ICF Consulting Calls for Caution in NO_x Pollution Control Investments

U.S. EPA has announced recently new regulations that utilize a market-based approach for controlling NO_x emissions from power companies and other stationary sources. ICF Consulting's NO_x Emissions Outlook 2002 reviews recent regulatory developments, assesses market trends, and forecasts future NO_x market movements. The results of the analysis indicate that power companies should consider employing a strategy that emphasizes flexibility and postpones capital investment.

Nate Collamer, Principal in ICF Consulting's Energy Practice, which authors the annual study, explained power companies are squeezed between the need to control emissions and demands from rating agencies and shareholders to reduce debt loads and increase earnings. "The balance sheet implications of EPA's new eastern NO_x trading program (the NO_x SIP Call) and upcoming multipollutant legislation are substantial, but following traditional capital-intensive control strategies could push more companies into junk bond territory," he said.

"Power companies can deliver shareholder value by deferring NO_x pollution control investments, thereby reducing debt, maintaining near-term earnings, and preserving flexibility to respond to the uncertain air regulatory future," Collamer said. "However, pursuing a capital investment deferral approach requires good NO_x market intelligence and a strong risk management strategy."

Fall of Enron, Regulatory Uncertainty Contributes to Boom-Bust NO_x Allowance Pricing

The combination of high near-term NO_x compliance costs and downward medium-term price pressures on such costs is resulting in a boom-bust cycle for the NO_x market. Investments of more than $5 billion for selective catalytic reductions (SCRs) have been committed already, with an additional $5 billion in investments likely by 2006. These investment dollars come at a significant premium because the Enron debacle has increased rating agency scrutiny of power company investments (resulting in higher debt costs) and because the scramble to comply has inflated the cost of NO_x control technology.

The likely bust in NO_x allowance prices will be driven by the return to a more stable financial climate for power companies, resolution of future air regulations, and falling NO_x control costs. Given the considerable regulatory and technological uncertainty, the results of the ICF Consulting analysis indicate that roughly $1 billion of NO_x control investments could be delayed in anticipation of lower-cost removal options and greater regulatory/market certainty.

Collamer says that power companies need to have a comprehensive understanding of NO_x market dynamics in order to make the right investment decisions. "The risks of over-investment can be far greater than those of under-investment. Financially stressed power companies must understand future NO_x markets to deploy successful capital deferral strategies and strengthen balance sheets."

ICF Consulting has been forecasting allowance market trends since the 1980s and began publishing the annual NO_x Market Outlook in 1998. These annual reports have proven consistently accurate year in and year out.

ICF International (Nasdaq: ICFI) partners with government and commercial clients to deliver consulting services and technology solutions in the energy, environment, transportation, social programs, defense, and homeland security markets. The firm combines passion for its work with industry expertise and innovative analytics to produce compelling results throughout the entire program life cycle, from analysis and design through implementation and improvement. Since 1969, ICF has been serving government at all levels, major corporations, and multilateral institutions. More than 1,800 employees serve these clients worldwide. ICF’s Web site is http://www.icfi.com.

For Immediate Release Contact: Douglas Beck 1.703.934.3820