Investors in Coal-Burning Plants Brush Off Supreme Court Decision on EPA Air Rules

Bloomberg BNA — Investors in coal-burning utilities are brushing off a decision by the U.S. Supreme Court this week that gave federal regulators more power to control air pollution.

Time, they say, is on their side.

It will be years more before utilities feel any pain from new rules as companies, lawyers and regulators wrangle over how to apply restrictions and fresh legal challenges work their way through lower courts.

In the meantime, power companies already have been upgrading their coal plants to meet stricter pollution limits, while phasing out older plants that have no chance of making it.

“We expect the Supreme Court decision to have a very limited impact on the U.S. coal-fired fleet,” said Hugh Wynne, an analyst for Sanford C. Bernstein & Co. Improvements already made to comply with previous pollution limits mean new targets will be met “with relative ease” by the time they are implemented, he said in an interview.

The U.S. Supreme Court April 29 reinstated an Environmental Protection Agency rule intended to cost-effectively reduce pollution that crosses state lines, saying the agency reasonably interpreted the Clean Air Act. The court's 6-2 decision overturned a 2-1 ruling by the U.S. Court of Appeals for the District of Columbia Circuit in 2012 that vacated the Cross-State Air Pollution Rule.

On the day of the April 29 court ruling, investors poured $157 million in fresh cash into exchange-traded funds that own utilities, extending investment in the sector funds to $1.5 billion this year. The S&P 500, 30-member utility index rose 0.16 percent yesterday, with Duke Energy Corp., the largest U.S. utility owner operating 21 coal-fueled plants, nudging 0.05 percent lower.

Drifting Pollution

The decision from the nation's top court confirmed that the U.S. Environmental Protection Agency has the authority to control pollution that drifts across state borders with new restrictions known as the cross-state, or the Good Neighbor rule.

The additional limits on power plants, particularly older coal-fired generators that produce more pollution, have been widely viewed as another blow to an industry struggling to maintain adequate electricity supplies while meeting increasingly tough environmental standards. The rule upheld by the Supreme Court is among a series of clean air and water proposals from the Obama Administration's EPA that have been opposed by the power industry.

Utility executives met the Supreme Court's support for the EPA on an even keel, downplaying the impact. While spending years fighting the stricter rules, power generators also were making many of the adjustments needed to clean up their plants.

“This one will have a relatively minor effect,” said Tom Fanning, chief executive officer of Southern Co., which operates 19 coal-fueled plants in Alabama, Florida, Georgia and Mississippi. Fanning said complying with any new cross-state rules will require “minimal” spending.

The overall pain factor? “Not really very much,” he said in an interview.

Plants Already Adapting

That's mainly because power plants already have been forced to adapt to even tougher EPA rules restricting mercury emissions into the air, which were upheld by the U.S. Court of Appeals April 15.

Complying with those mercury limits requires much of the same equipment that would meet cross-state rules, Sanford C. Bernstein's Wynne said.

The plants closed because of the mercury rules are the same ones that would have failed the cross-state rule. So, the total number of additional plant closings from the Supreme Court decision is “approximately zero,” Wynne said.

If coal plants haven't adequately controlled for nitrogen oxide, which has stricter limits under the cross-state rule than the mercury rules, then some plants may need to add more equipment, said Ralph Izzo, chief executive officer of Public Service Enterprise Group Inc., the owner of New Jersey's largest utility.

“That might suggest some additional retirements are in the queue,” he said in a call May 1 with media, though most plant shutdowns will still come in July 2015, when the mercury limit takes effect, he said.

Already Converted

Fanning, the Southern CEO, said his utility has already shut down or converted 7,000 megawatts of its 20,000-megawatt coal fleet to meet mercury limits. One megawatt can power about 800 average homes, according Energy Department data.

Julien Dumoulin-Smith, a New York-based analyst for UBS AG, said there will be at least a two-year delay, and perhaps longer, as the cross-state rules get hashed out.

Luminant, the generating unit of Energy Future Holdings Corp., which filed for bankruptcy this week, said in a statement that it's disappointed in the Supreme Court ruling and will be closely analyzing the opinion to evaluate what action to take. Because of other legal challenges still pending, the company said “it is uncertain when and how the rule's precise requirement will be completely resolved and implemented.”

Calpine Corp., the largest independent natural-gas power producer, doesn't see a “big impact” from potential new cross- state rules in Texas for the next couple of years, President Thad Hill said May 1 during a conference call with investors.

There may be indirect effects from the Supreme Court's 6-2 ruling favoring the EPA if the decision emboldens the agency to toughen standards for carbon dioxide emissions that it is expected to issue in June, Kevin Book, an analyst at ClearView Energy Partners LLC, said in a telephone interview.

Utilities including Southern, Duke and American Electric Power Co. and coal producers such as Peabody Energy Corp. are bracing for the additional rules intended to curb greenhouse gas emissions from existing power plants.

Yield Priorities

Utility investors today are more interested in capturing yield and guarding against an economic downturn than valuing the effect of pollution regulations, David Mazza, an exchange traded funds strategist at State Street Bank & Trust Co., said in a phone interview April 30.

American Electric Power also noted there are still more issues to sort out in lower courts after the ruling.

“There is no immediate impact on power plants or AEP's operations, and we don't expect this decision to change our plans for our coal-fueled power generation fleet,” said John McManus, vice president of environmental services at AEP.

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