Rising Interest Rates and Utility Capital ProjectsBy Andre J. Riley, Manager, April 06, 2017
The economy continues to improve and with that we have seen short-term interest rates starting to rise and a resetting of the long-term interest rates beginning around November 2016. In addition, during December 2016 the Federal Open Market Committee (FOMC) of the Federal Reserve System increased the key interest rate benchmark (Federal Funds Rate) for only the second time in the past ten years, and again recently the FOMC raised the benchmark an additional .25 percentage points on March 15th. All indications seem to lead us to suspect that the FOMC will implement additional rate hikes in the future.
Rising interest rates can be a good thing for interest earnings on your cash balances, but the downside is higher interest rates means your capital projects might be more expensive to finance. This could leave your utility with having to do a smaller project or possibly increase rates and charges more to pay for those projects. Communities continue to face the prospects of dealing with replacing aging utility infrastructure and developing strategies of how, when and where to best allocate their limited resources. These rising interest rates will impact the cost of capital on debt borrowings and could lead to a heightened sense of urgency in moving up the timeline on necessary projects while interest rates are still relatively low.
With the shifting and often volatile landscape of the bond market and the need of utility capital investments, there should be a renewed focus on developing an interactive strategic financial plan with a mix of rate funding and bond funding that addresses the aging infrastructure and other required capital projects and at the same time recognizing the impact on the utility rate payer.
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