Fitch Ratings: FERC's SMD Will Affect Credit Ratings.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 14, 2002

The Federal Energy Regulatory Commission's (FERC) plan to profoundly redesign the U.S. electricity market is likely to reallocate profits among market participants and result in gains and losses for individual companies, according to Fitch Ratings.

The FERC's standard market design (SMD) is the topic of a Fitch special research report. "In general, wholesale generators and energy marketers are likely beneficiaries and integrated utilities may be at risk, especially those that now derive healthy profits from generating power," said Ellen Lapson, Managing Director, Fitch Ratings. "Independent transmission companies, a new industry sector, will benefit from higher allowed returns on capital." However, the report cautions that SMD will not have the same impact on all companies within any sub-sector, since the companies have different pre-existing contracts, different tariff designs, and assets or loads that are positioned differently relative to congestion points on the transmission network.

Fitch highlights some gaps in the SMD plan, proposed as a 'one size fits all' solution for all regions. FERC may not have an easy time imposing the standard design on regions apart from the northeast and midwestern US. "States in the west and the southeast that have not previously unbundled their retail tariff or implemented direct access for retail customers and where utilities still operate in an integrated manner have strong objections to SMD," said Lapson. Both of these regions have a higher participation of public power and municipal utilities in their electric systems, and without their buy-in to the FERC proposal, SMD may not be workable in the west or southeast.

Despite some flaws in the current proposal, Fitch expects that SMD will be fully implemented within about two years in a large contiguous eastern and mid-continental area constituting approximately 45% of U.S. electric demand. Ultimately, it could lead to a single uniform market design for the entire Eastern market, around 75% of U.S. demand. "That would be a very substantial market and would permit the testing of the workings of SMD on a very large scale," said Lapson. In order to implement a comparable market structure in the western region, however, FERC would likely have to accept some special adaptations or variations from its standard plan.

'FERC Standard Market Design' is available on the Fitch Ratings web site at 'www.fitchratings.com'.