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Court scrutinizes Clean Power Plan foes' constitutional, feasibility arguments

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


Court scrutinizes Clean Power Plan foes' constitutional, feasibility arguments

The U.S. Court of Appeals for the District of ColumbiaCircuit wrapped up a marathon session of oral arguments on the late Sept. 27by questioning opponents' claims that the carbon-cutting rule isunconstitutional and that the U.S. EPA failed to show its goals are achievable,among other issues.

After probingthe legality of generation-shifting and promulgating the rule under Section111(d) of the Clean Air Act, the en banc panel of judges delved into whether theEPA infringed on states' authority, gave sufficient notice and chance forcomment on changes between the proposed and final rule, and demonstrated thatthe generation-shifting the rule will require is achievable.

The Clean Power Plan allows states to form their ownimplementation plans or choose a federal one that the EPA has yet to craft.Despite those options, David Rivkin Jr., an attorney for state petitioners,told the court the rule gives states "no choice at all" and "commandeersthousands of state officials," making the regulation unconstitutional.

Judge David Tatel said the structure of the Clean Power Planis similar to the Americans with Disabilities Act, a federal law that isimplemented through state policies. He continued to return to this analogy: Ifthe federal government can require states to implement accessibleinfrastructure and other accommodations for people with disabilities under thatact, why is it unconstitutional for the EPA to require states to work withpower plants to implement the Clean Power Plan?

Rivkin responded that the EPA is telling states that "theywant them to engage in generation-shifting." Judge Patricia Millett,however, noted that the Clean Power Plan does not specifically prescribe anysingle compliance action.

Harvard Law School constitutional law professor LaurenceTribe said he does not believe there is anything unconstitutional about theADA. But had Congress been unable to issue that legislation and instead anagency took up the gauntlet to force states to develop "mini ADAs,"then the ADA would be unconstitutional. Tribe said that is precisely what theadministration and EPA did in issuing the Clean Power Plan. Tribe previouslyserved as an adviser to President Barack Obama's 2008 campaign. He wasrepresenting Peabody Energy Corp.and other non-state petitioners in the arguments.

Clean Power Plan defenders maintained that the EPA wasacting within its regulatory boundaries.

"States have the classic cooperative federalism choiceof regulating power plants' carbon dioxide emissions themselves through a stateplan or declining to do so, in which case EPA regulates private sourcesdirectly through a federal plan," said Amanda Shafer Berman, a lawyer forthe Department of Justice representing the EPA. If states decline to form theirown implementation plans, Berman said they incur no penalties or sanctions,unlike other cases where federal regulations were deemed unconstitutional fortheir state impacts.

Judge Brett Kavanaugh asked if providing power was not astate function. Berman responded that power production was largely carried out byprivate entities in coordination with regional grid operators.

Berman also dismissed petitioners' comparisons between theClean Power Plan case and a separate one — UtilityAir Regulatory Group v. EPA — where the U.S. Supreme Court ruled EPAoverstepped its authority in wanting to regulate carbon from small stationarysources. The court did, however, generally uphold the EPA's authority torequire greenhouse gas controls for larger sources. Berman saidthat case does not compare to the current matter because the Clean Power Planpertains to an emissions source — power plants — that is already heavilyregulated under the Clean Air Act.

Notice issues

The court next heard arguments from non-state petitionerattorney Thomas Lorenzen, who claimed that the EPA unlawfully added specific,nationwide carbon emissions rate limits for coal- and gas-fired plants in thefinal rule that were not part of the proposed rule.

Lorenzen said Clean Air Act Sections 307(b) and (d)'sreconsideration provisions, which only allow issues to be raised for judicialreview if they were objected to during the public comment period, "do notapply to failure of notice" because petitioners did not know about thecoal and gas limits until the rule was final.

Department of Justice attorney Norman Rave Jr. counteredthat the EPA received a wave of comments on potential subcategories for coaland gas plants and that states and affected sources should have expectedchanges to the final rule.

Judge Cornelia Pillard asked what type of detailspetitioners wanted, pointing to the EPA's assertions that it "had millionsof comments … hundreds of meetings, that a lot of what they did that'sdifferent [in the final rule] is stuff that was proposed by industry."

John Barker, an attorney for state petitioners, said therewas "no number" with regard to sub-category specific rates in theproposed rule.

"It is usual and normal for an agency when it realizesthat the approach in its proposed rule is not going to work to republish therule. … That's all that we're asking to be done here," Barker said.

The EPA has received 38 petitions for reconsideration of therule, Rave said.

Demonstration argument

The day wrapped up with discussions of whether the EPA demonstratedthat the generation-shifting the rule will likely require can be met by allstates, an issue that stoked heavy questioning from the justices.

William Brownell, an attorney for non-state petitioners,said the EPA failed to show that emissions credits from renewable energysources under the Clean Power Plan will be enough to allow fossil fuel-firedunits to keep running to meet demand while still be in compliance with the rule.

"The rule's requirement … has not been demonstrated norshown to be achievable," Brownell said.

But Kavanaugh said the "idea of administrative practiceis to come up with a program that hasn't been used before, but that doesn'tmean it's not adequately demonstrated necessarily."

Judge Judith Rogers added later that the EPA has beenstudying electric generation trends "for decades" and thatspeculating what is achievable when states have yet to submit theirimplementation plans would be "premature." Tatel repeatedobservations from Kevin Poloncarz, a lawyer representing power companies thatsupport the Clean Power Plan, that generating shifting is now "business asusual" for most utilities.

Brownell responded that fossil energy-rich states likeMontana, Wyoming and North Dakota will struggle to meet the rule's targets.

Millett went on to ask what states can do if they are havingtrouble complying with the rule despite good faith efforts.

"I have no doubt that EPA would be available to consultwith the state in this process as it went on," said Brian Lynk, aDepartment of Justice lawyer speaking on behalf of the EPA.

The words of Supreme Court justice Antonin Scalia, who diedin February, also loomed large during the arguments, including those he wrotein penning the UARG decision in 2014."When an agency claims to discover in a long-extant statute an unheraldedpower to regulate 'a significant portion of the American economy,' we typicallygreet its announcement with a measure of skepticism," Scalia wrote.

Noting that Section 111(d) is a rarely used article of theClean Air Act, Kavanaugh said Scalia's words "might have been written withthis case in mind."

The DOJ's Eric Hostetler attempted to explain why Scalia'swords did not fit the Clean Power Plan "to a T," as Judge ThomasGriffith suggested. Hostetler said the EPA is not to expand its authority tohundreds of new emissions sources, as it was in the rule under review in UARG.

Hostetler further defended the EPA's use of Section 111(d)of the Clean Air Act, pointing out that it was previously used to regulate leadcontent in gasoline. "You might not use the fire extinguisher in yourhouse until there's a fire. That doesn't mean you shouldn't use it when yourhouse is on fire," Hostetler said.


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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