While it is too early to say what the credit rating effects of a recent move by the Trump Administration to offer financial support to owners of coal and nuclear generation could be for public power and electric cooperative utilities due to a lack of details, S&P Global Ratings has already identified some considerations it will focus on for those two utility sectors if the plan proceeds.
President Donald Trump on June 1 directed Secretary of Energy Rick Perry to take steps aimed at keeping “fuel-secure” power facilities -- coal-fired generation and nuclear power plants – operational.
In a June 5 report, S&P said, “We understand that electric consumers will bear the subsidies' costs,” noting that the administration has said the financial support will protect electric grid reliability.
While the administration's plan has yet to solidify into a formal proposal, based on the information S&P has seen, “we believe the concepts the administration is promoting are not novel with respect to nuclear generation but are in terms of coal-fired.”
It noted that several states, including Illinois, New York, and New Jersey, offer financial support to merchant nuclear units in their states. “Without these subsidies, the units might have closed because of their inability to recover fixed and variable costs while competing with low cost gas-fired and renewable generation,” the report said.
In related recent news, the Federal Energy Regulatory Commission and the Department of Justice recently said in a May 29 brief filed with the U.S. Court of Appeals for the Seventh Circuit that the Federal Power Act does not preempt a "zero emission credit" program in Illinois that is aimed at helping to keep a pair of nuclear power plants in the state up and running.
S&P identifies considerations it will focus on
Because public information surrounding the federal plan is fuzzy, S&P Global Ratings at this point can’t specify the subsidies' effects on the ratings on public power and electric cooperative utilities.
“Nevertheless, we have identified some considerations we will focus on if the plan for subsidizing uneconomical coal and nuclear plants proceeds. These factors will influence our analysis of utilities in these sectors,” the rating agency said.
If subsidies disrupt the traditional power plant dispatch queue “that has historically prioritized generation units' production based on relative plant economics, we believe that not-for-profit public power and electric cooperative utilities will continue to look to their native load customers in recovering fixed costs.”
S&P thinks that cost recovery prospects will not be altered “even if their generation units are not dispatching or their capacity factors erode while plants with subsidies assume a higher position in the queue.”
The rating agency pointed out that exclusive, defined, and secure customer bases and revenue streams are key attributes of public power and electric cooperative utilities. “The strong nexus between the utilities and their customers are their pathway to cost recovery.”
These attributes “stand in sharp contrast to merchant generators whose dispatch in competitive markets determines their revenue stream cost recovery.”
S&P highlighted the “sharp contrast” between the solid investment-grade ratings on public power and electric cooperative utilities compared with the prevalence of speculative-grade ratings on merchant generators.
The rating agency said that placing additional costs on electric consumers to subsidize others' coal and nuclear units should not change the vehicle for public power and electric cooperative utilities to recover costs from customers, “even if plants benefiting from subsidies leapfrog the output of the not-for-profit utilities.”
At the same time, if the subsidies' costs put “meaningful upward pressure on retail electric rates of public power and electric cooperative utilities, it could eat into their capacity to raise rates to meet their own financial needs, such as covering rising operating or financing costs.”
Central to the strong ratings on these utilities are their autonomous ratemaking authority and the financial flexibility it offers, the rating agency said.
“However, if higher costs from subsidizing uneconomical power plants raise rates to the point that those setting the rates are reluctant to impose further increases, negative effects on ratings within the not-for-profit utility sectors could follow,” S&P warned.
Moody’s also responds to Trump action
In related news, Moody’s Investors Service on June 7 issued a report on the Trump plan, albeit without a focus on implications for the public power and cooperative sectors.
Moody’s said that the DOE’s likely response to the administration’s directive will be to “require grid operators to purchase electric energy and capacity from designated fuel-secure power facilities for 24 months in amounts sufficient to forestall retirement, during which time, it would conduct a study focused on grid resilience.”
However, the timing and structure of such a proposal, “along with the identified plants, are unknown at this time,” the rating agency said in its report.
Should an action be adopted, Moody’s said that owners of fuel-secure power facilities such as FirstEnergy Solutions and Exelon Generation Company, along with US domestic coal producers, would likely benefit.
(In April, the American Public Power Association urged the DOE to reject a request by FirstEnergy Solutions that the Secretary of Energy issue an emergency order requiring PJM Interconnection and, by extension, electricity consumers in the PJM region, to provide “full cost recovery” for certain merchant generating plants in PJM).
Retail customers
Moody’s said in its report that retail customers “will likely pay more for electricity to cover the costs of the subsidy, while efficient gas-generating units, such as those owned by Calpine Corporation, would likely be dispatched less often by the grid operators. Additional risks involve the broader wholesale power market, which may experience a decline in power prices.”
It also said that the DOE is likely to reference Section 202 of the Federal Power Act, which gives the Secretary of Energy the ability to order the temporary connections of facilities to serve the public interest, and the Defense Production Act of 1950 “as legislation that provides it the authority to take corrective action.”
A recent Bloomberg article said that the DOE had circulated a draft memorandum prior to a meeting of the National Security Council held on June 1 to discuss the plant retirements. According to a copy of the draft memo posted with the Bloomberg story, DOE would exercise emergency authority under the FPA and the Defense Production Act of 1950 to direct “System Operators” to “purchase or arrange the purchase of electric energy or electric generation capacity from a designated list of Subject Generation Facilities (SGFs) sufficient to forestall any further actions toward retirement, decommissioning or deactivation” during a two-year time period. The memo did not include a list of the plants that might be covered by the proposal.
According to the draft memo, DOE would also establish a Strategic Electric Generation Reserve “To promote the national defense and maximize domestic energy supplies.” The memo describes these efforts as a “stop-gap measure” while DOE further assesses grid security challenges.
FERC scrapped DOE proceeding
FERC earlier this year said that it was terminating a proceeding it initiated in order to address a proposed rule on grid reliability and resilience pricing submitted to the commission by Perry last year. The rule proposed to FERC by Perry would have required several regional organized wholesale power markets to provide for full cost recovery for certain fuel secure resources in their regions.
While rejecting Secretary Perry’s proposed rule, FERC initiated a new proceeding to specifically evaluate the resilience of the bulk power system in the regions operated by regional transmission organizations and independent system operators.
DOE proposed rule in late September
In recent reply comments in that proceeding (Docket No. AD18-7-000), the Association said that filings made by regional transmission organizations and independent system operators at FERC don’t show the need for any specific FERC actions on resilience at this time, on either a generic or region-specific basis.
