Public financing of transmission would not damage the financial health of California IOUs, new analysis shows

Energy affordability is a central issue before the Legislature, and proposals across multiple bills mark an important realization: the push for climate solutions relies on an economy-wide switch to clean electricity, and consumers won’t do it if it costs them more.

One strategy in particular – reducing the costs to build a modern transmission system by changing how this infrastructure is financed – would reap significant savings: more than $3 billion per year, and $123 billion over 40 years. It is notable that this policy results in 3-4x more savings than the next best options, including securitizing distribution grid investments and regionalizing the state's electricity market.

However, a key concern that has consistently been raised by investor-owned utilities is that any attempt to change how the grid is financed, such as by reducing the typical amount of investor earnings allowed in a project, would result in credit downgrades for the utilities, and ultimately higher costs to ratepayers as a result.

But is this a true statement? Given the complexity of the power system and the absence of much data and research on this issue, it has been difficult to evaluate this claim. A new analysis from the Center for Public Enterprise (CPE) has sought to address this knowledge gap.

Public financing would not damage utility financial health

In a research note, CPE analysts evaluated the impact from reducing equity in investor-owned utility capital stacks in California, as contemplated in AB 825 (Petrie-Norris). The findings were clear: California can provide public financing for transmission, and help projects overcome development challenges, without negative effects on utility credit ratings.

In fact, this new form of public-private partnership could increase confidence in California’s market, leading to lower borrowing costs and faster development, in a transparent process that ensures ratepayers benefit from these savings.

CPE’s analysis reviewed empirical data and developed a financial model to evaluate the central investor-owned utility claim: whether replacing shareholder equity with low-cost debt would negatively impact ratepayers, by increasing the utility’s borrowing costs so much that savings would be overwhelmed. Across a range of scenarios, CPE finds that that the answer is no:

• Debt remains considerably cheaper than equity, to the benefit of ratepayers, under all realistic scenarios where credit ratings might be impacted;

• In any case, utility credit ratings are primarily determined by the overall availability of cashflow from operations, not by changes to how individual transmission projects are financed; and

• A utility’s ability to efficiently raise capital is more strongly impacted by macroeconomic forces than by minor changes in its credit rating.

CPE’s analysis demonstrates that the beneficial effects of changing how transmission is financed will not set in train any negative effects on investor-owned utility credit ratings. The authors emphasize that reducing consumer costs reinforces what makes utilities such credible borrowers - their ability to rate base. In this respect, persistent and excessively high electricity costs that lead to ratepayer pushback is "far more dangerous" to the credit ratings of IOUs than increasing the debt share of financing.

New financing solutions can bend the cost curve for the grid investments California needs to reach its climate targets, without harming utilities’ ability to raise capital. CPE’s analysis highlights that this public-private partnership could in fact help the utilities in delivering cost-effective service, while making a meaningful contribution to the immediate challenge of energy affordability.

For more information, please contact Dan Adler (dan@netzerocalifornia.org) and Sam Uden (sam@netzerocalifornia.org).