Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
the California Independent System Operator (CAISO) at 'A+' with a Stable
Rating Outlook. Approximately $183 million of secured debt is affected
by today's rating action. A full list of rating actions follows at the
end of this press release.
KEY RATING DRIVERS
--CAISO's ability to adjust rates quarterly without regulator or board
approval;
--The integral role played by the CAISO in achieving state and federal
energy policy goals;
--The company's first priority lien on market collections;
--Constructive federal regulatory oversight;
--The solid credit profiles of California's three largest investor-owned
utilities (IOUs);
--Geographic and membership concentration and the voluntary nature of
CAISO participation.
CAISO's ratings and Stable Outlook reflect the stable revenues and cash
flows derived from its Federal Energy Regulatory Commission (FERC)
regulated tariff structure, strong grid management charge (GMC) coverage
ratios, and the integral role played by the company in achieving state
and federal energy policy goals with regard to reliability, competition,
renewable energy and environmental issues.
Assured Cost Recovery: Fitch's confidence in CAISO's ability to
consistently and fully recover its costs is a function of CAISO's
ability to adjust rates quarterly without prior approval. The ratings
also consider CAISO's first priority lien on market collections, a
constructive regulatory environment at the FERC and the creditworthiness
of California's IOU's.
Addition of New Members: CAISO is expanding its Energy Imbalance Market
(EIM) to include other balancing authorities in the western U.S. CAISO's
EIM is expanding and current and prospective members include: PacifiCorp
(PPW, 'A-'/Outlook Stable); NV Energy Inc. (NVE, 'BBB-'/Outlook Stable);
Arizona Public Service Co. (APS, 'A-'/Outlook Stable); Puget Sound
Energy (PSE, not rated); Portland General Electric (PGE, not rated); and
Idaho Power (IDP, not rated).
PPW joined the EIM in November 2014, and NVE joined in December 2015.
APS and PSE are expected to join in October 2016, PGE in October 2017
and IDP in April 2018. The expanded EIM is expected to leverage resource
diversity over a larger geographic area, reduce costs and facilitate
greater penetration of renewable energy while creating a more liquid
power market. The EIM automatically balances electric demand with supply
every 15 minutes and incorporates five minute generation dispatch.
PacifiCorp, one of the West's largest balancing authorities, is
considering participating in the CAISO as a full transmission member by
turning over control of its transmission assets to CAISO, which could
potentially lower GMC rates by up to 20%.
Limited Gas Availability; Adequate Reserve Margins: Due to limited gas
supply withdrawal capability at the strategic Aliso Canyon Gas Storage
Facility, CAISO has identified that up to 9,500MW of gas fired capacity
remains at risk for curtailments in gas constrained Southern California
during the hottest days of the summer. To mitigate the effect of
potential curtailments approximately 15 bcf of gas storage at Aliso
Canyon along with demand response initiatives will be utilized to
maintain system reliability during peak demand. However, while supplies
are expected to be adequate under typical summer conditions, service
interruptions cannot be ruled out. A total of 2,306 MW of new generation
capacity is expected to enter commercial operation this summer and is
comprised of 85% solar, 6% natural gas, 4% wind, 4% hydro and 1% of
biogas. Hydrological conditions in the state are near normal levels, and
CAISO's forecasted summer operating reserve margins are expected to be
24.4%, greater than the California Public Utility Commission's 15%
resource adequacy requirement for planning reserve margin.
IOUs on Track to Meet 33% RPS: CAISO will play a key role in achieving
California's ambitious renewable energy policies. The State of
California currently has a 33% renewable portfolio standard (RPS) by
2020 that increases to 50% RPS by 2030, which will require new
transmission and renewable investments in the next decade. Renewable
generation comprised 28%, 23% and 32% of PG&E, SCE and SDG&E's total
retail sales, respectively, as of 2014. Notably, solar generation
comprised 11% of CAISO's total generation resource mix for 2015, an
increase of roughly 2% when compared to the prior year. Going forward,
due to falling solar PV panel prices and installation costs, Fitch
expects this trend to continue.
New Flexible Capacity Product: CAISO will be introducing a new flexible
capacity product this fall to preserve fast ramping generating
capability to support intermittent renewable generation. The need for
fast ramping capacity is growing with renewable generation as California
progresses towards its 50% RPS requirement by 2030.
Creditworthy Members: The grid management charge paid by the three
largest IOUs in California: Pacific Gas & Electric (PG&E, IDR
'BBB+'/Outlook Positive), Southern California Edison (SoCalEd, IDR
'A-'/Outlook Stable), and San Diego Gas and Electric (SDG&E, IDR
'A'/Outlook Stable) represents approximately 57% of CAISO's total
revenue. The CAISO administers a GMC, approved by the FERC, to market
participants to recover all of the company's costs (including operating,
capital expenditure and debt service), and to provide an operating
reserve.
First-Priority Lien on Market Collections: CAISO's tariff provides a
first priority lien on collections for market participants if there is a
shortfall in GMC collections. With the implementation of the MRTU, there
is now a greater breadth of market revenues to backstop GMC payments in
the unlikely event of the default of large participants.
MRTU Enhances Market Volumes: The successful implementation of the new
energy market (also known as the market redesign and technology upgrade
[MRTU]) has significantly enhanced market volumes and collections,
supporting CAISO's creditworthiness and enhancing its strategic role in
implementing California's energy policies.
In 2015, CAISO recorded approximately $3.7 billion of market collections
compared with $5 billion in 2014, $4.4 billion in 2013, $3.2 billion in
2012, and $2.4 billion in 2011. The ratio of total market
collections-to-GMC approximated 18.6x in 2015 as compared to 25.4x, 21x,
17.1x, and 12.5x, in 2014, 2013, 2012, and 2011, respectively. The
decrease in total market collections in 2015 is primarily due to lower
power prices and increased renewable penetration. As the EIM continues
to expand, Fitch expects total market collections and the ratio of total
market-collections-to-GMC coverage ratios to continue to be robust.
GMC Revenue Requirement: CAISO budgets into its annual GMC revenue
requirement 1.25x debt service coverage and 15% operating expense
reserves. The operating reserve account is fully funded at all times.
Any over-collections above the 15% reserve are used to offset future
year GMC revenue requirements. Additionally, CAISO is authorized to
adjust GMC rates quarterly if collections are deviating from budgeted
amounts by the greater of 2% or $1 million, without FERC or board
approval.
Rating concerns primarily relate to CAISO's membership and geographic
concentration, moderately high operating costs, as well as the voluntary
nature of CAISO participation. CAISO's 2013 series bonds are secured by
a collateral pledge of its headquarters in Folsom, CA, which was
completed in 2011.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CAISO include:
--GMC revenue requirement cap of $202 million;
--Capex averaging $25 million per annum through 2018;
--Long-Term debt maturities of $4.5 million in 2016, $4.6 million in
2017, and $4.8 million in 2018.
RATING SENSITIVITIES
What Could Trigger a Positive Rating Action: A positive credit rating
action is not anticipated at this time.
What Could Trigger a Negative Rating Action: A substantive adverse
change to regulatory oversight or a broad energy policy change at the
federal or state levels; significant membership departures; adverse
impacts from cyber or physical infrastructure attack; and competitive
threats from emerging technologies could lead to future credit rating
downgrades.
LIQUIDITY
Fitch views CAISO's liquidity position as adequate, despite the absence
of credit lines. The company relies largely on cash balances for working
capital needs and has substantial investments, some of which could be
readily liquidated in a funding emergency. CAISO is a party to the
transactions that clear through the market as per FERC Order 741 in 2011
that required the ISO/RTOs to become central counterparties.
Counterparty credit risk is mitigated by weekly settlements and
collateral requirements. In the event of a market default any shortfalls
are allocated among market participants.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
California Independent System Operator
--IDR at 'A+';
-- Secured revenue refunding bonds at 'AA-'.
Date of Relevant Rating Committee: July 19, 2016
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009171
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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