This story was updated at 11:23 a.m. EDT.
Power company executives reassured investors in recent weeks that their U.S. businesses are prepared to survive the coronavirus pandemic despite economic pain that's reshaping when and where Americans consume electricity.
But the public health crisis could slice into company revenues and drive up customer bills, so executives are trying to address electricity demand plunges, a shifting mix of coal and renewables, cost-cutting efforts, and new rate plans.
"The pandemic has brought unexpected challenges to our business in 2020," CEO Chris Crane of Exelon Corp. said on a call with analysts this month. "We have found ways to offset much of the financial impact of this unique challenge, but we're not done."
The spread of COVID-19, the disease caused by the novel coronavirus, could have short- and long-term effects on electric companies. As the pandemic stretches longer into 2020, some may cut back on capital-intensive projects if the level of power demand doesn't return to support new power plants or transmission lines. Regulated utilities make money from large capital projects, so pulling back on those plans also means their profits could suffer.
During earnings calls in the past three-plus weeks, many power companies reported a hit from lower electricity sales when businesses, schools and governments began closing, reducing the amount of demand on the power grid even as residential use was robust. Still, a number of companies kept their 2020 financial guidance on earnings in place following the first quarter.
Many power providers remain hopeful that they'll be able to recover extra costs from their regulators, while competitive companies don't have the same sort of protection. No one knows exactly how demand will shift.
Despite the uncertainty, CEO Pat Vincent-Collawn of New Mexico-based PNM Resources Inc. found time for a smile-inducing monologue as she spoke on a May 1 call with analysts. Generating a few laughs is a staple of her earnings calls in normal times.
"I know a lot of you have been cooking some more, so I have some menu planning options for you," Vincent-Collawn said. "May is National Barbecue Month, National Egg Month, Hamburger Month, Salad Month, Salsa Month and Strawberry Month. If I were you, I'd spread it out and not try all those things in one meal."
After that advice, she added: "So that is about the only thing that's going to be similar to our usual earnings call."
Here are four ways electric companies are responding to the coronavirus, according to comments in recent weeks from CEOs and other industry executives:
A utilities tug of war
Companies are figuring out the best way to offset money lost from lower electricity demand and from customers who cannot pay their bills as the pandemic stretches into the summer.
Many of the conversations on recent earnings calls highlighted the tug of war that utilities face: Wall Street wants the companies to make good on their profit forecasts, but now is not the time to raise rates for customers. This means utilities must manage future expenses or start cutting costs.
Chicago-based Exelon, with about 10 million utility customers across five states and the District of Columbia, trimmed its operating and maintenance budget by $250 million by reducing spending on contractors and travel and restricting some hiring. The company is also cutting capital investments at its generating subsidiary by $125 million and trimmed its earnings outlook for 2020.
"We'll continue to look for ways we can increase profitability and cash flow through the next three quarters," said Crane, Exelon's CEO.
A big challenge is predicting the pace at which the economy may recover. That has been particularly hard to do as states have taken a disjointed approach to reopening.
"The amount of time it takes to get back to normalcy, though, is inestimable," said Southern Co. CEO Tom Fanning.
Executives said they are using the Great Recession more than a decade ago to help forecast how the pandemic might affect their companies financially. That may signal how utilities want to recoup lost revenue and COVID-19-related expenses at some point.
Many have hope from state utility regulators that they can collect the cost of bad debt as part of a future rate hike. That promise alleviates pressure for utilities to ask to raise rates now.
Three of the Southeast's major utility owners — Duke Energy Corp., Southern and the Tennessee Valley Authority — said they could face lost revenues as high as $400 million to $500 million because of lower electricity demand. Duke executives outlined deep cuts to offset that (Energywire, May 13).
TVA, which has made significant cuts in the past five years to shore up its debt-heavy balance sheet, said the drop in electricity demand is among the biggest in its history.
"This has outstripped anything that we would have seen," John Thomas, TVA's chief financial officer, said in early May.
A 'decoupling' revival?
While many utilities fret about sales, one idea is seeing more discussion during the pandemic: decoupling.
The idea with decoupling is to provide stable revenue for utilities regardless of sales volume by shifting to a rate structure that allows utilities to receive their customary returns without having to worry about how much power they sell.
The difference between a utility's projected revenue and what's collected can be "trued up" under various decoupling scenarios. Skeptics worry that it could reduce financial oversight of utilities, but supporters say the setup can boost energy efficiency efforts. It does the latter by breaking the link between electricity sales and revenue and thus provides more incentive for utilities to support energy conservation, according to a report from the Edison Electric Institute, which represents investor-owned electric utility companies.
In a blog post last year, the Natural Resources Defense Council showed 32 states plus the District of Columbia as having revenue decoupling for at least one natural gas or electric utility. The piece from NRDC's Ralph Cavanagh said such a mechanism "uses small annual rate adjustments (both up and down) to ensure that fluctuations in sales don't affect utilities' ability to recover their authorized returns."
New Mexico-based PNM Resources is ready to embrace a decoupling mechanism for the state's largest electric utility, Public Service Co. of New Mexico.
The company plans to file this month for such a mechanism for residential and small commercial customers, according to Vincent-Collawn, PNM Resources' CEO. The New Mexico Public Regulation Commission has sparred with the company at times on various issues.
"Assuming the commission works with us to address this critical ratemaking issue, we can subsequently hold off and look to a more appropriate time to address the other components of a full rate review when there is greater certainty around COVID-19 impacts," Vincent-Collawn said.
Don Tarry, PNM Resources' chief financial officer, said that for now, "over 90% of the cost to serve PNM residential customers is fixed, but only about 12% of the fixed cost is collected through a customer charge, with the remainder collected under a volumetric rate."
But Mariel Nanasi, executive director of the New Mexico-based New Energy Economy, said "the devil's in the details" in terms of a potential decoupling.
"If it's a veiled rate increase outside of a rate case, that's going to be extraordinarily problematic," she said in an interview about PNM's plan.
Nanasi said poor customers must be protected, and she called for a robust energy efficiency commitment. The utility also would need a lower return on equity to reflect a lower risk to the company under decoupling, she said.
Raymond Sandoval, a spokesman for PNM Resources, said in a statement that "New Energy Economy tends to take a position against PNM regardless of what the company files." He said NEE will have an opportunity to raise issues in a regulatory proceeding once the case has been filed.
Sandoval also said, "PNM has had a robust energy efficiency commitment since 2007."
Investors assume an approved rate design is meant to recover authorized amounts, Sandoval said, while return on equity is used to attract investors.
Citing a bill passed last year, he said the New Mexico Legislature didn't intend to force utilities to choose between an ability to recover investments and an opportunity to earn a reasonable return on those investments.
"Traditional ratemaking relies on a prediction of various conditions, and decoupling eliminates these ratemaking infirmities," Sandoval said. "This benefits all customers."
FirstEnergy Corp. CEO Chuck Jones told analysts last month that his company, which has electric utilities serving about 6 million customers from Ohio to the Jersey Shore, is designed to weather the downturn in the economy.
Almost two-thirds of base electric distribution revenue comes from residential sales, which are up as consumers stay home from work and school, Jones said. And 20% of electric sales come from Ohio, where electric rates are decoupled from kilowatt-hour sales volumes.
"Our rate structures provide a measure of stability, even in tumultuous times," he said.
Coal, renewable shifts
The pandemic also is speeding up the transition of the once coal-heavy South toward natural gas and renewables. That has occurred as renewable and gas costs continued to fall, peak demand shifted, and manufacturers and businesses closed.
To be clear, lower demand and a movement in peak electricity times mean electric companies don't have to run all of their baseload power plants. That, plus cheap renewables, has further pushed coal by the wayside.
TVA took that one step further and reported that its use of renewable energy, including hydropower, recently outpaced that of coal during the first three months of the year (Energywire, May 11). At times in April, none of TVA's six coal-fired power plants ran, as the utility took advantage of scheduled refueling outages, lower demand and other power that was cheaper.
Indeed, an International Energy Agency report from late April said coal especially was "squeezed on all sides" as its power generation fell by 10% in the first quarter from the year-ago period (Energywire, May 14).
"In all regions that implemented lockdown measures, the electricity supply underwent a notable shift towards low-carbon energy sources," the report said.
Additionally, the U.S. Energy Information Administration recently projected that electricity generation will drop by 5% this year. Coal could make up 25% of that drop, and renewables may grow 11%.
That means renewable energy may beat coal for the first time this year in the annual mix of resources fueling the U.S. power grid.
Power companies like Florida-based NextEra Energy Inc. are eyeing business opportunities that may arise should smaller solar and wind developers suffer financially.
"We expect that some of our competitors may falter as a result of these challenges, and we will look to leverage any opportunities that this may present," NextEra CEO Jim Robo told analysts last month.
NextEra also owns two regulated electric companies in Florida. The lower cost of solar and storage led the utilities to scrap plans for natural gas plants at both utilities. The Florida Power & Light unit continues to build utility-scale solar projects as part of its effort to have more than 10 gigawatts of solar on the grid by 2030.
In Texas, fallout from the novel coronavirus could slow the development of renewable energy projects in the main power market based on calls Vistra Energy Corp. received from developers, CEO Curt Morgan said May 5.
But new technology is still valued. Vistra announced yesterday that it's planning to expand the size of battery storage systems at the Moss Landing power plant site in California, subject to regulatory approval. The new plan, which includes an agreement with Pacific Gas and Electric Co., involves a 100-megawatt/400-megawatt-hour battery that would complement a 300-MW/1,200-MWh battery that's under construction.
"When the Moss Landing battery comes online, it will be the largest battery of its kind in the world," Vistra said in a statement.
Electricity demand and reopenings
For many power companies, reopening the economy is about getting businesses up and running to help bring back lost commercial and industrial demand.
Pinnacle West Capital Corp., the parent of Arizona Public Service Co., applauded business reopenings earlier this month that were underway or planned in the state. Ted Geisler, Pinnacle West's chief financial officer, said he couldn't "wait to go get a haircut" after a May 8 earnings call.
"So certainly there's some resumption, and we'd expect to see some positivity from a sales standpoint as a result of this," Geisler said, even if some uncertainty remained.
Pinnacle West said there could be a 7% drop in electricity sales at Arizona Public Service, excluding the effect of weather, in the second quarter compared with the same period in 2019, based on a drop it witnessed over several weeks.
The company said the third quarter — July, August and September — historically accounts for about 56% of annual earnings at Pinnacle West, while 28% comes from the second quarter and 6% from the first quarter.
That suggests power companies in hot locations still have time to manage the economic effects of COVID-19, but the coming months will be crucial and will depend in part on weather conditions that drive air-conditioning demand.
Some states in the Southeast were among the first to reopen, with business and industry leaders eager to get auto manufacturers and other heavy industry back to work. The pro-business region is known for low wholesale electricity rates offered to the industrial sector, but the usual amount of money won't come in if large shops are closed.
Southern's Fanning told analysts that his company's home state of Georgia was "stepping out on reemerging" and added that it was happening in a "thoughtful phased process."
"There's a positive vibe right now, that people are trying to figure out ways to start again," Fanning said April 30. "The restaurants are doing all of this takeout. It feels a little better."
Vistra is looking for potential positives from the reopening of businesses in Texas' main power market even as many people continue working from home. Vistra operates in competitive wholesale and retail power markets.
"So you'll see some uptick or moderation of the demand declines on the business side, while at the same time seeing the uptick in the residential side being sustained," David Campbell, Vistra's chief financial officer, said in early May.
But John Berger, CEO of a Houston-based solar company called Sunnova Energy International Inc., cautioned that an uncertain environment remains. While there may be "a little reprieve here coming out of the full lockdowns," he said last week, there could be a "retracement" of the pandemic.
"There's a lot of risk here," Berger said, adding that it's prudent for the company to have access to the capital it may need.