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As Transition To 'Normal' Begins, States Eye COVID-19 Cost Recovery Options

As jurisdictions implement road maps for returning to "normal" business operations, signalling an approaching end to moratoriums on utility service disconnections, regulators in an increasing number of states are tackling issues with respect to the impact of the coronavirus pandemic. on utilities.

The COVID-19 outbreak has created challenges for U.S. utilities on several fronts, including but not limited to, reductions in usage as businesses, schools and government buildings remain shuttered for extended periods of time, lower revenues due to a higher anticipated occurrence of bad-debt/uncollectibles, which has been exacerbated by mandatory and voluntary moratoriums on utility shutoffs, and increased operating costs associated with enhanced employee and customer physical safety measures and maintaining sufficient staffing to ensure safety and reliability of utility service.

These challenges have the potential to significantly impact the financial performance of the investor-owned utilities, increasing the overall level of investor risk.

As noted by Regulatory Research Associates, a group within S&P Global Market Intelligence, in previous articles on this topic, there are mechanisms in place — such as full decoupling mechanisms, formula rate plans and earnings sharing mechanisms — in certain states that could at least partially address recovery of COVID-19 costs without specific action being taken by the commission, but depending on the ultimate magnitude of the related costs other approaches may be called for.

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Early on, RRA likened the COVID-19 pandemic and its associated costs, with storm costs; generally, costs associated with major storms that are significantly above and beyond typical annual storm response costs are permitted to be deferred and then recovered from ratepayers over time, typically five to seven years, in the context of the company's next base rate case.

As of this writing, 22 of the 53 state level jurisdictions followed by RRA had issued orders or enacted legislation allowing the utilities to defer COVID-19 costs and/or lost revenues, proceedings were pending to develop a regulatory framework in 14 states and five states had indicated that the utilities are to work out extended repayment plans with customers that have accumulated arrearages.

For purposes of clarity, as RRA understands it, to the extent possible utilities are to first attempt to work out payment plans with customers and avail themselves of federal and state relief provisions before other remedies for cost recovery are employed in virtually all jurisdictions. Consequently, RRA has included in the last category only those jurisdictions where there has been some specific statement made by regulators/policy makers that the moratorium on terminations does not relieve customers of the requirement to repay arrearages.

Notably, even in those jurisdictions, the arrearages could ultimately become "uncollectibles" or "bad-debt" expense, and as such, regulators may have to address recovery of those balances at some time in the future.

Deferral approved in 22 jurisdictions

Alaska — On April 9, legislation was enacted that calls for the utilities to work out deferred payment plans with customers, but also allows the companies to defer extraordinary uncollectibles and other COVID-19 related costs.

Arkansas — On April 10, the Arkansas Public Service Commission issued an order authorizing the utilities to establish regulatory assets to record costs resulting from the suspension of disconnections. In future proceedings, the commission will consider whether each utility's request for recovery of these regulatory assets is reasonable and necessary.

California — On April 16, the California Public Utilities Commission issued an order that authorizes the electric, gas, communications, and water and sewer corporations to establish memorandum accounts to track incremental costs associated with complying with a previously ordered suspension of service disconnections.

Connecticut — On March 18, the Connecticut Public Utilities Regulatory Authority, or PURA, directed the regulated gas, electric and water utilities to maintain a record of all costs incurred and revenues lost as a result of implementing the required emergency measures and permitting the establishment of a regulatory asset to track incurred costs. Even so, the PURA subsequently issued an order allowing the utilities to extend the term of customer repayment plans to 24 months from 20 months, presumably to reduce the level of arrearages that ultimately become uncollectible.

Delaware — In a May 13 order, the Delaware Public Service Commission authorized utilities operating in the state to to establish a regulatory asset for COVID-19-related incremental costs for the period starting March 24 and ending 30 days after which Gov. John Carney issues an order that the state of emergency is no longer in effect.

District of Columbia — On April 15, the District of Columbia Public Service Commission issued an accounting order authorizing Exelon Corp. subsidiary Potomac Electric Power Co. and AltaGas Ltd. subsidiary Washington Gas Light Co. to defer incremental costs associated with the COVID-19 pandemic.

Georgia — On April 14, the Georgia Public Service Commission issued an order in the most recently completed rate case for Southern Co. subsidiary Georgia Power Co. authorizing the company to defer all lost revenue and increased costs associated with COVID-19, with the deferred balances to be addressed in a future proceeding.

Hawaii — On May 4, the Hawaii Public Utilities Commission adopted an April 23 proposal by the Division of Consumer Advocacy that the commission order the regulated companies to suspend service terminations for non-payment and forgo late fees. Many of the utilities had previously voluntarily suspended service. The order also authorized the utilities to establish regulatory assets to record costs resulting from the suspension of disconnections.

Idaho — On April 14, the Idaho Public Utilities Commission adopted a staff proposal to open an investigation to address whether and to what extent Idaho public utilities should be authorized to defer incremental COVID-19 related expenses into a regulatory asset for possible future recovery.

Illinois — In March, the Illinois Commerce Commission opened a proceeding to address utility actions taken with respect to COVID-19; the commission directed the utilities to defer/track COVID-19 related costs. In a proposed second interim order issued April 20, the administrative law judge recommended that the companies continue the deferrals, with recovery of the deferred amounts to be addressed at a later date.

Iowa — On May 1, the Iowa Utilities Board issued an order that among other things finds the use of regulatory accounts by rate-regulated utilities is appropriate for the tracking of financial impacts after March 1 that arise from the COVID-19 pandemic. The order opens separate dockets for each rate-regulated utility to file information regarding these accounts and requires each rate-regulated utility to file a proposal for the use of regulatory accounts to be submitted for review by the board.

Maryland — On April 9, the Maryland Public Service Commission authorized each utility to create a regulatory asset to track the incremental costs related to COVID-19. Costs eligible to be deferred as a regulatory asset include expenses incurred "in their efforts to serve customers during this period." Presumably, this would include atypical operations and maintenance expenses, as well as increased uncollectibles, or bad-debt costs that arise from continuing to serve customers that normally would have been shut off for nonpayment.

Michigan — The Michigan Public Service Commission issued an order April 15 indicating that it is open to allowing utilities to track direct costs, bad debt, or uncollectible expenses, for future discussion.

Minnesota — The Minnesota Public Utilities Commission on May 7 voted to allow the state's energy utilities to defer costs incurred responding to the COVID-19 outbreak.

Nevada — On March 27, the Public Utilities Commission of Nevada issued an emergency order directing the state's utilities to begin recording, as of March 12, in regulatory asset accounts, "amounts that reflect the costs of maintaining service to customers affected by COVID-19 whose service would have been terminated, discontinued, and/or disconnected under normally-applicable terms of service. Such regulatory asset accounts must be maintained in a manner that will allow costs to be readily identified in future Commission proceedings where the utilities may seek recovery of the reasonably and prudently incurred costs."

Oklahoma — On May 7, the Oklahoma Corporation Commission adopted an April 20 proposal by the commission staff, allowing each utility to record as a regulatory asset increased bad debt expenses, costs associated with expanded payment plans, waived fees and incremental expenses that are directly related to the suspension of or delay in disconnection of service beginning March 15, 2020.

Pennsylvania — A May 13 Pennsylvania Public Utility Commission Secretarial Letter authorizes the state's electric, gas, water, waste water, steam and rate base/rate of return telecommunications utilities to to create a regulatory asset for any incremental uncollectible expenses incurred above those embedded in rates the period beginning March 13 through the of the existing state of emergency proclamation by Gov. Thomas Wolf.

Texas — On March 26, the Public Utility Commission of Texas issued orders established an interim funding mechanism for retail electric providers in the restructured Electric Reliability Council Of Texas Inc. territory, the associated lost revenue through a charge on transmission and distribution utility, or TDU, bills. The orders also allow both the TDUs within ERCOT and vertically integrated utilities outside of ERCOT to establish regulatory assets for the related costs and lost revenues.

Texas — In April, the Railroad Commission of Texas issued a notice authorizing each gas utility to record in a regulatory asset account the expenses associated with the COVID-19 State of Disaster.

Virginia — On April 29, the Virginia State Corporation Commission granted a request by the gas, water and wastewater utilities to create a regulatory asset in which to record the incremental uncollectible expense incurred, late payment fees suspended, reconnection costs incurred with the billing suspended, carrying costs, and other incremental prudently incurred costs associated with the COVID-19 pandemic. Presumably, these issues will be addressed for the large electric utilities in the context of their periodic earnings reviews (see the Virginia Commission Profile).

Wisconsin — On March 24, the Public Service Commission Of Wisconsin opened an investigation to understand what costs may be incurred by utilities from COVID-19-related disruptions, including efforts to prevent power shutoffs in the state. The order authorized all electric, gas, steam, and water public utilities to defer expenditures resulting from compliance with the PSC's orders suspending service shut offs. In an order issued on May 14, the PSC determined that costs eligible for deferral include bad debt or uncollectible expense above what is currently included in authorized rates and forgone revenues related to the service termination moratorium, with these to be offset by any reimbursements the companies receive. The order specifically excludes declining sales revenue from the items that may be included in the regulatory asset.

Wyoming — On March 26, the Wyoming Public Service Commission allowed the utilities to seek an accounting order to defer any related costs and lost revenues. Since then the PSC has issued accounting orders for Black Hills Corp. subsidiaries Cheyenne Light Fuel and Power Co. and Black Hills Power Inc. and Berkshire Hathaway Inc. subsidiary PacifiCorp.

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Proceedings pending in 14 states

Arizona — On April 24, the Arizona Corporation Commission initiated a proceeding in which the commission is to track the financial impact of the coronavirus pandemic on the state's regulated utilities and ratepayers. At a May 19 special meeting, the commission voted to reject a generic proposed order that would have allowed the utilities to defer COVID-19 incremental costs with no carrying charges to accrue on the deferred balance. However, the commission indicated that this does not preclude the utilities from filing for approval of company-specific accounting orders.

Indiana — On May 8, the Indiana utilities and the Office of Utility Consumer Counselor submitted proposals regarding the treatment to be accorded COVID-19 related impacts on the utilities. The utilities request Indiana Utility Regulatory Commission approval to to defer for future recovery certain costs associated with the pandemic. The companies also propose to track revenue reductions tied to lost sales and "other revenue reductions attributable to ... changes in operations and customer loads" caused by COVID-19.

Kansas — On April 14, Atmos Energy Corp., Black Hills Corp. and ONE Gas Inc. subsidiary Kansas Gas Service Co. Inc. filed a joint petition for an order allowing the gas utilities to record costs and lost revenues related to the COVID-19 virus.

Kentucky — The Kentucky Public Service Commission issued an order March 17 opening a proceeding (Case No. 2020-00085) to address issues related to the crisis, and presumably ratemaking issues will eventually be addressed therein.

Louisiana — A Draft Special Order proposed by Commissioner Craig Greene, vice chair of the Louisiana Public Service Commission, would, if adopted, allow utilities to track and defer expenses incurred from the suspension of disconnections and collection of late fees imposed by the PSC in its COVID-19 order as well as direct costs. On May 27, the PSC voted to postpone consideration of the order until June.

Maine — The Maine Public Utilities Commission opened an investigation on April 28, how the COVID-19 pandemic will impact the state's energy utilities and customers' ability to pay their utility bills, including federal efforts or resources that may be available to customers to manage their utility bills, as well as any federal resources available to assist utilities with their ongoing obligations.

Massachusetts — The Massachusetts Department of Public Utilities on May 11, initiated an inquiry into policies and practices for electric and gas distribution companies regarding customer assistance and ratemaking in connection with the COVID-19 pandemic.

Missouri — On May 13, the Missouri Public Service Commission opened an investigation into "best practices" the state's utilities could ultimately use to address recovery of customer arrearages related to COVID-19.

Montana — On May 8, MDU Resources Group Inc. subsidiary Montana-Dakota Utilities Co., or MDU, filed with the Montana Public Service Commission for an accounting order allowing it to defer as a regulatory asset incremental costs, including revenue impacts, incurred since Gov. Steve Bullock's establishment of the state of emergency as a result of COVID-19.

Nebraska — On April 22, Black Hills Corp. subsidiary Black Hills/Nebraska Gas Utility Company LLC filed with the commission for approval to establish a regulatory asset to record and preserve costs related to the COVID-19 pandemic.

New York — While there is no generic policy proceeding pending, Corning Natural Gas Corp. in a pending rate proceeding, has asked the New York Public Service Commission for approval to defer significant items that are not subject to reconciliation as part of its revenue decoupling mechanism. In addition, the PSC's Director of Accounting, Audit and Finance has asked the utilities to provide monthly financial information regarding COVID-19 impacts on earnings and cash flow.

North Dakota — Utilities operating in North Dakota, including MDU, Xcel Energy Inc. subsidiary Northern States Power Co. have asked for North Dakota Public Service Commission approval to "track, defer, and record as a regulatory asset, incremental costs" resulting from the COVID-19 pandemic.

South Dakota — On May 1, the utilities in South Dakota, including NSP, Berkshire Hathaway Energy subsidiary MidAmerican Energy Co. and NorthWestern Corp. filed for South Dakota Public Utilities Commission approval to create regulatory assets to track incremental expenses incurred as a result of the coronavirus pandemic.

Utah — On March 27, the Public Service Commission of Utah opened a proceeding to to discuss actions commission might take in light of voluntary moratoriums; on April 27, the Public Utilities Division recommended that the commission take no action.

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

Utilities to work out extended payment plans

Colorado — The governor's executive orders placing a moratorium on service disconnections and later extending that moratorium directs the Colorado Public Utilities Commission to "work with all public utilities to develop and provide payment assistance programs to aid customers. In RRA's view this implies that the intent is to, at least initially, offer customers extended payment options rather than treating the forgone revenues as bad-debt or "uncollectibles" expense. A proceeding has been opened under which the PUC is tracking actions taken by the utilities.

New Hampshire — A gubernatorial order issued on March 31, states that at the end of the state of emergency, customers having utility payment arrearages that were accrued during the state of emergency must be provided the opportunity to make a reasonable payment arrangement over no less than a six-month period without any fees for late payment; however, "customers are not relieved of their obligation to pay bills for receipt of any service covered by" the governor's order suspending utility shut offs.

North Carolina — An order issued by the North Carolina Utilities Commission on March 19, with respect to the moratorium on service terminations during the COVID-19 State of Emergency states: "At the end of the State of Emergency, customers having arrearages accrued during the State of Emergency shall be provided the opportunity to make a reasonable payment arrangement over no less than a six month period and shall not be charged any late fees for late payment for arrearages accrued during the State of Emergency. No provision in this Order shall be construed as relieving a customer of their obligation to pay bills for receipt of any utility service covered by this Order."

Ohio — An order issued by the Public Utilities Commission of Ohio on March 13, calling for the utilities to work with customers to avoid service disconnections, states that the directive "does not eliminate any payment obligations. Such obligations may be deferred based upon future filings made by the utility or stakeholder proposals."

Rhode Island — The Rhode Island Public Utilities Commission's March 16 order implementing a moratorium on service disconnections directed the companies to work out payment plans with customers to address any arrearages. A May 8 order extending the moratorium directed the companies to develop plans for resuming normal collection activities, but cautioned that shut offs should always be the last resort.

The data underlying the above discussion is provided in this spreadsheet. Please note, with developments occurring on a day-to-day basis across the country, the data provided has been gathered on a best efforts basis and may not be comprehensive.

Next steps...securitization as a deferral recovery option

While deferral is an attractive option for regulators and utilities, it is important to note that deferral is not a guarantee of recovery; deferred balances most certainly will be subject to prudence review prior to ratemaking treatment for the balance being approved. Nevertheless, it preserves utility earnings in the near-term without immediately increasing rates for customers at a time when the economy is struggling to rebound.

Accrued deferrals or regulatory assets found to be prudent may be recovered through a base rate case or an issue-specific proceeding. Securitization is another option that regulators may consider. This financing methodology has been used by commissions in the past to address large regulatory asset balances associated with electric industry restructuring/the implementation of retail competition, recovery of storm costs and other weather-related events and premature asset retirements.

As it pertains to utilities, securitization refers to the issuance of bonds backed by a specific existing revenue stream that has been "guaranteed" by regulators and/or state legislators.

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Securitization generally requires a utility to assign the designated revenue stream to a "bankruptcy remote" special purpose entity or trust, which in turn issues bonds that will be serviced by the transferred revenue stream. The funds raised by the bond issuance flow to the utility, and in many cases are used to retire outstanding higher-cost debt and/or buy back common equity, thus lowering the company's weighted average cost of capital.

While it is unclear if securitization requires legislation, a specific legislative mandate generally improves the rating accorded the securitization bonds and lowers the associated cost of capital, given that a legislatively supported revenue stream may be more difficult to rescind than a stand-alone order of a state commission. In RRA's experience, no state commission has authorized securitization in the absence of enabling legislation.

Securitization may be viewed as an attractive option because it allows regulators to minimize the customer rate impacts related to recovery of a particular utility asset. The carrying charge on the asset would be the lower interest rate applied to a highly rated, usually AAA, corporate bond rather than the utility's weighted average cost of capital or even the interest rate on typical utility bonds, which are generally rated BBB and carry higher interest rates.

At the same time, securitization simultaneously reduces the investment risk for the utility by providing the utility up front recovery of its investment in what are usually non-revenue-producing assets. The company can then redeploy those investment dollars elsewhere.

A quick look at Federal Energy Regulatory Commission action on COVID-19

In an April 12 pronouncement, the Federal Energy Regulatory Commission committed to expeditiously review and act on requests for cost recovery; FERC's subsequent actions were aimed at providing regulatory relief to the electric and gas utility companies and other entities the commission regulates, the majority of which were process related. For most large electric transmission providers FERC has formula based rates in place and presumably, the impacts of COVID-19 would flow through this process. No such mechanism is in place for gas pipelines; so it is as yet unclear how any impacts on those entities would be addressed. For additional information on ratemaking at the FERC, see RRA's FERC Review.

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.

Charlotte Cox, Jim Davis, Russell Ernst, Lisa Fontanella, Monica Hlinka, Jason Lehman, Dan Lowrey, Jim O'Reilly and Amy Poszywak contributed to this article.

Jose Miguel Fidel Javier 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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