Monday, November 12, 2007

Not Particularly Transparent: Part 2

When I encounter something I can't immediately understand, I have learned to slow down and read it slowly, one sentence at a time. This is what I did with the PACE report mentioned below. PACE Global Energy Resources was hired by Delmarva Power to analyze the cost to consumers of Bluewater Wind's revised term sheet submitted last week to the Public Service Commission (PSC).
Jeremy Firestone described the report as "not particularly transparent." So when I couldn't make sense of how PACE arrived at the conclusion that the commodity price risk that Bluewater had taken off the table had magically reappeared, I decided to use my training as an MBA in finance and extensive experience with the English language to examine the key sentence that explains just what happened:
"By removing the pricing escalators the SOS customer, through Delmarva, would need to hedge Bluewater credit exposure through the use of Credit Default protection."
Okay, the first thing I notice is that the sentence is poorly constructed:
"By removing the pricing escalators the SOS customer..."
Did the SOS (Standard Offer Service) customer remove the pricing escalators? I thought Bluewater did. For that matter, I didn't realize that we, as SOS customers, had been given a seat at the negotiating table. Perhaps I had overlooked the meeting notice sent in my bill along with the invitation to donate to the Good Neighbor Fund.
But let's continue:
"...the SOS customer, through Delmarva, would need to hedge Bluewater credit exposure..."
It's good to know Delmarva is looking out for my interests. Further:
"...the SOS customer, through Delmarva, would need to hedge Bluewater credit exposure through the use of Credit Default protection."
Now I know I have to look at my bill more carefully. Apparently Delmarva is going to arrange for me to take out "Credit Default protection" for Bluewater Wind and its parent company, Babcock & Brown. And Delmarva has already calculated the price down to the penny: $143.92/MWhr. That's 14.392 cents per KWh.
But wait a minute. What if I don't want to hedge Bluewater's credit exposure? Isn't that what investors are for?
Now it may be that I'm just dense, and don't know enough about finance to understand what just happened. It could be that the PACE report was written in a hurry and could benefit from some editing. It could be that sloppy writing reflects sloppy thinking. Or it could be that I couldn't make sense of this sentence because it just doesn't make sense.


Blogger Nancy Willing said...

WDEL has the DP&L show on right now. Said that BlueWater's Lanard did not return a call from the station.

1:15 PM, November 12, 2007  
Anonymous Anonymous said...

Are you telling me that Delmarva Power doesn't have enough "credit default protection" from the $68 million in security they required BWW to post in advance, as potential liquidated damages?
Puleeze. DPL should be paying "default credit protection" for the tens of thousands of DPL customers who are unable to pay their bills now. In the winter, in the cold, at the beach, the winds blow their hardest. Maybe Gary Stockbridge will send little knitted caps to all the grandmas out there freezing in their apartments because they can't afford coal-fired or natural gas electricity.

6:24 PM, November 12, 2007  

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