Sizing Up the Utilities, if Carbon Caps Take Hold

FUEL prices and dividends are usually big drivers of the share prices of utilities. Now there is a new variable to consider: how much carbon their power plants emit. Federal regulations over the next few years could limit the carbon emissions of these companies, and Wall Street analysts have begun compiling lists of potential winners and losers, based on that possibility.

All of the leading presidential candidates say they favor such measures, and some kind of legislation affecting utilities is likely at some point after the November election, Citi Investment Research said in a January report.

If “carbon caps” — limits on carbon emissions — eventually become law, the winners may include operators of nuclear power plants (which don’t emit carbon), while the losers may include power companies that mainly burn coal, analysts say. Beyond that, who wins and who loses will depend on the details of possible future regulations, which can’t be predicted with certainty. Still, a cottage industry on Wall Street has begun to evaluate these questions.

“I think the time when you can keep your head in the ground is just over,” said Hugh Wynne, a senior analyst at Sanford C. Bernstein & Company.

Some analysts have begun to evaluate the potential impact of carbon caps on stock prices.
“Carbon has been an ongoing issue for the investment community for the last three or four years,” said Brian Chin, an equity analyst at Citi Investment Research.

Federal carbon rules might be similar to regional efforts in the Northeast and California. These plans are to place emission limits on plants that emit carbon dioxide, and, in the case of California, on other greenhouse gases as well. Allowances or credits to emit a certain level of greenhouse gases are either auctioned or granted free.

Under such a system, called “cap and trade,” utilities that stay below emissions quotas can hold credits for the future or sell them on the open market. In Europe, the cost of one credit has averaged $25 a metric ton of carbon dioxide since January 2005, when the European Union's emissions trading plan began.

Companies like the Exelon Corporation, the Constellation Energy Group and the Entergy Corporation, which operate nuclear power plants, would benefit from cap-and-trade plans under consideration, like the Lieberman-Warner Climate Security Act, which is pending in Congress, Mr. Chin said.

“They all potentially get a very large benefit from higher power prices being pushed up by carbon,” he said.

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