This page contains information that can only be seen if you sign in as a member. Working Group - Debt Equivalency
Overview
One of the preeminent roles the CCRO plays for the energy industry is to develop, document, and advance best practices for financial and technical issues associated with risk. The matter of assigning notional capital equivalents to the risks that companies take is certainly one of these issues which the CCRO has been and continues to pursue through its white papers and meetings.
In the specific case of what has become commonly referred to as debt equivalency, our members have recognized inconsistencies and gaps in terms of:
- How each rating agency addresses the risks created by the exposures that are associated with PPA’s, plant builds, and other similar sources of risk capital.
- How each rating agencies specific approach to these risks can be aligned with established CCRO best practice frameworks for risk capital.
The CCRO hopes its new Debt Equivalency Working Group will
- Bring the industry a better understanding of the issues surrounding debt equivalency for these types of exposures,
- Help rating agencies and other practitioners close gaps versus best practice frameworks,
- Advance consistency in application across all outside stakeholders
The CCRO welcomes inquiry and input from all types of companies interested in this matter and will be arranging meetings with many groups outside the CCRO to look for shared interests and support.
Status Update from Co-Chairs
The Debt Equivalency Working Group has been meeting and holding conference calls to further refine our draft paper.
The paper’s focus to-date has been to examine the rating agencies' approaches to debt imputation (aka debt equivalents). Specifically, debt imputation for utilities that enter into a PPA, as opposed to a utility self-build.
Recently however, the group has been looking into the application of debt equivalents to entities that enter into PPA's to buy (including tolls), where there is not a regulatory mechanism for rate recovery. In that situation, S&P currently applies a debt equivalent adder of 100% of the NPV of the capacity payments to the purchasing entity.
Our discussions have now included several conversations with S&P. The Working Group thinks this is an area that has the potential to impact a larger segment of entities transacting in the energy space, especially entities involved in deregulated markets (e.g., deregulated load serving entities such as retail electric suppliers, and integrated entities with both wholesale and retail operations).
The Working Group has pulled-together quantitative examples illustrating the impact of the above issues, which we are considering integrating into the paper.
The Working Group is scheduling conference calls (typically Fridays at 1:00 CST) to discuss recent edits/additions and to begin finalizing the work on the new area we are exploring.
Shortly, we expect to have a revised paper for the CCRO members and the rating agencies to review, including this new area.
Morgan Davies, Calpine
Bob Long, Shell
Mike Beck, MJBC