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Insights Into Rate Case Proceedings And Other Major Regulatory Activity Pending For U.S. Energy Utilities

‘Death by Amazon’…Don't Believe the Hype

Street Talk Podcast

Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?

Energy
Insights Into Rate Case Proceedings And Other Major Regulatory Activity Pending For U.S. Energy Utilities

Apr. 23 2018 — The pace of regulatory activity remains active nationwide, with 77 electric and gas rate cases pending in 36 states as of March 16. In addition, most state regulatory commissions and the Federal Energy Regulatory Commission have opened proceedings to address the revenue requirement impacts of the federal tax act enacted in December 2017. Taking effect January 1, the act, among other things, lowers the corporate income tax rate to 21% from 35%.

Map of pending energy rate cases

In these 77 pending cases, the utilities are seeking rate increases aggregating to about $5.5 billion, net, excluding the later-year steps of multiyear rate requests

Of the 77 pending rate cases, about 18 of them were formally initiated this year. In those cases, the average requested ROE is 10% for electric and 10.4% for gas utilities versus 12% for electric and 12.4% for gas companies in 2000.

Average electric and gas requested ROEs graph

In addition to rate case proceedings, state commission reviews of merger proposals are underway in a few states from proposed transactions announced in 2017 and 2018.

Tax reform-related proceedings are ongoing at the state and federal level. A large number of companies are addressing the issue with their respective commissions on a stand-alone basis or as part of commission-initiated generic proceedings. Others have proposed to address the tax reform issues more holistically in the context of pending rate proceedings and have filed revised revenue requirements that reflect the changes that stem from the TCJA. Still others have filed new base rate cases or indicated that they plan to do so in the future to address the issue.

Several grid safety and modernization proceedings are pending nationwide. In California, the California Public Utilities Commission’s investigation into whether Pacific Gas and Electric Co., or PG&E, and its parent PG&E Corp.’s organizational culture and governance prioritize safety and adequately direct resources and accountability measures to achieve safety goals and standards continues. Among the possible remedies to be considered is a reduction in the company’s authorized ROE. An investigation is also pending before the California PUC to determine whether the costs related to Aliso Canyon Natural Gas Storage Facility should be excluded from the rates of Southern California Gas Co. following a highly publicized safety-related incident.

The District of Columbia Public Service Commission has opened an investigation to “identify technologies and policies that can modernize our energy delivery system for increased sustainability and will make our system more reliable, efficient, cost-effective, and interactive.”

In neighboring Maryland, the Public Service Commission has opened a proceeding to conduct a “targeted review” of Maryland’s electric distribution system to “ensure that [the system] is customer-centered, affordable, reliable, and environmentally sustainable.” Working groups are to complete deliberations on these issues by June 2018.

The Public Utilities Commission of Ohio has initiated a proceeding to investigate the merits of certain technological and regulatory initiatives that could “serve to enhance the consumer electricity experience.” The PUC has established a three-phase investigation; the first phase began in April 2017, with presentations to the commission that offer “a glimpse of the future.”

An investigation into the “NextGrid Utility of the Future,” a collaborative that will primarily focus on identifying future technological advancements and improved utility regulatory models was recently initiated by the Illinois Commerce Commission. An independent third party will lead the investigation, and reports will be presented to the commission in 2018.

A grid modernization investigation is underway in Rhode Island, referred to as the Power Sector Transformation Initiative. Meanwhile, as part of a pending rate case, National Grid plc subsidiary Narragansett Electric Co. is proposing a Power Sector Transformation plan to support the Initiative. Narragansett Electric’s Power Sector Transformation plan is comprised of four main components: investments in advanced metering, grid modernization, electric vehicle infrastructure, and energy storage and solar demonstration projects.

Similar proceedings are pending in Massachusetts, Connecticut, and Minnesota. In New York, a policy framework on ratemaking and utility business models was adopted in May 2016 as part of the Reforming the Energy Vision proceeding. The utilities submitted Distributed System Implementation Plans that address distribution system planning, operations, and administration, and identify changes that can be made to effectuate state energy goals and objectives.

Generic proceedings are underway in several states to review aspects of the ratemaking framework. In New Mexico, a proceeding is pending to increase the “transparency” of “rate cases by reducing the number of issues litigated in rate cases and provide a “more level playing field among intervenors and [New Mexico Public Regulation Commission] staff on the one hand, and the utilities on the other.”

In Oklahoma, a task force was established to undertake a “performance assessment” of the Oklahoma Corporation Commission, including the time it takes to process cases.

The Michigan Public Service Commission has commenced a study to address performance-based regulation, whereby a utility’s authorized rate of return would be dependent on achieving certain targeted policy outcomes. The PSC is to provide a report to the legislature and governor in April 2018.

In Minnesota, the commission initiated an investigation into performance metrics and potentially, incentives for Xcel Energy subsidiary Northern States Power-Minnesota’s electric utility operations.

In Nevada, a Committee on Energy Choice has been established by Gov. Brian Sandoval, a Republican, due to the passage on November 8, 2016, of a ballot measure that would amend the state’s constitution to allow for a competitive retail electric market for all customers. In addition, the Nevada Public Utilities Commission initiated a proceeding to examine issues associated with the state’s Energy Choice Initiative and the possible restructuring of Nevada’s energy industry.

In Oregon, legislation was enacted in August 2017 that requires the Oregon Public Utility Commission to establish a public process for investigating how developing industry trends, technologies, and policy drivers impact the existing regulatory system and incentives currently used by the commission.

In Pennsylvania, the PUC has opened a proceeding to address alternative forms of regulation of varying kinds. As part of a grid modernization investigation in Rhode Island, referred to as the Power Sector Transformation Initiative, 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, or MRPs, containing budget and revenue caps “to incent cost savings.”

In South Carolina during July of 2017, SCANA Corp. subsidiary South Carolina Electric & Gas, or SCE&G, announced that it will cease construction of V.C. Summer nuclear units 2 and 3, each 1,117-MW plants. On August 1, 2017, SCE&G formally filed with the PSC to abandon V.C. Summer units 2 and 3 and related ratemaking treatment of the related costs. The General Assembly and the governor’s office are conducting reviews. SCE&G subsequently tendered a proposal designed to resolve the ratemaking and capacity issues associated with the Summer abandonment. The South Carolina Office of Regulatory Staff and Governor Henry McMaster have called for SCE&G to cease collecting $445 million that is currently in rates, and legislation has been introduced to that effect. Passage of this legislation would severely impact SCANA’s financial health and possibly could engender a bankruptcy filing.

Pending before the FERC is a June 5, 2017 complaint related to the ROE authorized for certain transmission owners in the Southwest Power Pool. This is the latest in an ongoing string of complaints against FERC approved ROEs for transmission owners that are part of the California Independent System Operator, MidContinent System Operator and the PJM Interconnection.

A proceeding is also ongoing to broadly examine issues associated with the resiliency of the bulk power system, the goals of which “are to develop a common understanding among the Commission, industry and others of what resilience of the bulk power system means and requires; to understand how each regional transmission organization [RTO] and independent system operator [ISO] assesses resilience in its geographic footprint; and to use this information to evaluate whether additional Commission action regarding resilience is appropriate.”

Several proceedings have been initiated before the FERC to address changes in federal tax rates for companies it regulates, as a result of the TCJA, including electric transmission utilities and natural gas and oil pipelines. For the electric sector, FERC said that “because most of the FERC-regulated electric transmission companies have transmission rates that automatically adjust with changes in the tax rates, the adjustments for much of the industry are already taking place.” However, the commission simultaneously issued “show cause” orders directing 48 companies to propose revisions to their transmission tariffs.

For the natural gas pipeline sector, FERC issued a notice of proposed rulemaking, or NOPR, “that would allow FERC to determine which pipelines under the Natural Gas Act may be collecting unjust and unreasonable rates in light of the corporate tax reduction and changes to the Commission’s income tax allowance policies.” In addition, the NOPR requires pipelines “to file a one-time report, called FERC Form No. 501-G, on the rate effect of the new tax law and changes to the Commission’s income tax allowance policies.”


Credit Analysis
‘Death by Amazon’…Don't Believe the Hype

Highlights

Written by Camilla Yanushevsky, with analysis contributions from Melissa Doscher, Senior Manager, Risk Services, and Jim Elder, Director, Risk Services

Is Amazon unstoppable? And if so, what is Amazon’s next target?

May. 23 2018 — From an online bookseller that launched in 1995 to a high-tech conglomerate with global reach, Amazon.com Inc. has a bullseye on every market it touches. Today, Amazon is a retailer, hardware developer, cloud services provider, content streaming service, clothing designer, and, more recently, a home security company with its announcement to purchase Ring Inc. on February 27, 2018.

The company has rallied 37% this year, crushing Wall Street expectations for its first quarter earnings, posting $1.6 billion in profit and prompting nearly two dozen firms to up their price targets on the e-commerce giant. A few of those newly minted price targets place the company north of the $1 trillion threshold.1

Not surprisingly, the market is questioning — is Amazon unstoppable? And if so, what is Amazon’s next target?

How do Amazon’s acquisitions stack up?

Amazon, along with its subsidiaries, has made 96 merger and acquisition transactions since its 1995 launch, the largest being its acquisition of Whole Foods Market Inc. for approximately $13.7 billion, announced on June 16, 2017.

Figure 1: Amazon's largest acquisitions ($M) from January 1, 2008 – April 27, 2018

Figure 2: Amazon’s M&A activity by industry (%)

To compare the disruptive impact of innovation in the various sectors that Amazon has entered, we looked at Amazon’s 10 largest deals announced since January 1, 2008 and examined industry and company-level probability of default (PD) changes using our PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

Among these 10 major acquisitions, Amazon’s announcement to purchase food retailer Whole Foods Market Inc. on June 16, 2017 was the most disruptive, with the food retail sub-sector PD increasing from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or by about 30%. We attribute the PD escalation to the sheer size of the transaction, more than 10x the size of any of its past transactions, as well as the saturation within the food retail sub-sector.

But is the Amazon hype overblown?

With the exception of the Whole Foods purchase, our PD Market Signal model shows Amazon may not be the ‘Death Star’ it is hyped up to be. Seven of Amazon’s 10 largest acquisitions –Annapurna Labs Ltd. (Semiconductors), Souq.com FZ-LLC (Internet and direct marketing retail), Elemental Technologies LLC (Application software), Ring Inc. (Consumer electronics), Zappos.com Inc. (Internet and direct marketing retail), Twitch Interactive Inc. (Internet software and services), and Audible Inc. (Internet software and services)had a positive impact on the short-term market perceived quality of the target industry, with the magnitude of PD changes significantly greater for Amazon’s more recent acquisitions Annapurna Labs Ltd. (01/22/2015), Souq.com FZ-LLC (03/28/2017), and Elemental Technologies LLC (09/03/2015).

By contrast, only slight PD changes were observed for acquisitions during Amazon’s earlier years – Zappos.com Inc. (07/22/2009), Twitch Interactive Inc. (08/25/2014), and Audible Inc. (01/30/2008) when the market perception of the “Amazon Effect” was less in full flight.

In the case of Amazon’s most recent announcement to buy Ring Inc. for $992.8 million, we attribute the positive impact – the median PD for the consumer electronics sub-sector decreased 13.76% from 9.45% on February 26, 2018 to 8.15% on March 6, 2018 – to the lack of a ‘surprise factor.’ Amazon had previously invested in Ring through the Alexa Fund, which exclusively provides funding to Alexa-enabled devices.

Figure 3: One-week median U.S. Industry Market Signal Probability of Default change following Amazon’s acquisition announcement: January 1, 2008 – April 27, 2018

On a company-level, the “Amazon Effect” is more obvious. For example, significant escalations in PD were observed for both small- and large-cap companies in the peer groups of the acquired companies. Small-cap WOD Retail Solutions Inc.’s one-year PD increased from 0.12% on August 24, 2014 to 1.81% on September 1, 2014 (1,409.73% change) following Amazon’s announcement to acquire live streaming video platform company Twitch Interactive Inc. Similarly, Alphabet Inc.’s PD rose 170.75% from .03% on January 29, 2008 to .08% on February 6, 2008, following Amazon’s decision to buy Audible Inc., one of the world’s largest audio entertainment and information providers, on January 30, 2008.

Figure 4: Amazon’s target peer group: Largest changes in One-Week Market Signal Probability of Default following acquisition announcement, January 1, 2008 – April 27, 2018

What is Amazon’s next battleground?

While Amazon’s plans with Ring have yet to be disclosed, the deal certainly gives Amazon a leg up on Google and Apple in the smart home market, which many market participants expect to be Amazon’s next battleground. Ring already supports Amazon’s virtual assistant Alexa, which Amazon’s Director of Applied Science and Alexa Machine Learning, Ruhi Sarikaya, recently announced will soon be able to track memory and context.2

Ring, alongside Alexa can be leveraged with the smart lock system, Amazon Key, to facilitate the safe delivery of Amazon products in home. In just a few years, the trifecta Ring-Key-Alexa integration could lead to a completely new home landscape from security, to deliveries, and even lifestyle. Intelligent personal assistants, smart keys and video doorbells could be as ubiquitous as television sets.

While the immediate impact of the Ring acquisition might have had a positive impact on the sub-sector’s PD, this move might provide a glimpse into how disruptive Jeff Bezos’ longer-term strategy might be. With its smart doorbells and security cameras, Ring literally opens the door for Amazon to start selling services, not just goods. Is the market letting a giant through the front door?

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1 McDonald, L. (2018, May 08). Why Amazon could be the next black swan for the market.

2 Making Alexa More Friction Free (April 25, 2018). Retrieved April 27, 2018.

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

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Listen: Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

More banks are reaching further out the yield curve in their loan portfolios to meet customer demands but, increasingly, advisers believe institutions need to proceed with caution. In the episode, experts from PIMCO, Sandler O’Neill, Chatham Financial and PrecisionLender discuss rate risk and how banks focused on funding will ultimately prove the winners.

Street Talk is a podcast hosted by S&P Global Market Intelligence.

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Technology, Media & Telecommunications
National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

May. 17 2018 — This year's Broadband Forum Asia, held in Bangkok, Thailand, April 24-25, focused on ways to accelerate the growth of fixed broadband markets in developing countries. Looking at the success of advanced fixed broadband markets in the Asia-Pacific region, executives agreed that government participation is crucial to success.

In 2013, the Chinese government launched the Broadband China initiative with an investment of $323 billion and a target of full nationwide broadband coverage by 2020. The government has focused on accelerating fiber deployments, driving fiber's share of broadband households from 21.6% in 2013 to 84.2% in 2017. China has also become the world's largest fixed-line broadband market with an estimated 348.5 million subscribing households at year-end 2017.

Similarly, Vietnam's broadband initiative aimed at driving economic growth through fiber deployments accelerated fiber's share of broadband households from 47.4% in 2015 to 77.5% in 2017. Although the country's broadband penetration rate remains relatively low, Vietnam is one of the fastest growing fixed broadband markets in the Asia-Pacific region. Le Trung, deputy director of the infrastructure development center at FPT Telecom, said Vietnam is on the right track in terms of migration from asymmetric DSL, or ADSL, to gigabit passive optical networks, or GPONs. Trung further explained that FPT is positive about achieving 10 Gbps PON connections in the future after reducing its CapEx and operating expenses through advanced technology, including the use of software-defined networking optical line termination, or SDN OLT.

Broadband and fiber penetration by market in 2008 (%)Broadband and fiber penetration by market in 2017 (%)

Harin S. Grewal, cluster director of networks and technology for Singapore's Info-communications Media Development Authority, or IMDA, noted that the government provides grants of up to S$750 million (US$569 million) and S$250 million (US$190 million), respectively, to network companies (responsible for passive infrastructure including wirelines and ducts) and operating companies (responsible for active infrastructure including switches and routers), both for a license period of 25 years. In return, operators are obliged to meet fiber rollout and adoption targets under this initiative, called the Next Generation National Broadband Network, or NGNBN.

As of April, 13 operating companies are funded by NGNBN in Singapore while the number of retail fixed broadband service providers has increased to 28 from three when the program was launched in 2010. With the entry of more operators, Singaporean broadband subscribers enjoy competitive services and pricing with an average revenue per user of $25.33 and affordability index of 0.3% based on the market's 2017 per capita gross national income purchasing power parity.

Speed is another important indicator of the success of a broadband market. The Singaporean government requires new operators to reach a minimum of 100 Mbps peak downstream bandwidth and 50 Mbps peak upstream bandwidth per end-user connection by its launch; they are also expected to improve with downlink bandwidths exceeding 1 Gbps in the future.

Singapore achieved nationwide fiber coverage in mid-2013 and fiber is being deployed in new buildings. Hong Kong, on the other hand, struggles to extend fiber coverage to remote locations such as villages and outlying islands. Government plans to subsidize operators for expanding fiber coverage to about 380 villages is expected to drive marginal growth of the broadband market.

Global Multichannel is a service of Kagan, a group within S&P Global Market Intelligence's TMT offering.

As of April 25, 2018, US$1 was equivalent to $1.32.


Energy
Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?

Highlights

Electric vehicles allow consumers to realize transportation fuel savings and states to meet their emissions-reduction goals, and offer utilities a unique business opportunity. A recent report identifies regulatory initiatives that address the issue.

Until a few years ago, the nation's electric utilities had little direct interest in the automotive industry. While fleet vehicles have always been part of the utilities' infrastructure maintenance and customer service activities, and utilities with auto industry customers have always been impacted by the sector's overall health, few people recognized the full direct impact that electric vehicles, or EVs, could have on the utilities' business prospects until it became clear that EV technologies were viable, and that consumers were willing to begin moving away from vehicles with combustion engines. It is now becoming apparent that EVs could foster significant new demand growth for the electric utility sector after more than a decade of sluggish to negative growth in most parts of the country.

In addition to allowing consumers to realize significant transportation fuel savings and certain states to meet their ambitious emissions-reduction goals, EVs clearly offer the utilities a unique business opportunity. Electric sales for most utilities have been flat for several years due to sluggish economic growth and widespread adoption of conservation initiatives, and EV investments and, more broadly, increased use of electricity to charge EVs could be a boon to many utilities in the years ahead.

While many utilities have indicated interest and plans to pursue opportunities in the EV market, quantifying investments is a challenge due largely to companies not providing a clear delineation of commitments to capital costs, versus expense allocations.

Based on a preliminary analysis of the EV sector, Regulatory Research Associates, an offering of S&P Global Market Intelligence, has discerned certain key trends, as summarized below.

  • In states that have a strong focus on renewable energy development and alternative energy technologies, the backbone charging infrastructure for EVs is more developed than it is in those states that have been reluctant to adopt policies supportive of the industry. For example, California, which has been supportive of the nascent EV sector, leads the nation both in terms of the number of EVs in use and the number of charging stations, and has been a leader in calling for more stringent emissions reductions.
  • A significant issue that utility commissions are grappling with is whether third-party entities that own EV charging stations should be treated like regulated utilities due to the fact that they are essentially resellers of electricity. Utilities in some jurisdictions are interested in investing in charging stations and seeking rate base treatment of their investments, while utilities in other jurisdictions are primarily focused on ensuring that adequate distribution infrastructure is in place to support third-party charging stations and the beneficial impact that EVs are expected to have on electric sales.
  • There is a need to design time-of-use rates to incentivize off-peak EV charging, thereby minimizing adverse effects on the larger distribution grid. In fact, if structured correctly, funneling load to off-peak periods could smooth out demand, creating less dramatic peaks and valleys, thereby allowing the grid to operate more efficiently.
  • Certain regional approaches are being taken to standardize EV policies and infrastructure development. For example, in 2013, the governors of eight states, namely California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island, and Vermont, established the ZEV Program Implementation Task Force, which is a coordinated approach to support policies to foster the development of EV markets and the required charging infrastructure, and "remove barriers to the retail sale of electricity and hydrogen as transportation fuels and promote competitive plugin electric vehicle charging rates."
  • In October 2017, the governors of Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming signed a memorandum of understanding that calls for collaboration to create an "Intermountain West Electric Vehicle Corridor." The agreement calls for promoting EV market development and establishing standards for EV fast-charging corridors across these states.

Although the ZEV Program Implementation Task Force and the agreement to create the Intermountain West Electric Vehicle Corridor are perhaps the most disciplined attempts to date to standardize EV related policies for maximum efficacy, many other jurisdictions are addressing the matter on a case-by-case basis.

For further information concerning key regulatory initiatives, prominent legislation, and noteworthy proceedings addressing generic EV related matters, refer to RRA's Special Report dated May 2, 2018.

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Insights Into Rate Case Proceedings And Other Major Regulatory Activity Pending For U.S. Energy Utilities

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