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Trade associations debate standardizing transmission planning under FERC's Order 1000

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View


Trade associations debate standardizing transmission planning under FERC's Order 1000

Post-technical conference comments submitted by the majortrade groups addressing issues related to competitive transmission developmentwere wide-ranging and varied.

For instance, the Edison Electric Institute warned FERC not totake away any of the flexibility granted by Order 1000 — the agency's landmarktransmission planning and cost allocation final rule.

"Any new competitive approaches should be driven by theindividual region in order to address their unique challenges," the EdisonElectric Institute said. "As each region rolls out its implementation,changes and improvements continue to be made through lessons learned andindividual stakeholder processes."

In contrast, the Transmission Access Policy Study Groupargued for thestandardization of cost-containment provisions that can make apples-to-applescomparisons of different proposals difficult.

But the need for transparency throughout the process wasstressed by most of the trade groups, including with respect to the costdetails of proposals and the weighting of factors to be used in projectselection. And several emphasized the importance of FERC providing guidance allalong the way to ensure that transmission planners and other stakeholdersadhere to commission policy and are not blindsided by changing expectations.

Issued in July 2011, FERC's Order 1000 new requirements withrespect to the planning of power lines as well as the allocation of the cost ofthose lines both within and between regions. Over the following couple ofyears, transmission planners filed, and FERC approved, tailored proposals forcomplying with Order 1000. For instance, some adopted a sponsorship model fortransmission development and others chose to use a competitive bidding approach.

However, various issues have since arisen regarding therule's mandate for competitive transmission development. So, the agency in lateJune held a two-day technical conference to address those issues and subsequentlyasked stakeholdersto submit post-technical conference comments answering some or all of more thantwo dozen questions.

In response to that call, the Edison Electric Institutepraised FERC for its willingness to tackle the issues raised in the technicalconference but warned the agency not to "embark on any efforts toestablish a broad rulemaking and/or seek standardization of existingpractices." Order 1000-compliant regional and interregional planningprocesses "are still in their infancy," and transmission plannerstherefore have only just begun considering potential changes based on their ownexperiences, the institute noted.

While Edison Electric Institute did not back FERC'sestablishing a "prescriptive" method for evaluating cost containmentproposals, it said any methods used for that task must be "clear andtransparent."

The Transmission Access Policy Study Group similarly saidrevisiting Order 1000's interregional coordination requirements would bepremature at this time given that "some regions have not yet completedeven one full interregional cycle." Unlike the Edison Electric Institute,however, the Transmission Access Policy Study Group suggested that cost containmentprovisions should be standardized to include "all costs withoutexemptions," although the group said a less comprehensive provision thatwould include ROE, capital structure and incentives but allow other costs to berecovered on a full cost-of-service basis might be acceptable.

But acknowledging the need for regional variation, the TransmissionAccess Policy Study Group also said costs containment provisions that do notmeet the standardization requirement should still be allowed in RTO regionsthat use a competitive solicitation model, although they should be accordedless weight than standardized bids. For regions that use a sponsorship model,cost containment provisions should be just one of the many factors consideredand bids that contain them should not be "generically favored," thestudy group said.

The Transmission Access Policy Study Group also insistedthat developers should not be granted ROE incentives simply because theyvoluntarily propose a cost containment provision to improve their chance ofbeing selected and that unsuccessful bidders should not be able to recoverrelated costs. Noting that a recent solicitation in the Southwest Power Poolfor an approximately $8.3 million project generated 11 bids that collectivelycost between $3.3 million and $4.4 million to prepare, the study group said,"[s]uch subsidization should be eliminated, or at an absolute minimumcapped, to avoid the unintended consequence of spawning a cottage industry ofpoorly designed bids."

The American Wind Energy Association, Interwest EnergyAlliance, Mid-Atlantic Renewable Energy Coalition, Renewable Northwest, TheWind Coalition and Wind on the Wires, however, jointly standardizing cost containmentprovisions, arguing that doing so would reduce competition and stifleinnovation. They also insisted that the current interregional planningstructure "is simply unsuited to the task of planning and building modern,efficient" transmission systems because it fails to look at the issue in aholistic manner.

"Proactive interregional planning should evaluate thebroad range of options, needs, and benefits available when considering proposedtransmission investments," the wind parties said. "The commissionshould require that interregional processes consider projects that addressdifferent needs in different regions, such as reliability benefits in one buteconomic or public policy in another."

Moreover, the wind parties said FERC should considerrequiring consistency and standardization between neighboring regions'interregional planning processes and mandating that those processes be"run concurrently with the regional processes." They also said regionaltransmission planning and generation interconnection should not be two discreteprocesses because they are so intertwined.

The American Public Power Association and National RuralElectric Cooperative Association jointly stressed the importance of ensuring that "anycaveats or carve-outs" in cost containment provisions do not reduce ornegate any associated ratepayer benefits. More generally, they said FERC"should ensure that any new actions or policies are designed to address ademonstrated need to protect competition, not a perceived need or a desire toprotect competitors."

While the American Public Power Association and the NationalRural Electric Cooperative Association also said they see benefits tostandardizing cost containment provisions, they took no position regarding"what form that standardization should take or how best to achieveit."

The Electricity Consumers Resource Council it strongly supportscompetition so long as it is "demonstrably workable and not undulymanipulated by artificial regulatory incentives, administrative proxies formarket forces, or other vestiges of regulation." According to the council,real competition "does not allow any recourse to regulators if a developerfails to get the price or bid she wanted."

The Electricity Consumers Resource Council expressed concernthat the focus on public policy needs is resulting in the overbuilding oftransmission and inadequate consideration of nontransmission solutions.

"The transmission incentives offered by FERC may bedistorting the 'market' for competitive projects, increasing the tensionbetween incumbent utilities and non-incumbent developers, and biasing theselection process in favor of transmission when a generation fix mightotherwise be lower cost and provide more longer-term benefits to end-useconsumers," the council said. "The mixture of competition, riskmitigation measures and performance incentives is mutually inconsistent."(AD16-18)


Technology, Media & Telecom
Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

Highlights

The segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

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.

Mar. 20 2019 — The U.S. broadband-only home segment logged its largest net adds on record in 2018, validating Comcast Corp.'s and Charter Communications Inc.'s moves to make broadband, or connectivity, the keystone of their cable communication businesses.

The size and momentum of the segment also put in perspective the recent high-profile online-video video announcements by the top two cable operators as well as AT&T Inc.'s WarnerMedia shake-up and plans to go toe-to-toe with Netflix in the subscription video-on-demand arena in the next 12 months.

We estimate that wireline broadband households not subscribing to traditional multichannel, or broadband-only homes, rose by nearly 4.3 million in 2018, topping the gains from the previous year by roughly 22%. Overall, the segment stood at an estimated 23.6 million as of Dec. 31, 2018, accounting for 24% of all wireline high-speed data homes.

For perspective, broadband-only homes stood at an estimated 11.3 million a mere four years ago, accounting for 13% of residential cable and telco broadband subscribers.

The once all-powerful, must-have live linear TV model, which individuals and families essentially treated as a utility upon moving into a new residence, increasingly is viewed as too expensive and unwieldy in the era of affordable, nimble internet-based video alternatives. This has resulted in a sizable drop in penetration of occupied households.

As a result, continued legacy cord cutting is baked in and broadband-only homes are expected to continue to rise at a fast clip, with the segment's momentum in the next few years compounded by Comcast's, Charter's and AT&T's ambitious moves into online-video territory.

Note: we revised historical broadband-only home estimates as part of our fourth-quarter 2018, following restatements of historical telco broadband subscriber figures and residential traditional multichannel subscriber adjustments.

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Q4'18 multichannel video losses propel full-year drop to edge of 4 million

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Q4'18 multiproduct analysis sheds more light on video's fall from grace

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Listen: Street Talk Episode 40 - Digital Banks Take a Page Out of 'Mad Men'

Mar. 20 2019 — Some fintech companies are making hay with digital platforms that tout their differences with banks, even though they are often offering virtually the same products. In the episode, we discuss with colleagues Rachel Stone and Kiah Haslett the deposit strategies employed by the likes of Chime, Aspiration and other incumbent players such as Ally Financial, Discover and Capital One. Those efforts conjure up memories of a Don Draper pitch in Mad Men and likely will enjoy continued success.

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Watch: Power Forecast Briefing: As retirements accelerate, can renewable energy fill the gap?

Mar. 19 2019 — Steve Piper shares the outlook for U.S. power markets, discussing capacity retirements and whether continued development of wind and solar power plants may mitigate the generation shortfall.

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Credit Analysis
2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Fundamentals View

Mar. 15 2019 — On November 20, 2018, a joint event hosted by S&P Global Market Intelligence and S&P Global Ratings took place in London, focusing on credit risk and 2019 perspectives.

Pascal Hartwig, Credit Product Specialist, and I provided a review of the latest trends observed across non-financial corporate firms through the lens of S&P Global Market Intelligence’s statistical models.1 In particular, Pascal focused on the outputs produced by a statistical model that uses market information to estimate credit risk of public companies; if you want to know more, you can visit here.

I focused on an analysis of how different Brexit scenarios may impact the credit risk of European Union (EU) private companies that are included on S&P Capital IQ platform.

Before, this, I looked at the evolution of their credit risk profile from 2013 to 2017, as shown in Figure 1. Scores were generated via Credit Analytics’ PD Model Fundamentals Private, a statistical model that uses company financials and other socio-economic factors to estimate the PD of private companies globally. Credit scores are mapped to PD values, which are based on/derived from S&P Global Ratings Observed Default Rates.

Figure 1: EU private company scores generated by PD Model Fundamentals Private, between 2013 and 2017.

Source: S&P Global Market Intelligence.2 As of October 2018.

For any given year, the distribution of credit scores of EU private companies is concentrated below the ‘a’ level, due to the large number of small revenue and unrated firms on the S&P Capital IQ platform. An overall improvement of the risk profile is visible, with the score distribution moving leftwards between 2013 and 2017. A similar picture is visible when comparing companies by country or industry sector,3 confirming that there were no clear signs of a turning point in the credit cycle of private companies in any EU country or industry sector. However, this view is backward looking and does not take into account the potential effects of an imminent and major political and economic event in the (short) history of the EU: Brexit.

To this purpose, S&P Global Market Intelligence has developed a statistical model: the Credit Analytics Macro-scenario model enables users to study how potential future macroeconomic scenarios may affect the evolution of the credit risk profile of EU private companies. This model was developed by looking at the historical evolution of S&P Global Ratings’ rated companies under different macroeconomic conditions, and can be applied to smaller companies after the PD is mapped to a S&P Global Market Intelligence credit score.

“Soft Brexit” (Figure 2): This scenario is based on the baseline forecast made by economists at S&P Global Ratings and is characterized by a gentle slow-down of economic growth, a progressive monetary policy tightening, and low yet volatile stock-market growth.4

Figure 2: “Soft Brexit” macro scenario.5

Source: S&P Global Ratings Economists. As of October 2018.

Applying the Macro-scenario model, we analyze the evolution of the credit risk profile of EU companies over a three-year period from 2018 to 2020, by industry sector and by country:

  • Sector Analysis (Figure 3):
    • The median credit risk score within specific industry sectors (Aerospace & Defense, Pharmaceuticals, Telecoms, Utilities, and Real Estate) shows a good degree of resilience, rising by less than half a notch by 2020 and remaining comfortably below the ‘b+’ threshold.
    • The median credit score of the Retail and Consumer Products sectors, however, is severely impacted, breaching the high risk threshold (here defined at the ‘b-’ level).
    • The remaining industry sectors show various dynamics, but essentially remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 3: “Soft Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

  • Country Analysis (Figure 4):
    • Although the median credit risk score may not change significantly in certain countries, the associated default rates need to be adjusted for the impact of the credit cycle.6 The “spider-web plot” shows the median PD values for private companies within EU countries, adjusted for the credit cycle. Here we include only countries with a minimum number of private companies within the Credit Analytics pre-scored database, to ensure a robust statistical analysis.
    • Countries are ordered by increasing level of median PD, moving clock-wise from Netherlands to Greece.
    • Under a soft Brexit scenario, the PD of UK private companies increases between 2018 and 2020, but still remains below the yellow threshold (corresponding to a ‘b+’ level).
    • Interestingly, Italian private companies suffer more than their Spanish peers, albeit starting from a slightly lower PD level in 2017.

Figure 4: “Soft Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

“Hard Brexit” (Figure 5): This scenario is extracted from the 2018 Stress-Testing exercise of the European Banking Authority (EBA) and the Bank of England.7 Under this scenario, both the EU and UK may go into a recession similar to the 2008 global crisis. Arguably, this may seem a harsh scenario for the whole of the EU, but a recent report by the Bank of England warned that a disorderly Brexit may trigger a UK crisis worse than 2008.8

Figure 5: “Hard Brexit” macro scenario.9

Sources:”2018 EU-wide stress test – methodological note” (European Banking Authority, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies“ (Bank of England, March 2018).

Also in this case, we apply the Macro-scenario model to analyze the evolution of the credit risk profile of EU companies over the same three-year period, by industry sector and by country:

  • Sector Analysis (Figure 6):
    • Despite all industry sectors being severely impacted, the Pharmaceuticals and Utilities sectors remain below the ‘b+’ level (yellow threshold).
    • Conversely, the Airlines and Energy sectors join Retail and Consumer Products in the “danger zone” above the ‘b-’ level (red threshold).
    • The remaining industry sectors will either move into or remain within the intermediate risk band (here defined between the ‘b+’ and the ‘b-’ level).

Figure 6: “Hard Brexit” impact on the median credit risk level of EU private companies, by industry.

Source: S&P Global Market Intelligence. As of October 2018.

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  • Country Analysis (Figure 7):
    • Under a hard Brexit scenario, the PD of UK private companies increases between 2017 and 2020, entering the intermediate risk band and suffering even more than its Irish peers.
    • Notably, by 2020 the French private sector may suffer more than the Italian private sector, reaching the attention threshold (here shown as a red circle, and corresponding to a ‘b-’ level).
    • While it is hard to do an exact like-for-like comparison, it is worth noting that our conclusions are broadly aligned with the findings from the 48 banks participating in the 2018 stress-testing exercise, as recently published by the EBA:10 the major share of 2018-2020 new credit risk losses in the stressed scenario will concentrate among counterparties in the UK, Italy, France, Spain, and Germany (leaving aside the usual suspects, such as Greece, Portugal, etc.).

Figure 7: “Hard Brexit” impact on the median credit risk level of EU private companies, by country.

Source: S&P Global Market Intelligence. As of October 2018.

In conclusion: In Europe, the private companies’ credit risk landscape does not yet signal a distinct turning point, however Brexit may act as a pivot point and a catalyst for a credit cycle inversion, with an intensity that will be dependent on the Brexit type of landing (i.e., soft versus hard).

1 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.
2 Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
3 Not shown here.
4 Measured via Gross Domestic Product (GDP) Growth, Long-term / Short-term (L/S) European Central Bank Interest Rate Spread, and FTSE100 or STOXX50 stock market growth, respectively.
5 Macroeconomic forecast for 2018-2020 (end of year) by economists at S&P Global Ratings; the baseline case assumes the UK and the EU will reach a Brexit deal (e.g. a “soft Brexit”).
6 When the credit cycle deteriorates (improves), default rates are expected to increase (decrease).
7 Source: “2018 EU-wide stress test – methodological note” (EBA, November 2017) and “Stress Testing the UK Banking system: 2018 guidance for participating banks and building societies”. (Bank of England, March 2018).
8 Source: “EU withdrawal scenarios and monetary and financial stability – A response to the House of Commons Treasury Committee”. (Bank of England, November 2018).
9 As a hard Brexit scenario, we adopt the stressed scenario included in the 2018 stress testing exercise and defined by the EBA and the Bank of England.
10 See, for example, Figure 18 in “2018 EU-Wide Stress Test Result” (EBA November 2018), found at:https://eba.europa.eu/documents/10180/2419200/2018-EU-wide-stress-test-Results.pdf

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2019 Credit Risk Perspectives: Is The Credit Cycle Turning? A Market-Driven View

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