Clean Energy Now

MARCH 4, 2009—Public power and electric cooperatives, already facing prospects for regulation of greenhouse gas emissions and additional capital needs, will likely see the most near-term problems from recession-related issues, according to Standard & Poor's Ratings Services.

The ratings firm pointed to declining energy sales and regional capacity surpluses as two big problems facing the industry amid the recession, which it projected to last into 2010. Additional concerns include increasing payment delinquencies and political pressure to hold down rates or provide increasing support to help cover budget gaps of municipal governments.

During a recession, political pressure grows to hold down rates, S&P warned, but utilities, which are struggling with a drop in demand, are especially vulnerable to changes in demand as they base their rates on the expectation that energy sales will increase.

Additionally, most public power utilities provide some support to their local government, either in the form of a payment in lieu of taxes, a dividend payment or an outright transfer. The transfers are often tied to the utility's margins, and during a recession, the pressure to increase transfers intensifies, S&P said. In turn, the predictability of the transfer can be reduced and decouple it from the utility's margins.

The U.S. electric and public power utilities also face sizable costs related to carbon regulation and reduced dependence on fossil fuels through investment in renewable energy, which has been promoted heavily by the current administration. The ratings firm noted these shifts come as the sector is in the midst of its largest capital building program in roughly 40 years. S&P said the public power utilities outlook isn't entirely bleak, saying the economic outlook may change amid recovery plans already underway, including the recently passed stimulus package.