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By Matthew Coffina, CFA and Charles Fishman, CFA | 04-29-2015 03:00 PM

Which Utilities Benefit From New Emissions Regulation?

Companies operating in constructive regulatory environments as well as those with cleaner and more efficient energy production will be better positioned, says Morningstar's Charles Fishman.

Matt Coffina: For Morningstar StockInvestor, I'm Matt Coffina. I'm joined today by Charles Fishman, who is an equity analyst on our utilities team. We're going to talk about how utilities are affected by carbon dioxide emissions regulations. Charles, thanks for joining me.

Charles Fishman: You're welcome.

Coffina: So, the EPA has this Clean Power Plan that's in the works right now. Can you explain a little bit about how this came about?

Fishman: Well, you've got to go back to 1970. The Clean Air Act was started back when people started getting concerned about air pollution a long time ago. It was amended in the 1990s to address other pollutants. And a few years ago--actually, it was 2007--the Supreme Court ruled that the EPA needs to be concerned about greenhouse gases. With that, the EPA had its marching orders, and they developed a draft of the Clean Power Plan, which they released last year.

Coffina: So, the Clean Power Plan has certain building blocks that are supposed to reduce carbon dioxide emissions. Could you walk us through those building blocks?

Fishman: Sure. There are four building blocks that the EPA decided on. [The first is] making plants run more efficiently; [the second is to] make the end user be more efficient with the power. For both of those, the cleanest kilowatt hour is the one that you need less fuel to make, so that's [the strategy for reducing emissions there]. Those are sort of the easiest ones, and they also were the smallest as far as the percentage of reductions that the EPA estimated.

The biggest block, about 40%, is using sources that don't produce carbon dioxide or produce very little. Those would be nuclear and, of course, things like wind turbines and solar. And then, finally, switch to lower-carbon-intensity fuels--for example, natural gas. So, those were the four building blocks. The two biggest [reducers of emissions] are [not using sources that produce carbon dioxide or using] natural gas. That's about two thirds of it.

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