Letters to the Editor
December 2004
To the Editor:
In the August edition of Public Utilities Fortnightly, Dr. Fred Grygiel and myself co-authored an article that explained how linkages within a holding company can negatively impact regulated utilities, and how ring-fencing by regulators may help to alleviate such effects ("Fencing in Regulated Utilities," p. 32).
Unfortunately, the Fortnightly listed our ring-fencing article on the cover with the caption "Economists Blast S&P, Fitch Consolidated Ratings." This characterization is inconsistent with the substance of the article. While we are concerned about the effects of ratings linkage on regulated utilities, in no respect do we blame credit rating agencies. In fact, we strongly believe that the rating agencies are critical gatekeepers that point out for investors and regulators the potential linkages among holding company subsidiaries that could result in utility abuse or its credit downgrade.
Moreover, the caption is also inaccurate in using the term "Consolidated Ratings" to describe what we explain in the article as ratings linkage. While Standard & Poor's consolidates ratings (i.e., assigns the same rating to all entities in the corporate group), Fitch (and Moody's) does not. Standard & Poor's will analyze all subsidiaries and divisions of a company to determine the consolidated corporate credit quality of the entire organization. For utilities with multiple ratings within their corporate family, linkage between a stronger and a weaker entity almost always will affect the credit quality of both. Fitch and Moody's, on the other hand, look at the individual credit of each issuer within the group and consider the ring-fencing mechanisms and corporate linkages in their notching decisions. Our article explains that, irrespective of whether the rating is consolidated or not, the linkages should be the concern for regulators, not the credit rating agencies.
John M. Garvey, Dr. Fred S. Grygiel
New Jersey Board of Public Utilities
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Utilities Fortnightly & Spark
