Regulated Utilities Benefit from Environmental Retrofit Spending on Power Plants and on Shorter Depreciation Period

Implications:     When air pollution retrofits are placed on a power plant, a regulated, investor-owned, utility financially benefits.  An unregulated, independent power producer (IPP) does not necessarily financially benefit.

Analysis:     A regulated utility earns a return of, and on, its invested capital base.  The company cited in this article, Portland General Electric, is allowed a return of approximately 10.5% in this financial environment.  Other regulated utilities are allowed to earn similar returns.
 
     A scrubber and SCR retrofit on coal plants to remove sulfur dioxide (SO2) and nitrous oxide (NOx) are major capital spends.  The $400 million retrofit cost for PGE’s 600 MW Boardman coal plant equates to a capital spend of approximately $667 per KW installed.
 
     PGE, and other regulated utilities, could depreciate this investment and have the return on investment over the remaining life of the coal plant; which could be 20 years or less in many cases.  This compares to the initial life of 40 to 50 years for the plant.
 
     Thus, a regulated utility earns its allowed rate of return over an accelerated period of time on these environmental retrofits on power plants.
 
     An IPP, on the other hand, does not necessarily have the means to pass along these environmental retrofit costs because they do not have captive customers and rate setting as regulated utilities.