Utility capital spending, especially for transmission and distribution companies, will remain robust despite the loss of bonus depreciation, according to a new report from Moody's Investors Service.
The growth in utility capital expenditure will continue to grow despite lower cash flows and the loss of bonus depreciation resulting from the 2017 federal tax reform law, Moody's said.
- While utilities have a variety of mechanisms they can use to support their capex plans, including federal incentives, the rating agency also warned that the need to finance those expenditures could put pressure on the credit metrics of utilities that rely more heavily on debt financing.
Planned capital spending at the 31 utility companies Moody's examined for its report will peak at $100 billion in 2018, up from $90 billion in 2017, and likely decline to $90 billion in 2019 and $80 billion in 2020.
Moody's originally expected capex would peak in 2013 and 2014. Instead, it accelerated in 2016 and 2017 as companies anticipated the end of bonus depreciation. Even without bonus depreciation, which was rescinded by the Tax Cut and Jobs Act of 2017, utilities' capex projects remain robust into 2020.
Consolidated Edison, for instance, projects $3.1 billion a year in capital investments at the companies two utilities, Con Edison of NY and Orange & Rockland Utilities, spokesman Allan Drury, told Utility Dive.
Many of the planned utility investments are for transmission projects, and Moody's says they are being driven by three key factors: to improve reliability, to integrate renewable energy resources into the grid and to support distributed energy resources by facilitating flexible power flows.
Transmission investments also have strong regulatory support at both the federal and state level. Since 2005, the Federal Energy Regulatory Commission has been awarding elevated returns on equity for new transmission projects, leading to a tripling of transmission investment to about $22 billion in 2017.
There are signs, however, that regulators are beginning to rein in those returns. FERC proposed a new methodology for transmission returns in 2018 and in November announced it would review its transmission policy incentives.
Nevertheless, state regulators continue to support utility capex spending outside of traditional rate recovery cost recovery avenues, such as legislation in Virginia that allows regulators to approve annual adjustment mechanisms to recover the costs of utility projects. There are similar laws in place in Florida, Illinois, Missouri and New Jersey. Moody's said.
Moody's also noted that the 2017 tax law is cutting into utility cash flows, but said that utilities are managing that negative side effect through regulatory channels. They are proposing additional investments and asking regulators to accelerate cost recovery.
In 2018, Moody's noted that several utilities issued equity to help finance their capital expenditures and to partially offset the negative effect of tax reform. It is not yet clear how utilities will finance their capex plans, but to the extent a utility uses debt financing that could put pressure on its balance sheet, Moody's said.