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Virus-induced recession, city budget crunches could squeeze public utilities

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Virus-induced recession, city budget crunches could squeeze public utilities

A recession caused by restrictions to control the coronavirus is likely to put pressure on U.S. public power utilities as cities grapple with budget shortfalls and struggling customers foreclose options such as rate increases or service disconnections.

Government-affiliated utilities have historically been "very stable and largely immune to pronounced effects from changing economic conditions" due to their consistent financial performance and typically autonomous rate-setting authority, S&P Global Ratings credit analyst David Bodek said.

"However, recent weeks have been anything but ordinary, calling into question the degree of credit support that the legal right to establish rates autonomously provides," Bodek said in an April 29 report. "As coronavirus contagion accelerates and economic activity contracts due to illness and social distancing directives, S&P Global Ratings views these utilities as increasingly vulnerable to the potential economic effects of the pandemic."

Some public utilities may not be able to raise rates in response to revenue stream erosion caused by states' stay-at-home orders and economic shutdowns, Bodek wrote. Many states have either mandated or strongly encouraged utilities to suspend electric disconnections as residential, commercial and industrial customers struggle to pay bills.

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

The current economic crisis also puts pressure on cities and local governments overseeing municipal utilities. According to a recent survey of over 2,400 cities from the United States Conference of Mayors and the National League of Cities, nearly nine out of 10 cities expect budget shortfalls due to the COVID-19 pandemic. Nearly two-thirds of municipalities expect an immediate revenue loss from utility fees.

These governments typically receive transfers of surplus revenues or reserves from their utilities, either through payments or taxes, said Jennifer Chang, Moody's lead analyst on public power. One potential scenario is that cities may request larger transfers from utilities to help make up for budget shortfalls, but that is unlikely to be a widespread theme for the sector, in Chang's view.

In addition, utility board members and government officials overseeing these enterprises may be reluctant to raise rates during a recession, Bodek noted. But as financial pressures mount, city leaders may look to utilities for more revenue.

"The customer service area is important, and really the credit quality of the service economic area makes a difference," Chang said in an interview, noting that municipal utilities in weaker economic regions or that have higher exposure to commercial and industrial customers, such as investor-owned utilities, are more likely to see a hit in demand and revenue.

San Antonio municipal utility CPS Energy estimates its profits will decline by up to $100 million in its current fiscal year due to the coronavirus pandemic. The company estimates a 6% drop in electric load, particularly due to a decline in commercial and industrial usage.

Local governments are unlikely to consider selling public power utilities even if they have an acute need for cash, Chang said. Municipal utilities "are not typically easily sold," and Moody's does not see the number of utility sales rising, considering the political aspects and the fact that these utilities represent an essential service.

"It's not something that could happen overnight," Chang said. "It's not something that we're even hearing about as a potential solution for cities seeing anything like that."

For now, municipal utilities are trimming costs and delaying certain projects until the U.S. makes it through the worst of the coronavirus crisis. Groups representing public power providers are also calling for law changes that would help such utilities build greater liquidity by once again allowing for advance refunding on municipal bonds.

"We believe the financial impacts of the recession and pandemic on individual utilities and the stability of the ratings will depend on the duration and severity of these interlinked events, the sufficiency of liquidity available to serve as a shock absorber, the level of cash flow available for debt service, and the demographics of individual utilities' service territories," Bodek said.