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CO2 Control Costs Could Lead to Utilities Ratings Downgrades
The costs of addressing carbon dioxide and other pollutants linked to climate change could lead to credit rating downgrades in the US electricity sector, says Moody’s Investors Service.
While the timing and form of federal legislation establishing carbon emission caps in the US is unknown, it is likely to have significant effects on industry economics, operations and capital investment, Moody’s says in a Special Comment, The Cost of Climate Change - U.S. Electric Utilities’ Continued Uncertainty: How Big Is The Bill and When Is It Due?
These costs could lead to credit rating actions for U.S. electric utilities and raise the sector’s overall business and operating risk profile, Moody’s says.
Moody’s has not lowered any utility company ratings due solely to the sizable capital expenditures needed to reduce emission levels. That could change.
The biggest factors for Moody’s in considering whether environmental-related capital expenditures negatively affect a utility’s credit quality are its financing plan and its ability to recover such costs from its ratepayers.
While most states provide for some type of recovery of fixed environmental costs, either through an environmental cost recovery surcharge or rate case proceedings, Moody’s would likely frown upon aggressive financing plans at utilities facing such expenses.
The burning of coal to generate electricity is the most significant source of pollutant emissions from the US electric industry. Consequently, companies with significant fleets of coal-burning electricity generating stations whose regulatory jurisdictions do not support recovery of environmental costs are most at risk.
In the comment, Moody’s provides a snapshot of existing federal intervention to reduce the emissions of certain pollutants, including nitrogen oxides (NOx), sulfur dioxide (SO2) and mercury, and its impact on industry participants. Moody’s also addresses the likelihood for carbon dioxide (CO2) legislation and its potential form.