Virus Throws $6 Billion in Higher U.S. Utility Bills Into Limbo

(Bloomberg) -- U.S. utility customers may catch a break as more than $6 billion in proposed rate hikes are thrown into limbo now that regulators must decide whether to raise bills during a pandemic.

The pending increases requested by Duke Energy Corp., Dominion Energy Inc. and others would drive up costs in more than a dozen states. They may be delayed or face higher scrutiny as political pressure mounts to not burden homes and businesses while unemployment is already soaring.

“Kicking the can down the road is going to happen broadly,” Ryan Wobbrock, a credit analyst at Moody’s Investors Service, said in an interview.

While that would be good news in the short-term for customers struggling to pay electric and gas bills, there may a trade off. Delaying or reducing rate increases would crimp utilities’ cash flow and slow their efforts to recoup investments for big capital projects. That could hurt their credit, drive up borrowing costs and ultimately lead to higher customer bills.

Already, New York Governor Andrew Cuomo has ordered regulators to suspend pending rate hikes. In Massachusetts, Attorney General Maura Healey has asked to delay them. “This pandemic has caused financial struggles and record unemployment numbers – Massachusetts families can’t afford any additional costs right now,” Healey said in a statement.

Utilities including Eversource Energy, NiSource Inc.’s Columbia Gas and National Grid Plc have opposed Healey’s request. In a filing, they argued it could jeopardize their cash flow just as an increasing number of customers are falling behind on bills, creating a “perfect storm” that would drive up their costs to raise capital and in the end hurt consumers.

“Although at first glance the attorney general’s recommendation appears to be in the interest of customers, it is not,” the utilities said in their filing. “The attorney general’s well-intentioned but ill-advised proposal will only create additional financial stress for customers.”

In total, U.S. utilities have at least $6.4 billion in pending rate hikes, according to Moody’s. Not all are opposed to delaying them. In fact, several utilities have proactively asked to regulators to postpone rulings in light of the pandemic.

In New York, the outbreak’s global epicenter, Avangrid Inc., New York State Electric & Gas Corp. and Rochester Gas & Electric Corp. have asked to suspend their rate cases through mid-September. Dominion requested a delay in South Carolina.

Analysts for Moody’s called the moves prudent. “Over the long-term, these actions often enhance financial strategy, risk management and customer relations,” the analysts said in a statement.

Shalini Mahajan, a managing director at Fitch Ratings, said delaying rate increases doesn’t necessarily pose a credit issue for utilities. Utilities have demonstrated to have good access to credit markets and other funding sources to make up for lags until their rate cases are settled. “It’s more a timing issue than a credit issue,” she said.

Moody’s said it expected any impacts to be temporary.

Complex Process

Setting a utility’s rates is a complex and time-consuming process, requiring public hearings. They’re onerous undertakings during normal times and nearly impossible when entire cities and states are on lockdown.

Rate increases have become crucial to the growth of power companies.

While electricity demand has been mostly flat in the U.S. over the past decade, utilities have increased earnings by nearly doubling spending on new power plants, pipelines and other capital projects. They’re allowed to recoup costs from those efforts, plus a rate of return set by regulators.

If the virus triggers a prolonged downturn, spending to modernize grids and to cut carbon emissions could suffer if regulators ask companies to limit investments and “stick to their needs and try to keep the lights on,” says Karl Rabago, founder of consulting firm Rabago Energy LLC and a former regulator on the Texas Public Utility Commission.

Duke Exposed

With about $1.5 billion in pending requests to raise rates, Duke is among utilities most exposed to delays.

Duke is considering options to protect its cash flows -- including temporarily increasing rates, then refunding customers later -- in the event of any delays, spokeswoman Meredith Archie said.

“Our current focus is on maintaining safe and reliable service to our customers and providing support to our communities in this time of need,” she said. “At the appropriate time, we will have the opportunity to have our cases heard.”

Ultimately, the impact on utilities overall will hinge on how much economic pain the virus inflicts.

“Depending on how bad is the recession we’re in, there may be an increased amount of pressure from various entities, specially people in politics, asking for lower rates,” said Timothy Winter, a portfolio manager at Gabelli Funds LLC. “It certainly would diminish earnings growth.”

©2020 Bloomberg L.P.