DBRS Confirms Independent Electricity System Operator at A (high), Stable

DBRS Limited (DBRS) has confirmed the Issuer Rating of the Independent Electricity System Operator (IESO) at A (high) with a Stable trend. The confirmation is based on the comprehensive legislative framework and the reasonable regulatory regime for the IESO, under which it is able to recover all its operating costs. The IESO also maintains sufficient liquidity in the form of credit facilities in order to meet its objectives.

DBRS continues to view the rating of the IESO as stand-alone and separate from the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS). DBRS considers the Province as supportive of the IESO, as exemplified by the legislative framework and its indirect financial support. However, the IESO recovers its costs directly from electricity market participants, and has the authority and creditworthiness to obtain funding from the capital market on reasonable commercial terms. As such, the rating of the IESO is not directly dependent on the creditworthiness of the Province.

The regulatory framework for the IESO remains supportive, with the IESO operating under a cost-recovery model where it is allowed to recover all prudently spent expenses. Under the Electricity Act, 1998 (Ontario) (the Electricity Act), the Ontario Energy Board (OEB) can either approve the IESO’s revenue requirement, expenditures and fees applications, or refer it back to the IESO for further consideration. DBRS notes that as the IESO is a non-profit entity, the key credit metrics under the Rating Companies in the Regulated Electric, Natural Gas and Water Utilities methodology are not applicable to the rating of the IESO.

In addition to its responsibilities as an independent system operator (ISO), the IESO is also the counterparty to long-term energy procurement contracts in the Province. Additionally, the IESO is also the designated smart metering entity (SME), responsible for coordinating the implementation of smart meters throughout the Province and to maintain a central data depository. Under the Electricity Act, the IESO must separate the function and activities related to its procurement activities and its ISO operations, as effected through information barriers and separate financial accounts. The separation of these functions is a material consideration in the IESO’s rating. DBRS notes that the SME activities are not mandated to be kept separately, but are regulated by the OEB in a manner similar to the functions of the ISO. As such, DBRS does not believe this represents a material incremental business risk.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.