High profile regulatory proceedings, upcoming gubernatorial and commissioner elections have the potential to alter the tenor of the regulatory climate for electric power and natural gas utilities in several jurisdictions in the latter part of 2018, according to Regulatory Research Associates, an offering of S&P Global Market Intelligence.

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The RRA team evaluates the regulatory climates for energy utilities of the jurisdictions within the 50 states and the District of Columbia, a total of 53 jurisdictions, on an ongoing basis. The evaluations are assigned from an investor perspective and indicate the relative regulatory risk associated with the ownership of securities issued by each jurisdiction's electric and gas utilities.

Federal tax reform

Proceedings are ongoing in virtually every jurisdiction with respect to the treatment to be accorded the impact of the federal tax changes enacted in December 2017 that lowered the corporate federal income tax rate to 21% from 35%. RRA is monitoring these cases and will be on the lookout for jurisdictions that take an innovative approach to this challenge.

Elections

Changes in governors and the make-up of commissions in certain jurisdictions also bear watching, as they could lead to changes in policy. In November, 36 states will hold gubernatorial elections. In 20 of those 36 states, the incumbent governor is seeking re-election. In 16 states, the incumbent governor is either term-limited and not eligible for re-election or is not seeking re-election. In addition to the gubernatorial races, a mayoral race in the District of Columbia will take place where the incumbent is seeking re-election and 19 utility commission seats, across 11 states will be up for grabs.

At the District of Columbia Public Service Commission, Chair Betty Ann Kane and Commissioner Willie Phillips are serving pending reappointment or replacement; consequently, a change in the Mayor could signal changes in the makeup of the PSC. Similarly, in Texas, all three members of the Public Utility Commission of Texas, or PUCT, Chairman DeAnn Walker, a Republican and Commissioners Arthur D’Andrea and Shelly Botkin are serving pending Senate confirmation, so a change in governor could lead to a complete overhaul of the PUC membership.

In several states, commissioners have been appointed or reappointed and are serving pending senate/general assembly action on their confirmations, including Anastasia Palivos of the Illinois Commerce Commission Jason Stanek of the Maryland Public Service Commission, and Margaret Cheney and Sarah Hofmann of the Vermont Public Utility Commission. The outcome of gubernatorial elections in these states could lead to changes in the respective commissions' make up. In addition, there are vacancies on the New York Public Service Commission and the Public Utilities Commission of Nevada. In both of these states the governor appoints the commission members.

Nuclear and mergers

The Georgia Public Service Commission continues to grapple with nuclear plant related issues related to Southern Co. subsidiary Georgia Power Co.'s Alvin W. Vogtle Nuclear Plant expansion project, which became controversial following the bankruptcy of Westinghouse Electric in 2017. However, support for the Vogtle nuclear expansion has been strong and widespread both at the PSC and in the Georgia political establishment.

In South Carolina, the ongoing controversy surrounding SCANA Corp. subsidiary South Carolina Electric & Gas Co.'s V.C. Summer nuclear plant expansion, which led to two recent rankings downgrades by RRA, continues to be a cause for concern and has the potential to impact the proposed acquisition of SCANA by Dominion Energy Inc. The Federal Energy Regulatory Commission and Georgia Public Service Commission have approved the transaction, but review proceedings are underway in North Carolina and South Carolina.

Ongoing merger review proceedings also bear watching. While regulators in Alaska have already approved the transaction, those in Idaho, Oregon and Washington extended their reviews of the proposed acquisition of Avista Corp. by Canada-based Hydro One Holdings Ltd., following management changes at Hydro One. Settlements have been reached with intervening parties in each of these jurisdictions.

Regulatory reform

Proceedings regarding reforming the electric delivery system and/or regulatory framework are underway in Illinois, Maryland, New Hampshire, Ohio, Oklahoma, Oregon and Pennsylvania, while in Nevada, a measure will be included on the ballot in the November 2018 to amend the state’s constitution to provide for a competitive retail electric market allowing for all customers to choose their electricity suppliers. Under current law, retail competition is permitted only for certain large-volume customers.

In Iowa, legislation was enacted in May, directing the Iowa Utilities Board to develop rulings with respect to certain aspects of the traditional regulatory process, such as test year and rate base valuation. The board opened an investigation in August, and it remains to be seen whether the new rules will incorporate major changes to existing practices.

California wildfires

In California, issues associated with extensive wildfires in both northern and southern California in the fourth quarter of 2017 have taken center stage in recent months. Authorities have not yet established the causes of the wildfires that occurred in late 2017. The California courts have applied inverse condemnation to events involving utility equipment that holds the utilities liable for wildfire damages involving their equipment even without a determination of negligence. In addition, the PUC has ruled that it cannot permit recovery of costs that were the result of imprudence or negligence by the utility, raising the possibility that a utility would be unable to fully recover its costs if inverse condemnation is applied by the courts.

Activity before the California Legislature added another measure of uncertainty, with the introduction of Senate Bill 819, which would prohibit recovery of costs that resulted from imprudence. The situation recently improved somewhat, as on Aug. 31, Senate Bill 901 passed the California State Assembly. The bill would allow state investor-owned utilities to securitize wildfire liabilities, require utilities to adopt wildfire mitigation plans and allocate $1 billion over five years for fire prevention though forest management. In addition, the bill would grant the California Public Utilities Commission the authority to consider a broader range of factors when deciding if costs can be passed on to ratepayers. Gov. Jerry Brown is expected to sign the legislation.

Storm cost recovery

With the first major storm of the hurricane season set to hit the U.S. east coast in a few hours, it is worth noting that investors and utilities will in the coming weeks be focused on not only the operational and societal impacts of the storm, but also on how commissions in each of the affected states address recovery of any extraordinary costs that are incurred by the utilities. The current storm, Hurricane Florence, is expected to have the most dramatic impact on North Carolina, South Carolina and Virginia, but Alabama, Georgia, Kentucky, Tennessee and West Virginia may also feel some of the pain. While the mid-Atlantic is not expected to be materially affected by Hurricane Florence, the region has been prone to hurricane activity in recent years. Similarly, while Florence is not expected to impact the Gulf Coast states, these states bear mentioning as the season begins since they have historically seen the most hurricane activity.

Overview of RRA rankings process

RRA's rankings look at various state commission policies, but also take into account actions by state governors, legislatures, courts and intervening parties in major proceedings before the commissions. RRA maintains three principal rating categories: Above Average, Average and Below Average.

An Above Average designation indicates that, in RRA's view, the regulatory climate in the jurisdiction is relatively more constructive than average, representing lower risk for investors that hold or are considering acquiring the securities issued by the utilities operating in that jurisdiction.

At the opposite end of the spectrum, a Below Average ranking would indicate a less constructive, higher-risk regulatory climate from an investor viewpoint.

A rating in the Average category would imply a relatively balanced approach on the part of the governor, the legislature, the courts and the commission when it comes to adopting policies that impact investor and consumer interests.

Within the three principal rating categories, the designations 1, 2, and 3 indicate relative position, with a 1 implying a more constructive relative ranking within the category, a 2 indicating a midrange ranking within the category and a 3 indicating a less constructive ranking within the category.

RRA attempts to maintain a "normal distribution" of the rankings, with the majority of the states classified in one of the three Average-range categories. The remaining states are the split relatively evenly between the Above Average and Below Average classifications.

In a recently published quarterly evaluations report, RRA discussed four rankings changes: RRA raised the firm's ranking of Missouri regulation to Average/3 from Below Average/1, the team lowered the ranking of South Carolina regulation to Average/3 from Average/2, the ranking of Connecticut regulation was raised to Below Average/1 from Below Average/2 and the ranking of Vermont regulation was lowered to Average/3 from Average/2.

For a more in-depth discussion of the factors RRA reviews as part of its ratings process, see the Sept. 7, report entitled State Regulatory Evaluations--Energy.

For a discussion of the regulatory climate in each jurisdiction, refer to RRA's Commission Profiles.

For a complete, searchable listing of RRA's in-depth research and analysis please go to the S&P Global Market Intelligence Energy Research Library.