The following is a summary of an analysis conducted by Morningstar.com‘s Travis Miller on how markets are assessing electric utilities during the COVID-19 outbreak. As utilities address revenues and costs during and post the COVID-19 epidemic, I believe that state public utility commissions will incorporate some of these concerns into rate-making and other fee-generating decisions.
Markets should expect the largest single-year drop in commercial and industrial demand. The biggest declines are expected in commercial load in New York and industrial loads in Southeast and Midwest states, according to Mr Miller. Meanwhile, residential demand will remain flat or tick up in Florida and California.
Mr. Miller cites U.S. Energy Information Administration data describing a 3.1% drop in electricity demand. He believes, however, that the diminished effects of the corona virus during the summer months will mitigate the impact on lower commercial and industrial demand. The months of March, April, and May tend to be the lowest point of electricity demand due to weather.
Utilities will be forced to lower their earnings guidance where robust residential usage countered by sinking industrial and commercial demand could have the biggest impact on 2020 earnings. In addition, Mr Miller expects five to ten percent of growth investments to shift into 2021 and 2022.
What moves should investors keep an eye out for from public utility commissions? Investors should expect utilities to request permission from public utility commissions to capture bad debt and uncollectible expenses in future rates or allow for cost recovery deferrals or securitization of expenses caused by the economic impact of the corona virus. I also expect major push back from consumer advocates and offices of public counsel against rate increases designed to recover costs due to the virus particularly where the economy has not fully recovered and both households and businesses still find themselves under financial stress.