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Ohio regulation becomes riskier for investors as Wyoming becomes less so

In a review of its State Regulatory Evaluations conducted over recent weeks, Regulatory Research Associates, a group within S&P Global Market Intelligence, lowered its ranking of Ohio regulation while raising the ranking for Wyoming regulation. The rankings of the other 51 jurisdictions evaluated by RRA were unchanged.

RRA's rankings are designed to reflect the relative level of investor risk associated with owning the securities of the utilities regulated by the 53 state-level jurisdictions RRA covers. RRA monitors state-level regulatory developments on an ongoing basis, and ranking changes for an individual jurisdiction may occur at any time in response to an event or a series of events. The team also performs a comprehensive review of the rankings on a quarterly basis to ensure that they remain appropriately synchronized and balanced.

In the prior review, conducted in May 2020, the team maintained the rankings of all 53 jurisdictions but noted that several jurisdictions were worth watching.

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RRA lowered the ranking of the Ohio regulatory environment, to Average/3 from Average/2, connoting an increase in the regulatory risk for utilities operating in that state. The change reflects the impact of recent legal developments associated with the 2019 enactment of power plant subsidization legislation.

Federal prosecutors and the FBI recently charged former House Speaker Larry Householder for his alleged involvement in a bribery scheme to garner support for the 2019 bill. Although Democrats in the state legislature have been vocal about their desire to pursue a bill repealing the subsidization law, they are outnumbered by their Republican colleagues, and there does not appear to be widespread support to alter the existing framework. However, this matter is likely to cast a spotlight on Ohio's energy utility regulatory practices and could inhibit passage of any meaningful utility-related bills for the foreseeable future.

The ranking of the Wyoming regulatory climate is moving to Average/2 from Average/3 to recognize the Wyoming Public Service Commission's swift action to allow the state's utilities deferred accounting treatment of coronavirus-related costs. In addition, recent base rate proceedings that have come before the commission have been resolved via settlements, and the authorized equity returns in these cases have generally been at or somewhat above industry averages when established.

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While maintaining essential utility services in these difficult times has been the primary focus for policymakers, as the crisis has dragged on, regulators have begun to consider methodologies to address COVID-19 related costs. As of May 11, RRA had observed that regulators in 17 jurisdictions had authorized the utilities to track and defer COVID-19-related costs and regulators in several other states have opened proceedings to look into the issues. RRA has posited that securitization may ultimately be a viable option for recovery of the deferred balances.

In the wake of the pandemic, RRA has observed that fewer companies are filing rate cases and the schedules in others have been delayed. Similarly, concerns regarding the spread of the virus and the need to address the broader economic impacts have disrupted legislative sessions across the U.S., slowing the process and creating additional uncertainty for the sector as a whole and in some states primaries and/or elections have also been delayed/postponed.

In recent months, RRA has issued State Regulatory Reviews affirming the rankings of several jurisdictions.

In a Colorado Regulatory Review dated May 15, RRA accorded the Colorado regulatory environment an Average/2 rating, stating that the jurisdiction continues to be relatively balanced from an investor viewpoint.

RRA's Minnesota Regulatory Review, released June 16, affirmed the team's Average/2 ranking of that jurisdiction, which, overall, remains balanced and stable from an investor viewpoint.

Also in June, RRA reviewed the regulatory climate in Texas for electric utilities, which are subject to oversight by the Public Utility Commission of Texas, and gas utilities, which are regulated by the Railroad Commission of Texas. RRA maintained its Average/2 ranking of both the PUC and RRC, finding that despite certain unique characteristics, both are relatively balanced from an investor standpoint.

In a Virginia Regulatory Review issued Aug. 14, RRA affirmed its Average/1 ranking of that jurisdiction, indicating that the state remains somewhat more constructive than average for investors.

RRA's Wisconsin Regulatory Review, published Aug. 12, noted that Wisconsin regulation remains constructive from an investor perspective; consequently, RRA maintained its Above Average/2 ranking of the jurisdiction.

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.

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An Above Average designation indicates that, in RRA's view, the regulatory climate in the jurisdiction is relatively more constructive than average, 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.

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 the split relatively evenly between the Above Average and Below Average classifications.

For a more in-depth discussion of the factors RRA reviews as part of its ratings process, see the Aug. 19, 2020 report, State Regulatory Evaluations — Energy.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a discussion of the regulatory climate in each jurisdiction, refer to RRA's Commission Profiles.

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

Ciaralou Palicpic contributed to this article.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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