The coronavirus pandemic is wreaking havoc on the U.S. economy, and while electric utilities may be relatively sheltered from the storm that’s overtaking other economic sectors, they are not immune. 

In the past month, crashing oil prices have roiled international energy markets and pushed some U.S. oil and natural-gas producers to file for bankruptcy. Meanwhile, electricity demand has taken a dive as businesses and factories have closed down under state orders or economic duress, leading the U.S. Energy Information Administration to predict a 3 percent drop in electricity generation over the course of 2020. 

As a nationwide recession becomes ever more likely, credit rating agencies Moody’s and S&P Global Ratings have lowered their outlooks for the North American unregulated and regulated utility sectors, citing the overall economic downturn and industry-specific pressures. While risks are higher for independent power producers and retail energy providers in states with competitive energy markets, even vertically integrated utilities or those in the states with decoupling mechanisms that separate energy sales from revenue will face challenges. 

Some of the early effects will be revealed as investor-owned utilities report their first-quarter earnings in the coming weeks. How long these impacts last and how deeply they are felt will depend on the unknown future course of the pandemic itself, as well as the responses of state and federal governments, the private sector and the public at large.

Here are five things to keep an eye on in the weeks and months ahead.

1. Relative exposure to hardest-hit sectors of the economy 

The first question for utilities is how exposed they are to revenue losses from the portions of the economy hardest hit by the coronavirus. That includes utilities that have significant ownership of “midstream” natural gas and oil pipeline infrastructure — such as CenterPoint Energy and OGE Energy’s shared ownership of Enable Midstream Partners — or DTE Energy’s DTE Midstream business, according to a March research note from Moody’s. 

Another risk is exposure to a larger-than-usual share of commercial and industrial customers. EIA projects that commercial and industrial demand will fall by more than 4 percent in 2020. In hard-hit New York City, commercial demand has fallen more than 20 percent from typical levels. 

“That relative shift between residential and C&I is dependent on the load mix from region to region,” Steve Fine, managing director of distributed grid strategy at ICF, said in an interview this week. "Lower sales translates into lower revenue if they don’t already have decoupling or some other mechanism in place.”

Moody’s noted that C&I customers are less likely to be included as part of decoupling mechanisms and often pay high fixed-charge demand fees whose disappearance could add to revenue volatility for utilities.

2. Exposure to costs of protecting customers and workers 

Since the start of the COVID-19 pandemic, a growing number of utilities have pledged to suspend disconnections for failure to pay bills, waive fees for late payment or otherwise limit the financial burden on sick or out-of-work customers. Similar orders have been issued by utility regulators in at least 27 states, according to the Energy and Policy Institute and the National Association of Regulatory Utility Commissioners

Utilities will need to find ways to recover this lost revenue in some way since they’re not going to stop paying the generators for the electricity they provided, Lillian Federico, director of energy research at S&P Global Market Intelligence, told GTM. Regulators are unlikely to welcome proposals to force cash-strapped customers to repay what they owe in the short term, she added.

That leaves the option of asking regulators to spread those costs to customers, in a similar way that utilities manage storm recovery or other costs not captured in their base rates, Federico said. “Common practice has been to allow the company to recover that bucket of dollars from ratepayers over five years, maybe as long as 10 years, to smooth out the cost to ratepayers.” 

But that raises another question: What’s going to be included in the costs that are considered COVID-related costs? 

Utilities are hiring replacements or paying overtime to cover for sick employees, buying face masks and other protective gear for those who interact with the public, and sequestering critical grid and power plant operators. 

“That’s another issue that’s going to have to be addressed,” Federico said, and with utilities and regulators grappling with emerging crises, “I don’t think anybody is talking about what to do about it.”  

3. Relative access to debt financing 

While utilities are generally considered one of the safest investments in economic downturns, the utility sector has been taking on more debt in recent years, and many companies lack the free cash flow to fund ongoing operational costs, Moody’s wrote in a March note. That means they “require continual and generally unfettered market access to maintain adequate liquidity.” 

So far, it appears that utilities are maintaining their access to debt markets. S&P Global Intelligence tracked $25.7 billion in debt raised by electric utilities and independent power producers in the first quarter, including big raises from Berkshire Hathaway Energy, Dominion Energy, Exelon and FirstEnergy.

“There’s an incredible amount of refinancing of some of the debt that’s out there at very attractive rates,” Lisa Frantzis, head of the Advanced Energy Economy trade group’s utility advisory committee, said in an interview. Last month the Federal Reserve cut interest rates to close to zero to combat the economic downturn. “I don’t think utilities will be in such bad shape as some other sectors,” Frantzis said.

At the same time, S&P Global Ratings noted that some major utilities have seen their “financial cushions” eroded in the past few years.

California wildfires have driven Pacific Gas & Electric into bankruptcy and threatened the credit ratings of the state’s other investor-owned utilities until last year’s creation of a state insurance fund bolstered their positions. Other utilities have taken on debt for large capital projects or acquisitions, or have relatively large unregulated businesses with more exposure to energy market shifts. 

4.  Status and reliance on upcoming rate cases

The coronavirus pandemic has forced public agencies across the country to adjust to work under the constraints of social distancing and virtual meetings. Utility regulators are no exception, with many postponing nonessential proceedings, including utility rate cases. 

In an April note, S&P Global Market Intelligence tallied a host of utilities that have seen rate cases delayed, including Arizona Public Service and Tucson Electric Power, Eversource’s Public Service Co. of New Hampshire, Avangrid subsidiaries New York State Electric & Gas and Rochester Gas and Electric, and Duke Energy’s utilities in North Carolina, Indiana and Kentucky, to name a few. 

Beyond these procedural delays, there’s risk involved with utilities seeking rate hikes in the midst of the ongoing crisis, S&P’s Federico said.  

“Even if it was in their plans to file sometime in the second half of this year, you have to think about whether or not you want to do that in the current environment,” she said. “Do you want to be that utility that files a rate case when all your customers are struggling? That doesn’t necessarily endear you to regulators.” 

5. Potential for large capital project delays

The likelihood of delayed rate cases, combined with the potential for lost revenue, could delay some larger-scale capital projects on utility’s drawing boards, ICF’s Fine said. “I do think that utilities are going to be examining their expenditure plans, both from an [operations and maintenance] perspective and a capital plan perspective.”

Moody’s noted that a deeper economic downturn may lead utilities with weaker financial metrics to cut capital spending “to maintenance levels,” or just enough to maintain reliable and safe service. That could provide the liquidity to cover their cash needs “if COVID-19 and recessionary pressures limit capacity of the financial markets to absorb corporate issuance needs.” 

Paul A. DeCotis, senior director at West Monroe Partners, observed that some of his utility clients are limiting capital spending because they lack the workforce to carry out projects. “Of course, [information technology] capital spend can continue virtually unabated,” he said. 

Frantzis of Advanced Energy Economy agreed that “some of the more strategic kinds of investments may have to sit on the back burner a bit longer than expected.” At the same time, “I think they’re going to take this time to move ahead on customer communications, energy efficiency assistance and bill payment assistance.”