WASHINGTON - The public power industry, pummelled by the recession like the rest of the municipal bond market, plans to seek federal assistance this year both to help issuers access the market and enable them to use more tax-credit bonds to finance projects, market participants said in recent interviews.

The American Public Power Association, which represents roughly 2,000 community-owned electric utilities, sent Treasury Secretary Henry Paulson a letter last month asking him to ensure financial guarantors are available to issuers in the public finance market.

"Bond insurance has been an integral component of the municipal bond market for the past 25 years, and healthy competition among various firms facilitated our market access and reduced our financing costs," said Mark Crisson, president and chief executive officer of the group. Public power utilities will struggle to sell debt unless insurers get help from higher up, he said.

Wall Street's meltdown not only caused bank funding for public power to dry up, but also had a ripple effect due to insurer downgrades.

Peter Murphy

Moody's Investors Service in October downgraded $504 million of gas project revenue bonds that had been issued by the Southern California Public Power Authority - after the credit rating of guarantor American International Group Inc. was downgraded.Crisson also joined state and local governments in asking Paulson and Federal Reserve chairman Ben Bernanke to either include municipal issuers in the government's commercial paper funding facility or to find another way to help public power utilities at a time when "basic infrastructure upgrades are stalled."

At the same time, the APPA wants federal lawmakers to remove or raise the current ceiling on clean renewable energy bonds for certain energy projects.

CREBs are tax-credit bonds that were created in 2005 and authorized at a national cap of $800 million. Patterned after qualified zone academy bonds, they can be used for wind energy facilities, biomass facilities, geothermal energy facilities, solar energy facilities, small irrigation power facilities, landfill gas facilities, trash combustion facilities, refined coal production facilities, and some hydropower facilities.

Economic recovery legislation enacted by Congress in October provided authorization for an additional $800 million of CREBs, and $800 million of qualified energy conservation bonds, a new category of tax-credit bonds allocated to states, municipalities, and tribal governments.

But Standard & Poor's analyst Peter Murphy said that although CREB financing is "priming the pump of renewables," with 350 million people and various industries using electricity, $800 million of tax-credit bonds for projects spread throughout the United States is "going to barely move the needle in terms of what percent of total energy supply comes from renewables."

Public power advocates are also pushing for help in stimulus legislation being drafted by Democratic leaders and the staff of President-elect Barack Obama.

Malcolm Woolf, director of the Maryland Energy Administration and mid-Atlantic representative for the National Association of State Energy Officials, said during a hearing last month before the Senate Energy and Natural Resources Committee that the federal government should provide in stimulus legislation more than $20 billion for green energy projects and programs. Some of those funds could be disbursed by state and local governments to utilities, he said.

In their outlook for public power, market participants said although public power utilities head into this year with stable credit, volatile energy prices, continued uncertainty about climate change legislation, among other factors will pose challenges for the sector.

As the faltering economy causes demand for public power to decline, utilities may need to raise rates, Crisson said. But at the same time, decreased demand also means less stress on capacity and therefore less need to sell debt to pay for capital projects at a time when the bond market is unfavorable.

Plant "additions can lead to increased prices or increased overall costs, especially if it's new capacity," Murphy said. "Pushing into the future the need for new construction relieves pressure in the short run."

The public utilities expected to be under the most credit rating pressure this year are those that will need to buy natural gas, because they will be subject to especially volatile pricing, Murphy said.

"Anyone obtaining supplies needs to be flexible to ... seize opportunities while prices are low to lock in some level of resources," he said.

Publicly owned utilities should also adjust rates as frequently as possible, and obtain regulatory ability to set rates if they haven't already done so, he said.

Crisson said that in addition to construction and commodity prices falling, public power may benefit from a "flight to quality" by investors, such as the recent rush to invest in no-interest Treasury bills.

"That augurs well for us because currently, we're rated in the industry very highly," he said. More than 80% of issuers in the group have stable or positive credit rating outlooks, he said.

Moody's analyst Dan Aschenbach noted, however, that utilities in the middle of construction projects for new generation that had to issue short-term notes, will need to access the long-term market this year or soon after.

"If rates don't improve, and they're stuck then with higher costs, that could be a risk on debt service coverage," he said.

SUPPLY AND DEMAND

One major dilemma that utilities face moving forward is how to strike a balance between decreased demand for power during tough economic times, and rates that are high enough to generate revenues for debt service payments.

Mark Crisson

"There potentially could be credit rating pressure if the retail rates are not raised enough," Aschenbach said.The Energy Information Administration of the U.S. Energy Department predicts domestic natural gas production will expand steadily due to climbing demand and prices between now and 2030. But climate change policies will "moderate" projected economic growth in the energy sector, and the financial community is "behaving as if they anticipate regulations," the administration said in a report last month.

The growth in electricity use is expected to decline through 2030, thanks to higher prices and improved efficiency, among other factors, according to the EIA.

While the use of renewable energy sources will climb, so will coal energy, it said. Coal's generation share will drop from 49% to 45% between 2007 and 2025, then recover slightly to 47% in 2030 as a small number of new coal plants are added, the administration said.

But natural gas and, to a lesser extent, renewables will easily outpace coal in added generating capacity through 2030.

Climate change agendas in Washington have presented - and will continue to present - planning challenges for public power utilities that need additional capacity but are unsure whether to move forward with projects, particularly traditional coal-fired power plants, sources said.

However, the struggling economy could make it tough for legislators to foist aggressive regulations on public power entities.

"Going forward, it's difficult to know what new regulations or legislation will come out of the federal government. However, in the short run, 2009, the current economic conditions in the United States may make it more complicated for the federal government to impose more strict and/or more costly emissions regulations," Murphy said. "At a time of crisis, you're going to [ask more of] utilities that are struggling to stay open?"

Steven Chu

The president-elect has said he intends to curb greenhouse gas emissions, and nominated Steven Chu, who has worked to develop technologies to reduce greenhouse gas emissions, to become Secretary of the Department of Energy.Public power entities worry that a cap-and-trade program may be instituted without a maximum allowance price to prevent volatility in costs, Crisson said.

Crisson believes that politics surrounding energy in the United States have "solidified" in the past couple of years, with both parties agreeing that the status quo must change. But the economic downturn will "make it hard to reach consensus on a comprehensive bill" in 2009, he said.

What the APPA does not want is a federal renewable portfolio standards bill. Such legislation would require utilities to derive a certain percentage of their electric power generation or sales from renewable energy sources. Twenty-one states already have their own portfolio standards or similar mandates.

But a federal standard would complicate the already-strained economic outlook for utilities, Crisson said, arguing that a poor economy makes high-cost emissions requirements especially untenable for issuers in regions with limited renewable sources such as wind, solar, or hydro power.

"The southeast has very limited renewable options," he said. "What do you do if [a utility] isn't growing, or is having negative growth?"

 

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