Suzanne Smith, Director

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NARUC MeetingColumbus, OhioSeptember 15, 2003

• Suzanne Smith, Director
• Standard Poors, New York
• Tel [phone]
• Email Suzanne_Smith_at_sandp.com

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Agenda

• Utility Ratings
• Importance of Regulation
• Analyzing State Regulation
• Examples
• What Are We Watching

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Utility Ratings

• Consistent Methodology
• Business Position
• Financial Position
• Comparative Analysis

• Rate Over 400 Entities
• Electric, water, gas
• Vertically Integrated
• Transmission Distribution
• Merchant Generation
• Independent Power Generators
• Public Power

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Credit Armageddon for Some
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Rating Actions 2003 YTD
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Reasons for 2003 Downgrades

• Deteriorating Financial Profiles
• Constrained Access to Capital Markets
• Liquidity Problems
• Insolvency
• Investments in Unregulated Businesses

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Current Ratings and Outlook Distribution
Investor-Owned Utilities
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Downgrades Because of Regulation

• Small percentage of overall downgrades
• 6 in 2002
• Reasons
• Deteriorating financials (ConEd)
• Acquisition Debt (Ameren and SCANA)
• Lack of Regulatory Insulation (Arizona PS)
• Nevada Disallowances (437 million)

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Survey of Regulators (2003)

• Most Important Issues
• Shift of Emphasis towards Financial Health
• Federal State Jurisdictional Issues
• Generation and Transmission Adequacy

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Importance of Regulation

• Regulation is a key part of utility ratings.
• The safety net of regulatory oversight provides
  credit strength by enabling utility companies to
  carry higher debt balances and realize less cash
  flow protection measures than their comparably
  rated industrial counterparts.

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Analyzing Regulation

• Specific Regulatory Mechanisms
• Overall Regulatory Framework
• Regulatory Regime

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Specific Regulatory Mechanisms

• Rate of Return
• Common Equity Layer
• Weather Normalization
• Purchased Power/Gas Cost Recovery
• Maximum Dividend Payout
• Recovery of Environmental Expenditures
• Stranded Cost Recovery

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Overall Regulatory Framework

• Are Utilities Earning Allowed Returns
• Price and Revenue Caps
• Length of Review Period
• Historical or Forecast Test Year
• Ability to Pass Through Costs
• Pre-Approval Mechanisms
• Minimum Credit Rating Requirements
• Review of Affiliate Transactions
• Oversight of Parent

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Regulatory Regime

• Independence
• Transparency
• Stability
• Flexibility
• Timeliness
• Fairness

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Example

• Idaho Supportive Regulation
• Power cost-adjustment that provides
• recovery for 90 of net power supply costs
• beyond those included in base rates.
• Company incurred power cost deferrals
• of 248 million as of June 31, 2001.
• Idaho Pubic Utility Commission
• approved recovery as follows
• - 168 million in May 2001
• - 47.7 million on Sept. 28, 2001

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Example (contd)

• Vermont Less Supportive, But Improving
• Late 1990s Power Cost Disallowances
• Placed the Company in Financial Jeopardy
• Jan 2001 Agreement Ensures Recovery of
• Power Costs in Base Rates
• Still Vulnerable to Power Cost Increases No
• Cost Adjustment Mechanism
• Recent MOU decreases ROE to 10.5 but
• Promises Minor Rate Increases

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What are We Watching?

• Will ROEs Go Down Because of Low Interest
  Rates?
• Rising Pension Obligations and Health Care Costs
• More Counterparty Credit Risk
• Pressures to Keep Rates Low
• Treatment of Hedging