Fitch: California public utilities will manage regulations

November 01, 2013 10:52 AM Eastern Daylight Time

NEW YORK–(BUSINESS WIRE)–California’s plan to reduce greenhouse gas emissions by 25% will likely be manageable for the state’s public power agencies as they have gradually been adding renewable resources for a number of years, Fitch Ratings says. Additionally, implementation of the full requirement is set on a reasonable timeline and most public power agencies in California could exercise rate flexibility to absorb the additional cost of compliance.

Fitch believes California’s diversified power supply market and generally low dependence on coal will make complying with these regulations manageable statewide. Natural gas is the most common fuel used by the state’s utilities, accounting for 37% of statewide power production in 2011. Nuclear is the second most common at 16%. Large hydroelectric was third at 13%. National consumption is more concentrated in coal and much less diversified. Nationally, utilities used coal to generate nearly 53% of their electricity supply in 2011 while natural gas and nuclear produced almost 17% each.

Public power agencies in the state that have a greater reliance on coal-fired generation will face greater challenges in repositioning their power supply portfolios to meet requirements of the legislation. Anaheim Public Utilities Department used coal to produce 51% of its electricity in 2012 while Pasadena Water and Power used coal for 44% of its electricity production in the same year. Los Angeles Department of Water and Power, the state’s largest public power agency, used coal for 34% of its power supply in 2012. Although more challenging, Fitch expects these utilities to manage plans for investing in new gas-fired generation resources, adding renewable generation, and raising rates to retail customers over time to recover the costs associated with the state’s environmental agenda.

Regulations similar to those evolving in California are being considered in other states and on the federal level. We believe public power entities outside the state, with less financial flexibility, lower access to renewable resources, and high dependence on coal may be challenged to comply.

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