper incentive to develop such

cate Standard & Poor’s flexibility

and the U.S. Department

technologies, this was a proper

in incorporating industry dynam-

ergy is using the success to lobby

candidate for collaborative re-

ics into its rating guidelines.”

Congress on funding for federal

search and govenunent-supported R&D.”

The three areas which will drive

n electric car has set a new record of 373 miles on a charge of En-

research and development pro-

public power credit ratings are:

grams. In the recent Tour de Sol, a

business position, financial pos-

Solectria powered by the Ovonic

L July 1996

5