New York electric and gas utilities have asked state regulators to implement mechanisms to help them weather the economic impacts of the COVID-19 pandemic.
A group of utilities urged the New York State Public Service Commission, or PSC, to allow them to defer COVID-19-related costs, authorize surcharges to prevent a cash flow crisis and excuse them in cases where they cannot meet performance metrics due to the pandemic. The recommendations were part of the PSC's recently opened proceeding to consider the pandemic's broad impacts and find an equitable path forward for utilities and ratepayers.
The companies said regulatory uncertainty is already impacting their business through adverse credit rating agency actions, the need to issue more debt, and earnings and cash flow headwinds. They noted that ratings agencies are monitoring the PSC's actions, arguing that regulatory uncertainty and inability to defer pandemic-related costs could lead to credit downgrades, higher financing costs and barriers to accessing capital.
"The commission should adopt mechanisms to adequately support utilities' access to the capital markets at reasonable terms and conditions so they can continue their important role in the economy and provide public policy benefits," the companies said in a July 13 filing.
The companies included Central Hudson Gas & Electric Corp.; Consolidated Edison Inc. subsidiaries Consolidated Edison Co. of New York Inc. and Orange and Rockland Utilities Inc.; National Fuel Gas Distribution Corp.; Avangrid Inc. subsidiaries New York State Electric & Gas Corp. and Rochester Gas and Electric Corp.; and National Grid USA subsidiaries KeySpan Gas East Corp., Niagara Mohawk Power Corp. and Brooklyn Union Gas Co.
Companies grappling with rising bad debt
The companies are seeing uncollectible expenses rise due to customer nonpayment while they are simultaneously barred from collecting late payments and other fees under a state moratorium. The companies expect uncollectible expenses to rise above historical levels used to establish rates, based on the economic outlook and rising arrearages, or overdue payments.
ConEdison and Orange and Rockland reported that residential customers in arrears for more than 60 days were up by about 60,000 accounts in June, or $102 million, compared with June 2019. Non-residential customers in greater than 60-day arrears were up 39,000 accounts and $140 million over the same period.
National Grid's utilities saw greater than 60-day arrears jump in June by 70,000 accounts and $62 million for residential customers from a year ago. For non-residential customers, the companies saw increases of 18,000 accounts and $37 million in June.
Central Hudson accounts in greater than 60-days arrears were up 43% through June, compared with the year-to-date 2019 period.
To account for the increases, the companies asked the PSC to let them defer the uncollectible expenses. The companies would record the deferrals as reserves on their balance sheets and fund them through a combination of equity and debt.
Mizuho Securities analyst Anthony Crowdell noted that the PSC typically considers three factors in determining whether utilities can defer an expense: It has a material impact on net income, was unforeseen and was not in the company's control. The pandemic's economic fallout would appear to meet that test, but there is little precedent to indicate how the PSC will rule, Crowdell said.
"Investors are concerned about how NY utilities recover bad debt, expense greater than what is included in rates. At this time we are unable to predict how the PSC will rule given inconsistent past precedent," Crowdell said in a July 15 research note.
Utilities seek surcharges, waivers
The utilities anticipate many customers will not be able to pay their bills during the pandemic and recession, leading to material increases in uncollectible expenses that will pressure cash flow. They urged the PSC to establish a framework to backstop liquidity until they can address financial issues in future rate cases.
One option would be to allow companies to apply a surcharge to bills to prevent a liquidity crisis, they said. The surcharge could kick in when deferrals reach a certain percentage of company revenues, when deferral balances for an expense class exceed a minimum threshold or when a company reaches its credit rating downgrade threshold. Regulators could cap the surcharge and should authorize the mechanism that best suits a utility's circumstances, the utilities said.
The companies warned they may also face negative revenue adjustments for failing to hit performance targets outlined in their rate plans. Social distancing guidelines have prevented some operators from reading indoor meters or replacing leak-prone pipes, so they may fall short of targets in these areas.
To avoid the typical consequence, a downward adjustment to allowable revenue for the rate period, they asked the PSC to "declare that the pandemic crisis is the kind of extraordinary circumstance that justifies excusing a utility's inability to meet a rate plan performance metric." That would allow the PSC to extend a waiver to utilities, helping them avoid the negative revenue adjustment in cases where they can link the performance shortfall to COVID-19.