WASHINGTON — The outlook for public power utilities is uncertain for next year, as federal regulators ramp up efforts to implement greenhouse-gas regulations and states and regions push for developing more renewable energy sources.
The three major rating agencies all have stable credit outlooks for the public power sector of the municipal market. But analysts also have concerns about whether utilities will be able to absorb the costs of increased regulation and pass them on to ratepayers.
The prospect of increased federal regulation and new state standards has become more of a concern for utilities as it becomes clear that a divided Congress will not be able to approve any large-scale climate change or energy measures.
“We feel like we’re in transition now from worrying about climate change [legislation] to other things,” said Mark Crisson, president and chief executive officer of the American Public Power Association.
The Environmental Protection Agency is slated to start developing greenhouse-gas emission regulations next month, after having determined that certain carbon emissions are a threat to public health.
EPA regulations, as they are rolled out over the next several years, will most directly affect the coal power industry, according to Crisson and other market participants.
Public power utilities understand the need to comply with new rules and do not believe they should be exempt or have their compliance deadlines delayed indefinitely.
However, they have concerns about how the rules will affect their finances in the coming year, possibly forcing them to increase spending or potentially hampering their revenue collections.
The rules are expected to “have significant cost impacts on a lot of coal plants,” which are concentrated mostly in the Midwest and Southeast, Crisson said.
Those regions typically get up to 80% or 90% of their power generated from coal, he noted.
As a result of uncertainty about new requirements, and the possibility that utilities may face tight deadlines for complying with them, the APPA is currently working with the EPA and others in the sector, hoping to find “some kind of approach that would work for the entire industry,” Crisson said.
While saying he is “not criticizing the EPA,” he said power sector participants are concerned that they cannot predict whether the first round of regulations will be too expensive to comply with, “or the third and fourth and fifth might get you.”
Some members of Congress, led by Sen. Lisa Murkowski, R-Alaska, pushed for legislation that would effectively block the EPA’s ability to regulate greenhouse-gas emissions, but their efforts failed.
“We’ve got a real challenging time out there,” said Daniel Kreeger, executive director of the Association of Climate Change Officers.
While the politically divided House and Senate next year will make it difficult for Congress to approve any laws blocking the EPA from writing regulations, litigation could delay the new rules once they are finalized.
“People have been commenting that the minute we put the regulations in place, there are going to be court challenges,” Kreeger said.
Plant operators are trying to decide whether it makes sense to make investments in their facilities when future compliance requirements could prove so costly that they might have to shut down the plants, Crisson said.
“That represents a real challenge, for EPA and for the industry,” he said. Crisson added that while he is unsure whether the agency could — or is legally able to — issue all new regulations in one fell swoop, “you can see the uncertainty it creates in the industry” not to do so.
Standard and Poor’s sees regulatory uncertainty as a big issue for public power providers in 2011, according to credit analyst Peter Murphy. Utilities’ planning is affected if they are unsure about forthcoming rules, he said.
But that does not seem to be scaring issuers away from using debt to finance their capital projects. “There seemed to be a large amount of issuance in 2010, and [Build America Bonds] also contributed to that,” Murphy said.
It’s possible that some utilities may have accelerated the timing of their projects to take advantage of BABs, he added.
Regardless of the timing of regulations, certain plants and public power utilities will invest in retrofitting their equipment or taking other actions to comply with new rules. That on its own could be a financial stress. But sources said that public power authorities are eying a secondary issue as well: whether they can raise rates enough to meet those costs without losing public support or even customers.
“Older, smaller plants in particular are somewhat vulnerable” to higher costs for compliance with new regulations, “so we’re concerned at the ability to maintain economic viability,” Crisson said.
Credit rating analysts say they are watching the same thing.
“We are concerned about some of the potential impacts on some of the smaller, older coal-fired generation that could be targeted” for EPA regulation, said Fitch Ratings credit analyst Chris Jumper.
Some of those generation sources could be taken offline in the next five to seven years, he said.
“The challenge for public power is they’ve got to look through the present, short-term situation and anticipate building for the next 20, 30 years,” he added.
On the plus side, the credit outlook for public power utilities is stable, according to the rating agencies.
Utilities had been planning on large capital expenditures before the recession hit, Jumper said. That allowed them to go into the economic downturn “very well funded and financially strong.”
For the next year, the sector is expected to continue performing well, he said.
“Bad debt expenses didn’t skyrocket, and for the most part the issuers were able to raise rates when they needed it” in 2010, Jumper said. “Our concerns are increasing leverage, increasing amounts of debt. There are a lot of big projects going on, and debt levels are getting pretty high.”
It helped utilities heading into 2011 that their revenues this year seemed to perform “quite nicely” thanks to the cold winter and warm summer, he added.
The cautionary part of Moody’s Investors Service’s stable outlook for the sector is how various climate-change initiatives and the economic landscape affect the ability of ratepayers to absorb cost increases, said credit rating analyst Dan Aschenbach.
“If rates aren’t raised sufficiently enough … that could have some bearing on their credit rating,” he said, while noting that public power utilities usually are not constrained in their ability to raise rates.
For most of the rest of the country, outside of California, there are a number of power utilities relying on coal that might be shut down if more aggressive air-quality regulations are enacted, Aschenbach added.
The market could see more debt issuance to finance projects that replace coal, such as wind power, he said, adding that he expected to see more nuclear power issuance in the Southeast.
“Next year is still open to question,” Aschenbach said. “And what do they replace [coal] with?”
Meanwhile, states and regions are trying to establish their own renewable-energy portfolio requirements, that is, the percentage of a utility’s portfolio that should come from renewable energy.
States and localities have been sitting on the sidelines for the past few years waiting for Congress to pass a climate change bill, Kreeger said. Now that prospects for that are unlikely, the responsibility falls back to the states.
After providing some guidance on the best technology that could be used to control air pollution, the EPA “kind of handed the ball to states,” Crisson said.
But there are some inherent roadblocks to getting all utilities tapped into renewable energy. For example, wind energy can be plentiful in some states, but is not easily transmitted to consumers.
There are “huge amounts of wind generation in North Dakota and South Dakota, and that’s wonderful, but you can’t get it to where the population centers are,” Jumper said.
In some cases, that results in wind projects “actually paying to distribute their power,” he said.
One of the APPA’s main issues right now and for the next year will be what they view as an unfair imbalance in tax credits for public power. While certain incentives are available to investor-owned utilities, Crisson said Congress has been less supportive of incentives for public utilities.
Pushing for CREBS
Clean Renewable Energy Bonds are one example, Crisson said. The APPA wants to see the cap on CREBs removed entirely or at least increased from the current $2.4 billion limit because the allocations are not large enough to finance the major projects planned by public utilities.
Absent the use of CREBs or another comparable incentive for making their own renewable-energy power, the 2,000 community-owned utilities that the APPA represents usually find it more cost-effective to negotiate agreements with private energy producers to buy renewables from them, Crisson said.
Rep. Jim McDermott, D-Wash., introduced legislation earlier this year that would allow an unlimited amount of CREBs to be issued through 2013, but only by public power providers, electric cooperatives, and tribal utilities — not states and cities, which currently are allowed to issue CREBs along with public power entities.
Meanwhile, incentives for renewable-energy projects, such as grants that were created by the stimulus law, are not available to public power and cooperatives.
“We’re becoming increasingly disenchanted with the whole idea of incentives for renewables,” Crisson said, citing wind power and nuclear power tax credits that are not helpful to tax-exempt public power utilities.
“We love renewables, we support the incentives, but it’s very disappointing that we still haven’t seen comparable fair treatment for public power and coops,” he said.
States have been at the forefront of renewable-energy portfolio standards, and currently about 30 of them have standards in place. California and the New England states seem to be the “most committed” to setting goals for their utilities, according to Crisson.
Moody’s Aschenbach said California municipal public-power utilities “are facing a state cap-and-trade program implementation in 2012, so they have been busy positioning their power-supply mix to be more renewable,” mostly with solar and wind energy.