Regulation Matters: A State-By-State Look At Comparative Regulatory Risk

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In recent years, the pace of regulatory change in the energy sector has accelerated, as the utilities and their state regulators grapple with challenges posed by aggressive capital spending plans designed to remediate aging infrastructure, mitigate safety/reliability concerns, address environmental compliance requirements, and replace retiring generation capacity; the proliferation of new technologies and resources that are changing the way that customers approach their utility service; and, an active merger and acquisition agenda.

The use of innovative regulatory constructs, such as performance-based ratemaking, formula rate plans, and rider mechanisms has become more pervasive. However, the pace of change has been far from uniform across the 53 regulatory bodies followed by Regulatory Research Associates, an offering of S&P Global Market Intelligence.

Against this backdrop, RRA evaluates the regulatory climates for energy utilities of the jurisdictions within the 50 states and the District of Columbia, a total of 53 jurisdictions, on an ongoing basis.

The evaluations are assigned from an investor perspective and indicate the relative regulatory risk associated with the ownership of securities issued by each jurisdiction's electric and gas utilities.

Overview of RRA rankings process

RRA evaluates the regulatory climates for energy utilities of the jurisdictions within the 50 states and the District of Columbia, a total of 53 jurisdictions, on an ongoing basis. The evaluations are assigned from an investor perspective and indicate the relative regulatory risk associated with the ownership of securities issued by each jurisdiction's electric and gas utilities.

The rankings look at various state commission policies, but also take into account actions by state governors, legislatures, courts and intervening parties in major proceedings before the commissions.

RRA maintains three principal rating categories: Above Average, Average, and Below Average. An Above Average designation indicates that, in RRA's view, the regulatory climate in the jurisdiction is relatively more constructive, representing lower risk for investors that hold or are considering acquiring the securities issued by the utilities operating in that jurisdiction. At the opposite end of the spectrum, a Below Average ranking would indicate a less constructive, higher risk regulatory climate from an investor viewpoint.

A rating in the Average category would imply a relatively balanced approach on the part of the governor, the legislature, the courts, and the commission when it comes to adopting policies that impact investor and consumer interests.

Within the three principal rating categories, the designations 1, 2, and 3 indicate relative position, with a 1 implying a more constructive relative ranking within the category, a 2 indicating a midrange ranking within the category, and a 3 indicating a less constructive ranking within the category.

State regulatory rankings distribution

RRA attempts to maintain a "normal distribution" of the rankings, with the majority of the states classified in one of the three average-range categories. The remaining states are split relatively evenly between the Above Average and Below Average classifications, as seen in the accompanying chart that depicts the current distribution of the rankings.

Ranking changes

RRA monitors events nationwide and adjusts the individual jurisdictional rankings as developments dictate. In addition, RRA conducts a quarterly review of the full slate of its rankings. The latest quarterly review was released on November 15, at which time RRA noted several ranking changes versus the prior report published on Aug.21.

In October 2017, RRA lowered the ranking of South Carolina regulation to Average/2 from Average/1, to reflect increasing uncertainty concerning the resolution of controversial nuclear-plant-related issues, and in conjunction with the issuance of the November 15 report, RRA modified the rankings of certain other jurisdictions.

RRA's decision to lower the ranking of South Carolina was the result of increasing regulatory and political opposition to SCANA Corp. subsidiary South Carolina Electric & Gas Co.'s, or SCE&G's, decision to abandon construction of the two new nuclear units and concerns regarding the related cost recovery. While the Public Service Commission of South Carolina had not issued a substantive ruling regarding the abandonment and related cost recovery, actions by various factions indicated that the level of risk to the company receiving full recovery of and on its investment had notably increased. In RRA's view, this heightened level of risk is not consistent with the previous Average/1 rating accorded the South Carolina regulatory environment.

Connecticut moved up one notch to Below Average/2 from Below Average/3, primarily due to a rebalancing of the rankings. RRA notes that over the last 10 years or so, Connecticut has fluctuated between these two rankings. While retaining its largely restrictive stance, in recent months certain somewhat constructive developments, including the approval of a major merger, have occurred related to issues of concern to investors.

The District of Columbia moved down one notch to Below Average/3 from Below Average/2, where it had already been low in the category, with this move precipitated by a rebalancing in the rankings in the face of other changes and also to reflect adversarial positions taken by stakeholders with respect to a pending merger.

RRA raised the ranking of Michigan regulation to Above Average/3 from Average/1, reflecting the PSC's constructive approach to the implementation of legislation enacted in December that addresses various aspects of the state's regulatory framework.

The ranking of Montana went to Below Average/1 from Average/3, primarily due to a rebalancing of the rankings; Montana had been at the lower end of the Average/3 category.

RRA's ranking of Utah rose to Average/1 from Average/2 primarily due to a rebalancing of the rankings; Utah had been at the upper end of the Average/2 category previously.

States to watch

Several jurisdictions are in the midst of high-profile proceedings, the outcome of which have the potential to alter RRA's view of the regulatory climate in the respective jurisdictions.

Regulatory proceedings are under way in the District of Columbia and Maryland with respect to the proposed acquisition of WGL Holdings Inc., parent of Washington Gas Light Co. by Canadian concern AltaGas Ltd., which already owns U.S. utilities in Michigan and Alaska. Maryland and D.C. have typically been stringent in their reviews of proposed mergers.

The merger was also subject to review by regulators in Virginia, and the commission ultimately approved the transaction without onerous conditions. Also in Virginia, the base ROEs used to calculate revenue requirement adjustments under the electric utilities' rider mechanisms have been controversial as of late, with recommendations coming in at levels well below prevailing industry averages. In addition, a new governor will take office in January 2018, and while the governor does not designate the members of the Virginia State Corporation Commission, there could be a shift in overall policy as a result of new administration.

In Kansas and Missouri, the commissions are taking another look at the proposed merger of Great Plains Energy and Westar. The commission is gearing up in Texas with a new chairman at the helm and another new commissioner about to take office to tackle the fourth proposed acquisition of Energy Future Holdings, which owns 80% of Oncor Electric Delivery; this time the suitor is California utility holding company Sempra Energy.

In Georgia and South Carolina, regulators and legislators continue to grapple with issues surrounding appropriate regulatory treatment of two over-budget nuclear generation projects — Southern Co. subsidiary Georgia Power's Vogtle plant and SCE&G's Summer units.

In addition, in Georgia, PSC Chairman Stan Wise intends to resign early next year, several months before the end of a term that ends in December 2018, and it is unclear how the change in the composition of the PSC might alter the posture of the commission with respect to the Vogtle issue, and by extension RRA's view of the regulatory climate in the state.

In South Carolina, several bills have been introduced that, if enacted, could negatively impact SCE&G, which could lead to a further reduction in the RRA ranking of that jurisdiction.

Although not a nuclear unit, there has been a good deal of controversy in Mississippi concerning Southern Co. subsidiary Mississippi Power Co.'s Kemper facility, and a new proceeding is ongoing to address issues surrounding the plant.

Both New Jersey and Pennsylvania have initiated generic proceedings to look at alternative ratemaking mechanisms and other possible enhancements to the regulatory framework. It remains to be seen whether these lead to any substantive changes. A new commissioner has joined the Pennsylvania PUC, filling the vacancy created by the departure of Commissioner Robert Powelson following his appointment to the Federal Energy Regulatory Commission. Pennsylvania regulation has become more constructive in recent years, and it is unclear how this new commissioner might alter the existing balance.

A new governor will take office in New Jersey in January 2018, and could have a significant impact on the make-up and the policies of the Board of Public Utilities, or BPU, as the BPU president is a member of the governor's Cabinet. In addition, BPU Commissioner Mary-Anna Holden is serving beyond the end of a term that expired in March.

In Oklahoma, at the direction of Gov. Mary Fallin, a task force is undertaking a comprehensive review of the Oklahoma Corporation Commission, and Missouri is expected to undertake a review of the regulatory framework; RRA notes that similar reviews undertaken in recent years have failed to result in substantive changes.

In Rhode Island, as part of a grid modernization investigation, various state agencies have proposed shifting the traditional utility business model in the state to a more performance-based model that would align incentives with customer demand and public policy objectives. Other recommendations include utilization of multiyear rate plans containing budget and revenue caps "to incent cost savings." If ultimately approved, these changes could signal improvement in the regulatory climate in the state.

In addition, RRA notes that the latter part of the year generally produces a high volume of rate case decisions, any of which could lead to shifts in the jurisdictional rankings. There are 85 energy rate cases pending nationwide, more than 20 of which could be decided by year-end.

Already a client? For a more in-depth discussion of the factors RRA reviews as part of its ratings process, see the November 15, 2017 report: State Regulatory Evaluations--Regulatory Climate for Energy Utilities.

For a complete, searchable listing of RRA's in-depth research and analysis please visit the S&P Global Market Intelligence Energy Research Library.

Sep 21, 2017
Aug 22, 2017