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Duke Energy Corp (DUK), Edison International (EIX): Top Utility Companies Will Survive EPA’s Regulatory Agenda

The EPA is set to unleash a host of new regulations that will impact the energy sector, and top utility companies in the U.S. are facing hurdles that will ultimately drive up the cost of supplying energy.

As has widely been reported, the Environmental Protection Agency has been hammering away behind the scenes to build a new energy sector regulatory infrastructure. This includes plans to enhance restrictions on greenhouse gases, implement tougher clean water guidelines, and tighten ozone standards.

EPA regulatory agenda for 2013

Obviously protecting the environment so that we live in a cleaner world is a good thing. But the question remains as to whether the EPA’s ambitious agenda is the best way to get there. And whether a sufficient cost/benefit analysis was undertaken in planning this brave new world is uncertain. In fact, there is a growing debate on this point.

Some observers contend that the costs far outweigh the benefits, especially when the U.S. economy that runs on fossil fuels is still trying to get its sea legs in the wake of the economic tsunami of 2008.

In particular former General Electric head honcho Jack Welch blasted the Obama administration in a recent appearance on CNBC’s Closing Bell. He declared that the U.S. energy boom could mean another century of economic dominance for the Country. But the stringent new rules are an impediment.

“We can’t keep throwing sand in the gears of the economy,” said Welch.

Greenhouse gas regulations

The EPA is proposing so-called first source-specific emissions standards for new oil refineries and coal fired power plants. And a recent story in paints an ominous picture of these standards. Their argument is that the agency’s proposed rules for new power plants “are so strict they will eliminate coal as an option for future electric power generation.”

However, the standards do not apply to existing power plants as well as refineries. But they contend that the agency will forge ahead once the new standards are in place by relying on the Clean Air Act (CAA) to issue revised regulations. In sum, the rules will apply to the utility sector as well as a number of other industries, including oil refineries. In short, many aspects of the American energy sector will be “constrained by strict bureaucratic permitting requirements.”

The bottom line: the stricter standards will further drive up electricity and gasoline prices once they are implemented. And the new rules are projected to cost more than $300 to $400 billion a year, and will significantly raise the prices of gas and energy for consumers.

Can top utility companies survive new EPA standards?

The challenge facing top utility companies is whether they will be able to adapt to these standards by further developing enhanced technologies that allow for cleaning burning coal. They will also need to convert to natural gas and alternative resources to fire up their plants. The EPA mandates will require utility companies to finance the transitions. These costs will ultimately be passed on to consumers, provided the regulators approve inevitable rate hikes.

The new mandates will affect leaders like Duke Energy Corp (NYSE:DUK), Edison International (NYSE:EIX) and The Southern Co (NYSE:SO).

Duke Energy along with its subsidiaries operates in the United States and Latin America. The company is comprised of three segments: U.S. Franchised Electric and Gas, Commercial Power, and International Energy. The US segment has a market cap of $49.01 billion. The company has a P/E ratio of 16.1, and shares are up by almost 10% this year.

Analysts also note that the company is solid in a number of ways including its healthy revenue growth, increase in net income, reasonable debt levels, and increase in its share during the past year.

Edison International is another of the top ten utility companies and its stock has been a solid performer in 2013. In fact Edison hit a new 52-week high this week and average volume has been 2.4 million shares over the past 30 days. The company has a market cap of $16.35 billion and shares are up about 12.2% year to date.

Southern Company has already starting taking steps to meet the new standards. One of its subsidiaries, Georgia Power, recently announced it intends to seek approval from Georgia regulators to retire 15 coal, oil, and natural gas-fired power plants due primarily to the high cost of meeting stricter federal environmental regulations.

But closing these plants will be less costly than opening new ones given the currently low natural gas prices brought on by a boom in reserves that can be tapped because of improved technologies.

In the final analysis, despite the pending standards the utilities sector should continue to perform well in 2013 according to a consensus of some analysts. But beyond that the future is uncertain.

The article Top Utility Companies Will Survive EPA’s Regulatory Agenda originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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