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Global Credit Research - 08 Jun 2010
London, 08 June 2010 -- The potential new regulatory framework for the UK's gas and electricity
transmission and distribution networks could increase risk for the sector,
says Moody's Investors Service in a new Special Comment.
Details of the new framework were published in January 2010 by the UK
energy regulator, the Office of Gas & Electricity Markets (Ofgem),
in its Emerging Thinking consultation document.
"Moody's welcomes Ofgem's review of the UK regulatory
framework, which we believe is (i) necessary, given the challenges
faced by energy network companies; and (ii) not overly surprising
as regulation is bound to evolve over time," says Paul Marty,
a Moody's Vice President -- Senior Analyst and co-author
of the report. "We further note the high degree of transparency
of the review, as well as the regulator's understanding of
the potential financial implications it may have. Generally,
we view the proposed changes as more evolutionary than revolutionary.
Indeed, the key features of the existing regime (i.e.
ex-ante, incentive-based, and incorporating
the concept of Regulated Asset Value or RAV) will be maintained."
In the report, entitled "RPI-X@20: A Welcome
Review of the UK Regulatory Framework But A Step Change Could Raise Credit
Risk", Moody's notes that although the existing regulatory
framework -- commonly known as "RPI-X" --
has worked well over the past 20 years or so, Ofgem recognises that
the scale and type of challenges faced by energy networks as Britain moves
to a low carbon economy is unprecedented and therefore requires a new
set up. The Emerging Thinking consultation document (together with
the more specific parallel consultation papers published at the same time
and the more recent working paper on financeability) therefore outlines
Ofgem's proposals, which are centred around the themes of
(i) an outcomes-led framework; (ii) enhanced engagement;
and (iii) incentivising efficient long-term delivery.
Moody's believes that the transition to a new regulatory regime
with a different mindset and focus from the past approach is likely to
present significant challenges for companies' managements and may
thus result in a different assessment of the stability and predictability
of their cash flows, at least in the short-term until a track-record
has been re-established. "Similarly, although
we take some comfort from Ofgem's reiterated financing duty,
changes in regulation could raise financing risk and hence further increase
the credit risk profile of the network companies," adds Mr.
Moody's cautions that potentially greater complexity of the regulatory
model in future price control determinations could complicate the analysis
of the sector, and any such increased opacity of companies'
performance may act as a deterrent for future investors and thus impact
financeability. However, the rating agency also believes
that Ofgem is mindful that change will bring with it increased risk or
at least the perception of increased risk, simply through a lack
of experience with the new framework. "The regulator will
have the option of recognising this in the early stages of the new regime
by possibly allowing some credit mitigants, at least until a track
record has been re-established. This kind of regulatory
choices in determining the outcome of RPI-X@20 as well as companies'
responses will ultimately determine whether ratings will be affected,"
Mr. Marty concludes.
The report is available on www.moodys.com
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Moody's: Regulatory Changes Could Increase Risk For UK Gas And Electricity Companies
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