EPA carbon plan poses challenges for public power, Fitch says

Many states that rely heavily on public power and electric cooperatives could face a difficult time complying with the Environmental Protection Agency (EPA) Clean Power Plan, according to a recent report from Fitch Ratings.

The Oct. 14 report is an update on an earlier assessment that Fitch issued in January.

“Fitch believes public power and cooperative utilities operating in states where the relative cost of electricity is highest generally face the greatest pressure to avoid rate increases. In its assessment of a utility’s willingness to increase rates,” the firm said.

“Fitch continues to believe public power and cooperative utilities that operate in states subject to sizable mandated carbon-reduction goals, high carbon-reduction costs and high electric costs will be most challenged,” the ratings firm said. “For these utilities, meeting the goals and recovering related costs will likely require sizable rate increases on end users already burden by comparatively high electric costs or retail rates.”

States facing the greatest challenge now include Kansas, Missouri, Nebraska, Tennessee and West Virginia based on the Fitch-calculated carbon cost recovery index (CCRI). “All of these states, with the exception of Tennessee, rank among the most challenged based on the revised reduction goals,” Fitch said.

Other states have it much better.

“Washington and Oregon remain among the states that appear best suited to comply with the proposed rules and maintain margins, and are now joined by Virginia and Maine, largely due to reduction goals that exceed 2012 carbon emissions costs, carbon-reduction measures available at little or no incremental cost according to EPA figures, and electric rates and costs lower than national averages,” Fitch said in the report.

The EPA released the final CPP on Aug. 3, 2015, which includes carbon dioxide (CO2) reduction goals for each state. The final goals fall in a narrower band than originally proposed, broadly reflecting greater opportunities for regional cooperation and a more consistent approach among generating sources, Fitch said.

States are now required to develop and implement compliance plans that achieve interim reduction goals beginning in 2022 rather than 2020.

Final goal emission rates range from 771 lbs./MWh in states where the only affected units are natural gas-fired (Rhode Island, Idaho), to 1,305 lbs./MWh where affected units are entirely coal or oil-fired (Montana, North Dakota, West Virginia, Fitch said.

Although the final rules appear less onerous than originally proposed and provide more time to comply, Fitch believes the effect on individual credit quality will continue to hinge on each utility’s ability and willingness to recover compliance costs from end users.

States now have until Sept. 6, 2016 and Sept. 6, 2018 to submit their initial and final compliance plans, respectively, and until 2022 (rather than 2020) before interim compliance goals take effect. Moreover, the rules allow states to apply reduction measures in a more gradual way.

The Fitch report was produced by analysts Dennis Pidherny, Olu Sonola and Roshan Bains.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.