Utility regulators expect major federal-state conflicts over electricity reforms

NORTH SALEM, N.Y., May 7, 2003 — State utility commissioners see trouble ahead in the form of deep jurisdictional disputes with the Federal Energy Regulatory Commission (FERC), according to the latest Standard & Poor’s survey of state regulators, conducted by RKS Research & Consulting.

Signaling further contention, significant majorities of state regulators believe FERC’s Standard Market Design is fatally flawed, and will only lead to wide inequities between high and low-cost electricity regions. Further, a majority of commissioners express doubt that the Federal SMD proposal will ever deliver promised benefits to rate-paying consumers, according to the survey.

Recalling the Enron collapse, plus credit quality issues facing utilities, energy holding companies and independent power producers, commissioners in this latest survey oppose repeal of the Public Utility Holding Company Act. Majorities are against the easing of regulation on utility holding companies, and their conviction has increased over the past two years, the survey shows.

Concerned that energy company financial conditions are worsening, state regulators expect to be more involved in monitoring the activities of utilities in their jurisdictions. But at the same time, among those commissioners who say they have sufficient powers, fewer than half say these tools provide adequate authority to prevent the financial condition of the regulated utility from being harmed by the actions of its parent or unregulated affiliates.

The same survey finds broad agreement by commissioners that industry restructuring has stalled, along with increasing support for a return to cost-of-service regulation. And only a third of state regulators describe the transmission system in their region as fully adequate, according to the survey. Commissioners report heightened attention to outages and power quality incidents in their jurisdictions, the survey shows.

The results are part of the 2003 Edition of Standard & Poor’s survey of state regulators, conducted by RKS Research & Consulting. During January and February, RKS completed telephone interviews with 98 regulators — including 87 sitting commissioners — representing 47 separate jurisdictions. RKS performed its first regulators’ survey for Standard & Poor’s in 1995, and completed the second edition in January, 2001.

This latest RKS update finds strong opposition among regulators to FERC’s proposed SMD. Although commissioners from the Midwest and states offering a degree of choice in electricity markets express guarded to neutral assessments of FERC’s latest proposals, regulators from the South and West, plus regulated states, register opposition by margins by as much as 10-1. Respondents cite inflexibility, cost-shifting between states, and the absence of a compelling need as their reasons for negative reactions to the SMD.

“From these responses, it is apparent that state regulators will be unwilling to cede their jurisdiction to FERC,” said David S. Cohen, former chairman of the New Mexico Public Utilities Commission and special advisor to RKS and Standard & Poor’s on the regulatory responses. “Absent new Federal legislation, it appears that litigation is a probable outcome.”

Reflecting the impact of recent events on energy markets, the RKS survey finds a plurality of commissioners — 45 percent to 33 percent — opposed to repealing the Public Utility Holding Company Act. Again, regulators representing non-choice states are most negative, registering opposition to repeal by a 2-1 margin.

In contrast to the 2001 Standard & Poor’s survey, state commissions are clearly more concerned about utility financial health. By a 2-1 margin, for example, regulators call the financial health of utilities in their jurisdictions worse than three years ago. More than a third say they are extremely concerned about the financial condition of utilities in their area. And a quarter of these respondents — 26 percent — now have less confidence in the integrity of utility financial statements, according to the survey.

But while 53 percent of commissioners in this survey (down from 74 percent two years ago) say their state has explicit laws that require the regulated utility’s financial affairs to be insulated from those of the unregulated affiliates within the holding company, most regulators remain divided over just how authority these laws confer.

In the Midwest, South, and West, more than half the regulators say these laws provide little or no authority to insulate the regulated utility from the unregulated subsidiaries within the holding company.

Only in the Northeastern region do more than half of the commissioners believe these laws provide sufficient authority to prevent the regulated utility from being affected by the activities of its unregulated affiliates.

“These latest results highlight major shifts of attention and opinion among regulators since our 2001 survey,” said David J. Reichman, RKS chairman and chief executive. “In fact, in our 2001 Regulator Survey report we projected that the strong regulatory focus on transmission and reliability issues to the exclusion of financial matters could portend serious consequences for electric utilities — a situation that now permeates our latest findings.”

In fact, the adequacy of the nation’s transmission system, the major concern in the 2001 survey, continues to trouble the regulatory community. In this latest reading, commissioners only give their regional transmission system a “6” rating on a 0 (inadequate) to 10 (fully adequate) scale. Regulators in the West, Midwest and “choice” states register even lower scores.

Reflecting the realities of a “wired” national economy, with homes and businesses more dependent on sensitive electronic equipment, commissioners report growing unease with power reliability and outage issues. Half of the respondents indicate they are now monitoring outages and power quality incidents, despite the costs and complexity of gathering such data.

“This new report captures a major shift in regulatory priorities, which now includes, unlike the earlier surveys, an enhanced appreciation for the importance of maintaining strong utility financial profiles,” said Richard W. Cortright, Jr., director of Standard & Poor’s Utilities, Energy & Project Finance Group. “For instance, many regulators feel that they do not have the appropriate tools to significantly insulate utilities from the business pursuits of their parents or affiliates.”

Now in its 29th year of business, RKS Research & Consulting designs and conducts both syndicated and customized market research and public opinion polling for energy and natural resources clients, including their major associations. RKS operates from headquarters in North Salem, NY, plus field offices in New Jersey, Florida, Ohio, and California. Further information is available at www.rksresearch.com.

Standard & Poor’s, provides widely recognized financial data, analytical research and investment and credit opinions to global capital markets. With more than 5,000 employees located in 18 countries, Standard & Poor’s is an integral of the global financial infrastructure. Additional information is available at www.standardandpoors.com.


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