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Bans on utility shut-offs during COVID-19 pandemic challenge regulators

As the reign of the COVID-19 pandemic marches on and policymakers struggle with concerns that a resurgence will occur as social distancing restrictions loosen, there has been an increasing amount of discussion among utility regulators about whether to extend existing mandatory moratoriums on utility service terminations or whether to allow them to expire. Similarly, the utilities have taken different approaches on whether to terminate voluntary moratoriums or extend them further.

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Regulatory Research Associates, a group within S&P Global Market Intelligence, has observed considerable activity in this regard in several states over the last few weeks.

On Aug. 27, the Public Utility Commission of Texas adopted a transition plan that allows customers to apply for benefits, including protection from a service shut-off for nonpayment, under its Electricity Relief program through Aug. 31, but the benefits themselves would not expire until Sept. 30. By contrast, the Railroad Commission of Texas, which oversees gas utilities, did not mandate that utilities refrain from shut-offs, but the utilities agreed to forgo disconnections initially. These moratoriums have largely expired, but the companies continue to offer customers flexible payment plans.

The Pennsylvania Public Utility Commission has deadlocked twice in recent months on motions to extend or rescind the moratorium. The commission has solicited input from stakeholders and the discussions are ongoing. In opening the proceeding, PUC Chairman Gladys Dutrieuille said extending the moratorium for "a time period that is too lengthy may only work to accelerate the accrual of arrearages for many utility customers and place them at increased risk of default and termination in the future, when large bills inevitably become due." Utility companies largely supported terminating the moratorium, but groups representing customer interests expressed concerns regarding customers' ability to pay and that the specter of service termination would make staying at home "less tenable" for ratepayers and could "endanger the state's fight against the spread of COVID-19."

On Aug. 25, the Hawaii Public Utilities Commission voted to extend the state's moratorium on utility service disconnections through the end of 2020.

On Aug. 24, the Virginia State Corporation Commission extended the mandatory moratorium on utility service disconnections through Sept. 16 as the General Assembly debates issues related to COVID-19 in a special session convened Aug. 18. Even so, the commission previously expressed concern that the "moratorium on utility service disconnections for nonpayment is not sustainable" and could result in costs being "unfairly shifted to other customers." The commission also said the moratorium could have "negative impacts on small, less-capitalized utilities and member-owned electric cooperatives," while larger, more well-capitalized utilities would have greater flexibility to absorb the cash flow and earnings impacts of the moratoriums.

On Aug. 21, New Jersey Gov. Phil Murphy announced that the state's water, gas and electric utilities agreed to extend their voluntary moratorium on customer shut-offs through Oct. 15 and agreed to offer customers flexible extended deferred payment plans of between 12 and 24 months.

On Aug. 20, the Public Service Commission of Wisconsin extended the moratorium, which had been scheduled to expire Sept. 1, to Oct. 1. The commission is to again consider whether to extend or rescind the moratorium at a Sept. 17 meeting.

On Aug. 10, the Tennessee Public Utility Commission voted to lift the ban on utility service disconnections effective Sept. 28.

On Aug. 5, Delaware Gov. John Carney extended the state of emergency and each of its related provisions, including the moratorium on utility disconnections, until Sept. 4.

On July 31, Maryland Gov. Larry Hogan issued an executive order to extend the moratorium in that state until Sept. 1. On the same day, the Massachusetts Department of Public Utilities extended the duration of an existing moratorium for residential customers, but the moratorium for commercial customers expired Aug. 31.

Also on July 31, in Washington, the governor issued an executive order that requires the moratoriums to continue through the end of the state of emergency, which extends through Oct. 15.

On July 30, the Vermont Public Utility Commission extended that state's moratorium until Sept. 30.

On July 28, the Nebraska Public Service Commission issued an order rescinding the ban on service terminations effective Aug. 15. On July 29, the North Carolina Utilities Commission issued an order authorizing the companies to resume disconnections effective Sept. 1, but certain utilities have indicated that they would continue to forgo shut-offs beyond that date.

In addition, service moratoriums that were in place in Illinois, Indiana, Louisiana, Missouri, certain utilities in Ohio, for certain customers in Rhode Island, and certain companies in South Dakota have expired since the latter part of July, and a ban in New Mexico expires Aug. 28.

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The items listed above are updates that RRA has become aware of since the previous article summarizing COVID-19 regulatory developments, "As COVID-19 wears on, regulators examine moratorium extensions, cost recovery," was published July 24.

Overview of COVID-19 service termination moratoriums

Moratoriums were implemented in all 53 of the state-level jurisdictions followed by RRA. The moratoriums are/were voluntary in about 19 jurisdictions and mandated by the governor, legislature or regulatory commission in the remaining 34. The latter includes states where one or more companies initially suspended service disconnections on their own but policymakers subsequently issued a directive mandating a moratorium.

According to data gathered by RRA, as of Aug. 26, moratoriums on service disconnections had been lifted for all customers in 14 of the jurisdictions followed by RRA.

In 12 states, target end dates have been established that allow protections to remain in place for certain customers through as far as early 2021. In 13 states, the application/duration of the moratorium varies by company or by service class, and in some instances, the moratoriums have been lifted for some customers.

In the remaining 14 states, moratoriums remain in place with no definitive end date established. In many cases, the moratoriums are to extend until the expiration or rescission of a state of emergency or for a period of time thereafter.

In Texas and Louisiana, two bodies regulate utilities. In Louisiana, most of the electric and gas utilities are regulated by the Louisiana Public Service Commission, but Entergy Corp. subsidiary Entergy New Orleans LLC is regulated by the City Council Of New Orleans. The PSC has authorized the companies to resume service terminations beginning July 17, but the companies have voluntarily left the moratoriums in place. The moratorium for Entergy New Orleans is set to expire Aug. 1. In Texas, the Public Utility Commission of Texas regulates electric utilities and the Railroad Commission of Texas regulates gas utilities.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

COVID-19 cost recovery

The magnitude of COVID-19-related costs to be recovered by the utilities and the degree of difficulty regulators and companies will face in addressing recovery of these costs will be impacted by a variety of factors including, but not limited to, the severity of the outbreak in the utility's service territory, the duration of the related state of emergency declared by the governor, the timing and duration of a transition to "normal," the level of unemploymentcapital spending plans, the individual company's sales and revenue mix, and the type of regulatory mechanisms that are already in place to address extraordinary costs and/or revenue volatility.

In addition, at least for the time being, electric utilities are facing more significant challenges than gas utilities because the pandemic hit the U.S. largely after the peak heating season when gas companies collect the majority of their revenue. For electric utilities, the pandemic hit just as they were heading into the peak summer season.

Even so, during the first and second quarters, financial results for most of the utilities in RRA's coverage universe did not reflect significant pandemic-related impacts. Adjusted earnings for the companies in the energy and water utility universe were up an average of 10.2% year over year, although individual company results varied widely. Despite many companies reporting that commercial and industrial sales fell in the second quarter, most management teams affirmed existing earnings guidance ranges.

For discussion purposes, RRA buckets the costs into two categories: direct costs and indirect costs. Direct costs include purchases of personal protection equipment for employees, such as masks, gloves, face shields and sanitizers. It also includes other health and safety costs, such as employee screening and testing, incremental labor costs/overtime/training, critical employee sequestration costs and increased technology cost for remote work.

Indirect costs include higher incidence of bad-debt/uncollectibles costs relative to the normalized amounts reflected in base rates and lost revenues due to business closures caused by stay-at-home requirements and the pandemic-related recession. All things considered, direct costs, while not immaterial, are expected to be less substantial and less controversial than the indirect costs. The magnitude of the indirect costs may not be known for some time as the economic impacts of the pandemic will likely persist after the crisis subsides.

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Thus far, by RRA's count, regulators in 30 jurisdictions have allowed at least one company to defer costs associated with the COVID-19 pandemic and the related moratoriums. In many instances, the directives lack specificity as to what costs are eligible for deferral. By and large, where the commission has specified the categories of costs that may be deferred, direct costs and incremental bad-debt/uncollectibles costs have been included. The issue of lost revenue is likely to be more controversial; so far only Kansas and Indiana have rendered specific rulings on this issue, with Kansas permitting deferral of lost revenue and Indiana prohibiting the practice.

However, for companies that have full revenue decoupling mechanisms or formula-based ratemaking plans in place, recovery of lost revenues will tacitly be addressed in the context of the periodic adjustments under these mechanisms, assuming the costs do not exceed any cap on adjustments under the mechanisms and that policymakers do not suspend the mechanisms due to the pandemic's economic impacts. For a more detailed discussion of these mechanisms, refer to RRA's Topical Special Report "Alternative ratemaking plans in the U.S."

Recovery of the amounts deferred will be addressed, on a company-specific basis, either through a base rate case or an issue-specific proceeding. Deferral is an interim remedy that generally allows the company's earnings to remain whole while the commission considers whether unanticipated costs should be treated as "extraordinary" and recovered or be considered "normal" volatility in utility costs that are part and parcel of the traditional regulatory process.

Once the commission determines which classes of costs are eligible for this treatment, the costs will be subject to prudence review before recovery begins. Commissions nationwide have used this methodology for various other types of costs, including storm costs and pension costs. Recovery generally occurs over several years, and the commission may or may not permit the utility to earn a return on the unamortized balance during the recovery period. Securitization has also been used in many instances to address the recovery of these types of deferrals.

It is important to note that utilities in virtually all states have implemented some type of flexible payment arrangements, in some instances extending repayment plans for as long as 24 months, and this is generally the first avenue the companies must explore for recouping arrearages associated with the pandemic. While these plans are in force, the unpaid portion of customer bills is booked as deferred revenue. These amounts would not be considered bad debt, and eligible for deferral, until or unless the customer is unable to meet even the more liberal payment options the utility has offered.

Nevertheless, RRA has identified five jurisdictions where the state governor, legislature or commission has issued a definitive statement that the moratoriums do not absolve the individual customer from responsibility for repaying arrearages accrued during the moratorium on disconnections, implying that the policymakers would not be amenable to allowing the utilities to defer these amounts for potential recovery from all ratepayers.

Proceedings to address COVID-19 cost recovery issues are pending in 18 jurisdictions, and no discernible action has been taken in three jurisdictions.

Detailed information on utility service termination moratoriums and cost recovery activity is available in this data file.

This information has been compiled on a best-efforts basis and may not be comprehensive due to the rapid evolution of events. In the coming days and weeks, RRA expects additional developments to occur and will disseminate relevant details in a timely manner.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.

For a full listing of past and pending rate cases, rate case statistics and upcoming events, visit the S&P Global Market Intelligence Energy Research Home Page.

Liz Thomas contributed to this article.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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