Former FERC Commissioner Philip Moeller told the current commissioners last week that demand destruction is the electricity industry’s primary concern during the COVID-19 crisis.

Moeller, now executive vice president of the Edison Electric Institute’s business operations group and regulatory affairs, said that the longer it takes to flatten the curve of coronavirus cases, decreasing demand becomes a larger problem.

Phillip Moeller, EEI | FERC

“I don’t know how long [the recovery will take], but if demand stays lower for an extended period of time, that takes on added risk,” he said during a panel on access to capital Thursday, the second day of a commission technical conference on the pandemic’s impact on the energy industry. “The cost of equity is higher, and despite the lower interest rates, that is a risk the market has put into the price of capital.”

In June, EEI asked FERC for expedited action on the Notice of Inquiry the commission opened on return on equity policies last year (PL19-4). (See FERC Opens Inquiries into Tx Incentives, ROE Policies.)

“We hope FERC comes up with policy that helps with stability [and] continues to attract [capital] needed to build [transmission] infrastructure,” Moeller said. “It’s getting more and more difficult to build major energy projects. It’s worth remembering that all transmission projects, regardless of who develops them … [go] through a vigorous process. Whether it’s the engineering contract or the construction contract, those are laborious projects in themselves before a project gets the greenlight to go ahead.”

CAISO General Counsel Roger Collanton, speaking for the ISO/RTO Council, said liquidity is the most immediate concern for market participants.

“COVID-19 has caused some disruption in the financial markets, which could affect liquidity sources for market participants to cover their positions,” he said. “In addition, some market participants’ revenue streams may be impacted by declining loads and nonpayment for retail services. This does not mean we can relax our monitoring of credit risk. We must remain even more vigilant during these uncertain times.”

Collanton said the grid operators monitor for credit downgrades and unexpected default rates that could lead to lower amounts of unsecured credit limits. Market participants whose credit ratings fall beneath investment grade would be forced to post only secured forms of collateral for all outstanding liabilities without an allowance for unsecured credit, he said.

“The majority of the market participants qualifying for unsecured credit use only a fraction of their limit to handle the day-to-day variances in their outstanding liabilities,” Collanton said. “However, if a market participant’s declining financial health has led to the elimination of unsecured credit limits in wholesale electricity markets, it has likely led to elimination of unsecured credit in other markets, which could begin to pose a liquidity problem.”

He noted FERC has recently allowed some RTOs to impose higher credit requirements on market participants that may pose a higher credit risk.

“In part, this discretion will allow these ISOs/RTOs to assess the positions of market participants that may not operate physical assets and may create asymmetric risks between themselves and the rest of the market,” Collanton said.

He suggested the commission remind state regulatory commissions to monitor load-serving entities’ financial health and the importance of maintaining credit protections.

FERC Commissioner Bernard McNamee | FERC

Asked by Commissioner Bernard McNamee whether infrastructure investments will continue given the pandemic, American Electric Power’s Antonio Smyth, senior vice president of transmission ventures, strategy and policy, noted that his company has already shifted $500 million of capital spending from 2020 to 2021.

“This really highlights and underscores the importance of the commission continuing to adopt solid ROE policies and mechanisms that are put in place to allow us to continue to invest,” Smyth said. “If we don’t invest today, we’ll certainly suffer the consequence tomorrow.”

Christine Tezak, managing director of ClearView Energy Partners, noted the energy sector is not immune from movements in the global economy.

“This is not leaving anyone untouched,” she said. “Where the commission is going to need to exercise its discretion is discerning where there are developing problems. These are cyclical markets, and the commission needs to recognize it would be asking itself to accomplish a superhuman feat to predict all cyclicality in cyclical markets. I think there’s good faith on Wall Street that state regulators are going to work with utilities and work on recovery of bad debt over some period of time.”

Kinder Morgan President Kimberly Dang said access to capital has improved since the Federal Reserve’s market interventions in March and April, but it has gotten more expensive.

“That has unleashed uncertainty into the industry,” she said. “Projects are more difficult to get done in this environment, and that’s going to drive up required returns. Needed projects are not getting built. We need as much certainty as possible. We can’t have contractors sitting on the right of way.”

Several other panelists weighed in on the danger of regulatory uncertainty.

“The power industry has done a phenomenal job in maintaining reliability and keeping the lights on. I believe we have the tools to manage through right now,” NRG Energy CEO Mauricio Gutierrez said. “The biggest risk, when I talk to investors, is regulatory risk and regulatory intervention. Changing the rules in middle of the game is the biggest risk to investing in the power grid.”

“Our industry is the most capital-intensive industry in America,” Moeller said. “Because of the long-term nature of these investments, we appreciate the extent to which the commission is working to provide that certainty, so we can provide reliable, safe electricity.”

Smyth reminded the commission of the transmission system’s “vital, reliable service, which goes back to the base ROE.”

“We believe the commission should continue with its work to adopt a sound ROE policy,” he said. “On the incentives front, well-crafted ROE policies will ensure the grid works for customers, both today and in the future.”

Duke Energy CFO Steve Young closed the panel discussion by complimenting FERC on its “very fair and balanced view” of the risk associated with building, owning and operating long-term infrastructure.

“Having a healthy respect for that risk, as they set ROEs and recovery policy, is very valuable,” he said. “That allows us to effectively raise capital and gives the investor confidence. They’ve done a good job of that over the years.”

Gas Sector Finds Some Capital Available

Another panel Thursday explored the COVID-19 pandemic’s effect on natural gas and oil supply, demand, transportation and infrastructure planning.

Anatol Feygin, chief commercial officer for LNG giant Cheniere Energy, told McNamee the natural gas industry finds itself in a “very challenging time.” Some sectors have ready access to the capital markets, but others don’t, he said.

“Parts of the industry fall under the infrastructure umbrella where, in a low-interest-rate environment, it has plenty of capital. Hundreds of billions of dollars have been raised on the infrastructure side of world,” Feygin said. “The upstream space is working to morph its business model and economics … to offer the types of return that are attracting … investment. It’s a difficult transition.”

Several panelists said the rapid growth of COVID-19 cases and the ensuing lockdowns caught them off-guard, in contrast with the 2008-2009 financial crisis.

“In 2008 and 2009, we could kind of see that coming a little bit. There was more time to react to it and more time to recover,” said Gary Gibson, CEO of City Utilities of Springfield (Mo.). With the COVID-19 crisis, “we saw some pretty immediate changes in our industry and what consumers were doing. Going forward, we still have issues of when we could shut down again. If we continue in that direction, we’ll see more demand destruction that will continue for several years.”

“There were some lessons learned previously,” he continued, “but we’re learning new lessons now.”

“In 2008, when the economy recovered and our industry’s access to capital was still there, it transformed our industry to be the world lead for gas production,” said EQT CEO Toby Rice, alluding to the shale drilling revolution. “Now, with a lack of returns, there’s very cautious thinking. A lot of people have concerns whether that access to capital returns for the energy industry. We have to ensure we still have access to capital to keep our economy strong, our energy cheap, improve the environment and enhance the national security of our country. We have to be more efficient, to allow the market to be more efficient.”