Giant U.S. utility American Electric Power will spend more than $4.6 billion to comply with a landmark settlement to reduce emissions from its coal plants that cause acid rain and haze, the Environmental Protection Agency said on Tuesday.

AEP disputed the figure, which the agency did not detail, and said that it had been spending billions to clean up for years before the deal. Wall Street barely reacted. The EPA called the agreement the single biggest environmental enforcement settlement in U.S. history, as Ohio-based AEP agreed to end an eight-year lawsuit brought by the federal government. "This is a landmark, an unprecedented case, in the annals of air pollution regulation in the United States," said Granta Nakayama, assistant administrator of enforcement at the EPA.

It was not immediately clear how the EPA calculated the $4.6 billion compliance estimate, or if it includes billions of dollars that AEP has already spent to reduce emissions. The previous investment record was when Virginia-based Dominion Resources Inc agreed in 2003 to spend $1.2 billion on pollution controls in an EPA settlement.

In its deal, AEP agreed to pay $15 million in civil penalties and $60 million in pollution cleanup costs to end the "new source review" case brought by the Justice Department in 1999. AEP, whose fleet of coal-fired power plants form the backbone of the Midwest's power grid, agreed to cut soot and smog emissions by 813,000 tons a year when the agreement takes full force in about a decade.

AEP spokesman Pat Hemlepp disputed the $4.6 billion figure and pointed out that the number did not appear anywhere in the consent decree filed in a U.S. district court in Ohio on Tuesday. The 121-page settlement came the day that a trial was scheduled to begin.

EPA's Nakayama called the $4.6 billion figure "a solid and conservative number," and said it would probably end up higher because it does not include operating costs. "It's fair to say that those things were not in the plans in 1999 when this case was first brought," Nakayama said.

"We are doing these projects to comply with existing or upcoming environmental regulations, not because of some sort of requirement in the settlement agreement," Hemlepp countered. AEP has spent $2.6 billion since 2004 to install pollution-control equipment at coal-fired plants in Kentucky, Ohio, Virginia and West Virginia, and will spend more than $5.1 billion fleetwide by 2010 on emission controls, Hemlepp said.

SHARES EDGE UP
The company's shares firmed in afternoon trade, rising 0.9 percent to $48.13, off an earlier high at $48.22, on the New York Stock Exchange. "In a way it's expanding substantially their base," said Dahlman Rose analyst Daniele Seitz. That is because utilities can recover equipment and upgrade costs from their customers and earn set profits from state regulators, Seitz said.

Environmental groups applauded the settlement. John Walke, an attorney at the Natural Resources Defense Council, said it "puts big polluters on notice that they can no longer run and hide from their actions or circumvent the Clean Air Act." It is unclear how the AEP settlement will impact three other companies that face similar lawsuits - Southern Co, and Duke Energy and Cinergy - which have since merged into a single company.

(By Chris Baltimore, Lisa Lee and Matt Daily, Reuters, 09/10/2007)