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Clean Power Plan Puts Financial Squeeze On Electric Co-Ops
By Keith Goldberg
Law360, New York (August 31, 2015, 2:14 PM ET) -- The carbon emissions reductions mandated by the
Clean Power Plan may force many rural electric cooperatives to prematurely close their coal-fired power
plants, creating a multibillion-dollar debt headache for the nonprofit electricity providers, as well as the
federal agency that loaned them the cash to build and update those plants.
Rural co-ops, which came into existence largely thanks to the Rural Electrification Act of 1936, serve 42
million people in the U.S., frequently in high-poverty areas. Given the need for the cheapest electricity
possible, the fuel mix for co-ops is skewed heavily toward coal — about 70 percent of the electricity
generated by generation and transmission co-ops and 58 percent of the electricity sold by distribution
co-ops, according to the National Rural Electric Cooperative Association, a trade group.
The U.S. Environmental Protection Agency's Clean Power Plan calls for existing power plants to slash
their greenhouse gas emissions by 32 percent from 2005 levels by 2030. While compliance will be costly
for all coal-heavy utilities, it could be especially costly for nonprofit, member-owned co-ops, advocates
say.
"From a co-op standpoint, they only have debt; they don't have equity, they don't have shares they can
issue," said Sutherland Asbill & Brennan LLP partner Jay Holloway, who represents co-ops. "The only way
they can raise money is through debt and have that debt secured and paid back through rates. It's going
to be difficult, if not impossible, to pass on all that debt through rates."
The CPP is also expected to push many coal-fired plants into retirement, including one-fifth percent of
plants operated by co-ops, the NRECA claims. The problem is that many of those plants still have
decades of life — and debt — left in them, experts say.
Many coal-fired plants built by co-operatives were built in light of the now-repealed Powerplant and
Industrial Fuel Use Act of 1978, which, in the wake of global oil and gas shortages, mandated that any
new baseload power plant had to be able to burn coal as an alternative.
"What will happen is some of the investor-owned utilities are making a business decision to close plants
that are 50 years old," McCarter & English LLP partner Bob O'Neil said. "Is there a possibility that you'll
have power plants of a more recent vintage be forced to close?"
For example, Seminole Electric Cooperative Inc., which serves about 1.4 million customers in Florida,
built its 1,300-megawatt, coal-fired Seminole Generating Station in 1984 and recently spent $530 million
on new pollution controls. Yet it's one of the coal plants that may have to close in order for Florida to
meet its carbon emission reduction targets imposed under the CPP.
"We would no longer have a working asset that is producing energy, but members would still have to
pay that debt and we'd have to replace the generation," Seminole CEO Lisa Johnson said. "That would
be leaving them to pay twice for the same amount of energy to meet that need."
Johnson says her co-op will be carrying about $879 million in debt on the Seminole Generating Station
by the end of 2019 and $485 million by the end of 2029. Meanwhile, Tony Campbell, the CEO of the 1.1
million customer-East Kentucky Power Cooperative, says his coal plants threatened with retirement are
carrying between $400 million and $700 million in debt.
Co-ops will have to take on more debt in order to replace the generation they've retired, according to
Holloway.
"If the debt causes the financial ratings to go down on the particular co-op and the co-op under this new
rule needs to invest significantly in new renewables and energy efficiency programs in order to comply
and maybe build more gas-fired generation, where is that money going to come from if you have
difficulty addressing the debt you already have?" Holloway said.
These are thorny financial questions for both co-ops and their largest creditor and loan source: the
federal government.
The U.S. Department of Agriculture's Rural Utilities Service and its predecessor, the Rural Electrification
Administration, has been the main financier of co-ops since the Rural Electrification Act's passage. The
RUS has currently invested about $7 billion in power generation assets related to coal, about 15 percent
of its $45 billion-plus electric loan portfolio, according to the agency.
While they don't have the figures for the final version of the CPP, the NRECA says co-ops would
potentially have $4.5 billion of stranded RUS debt under the proposed version.
"Is the government going to somehow forgive that debt or provide workouts for that debt?" Holloway
said. "You've got one part of the federal government enacting regulations that are going to affect
another part of the federal government."
Restructuring or forgiving some of that debt could be a financial lifesaver for co-ops as they look to
comply with the CPP, advocates say. Campbell says that EKPC has been working with the RUS, as well as
its representatives on Capitol Hill, on devising ways that might allow RUS borrowers to refinance existing
debt with lower interest rates.
"We have worked closely with USDA regarding this issue and will be working with Treasury, too,"
Campbell said.
However, a RUS spokesperson told Law360 that it's too early to tell whether debt refinancing or
forgiveness will be necessary, since federal and state CPP compliance plans haven't been implemented
yet.
"RUS has an array of authorities in its statute and regulations to work with borrowers that face
significant changes in circumstances for any reason," the spokesperson said. "As compliance strategies
are developed, RUS will continue to work with its borrowers and remains focused on financing
infrastructure that delivers affordable power and supports rural economic development."
If co-ops don't get any debt relief, their best chance of weathering the CPP's requirements will come
through participating of cap-and-trade systems, observers say. The EPA made a trading system the
centerpiece of its proposed federal CPP implementation plan for states that don't submit their own
implementation plans, and a cap-and-trade system is seen by many as the most logical way for states to
comply with the new regulations.
"It just makes a lot of sense," O'Neil said. "You want to get the plants that are the least efficient ones to
retire, and when you use a cap-and trade approach, those who have the new units can stretch out their
economic life."
Given co-ops' slim margins for error, how those cap-and-systems are structured and their participation
costs will be crucial.
"Is it state-by-state, is it a regional issue?" Johnson said. "There's a question of cost, a question of
volatility of that cost and a question of whether it's a market system that can be hedged. We're going to
be closely watching the development of that."
--Editing by Katherine Rautenberg and Patricia K. Cole.
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