Fitch: High-Cost, High-Rate States Most Challenged by EPA Clean Power Plan
January 30 2015 - 7:16AM
Business Wire
Public power and cooperative utilities operating in states
subject to high electricity costs, sizable mandated
carbon-reduction goals and high carbon-reduction costs will be most
challenged to preserve financial margins while complying with the
EPA's Clean Power Plan, according to a new Fitch Ratings'
report.
Fitch's inaugural Carbon Cost Recovery Index (CCRI) shows that
utilities in Arkansas, Arizona, Florida, Mississippi and West
Virginia will face the greatest challenges. Carbon reduction
related costs are expected to be high in these states due to
sizable reduction requirements, high-cost alternatives, or both.
Further, these states will be challenged to maintain financial
margins, given the need to impose significant rate increases on end
users already burdened by high electric costs.
"While many states have already made meaningful progress toward
reducing emissions and reliance on coal-fired generation, further
reductions could be costly," says Ryan Greene, Director, U.S.
Public Finance. "Many public power utilities already near the top
of what's affordable for customers could face backlash to raise
electricity rates further. However, not raising rates comes at a
price, too, as it could impair credit quality."
States least likely to be challenged by compliance include
Washington, Idaho and Oregon, which benefit from lower-than-average
electric rates, low- or no-cost carbon reduction measures, and low
mandated reductions.
"The Carbon Cost Recovery Index shows that the challenge of
maintaining credit quality while implementing the Clean Power Plan
is going to be higher for some states than for others," says Dennis
Pidherny, Managing Director, U.S. Public Finance. "While it's
almost certain that public power and cooperative utilities will
pass on those costs to customers, it's nearly impossible to
determine how rate setting strategies and financial policies will
be impacted."
Key findings from the report include:
--Arkansas faces the largest relative carbon reduction goal
measured against total estimated 2030 statewide generation (12.86
million metric tons on total generation of 68 million MWhs);
--Texas faces the largest absolute carbon reduction goals for
2030 at 54.89 million metric tons, more than double the next state,
Florida, at 26.31 million metric tons;
--West Virginia and Utah utilities are subject to the highest
cost carbon reduction alternatives, based on EPA planning
models;
--California is the only state where the 2030 final carbon
emissions goal is higher than actual 2012 emissions (44.11 million
metric tons vs. 43.73 million metric tons).
-- Mississippi has the least affordable electricity relative to
residents' Median Household Income (MHI) at 4%;
--Connecticut and New York utilities have the largest average
retail rates at over 15 cents per kWh and could be challenged to
recover even relatively low compliance costs.
While the EPA's Clean Power Plan will not be finalized until
mid-2015 and could be delayed by political pressures or legal
challenges, Fitch believes carbon reduction initiatives will remain
part of the national energy landscape over the long term.
About the Carbon Cost Recovery Index
Fitch's Carbon Cost Recovery Index is a relative ranking of U.S.
states in terms of the prospective challenge to maintain financial
margins while implementing the EPA's Clean Power Plan. It considers
the relative magnitude of mandated reduction goals; estimated cost
of carbon reduction alternatives; average retail rates; and the
cost of electricity as a percentage of MHI for each state to assess
the combined influence of these variables. To determine composite
scores, metrics for all four variables have been standardized
against their respective means and weighted equally (25%) to
provide balanced consideration. Fitch expects to update The Carbon
Cost Recovery Index periodically as appropriate.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research: The Carbon Effect
(Assessing the Challenges for Public Power)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=853488
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Fitch RatingsUS Public FinanceDennis Pidherny, +1
212-908-0738dennis.pidherny@fitchratings.comManaging DirectorFitch
Ratings, Inc.33 Whitehall StreetNew York, NY 10004orUS Public
FinanceRyan Greene, +1
212-908-0593Directorryan.greene@fitchratings.comorUS Public
FinanceOlu Sonola, +1 212-908-0583Senior
Directorolu.sonola@fitchratings.comorCorporate FinanceRoshan Bains,
+1 212-908-0211Directorroshan.bains@fitchratings.comorMedia
RelationsElizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com