Business & Money

Deck: 
Credit-rating linkage harms certain power companies. Ring-fencing is the best answer for regulators.
Fortnightly Magazine - August 2004
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

Business & Money

Credit-rating linkage harms certain power companies. Ring-fencing is the best answer for regulators.

In recent years, a persistent battle has developed between state public utility commissions (PUCs) and holding companies over the negative financial and operational impacts on regulated utilities of failed diversification investments. Ratepayers expect to compensate companies for the costs of providing utility service-not those costs associated with the unregulated activities of affiliated companies.

Unfortunately, the realities are often painfully different, and in some instances disastrous for the financial health of the utility. Moreover, ratepayers and politicians are highly sensitive and easily outraged by a utility attempting to recover costs associated with non-regulated companies in the regulated cost of providing utility service.

Credit ratings linkage is an additional worry for state regulators when confronting failed diversification. Fitch and Standard & Poor's, for example, apply linkage in determining the ratings of companies within a holding company structure. This method directly links the credit rating of the utility to the parent and any affiliated companies. Consequently, the regulated utility may be penalized via a lower credit rating, which would not happen if it were a stand-alone company.

In fact, Fitch indicates that ratings linkages caused about half of all rating changes for electric and gas utilities. The consequences of linked credit ratings on utilities, of course, includes higher debt and equity costs that are typically passed along to ratepayers via higher charges for regulated services.

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.