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US power industry divided over importance of Supreme Court MATS ruling

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Electricity industry representatives and consultants were divided Monday on how much impact the US Supreme Court's remand of the Mercury and Air Toxics Standards to a lower court is likely to have on power markets and investments.

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Brian Walshe, managing director of ION Consulting in Denver, said he thinks the decision is likely to bring "significant" change in the electricity industry's direction.

"The biggest fallout will be to [Clean Power Plan] compliance strategies," Walshe said in an email. "Many utilities will now be forced to consider this 'game of chicken' strategy when CPP rules are announced, due to the enormity of their impact."

But Tammy Ridout, American Electric Power spokeswoman, noted that the Supreme Court did not vacate the Environmental Protection Agency's MATS rule.

"The MATS rule remains in effect unless otherwise ordered by the [US Court of Appeals for the District of Columbia Circuit], and there has been no change in AEP's ongoing compliance activities," Ridout said in an email.

ISO-New England spokeswoman Marcia Blomberg said: "Because of the stricter air regulations that have been in place in New England for years, most plants would not have been affected by this rule and, further, the economics of low-priced natural gas have driven many of the region's older fossil-fired units to retirement, so we expect there will be limited impact from this ruling."

In contrast, an executive with a Texas power company who asked to remain anonymous because he lacked permission to speak with the media said he thinks the decision is likely to push down prices "for the interim" for wholesale electricity and emissions-related derivatives such as greenhouse gas allowances and renewable energy credits.

However, a lot of generators and utilities' CAPEX plans have already been shorn of spending on coal-fired units, he said in an email, while adding that mothballed coal "might have a place in the hearts of private equity folks."

ION Consulting's Walshe said he thinks the ruling "will slow down many of the retirement projections we have been seeing."

"Many of the announced retirements will still occur but at a slower pace, but the next wave of retirements now has to be reconsidered," Walshe said.

"There is still enough uncertainty that investment in electricity assets will be slowed," he said. "Plants can justify some minor fixes, but the larger projects may still be deferred until regulatory clarity returns. Meanwhile, the coal assets continue to get older, workers continue to retire, young people are reluctant to enter the coal side, and coal plants will increase their reliance on third-party service providers to fill the gap."

But Jim Carson, CEO of Risquant Energy, an electricity market consultancy based in St. Paul, Minnesota, said he thinks the ruling is unlikely to affect the electricity industry's direction, which is already being driven by the relative economics of natural gas and coal. The ruling should therefore have little effect on East Coast electricity prices, Carson said.

"Anywhere served by Powder River [Basin] coal will find electricity prices held down," Carson said.

David Flanagan, New York Independent System Operator spokesman, said: "We are reviewing and analyzing the decision."

Duke Energy spokesman Chad Eaton said the EPA's efforts to justify the costs of the MATS rule "will require additional time."

"Duke Energy is currently reviewing today's ruling by the Supreme Court," Eaton said in an email. "At this time, there will be no immediate effect on Duke Energy's MATS compliance program. All Duke Energy power plants will continue existing compliance activities."

Duke has cut its sulfur dioxide emissions by 85% and its nitrogen oxide emissions by 64% since 2005, Eaton said.

"These decreases are the result of the addition of pollution control equipment, decreased [coal-fired] generation, increased natural [gas-fired] generation, and replacement of higher-emitting plants," Eaton said. "Duke Energy remains committed to reducing [its emission levels], while consistently delivering clean, safe, reliable electricity to customers."

A female executive with a Texas-based power company who asked to remain anonymous because she lacked authorization to speak to the media said, "most plants that would be impacted by the rule have already reacted to it, so [we are] unlikely to see a huge reversal."

AEP's Ridout said the company is "pleased that the court recognized that costs are an important component of rational agency decision-making."

"The case underscores that the Supreme Court expects the EPA to implement the Clean Air Act as written, not according to its own policy preferences," Ridout said.

In contrast, Walshe said: "The [case] results unfortunately validate a strategy of dragging your feet, and fighting compliance as long as each company thinks it is politically able to do so."

"The 'winners' in this story are those that might have originally gotten the extension for MATS compliance, have not yet committed the funds to comply, and now receive a further extension until the EPA tries again," Walshe said.

"The 'prize' in this scenario becomes the time value benefit of deferring action and squeezing out some extra profits for a few upfront years," he said, adding: "This is not good for the country or industry in the long run and is contrary to what most participants would want to do, but the economics will become more tempting."

But the male Texas power company executive said he was "somewhat surprised" by, but agrees with the Supreme Court's ruling.

"[The] EPA needs to work with coal generation to identify cleaner technology and figure out a way to offset those costs," he said. "I think the EPA will have to come back to the drawing board to identify and work in collaboration with the coal generators to [identify] ways to reduce emissions."

--Mark Watson,
--Edited by Keiron Greenhalgh,