DBRS Confirms Rating of IESO at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Independent Electricity System Operator (IESO) at A (high) with a Stable trend. The IESO’s rating reflects (i) the comprehensive legislative and regulatory framework supporting its operational objectives, and (ii) a robust funding model with borrowing authority to fully meet all objectives.

The Province of Ontario (the Province) is clearly supportive of the objectives of the IESO. In addition to having provided the legislative and regulatory framework, it indirectly provides funding of the IESO’s fixed assets, capital expenditures and of settlement imbalances in the electricity market. However, DBRS does not view this as provision of financial support in the sense that the rating of the IESO is directly dependent on the creditworthiness of the Province. Specifically, (i) the operating and other costs of the IESO are paid directly by electricity market participants, rather than by the Province, and (ii) the IESO has the authority and creditworthiness in its own right to obtain funding from third parties on reasonable commercial terms.

The regulation of the IESO is highly supportive of its credit profile, with the relevant regulatory risk considerations assessed as good or excellent. The IESO does not own electricity transmission assets and is constituted without share capital as a not-for-profit entity. For these three reasons, many of the regulatory risk considerations and all of the financial metrics usually applicable to regulated utilities are not applicable to the rating of the IESO.

The IESO’s business mix is atypical compared to most other independent system operators (ISOs) due to its responsibilities as counterparty to long-term energy procurement contracts. Its core, legislated function as an electricity system operator is at the heart of the rating. IESO’s procurement and contract management functions and activities are mandated to be separate from market operations, with the separation effected by information barriers and keeping separate financial accounts. The degree of separation between these two functions is a material consideration for the rating. The IESO is also the designated Smart Metering Entity, with responsibility to coordinate the implementation of the Province’s Smart Metering Initiative. Despite the SME activities being similar to an information technology services provider, the very similar regulatory and funding model to the IESO’s market operations means that this does not represent 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 applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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