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NW Drought Will Drive Up Prices But Won't Reduce Reliability, Fitch Report Says

A sixth consecutive below-normal water year for the Pacific Northwest carries more financial than operating impact on the region and the greater Western Electricity Coordinating Council (WECC) grid system covering 12 states, according to a "Hydro Update" report by Fitch Ratings released earlier this month.

Ample power generation capacity will be available this summer, but overall power costs will be up due to more reliance on thermal-based power using natural gas-produced power supplies.

Fitch said that "ample generating capacity exists throughout the WECC from a reliability point of view, although congestion and transmission bottlenecks [aside from the water conditions] could lead to problems during peak demand periods." The rating agency said this conclusion is supported by "significant new natural gas-fired capacity added in recent years, primarily by merchant generating companies."

While the numerous public sector power providers in the region have weathered the continuing drought conditions, the private sector utilities are facing a tougher time financially, Fitch's report said. Creditworthiness and financial performance are being diminished for "certain investor-owned utilities," the report said.

"The adverse financial effect of continued dry-weather conditions on load-serving entities (LSEs) in the region is exacerbated by high natural gas prices, which will make replacement power services and peaking capacity more expensive," said the report, noting the overall WECC grid area covering essentially the western half of the nation is uniquely reliant on more volatile hydroelectric and natural gas-fired sources of electricity.

Underscoring its comments about financial impact, the report noted the difference in credit ratings assigned by Fitch to the major public- and private-sector power companies. It lists the eight largest Northwest public sector entities, including Bonneville Power Administration (BPA) and Snohomish County Public Utility District, all having some level of "A" credit ratings, while the major private-sector utilities, including Avista and Portland General Electric, are all in the "B" range of ratings, except for PacifiCorp (currently "A-").

While the report noted that the private sector utilities have a lot of dependence on hydroelectric supplies to varying degrees, regulatory commissions in several states have provided purchased power cost adjustment mechanisms to allow the utilities to recover added power costs in future utility rates on a fairly timely basis.

"In Idaho and Washington, regulatory pass-through mechanisms generally provide for the deferral and recovery of the lion's share of power cost deviations from amounts reflected in base rates on an annualized basis for [local utilities]," Fitch's report said. It noted that there are still up to 10% of the costs that the utilities sometimes have to absorb, and cumulatively over the past six years of drought conditions, cash flows, balance sheets and financial flexibility for the private-sector utilities have all suffered.

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