Standard & Poor’s Credit Assessment of Regulatory Treatment (CART)

1. Standard & Poor’sCredit Assessment of Regulatory Treatment (CART) Society of Utility and Regulatory Financial Analysts 40th Financial Forum April 11, 2008

2. Todd A. Shipman, CFAUtilities & Infrastructure Ratings212.438.7676todd_shipman@standardandpoors.com

3. Today’s Topics • Evaluating Regulation in the Credit Rating Process • New Initiative - CART

4. Utility Regulation - Principles Utility credit quality is fundamentally based on the “regulatory compact” and the following principles: • Consistency and Predictability • Efficiency and Timeliness • Balance • Clarity and Certainty • Political Insulation

5. Evaluating The Regulatory Environment Political Considerations • Regulators are by design and by nature political, but there are checks on their behavior • the “implicit bargain” • legal protections (the 5th Amendment) • Utility matters (reliable service, rates) have direct impact on voters and employers • Look for institutional (i.e. more permanent) elements that shield or insulate regulators from direct political influences • Take every opportunity to meet with commissioners, staffers, company personnel responsible for regulatory affairs

6. Regulation In The Ratings Process General Thoughts • Cash Is King – we track deferred cost recovery, build-up of regulatory assets, low depreciation rates • Utility management is just as responsible for managing regulatory risk as any other kind of risk • “Companies with the best regulation are the ones that ask the least of their regulators”

7. Credit Assessment of Regulatory Treatment S&P’s Next Step - • A new tool to promote consistency in our utility ratings • Use objective, data-based criteria to produce an assessment of each regulatory jurisdiction • IMPORTANT: CART will not supplant the traditional S&P view that regulatory risk is company-specific.

8. CART – Tentative Criteria REGULATORY FACTOR: • Legislation and Regulatory Policies • Legal Basis for Regulation / Regulatory Paradigm • Legislative Climate • Major utility legislation (recent) • Commission Policies (non-ratemaking) • Organization (Staff, consumer cousel) • Power procurement process • Record of important decisions (non-rate case)

9. CART – Tentative Criteria REGULATORY FACTOR: 2. Ratemaking Practices and Procedures • Rate case lag • Earned returns / authorized returns • “Staleness” of rates (test year, allowance of updates) • Treatment of large expenditures (pre-approval, prudence reviews) • Third-party intervention (AG, OCA, industrial groups)

10. CART – Tentative Criteria REGULATORY FACTOR: 3. Political Insulation • Method of selecting commissioners • Record of intervention by governor and legislature • Visibility of utility issues

11. CART – Tentative Criteria REGULATORY FACTOR: 4. Cash Flow Support and Stability • Separate tariff clauses for large expense categories • Rate design • Decoupling / weather normalization • Deferrals / Regulatory assets • Attitude toward hedging & risk management

12. The End You can tell whether a man is clever by his answers. You can tell whether a man is wise by his questions. -Naguib Mahfouz, writer