Implications for Autos and State Finances Electric Car ...2016/10/31 · CROSS-SECTOR SECTOR...

CROSS-SECTOR

SECTOR IN-DEPTH31 October 2016

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Bruce Clark 212-553-4814Senior Vice [email protected]

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Jim Hempstead 212-553-4318Associate [email protected]

Robert Jankowitz 212-553-1318MD-Corporate [email protected]

Emily Raimes 212-553-7203VP-Sr Credit [email protected]

Michael Mulvaney 212-553-3665Managing DirectorProject [email protected]

Infrastructure, Autos, State Government - California

Electric Car Growth Boosts Utilities; MixedImplications for Autos and State FinancesSummaryCalifornia’s environmental goals provide strong incentives for increased use of electricvehicles (EVs). State policies and declining battery costs will boost EV sales, but we seedisparate credit implications for utilities, auto manufacturers and the state's finances. Wefocus on California because it is the largest US market for electric cars, accounting for about50% of the US EV market and almost 25% of global EV sales.

» We present three scenarios for EV adoption. The “California ZEV scenario” assumesthat CA achieves its goal of 1.5 million zero emission vehicles by 2025. The “no growth”scenario assumes sales remain flat, reaching a total of about 600,000 EVs by 2025. The“base case” is a mid-point between these two cases, at one million EVs by 2025.

» EVs are credit positive for the power sector. Utilities and independent powerproducers will see sales growth and additional grid investment opportunities. EVs couldprovide as much as two-thirds of load growth by 2030. However, EVs could complicatethe transition to clean energy for those public power utilities still heavily reliant on coal-fired generation.

» EVs can reduce the carbon compliance burden in CA. Each EV now saves about2.66 tons per year of CO2 emissions in CA, relative to gasoline cars. By 2030, emissionreductions could be 12% annually and cumulatively worth $725 million. The savings arehigher than other states given the higher mix of renewables in CA's electric grid.

» EVs are a disruptive technology-driven trend in the auto sector. EVs, along withride sharing and autonomous driving, pose important long-term risks for the global autosector. California's significance also lies in its history setting trends relating to the fuel-economy and emissions framework for the rest of the country.

» EVs present opportunities and challenges to auto manufacturers. Most traditionalmanufacturers see EVs and autonomous cars as an opportunity to enhance revenueand earnings growth. However, EVs also challenge existing business models, and createpotentially formidable new competitors such as Tesla, Uber, and Apple Inc. (Aa1 stable).

» California will collect lower gasoline tax revenues but will see long-term healthbenefits. EVs will lower California's gas tax revenues up to a cumulative $3 billion by2030. However, this fiscal impact is small relative to the size of the state budget, and canbe offset by other measures. Meanwhile, lowering non-carbon emissions improves airquality and reduces long-term healthcare costs.

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2 31 October 2016 Infrastructure, Autos, State Government - California : Electric Car Growth Boosts Utilities; Mixed Implications for Autos and State Finances

California well positioned for growth of electric vehiclesThe state of California has the most focused policy targeting strong growth in EVs and related infrastructure. While the availability ofnew vehicle models, improved battery technology and federal tax credits are key factors to EV adoption, CA's policies are helping bytargeting better charging infrastructure and incentives (such as carpool lane access) and state and air district rebates. Between January2011 and July 2016, approximately 0.5 million EVs were sold nationally (about 0.6% of the total car market in 2015), of which almost0.25 million were in California1. With global EV sales reaching one million in 2015, CA alone accounts for almost 25% of global EVsales.

California's policy push continues to progress. On 29 April 2015, Governor Brown issued an Executive Order to establish a greenhousegas reduction goal of 40% below 1990 levels by 2030 and 80% below by 2050. In his 2015 state of the state address, he alsoestablished a new goal to reduce petroleum use in cars and trucks by 50% by 2030. These announcements incorporated a goal of 1.5million Zero Emission Vehicles (ZEVs) on California’s roadways by 2025 (one million by 2020).

The state has a portfolio of incentives designed to achieve these objectives:

1. The California Vehicle Rebate Program provides a rebate of $1500 for most plug-in hybrid models and $2500 for battery electricmodels. This is in addition to the $7500 federal tax credit for electric cars.

2. The California Energy Commission’s Alternative and Renewable Fuel and Vehicle Technology Program is a competitive grantprogram that provides $100 million annually towards innovative transportation and fuel technologies, including charging stationsfor EVs.

3. The state has launched a program to build a large network of charging stations through its electric utilities.

4. A report by the International Council on Clean Transportation (ICCT) 2 noted that the state also has a number of indirect or non-financial incentives (Exhibit 1) that support the growth of EVs.

Exhibit 1

Selected Electric Vehicle Promotion Actions in California

* AQMD – Air Quality Management DistrictSource: International Council on Clean Transportation

California's suite of policy measures aid the state's emergence as the largest market for EVs. There are 30 cities in California where EVsaccount for between 6% and 18% of new car sales (Exhibit 2). Several cities have over 20 models of EVs available to choose from.



Exhibit 2

Electric Vehicle Shares and Model Availability in California Cities in 2015

Source: International Council on Clean Transportation

Three electric vehicle growth scenariosThe extent to which EVs will affect sectors such as utilities, autos and state/municipalities will be substantially determined by actualgrowth rates of EVs. Given the still-nascent state of the EV industry, we have chosen three illustrative scenarios (Exhibit 3) thatrepresent the wide range of possible outcomes.

Exhibit 3

California Electric Vehicle Sales Scenarios ('000s)

Source: California Energy Commission, Moody's Investors Service

The California ZEV Scenario: We assume that the state is able to achieve its policy target of 1.5 million EVs by 2025, with 15% ofnew vehicle sales in 2025 coming from EVs (up from 3% in 2015). We do not consider CA achieving its policy goals to be our base casebecause the state cannot require its residents to purchase electric vehicles. We note that both price and the availability of charginginfrastructure are impediments to EV growth. In this scenario, EV sales grow at 18% p.a. through the end of this decade and 25%starting in 2021, since both charging infrastructure and EV pricing are likely to be more favorable in the next decade.



The No Growth Scenario: We assume the EV market stagnates at current levels. Over the last five years, about 200,000 EVs havebeen sold in CA. This scenario assumes that 200,000 EVs will be added to the state’s fleet every five years, resulting in about 600,000EVs on the road in CA in 2025, or less than 50% of the state’s target. This reflects a 3% rate of growth in annual sales (from 2015levels). This scenario could arise if EV prices remain high, charging stations inadequate and perhaps if gasoline prices continue to remainvery low, skewing economics against EVs.

The Base Case: We assume policy incentives, coupled with EV sales momentum (373,000 people signed up to buy Tesla’s upcomingmodel 3 priced at $35,000 within a few days of its announcement3), will result in a boost to EV sales, but that CA will be unable toachieve its 2025 goals. We assume that there will be one million EVs in CA by 2025, about two thirds of the state’s goals. This is a 12%rate of growth in annual sales (from 2015 levels).

EVs are credit positive for the dominant investor-owned power sectorEVs may emerge as a material driver of load growth for the electric power sector, which is a positive for both independent powerproducers (IPP) and for regulated utilities. IPPs face weak cash flows in CA due to low natural gas and power prices and a glut ofrenewables. Anemic power demand growth also contributes to the challenged outlook in part due to a strong focus on energyefficiency. Any incremental power demand would be a positive. IPPs with a significant presence in CA include Calpine (Ba3 stable),Dynegy (B2 stable) and NRG Energy (Ba3 stable).

Regulated utilities, such as Pacific Gas & Electric Co (PG&E A3 stable), Southern California Edison Co (SCE A2 stable) and SanDiego Gas and Electric Co (SDG&E A1 stable), are much less sensitive to power volumes owing to the presence of a decouplingmechanism that adjusts utility tariffs up or down as sales deviate from expectations. That said, volume growth is credit positive forthese companies as well. There is substantial ongoing capex in the grid independent of EVs (PG&E and SCE are each spending over $5billion annually), and the ability to spread these costs over growing sales volumes will mitigate tariff increases for customers. Slowingrate increases will help manage political sensitivity regarding tariffs over time, especially if natural gas prices were to increase in thefuture.

Exhibit 4 provides an estimate of annual and cumulative load growth under our three scenarios for EV growth. If the actual growthis between the base and “California ZEV” cases, then EVs could account for 2%-5% of total electricity consumption in the utilities'service territories by 2030. Between 28%-67% of annual load growth will come from electric cars, which will make EVs an importantconsideration for utility system planning. In the “no growth” case, EVs will remain a marginal consideration, accounting for less than1% of load and less than 10% of load growth throughout. In making these calculations, we have assumed that non-EV electric loadwill grow at 0.5% p.a. If non-EV load growth proves to be even lower, as has been the case in recent years, EV-related load will only bemore important for the sector.

Exhibit 4

EVs Share of Total Load and Load Growth %




EVs present a material, albeit long-term, capex opportunity for regulated utilitiesThe growth of EVs provides regulated utilities with an opportunity to increase capex, which will also increase earnings. We see twodirect areas of capex related to electric cars – charging stations and grid upgrades.

Charging Stations: Originally, PG&E, SCE and SDG&E have proposed EV infrastructure programs to build up to 62,000 chargingstations at a total cost of $1.1 billion. Each utility has a different mix of slow level 1 (L1) chargers, L2 chargers and ultra-fast DCchargers. SDG&E and PG&E have proposed adding them to the utility rate base, while SCE has proposed to act as an enabler for non-utility ownership of charging stations.

The CPUC has made a start by approving Phase I pilot programs in early 2016, which have now started. SDG&E will build 3,500charging stations with a capex of about $100 million, while SCE will spend $22 million to support a third-party owned buildout ofabout 1,500 stations. PG&E also submitted a revised proposal for 7500 stations with a capex of about $130 million and the CPUCis expected to render a final ruling in Q4 2016. The full proposals of the utilities will be considered by the California Public UtilitiesCommission (CPUC) in Phase 2 after reviewing results from Phase 1.

Utility involvement in the development of a charging network not only provides an investment opportunity for them, but also createsgreater certainty around the growth and operation of the network and in turn supports growth of EVs, helping overcome the chicken-or-egg problem plaguing EV adoption. Today, most charging stations in CA are currently owned by start-ups – such as Chargepoint Inc.(unrated), with a 70% market share in CA today), Tesla, Greenlots, and NRG Energy's (Ba3 stable) EVGo.

Grid Upgrades: Utilities will benefit from the capex that will be required to upgrade local transformers and the grid to handle higherpower volumes that result from EVs. Load growth from EVs is somewhat different from normal load growth in terms of its lumpiness(an EV's electric load is equivalent to a quarter of an average home) as well as its profile (charging at night) and utility planningapproaches are already being suitably modified to incorporate these differences.

We see no simple metrics (such as “capex per 1000 EVs”) that can be used to estimate the investment potential associated withEV growth. Thus far, only about 1% of EV purchases in CA have resulted in a need for grid upgrades. However, this is because EVpenetration is currently very low. Eventually, the addition of multiple EVs in a neighborhood mimics the addition of new homes. Aspenetration increases, the need for grid upgrades is expected to increase at an accelerating pace, although this dynamic is not expectedto occur for several years.

Longer term, the advent of EVs is also likely to bring about changes to how the utility grid is operated. Electric cars can be chargedduring times that allows for more efficient integration of CA's renewable resources and managing the “duck curve” 4. Large chargingstations also represent a kind of flexible load that can be turned on or off to provide demand response services (SCE has proposedrequiring this) and improve utilization of grid resources.

EVs are a mixed bag for public power electric utilities that own coal-fired generationFor California public power electric utilities that have coal-fired generation, electricity volume growth from EVs is a double-edgedsword in that despite the benefits such as new demand, the utilities have to secure low carbon energy and capacity to meet the newdemand while they are in the process of reducing dependence on coal. For example, the Los Angeles Department of Water and Power(LADWP) still has significant coal-fired generation that represents 40% of its energy supply. In contrast, California’s investor-ownedutilities have virtually zero generation coming from coal. In fact, LADWP is focused on reducing demand through efficiency programs soit can better meet the legislative mandate of getting 50% of its supply from renewables. On a positive note, it is expected EV usage willlead to better utilization of surplus renewable energy. LADWP aims to be at 0% coal by 2025 and also to serve retail load with 50% ofthe energy from renewables by 2030, up from 25% in 2016.

Public power utilities, which are self-regulating and set their own rates, also have concerns around how costs are allocated to fundinfrastructure for early EV adopters, since low income ratepayers will effectively have to pay a portion of the costs, while benefits flowentirely to higher income EV owners. These challenges for self-regulating utilities make the impact of EVs more uncertain for them.Although such concerns are valid for investor-owned utilities as well a few factors mitigate those concerns. First, their much larger sizemakes EV investments a much smaller share of the total. Second, a tiered rate structure ensures that the wealthy who own EVs will



also pay higher tiered rates thereby contributing more towards EV infrastructure. Finally, some such as SCE are also pursing third-partyownership of charging stations when the cost of the infrastructure is directly passed onto to EV users.

Sacramento Municipal Utility District (SMUD) (Aa3 stable), the utility that serves the California state capital and has no coal exposure,has introduced rate structure changes. SMUD has moved ahead a program that features time-of-use rates to permit planning andincentivize EV charging during off-peak hours to better utilize its energy resources. SMUD is also expected to fully implement time-of-use rates as the default rate for residential customers by 2018 which it believes will better collect fixed costs from customers.

EVs can reduce the carbon compliance burden in CAWe estimate that for every EV that replaces a gasoline fueled vehicle, the state will avoid about 2.7 tons of CO2 annually (Exhibit5). This rate of saving will change over time because the fuel economy of both EVs and gasoline cars change and because the fuelmix of the state's power supply changes to incorporate more renewable energy over time (from 33% in 2020 to 50% by 2030).Emission reduction benefits from EVs will be greater in CA than in other states because the state's electric fuel mix is already relativelyclean, with very little coal, 60%-65% natural gas and the rest from hydro and renewables. This means that electric cars are fueled byrelatively clean power. States that have a greater reliance on coal-fired power generation will see fewer carbon emission reductionsbecause the gains from burning smaller quantities of gasoline will be partly offset by burning more coal to produce electricity for EVs,although there will be still be a net benefit.

Exhibit 5

An EV in CA saves 2.66 tons of CO2 per year compared to a gasoline vehicle today

* CA gets 60% of its electricity from natural gas, which emits 0.5 tons per MWh. Ignoring the small share of coalSource: Moody's Investors Service, US Environmental Protection Agency

At these levels of savings, EVs can materially contribute to reducing the carbon footprint of the state as indicated in Exhibit 6 below. By2030, an important milestone both under CA’s own plan as well as under the federal Clean Power Plan, EVs can contribute up to 30-50million tons of cumulative CO2 emission reductions. A reduction in gasoline usage will also contribute to a reduction in emissionsfrom refineries. Although directly a consequence of the growth of EVs, we have not included these “second order” benefits in ourcalculations.



Exhibit 6

Reduction in CO2 Emissions due to EVs - Annual and Cumulative


According to California Air Resources Board’s 2015 GHG Emission Inventory report, tailpipe emissions accounted for 37% of the state’s459 million tonnes of CO2 emissions in 2013. Cars and light trucks accounted for about half of those emissions, or about 85 milliontonnes p.a. At 10 mtpa of emission reductions in the year 2030 under the California ZEV case, EVs could reduce emissions from cars byabout 12%. In economic terms, a cumulative reduction of 53.4 million tons by 2030 under the California ZEV scenario translates intosavings of $725 million based on the year-to-date average price for CO2 credits under CA's cap-and-trade program of about $12.8/ton5.

EVs present both opportunities and risks for auto manufacturersEVs, along with ride sharing and autonomous driving, represent disruptive technological trends that pose important long term risksfor the global auto sector. Most traditional auto manufacturers, including Ford Motor Co. (Baa2 stable), General Motors Co. (Ba1positive), and Toyota Motor Corp. (Aa3 stable), identify these trends as areas of opportunity to enhance revenue and earnings growth.However, despite the long-term potential that might be available, these trends will pose significant challenges to the existing design,manufacturing, sales and capital allocation models of traditional manufacturers.

Moreover, the pace at which these trends will progress and become part of the future mobility environment are likely to be linked. Thelarge capital inflows to the EV, autonomous driving and ride sharing businesses will mutually reinforce the expansion of all three ofthese sectors. For example:

» Full EV platforms can be very conducive to autonomous driving and connectivity.

» The ride sharing business model can benefit from autonomous vehicles.

Finally, these trends are also presenting the traditional auto manufacturers with a host of potentially formidable new competitors inthe mobility space, such as Tesla Motors (unrated), Uber Technologies Inc (Unrated), Apple Inc (Aa1 stable), Alphabet Inc (A2 stable,parent of Google), Alibaba Group Holding Ltd (A1 stable) and others.

Consequently, we view the risks posed by California’s EV initiative within the broader context of a number of technology-driven trends.These trends will all contribute to a significantly more dynamic and challenging environment for the auto sector globally.

Traditional auto manufacturers have not been asleep in the face of these trends. They have brought, or are bringing in the nearterm, full EVs to market. Nevertheless, the challenges posed by these trends are formidable and they add to an already highlycompetitive (Exhibit 7 and Exhibit 8) environment that is characterized by extreme cyclicality, excess production capacity, low returnson investment, and the very high investment requirement necessary to meet product renewal, emissions, fuel economy and safetyrequirements.



Exhibit 7

Electric Vehicles Currently in the U.S. Market

Source: Companies' websites

Exhibit 8

Electric Vehicles Coming to Market 2017-20

Source: Companies' reports



CA is Often the Harbinger of Future TrendsThe current market for EVs is small, representing only 0.6% of the global market and 0.7% of the US market. If US vehicle sales were togrow at an annual rate of 1% per year, unit shipments would rise to 19.2M in 2025 from 17.4M in 2015 (CA stood at about 2 million in2015). Based on Moody’s scenarios for the potential pace of adoption of EVs in California, that state’s EVs as a percentage of total carsales in CA in 2025 would approximate the following: California ZEV case – 16.9%; Base case – 8.3%; No growth case – 3.8%.

Beyond the number of EVs that might be sold in California, however, the significance of the state’s decision to promote the sectoralso lies in its history of setting trends relating to the fuel-economy and emissions framework for the rest of the country. California’sdecision could accelerate the move to EVs nationally. This would be an acceleration of disruptive change and consequently an increasein credit risk for the auto sector.

Unlike utilities, which have well-defined state or regional markets, the auto sector is global. Because of its size and exceptional long-term growth prospects, China is likely to play a role in the global auto market which is similar to California's in the US market. Mobilitytrends in China will significantly impact trends in the rest of the industry. Given its severe pollution problems, China has set a goal ofhaving 5M EVs on the road by 2025. If Chinese total vehicle sales were to grow at an annual rate of 5% per year, unit shipments wouldrise to 39.9M by 2025 from 24.5M units in 2015. Under such a scenario, China’s targeted cumulative total of 5M EVs by 2025 wouldresult in about 4.5% of all sales nationally in 2025 being EVs. We expect that other national, regional, and local government bodies willcontinue to undertake similar actions to spur the adoption of EVs.

California will see lower tax revenues but long-term health benefitsThe advent of EVs has the potential to remove upwards of $3 billion cumulatively in state gas taxes through fiscal 2030 (Exhibit 9).Gas taxes are a large revenue source to California in dollar terms, but remain a relatively small part of the state’s $114 billion budget.We believe that the state will adjust its tax policy or take spending measures to compensate for any decline in motor fuel usage, asit currently does in its normal budgetary process on an annual basis. Gas taxes are not a significant credit factor for California localgovernments.

California levies a per-gallon gas tax. The tax is 27.8 cents-per-gallon for fiscal 2017 and is expected by the state to increase toabout 35 cents per-gallon over the following four years. The state also levies a 2.25% sales tax on gasoline, which it remits to localgovernments.

Under the California ZEV case, the state stands to lose about $3 billion in tax revenues cumulatively through 2030. The number isas high as $1 billion even in the “no growth” case. These revenue losses amount to between 0.6% and 0.1% of state operating fundrevenues by 2030 if the state did not adjust the tax rate (Exhibit 9). Current law, however, requires the state to adjust tax rates toachieve revenue neutrality relative to the state’s gas taxes in 2010. This mitigates credit concerns related to gas taxes.

Exhibit 9

Lost revenue from EV adoption should prove manageable for California

Source: State of California, Moody's Investors Service

We expect the state to adjust its transportation tax policy to reflect increasing fuel efficiency. In July 2016, the state began a nine-month pilot study on the viability of charging drivers a tax based on miles traveled as a long-term replacement of the current per-gallon gas tax. Similarly, Oregon (Aa1, stable) launched a pilot vehicle-miles traveled (VMT) tax program last year. In September,Oregon's Department of Transportation recommended expanding the VMT tax to all new fuel-efficient vehicles to compensate fortheir effect on gas tax revenues, which would otherwise begin to decline by 2020, according to the state.



Even if California's VMT tax does not prove viable, the gradual nature of the eroding gas tax affords the state sufficient time to adjustto a new normal, whether that means a higher per-gallon rate, an increase in other existing tax rates or a new tax altogether, forexample on electric cars. In May 2016, California adopted a five-year plan that cuts $754 million and delays $755 million from the$36 billion transportation spending plan due to the drop in the price of gas. California levies both a per-gallon gas tax, which it adjustsannually, and a 2.25% sales tax on motor vehicle fuel. The legislature is contemplating additional fees to make up for the shortfall.

EVs will bring long-term health benefitsThe growth in EVs will bring long-term health benefits for California because the state's goal of a 50% reduction in petroleum use incars and trucks will significantly reduce non-CO2 vehicular pollution. The electricity needed to power EVs results in substantially lowernon-CO2 pollution since it comes primarily from natural gas and renewables.

California made more progress in curbing vehicle pollution than any other state between 1990 and 2014, according to EPA data(Exhibit 10). The exhibit shows reductions in CO2 emissions from cars but it follows that non-CO2 emissions, which determine localair quality in the state, would have also declined proportionately. Despite this sharp decline, California continues to have some of theworst air quality in the nation. More people in California live in areas that do not meet federal air quality standards than in any otherstate in the country and the state dominates the list of cities with the worst air pollution in the US as measured by the American LungAssociation (Exhibit 11).

Although the savings are not quantified here, a reduction in non-CO2 pollution indirectly caused by the state's focus on CO2 emissionscould reduce the state's healthcare costs. One study6 estimated that not meeting federal clean air standards cost California's Medicaidprogram $28 million between 2005 and 2007, which is small relative to the state's $171 billion budget (private insurers and Medicarespent another $165 million). However, cleaner air will also improve productivity and quality of life over the long-term, increasing thestate's in-migration and boosting the economy.

Exhibit 10

California's Vehicle Emissions Has Improved the Most, but RemainsAmong the HighestTop 5 states - highway vehicle CO2 emissions

Exhibit 11

California's Cities Among the Most Polluted in the US

Source: Environmental Protection Agency

Source: American Lung Association



Moody's Related ResearchSpecial Comments:

» Global Unregulated Utilities and Power Companies: Carbon Transition Brings Risks and Opportunities, Oct 2016

» Environmental Risks: Automotive Sector Faces Rising Credit Risks from Carbon Transition, Sept 2016

» Environmental Risks: Moody’s To Analyse Carbon Transition Risk Based On Emissions Reduction Scenario Consistent with ParisAgreement, Jun 2016

» Cross-Sector - Europe: Autonomous Vehicles Will Drive Change from Auto Manufacturing to Insurance, May 2016

» Regulated Utilities - US: New York's REV: Seeking a Greener Utility Grid for the Environment and Investors, Oct 2015

» US Regulated and Unregulated Utilities: Batteries Charge Up For the Electric Grid, Sept 2015

» US Utilities: Regulatory Response Looks to Stay Ahead of the Distributed Generation Curve, Nov 2014

https://www.moodys.com/research/Global-Unregulated-Utilities-and-Power-Companies-Carbon-Transition-Brings-Risks--PBC_1030584

https://www.moodys.com/research/Environmental-Risks-Automotive-Sector-Faces-Rising-Credit-Risks-from-Carbon--PBC_1038590

https://www.moodys.com/research/Environmental-Risks-Moodys-To-Analyse-Carbon-Transition-Risk-Based-On--PBC_1029574

https://www.moodys.com/research/Environmental-Risks-Moodys-To-Analyse-Carbon-Transition-Risk-Based-On--PBC_1029574

https://www.moodys.com/research/Cross-Sector-Europe-Autonomous-Vehicles-Will-Drive-Change-from-Auto--PBC_1023334

https://www.moodys.com/research/Regulated-Utilities-US-New-Yorks-REV-Seeking-a-Greener-Utility--PBC_1008618

https://www.moodys.com/research/US-Regulated-and-Unregulated-Utilities-Batteries-Charge-Up-For-the--PBC_1004007

https://www.moodys.com/research/US-Utilities-Regulatory-Response-Looks-to-Stay-Ahead-of-the--PBM_PBM176775



Endnotes1 Source: California plug-in electric vehicle collaborative http://www.pevcollaborative.org

2 http://www.theicct.org/ev-markets-calif-cities-sept2016

3 See Bloomberg news report here

4 See California ISO's publication, “What the duck curve tells us about managing a green grid”

5 The history of carbon credit prices in CA can be found here

6 See the RAND Corp study “The Impact of Air Quality on Hospital Spending”

http://www.theicct.org/ev-markets-calif-cities-sept2016

https://www.bloomberg.com/news/articles/2016-05-18/tesla-says-12-200-model-3-orders-were-cancelled

https://www.caiso.com/Documents/FlexibleResourcesHelpRenewables_FastFacts.pdf

http://calcarbondash.org/

http://www.rand.org/pubs/technical_reports/TR777.html



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To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatorylosses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for theavoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents,representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCHRATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any rating,agreed to pay to Moody's Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO andrated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually atwww.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's InvestorsService Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intendedto be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly orindirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion asto the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be recklessand inappropriate for retail investors to use MOODY'S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or otherprofessional adviser.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody'sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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