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Whether Md. community solar program sparks FERC's jurisdiction depends on whom you ask

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

Broadband Only Homes Skyrocket In 2018 Validating Top MSOs Connectivity Pivot

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

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


Whether Md. community solar program sparks FERC's jurisdiction depends on whom you ask

A potential FERC order granting a complaint regarding aMaryland community solar aggregation program could either dampen innovativestate efforts or provide needed clarity, depending on which stakeholders youbelieve.

At issue is a three-year pilot community solar electricgeneration system, or CSEGS, program developed by the Maryland Public ServiceCommission to comply with a state law. Under the program, if a CSEGS producesmore energy than is needed by its subscribers, the local electric utility must"use" and compensate the CSEGS or its subscribers for that surplusgeneration.

In an Aug. 23 complaint, the and Choptank Electric CooperativeInc. jointly alleged that the only way the utility can use thatgeneration is to sell it to others. Therefore, they said, such sales are atwholesale and subject to the Federal Power Act, or FPA.

The problem, according to the co-ops, is that neither theMaryland statute nor the PSC's regulations require a CSEGS to be a qualifyingfacility, or QF, before it can be compensated by a utility for its excessgeneration under the pilot program. They further complained thatthe PSC's regulations require that the payments for that excess power to bemade at the full retail rate. As such, the co-ops claimed that the PSCregulations violate both the Public Utility Regulatory Policies Act, or PURPA,and the Maryland statute, both of which require such sales to be at theutility's avoided-cost rate.

In recent comments, the Electric Power Supply Associationsaid the matter is asimple one to resolve and urged FERC to resist any attempts to have it opine onbroader distributed energy resource integration issues that are beyond thescope of the proceeding.

EPSA insisted that the sale of any excess power produced bya solar generation facility participating in the CSEGS program is clearly awholesale sale, and therefore it is subject to FERC's exclusive jurisdictionand must be priced at no more than the purchasing utility's avoided cost.

Since CSEGS facilities are, by definition, solar-poweredfacilities, EPSA said they should have little difficulty satisfying therequirements for QF status. Thus, the association added, the PSC could justeasily add a QF status requirement as well as one dictating that any such salemust be at no more than the purchaser's avoided costs.

Also chiming in, the Edison Electric Institute that while designing andimplementing community solar programs is "squarely within the bailiwick ofthe states," those states also must recognize the potential interplay ofthe programs with federal requirements. And here, EEI said, any mandatorypurchase of excess or unsubscribed generation under the CSEGS pilot programmust be priced in accordance with avoided cost standards or risk violatingPURPA.

EEI added that the Maryland state law requiring the pilotprogram reflects that requirement, and therefore the problem is easily remediedbecause it is with the PSC's regulations.

According to the National Association of Regulatory UtilityCommissioners, however, the complaint raises much larger issues. NARUCaccused the twoelectric cooperatives of "trying to undermine the ability of a statecommission to conduct a pilot program by limiting its design options." Italso maintained that granting the petition would infringe on the statecommissions' jurisdiction over retail rates.

"If the commission acts on this complaint, it willimmediately have a chilling effect on State experiments not only in Maryland, butin other jurisdictions as well. And this chilling effect will extinguish FERCand State access to empirical data from ongoing State experiments — dataunavailable elsewhere," NARUC insisted.

Several commenters asserted that the complaint is premature.For instance, the Maryland PSC stressed that its pilot is strictly voluntary, and thetwo co-ops have not yet indicated whether they will participate.

"Since the cooperatives haven't proposed tariffs toallow their customers to participate, there is no indication that issues thatthey raise will in fact arise," the Maryland PSC said. "Having failedto do so, the cooperatives have failed to exhaust their administrative remediesand their petition is — at best — premature."

Moreover, the Maryland PSC stressed that the effect of thefull retail rate bill credit component is unknown and maintained that its pilotis part of the state's existing net metering program, therefore not subject toPURPA's avoided cost standards.

The New York Public Service Commission also that granting thecomplaint could have a stifling impact on the development of communitydistributed generation programs, noting that at least 25 states have createdcommunity solar programs or pilots. New York alone has more than 1,000community distributed generation projects under development, the stateregulator noted.

In addition, the NYPSC said the CSEGS program does notconflict with PURPA or FERC's regulation because it allows electric companiesto file tariffs that set compensation based on avoided cost rates. And becausethe requirements to qualify as a CSEGS are narrower than PURPA's definition ofa QF, the NYPSC said all generators eligible for the CSEGS program willnecessarily be QFs. Thus, requiring CSEGS participants to be QFs is not needed.

SolarCityCorp also wondered what all the controversy is about, noting thatthe Baltimore Gas and ElectricCo., Potomac ElectricPower Co. and PotomacEdison Co. have submitted CSEGS compliance filings to the PSCwithout identifying any FPA or PURPA concerns.

In addition, SolarCity argued that the directive to"use" CSEGS generation as part of a net-metering mechanism does notmake the net-metering transaction a wholesale sale under the FPA. It said the requirementis nothing more than a directive for participating utilities to use the energyto offset certain purchases and not waste the electricity that will be providedunder the pilot program. And "requiring a utility to prioritize the use ofone resource type over another … is well within the state's rights,"SolarCity maintained.

The Coalition for Community Solar Access, the Maryland DCVirginia Solar Energy Industries Association and the Solar Energy IndustriesAssociation similarly argued that the transactions at issue are net meteringtransactions, which are state jurisdictional retail transactions.

And while the CSEGS regulations do not specifically requirea CSEGS facility to certify as a QF, the solar groups said "it isaxiomatic that only QFs are eligible to exercise PURPA rights and receive astate-established rate of compensation for sales for resale." Thus,"it does not follow that the regulations actually compel utilities topurchase from a non-QF in violation of PURPA."

The solar groups further argued that "it isunreasonable for the cooperatives to assume or speculate that a developer of amulti-million dollar solar facility would fail to do its basic due diligenceand put in a few additional hours of administrative work to self-certify inorder to relieve any jurisdictional anxiety." (EL16-107)


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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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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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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