Energy Policy Act 2005 has limited credit implications: S&P

18 August 2005

Credit ratings agency Standard and Poor's (S&P) has issued an analysis of the newly signed US Energy Policy Act suggesting that while the bill is broadly positive for utility and energy industries, it holds little that will have sweeping implications for the credit quality of participants.

Nonetheless, by extending Price-Anderson Act for another 20 years the bill limits massive operator liability if a nuclear accident occurs by indemnifying the private sector's liability. While certainly positive for the credit quality of nuclear operations, S&P had expected the liability protections to be extended.

S&P also suggests that while federal insurance covering the costs of regulatory delays may help reduce financing risks during permitting and construction, it is likely to do so only marginally. Indemnification is capped at $500 million for each of the first two reactors built and $250 million for the next four. Actual compensation in the event of a delay is also subject to appropriation and, therefore, uncertain.

Furthermore, despite the new indemnification provisions, regulatory risk for new nuclear construction remains high. Companies building nuclear generation must still interface with several regulatory bodies, heightening the risk that a plant for which construction has started may never actually commence operations.

Finally, the law is silent regarding nuclear waste storage. Lack of clarity about storage increases decommissioning costs and is as much or more of a risk than regulatory delays. Modifications to the tax treatment of nuclear decommissioning trusts should improve operating cash flows, albeit marginally, and the changes will modestly enhance credit quality for regulated or unregulated operators.

In conclusion, S&P says that while the Energy Policy Act is a small positive step for the utility and energy industries, the credit implications of the various provisions are, for the most part, marginal to the credit quality of industry participants.

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