Dive Brief:
- Dominion Energy in South Carolina and several other utilities have asked to delay their requests for rate increases given the novel coronavirus pandemic. In New York, an epicenter of the outbreak, regulators have approved multiple deferrals, from three to five months, according to a report from Moody's on Monday.
- Regulators in North Carolina and other states postponed rate case hearings by at least 60 days, as the time-intensive proceedings and public hearings are "difficult to process in a remote environment," Moody's wrote. These rate case delays are "a social benefit," and Moody's assumes the pandemic will be contained by the time they restart.
- COVID-19 also threatens the economic state of the nation as unemployment soars, which "could have negative credit implications for certain utilities," the report said. However, a worsening pandemic could also push regulators to be more aggressive against cost increases, some analysts say.
Dive Insight:
When utilities are early on in their rate cases, "that's when they're most vulnerable to regulators, to regulatory pressure," Eric Selmon, co-head of utilities and renewable energy research at SSR LLC, told Utility Dive.
On March 17, SSR published a report identifying Duke, CMS Energy, Hawaiian Electric and Arizona Public Service for being the "most exposed based on the size of the rate base in the rate cases, the risk to ROE and the early stage of their rate cases" during the pandemic.
The company analyzed the national average allowed ROE for 2020, and forecast that 14 utilities could see a negative change to their ROE in current rate cases. Utilities could see as much as a 1% drop in allowed ROE, in the case of Eversource Energy's New Hampshire utility, SSR forecast.
However, ROE impacts on utility rates are more limited, and regulators that take a more aggressive stance could seek to limit rate increases by questioning the need for cost increases or delaying their introduction, which would defer utility collection until after the pandemic has passed, according to the SSR report.
Moody's analysts say utilities have been suggesting delaying rate case proceedings on their own and engendering a stronger cooperative relationship with regulators by postponing decisions critical to their earnings and cash flow.
"We expect regulators to remain supportive of cost recovery," Ryan Wobbrock, lead analyst on the report, told Utility Dive.
Extending the stay-in-place orders will also impact utility demand.
"If you have this big shift in demand at utilities, where businesses are shut down for a month, you could be in a situation where demand and revenue is down beyond anything we've really seen before ... then utilities will need to figure out how to preserve cash," Selmon said.
S&P Global Ratings recently revised its North American regulated utilities outlook from "stable" to "negative" based on COVID-19 impacts.
This is a temporary thing and "utilities will be hurt financially over the near term," Wobbrock agreed.
By delaying a rate case, utilities are delaying cost recover for investments they have already borrowed money for, Wobbrock said. "You just have to sit there and stay at that cash level or potentially lower cash level until you can get the right case through and receive that incremental boost of revenue and cash."
"We're really trying to look through that type of temporary thing and not have a knee-jerk reaction, and change ratings just to then change them again another six months down the road," Wobbrock said.
Moody's expects regulatory and political support will help put rate case proceedings on track so that utilities don't have to wait a prolonged time without incremental cash flow.
However, SSR thinks expediting a rate case will impact utilities in a negative way.
"They're on the front line because they're the first ones in before regulators," Selmon said. "Deferring their rate cases may be the best thing they can do, [although] they may have to defer anyway" as COVID-19 conditions worsen.
"None of us have a grasp of the whole picture," he said.
