PSC's 'politicized atmosphere' draws warnings from Wall Street
A day after Florida Power & Light lost its bid to build a ratepayer-financed natural gas pipeline, utility analysts Wednesday said Florida had "highly politicized atmosphere'' for utility regulation and warned that if it continues, credit ratings for utility companies could drop.
"Moody's views political intervention in the utility regulatory process as detrimental to credit quality, sometimes resulting in adverse rate case outcomes,'' Moody's Investors Service wrote in its Global Credit Research letter.FPL is seeking a $1.3 billion increase in its customer base rates beginning next year and Progress Energy is seeking a $500 million increase. But Gov. Charlie Crist, fearing undue influence of the utility lobby on the commission and its staff, announced it was "time to clean house.'' He appointed two new commissioners to the panel and asked the PSC to postpone a decision on the rate cases until his appointees take office in January.
Moody's cited the rejected pipeline, the governor's call for a delay, the fact that a sitting commissioner who was expected to vote on the rate case resigned on Monday, and the possibility that new commissioners may take a while "to get up to speed on often complicated utility rate matters.'' It concluded that if both FPL and Progress Energy Florida don't get a rate relief "sufficent to maintain cash flow'' at historic levels, the situation could "pressure the credit rating of both utilities'' and add a "level of uncertainty to the rate proceedings.''
"When political intervention gets involved, it sometimes prevents enough of a rate increase to keep [the utility's] debt service stable,'' said Michael Haggerty, the Moody's utility analyst who wrote the report.
But Haggerty also acknowledged that even if both companies face a lower credit rating, the added cost of capital could be marginal compared to what the company would get if the PSC approves the rate increases.For example, FPL now has an A1 credit rating while Progress Energy has a A3 rating. If FPL needed to borrow $2 billion to finance a project and the rating companies dropped its rating one notch to Baa, the added cost of the capital paid by electric customers -- based on Moody's Daily Bond Yields on Wednesday -- would be $10 million a year more, Haggerty said. By contrast, if the PSC approves FPL's rate increase, customers would see their base rate rise $1.3 billion more a year.
The Moody's report also noted that the companies need the rate increase to offset the drop in customers. "These base rate increases were filed during a period of challenging economic conditions in the state, which has recently begun to lose population, contributing to weak sales volumes at both utilities,'' the report said.
FPL released a statement saying that, "a perception of greater regulatory risk means capital will be more expensive. On the other hand, constructive regulation will enable us to continue to provide efficient, reliable power at reasonable rates to our customers."
The Moody's warning is intended for investors, Haggerty told the Herald/Times. But, while analysts don't expect either company to get 100 percent of their rate increase request, the impact of a lesser rate increase will depend on other variables, he said. (Such as how much of a rate increase; how it is divided between residential, commercial and industrial users; and how much the company can depreciate.)
Haggerty, by the way, is a frequent commentator on FPL's credit ratings and debt. He appeared in February on a panel sponsored by the University of Florida's Public Utility Research Center along with FPL's chief financial officer Armando Pimentel.
Here's the full Moody's report and FPL statement:
Moody's Views Politicized Florida Rate Cases as Credit Negative
Moody's views the highly politicized atmosphere surrounding the base rate proceedings of Florida Power & Light Company (FPL, A1 Issuer Rating) and Progress Energy Florida, Inc. (PEF, A3 Issuer Rating) as negative to the credit quality of both utilities and an indication that the political and regulatory environment for investor-owned utilities in Florida may be deteriorating. These base rate increases were filed during a period of challenging economic conditions in the state, which has recently begun to lose population, contributing to weak sales volumes at both utilities. Rate relief that is insufficient to maintain cash flow coverage metrics at or close to historical levels could pressure the credit ratings of both utilities.
Over the last several weeks, the governor of Florida has become increasingly vocal in expressing his opposition to the utility rate requests, appointed two new commissioners to the Florida Public Service Commission (FPSC), and requested that the FPSC delay action on the rate cases until these new commissioners are in place in January. On October 5, one of the sitting commissioners that had been expected to vote on the pending rate cases resigned from the FPSC effective immediately, temporarily leaving the Commission with four sitting members. On October 6, the four remaining FPSC members unanimously denied FPL's petition of need for the construction of a new underground natural gas pipeline in Florida, indicating that FPL did not prove that the pipeline was the most cost-effective alternative and ordering the company to rebid the project.
Moody's views political intervention in the utility regulatory process as detrimental to credit quality, sometimes resulting in adverse rate case outcomes. In some cases, this has led to multi-notch credit rating downgrades of utilities in states where this has occurred, most notably Illinois and Maryland in recent years. Moody's notes that such intervention is highly unusual for the state of Florida, which has traditionally been one of the more constructive utility regulatory jurisdictions in the nation, characterized by fair and balanced regulatory proceedings with little to no political interference or controversy.
Moreover, the turnover of commissioners at state utility regulatory bodies heightens the level of uncertainty surrounding utility rate proceedings because of the lack of an established track record, the limited experience of new commissioners, and the challenges that many new commissioners face in quickly coming up to speed on often complicated utility rate matters. The replacement of experienced and seasoned commissioners on the FPSC with newcomers well after the rate proceedings have begun and most hearings have been completed increases the possibility of a rate case outcome that is negative to utility credit quality.
Over the years, utility regulation in Florida has been constructive, in turn helping keep our credit rating strong. We've been able to raise significant amounts of capital at reasonable prices, which has allowed us to keep our rates the lowest in the state and below national averages.
Like other companies, we are entering one of the most significant construction cycles in our history. As we go to the market for our capital needs, debt and equity investors are keenly focused on the Florida regulatory environment. A perception of greater regulatory risk means capital will be more expensive. On the other hand, constructive regulation will enable us to continue to provide efficient, reliable power at reasonable rates to our customers.