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US tax reform could make it easier for some generators to speed coal retirements

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Plant Scherer is a coal plant in Georgia operated by multiple companies. The four units at the plant are newer than many in an aging coal fleet that has contracted sharply in recent years.
Source: Associated Press

While several coal mining companies have cheered tax reform's effect on their bottom lines, it might give some U.S. utilities a path for closing coal-fired power plants in a way that softens the impact on ratepayers.

On a Feb. 27 earnings call, PNM Resources Inc. President and CEO Patricia Vincent-Collawn said the utility, which serves New Mexico and Texas, is passing the benefits of tax reform to customers with new rates. The move, she said, also allowed the company to begin a transition away from coal while holding the impact on customers' bills to just over 1%.

"We're excited about our plan for a coal-free generation portfolio by 2031," Vincent-Collawn said. "The transition from coal-fired generation creates opportunities to take advantage of New Mexico's abundant sunshine and wind."

In a Jan. 30 report, The Brattle Group suggested utilities could find "creative ways" to return tax savings to customers other than a simple rate reduction, including accelerating book depreciation for early retirement of power plants or other at-risk assets.

Accelerated depreciation reduces an asset's book value more quickly, allowing an entity to recoup costs over a shorter time period than initially accounted. For coal plants retiring before previously projected, accelerated depreciation can help match the end-of-life date of a plant and the full depreciation of that asset to avoid stranded costs.

On a Feb. 20 call with analysts, Duke Energy Corp. CFO and Executive Vice President Steven Young noted Florida regulators approved the company's proposal to use benefits of tax reform to offset future increases in rates. Duke struck a deal in late 2017 that would fund investments in energy technology such as solar energy, grid modernization and battery storage in Florida. The deal also gave a green light to accelerate depreciation of certain coal units in the state.

Duke spokeswoman Catherine Butler said the company is also proposing to accelerate the depreciation of assets in North Carolina. Like in Florida, that proposal aims to use benefits from tax reform to mitigate future customer price increases and maintain utility credit quality.

As companies shift from coal, a counterweight to deciding to retire coal power is often the cost consumers will incur closing a plant that has not yet returned a utility's investment. Often, accelerated depreciation allows for recouping costs more quickly, but by increasing customer rates.

For example, IDACORP Inc. proposed an accelerated depreciation schedule for its Valmy plant in late 2016 as part of its "glide-path away from coal" to ensure the costs of Valmy were paid by customers benefiting from the asset.

"Similar to paying off a home or car loan early, costs are compressed into a shorter schedule," the company explained.

Moody's noted tax reform overall was credit-negative for the regulated U.S. utility sector because it reduces the difference between what utilities collect from ratepayers to cover taxes and payments to tax authorities, which reduces cash flow. Analysts wrote in a January report that utilities may ask regulators to allow additional investments beneficial to customers or to accelerate recovery of regulatory assets, effectively using excess cash from tax reform to offset future costs and volatility in billing.

Ryan Wobbrock, vice president and senior analyst with Moody's, said with less revenue to collect, the difference could be filled with "lots of things," including making future coal power plant retirements easier on customers' wallets. What it will come down to, he said, is whether there is political will or appetite from regulators to fill the gap with new investments, making asset retirements more palatable or offering customers a reduction in their bills.

S&P Global Ratings analyst Gabe Grosberg noted tax reform also cut utilities off from bonus depreciation, an immediate tax deduction utilities have used as a partial funding source for large capital spending. Duke, for example, noted on its earnings call that because of bonus depreciation, the company has been in a net operating loss position for tax purposes for the last several years.

Now, Grosberg said, utilities will have to depend on capital markets to fund new projects. For coal, it might not make that much of a difference since coal-fired power plants are considered high-risk and are generally not being considered in the near- or long-term, he said.

"It's really looking like gas-fired generation and renewables are the primary growth vehicles in generation going forward," Grosberg said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.