Municipal utility credits would withstand Trump plan to meddle in power market
A Trump administration plan to subsidize flagging coal and nuclear power plants is getting mixed reviews about what it could mean for public power agencies and the communities they serve.
The costs would be borne by utilities and their ratepayers.
Municipal power providers and electric cooperatives would be in a strong position to absorb the higher costs created by the plan, analysts said, although increasing rates could be difficult and contribute to delays in making capital improvements.
President Trump directed Energy Secretary Rick Perry to take steps to stop the loss of fuel-secured power facilities on June 1, after Bloomberg first reported on a draft plan under consideration that would require all utilities to buy electricity from coal and nuclear plants. Both generating sources are among the most costly.
The plan would invoke emergency powers under the Defense Production Act of 1950 and the Federal Power Act to temporarily delay plant closings – a move allowing the government to intervene in the U.S. wholesale energy markets that some analysts said would tilt the competitive landscape toward a system that favors certain generating sectors over others.
“Unfortunately, impending retirements of fuel-secure power facilities are leading to a rapid depletion of a critical part of our nation’s energy mix and impacting the resilience of our power grid,” White House press secretary Sarah Huckabee said June 1. “President Trump has directed Secretary of Energy Rick Perry to prepare immediate steps to stop the loss of these resources.”
Utility customers face higher electric costs under the plan, which the administration said will protect the reliability of the electric grid, which has evolved to include cheaper forms of generation such as natural gas and renewables like wind and solar.
Critics say the plan is an unneeded market distortion.
"The competitive market is capable of ensuring future reliability and resilience," according to the Natural Gas Supply Association.
“It is time to end discussions directed at short-sighted measures to prop up specific uneconomic coal and nuclear plants at the expense of energy customers and healthy markets," Pat Jagtiani, executive vice president of the Natural Gas Suppliers Association, said in a statement.
If Trump’s plan is implemented, municipal power issuers aren’t likely to have credit problems, said Dennis Pidherny, managing director at Fitch Ratings.
“Our municipal issuers are still largely protected in terms of their credit quality because their rates and organic structures still provide the ability to recover all their costs” from customers, Pidherny said. “I don’t see a credit negative here.”
The plan could be “mildly positive,” he said, if weaker performing coal units benefit from the plan by improving cash flow, extending the lives of some units and enabling them to exhibit stronger credit quality.
Big winners would be coal and nuclear "merchant generators," who operate plants independent of a regulated utility and sell the products on the open market.
“I can see from the merchant’s standpoint this would be a huge win or upside,” Pidherny said. “Those folks are completely at the mercy of the marketplace for recovering of their captive costs so any whiff of a subsidy or support for their generation would be very positive.”
Before news about the administration’s plan went public, First Energy Solutions Corp. urged the federal government to help keep its struggling nuclear and coal facilities open by compensating “at-risk merchant nuclear and coal-fired power plants for the full benefits they provide to energy markets.”
FirstEnergy filed for Chapter 11 reorganization in Akron, Ohio, on March 31.
The company is the obligor on $2.1 billion of tax-exempt, private-activity bonds – the largest amount of municipal debt issued on behalf of a merchant utility, according to analysts who say other companies operating in the non-regulated power generation industry also borrowed through conduits to issue tax-exempt bonds.
FirstEnergy wrote to Perry March 29, asking the Energy secretary to declare that an emergency exists in the PJM Interconnection, the regional transmission organization that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.
“Nuclear and coal-fired generators in PJM have been closing at a rapid rate, putting PJM’s system resiliency at risk, and many more closures have been announced,” FirstEnergy general counsel Rick Giannantonio wrote. “PJM has done little to prevent this emergency despite the numerous signs for many years that the emergency was coming.”
If the administration’s plan comes to fruition, aiding utility owners that operate less economical forms of electric generation could have consequences for utilities that don’t qualify for similar federal subsidies or support, according to David Bodek, a senior director in S&P Global Ratings’ public utilities group.
A plant that is more economical would fall behind subsidized plants, he said, adding that disruption in the power market could have a cascading effect, and an economical plant might struggle to recover costs. “It might be pushed far enough back in the line that it’s negative,” he said.
Socializing the cost of electricity across all ratepayers could create an impediment to raising rates to cover costs inflated by the subsidies, Bodek said.
“We don’t know at this point but it could whittle away the appetite for those who set rates,” he said.
While public power agencies can recover costs through their customers, some may find that the need for higher rates “might eat away at their ability to make further investments in their utility,” said Bodek. “There’s a lot of uncertainty.”
Triet Nguyen, head of municipal credit for Triangle Park Capital Markets Data, said it will be interesting to see if Trump’s plan leads to greater support for nuclear reactor projects in South Carolina and Georgia.
South Carolina Electric & Gas and state-owned Santee Cooper stopped construction of two reactors at the V.C. Summer Nuclear Station after spending billions. Both have no asset to show for the debt.
At Plant Vogtle in Georgia, two nuclear reactors are still under construction by Georgia Power Co. and public power agencies, including the Municipal Electric Authority of Georgia.
“Santee Cooper has already canceled the new Summer units and is facing great political pressure as a result,” Nguyen said. “MEAG is still proceeding with the Vogtle units and may get more federal help as a result of the new Trump directive.”
In West Virginia, where the state’s economy heavily depends on coal, Gov. Jim Justice hailed the administration’s plan because it meshes with his own mission.
“President Trump is dedicated to our coal miners and putting them back to work, and my plan has been clear from the beginning [that] we’ve got to preserve our eastern coalfields and save our coal-fired power plants,” said Justice, a billionaire who also owns mines in his state and others, including Virginia and Kentucky.
Justice, who became a Republican after election to office as a Democrat November 2016, said he initially backed a plan to make incentive payments to Eastern utilities for “each ton of coal that they purchase.”
Under Trump’s plan, Justice said, “we would be ensured the security this nation deserves and put tens of thousands of West Virginia and surrounding states coal miners back to work. Simply put, we cannot do without coal in the foreseeable future.”
To the extent the plan would result in more production at existing coal-fired utility plants, Pidherny said that would be a boon to employment in the mining sector. The plan probably won’t improve employment prospects by much, he said, adding that it’s more likely to curtail the decline of the industry for an extended period of time.
Although large-scale utilities produced 30% of electricity using coal in 2017, according to the U.S. Energy Information Administration, a growing amount of U.S. coal is sold overseas. Some 20% of the country’s energy is produced by nuclear reactors, which are costly to build.
Trump is in the process of scrapping the Clean Power Plan, a major initiative of the Obama administration to reduce carbon emissions, although analysts said some states still embrace the concept and plan to curb greenhouse gas emissions from power plants.
“I find hard to believe that at least any of our public issuers would run to build new coal units or new nuclear units,” Pidherny said. “I think people would be reticent to believe that over the long term there won’t be a continuing process to reduce carbon emissions.”
The administration’s plan is far from being implemented, he said, and it’s very likely to be controversial given the reliability of renewable energy sources.
“To date we haven’t had a situation where the sun didn’t shine and the wind didn’t blow for an extended period of time somewhere,” Pidherny said. “If you have that type of event then perhaps the arguments for grid reliability will be a little stronger.”