S&P: EPA rule positive for U.S. utilities

NEW YORK, Sept. 5, 2003 — The newly revised Environmental Protection Agency (EPA) rule that clarifies how much a U.S. power generator can spend on routine equipment maintenance and replacement before triggering a review and costly antipollution compliance has few immediate credit implications, but could reduce costs for power plants in the long term, according to Standard & Poor’s Ratings Services.

“We have incorporated into current ratings that compliance costs would be mostly recoverable in rates for regulated utilities, so cost reductions would not automatically lead to a shift in credit quality,” said Standard & Poor’s credit analyst Todd Shipman.

On Aug. 27, 2003, the EPA said that utilities could now replace equipment components as long as the cost is less than 20% of the equipment’s overall value. Any more than that would trigger an antipollution review and lead to further spending on clean-air controls, as outlined in the EPA’s New Source Review, a provision of the 1970 Clean Air Act. The new rule could be applied to about 17,000 facilities nationwide, according to the EPA.

“From the utilities’ standpoint, they now can make better decisions on how much to spend on a plant,” Shipman said. “The new rule provides greater clarity as to when pollution control equipment needs to be implemented,” he said.

The rule would probably not impact most rate-based plants, because their generation and transmission sites are normally state regulated; pollution control equipment costs are generally passed along to ratepayers.

The EPA’s rule would give independent power producers (IPPs) a clearer picture of how much they will need to spend on antipollution equipment as well, and allow them to focus on nonpollution issues. However, because states do not regulate IPPs, the IPPs have no asset rate-base, and they are responsible for any added cost of pollution control equipment. “It allows them to make good decision about maintenance and upgrades, which is positive for the industry,” Shipman said.

Prior to the new EPA rule, the main issue for most utilities was regulatory lag. Specifically: When would utilities recover these compliance costs? The longer it takes for cost recovery, the worse it is for credit quality. Regulatory lag provides some element of credit uncertainty for utilities.

Standard & Poor’s said it will continue to monitor whether the rules will lead to a reduction in costs for environmental cleanup.

Standard & Poor’s, a division of The McGraw-Hill Companies, provides widely recognized financial data, analytical research and investment, and credit opinions to the global capital markets. With more than 5,000 employees located in 19 countries, Standard & Poor’s is an integral part of the global financial infrastructure. Additional information is available at www.standardandpoors.com.

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