CMS Energy warns investors of new coal costs

New environmental regulations are likely to increase the costs of building and operating coal plants, CMS Energy told investors this month, possibly putting a proposed new coal-fired plant in the Bay City area on hold.

In filings with the Security and Exchange Commission this month Consumers Energy acknowledged substantial uncertainty over how expected environmental regulations will affect the company, and in a conference call with investors the company acknowledged serious legal and regulatory obstacles to the development of it’s proposed new 830 megawatt plant planned for the Karn/Weadock complex.

The Sierra Club, which has made fighting new coal plants a top priority, characterized the statements by CMS as more evidence that the highly controversial proposed plant will be “a bad investment that will sock shareholders and ratepayers alike.”

“Consumers Energy’s own documents show the writing is on the wall for coal,” Simon Billenness, Senior Campaign Representative for the Sierra Club’s Beyond Coal Campaign said in a statement. “Coal is an all-round bad investment that will hit shareholders and ratepayers. At a time when investors, banks and entire governments are moving away from coal and toward more clean energy investments and jobs, Consumers Energy would be foolish to dump good money down a coal hole. Consumers Energy’s bad coal investment puts its own future, its shareholders and its employees at risk.”

Ratepayers will be on the hook for any increased cost of coal development because of a provision of the 2008 energy package that gives CMS Energy and DTE Energy a guaranteed customer base by eliminating the right to chose power providers for 90 percent of Michigan consumers.

Jackson-based Consumers Energy, is a regulated power company with more than 3.5 million customers in 68 counties of the Lower Peninsula. Consumers Energy is the primary subsidiary of CMS Energy which also generates power and operates natural gas pipelines.

In January the SEC released guidance instructing publicly traded companies to inform investors about the potential economic impact of legislation and regulation related to climate change, as well as indirect consequences of regulation and business trends and the physical impacts of climate change.

According to the company, CMS generates about 80 percent of its power from fossil fuels and could be affected by expected new regulations intended to curb the greenhouse gas emissions.

In its 10-K filing this month CMS stated that it expects that environmental laws and regulations related to greenhouse gases emissions and coal ash disposal will become more stringent and that the company will be required to make significant new investments in upgrades to pollution control equipment.

Such new laws and rules, CMS said, “could require CMS Energy and Consumers to install additional equipment for emission controls, purchase carbon emissions allowances, curtail operations, invest in non-fossil-fuel generating capacity, or take other significant steps to manage or lower the emission of greenhouse gases.”

CMS said that EPA’s December 2009 determination that greenhouse gases threaten the health and welfare of future and current generations and should be regulated under the Clean Air Act is a concern, and that Congress is likely to enact legislation such as the American Clean Energy and Security Act which would require greenhouse gas reductions that could be expensive for fossil fuel plants to achieve.

Other environment related financial risks identified by the company in its official statement to investors include greenhouse gas related litigation by third parties, “impairment of CMS Energy’s or Consumers’ reputation due to their greenhouse gas emissions and public perception of their response to potential greenhouse gas regulations, rules, and legislation,” and extreme weather that could affect power demand as well as company operations and assets.

EPA’s anticipated new rules for coal ash disposal are also considered a financial risk by CMS.

If these new rules require CMS to dispose of its coal ash in hazardous waste landfills, the costs could be substantial, the company said. Also, the company currently sends 30 percent of its ash to companies that use it to manufacture cement. This might not be allowed under more stringent disposal rules.

Customers might also have to pay if CMS is found to have broken existing environmental laws.

The company acknowledged it has been cited numerous times by EPA in recent years for exceeding the emissions limits of its air permits and could face a lawsuit and/or fines and be required to install additional pollution control equipment at some or all of its coal-fired power plants.

“CMS Energy and Consumers expect to collect fully from their customers, through the ratemaking process, expenditures incurred to comply with environmental regulations,“ the company stated. “If Consumers were unable to recover these expenditures from customers in rates, it could negatively affect CMS Energy’s and/or Consumers’ liquidity, results of operations, and financial condition and CMS Energy and/or Consumers could be required to seek significant additional financing to fund these expenditures.”

Michigan Environmental Council Energy Program Director David Gard said that it makes sense for a corporation such as CMS Energy to recognize the financial risks associated with investing in a new coal plant in an uncertain regulatory climate.

“One of the reasons we want to see strong federal carbon regulation in place is because that will give corporations more certainty about what the cost of emitting carbon will be in the future. Right now it is a kind of a guessing game.”

“If I was a Consumers Energy investor or ratepayer, I would be very worried about making any investment before I knew what that federal framework would be.”

If regulation raises the cost of energy produced by coal, what you are doing is making the marketplace more realistic by recognizing the environmental and human health cost of greenhouse gas emissions, Gard said, making investment choices more realistic and making alternatives like increased efficiency and wind more attractive.

In a conference call with investors company officials CMS officials acknowledged that the future of its proposed new coal plant is uncertain and emphasized that they have a back up plan if the coal plant turns out not to be economically feasible.

“[O]ur plan hasn’t been based on just building a new coal plant,” CMS Energy president and CEO David Joos said. “And frankly there are a number of hurdles to get over before we are going to move forward with the construction of the coal plant.”

Joos said that although CMS has received an air permit for the planned power plant, it expects that the permit will be appealed in the courts.

The company must now try to secure a Certificate of Need for the plant form the state Public Service Commission they still must “resolve with the commission whether it still makes sense to go forward with the coal plant.”

Joos said that he did not want people to get “overly focused” on the coal plant, that it should be seen as because just one of several possible investment opportunities for the company.

Company officials said that alternative investment options include investing in new natural gas power generation or upgrading existing old power plants so that they can be operated in compliance with the Clean Air Act.