As climate change legislation makes its way through the House and the country's job losses continue, the credit profiles of many investment-grade utilities could suffer despite their usual strength in the face of financial strife, Standard & Poor's said.

"While we expect the sector's overall credit quality to hold up in the next 12 months, in our view the long-term picture is less certain," the rating agency said in a report issued last week.

Analysts for the rating agency were hesitant to cast a dark cloud over the future of public power, however, noting that the past year was less destructive to public power utilities than to other sectors. Standard & Poor's upgraded 29 of the 250 public utilities it rates, and downgraded only one, during a time when the economy was slumping and commodity and energy prices were volatile, the rating agency noted.

The report also said that while the climate change legislation's proposed emissions regulations or requirements for expensive equipment could be harmful to utilities' financial profiles, bills tend to move at a glacial speed and often change significantly during the legislative process.

"We don't think anything is imminent," said Peter Murphy, the primary analyst for the report. Comprehensive climate change legislation "might come out as this landmark global warming or clean energy bill, but there are many, many loopholes, allowances, exemptions that at the end of the day, it has less teeth."

But the agency's analysts say the combination of a Democrat-controlled Congress and an environmentally focused administration makes new regulations more likely.

The climate change bill - sponsored by House Energy and Commerce Committee chairman Henry Waxman, D-Calif., and subcommittee chairman Edward Markey, D-Mass. - seeks to cut emissions 83% from 2005 levels by 2050 and would establish a federal cap-and-trade system.

Utilities relying on coal-fired power plants for energy would be most vulnerable to new regulations on carbon emissions, the report said. That means Midwestern public utilities could be especially pinched, but most public power systems would feel the pressure of a cap-and-trade or other federal law affecting coal power, Murphy said. The Los Angeles Department of Water and Power gets a majority of its energy from coal, he pointed out.

Municipal utilities also may be better prepared for new regulations anyway, because they have been investing in renewable energy for decades, Murphy said. "Unlike an investor-owned utility, they're a little closer to the mission to be a good neighbor rather than profit-oriented," he said.

States, too, have taken actions on greenhouse gas emissions. Utilities in California have been barred from adding new coal-based power supply; regional groups in the Midwest, Northeast and Midle Atlantic have implemented their own market-based cap-and-trade systems; and Florida and Kansas have blocked new coal-fired power facility construction, the report noted.

However, the rating agency argued that utilities are entering fiscal 2010 with an additional set of challenges related to the recession. Delinquency rates among customers are climbing modestly - an even bigger problem as foreclosures and bankruptcies increase, making it harder for utilities to recoup their losses from delinquent customers, Murphy said.

Some utilities are evaluating their policies and may require deposits or establish prepaid electricity programs, he said. At the same time, though, weaker demand for fuel has driven down fuel prices that had been soaring.

"Utilities that have what we consider a strong track record of passing along power costs to consumers fully and efficiently, and those whose consumers have the financial ability to absorb higher costs, should, in our view, likely maintain their strong credit quality," the report concluded.

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