Wall Street Journal (pg. A6)
February 4, 2008

Wall Street Shows Skepticism Over Coal

Banks Push Utilities To Plan for Impact Of Emissions Caps

By Jeffrey Ball

Three of Wall Street's biggest investment banks are set to announce
today that they are imposing new environmental standards that will
make it harder for companies to get financing to build coal-fired
power plants in the U.S.

Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley say they
have concluded that the U.S. government will cap greenhouse-gas
emissions from power plants sometime in the next few years. The banks
will require utilities seeking financing for plants before then to
prove the plants will be economically viable even under potentially
stringent federal caps on carbon dioxide, the main man-made greenhouse
gas.

The move shows Wall Street is the latest U.S. business sector that
sees some kind of government emissions-capping as inevitable. But it
shows disagreement about what to do.

It also marks the latest obstacle to coal, which provides about half
of U.S. electricity but emits large amounts of CO2. Citing costs, the
U.S. government last week pulled support for a project called
FutureGen that many utilities saw as a step toward burning coal
cleanly.

The standards, which would apply to all but the smallest plants,
result from nine months of negotiations among the three banks and some
of the biggest U.S. utilities and environmental groups. The standards
could hurt coal-dependent utilities that haven't begun factoring a
future price of CO2 emissions into their planning. But they could help
utilities that have.

The banks say they don't want to be involved with debt that goes bad
as a result of government emissions caps that require the power plants
they finance to buy large numbers of extra pollution allowances. Under
a cap-and-trade system to limit greenhouse-gas emissions, the
government would distribute a certain number of emission allowances
each year. Companies whose emissions exceeded their allowances would
have to buy more from companies that had more than needed. Congress is
considering several cap-and-trade proposals.

"We have to wake up some people who are asleep," says Jeffrey
Holzschuh, vice chairman of institutional securities at Morgan
Stanley.

The banks are likely to continue to finance certain coal-fired power
plants: those designed to capture greenhouse-gas emissions and shoot
them underground if that technology became practical. But they make it
less likely the banks will finance other coal-fired plants. Several
dozen are on the drawing board in the U.S., many not yet financed.

The standards follow TXU Corp.'s proposal to build 11 coal-fired power
plants in Texas -- a plan it scaled back to three last year. TXU was
later taken private by a group led by Kohlberg Kravis Roberts & Co.
and TPG, formerly Texas Pacific Group. Citi, J.P. Morgan and Morgan
Stanley -- top financiers to the U.S. power industry -- were among the
banks that advised the buyers.

The banks are under pressure from environmental groups but say their
bigger motive is financial. Most major presidential candidates favor
legislation to limit emissions. "What is earth-shakingly different
between now and two years ago is the focus on CO2," says Eric Fornell,
vice chairman of J.P. Morgan's natural-resources banking division.
Several states have begun requiring utilities to account for the
potential cost of emissions in new-plant plans.

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Sidebar: Wall Street and Warming

Three big banks will ask companies seeking financing for new U.S.
coal-fired power plants to:

** Look at energy efficiency options.

** Look at renewable-energy options.

** Assess whether the plant design and nearby geology would allow
emissions to be captured and stored underground.

** Use consrvative assumptions about how many emission "allowances"
the plant would get from the government under a greenhouse-gas cap.

** Ensure the plant will be allowed to charge electricity rates high
enough to cover the cost of buying emission allowances.

========================================================

The banks say they will encourage energy-efficiency and renewable-
energy pushes before backing new coal plants. And they say they will
help utilities push for new government policies that make efficiency
programs and renewable energy more practical.

When utilities apply for financing for coal-fired plants, the banks
will use "somewhat conservative" assumptions about future caps, says
Hal Clark, co-chairman of Citi's power-sector investment-banking
division. The banks say they will consider the possibility that
utilities will have to pay for their allowances -- an idea utilities
are fighting.

Two environmental groups -- Environmental Defense and the Natural
Resources Defense Council -- worked with the banks to develop the
standards. Mark Brownstein, an Environmental Defense official, says if
utilities have to pay for emission allowances, "the days of
conventional coal really are over."

But several utilities that helped draft the standards say they
shouldn't have to pay for most of their allowances. Michael Morris,
chief executive of American Electric Power Co., says his company
believes it should get 90% to 95% free. Most big coal-fired utilities
paying for their allowances would drive up their costs and consumers'
electric bills.

Some conventional coal-fired plants could pass muster if the utility
showed it could raise its rates to cover the higher cost of polluting.
"It's still conceivable that conventional coal plants might make the
most sense in a specific location in a specific community," J.P.
Morgan's Mr. Fornell says.

AEP's Mr. Morris says the new standards clearly make it "more
difficult" to build a conventional coal plant. AEP is designing new
plants to capture and store CO2 if that technology becomes viable. The
Wall Street seal of approval, he says, might help surmount local
opposition. "A regulator may find this another reason to go forward"
in approving a new coal-fired plant, Mr. Morris says. A spokesman for
Southern Co., another big utility that helped draft the standards,
says it believes they will stimulate more discussion.

--Rebecca Smith contributed to this article.

Write to Jeffrey Ball at jeffrey.ball@wsj.com


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Peter Montague (peter@rachel.org)
Rachel's Democracy & Health News