This is part one in a two-part series that evaluates the coal ash management costs and impoundment closure plans for electric utilities and power providers in the U.S.

When North Carolina regulators ordered Duke Energy Corp. to remove nearly 100 million tons of waste produced by six of its coal-fired power plants, the utility said the directive would nearly double its previous coal ash cleanup estimate of $5.6 billion for the Carolinas.

The company is now challenging the April 1 order from the North Carolina Department of Environmental Quality to fully excavate nine leaking coal ash basins — also known as impoundments or ash ponds — at the six sites, the oldest of which entered service in 1940. Meanwhile, the state's attorney general has asked the North Carolina Supreme Court to reverse decisions by the North Carolina Utilities Commission that allow Duke Energy's subsidiaries to recover coal ash management costs, arguing that it is "unfair and unacceptable" to raise rates and "earn a profit on the cost of cleaning up the coal ash mess."

Duke Energy's obligations are not unique. With thousands of acres of coal ash impoundments nationwide expected to initiate closure in 2020 due to the U.S. Environmental Protection Agency's Coal Combustion Residuals, or CCR, rule, the question of who foots the cleanup bill remains largely unanswered.

"That's the big issue," Morningstar Research Services analyst Travis Miller said in an interview. "At the end of the day, someone has to pay for all of this, and that usually comes down to shareholders or customers."

How much will have to be paid, and by whom, is not always clear as some companies have not detailed their obligations directly related to the EPA's 2015 CCR rule. "Given uncertainties regarding the outcome, timing and compliance plans for these environmental matters, the complete financial impact of each of these rules is not able to be determined," Alliant Energy Corp., which operates utilities in Iowa and Wisconsin, said in its latest Form 10-K filing.

However, other electric and diversified utilities have disclosed more. Following the narrow passage of a shareholder resolution in May 2018 directing Ameren Corp. to report on how its coal ash waste disposal could impact the environment, the company disclosed that as of the end of 2018, its subsidiary Ameren Missouri, known legally as Union Electric Co., was facing $135 million in asset retirement obligations associated with the CCR rule. Ameren Missouri will need to spend between $150 million and $200 million through 2023 on a CCR management compliance plan, which includes installing dry ash handling systems, wastewater treatment facilities and groundwater monitoring equipment, according to an Ameren Form 10-K filing.

Vistra Energy Corp. in February reported $605 million in "coal ash and other" noncurrent liabilities as of Dec. 31, 2018. Its power generation subsidiary, Luminant Generation Co. LLC, operates coal-fired plants in the Electric Reliability Council Of Texas, Midcontinent ISO and PJM Interconnection wholesale power markets and has no end-use ratepayers from which it can directly recover costs.

"Independent power producers face a much different set of economics," Miller said.

The Trump administration has initiated a series of rulemakings to revise the Obama-era regulation, an effort Ameren said will not affect the closure schedule for the 15 ash basins in Missouri covered by the CCR rule.

'Least intrusive' but not always preferred

With 66 total CCR units spread across four states, including landfills, Duke Energy leads the U.S. in both the number of coal ash storage sites and total coal ash volume regulated by the federal rule, according to an S&P Global Market Intelligence analysis. Luminant Generation ranks second in terms of CCR units, at 55, and in total volume.

The analysis, while primarily conducted by contacting companies directly, also drew on data that environmental groups Earthjustice and the Environmental Integrity Project compiled using filings mandated by the CCR rule. Among its many requirements, the regulation requires utilities to conduct groundwater testing and post the results to public-facing websites. The EPA does not collect the resulting compliance data in its own spreadsheet, an agency representative said.

Considering total volume is important because the number of CCR units does not tell the full story, Jeff Maxted, lead environmental specialist for Alliant Energy, said in an interview. "Keep in mind that one pond owned by a different utility might be larger than all of our ponds put together."

Coal ash impoundments found to be leaking unsafe levels of pollutants such as arsenic, lead and mercury are now required to initiate closure by October 2020 after the EPA extended the deadline. Closure can be performed by fully excavating the ash and transferring it to dry landfills, capping the ash in place with a protective liner, or some combination of the two methods. In March, Earthjustice and the Environmental Integrity Project grabbed national headlines with the release of a report that found that most coal plants with available data are polluting groundwater across the country with potentially toxic substances.

Full excavation, which can require trucking millions of tons of coal ash over long distances, is generally considered the most expensive option. But environmental groups are increasingly pushing for that method in citizen lawsuits, arguing that evidence shows that removing all of the ash sitting below the water table is the only way to restore groundwater quality. Utilities say that capping the ash in place can be done safely.

"If the public is being protected and the environment is being protected, then we want to go with the option that is least intrusive … and doesn't put our customers on the hook for unnecessary billions of dollars in expenditures," Duke Energy spokesperson Bill Norton said in an interview.

Duke Energy manages about 170 million tons of ash at impoundments in North Carolina, South Carolina, Indiana and Kentucky. The company says on its website that it has excavated about 22 million tons of coal ash, with more than 5 million tons moved in 2018 alone.

A North Carolina law enacted in response to the February 2014 coal ash spill at Duke Energy's retired Dan River coal plant requires all of the company's impoundments be closed no later than Dec. 31, 2029. However, Duke Energy has warned that full excavation of nine additional "low-risk" basins in North Carolina could add an incremental $4 billion to $5 billion to its ash management costs, which would be passed on to ratepayers. The company also said this process could take decades to complete.

"And really, at the end of the day, capping is safe," Jessica Bednarcik, vice president of coal combustion products, operations, maintenance and governance for Duke Energy, said in an interview. "It is protective of people. It is protective of the environment. It protects communities by reducing the amount of time that it takes to excavate. It reduces the disruptions [these communities] see as well. It is also less expensive to our customers while being equally protective of the environment."

Meanwhile, North Carolina state Rep. Joe Sam Queen introduced legislation that would bar Duke from recovering future coal ash cleanup costs from customers. The bill faces long odds in the Republican-controlled General Assembly, but Queen, a Democrat, said in an interview that "voters and ratepayers can be pretty vocal about this."

Financial analysts will continue to account for coal ash costs and other environment-related obligations in their analyses of credit risk, Obioma Ugboaja, S&P Global Ratings' director of infrastructure ratings for U.S. regulated utilities, said in an interview.

"With respect to the latest news about Duke and the [North Carolina Department of Environmental Quality] requiring the company to fully excavate the nine basins, I think it creates a bit of concern given the extent of additional capital spending that could be required to comply with the NCDEQ's order," Ugboaja said. "There is some precedent with how they have managed to obtain cost recovery for coal ash historically. Whether this precedent can consistently be applied across all impacted jurisdictions is something that we will continue to monitor."

In addition to the legal action brewing in North Carolina, Duke Energy could appeal decisions in rate cases for its South Carolina utilities that reduced their return on equity and disallowed recovery of certain coal ash costs.

States begin to set limits

Illinois lawmakers sent a bill to Gov. J.B. Pritzker in May that would shield taxpayers by requiring coal plant operators to set aside cleanup funds while imposing fees on them to pay for a state-run coal ash management program. The legislation would also require power plant operators to analyze the costs and benefits of full excavation versus capping the ash in place.

Frank Holleman, a senior attorney with the Southern Environmental Law Center, expects to see the number of full excavations increase as communities become more aware of the public health and environmental risks associated with coal ash.

Holleman cited the recent decision by regulators in North Carolina — Duke Energy's home state — as one example. The attorney also noted that Dominion Energy Inc., which has traditionally played a key role in shaping energy policy in Virginia, decided not to oppose legislation signed into law in March requiring the company to excavate and recycle coal ash from unlined impoundments at four power plants in the Chesapeake Bay watershed.

"The public concern and the overwhelming evidence of serious pollution in waterways are swamping the massive political influence utilities have in state capitals," Holleman said in an interview.

Under the Virginia bill, at least 25% of the ash would be recycled for beneficial use, and the rest would be stored in lined landfills. The agreement also would limit removal costs that Dominion Energy Virginia can recover from ratepayers to $225 million in any given year.