Even with the continuing volatile wholesale energy prices, Wall Street rating agencies have come full circle in the past five years, focusing on broad regulation trends and conservative price criteria in assessing energy holding companies and their utility subsidiaries, according to Standard & Poor’s Ratings Services’ San Francisco-based energy industry analyst Swami Venkataraman.

Speaking at the second day of a two-day conference on “Buying and Selling Electric Power in the West,” Venkataraman said there are three factors S&P employs in making its ratings: “regulation, regulation and regulation.”

“Everything has come back to the quality of regulation and particularly cost-recovery mechanisms for utilities,” said Venkataraman, noting that assurances of recovering costs is one of three keys — the other two being power procurement and resource adequacy plans — that are used to judge all utilities these days.

Regarding energy prices, he said S&P has become very conservative, doing its own quarterly assessments to create benchmarks that are applied across the industry to all companies. For example, S&P raised the wholesale natural gas price assumption twice last year.

Going forward, S&P’s broad assumption of wholesale gas prices call for a $5/MMBtu assumption this year; $4 in 2006; and $3.75 for 2007, with a 2% annual escalation in subsequent years, he said.

For a much longer period of time going back seven years, Venkataraman said that S&P has been applying the same conservative approach to oil and gas producers. The rating agency assumes a $3.50 price for natural gas, although many of these O&G companies have been getting prices twice that amount, he said.

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