Electric utilities could face a cash crunch if government spending cuts and tax hikes scheduled for Jan. 1 create uncertainty and prompt businesses to cut back expenses, according to a report by Moody’s.
Competitive, unregulated power companies– which generate most electricity in Texas — would be the hardest hit utilities, Moody’s wrote, because of declining electricity demand.
President Barack Obama and Republican lawmakers have failed so far to reach a deal that could avoid the looming tax and spending measures known as the “fiscal cliff” that economists say could put the U.S. back into recession.
“The fiscal cliff could create a scenario where liquidity resources become exhausted,” Moody’s wrote.
Power companies including NRG Energy, Calpine Corp. and Energy Future Holding, are working to manage their cash to protect themselves against any potential deterioration in access to capital, Moody’s said.
Companies have indicated an economic downturn could affect their cash flow, based on the belt-tightening decisions other businesses make.
“Our business is derivative of other parts of the economy,” said David Crane, CEO of NRG Energy, in a November interview with The Street. “A chemical plant’s decision to go ahead and build will have a big impact on electricity demand in that area.”
Based on recent economic history, a slowdown may not hit Texas as hard as other parts of the country, but if credit is short, it could affect development of additional electricity generation.
“I think we are somewhat different in Texas in that we have continued to grow, even through this last recession, both population-wise and industrially – and that has been good for the sale of electricity,” said John Fainter, president of the Association of Electric Companies of Texas. “We have had growth in demand and generators have been able to meet it, but we have a well-publicized issue that we need to build more generation.”