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Utilities call on Fed to expand access to short-term debt as nonpayments spike

The Federal Reserve is fielding calls from the U.S. Congress and energy regulators to give electric, gas and water utilities easier access to short-term loans amid commitments to suspend customer disconnects due to the coronavirus pandemic.

Trade groups such as the Edison Electric Institute, or EEI, announced in late March that their member companies would suspend disconnects for nonpayment as the COVID-19 outbreak puts a record number of U.S. households out of work.

On March 24, the EEI was joined by the American Gas Association and National Association of Water Companies in urging the Fed to expand its Commercial Paper Funding Facility, or CPFF, to include what are known as Tier 2 companies.

Launched a week earlier, the facility buys short-term debt from companies and is largely focused on helping investment-grade issuers. The commercial paper market is critical to the U.S. corporate finance system. Many large companies use it to issue short-term debt in exchange for cash, which they can then use to meet payroll and other short-term liabilities.

As currently structured, the central bank is only purchasing commercial paper from companies that were rated A-1/P-1/F1 as of March 17 as well as making one-time purchases from issuers that held that rating at the time but have been downgraded one tier below since then. Excluding other Tier 2 companies from the program will not address liquidity and cost issues in the A2/P2/F2 commercial paper market "where liquidity is rapidly declining," the EEI said in a letter addressed to Fed Chairman Jerome Powell.

Noting that utilities are significant issuers in the A2/P2/F2 commercial paper market, the trade groups warned that their members are facing severe declines in revenue and "extraordinary increases in short-term funding costs" due to the coronavirus pandemic. The groups therefore recommended that the CPFF be extended to commercial paper programs rated at A2/P2/F2 by at least two of the major credit rating agencies and to Tier 2 holding and operating companies in sectors designated as critical infrastructure by the U.S. government.

Those recommendations were echoed in an April 2 letter signed by 81 members of Congress representing both parties. "The cost of [commercial paper] for many Tier 2 issuers in recent days has been two to three times their historical average," the members noted.

That letter was followed by a similar April 7 letter co-signed by Federal Energy Regulatory Commission Chairman Neil Chatterjee and National Association of Regulatory Utility Commissioners President Brandon Presley.

U.S.-regulated utilities could dial back their shareholder dividend payout plans to boost available cash if the coronavirus pandemic continues to drag the economy down, the credit rating agency Moody's recently said.

Congress is also hearing calls to provide financial relief to the nation's rural electric cooperatives, which do not have the same access to commercial paper or ability to tap shareholder dividends.

"Electric bill nonpayment is increasing nationwide and electric load from commercial and industrial users has dramatically decreased," National Rural Electric Cooperative President and CEO Jim Matheson wrote in his own April 6 letter to congressional leaders. Matheson's letter outlined a range of COVID-19-related concerns, warning that without federal assistance to address operational shortfalls, "co-ops may face severe financial distress."

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