Home Part of States Newsroom
National financial agency downgrades assessment of Md.’s utility regulation. What does it mean?


National financial agency downgrades assessment of Md.’s utility regulation. What does it mean?

Jun 01, 2023 | 6:48 am ET
By Josh Kurtz
National financial agency downgrades assessment of Md.’s utility regulation. What does it mean?
Photo by Justin Sullivan/Getty Images.

When Gov. Wes Moore (D) took office in mid-January, he vowed to shake up the Maryland Public Service Commission, a powerful but obscure agency that regulates gas and electric utilities. Critics in recent years have complained that the PSC hasn’t been proactive enough when it comes to the state’s strategy for fighting climate change.

Moore moved swiftly to remake the five-member PSC. He rescinded two recess appointments to the commission that his predecessor made last summer. He appointed a new chair to take over on July 1. And he consistently said his goal for the agency is “environmental stewardship while ensuring ratepayers are protected.”

But the transition at the Public Service Commission has prompted a national ratings agency for energy and utility investors to downgrade its assessment of Maryland’s regulatory framework.

Last month, Regulatory Research Associates, a group within S&P Global Commodity Insights, a national analyst of commodity businesses, said it was downgrading its assessment of Maryland’s regulatory environment “to reflect increasing uncertainty and the potential for a more restrictive regulatory climate in coming months, as the new governor, Wes Moore, moves forward with his energy agenda and recasts the Maryland Public Service Commission.” The RRA added: “Coming at a time when the state is considering major issues related to the pace of the energy transition, and when the PSC has six major energy utility rate cases before it, three of which involve multiyear rate plans, the turnover at the commission is particularly concerning for investors.”

RRA, whose reports are proprietary (Maryland Matters obtained a copy of the most recent one) has nine levels for assessing the regulatory environment in a state, and it just moved Maryland from the “Average 3” category to the “Below Average 1” list — dropping the state from the sixth level to the seventh. Six states share Maryland’s rating, and three others are rated even lower.

When a financial ratings agency downgrades a government’s bond rating, it has a tangible impact on that government’s ability to borrow and spend money on major infrastructure projects and other services. So what’s the significance of RRA’s latest assessment of Maryland? Opinions differ.

To Jason M. Stanek, the outgoing chair of the Maryland PSC, who leaves at the end of this month after five years on the job, “this downgrade is significant and unfortunate.”

National financial agency downgrades assessment of Md.’s utility regulation. What does it mean?
Maryland Public Service Commission Chair Jason M. Stanek.

“The investment community is, not surprisingly, concerned with the future stability of the regulatory environment in Maryland,” Stanek, who was appointed by former Gov. Larry Hogan (R), said in a statement provided to Maryland Matters. “While the state has received multiple upgrades in recent years, investors in the utilities and energy sectors are now clearly reevaluating the outlook in Maryland, as evidenced by this ‘below average’ rating.”

Lillian Federico, research director for energy at S&P Global Commodity Insights, said the evaluations are meant to guide utility industry investors about regulatory risks in each state but aren’t an assessment of how regulatory agencies are doing.

“The rankings were designed to provide current and prospective investors actionable analysis to inform their investment decisions vis-à-vis U.S. utilities,” she said. “Similarly, multi-state utilities may look at our research in the course of making decisions as to where to allocate capital within their organizations or assess the efficacy of potential merger candidates. Other stakeholders often find the rankings informative as well, though they may have a different perspective on which category is desirable.”

Federico said RRA considers several factors in its assessments of the states and tries to “look at the regulatory framework holistically.”

Maryland has moved up and down the list during the 41 years of RRA ratings. It held its highest rating — “Above Average 3,” the third-highest level — from 1993 to 1997, and went steadily downward through 2017, bottoming out at the “Below Average 3” level. But three consecutive ratings changes from 2019 to 2021 eventually moved Maryland up to “Average 3.”

Richard McMahon, senior vice president of energy supply and finance at the Edison Electric Institute, the national association for investor-owned utilities, conceded that the assessments of state utility commissions in the RRA report aren’t “apples to apples,” but do provide useful comparisons.

“The financial community is the core audience for this, but a lot of people look at it,” said McMahon, who is also the institute’s chief environment, social and governance officer.

McMahon called energy generation and distribution “the most capital intensive business” in the country, and said while investors and utilities are generally committed to a transition to green energy, it’s useful to know which state governments and regulatory agencies are charting the most clear-cut and consistent paths when so much money is at stake.

“Almost all of our companies have laid out clean energy goals, aggressive clean energy goals, and most of those have been developed in consultation with the states,” he said.

‘Additional change is on the horizon’

Yet it appears that Moore’s regular declarations that he plans to make Maryland a leader in combating climate change had an impact on Regulatory Research Associates’ latest assessment.

“Additional change is likely on the horizon as Moore plans to accelerate the energy transition,” the ratings agency said in its May report. “While RRA views the energy transition as neither constructive nor restrictive from an investor standpoint, the pace of the transition and whether the commission considers investor concerns does impact the level of regulatory risk.”

David S. Lapp, who heads Maryland’s Office of People’s Counsel (OPC), which represents consumers’ interests before the Public Service Commission, suggested the RRA’s analysis is targeted to a very limited audience.

“The important thing to keep in mind is, utility regulation is about utility performance, and specifically the performance of utility monopolies,” he said. “Regulations aren’t there for the benefit of utility investors. It’s for utility performance.”

Lapp did agree with S&P’s Federico that the RRA assessment “really doesn’t tell you anything about how the regulators are performing their responsibilities.”

In its assessment of Maryland, RRA called out the OPC for its “more confrontational stance in recent months” toward the Public Service Commission, citing an OPC petition from earlier this spring accusing the PSC of eroding consumers’ rights by not responding fast enough to some of the people’s counsel’s previous filings and complaints. The OPC filing asked the PSC to adopt formal procedures that ensure that the people’s counsel requests for commission action are addressed on their merits in a timely fashion. The PSC recently rejected the OPC’s request, but it’s possible that it will be revisited when the new chair of the PSC, Fred Hoover, who is wrapping up his work as an OPC attorney and held high-level positions at the Maryland Energy Administration during the previous two Democratic administrations in Annapolis, takes over the agency on July 1.

And the remake of the PSC under Moore continues. Shortly after he took office, he rescinded Hogan’s appointments last year of Commissioners Patrice Bubar and Odogwu Obi Linton, who were not confirmed by the state Senate because of the timing of their nominations (Linton, who was up for a second five-year appointment, had been confirmed for his first term). A few weeks later, Moore nominated Hoover and Juan Alvarado to the PSC — but Alvarado withdrew amid criticisms from environmental groups for his work in the natural gas industry.

More recently, Moore nominated veteran lawmaker Kumar P. Barve, the longtime chair of the House Environment and Transportation Committee, to the PSC, and he takes his seat this week, replacing Bubar — though he’ll still have to be confirmed by the Senate in next year’s legislative session. This means the governor has yet to nominate a replacement for Linton, who continues to serve in the interim. Two other Hogan holdover appointees — Tony O’Donnell, former House GOP leader in the legislature, and Michael Richard, who headed the Maryland Energy Administration under former Gov. Bob Ehrlich (R) — remain. Their terms end in 2026 and 2025, respectively.

Even if the RRA sees risks for investors in Maryland’s political and policy transitions, the state’s investor-owned utilities —BG&E, Pepco, Delmarva Power, Potomac Edison, Washington Gas and Columbia Gas — continue to wield great power in Annapolis. Lapp expressed skepticism that any uncertainty in the regulatory environment, real or perceived, would hinder their ability to thrive in the state.

McMahon, the Edison Electric Institute executive, said he believes that even with differences from state to state, the regulatory structure for electric utilities is historically effective and benefits investors, companies and consumers alike.

“I think our regulatory process in the U.S. and in the states is an excellent process,” he said. “There are intervenors. There’s transparency. And a lot of stakeholders have a say.”