Risk Reduction for Energy Project Sponsors Through Synthetic, Revenue-Neutral Diversification
Financial institutions and insurance companies account for 96% of the activity in the $4.8 trillion credit derivatives market while corporations account for a mere 4%. This article makes a case for? synthetic, revenue-neutral diversification? as a method for energy firms to manage the credit risk in their long-term power-purchase agreements (PPAs). Synthetic, revenue-neutral diversification involves a firm buying insurance on assets in its portfolio and paying the associated insurance premium by simultaneously selling insurance to another firm, thus enabling it to avoid any cash expense. The primary objective of synthetic, revenue-neutral diversification is implicitly to change the firm?s asset portfolio and to increase diversification without reducing the firm?s revenues. In an example, two independent power producers use credit derivatives to diversify the geographic exposures of their PPA portfolios, thereby reducing their expected losses, improving their credit ratings, and lowering their cost of borrowing.
The Global Crises in Power and Infrastructure
As a result of high-profile, power-project defaults in the developing world; the collapse of power prices and asset values in markets such as the U.K. and the U.S.; and continuing ripple effects of the failure and fraud of Enron, major portions of the power and infrastructure sectors are convulsed by crisis and a resulting loss of investor and lender confidence. To attract investors when new capacity is needed in the future, regulators need to help create a climate of stability in which reasonable investor expectations can be fulfilled. For the poorest countries, where capital for infrastructure investment is so badly needed, the author proposes a new public-private partnership model. Such a model would put the initiative and creativity of the private sector to work supported by the resources of multilaterals, ECAs, and other government agencies as aid donors and providers of credit support.
Determining the regulatory asset base for utility price regulation
Abstract Price controls for regulated utilities determine the revenue streams, which cover costs, returns to shareholders and depreciation of assets. Allowable profits and depreciation depend on the regulatory asset base, and determining this for capital-intensive utilities privatized at a discount has been contentious. The paper argues for discounting both the original assets and their depreciation by the market-to-asset ratio. The efficiency problem is less that capital is thereby underpriced than that efficient prices may be inversely related to average costs for lumpy assets, a problem unrelated to asset valuation.