Fitch revises Midwest ISO rating outlook down to stable


Oct. 21, 2003 — Fitch Ratings has affirmed the ‘BBB+’ senior unsecured debt rating for the Midwest Independent System Operator (MISO) and revised the Rating Outlook to Stable from Positive.

Approximately $200 million of senior notes are affected.

The current ratings and Stable Outlook for the MISO reflect the company’s steady and predictable cash flows, as well as supportive federal regulatory policy. The MISO currently operates under cost-of-service tariffs accepted by the Federal Energy Regulatory Commission (FERC), which allow for the recovery of all costs associated with services MISO provide as an agent for transmission owners.

Rating concerns facing the company relate to the execution risk in implementing a real-time market for energy, ancillary services, and congestion rights; the potential loss of load under the MISO’s control in the event of the withdrawal of some utilities; and the transitional regulatory and operational environment of the electric transmission sector in the US.

The change in Rating Outlook follows the recent announcement that the MISO will withdraw and subsequently re-file its energy markets tariff (EMT). The EMT filing related to the formation of real-time and day-ahead energy markets (so-called Day 2 activities) by March 31, 2004. Fitch affirmed the Positive Rating Outlook for MISO in January 2003 based on the expectation that the company would operate as forecasted during its implementation of Day 2 activities.

This latest action by the MISO effectively delays the start of the energy markets in the Midwest, and a new completion date has yet to be established. The Stable Outlook recognizes the continued execution risk associated with Day 2 development efforts and uncertain membership participation (see below), mitigated by the reasonable assurance of cost recoveries through Schedules 10, 16 and 17 of the ISO tariff, and by exit fees for withdrawing members. While not expected, the ratings of the MISO would be negatively impacted if the company experienced an adverse change in FERC regulatory policy regarding RTOs. Fitch would view the stabilization in MISO membership participation and the successful completion and operation of a day-ahead and real-time energy markets for energy and transmission congestion rights as positive credit events for MISO.

It is anticipated that the FERC will release an opinion on October 22, 2003 regarding the MISO’s proposed EMT, filed in July of this year, which will provide further guidance on issues that were absent from the prior proposal, such as control area responsibilities and the treatment of grandfathered contracts. It is expected that the MISO will then re-file a complete EMT and set a target completion date for the creation of energy markets in the Midwest. To date the MISO has spent approximately $75 million on technological systems in preparation for ‘Day 2’ operations.

MISO’s tariffs include a cost-recovery provision, called Schedule 10, that is adjusted monthly and subject to a $0.15 per mwh cap through February 1, 2008. Costs above the limit between now and February 2008 are deferred until the rate for current charges drops below the cap and then the deferred amount is recovered at that time. The MISO also has the ability to recover all costs associated with the development and administration of firm transmission rights and the energy markets through Schedules 16 and 17, respectively. Any costs not recovered under Schedules 16 and 17 will be recouped through Schedule 10. Furthermore, FERC regulatory decisions on MISO matters have historically produced favorable outcomes for the company, including the FERC mandate that members must support the obligations of the MISO. Indeed, any transmission owner withdrawing from the MISO before it recovers the deferred costs associated with its services will be directly assigned those costs upon withdrawal.

Ameren Corp.’s membership status in the MISO is currently a matter of controversy. Ameren is slated to join the MISO as part of GridAmerica, an Independent Transmission Company composed of FirstEnergy’s American Transmission System (ATSI), Ameren and Northern Indiana Public Service Co. (NIPSCO). On Oct. 1 2003, ATSI and NIPSCO began operating under the MISO; however, Ameren has petitioned the Missouri Public Service Commission for permission to transfer functional control of GridAmerica and MISO, and is currently negotiating with the MPSC Staff on the terms and conditions of the requested transfer. The FERC held hearings in late September to review the situation of those utilities in the Midwest that have not yet joined, or announced plans to join, ISOs or regional transmission organizations (RTO), including Ameren, Illinois Power and American Electric Power. An announcement by the FERC is expected in November.

Fitch does not expect the non-participation of Ameren to have a negative impact on the credit quality of the MISO, since the revenue base of existing members is sufficient to keep MISO’s Schedule 10 tariff below the $0.15 cap. However, the absence of Ameren from the MISO footprint would complicate operations as there would be increased seams and impaired connectivity between the east and west regions of the RTO. Fitch notes that the FERC order approving Ameren’s merger with CILCORP was contingent upon the combined company being in the MISO. The MISO is a non-stock, not-for-profit corporation that was organized as a FERC-approved RTO in December 2001. The MISO was founded in 1996 and began selling transmission service under its FERC-accepted open-access transmission tariff (OATT) in February 2002.


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