Expanding on Cinergy’s plans to reduce emissions ahead of regulatory requirements, CEO James Rogers said the Midwestern company that serves 1.5 million customers and burns 30 million tons of coal per year will continue to face environmental and capacity addition issues.

Looking at the marketplace that Cinergy currently faces, Rogers said they are really the only two issues that will “come back over and over again.” Speaking at Merrill Lynch’s Power and Gas Leaders Conference on Tuesday, the exec outlined the company’s proposed solutions, which were first unveiled in early September.

“If you look back over the last four years, what we have really tried to do is keep [the company] in the middle of the road,” said Rogers. “While many people have veered off of the road into the ditches, our focus has been to keep it in the middle.” Noting that Cinergy sits on a fault line when it comes to regulation, Rogers pointed out that its business in Ohio has been through restructuring while in Indiana and Kentucky the company continues to be regulated.

“It is a pretty interesting challenge sitting there on the fault line trying to design policies that work, not only in a regulated environment…but also in an environment that has been restructured. That is going to be a challenge going forward.”

Rogers noted that the company is currently awaiting action from the Public Utilities Commission of Ohio regarding a settlement the company entered into with many of its customers. Rogers said the rate stabilization settlement is a result of Ohio’s unreadiness to move to a competitive market.

On Wednesday, PUCO modified and approved a stipulation that will establish a rate stabilization plan for Cincinnati Gas & Electric Co. (CG&E). In May, CG&E, PUCO staff, FirstEnergy Solutions Corp. and several other entities filed a signed stipulation with the PUCO. As outlined in the stipulation, CG&E would charge a fee to its customers called a rate stabilization charge (RSC). The RSC could be avoided by the first 25% of each of CG&E’s customer classes that switch to a certified retail electric supplier.

Rogers added that the state’s unreadiness is easily attributable to the current environment, where natural gas and coal prices are up and there is “more pressure pushing up than down.”

Rogers noted that state regulators are concerned about who is going to build the next generation of power plants. “We all know that the probability that [they will be] gas plants is pretty low, because at no time in our history have we been so dependent on gas-fired generation as we have been for the last 10 years. Almost 90% of the generation that has been built in our country [during that time] has been gas-fired generation.”

Rogers said the likelihood of building natural gas-fired plants is also very low given the current gas prices. “Even if the prices come down, I believe that from a long-term standpoint it is not good public policy to continue to push for additional gas-fired generation in this country.”

With 250-300 years of U.S. coal reserves, Rogers said the key is to find a way to use coal in an environmentally responsible manner. “One of the great challenges that we have is how do you operate in a world where the rules with respect to mercury and SO2 are not yet clear,” he said. “I am a firm believer that the restrictions on the emissions of power plants is only going to increase in the future; the only issue is the timing.”

As a result, Rogers said Cinergy has recently filed a comprehensive least-cost compliance plan with the Indiana Utility Regulatory Commission, under which the company proposes to start a process of building scrubbers and implementing selective catalytic reduction before the regulations actually require it.

“Over the course of the life of the assets where we do this retrofit work, our belief is that it will be the least-cost way to do compliance and ultimately the laws will move into a place where the restrictions that we are imposing on our emissions will match up,” he said.

Rogers said this least-cost plan that leads to over-compliance for some period is the best plan for consumers over the next five to 15 years. “We are looking at investing roughly $1.65 billion to $2 billion to reduce emissions from our plants.”

Rogers said Indiana and Kentucky have “very user-friendly” environmental compliance regulations in terms of cost recovery. However, Ohio is uncertain. “We will know more after we see the order [Wednesday] and we will know more in 2009 with respect to our ability to recover those costs in Ohio,” he said.

From Cinergy’s standpoint, the company believes it is roughly 1,000 MW short looking into the future. Commenting on the company’s recent Indiana rate case where it was able to increase its rate base in the state by $1.3 billion to add capacity and recover significant environmental expenditures, Rogers said his belief is that Cinergy will face those same challenges in the future. “The challenge is to find a way to increase rates incrementally over time rather than have huge increases,” he said.

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