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By J. Wylie Donald
Last Tuesday night saw a few of us enjoying the charms of Virginia Beach as we recovered from a long day of coal plant demolition. (Lawyers in hard hats. Run from that.) Well, not exactly.
We were attending a conference run by EUCI: Plant Retirement: Learning from Experience. EUCI did a nice job gathering experts from the contracting, consulting and plant owner communities and providing a deep dive into what happens when a coal plant is taken down. The focus was on the contracting and safety aspects. Perhaps at another seminar they'll focus more on the environmental and redevelopment aspects.
The buzz in the community was all about the value of scrap. When scrap was going for $400 per ton, these projects could almost pay for themselves. But that was then. Now scrap is at $220 per ton and the global economy is lethargic. No one sees scrap as a pot of gold.
Another lauded source of revenue was the sale of used equipment. But that is in even worse shape than scrap. The reason is pretty obvious. If you've got a coal plant that is now obsolete because of external factors, and you are trying to sell in a market populated with the used equipment from other coal plants that are obsolete because of external factors, you have a really bad case of too much supply and not enough demand.
So if there is no pot of gold, is there at least a silver lining? For regulated utilities, permitted cost recovery makes the status of the scrap and used equipment markets only marginally relevant. A utility that demonstrates that it was reasonably diligent in getting the best price available for scrap may be well on its way to satisfying its prudence review.
For unregulated utilities, which cannot recover their demolition costs from the rate base, silver needs to be found in other ways. Three ways suggest themselves. First, the external obsolescence mentioned above may establish that a plant's rate of depreciation needs to be accelerated. That in turn means that the assessed value is overstated and there is a tax abatement waiting for a little bit of advocacy.
Second, coal plants have infrastructure and often a lot of it. Whether it is water access, railway lines, gas supply or high power lines, other power plants or manufacturing enterprises may find the defunct coal plant's site highly valuable. And while coal plants are on the wrong side of the supply and demand curve with respect to their materials, they are emphatically well placed to benefit from the need to develop 100 GW of power to replace the 100 GW of coal that is forecast to shut down. With sites that are already zoned appropriately, with infrastructure in place, and with city fathers looking for a replacement source of revenue, coal plant sites, even those that have languished, may have a rosy future.
Third, for a small set of plants, their sites have attributes that developers want. In Alexandria, Virginia city planners have their sights set on the former Potomac River Generating Station which was idled in 2012. The 25-acre site is described as "a huge opportunity to replace an "undesirable use" with public amenities and new development on the waterfront." In Chicago the former Fisk plant is looking at a new life as a bus garage, park and nature walk. The former Mt. Tom plant in Holyoke, Massachusetts is being considered for a solar farm and public amenities. To be sure, there are plants that no one seems to want to touch. The Hartford Courant recently profiled the English Station in New Haven, Connecticut, which has been idle for over 15 years. Environmental contamination is threatening to get in the way of a $3 billion merger because the regulators and the community are concerned that the site will never be cleaned up.
One of the speakers at the conference explained his company's plan for the future: they will own all their sites forever. We can't see how shareholders and communities will long abide by that. Redevelopment of brownfield sites is a staple of commerce and business. Risks can be addressed. Idle properties not only don't bring value, they may depress values. What is now a lump of coal in a community's common stocking, may, with vision, become gold or silver or at least no longer an eyesore.
J. Wylie Donald, a partner at McCarter & English, LLP, counsels and litigates for clients on insurance coverage, environmental and products liability matters. Mr. Donald co-chairs the firm's Climate Change and Renewable Energy Practice. He draws on his substantial environmental experience, his prior non-legal technical work, and his deep involvement in risk management to assist clients in understanding and controlling the coming regulatory and non-regulatory impacts of climate change. He has tried cases and argued appeals in the state courts in New Jersey and Maryland, conducted private arbitrations and mediations, and argued motions in federal courts across the nation.
Read more at Climate Lawyers Blog by McCarter & English, LLP.
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