New York, July 23, 2002 — Despite the uncertainty and disruption caused by industry restructuring, most municipal electric utilities will maintain credit stability, says Moody’s Investors Service in a newly released special report.
In its forecast, Moody’s cites these utilities’ flexibility to raise rates as financial conditions warrant; statutory limitations on exposing retail customers to competitive choice; and management strategies to brace for a more competitive marketplace.
“We also note that public power’s decision to maintain ownership of generation have made them long on resources, thus limiting exposure to wholesale market volatility,” says Moody’s Senior Vice President Dan Aschenbach, who authored the report.
Moody’s rates 450 municipal electric utilities with more than $100 billion in total debt outstanding. The average rating is currently A3 for joint power agencies, and ranges A to Aa for city-owned electric utilities.
Even with the stable credit trends, there are still some potential credit vulnerabilities for these utilities going forward, the investors service reported. Among them is the exposure to the pricing volatility of wholesale electricity deregulation.
“Deregulation may mean more competition and choice in the purchase of electricity from suppliers,” states Aschenbach. “However, various factors including droughts or equipment failure can lead to supply/demand imbalances, and thus exposure to higher prices.”
Moody’s also said that these public power utilities can suffer if there are no market rules or enforcement of those rules to help the market function. “California energy markets, for example, lacked even a self-regulatory body to provide effective oversight such as those found in various financial markets,” says Aschenbach.
Finally, Moody’s says that power purchase contractual arrangements made without knowing the credit assessment of the energy supplier can pose prospective credit challenges for electric utilities. “If utilities do not know the credit standing of a supplier with whom they are doing business, they run the risk that the supplier could default on their contract, and create difficulties for the muni electric facility,” Aschenbach said.