AEP American Electric Power Company Inc

New U.S. environmental regulations could prove far more expensive for power companies than the government projected, but the changes also may speed up a recovery for the whole industry.

The Obama administration proposed a rule in March to cut toxic air emissions by 91% at coal-fired power plants in 2015 as a way to improve the environment and reduce health-care costs. It could arguably be the most cumbersome of the upcoming environmental rules because companies may be required buy costly new equipment for plants or shut them down, industry executives have said.

Federal regulators are also expected to layer on other air and water restrictions next year.

Altogether, these rules are the "most demanding in the last decade" and could fuel a recovery in an oversupplied market, said UBS Investment Research analyst Julien Dumoulin-Smith. "This is the golden goose."

Demand for electricity fell sharply with the housing crisis and economic downturn and is recovering slowly. Power producers have been reluctant to cut supply, even as electricity prices have fallen. The regulations would force the producers to close outdated plants, reducing supply and driving the cost of electricity higher.

In total, the new Environmental Protection Agency regulations could take 30 to 70 gigawatts off the market, which is 10% to 22% of the nation's coal plants, power executives and analysts say.

The EPA estimated the toxic-air rule alone would cost the industry $11 billion and cause 3% of U.S. coal generation to go offline, yielding $140 billion in annual health-care savings by reducing Americans' exposure to mercury and acid gases that contribute to heart disease and cancer.

Critics say the costs could be higher for power companies because the EPA isolates the cost per rule, instead of looking at the costs of all of the proposed changes together.

An EPA spokeswoman said in an emailed statement that there is "no reason to think that the EPA's estimates are inaccurate in any way, but before we finalize the rule we're going to review and consider what others are modeling."

The power industry is modeling different scenarios to determine how much extra cost they can absorb.

GenOn Corp. (GEN), a merchant power generator that relies on market prices to make a profit rather than utility rates, will likely be forced to retire some plants. But Chief Executive Edward Muller said the earnings hit would be "more than offset by higher earnings from increases in market prices a result of industry retirement."

Exelon Corp. (EXC), the nation's largest operator of nuclear plants, and Constellation Energy Group. (CEG) stand to benefit from stricter rules because most of their electricity already comes from cleaner-burning sources. Utilities including American Electric Power (AEP), Duke Energy Corp. (DUK) and Southern Co. (SO) are asking for more time to implement the rules.

"There is no legal flexibility to change the timeline unless the law is changed," said Hugh Wynne, senior research analyst at Sanford C. Bernstein & Co. But the EPA can grant a one-year extension and ultimately Congress does have the purview to make changes, Southern CEO Tom Fanning recently said.

AEP CEO Mike Morris called the EPA's existing timeline a "train wreck" precisely because a surge of shutdowns would create grid reliability problems and hurt the economy.

"We can get everybody to where they want to go environmentally by 2020," Morris said.

AEP estimated that EPA regulations would cost it between $5 billion and $11.2 billion depending on the timeline and the scope of the rules that are implemented. These costs would be passed on to AEP's utility customers in the form of higher rates.

Not every coal-power generator will feel the heat from higher costs, though. The EPA's rules has "bifurcated" coal generators by targeting those that use sulfur-rich Appalachian coal for the use of scrubbers, said Dumoulin-Smith of UBS.

The federal agency is using sulfur dioxide as proxy for measuring acid gases so plants that use low-sulfur Powder River Basin coal from Wyoming don't face the same cost burdens. As a result, NRG Energy Inc. (NRG), a merchant generator that analysts said could have been the most exposed to the EPA regulations, said it no longer has to spend an additional $900 million to $1 billion on environmental upgrades on top of its current spending plan of $720 million.

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

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