Rittenhouse: Are you seeing greater public awareness on environmental issues?

Furey: Yes, there is a growing interest in environmental issues. In particular we are getting a good deal of calls from many investors, the media and environmental groups about emissions trading. Two things have happened and these are noted in the report I wrote for Fitch with Rajat Sehgal, The Status of Environmental Regulation, dated October 2004. First, the discussion today is no longer about whether global warming exists; it’s about the significance or extent of global warming. Second, global warming is no longer just a topic of discussion among scientists and environmentalists. It is now on the radar screen of part of the mainstream financial institutions, such as insurance companies and institutional investors.

Institutional investors, such as public pension plans and investment funds of faith-based organizations, appear to be most interested in global warming. These groups have socially responsible investment criteria. They want to fulfill their social desires and make money at the same time. They need to take care of their retirees. One institutional investor of note is the investment fund of the Presbyterian Church USA.

Rittenhouse: Still, I find that most mainstream investors, including institutional investors, are not really concerned or focused on the issue of global warming.

Furey: Most institutional investors haven’t focused on global warming because there is no federal regulation of carbon dioxide (CO₂) in this country at this time. Fitch does not anticipate such regulation for the next one to five years. As a result, there is a mismatch between company planning horizons and investor horizons. Utility companies have to build baseload power plants that have useful lives of roughly 60 years. If they want to start construction in 2008, they must plan now for those facilities. In other words, the utility construction cycle and investor’s time horizons are totally different. Most institutional investors turn their portfolio over every two years or less. There are times when even Fitch’s analysis may not include projections further out than five years.

Insurance companies have a much longer time horizon. There have been instances of people being denied flood insurance based on concerns that water levels may rise due to global warming.

Rittenhouse: How does this mismatch of investor and company planning horizons affect the planning and construction of major power plants?

Furey: The issue is really about what kind of plant will be built? Will it be a Pulverized Coal (PC) plant or an Integrated Gasification Combined Cycle (IGCC) coal plant? IGCC plants are expected to greatly reduce sulfur dioxide (SO₂), nitrogen oxides (NO_X) and mercury emissions. They burn coal more efficiently and as such have lower CO₂ emissions than conventional coal plants. However, if it comes down to cost, IGCC plants cost more to build and the technology is relatively new.

While Fitch believes that we will probably have a carbon law at the federal level in five years, the fact is that we do not have one now. Without regulatory certainty, many companies may not obtain the support they need for building a more expensive plant than one that uses more proven technology.

There’s also the issue over carbon sequestration. The industry will need an economically feasible way to sequester carbon. In other words, it will need a way to strip out CO₂ and then inject and store it in geologic formations or other places. There is some limited research in this area. IGCC plants do not necessarily sequester carbon, however, it is expected that they will be more easily retrofitted for sequestration equipment as compared to a PC plant.

The problem is companies that can develop carbon sequestration technology don’t have a real incentive to accelerate that development at this time. They need to know when there will be laws in place that will require generators to buy their technology. So there’s no real incentive for this technology at this time. About a year ago, Wisconsin Electric proposed building an IGCC plant, but their state regulatory commission didn’t approve it. They didn’t agree with the company’s assessment as to the future environmental cost benefits of building a more expensive plant today.