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Certain State Unemployment Rates May Indicate Utilities With Most Revenue Risk

Based on April 2020 data, the states with the highest unemployment rates, which we are using as a proxy for the magnitude of economic decline resulting from the coronavirus pandemic, are Nevada, Michigan, Hawaii, Rhode Island, Indiana and Ohio. Among the utility holding companies that have significant electric operations in these and other comparatively high unemployment rate states are American Electric Power Co. Inc., Berkshire Hathaway Inc., CMS Energy Corp., Duke Energy Corp., DTE Energy Co., FirstEnergy Corp., Hawaiian Electric Industries Inc., Southern Co. and the three California utilities, PG&E Corp., Sempra Energy, and Edison International.

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The 2020 unemployment data for each of the 50 states and the District of Columbia is summarized in the above map. The tables that follow provide more detailed information, including the major electric utilities that operate in each state, the increase in each state's unemployment rate from January to April 2020, and the states that utilize full revenue decoupling mechanisms.

While several factors will affect a utility's revenues during the current severe economic downturn, the overall level of economic activity will be a major, if not the major driver, and using each state's unemployment rate should give a reasonable comparative indication as to the degree of economic decline.

As indicated in the table at the end of this report, the states that have experienced the largest percentage point increase in their unemployment rate over the January to April 2020 period are Nevada, Hawaii, Michigan, Indiana, New Hampshire, Rhode Island, Vermont, Illinois, Ohio and Massachusetts.

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We note that many companies have utility operations in more than one state, with prime examples being American Electric Power, Duke Energy, Entergy Corp. and Southern Co. Thus, the level of unemployment in a single state likely will not provide a good indication of the risk to the revenues of a company with significant operations in more than one state. A better indication likely would be achieved by considering the unemployment rate in all states in which a company operates and using an appropriate weighting to determine the overall unemployment situation and revenue risk facing the company's operations.

In addition, many states utilize alternative regulatory mechanisms that, to varying degrees, insulate a utility's earnings from the negative effects of the economic downturn. Among these mechanisms is a full revenue decoupling mechanism, or RDM, which insulates a utility's earnings from revenue variances from any source, including an economic contraction. Mechanisms that only insulate a company from the earnings effects of revenue variations caused by non-normal weather and conservation/demand side management, i.e. partial RDMs, will not offset the effects of revenue declines due to an economic contraction.

We also note that as part of regulators' response to the impact of the pandemic on utilities, commissions may, in the absence of a full RDM, provide for the tracking of lost revenues, to be addressed in future proceedings.

Among large utilities with substantial electric operations in states that do not utilize full electric RDMs are American Electric Power, Southern Co., Duke Energy, NextEra Energy Inc.Xcel Energy Inc., CMS Energy, DTE Energy, Dominion Energy Inc.Public Service Enterprise Group Inc. and WEC Energy Group Inc.

As indicated in the table at the conclusion of this report, states that utilize full revenue decoupling mechanisms for at least one of their electric utilities are: California, Connecticut, Hawaii, Idaho, Illinois, Louisiana, Maine, Maryland, Massachusetts, New York, Rhode Island and Washington. Thus, the earnings of companies with full RDMs operating in these states should not be materially affected by revenue declines driven by the economic contraction.

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Additional mechanisms are in place in many jurisdictions, including recent regulatory commission rulings authorizing deferrals that are expected to facilitate the companies in recovering the additional expenses caused by the coronavirus pandemic. Because of the variability of these mechanisms across the states and as they apply to specific utilities in each state, the reader is encouraged to refer to the following recent Regulatory Focus analysis and to the individual state commission profiles for more detail.

We note that many utilities have indicated they intend to offset revenue declines with expanded expense control efforts.

States with low unemployment rates

The states with the lowest April 2020 unemployment rates are indicated in the below table. Connecticut, bucking the trend of most of the other New England states, had the lowest rate nationwide, 7.9%. With the exception of Maryland, the other lowest unemployment rate states are in the Midwest and Rocky Mountain regions.

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Among the larger utilities with operations in states posting comparatively low April 2020 unemployment rates are Xcel Energy, Exelon Corp. and Ameren Corp. The quite small Otter Tail Corp. has utility operations in three states that have comparatively low unemployment rates, Minnesota, North Dakota and South Dakota, but the company's significant non-utility manufacturing operations will likely cause its revenues to decline during the economic contraction. Connecticut has implemented full revenue decoupling mechanisms for both of its electric utilities and Maryland has done so for Exelon.

As indicated in the table at the conclusion of this report, the jurisdictions that experienced the smallest percentage point increase in the unemployment rate from January to April 2020 are Connecticut, Minnesota, Nebraska, Wyoming, the District of Columbia, Missouri, North Dakota, New Mexico, Maryland and Arkansas.

The commentary in this article has not considered the impact of the sharp economic contraction and the extremely high levels of unemployment on gas utility revenues since the second and third calendar year quarters are a time of low gas use and sales due to the warmer weather. Gas use typically does not significantly increase until the winter heating season commences in October or November, depending on geographic location. The degree to which the economy will have recovered by that time from the current sharp downturn remains to be seen.

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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.

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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