In an age where extreme weather events are becoming increasingly common and power demand is escalating due to the proliferation of data centers and electric vehicles, investors in public power bonds are calling for enhanced transparency from utilities. A recent draft by the National Federation of Municipal Analysts (NFMA) on best disclosure practices reflects this growing need for accountability. It’s been two decades since the NFMA last updated its guidelines, a period that has witnessed significant changes in credit risks associated with public power utilities.
Understanding the fundamental nature of the public power sector is essential for any investor. With estimates pointing to approximately $100 billion to $140 billion in outstanding revenue bonds, public power utilities form a critical part of the municipal bond landscape. The NFMA’s updated recommendations aim to encapsulate how the industry has developed amidst emerging risks. Dan Aschenbach, a principal author of the NFMA recommendations, notes, “The industry’s fundamental challenges—affordability and reliability—have largely remained intact, but we must now account for new trends.” The updated draft serves as a comprehensive guide, outlining what utilities should disclose in their official statements, annual reports, and interim disclosures across approximately 15 critical categories.
One of the key areas that the NFMA emphasizes is the transparency around climate-related risks. The paper advocates that utilities must disclose their net-zero emissions targets, the nature of these emissions, and any existing sustainability statements. While some states have attempted to sidestep the relevance of Environmental, Social, and Governance (ESG) factors, Aschenbach reinforces that acknowledging these risks has always been crucial for utility credit assessments. He states, “Even amidst the turmoil regarding ESG disclosures, a comprehensive understanding of environmental and governance metrics remains fundamentally important.”
The NFMA’s calls for transparency come against a backdrop of increasing scrutiny on utility companies to navigate the complexities of climate change responsibly. It is now more imperative than ever for utilities to identify their strategies for transitioning to cleaner energy sources to protect investor interests.
The growing frequency of extreme weather poses a severe threat to the public power infrastructure, highlighting the necessity for proactive measures. The NFMA draft calls for utilities to disclose their storm hardening and resiliency strategies, as well as their responses to natural disasters. Events like Winter Storm Uri in 2021 exposed critical vulnerabilities in the Texas power grid, forcing industry stakeholders to confront the real costs associated with such weather events. Aschenbach emphasizes that these climatic shifts have transformed how utilities must approach their operational strategies, underscoring a pressing need for documented financial tools, insurance strategies, and other measures to recover from potential weather-related losses.
In addition to climate impacts, the NFMA identifies a surge in electricity demand as a pivotal consideration for investors. Increased reliance on data centers, coupled with efforts to electrify transportation and buildings, has dramatically altered power consumption patterns. Understanding these demand trends—not just historically over the past five years but also in anticipation of future shifts—is crucial.
Aschenbach points out that this emerging strain on the public power sector presents new challenges that utilities must navigate. He highlights that utilities should not only account for how they’ve adapted to past demands but also plan strategically for the future to accommodate rising energy consumption.
The NFMA’s proposed update to disclosure practices acknowledges and addresses the changing landscape in which public power utilities operate. By focusing on climate-related targets, resilience against extreme weather, and the necessity of understanding demand dynamics, the recommendations offer a roadmap for the sector’s future. In doing so, they facilitate a more transparent and informed investment environment, ultimately benefitting investors and utilities alike. For stakeholders in this sector, embracing these updated practices may well be the key to navigating the complexities of a rapidly evolving energy landscape.