Clean Power Plan ruling bad credit news for coal states, says Moody’s

Last Thursday, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit denied an application seeking to stay the Environmental Protection Agency’s Clean Power Plan rule while litigation is ongoing.

The Clean Power Plan, released in August 2015, establishes statewide carbon dioxide emissions standards for existing coal and gas-fired power plant units, with the goal of cutting CO2 emissions 32 percent by 2030 versus a 2005 baseline.

The denial is credit negative for big coal-fired generators such as NRG Energy Inc. (Ba3 stable) and Dynegy Inc. (B2 positive) and more than 300 US Midwest cities that financed new coal-fired units with $9 billion of revenue bonds. The ruling is also credit negative for states such as West Virginia (Aa1 negative) and Kentucky (Aa2 stable), which benefit from coal-related severance tax revenue (which applies to the extraction of natural resources such as coal) because the Clean Power Plan will accelerate the transition to cleaner electricity supplies at the expense of coal.

NRG and Dynegy both have substantial coal generation assets that would be negatively affected. The cities’ new coal-fired units, which are highly efficient and meet all current EPA environmental regulations, will be subject to state implementation plans under the Clean Power Plan. To comply, the coal-fired units might have to run less or could be subject to a carbon cap-and-trade program.

The affected states will continue to be negatively affected by the protracted decline in coal consumption, which is hampering severance tax revenue, coal employment and income. West Virginia collects severance taxes equal to 7 percent of general fund revenues, while Kentucky collects 1.8 percent. West Virginia estimates net coal severance tax revenues will fall to $198 million in fiscal 2016, a 29 percent decline from fiscal 2015 net collections of $277 million, although a portion of the decline is due to an increase in the share of revenues distributed to local governments.

A coalition of states led by West Virginia and several business groups requested the Appeals Court to grant the stay. Prior to the court’s decision, coal sales were expected to slightly rebound in fiscal 2017. The exhibit below shows the decline in coal sales in West Virginia.

Although the rule is in effect for the duration of the litigation period, it is not a final ruling. We expect the Appeals Court to hear oral arguments on 2 June and decide whether the regulation is legal, and expect that the D.C. Circuit Court will have a decision on the larger case before year-end. The judges ordered participants to submit a proposed format for briefing by January 27, and a proposed schedule that ensures initial briefs are filed by April 15 and finalized by April 22.

Although regulators telegraphed the standards for more than a year, some coal-heavy states found the rule surprising because their targets were more stringent than under earlier versions of the proposal. As a compromise, the EPA eased the timeline for compliance to 2022 and established an early incentive program for energy efficiency and renewable energy projects.

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