Fitch believes that capital expenditures by public power entities are likely to remain low until the U.S. economy improves and the many pending environmental regulations become clearer. According to our most recent "U.S. Public Power Peer Study" dated June 18 and available on Fitch's Web site at www.fitchratings.com, the ratio of capital expenditures to depreciation has continued to decline and cash on hand has risen for the majority of public power entities. We believe this is attributable, in large part, to the deferral of capital projects.

This trend is particularly easy to see in the data we collected on wholesale systems with an 'A' rating. These utilities sell to other systems or other members and are typically organized as joint action agencies (JAAs). In 2011, the median ratio of capital expenditures to depreciation and amortization for these issues fell to 1.4x from 2.4x the year before. This is close to the lowest level we have surveyed. At the same time, they also have more days of cash on hand (86 at the median) than at any year since 2006.

Retail electricity providers we rate at 'AA' and 'A' reported similar levels in 2011. We define retail electric systems as those that sell directly to end-user customers. Retail systems may be fully integrated utilities or distribution-only systems. Median ratios of capital expenditures to depreciation and amortization were also below 1.5x for both rating categories. This is generally lower than the levels observed in the past. They also had days cash on hand ranging from 127 days ('A' category) to 150 days ('AA' category), the highest levels since 2006.

In our view, wholesale systems have reduced their capital expenditures in response to a reduction in demand and low wholesale market prices, which have driven some wholesale systems to buy power supply rather than build the means to generate it. We also believe that the prevailing uncertainty related to new environmental regulations is causing wholesale systems to postpone decisions of whether to build new plants or to invest in existing resources. We believe that retail providers have also deferred some maintenance expenditures in response to weakness in the economy and pressure to reduce rate increases.
 
We expect the environmental regulations to take approximately three years to be clarified, further delaying many investment decisions. If the economy has recovered by then, we would expect a quick increase in capital expenditures across many public power entities in order to comply with final rules and to meet rejuvenated demand.