BANKS LENDING TO MERCHANT PLANTS ARE STARTING TO FRET about whether the projects might have to refund some money collected for electricity

BANKS LENDING TO MERCHANT PLANTS ARE STARTING TO FRET about whether the projects might have to refund some money collected for electricity

December 01, 2000
BANKS LENDING TO MERCHANT PLANTS ARE STARTING TO FRET about whether the projects might have to refund some money collected for electricity.

The risk is that regulators might order generators to refund electricity revenues during periods when prices skyrocket. Bank loan negotiations are an exercise in risk allocation. At least for new loans to California projects, the borrower takes the risk that refunds will be ordered for revenues the project has already collected before the loan closed. Project sponsors are being asked to enter into capital contribution agreements promising to contribute an amount equal to any refunds to the project company that is the borrower.

Refunds of future revenues are the bank’s risk. However, some banks ask that a reserve account be established equal to any excess revenue above what the project is projecting to earn. This reserve would remain in place only for a short period – for example, a year – before the revenues in it are released.

The Federal Energy Regulatory Commission warned generators in California in early November that their revenues from power sales for the next two years through the California Power Exchange will remain subject to possible government-ordered refunds. This precedent suggests the same thing could happen in other parts of the country.

Keith Martin