Moody's: Warnings of a utility "death spiral" from distributed generation premature

News Release from Moody's Global Credit Research

New York, November 06, 2014 -- Distributed generation -- defined as when utility customers produce their own electricity, such as with solar panels -- is a long-term competitive threat to US electric utilities operating under a traditional ratemaking structure. But Moody's Investors Service believes that utilities will receive reasonable regulatory treatment to deal with any potential industry transformation that a widespread adoption of distributed generation would bring.

"Distributed generation poses a threat under traditional ratemaking but it's premature to call a 'death spiral' for the sector," says Moody's Senior Vice President Mihoko Manabe in the report "US Utilities: Regulatory Response Looks to Stay Ahead of the Distributed Generation Curve."

Moody's discounts the "death spiral" caused by a large number of customers disconnecting from the utility grid as a remote worst-case scenario while a steady decline in volumes, however, is more likely in a do-nothing scenario. Technological developments are inherently uncertain and could be disruptive, but Moody's did not see the utility structure being upset on the horizon.

"The electric grid is a critical piece of infrastructure, and its value could be even greater in the future," says Manabe. "Consequently, we believe utilities will continue to receive reasonable regulatory treatment."

Moody's said that proactive regulatory response to distributed generation is credit positive as it gives utilities improved rate designs and helps in the long-term planning for their infrastructure. In some states, such as California, New York and Hawaii, regulators are going even further by pursuing brand new utility business models that embrace distributed generation, but most are tackling rate design and policy issues first.

The near-term regulatory agenda is focused on reforming net metering, a tariff that most rooftop solar customers have to reduce their electric bills. The fast growth in customers generating some of their own power with their solar panels have raised a policy concern that the costs of maintaining the utilities' facilities are shifting to other customers.

Across the country, regulators are reassessing net metering tariffs to reduce the risk to utilities' revenues. In addition, lawmakers also have other policy tools, such as renewable portfolio standards, to manage the growth of distributed generation.

Distributed generation poses a competitive threat to utilities under traditional vertically integrated regulation that own generation assets. Moody's found that utilities in those states were the least likely to have policies or rate designs that promoted distributed generation. On the other hand, Moody's found that transmission and distribution utilities, that don't own generation assets and have decoupled rates are more likely to promote distributed generation in their service territories.

Increased investments expected in the electric grid will make transmission and distribution more valuable, while vertically integrated utilities are seeking ways to make distributed generation a business opportunity.

"Lessons learned from these early initiatives will set precedents for others in the sector," says Manabe.

For more information Moody's research subscribers can access this report at

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_176775.

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