BRADENTON, Fla. - Public power utilities in five southern states face fiscal challenges in complying with the EPA's Clean Power Plan, according to Fitch Ratings.

Arkansas, Arizona, Florida, Mississippi, and West Virginia have sizable carbon-reduction requirements or high-cost alternatives, or both, as a result of the Environmental Protection Agency's new mandates, Fitch said in special report Friday.

The 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, Fitch said.

"While many states have already made meaningful progress toward reducing emissions and reliance on coal-fired generation, further reductions could be costly," said analyst Ryan Greene.

"Many public power utilities already near the top of what's affordable for customers could face backlash to raise electricity rates further," he said.

"However, not raising rates comes at a price, too, as it could impair credit quality," Greene said.

The impact of the EPA's plan is based on the results of Fitch's new Carbon Cost Recovery Index ranking U.S. states in terms of the prospective challenge of maintaining financial margins while implementing the Clean Power Plan.

States subject to high electricity costs, sizable mandated carbon-reduction goals, and high carbon-reduction costs will be most affected by the plan, the index shows.

States least likely to be challenged by compliance include Washington, Idaho, and Oregon, which benefit from lower-than-average electric rates and low- or no-cost carbon reduction measures, Fitch said.

"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," said managing director Dennis Pidherny. "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."

In June, the EPA proposed a sweeping rule to cut carbon dioxide emissions from coal plants by as much as 30% by 2030. Comments on the proposal, also known as the Clean Power Plan, were due by Dec. 1.

The complex plan has been criticized by coal-dependent states like West Virginia, and hailed by some environmentalists and states, including Virginia.

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 said it believes carbon reduction initiatives will remain part of the national energy landscape over the long term.

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