ESG initiatives, broadband projects among enticing opportunities for utilities

Following a multiyear stretch of unpredictability and financial uncertainty, utility companies are staring at the possibility of a more normal year in 2023.

With utilities having a variety of strategic opportunities at their disposal, Baker Tilly recently hosted two utility-focused webinars – one on the impacts, benefits and challenges of ESG initiatives and another on the opportunities with broadband projects that utilities should consider.

ESG considerations for utilities and municipalities

While Environmental, Social and Governance (ESG) initiatives are becoming increasingly common in both the public and private sector, at this point there still is not a universally accepted definition of what ESG means, let alone an agreed upon strategy for how utilities should identify, plan for and address their ESG needs.

Utility companies have a long list of ESG considerations as they pertain to:

• Environmental factors: Climate change, natural resources, pollution mitigation, waste-reduction and improvements that benefit the environment
• Social issues: Human capital and strength in diversity, human rights and community relations, affordable housing and utility rates, and other projects and initiatives to address social issues
• Governance concerns: Leadership team, financial management, cybersecurity and risk management

At a high level, utility companies need to be able to tell their ESG story to their employees and customers, to the public, to the media, and to rating agencies. Their story needs to include the steps that their company or municipality is taking, as well how they are going to monitor and measure the results, what the impact will be, and ultimately what it will mean for their utility (or their city or town). This includes highlighting impacts such as:

• The “material risks” that impact your organization on a daily basis
• The ESG-related initiatives that are proactively used to address those risks
• The ways your organization responds to and prepares for rating agency and investor inquiries.
• Your organization’s ESG-related bond designation potential

Having clear answers to these questions – in essence, your ESG disclosure statement – can assist your company or municipality with ratings, investor outreach and official statement development. After all, ESG requires a balance between acknowledging your known and potential risks and financial pressures and providing the public with sufficient information about your projects.

Each rating agency has developed ESG assessments that are focused on material benefits and risks. The ratings are broken down into three general categories – positive, neutral and negative – and are based on different metrics that ultimately influence bond issuers’ ratings and investors’ decisions.

These assessments and ratings weigh key factors, such as:

• What are your current ESG opportunities, challenges and issues?
• What are you already doing to address ESG-related issues?
• What do you plan to do to meet and address ongoing and upcoming ESG issues?
• What are the known costs or other useful management measurements?
• How can you incorporate this information into a holistic discussion with customers, ratings agencies and potential investors?

Perhaps above all, these topics can help utilities and municipalities tell their sustainability story and determine their ESG disclosure strategy for 2023 – and beyond.

Examining opportunities with broadband

Another intriguing opportunity facing utility companies is the possibility of putting federal funding dollars from the American Rescue Plan and Infrastructure Bill (ARP) toward broadband projects.

Broadband is the transmission of wide-bandwidth data through a high-speed internet connection, either wireline or wireless. Municipalities that are running or hoping to run their own internet service provider (ISP) should think about broadband-related business models such as:

• Public ownership and operation: In this business model, a government may own and operate broadband utility for supplying its own needs for utility service, or for supplying utility service to private consumers or both. It may construct all facilities reasonably needed for that purpose and may acquire any existing utility properties so needed.
• Open access public ownership: This option (where the municipality owns the infrastructure) is available to public entities with two or more service providers that want to compete for the citizens, businesses and government facilities of this jurisdiction.
• Public Private Partnership: In this case, the government or public entity works with a private broadband business to provide services through a custom arrangement negotiated between the entities. The public entity has the leverage in this instance and can use it to entice the private entity.
• Private with public permission or support: In some cases, a good relationship exists between the private supplier and public entity, but the public entity has no desire or capacity to own or provide service. Or sometimes the public entity only wants to provide service to its own facilities and can get excellent terms with some subsidy of the private entity.
• Private: This covers much of municipal situations that are rural. The Incumbent Local Exchange Carrier (ILEC) gets Universal Service Fund (USF) subsidies but only builds what is bare minimum to pass the “sniff” test for universal service.

These business models vary between who owns, operates and delivers the services – and each of those elements comes with its own advantages. In fact, we believe that infrastructure ownership is almost always the best option for municipalities. It allows the utility or municipality to be a price maker, rather than a price taker. It also allows the entity to have more leverage, more access to subsidies and more control over its future (including the option to change business models).

Of course, there are also inherent challenges with broadband deployment, including with the various methods for deployment.

The different ways of designing, constructing and installing fiber optics for broadband projects all come with their own challenges. For instance, when deciding whether to install aerially or underground, entities must weigh how underground can create issues with restoration or care of private property, while aerial deployment can create issues with other utility companies and FCC regulators. In either case, proper installation, identification and testing of fiber optic cabling is essential when deploying and servicing infrastructure.

Additionally, when it comes to broadband project reporting, utilities must keep their mix of defining cost, quality and schedule considerations in balance in order to ensure project success.

To learn more about how Baker Tilly can assist utilities or municipalities with their ESG initiatives or broadband projects, or to discuss your specific situation, contact our team.