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Moeller reflects on time at FERC, work still to be done

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


Moeller reflects on time at FERC, work still to be done

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Onlyone FERC commissioner served longer than Philip Moeller, who since leaving theagency has buckled down in his new job working for the Edison ElectricInstitute. Still, he has plenty to say about his time at the commission and thechallenges facing the industry.

Moellerjoined FERC in July 2006 after being appointed by fellow Republican PresidentGeorge W. Bush. It was "an interesting time," Moeller said, recallingthat the commission approved the North American Electric Reliability Corp. asthe nation's first official electric reliability organization the same month hetook his seat with the agency.

Healso cited the dramatic changes that occurred in electricity markets duringthose early years. Power prices were "pretty high" from late 2006 toSeptember 2008, which made the generators happy but made consumers "prettymad at us," he said, noting that the dynamic changed when wholesale powerprices dropped dramatically in 2009.

Moreover,California launched its newly revamped market — dubbed a Market Redesign andTechnology Upgrade — in September 2006 after the original market design faileddramatically during the Western energy crisis of 2000-2001, Moeller added.

"Thatwas a pretty significant effort that was pretty controversial at thetime," he said. But the new design has been a success and continues toexpand beyond California's borders, which was "kind of hard to imagine ...10 years ago," the former commissioner quipped.

FERC has plenty of work leftto do

Moellersaid that when he departed from FERC in October 2015, he left behind an agencywith plenty of work ahead of it. One of the items topping that list was theneed to tie up the many loose ends related to FERC's implementation of itstransmission planning and cost allocation rule, Order 1000. Moeller, whodissented from parts of the final rule, maintained that he "saw theproblems coming."

Inparticular, Moeller observed that the RTOs were being put in the position ofhaving to pick transmission project winners without any guidance as to how thatprocess should work or what factors should be evaluated over others. "It'sjust a whole new set of issues for them with a lot at stake, and I think it'sfair to say they are really struggling as to how they move forward in a newrole for them," Moeller said.

Moelleralso dissented from FERC's demand response pricing rule, Order 745, which waslater upheld by theU.S. Supreme Court. He said he was surprised by the court's decision,especially after listening to the oral arguments. "I fought the goodfight, and felt like I had most economists on my side, but the court decideddifferently," Moeller said. He added that trying to guess which way thecourt ultimately will rule based on questions posed during oral arguments isfoolhardy "because they can surprise you."

Conversely,Moeller said he was not surprised that the Supreme Court in Hughes v. Talen Energy that a Maryland program providing long-termrate guarantees to an entity that agrees to build a new power plant in thestate intrudes on FERC's jurisdiction. However, he stressed that the courtprovided plenty of flexibility on what states can do to encourage thedevelopment of new or clean generation, possibly in a way that still impactswholesale markets. But, he said, exactly where the line should be drawn will bedecided in future test cases.

Similarly,Moeller maintained that FERC has signaled that it might sign off on certainstate actions that could impact power capacity markets. "But when do thoseactions cross the line?" he asked, suggesting that FERC will soon beforced to make more of those calls. Thus, Moeller said he is very encouraged bydiscussions taking place in the ISO New England Inc. and the regarding waysstate policies can be incorporated without causing problems with wholesalemarkets.

Moelleradded that PJM's markets were not really designed to reflect the value nuclearand certain other power plants provide in maintaining system reliability on a24/7 basis. Because those plants are becoming increasingly important, Moellersaid a discussion on whether market rules need to be changed to reflect thatvalue "is very worthwhile and I'm hoping that continues and actually leadsto something."

RTOsand ISOs are on the right track in trying to finding potential solutions ontheir own without waiting for FERC to impose a top-down approach, Moeller said."The stakeholder process allows them to work through what could be somevery complicated market rules before actually filing something worthy ofserious consideration," he explained.

Does Congress need to modifythe FPA?

Lookingat the bigger picture, Moeller said Congress may need to revisit the FederalPower Act to clarify what constitutes a sale under that act versus a sale underlocal jurisdiction, as well as the proper treatment of aggregated distributedresources such as rooftop solar.

Hissuggestions echothose made by former FERC staff members at a recent hearing on Capitol Hill —one of several planned oversight hearings on the FPA. Policymakers have paidmore attention lately to jurisdictional issues for power markets in the wake ofthe two recent Supreme Court cases.

Moelleralso said Congress could provide permitting certainty, including possiblefederal siting authority for wholesale transmission. "If something likethe [Clean Power Plan] moves forward, I don't know how you hit [the gas andrenewable] building blocks without more pipes and wires," Moeller said.

Turningback to his time at FERC, Moeller said that it was "terrifically fun andinteresting" and that he enjoyed the camaraderie of the othercommissioners and the staff. "The agency works very well. … It's notperfect, but if all the agencies in the federal government ran as well as FERC,we'd be in a much better spot," Moeller said.

FERChas generally been given high marks for acting as an independent agency andstaying relatively apolitical. Moeller largely agreed with that assessment,although he noted that Republican commissioners tended to favor somewhat higherreturns for transmission projects. He also cited a "bit of a philosophicaldivide" on contract sanctity issues and demand response compensation.

Inaddition, Moeller acknowledged some opinions among the FERC commissioners on theClean Power Plan that reflected their political affiliations. But he alsopraised the U.S. EPA for agreeing to extend the plan's compliance deadlinesafter participating in a series of FERC technical conferences on thereliability implications of the rule.

"I'mguessing they weren't thrilled that the commission had those technicalconferences when they were announced. But I think in the end, even they seemedto agree that we all learned a lot from those," Moeller said.

AlthoughFERC is down to just three commissioners — the bare minimum needed to vote outan order — following the exit of Tony Clark at the end of September, Moeller saidthe agency still should be able to get its work done. As for getting the two emptyFERC seats filled again, he noted that any new nominees likely will faceincreased scrutiny regardless of who they are.

FERC"is a higher-profile agency now for a variety of reasons, and so theappointment process is going to reflect that and people are more engaged inthese issues if they're members of Congress or the U.S. Senate. They've had tothink about them more. It's not a calm time," Moeller observed.

Finally,Moeller — whom EEI hired to fill the newly created position of senior vicepresident of energy delivery and chief customer solutions officer — said one ofhis main areas of focus at EEI will be to advocate for "getting the ratesright."

"It'sa two-way grid now, both with information and energy production andconsumption, and that's pretty exciting, but you have to get the rate structureright so that cost causation lines up as it should," Moeller concluded.


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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