The competitive electricity market poses credit risks for municipal utilities with heavy debt, above-average rates, and customer bases dominated by commercial or industrial users, Moody's Investors Service said this month.
In a report, Moody's said that competition in the electricity market has been developing for the past decade because of a variety of factors, including mergers and more aggressive customer service marketing.
Competition increased further with the passage of the National Energy Power Act of 1992, which could facilitate some utilities' ability to transmit power through other utilities' transmission systems, according to the rating agency.
The act gives the Federal Energy Regulatory Commission on the authority to order a utility to provide access to its transmission lines for another utility if the originating electrical service is in the public interest and does not unduly degrade reliable electricity. The act also does not restrict states' or local governments' ability to allow this type of access.
Transmitting power through other systems, which is known as retail wheeling, will allow electric customers to bypass local utilities and purchase lower-cost electricity from other suppliers, Moody's said.
While limited forms of retail wheeling are permitted in Nevada, Utah, Texas, New York, and Connecticut, other states are debating the issue.
Moody's said that utility credit concerns exist in areas that are dominated by a major commercial or industrial customer.
"If rates are high and retail wheeling is permitted, the retail customer could be won over by competitors, resulting in financial strain for the utility," Moody's said.