Fitch looks at state-by-state impacts of Clean Power Plan

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January 30, 2015 07:16 AM Eastern Standard Time

NEW YORK--(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'.

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