Fitch: Municipal Utilities Takes Steps in California to Address Climate Change

AUSTIN, Texas–(BUSINESS WIRE)–California’s ambitious environmental agenda has triggered a radical
transformation of the state’s energy supply, with the promise of
significant changes still to come in the second decade of this pursuit,
according to Fitch Ratings. Driven largely by legislative initiatives
requiring the expanded use of renewable energy resources and a reduction
in greenhouse gas emissions, the state’s policy objectives are having a
direct impact on utility finances and operations. Thus far, California’s
public power utilities have risen to the challenge and preserved credit
quality throughout the process, and Fitch expects this success to
continue as the state pursues a new energy economy.

Beginning in 2006, the state’s power utilities, including public power
systems, began the process of complying with two key components of the
enacted legislation – the renewable portfolio standard (RPS) and
greenhouse gas emission reduction goals. The RPS is the principal
standard driving the power supply transformation of public power
utilities, as it requires power suppliers to generate or purchase an
increasing portion of the electricity sold to retail customers from
eligible renewable resources. The standard, which began at 20% in 2013,
rises to 33% in 2020, before reaching a maximum of 50% by 2030.
According to the California Energy Commission, California supplied
nearly 21.9% of its energy from eligible renewable sources in 2014, up
from 10.6% in 2008.

State legislation enacted in September 2016 requires a reduction in
greenhouse gas emissions to 40% below 1990 levels by 2030. This
supersedes the original goal set in 2006 that required a reduction to
1990 levels by 2020. While these increasing standards are also
contributing to the addition of renewable resources, the RPS targets
have been the primary factor in resource decisions. Public power
utilities have also been directly impacted by 2006 legislation limiting
investment in coal-fired generation beyond 2026. To comply, utilities
have put in place the legal and operational components needed to divest
themselves of two large coal-fired power plants – the San Juan Power
Project located in New Mexico and the Intermountain Power Project
located in Utah – that provide power to 13 public power utilities in
California.

Complying with the myriad of environmental regulations has generally
resulted in higher operating costs for California’s public power
utilities, which must be paid for by electric consumers. The higher
costs are not only attributable to the addition of required renewable
resources (including wind or solar generation), but also result from
legacy costs related to the ownership of, or contractual positions in,
existing resources (coal and natural-gas fired generation and large
hydro projects) that cannot be easily or quickly terminated. Moreover,
the recovery of these costs has been hampered by lower utilization as
energy sales are generally not increasing in California. Although
customer growth continues, conservation and energy efficiency gains have
led to flat or declining energy sales.

Upward cost pressure at most public power utilities has been moderated
by the downward price trend in renewable energy prices over the past
decade and the laddering in of new capacity, as well as by low natural
gas prices, but electricity price increases continue to outpace the rest
of the nation. While California’s average residential price of
electricity increased 48% over the last decade according to the U.S.
Energy Information Administration, the national average increased only
32% over the same period.

Public power utilities have generally passed the full cost of compliance
through to consumers, which has resulted in higher electric rates, but
preserved financial margins and credit quality through this period of
transformation.

Fitch expects the trend of higher costs and full recovery to continue,
and public power credit quality to remain strong through the second
decade of transformation. Despite the potential for continued escalation
in environmental standards and related costs, public power utilities
have established utility practices to stabilize performance, including
improved rate structures that better accommodate the cost variability of
renewable supplies and compensate for lower load growth. Moreover,
further declines in renewable energy costs due to improvements in
technology and efficiency, together with projected low natural gas
prices, should aid the overall cost profile of the state’s public power
utilities.

Additional information is available at ‘www.fitchratings.com‘.

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Contacts

Fitch Ratings
Kathryn Masterson
Senior Director
+1-512-215-3730
kathryn.masterson@fitchratings.com
Fitch
Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Matthew
Reilly
Director
+1-415-732-7572
matthew.reilly@fitchratings.com
or
Dennis
Pidherny
Managing Director
+1-212-908-0738
dennis.pidherny@fitchratings.com
or
Media
Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com