Authors
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.
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
by Tom Mounteer and Michael Lukens
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, compa-
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