(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings). )
Key Takeaways
- The U.S. power industry faces an acute supply backlog of critical grid components, such as foreign-manufactured transformers, and tariffs could increase the already elevated prices of the equipment and materials.
- S&P Global Ratings believes that whether credit quality will be negatively affected by tariffs will depend on their magnitude and duration and utilities' capacity to recover related costs from their customers.
- Our negative sector outlook does not mean that we contemplate lowering our ratings on a large swath of the public power utilities; rather, in the prevailing inflationary environment, public power utilities are more susceptible to weakening financial metrics and possible downgrades than they were historically.
Tariff Costs Could Add To Existing Inflationary Pressures
There are many unanswered questions as to what tariffs could mean for the U.S. not-for-profit electric utility sector and utility credit ratings. Power utilities could be particularly exposed to tariff costs because many are engaged in a build cycle that depends on a supply chain of materials from Canada, China, and Mexico. The U.S. power industry already faces an acute supply backlog of critical grid components, such as foreign-manufactured transformers, and tariffs could increase the already elevated prices of the equipment and materials. The recent pause on U.S.-China tariffs is temporarily macro positive, but U.S. imports still face tariffs that are six times higher than 2024 levels. Where the tariff level settles after the 90-day pause remains uncertain. (See "Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief," published May 15, 2025, on Ratings Direct.)
S&P Global Ratings believes that whether credit quality will be negatively affected by tariffs will depend on their magnitude and duration and utilities' capacity to recover related costs from their customers. Utilities report that tariff and policy uncertainties are hindering their ability to quantify the magnitude of additional operating and capital costs and the corresponding rate increases that could be necessary to maintain sound financial performance.
Recent years' inflation and related consumer affordability concerns are reducing the flexibility provided by autonomous ratemaking authority to adjust rates in response to increasing costs. Historically, S&P Global Ratings considered public power utilities' ratemaking flexibility a key underpinning of their broadly sound financial performance and it has contributed to the generally strong ratings we assign to public power utilities (see "Not-For-Profit Public Power, Electric Cooperative, And Gas Utilities 2025 Outlook: Climate Change, Energy Transition, And Load Growth Underlie Negative Trends," published Jan. 14, 2025).
Economic barriers have diminished maintenance of sound financial metrics through rate increases, as issuers balance cost recovery with customer affordability
Members of utility boards and city councils are attuned to economic trends and their related affordability considerations, and in recent years, these considerations have tempered or deferred rate increases at some utilities.
Even with these limitations, national retail electric price inflation outpaces increases in the broader Consumer Price Index as utilities invest in infrastructure to become more resilient to climate hazards, invest in decarbonization, and build for growth.
Chart 1
Rising costs of infrastructure, labor, and financing, along with the specter of tariffs, compound inflationary and affordability pressures for utilities and their customers
We reflect the emerging interplay of these exposures in the negative sector outlook we assigned to the sector in January 2025.
Our negative sector outlook does not mean that we contemplate lowering our ratings on a large swath of the public power utilities. Rather, in the prevailing inflationary environment, public power utilities are more susceptible to weakening financial metrics and possible downgrades than they were historically.
Smaller utilities generally have more limited balance sheets, providing less liquidity to absorb shocks from cost increases
Service area income demographics among systems with limited numbers of customers can also constrain affordability and rate-adjustment flexibility. Among the public power utilities rated by S&P Global Ratings, 47% have fewer than 15,000 customer accounts and 33% have fewer than 10,000 customer accounts. The average number of customers among rated public power utilities is 90,600, and 18% of rated public power utilities have more than 100,000 customers.
Chart 2
However, that's not to say that large utilities are immune to inflationary and affordability pressures. In fact, management teams at many large public power utilities have reported an uptick in customers that are on payment plans due to burgeoning affordability issues. Despite this trend, larger utilities with broader customer bases, revenue streams, and liquidity typically are better positioned to socialize and address higher operating and capital costs without substantially eroding financial performance, compared with smaller utilities.
Against the backdrop of multifaceted ratemaking constraints, including tariffs, the overall ratings distribution remains mostly investment-grade, reflecting our view of public power utilities' broad capacity to remain financially resilient.
Chart 3
We continue to monitor whether tariffs will disrupt this resilience, particularly as we, and utilities, gain more clarity on the duration, exclusions, and size of tariffs across trading partners.
Related Research
- For A Resilient Global Infrastructure Sector, The Immediate Impact From Tariffs Will Be Limited, May 14, 2025.
This report does not constitute a rating action.
| Primary Credit Analyst: | David N Bodek, New York + 1 (212) 438 7969; david.bodek@spglobal.com |
| Secondary Contact: | Tiffany Tribbitt, New York + 1 (212) 438 8218; Tiffany.Tribbitt@spglobal.com |
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