EPB's new smart grid may upgrade its electric and telecom service, but the cost of the $226.8 million, bond-financed project helped downgrade the utility's financial standing.

Fitch Ratings announced late Wednesday it has cut its bond rating for EPB from "AA-plus" to "AA."

"The smart grid will definitely help them better manage their network, but at the same time they've increased their borrowing and leverage over the past two to three years," Fitch rating analyst Bhal Mehendale said Thursday.

In its routine review of EPB, Fitch said the utility's growing telecom division built on the back of its fiber-optic network "entails a higher degree of business risk and operating margins that are less predictable" than EPB's electricity business.

EPB, which has distributed TVA-generated electricity throughout Chattanooga since 1939, has added a fiber-optic network and telecommunications services across its service territory over the past three years. EPB borrowed $226.8 million for the project, although a $111.6 million federal stimulus grant is paying for nearly half of the cost.

EPB is using the fiber-optic lines not only to monitor and control its electricity, but to provide high-speed Internet, television and telephone services in Chattanooga.

EPB competitors complain that the utility's telecom division got an unfair advantage by using electricity revenues and infrastructure to help support new telecom services over rival phone and cable TV providers.

David Snyder, chief executive of VOLstate Inc. and RevTel LLC in Dayton, Tenn., said his business competes in Rhea and Bradley counties but is practically shut out of Hamilton County by EPB's closed network.

"EPB's telecom rates are subsidized by electric ratepayer dollars," he charged Thursday.

Snyder claims that if the smart grid truly was saving electricity costs, EPB would not have needed an 8.2 percent rate increase in 2006 followed with a 5 percent rate increase last year.

But Greg Eaves, EPB's chief financial officer, said the smart grid is helping EPB reliability, and the telecom division now is turning a profit. Eaves blamed the bond ratings decline, in part, on costly storms in the past year and the startup costs for the telecom venture.

Eaves said the Fitch downgrade "will have no financial impact on us as our debt is fixed rate, and we do not have any plans to issue new debt."

Standard & Poors also has a AA rating on EPB debt with a "positive outlook" given a year ago.

Fitch still rates EPB's balance sheet as "healthy," especially following last year's local rate increase projected to generate another $20 million for the city-owned utility.

The AA rating for EPB still is above the median Fitch evaluation for municipal electricity providers nationwide. But the downgrade leaves Chattanooga's TVA distributor with a lower rating that either Memphis Gas Light and Water or Nashville Electric Service, Mehendale said.

The downgrade reverses the bond rating upgrade Fitch gave EPB in April 2010 to AA-plus, but returns the utility to its long-held bond rating before that period, Eaves said.