Supreme Court EPA ruling unlikely to impair utilities' credit

BY SourceMedia | MUNICIPAL | 07/05/22 09:41 AM EDT By Connor Hussey

The Supreme Court?s ruling against the Environmental Protection Agency will leave the battle to cut greenhouse gas emissions to states and localities, a move that will make a coordinated effort more difficult.

The decision, though, is unlikely to impair public utilities' credit in the near-term because many of the efforts were already underway and the costs associated with the moves already factored in. And those governments that have yet to address emissions have no legal requirement to do so.

The ruling in West Virginia v. EPA bars the agency from setting any standards for emissions.

The decision ?will have little impact on the credit quality or carbon transition-related capital expenditure plans of U.S.-regulated utilities, which are being driven more by customer and investor preferences, the declining cost of renewable energy and individual state energy policies,? said Michael Haggarty, associate managing director of Moody?s Investors Service.

However, it does "reduce the risk of an accelerated carbon timeline driven by federal policy that could adversely affect utility credit, as the U.S. Congress is unlikely to act quickly or deliberately as the EPA would have,? Haggarty said.

Essentially, no deadlines to meet costly emissions reductions and move toward other energy sources will leave utilities that have yet to work on those efforts more flush with cash.

But some states and localities set ambitious transition plans to move away from coal-fired power plants, whether the directive came from federal organizations or the states themselves. This Supreme Court decision eases some of those pressures.

?The fear had always been that accelerated schedules would have an impact on credit,? said Dan Aschenbach, principal consulting partner at AGVP Advisory. ?Having an arbitrary deadline that requires them to accelerate that transition raises a lot of credit risk for those types of bonds. But now that this pressure is off, it causes less stress on the schedule.?

States reliant on fossil fuels or coal-fired power plants have always had more of a credit risk than those reliant on other energy sources, said Triet Nguyen, vice president, strategic data operations, at DPC Data, as they are reliant on an energy source that is already being phased out.

"The market dynamics are still in place for that but it's not going to be imposed by the federal government," Nguyen said.

The pressure will now be on market forces, which have already led the push toward renewables as associated prices have dropped and technologies have improved that help to get coal-fired plants out of existence. However, without a federal requirement, there is less incentive for states to work together.

States that have been averse to the EPA mandates ? namely those reliant on the fossil-fuel industry as part of their economies ? welcomed the decision.

?West Virginia is one of the few states in the nation where all agency regulations must be approved by a vote of the state legislature before they take effect,? Gov. Jim Justice said. ?I?m glad that the federal government will now be following the West Virginia model.?

In an example of how interconnected some state and local efforts have become, Utah?s Intermountain Power Agency is undergoing a transition following its April 2022 issuance of $552 million of power supply revenue bonds designed to finance its move to natural gas and hydrogen plants from coal-fired plants. The transition was spurred by the needs of the agency?s California-based power purchasers to meet state and local renewable and clean energy targets and requirements.

The Los Angeles Department of Water and Power, the nation?s largest municipal utility, is the IPA?s biggest power purchaser in both existing contracts that run through June 15, 2027, and new contracts that will be in effect until mid-June 2077. It is also IPA?s operating agent and project manager, as well as a key credit element for the bonds.

John Ward, spokesman for the IPA, said the ruling will not affect their transition plans, as its coal-fired plants will be shut down in 2025.

But had they not already established their customer base and many other specifics months back, the coal-fired plant and the issuers transition plans may have been more disrupted by the ruling, Ward said.

President Joe Biden set lofty climate goals of cutting emissions in half by the end of the decade and reaching net zero carbon emissions by 2035. Biden signaled his intent to continue the push to meet his environmental objectives and those efforts may be through executive authority.

?My administration will continue using lawful executive authority, including the EPA?s legally upheld authorities, to keep our air clean, protect public health and tackle the climate crisis,? Biden said.

The ruling, ?does almost nothing to constrain President Biden?s toolbox to address the climate crisis,? said Colin Rees, U.S. program manager at Oil Change International, an advocacy group focused on the transition from fossil fuels to clean energy. ?As Congress flails and climate impacts mount, executive action to confront fossil fuels is more crucial than ever.?

While many municipalities will continue to try to curb greenhouse gas emissions, Clarence Anthony, chief executive officer and executive director of National League of Cities and Tom Cochran, chief executive officer and executive director of the U.S. Conference of Mayors, said the "decision leaves us working uphill against this threat.?

The ?announcement represents a major step back in our fight to keep our communities safe from the devastating effects of the climate crisis, including stronger and more frequent natural disasters, extreme temperatures, negative public health effects and more,? Anthony and Cochran said in a joint statement.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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