While ratings will remain stable in the public power sector over the next 12 months, the sluggish economy and prospect of new regulations pose risks for the longer term, Standard & Poor’s said in a report issued Thursday.
“A double whammy of economic and regulatory risks is bearing down on U.S. public utilities,” the rating agency said in a report titled: “A Sluggish Economy and Developing Regulations Remain the Biggest Shocks to U.S. Public Power Credit Quality.”
“Traditional strengths in this sector that provide a solid credit foundation include that utilities have rate-setting autonomy, a focus on the core mission of serving customers, and a lack of direct competition for retail customers,” according to the report.
But the recession and weak recovery, along with energy-conservation efforts, have chilled electricity demand, the report said.
Electricity sales have dropped, particularly for utilities with large, concentrated and economically cyclical industrial loads.
As a result, they have had to spread debt service and other costs over a smaller pool of sales, pushing up rates in some cases.
In past recessions, municipalities called on utilities to transfer funds to them. So far, such calls have not been made, “yet we remain concerned that this practice could return as local governments muddle through weak economic conditions,” Standard & Poor’s said.
Nevertheless, the weak economy has produced at least one silver lining — lower demand has relieved or delayed the need for utilities to obtain more power generation resources, according to the report.
In the regulatory arena, the report noted that a few years ago it appeared that Congress was about to approve a cap-and-trade measure.
However, that legislation was derailed by a prolonged recession, a weak recovery and political gridlock, it said.
While some states, like California and New Mexico, have moved forward with efforts to reduce carbon emissions, others in the Northeast and the West have abandoned such schemes.
“In our opinion, there is no political appetite for federal climate change legislation,” Standard & Poor’s said. “The Obama administration has turned to regulating through the [Environmental Protection Agency] what it cannot legislate through Congress.”
More than a dozen environmental regulations that have been finalized are scheduled for implementation by 2017, according to the report.
“While regulatory headwinds are beginning to blow, we do not expect that these headwinds will reach gale force in 2012,” it said.
The rating agency is particularly concerned about the implementation of Mercury and Air Toxics Standards, or MATS, also referred to as the Maximum Achievable Control Technology, or MACT standard. MATS is scheduled to take effect in 2015.
Issued under the 1990 Clean Air Act amendments, MATS sets limits based on the emissions reductions of the average of the top 12% beset-controlled sources. It applies to all coal and oil units that are 25 megawatts or greater.
“We expect MATS to apply to 1,400 units (1,100 coal and 300 oil) at 600 investor-owned, municipal, federal, and cooperative utilities,” Standard & Poor’s said. “We believe these regulations will likely cause disparate effects based on coal-dependency.”
The report notes that the U.S. Department of Energy’s 2012 outlook projects a continuing shift in power generation to natural gas due to low commodity and capital costs associated with gas-fired generation as well as the attraction of carbon reduction.
While natural gas prices are low and are likely to remain low during the next few years, “the return of historical price volatility remains a concern,” the report said.
Standard & Poor’s has about 250 ratings in the public power sector, including wholesale, retail, and combined systems. All of the ratings are investment grade, that is, BBB-minus or higher.
