Expect EPA litigation, stable outlook for utilities in 2015

Despite anxiety over the financial impact of the Environmental Protection Agency Clean Power Plant to cut carbon dioxide emissions, Moody’s Investors Service is upbeat about the outlook for public power utilities in 2015.

“The [EPA] rule leaves much up to the states to devise their approach to regulate carbon emissions,” Moody’s said. “In any case, we expect a highly contentious period of litigation and that the implementation of the rule would take years.”

“The main reason for our stable outlook is public power electric utilities' unregulated ability to establish electricity rates,” Moody’s said in a report issued Dec. 15. Moody’s Investors Service does not expect utilities to take on significantly more debt in 2015.

Projected lower demand for electricity reduces the need for utilities to borrow in order to build new capacity, so leverage is unlikely to significantly increase in 2015. Environmental compliance and system reliability projects will remain a major focus of new capital improvement programs, Moody’s noted.

“Uncertainty about the ability of public power electric utilities to comply with proposed federal carbon rules is an evolving long-term risk to our outlook,” Moody’s said.

“Our stable outlook is based on our expectations that debt-service coverage and liquidity in the industry will remain stable, supported by the ability of public power electric utilities to raise consumer rates when needed to recover the costs of generating and distributing electricity,” Moody’s said.

Slow growth in demand for electricity will put pressure on utilities to raise electric rates because their fixed costs will have to be spread out over the same or a lower volume of electricity. Still, the improving domestic economy and another year of low natural-gas prices will help keep electric rate increases moderate. If needed, however, public power electric utilities will use their unregulated ability to raise rates to keep their finances stable, Moody’s said.

The ratings service looked at a universe of public power companies that includes electricity generators, electricity distributors and joint action agencies, which are groups of municipal electric utilities that jointly finance power generation.

Moody's expects the economy to expand about 3 percent next year, up from about 2 percent in 2014. According to the Energy Information Administration (EIA), flat to 2 percent demand growth will be the norm for the next two decades. This is due in part to energy efficiency programs implemented by public power electric utilities, Moody’s said.

But slower demand growth will also reduce the need for utilities to borrow in order to build new generation capacity. “Against this backdrop, debt ratios for 18 of the largest 20 U.S. public power electric utilities with generation ownership fell between 2010 and 2013, the latest data available,” Moody’s said.

“Still, slower growth in electricity demand and the transition to cleaner energy are risks for public power companies,” Moody’s said. For example, Santee Cooper (officially known as South Carolina Public Service Authority) is a case in point. Santee Cooper has a 45 percent ownership stake in the V.C. Summer 2 and 3 nuclear units.

“Causes of lower demand include the impact of the national recession on South Carolina and an agreement with a co-operative to allow it to transition a portion of its power supply needs to another supplier over a six-year period. Santee Cooper is implementing strategies to mitigate the significant excess capacity when the units begin their commercial operation,” Moody’s said.

Moody’s also notes that California's municipal electric utilities are on track to supply 33 percent of retail power with renewable energy sources by 2020, thereby reducing the utilities' carbon exposure. “Questions remain about whether the transmission grid can manage the intermittent energy supply of solar and wind power and whether costs are affordable,” Moody’s said.

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