S&P wary of huge clean-air, fuel costs
| A wave of new clean-air regulations splashing
down on a climate of high energy prices is creating an atmosphere where
electric utilities may get soaked with under-recovery of their compliance
costs, placing their creditworthiness at risk, according to Standard &
Poor's. "The credit issue we have is whether utilities can recover all those increasing capital costs as they have in the past, given this high power price environment," said S&P Director Terry Pratt, primary analyst for the report, "Peer Comparison: Three U.S. Power Giants' Environmental Costs and Strategies." Like Power Magazine and Platts, S&P is a McGraw-Hill company. While utility recovery of such costs has been "fairly good," the report said, the "credit risk is that exposed utilities may not be able to recover large and growing compliance costs in full or on a timely basis, especially in an environment of already high electricity prices caused by the run-up in natural gas and coal prices." S&P said AEP's position for complete cost recovery appeared "less favorable" than Southern's or Cinergy's because the huge energy company's regulated units "largely rely on after-the-fact rate cases to achieve full recovery." AEP has the largest share of regulated coal capacity, 69%, compared with the other two. AEP's major expenditures, however, have been recovered on a timely basis, the ratings firm said, and the company's diversity "may partially mitigate cost-recovery risk as compliance costs rise." Still, S&P said "deregulation in Ohio increases the risk for AEP units that full and timely recovery of emissions costs may not occur." AEP is in the throes of a $3.7-bil plan to retrofit coal-fired plants with equipment to reduce their emissions of air pollutants in the face of new federal rules to curb nitrogen oxides, sulfur dioxide and mercury. Such a strategy would "dramatically" increase its environment-related spending and could raise credit risks, according to the ratings firm. "Although you never know exactly what will happen until you receive the final order, we are confident that the regulators in the states where we operate will recognize that the environmental investments we are making on our facilities are the right investments to ensure a continuing, reliable, low-cost electricity supply for our customers," an AEP spokeswoman said. AEP's environment-related spending share of capital expenditures was 15% in 2003 and 21% in 2004, and is expected to be 34% in 2005, S&P said. Southern's environmental spending share of its total capital expenditures is forecast at 20% this year and it is forecast to double by 2007. Cinergy's share of environmental compliance costs is predicted to be 42% of its total budget this year, with $1.8 billion in spending for environmental compliance between 2005 and 2009, which is about 33% of its budget for that period, S&P said. Cinergy's unregulated coal risk position, 31% of its coal capacity, is expected to be mitigated under its proposed merger with Duke Energy, which has large natural gas and nuclear capacity. Exacerbating the situation are high coal and natural gas prices on top of these compliance costs, Pratt said. "The issue that we have is that those expenditures are going to increase substantially in the years ahead," he said. "Recovery has been good in the past ... but prices have increased in a sustained way." Because advanced "clean" coal and integrated gasification combined-cycle technologies are still under development, there is little alternative for companies in the near term to installing costly selective catalytic reduction systems and flue gas desulfurization systems to reduce SO2, NOx and mercury emissions. AEP earlier said it would install FGDs on units 1, 2 and 3 at the John E. Amos plant in West Virginia, Unit 5 at Muskingum River in Ohio, Unit 2 at Big Sandy in Kentucky and Unit 4 at Conesville in Ohio, which will also get an SCR. AEP said it would also upgrade the FGD at its HW Pirkey plant in Texas. In the meantime, AEP has filed with the Public Utilities Commission of Ohio to seek cost recovery of its proposed 600-MW IGCC plant that would turn coal into a gas for low-emission generation. Ultimately, an energy company's success in avoiding under-recovery risk may lie with its PUC and how the state regulators treat environmental compliance costs, Pratt said. The PUC may allow the costs to pass thru fully with sufficient return or the commission could review the costs as excessive. The "track record" for recovery has been "good so far," said Pratt, but "there is a risk that they will not fully recover those costs." |
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