Quantcast

Fitch: Proposed Changes to California SRAC Methodology Should Lead to Lower Prices for QFs

October 19, 2007

According to a special report just issued by Fitch Ratings, the state of California is currently considering a significant overhaul of its Short-Run Avoided Cost (SRAC) methodology. Unique to the state, SRAC is a regulatory tariff that qualifying facilities receive for selling their output to a California utility including San Diego Gas & Electric Co. (SDG&E), Pacific Gas & Electric Co. (PG&E), and Southern California Edison Co. (SCE). Recalculated monthly based on a variety of market conditions, SRAC is primarily driven by the prevailing price of natural gas.

Fitch expects SRAC tariffs will continue to reflect the considerable volatility in natural gas prices and now present the additional uncertainty introduced by the ongoing debate to modify the underlying calculations.

The California Public Utility Commission (CPUC) developed a series of standard offer contracts specifying terms and conditions under which California utilities were required to purchase power from qualifying facilities (QFs). The standard offer contracts specified that energy purchased from QFs would be priced at each utility’s SRAC. The fundamental SRAC equation is the same for each California utility; however, individual components of the equation are tailored to each utility’s market in order to approximate the utility’s avoided cost. Accordingly, the utilities typically offer meaningfully different SRAC tariffs.

The CPUC now appears ready to overhaul the SRAC methodology yet again. Several proposed decisions are being considered that share a common theme of indexing SRAC to a market heat rate that is regularly updated based on market prices. The primary difference in the proposals is the mechanism for calculating market heat rate.

Fitch has been advised that the current market heat rate is roughly 8000, which appears to be lower than the heat rate implied by the current SRAC methodology for all utilities. Accordingly, Fitch believes that the proposed changes will lead to lower SRAC tariffs for all QFs that have not entered into separate agreements to fix prices.

For full details on the proposed changes to California SRAC and Fitch’s commentary, go to the Fitch Ratings web site, www.fitchratings.com, to download the Special Report ‘California’s SRAC – Anticipating the Overhaul’.

A similar report titled ‘Leveraged Leases: Different Structures, Different Metrics’ was issued on Sept. 24, 2007. The report details the basic structure of leveraged lease transactions and Fitch’s analytical considerations for these transactions. This report can also be found at www.fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.




comments powered by Disqus