ALAMEDA, Calif. — Public power utilities in the Pacific Northwest face unique credit risks by virtue of their heavy reliance on hydroelectric power, but are managing them appropriately, according to a report released last week by Fitch Ratings.
Fitch recently upgraded 40% of public power retail systems in the Pacific Northwest region, noting that they are likely to suffer less from future carbon taxes and regulation than utilities that are more dependent on fossil fuels.
The upgrades indicate “our positive view of this fairly 'green’ area of the country,” analyst W. Drake Richey said in a statement. “Credit rating improvements were driven by individual utility strengths and relative stability despite a challenging operating environment.”
Fitch rates 12 public power agencies in Washington and Oregon. Their ratings range from A-minus for Klickitat County Public Utility District #1 and Pend Oreille County Public Utility District #1 to AA-plus for Chelan County Public Utility District #1. All three are in Washington.
More than 60% of the power generated by Northwestern utilities comes from hydroelectricity. That dependency is a challenge for utilities because production varies from year to year due to changes in precipitation levels, snowpack, and runoff.
The inherent volatility of hydroelectric supply is reflected in the conservative financial structure of Northwestern utilities, according to Fitch.
“The financial metrics of the public power utilities in the Northwest are generally better than national averages in order to account for variable hydro conditions and the potential impact of a bad water year on financial margins,” the report said. “Although water conditions were below average for most of the past decade, financial metrics remained strong given that regional wholesale electricity prices generally varied inversely with water flows.”
The utilities are heavily exposed to the region’s largest electricity generator, the federal Bonneville Power Administration. It markets electricity generated from Columbia River dams, including the Bonneville Dam and the Grand Coulee Dam.
The reliance on hydroelectric power has other pluses as well, including lower carbon emissions and relatively low generation costs.
“Demand growth has persisted for most utilities through the past and current economic downturns,” the Fitch report said.
That absence of carbon emissions may prove to be a greater competitive advantage for hydroelectricity as governments take a more active role in reducing greenhouse gas emissions, analysts said.
“Coal and natural gas-based utilities in other parts of the country face increased cost pressure associated with potential carbon taxes and regulation,” the report said. “While hydro facilities also face environmental compliance costs associated with fish and wildlife preservation, Fitch believes the long-term rate impact associated with hydro compliance will be less than the impact of a carbon tax on fossil fuel-based utilities.”
