Climate Change Initiatives and The Bottom Line

What SEC reports reveal about the impact of legislation on power producers

by Tom Mounteer and Michael Lukens

One source of information about power producers’ perspective on the financial impact of climate change initiatives is the reports the companies file with the Securities Exchange Commission (SEC). Companies whose shares are traded on public stock exchanges and certain other companies must file disclosures with the SEC that, in part, provide investors with management’s perspective on the financial impacts of future developments. Over the past few years, public interest groups and shareholder activists have put this aspect of power producers’ SEC reports under the microscope.

Around the time this Industry Report is published, most affected companies will file their reports with the SEC for the just-ended fiscal year. Those reports might reveal some effect of this outside pressure. The legal framework governing the contents of the reports and the still-evolving climate change policies make it unlikely that the reports will contain the specificity that activists seek.

While specificity may not yet be possible, SEC reports for the previous full fiscal year and for the first three quarters of the past fiscal year start to signal disclosures to come. They begin to tell the story of how power producers see these evolving laws affecting their bottom lines.

Securities reports

Before getting into what these SEC reports have already revealed about how power producers see climate change initiatives affecting their bottom lines, it may be useful to provide a little explanation of the context in which they are made.

SEC rules require affected companies to file quarterly and annual reports. One rule requires disclosure of the material effect of capital improvements needed to comply with environmental law. Another rule requires a description of trends likely to affect the company’s liquidity or capital expenditures. The intent of this rule is to provide investors with an opportunity to look at the company through the eyes of management.

Six years ago, public interest groups began poring over power producers’ SEC reports to examine climate change disclosures. One early advocate of more disclosure alleged hypocrisy if companies were alleging grievous hardship to fend off Congressional action while not disclosing financial hardship in their SEC reports. Since then, the call for more robust disclosure has grown louder. Congress ordered an investigation of SEC policy toward enforcing climate change disclosures. In September 2007, a coalition of investors and environmental public interest groups, joined by New York’s Attorney General, petitioned the SEC for more definite rules governing climate change disclosures.

Against that backdrop, it is interesting to mine SEC reports to see what power producers have disclosed about the financial effects of evolving federal climate change policy, developing regional initiatives, and how fleet composition affects the impact of climate change initiatives.

Federal policy

The precise contours of eventual federal climate change legislation remain to take shape, but despite that uncertainty, one might nevertheless expect to find more robust disclosure of the impact on power producers in their 2007 SEC reports. Certainly that is something that public interest groups and activists seek. During 2007, consensus appears to have coalesced around an economy-wide cap-and-trade program. One inevitable effect of any such program—regardless of the flexibility built into it—is to constrain CO2 emissions, thus driving up costs. As a result, one might expect acknowledgement of that cost effect.

In our informal and limited survey of the 2007 SEC reports of leading power producers’ disclosures regarding climate change, we found only one company that acknowledged that the effect of a future federal law could be “substantial.” Consolidated Edison made that disclosure more than a year ago.

That is not to say that power producers’ SEC reports ignore Congressional consideration of climate change legislation. Indeed, in reports filed over the past year, possible federal legislation is the most frequently mentioned aspect of climate change. Most of the disclosures, however, simply state that it is not possible to predict how potential future legislation will affect the company’s business.

The upcoming presidential election looms large, of course, in all of this. Few expect federal climate change law to be enacted under the current administration. The legal context in which companies make disclosures in their SEC reports does not compel speculation about the impacts of potential policies that have not yet taken form.

Regional initiatives

Three regional climate initiatives do apply—or will soon—to power producers: the Regional Greenhouse Gas Initiative (RGGI), the Western Climate Initiative (WCI), and the Midwestern Greenhouse Gas Accord (MGGA). Because regional programs have more definite form than federal policy, companies with operations in affected regions have had more specific things to say about the effect of those initiatives. As RGGI is the most fully developed program (model rules became final in January 2007), companies’ disclosures about its effect have been the most frequent.

Disclosures about RGGI’s effects have taken a variety of forms. Old Dominion Electric Cooperative, which operates in states where RGGI is in force, acknowledged that RGGI may impact its electricity generating units but stated generally that it “cannot exclude the possibility that future CO2 emission regulations could have a significant effect on our operations.”

Other affected power producers have been more explicit about the effect of RGGI on their operations. Mirant’s September SEC report contained not only a full and detailed description of RGGI but also stated that the cost of upgrading its plants or buying credits could have a “material affect” on its operating costs. Mirant also stated that complying with RGGI may result in higher market prices to offset operating cost increases. Earlier in the spring, Calpine acknowledged that RGGI will affect its operations in Maine, New York and New Jersey and that proposed auction rules in New York will increase costs the most.

The early stage of development of the WCI and MGGA initiatives likely accounts for the lack of widespread disclosure about their effects. Our search identified only one company addressing WCI and one company addressing MGGA in their SEC reports. Last year, Arizona Public Service acknowledged the possibility of regulation under the WCI but, without final rules, did not predict WCI’s effect on its operations. Commonwealth’s February 2008 report acknowledged MGGA’s existence and the fact that it may impact Commonwealth plants if and when it is finalized.

Fleet composition

It comes as no surprise that the composition of a power producer’s fleet of generators affects what it discloses about the effect of climate change initiatives.

In their reports to the SEC, power producers with fewer coal-fired plants in their fleets like to tout that they may be relatively better off than others in their sector if federal legislation is enacted. Calpine’s filing last spring boasted of its “relatively clean portfolio of power plants as compared to our competitors.” Power producers that rely more heavily on coal try to put the best possible face on the situation. For example, Consolidated Edison’s filing last spring spoke of minimizing greenhouse gas emissions through, among other things, application of cogeneration technologies.

When it comes to climate change, nuclear wins hand down compared to fossil fuels and SEC reports reflect that. Entergy’s filing at this time last year noted that its “overall CO2 emission “Ëœintensity,’ or rate of CO2 emitted per kilowatt-hour of electricity generated, is already among the lowest in the industry” due, in part, to the nuclear component of its fleet.

Power producers’ SEC reports filed around the time this is published may disclose even more about how companies foresee climate change initiatives affecting their bottom line. From what we have seen before, the foundation has been laid for more robust disclosure as these initiatives take more definite form. Certainly we can expect the same public interest groups and shareholder activists that have clamored for more disclosure to keep after the sector for even greater disclosure.


Tom Mounteer is a partner in Paul Hastings’ Washington office and co-chairs the firm’s environmental practice. Since 1997, he has been an adjunct professor in environmental law at the George Washington University Law School. Michael Lukens is an associate in the environmental practice.


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