Maryland Public Service Commission Staff Issues Ring Fencing Analysis
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March 14, 2005
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Christine Nizer, Manager
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Baltimore, MD – On February 18, 2005, the Staff of the Maryland Public Service Commission (“Commission”) issued a report entitled, “Analysis of Ring-Fencing Measures for Investor-Owned Electric and Gas Utilities.”

The term “ring-fencing” is a generic term for adopting legal protections for specific affiliates within a holding company structure in order to differentiate risk profiles among affiliates or a corporate parent. In some circumstances, absent ring-fencing protections, credit rating agencies may impute additional risk and give lower credit ratings to companies because of a higher risk profile of a corporate affiliate. As is detailed in the Maryland Commission Staff report, the ring-fencing measures may be adopted voluntarily or required by regulatory agencies.

Chairman Kenneth D. Schisler stated, “As a result of diversification in the energy sector, ring-fencing is a important topic for state utility commissions, utilities and customers. We do not want to extend a regulatory hand over unregulated activities, but state commissioners have an obligation to make certain that utilities and customers are not exposed to undue risk and excessive cost of capital requirements. This Report provides an excellent review of ring–fencing policy throughout the country and then analyzes Maryland’s policies to ensure we have appropriate rules in place to protect utilities and customers.”

The Staff, at the direction of the Commission, issued the Report to describe ring-fencing measures currently in place in Maryland and around the country. The report addresses capital structure requirements, dividend limitations, utility loans and financial guarantees of affiliates, asset transactions between a utility and non-utility affiliate or parent, effect on credit ratings, bankruptcy issues, and reporting requirements.

The Commission’s Staff observed in the Report that appropriate ring-fencing strategies can be as different as the companies that are regulated, and that one-size-fits-all measures may not be appropriate or in the public interest. The report concludes that the Commission has sufficient statutory and regulatory authority and flexibility to act when necessary to protect jurisdictional utilities and their customers. The report recommends that the Commission implement an annual ring-fencing report, and that the Commission use such a reporting system to monitor corporate risk profiles to determine whether there is a need to take regulatory action.

According to Chairman Schisler, the Commission intends to initiate a stakeholder process to gather the input of all interested parties to review the recommendations contained in the report

“This Report confirms that the Commission has been proactive in ensuring reliable and reasonably priced electric and gas service to the citizens of Maryland. The Commission appreciates the thoughtful and balanced staff analysis and looks forward to reviewing the results of the stakeholder process,” Schisler said.

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