Using individual state unemployment rates for June as a proxy for the magnitude of economic decline resulting from the coronavirus pandemic, Massachusetts, New Jersey, New York, Nevada, California and Michigan have experienced the worst contraction. Of the utilities operating in these states, CMS Energy Corp., DTE Energy Co. and Public Service Enterprise Group Inc., subject to the clarifying discussions below, may be especially at risk for COVID-19 driven revenue loss. Other states with comparatively high June unemployment rates are Illinois, Hawaii, Pennsylvania and Delaware.
We note that while the overall U.S. unemployment rate has notably improved since April, the recent increase in COVID-19 cases in many states may cause further significant improvement to be elusive in the short-term.
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 as a proxy should give a reasonable comparative indication of the degree of economic decline in the various states.
However, the degree that the unemployment rate and by implication economic health of a specific state impacts the utilities operating in it is not a straightforward matter. Many states utilize alternative regulatory mechanisms that, to varying degrees, insulate a utility's earnings from the negative effects of an 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's earnings from the 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 decline. For a discussion of alternative state regulatory mechanisms in the context of the coronavirus pandemic, see here.
We note that of the states mentioned above, Massachusetts, New York, California, Illinois and Hawaii utilize full RDMs, and hence, the utilities operating under an RDM in these states should be insulated from the earnings impact of the revenue decline expected to occur from the COVID-19-driven recession.
The June 2020 unemployment data for each of the 50 states and the District of Columbia is summarized in the above first map. The tables included in this analysis provide more detailed information, including the major electric utilities that operate in each state and those that utilize full revenue decoupling mechanisms. The table at the conclusion of this report also indicates the percentage point change in each state's unemployment rate from April to June and the increase from January to April 2020.
The above second map shows the percentage point change in the unemployment rate for each state from April, when the U.S. unemployment rate had peaked at 14.7%, to the rate in June, when the national rate was 11.1%. As indicated on this map and the table at the end of this report, the states that have experienced the largest percentage point decrease in their unemployment rate over the April to June 2020 period are Nevada, Kentucky, Hawaii, Michigan, Oklahoma, Mississippi, Vermont, Ohio, Washington, Alabama and Indiana. Several states, however, experienced an increase in the unemployment rate in this period, namely Connecticut, Massachusetts, New Jersey and New York.
We note that many companies have significant utility operations in more than one state, with prime examples being American Electric Power Co. Inc., Duke Energy Corp., Entergy Corp. and Southern Co. Thus, the level of unemployment and economic contraction in a single state likely will not provide a good indication of the risk to overall 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 rate/economic situation and revenue risk facing the company.
READ MORE: Sign up for our weekly coronavirus newsletter, and read our latest coverage on the crisis .
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, with possible rate recovery 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 Company, Duke Energy, NextEra Energy Inc., Xcel Energy Inc., CMS Energy, DTE Energy, Dominion Energy Inc., Public Service Enterprise Group and WEC Energy Group Inc.
Additional mechanisms are in place in many jurisdictions, including recent regulatory commission rulings authorizing expense deferrals, are expected to facilitate the companies' recovery of the additional costs 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 June 2020 unemployment rates are indicated in the below table and include Kentucky, which had the lowest rate nationwide at 4.3%, followed by Utah, Idaho, North Dakota, Maine and Oklahoma. Most of the lowest unemployment states are in the Midwest and Rocky Mountain regions. We note that Nebraska has no investor-owned electric utilities.
Among the larger utilities with significant operations in states posting comparatively low June 2020 unemployment rates are Berkshire Hathaway Inc., American Electric Power, PPL Corp. and Evergy Inc.
The analysis in this article has not considered the impact of the sharp economic contraction and the very high levels of unemployment on the revenues of local distribution gas utility companies 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 downturn remains to be seen.
For a discussion of state unemployment rates in April and earlier in 2020, see here.
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 and Ciaralou Palicpic 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.