Air Pollution Control Equipment Services, Emissions

Update: Coalition Files “Filthy Five” Global Warming Proxy Resolutions

Issue 2 and Volume 107.

Proxy resolutions seeking the disclosure to shareholders of potential financial liability from not reducing carbon dioxide (CO2) emissions have been filed with the five largest CO2 emitting utilities in the U.S. The filing is by a group of shareholders headed by the Coalition for Environmentally Responsible Economics (CERES), the State of Connecticut Retirement Plans and Trust Funds, and the Presbyterian Church, USA. Labeled the “Filthy Five” by the coalition, the companies are Columbus, Ohio-based American Electric Power (AEP), Atlanta-based Southern Company, Cincinnati-based Cinergy Corp., Minneapolis-based Xcel Energy, and Dallas-based TXU.

On January 16, CERES senior advisor David Gardnier spoke for the coalition at a teleconference announcing the proxy filings. As a senior official in the Clinton Administration, Gardnier directed the White House Climate Change Task Force, served as assistant administrator for policy at the Environmental Protection Agency, and was a senior member of the U.S. delegation to United Nations climate treaty negotiations, including the Kyoto meeting.

“U.S. electric utilities are estimated to cause more than a third of U.S. – and fully 10 percent of global – carbon dioxide emissions that contribute to global warming,” said Gardnier. “The five companies that we are filing with, plus the Tennessee Valley Authority, are responsible for 25 percent of electric sector carbon dioxide emissions, and are significant contributors to acid rain, soot, smog, and toxic air pollution.”

Gardnier said that heavily polluting utilities may incur legal liability, with the very real threat of future lawsuits as has been seen in the tobacco industry. “The issue is not whether we will regulate carbon dioxide emissions, but when,” he said. “And it is this coming regulation that creates both uncertainty and business risk for these electric companies. Global warming and air pollution are a significant part of each company’s financial and competitive picture.”

Although such resolutions do not typically garner large shareholder support, those filing them believe they help draw attention to social and environmental issues. In naming the five companies, the group did not consider the amount of electricity produced. TXU, for example, ranks 57th in the nation for its rate of CO2/MW generated. When asked if the companies made the list by virtue of the fact they were also among the nation’s largest utilities, coalition speakers conceded they were.

Asked if utilities seeking to engage in wind power should be required to respond to the resolution by revealing the financial exposure of large wind development site outlays that might be rejected by local communities – such as current opposition to wind turbines being located off the New England Atlantic coast – Gardnier said, “If companies view siting issues as a problem with wind energy, they could reveal this in the report that the shareholders are seeking.”

During the press conference, speakers made numerous references to Enron as an example of why potential financial risk should be projected and disclosed to shareholders. “As Enron and other scandals in the electricity industry demonstrate, the bottom line is that investors cannot discern the risk they face without disclosure that gives the full financial picture of the company,” said Gardnier.

“In my view, the lesson we must learn from Enron and the scandals that followed is that management must provide shareholders with clear and accurate information about the current and future health of the company — and this goes beyond accounting,” said Connecticut State Treasurer Denise Nappier, principal fiduciary of the $17 billion Connecticut Retirement Plans and Trust Funds.

Speaking for the Presbyterian Church USA, Jim Newland said no one is providing investors with the “holistic” picture of how overall planning including small investments in wind generation fits into company financial risk assessment and long-term business planning. “And if they’re not disclosing that picture to investors, they’re probably not looking at that full picture for themselves,” he said. Newland heads the Mission Responsibility Through Investments Committee, a watchdog for the denomination’s $8.2 billion foundation and pension fund investments. He also chairs the primary filers of the resolution at Cinergy.

Meanwhile, one of the companies targeted by the resolution, AEP, has joined the Chicago Climate Exchange (CCX), the first U.S. voluntary pilot program for trading of greenhouse gas emissions. AEP is one of 14 founding members and the first electric utility in the group.

Participation in the CCX includes a voluntary commitment to reduce the company’s greenhouse gas emissions by 4 percent over the next four years, beginning in 2003 with a 1 percent reduction from the company’s baseline emissions (defined as average 1998-2001 emissions, or about 180 million tons for AEP) and an additional 1 percent reduction each year through 2006, the last year for the pilot program. Through its commitment, AEP expects to reduce or offset an estimated 18 million tons of CO2 emissions based on current emission levels.

“Participation in the Chicago Climate Exchange allows AEP to meet a number of objectives,” said Dale Heydlauff, AEP’s senior vice president, governmental and environmental affairs. “AEP has considerable experience with existing sulfur dioxide and nitrogen oxide emissions credit markets. Our participation in the CCX is a natural next step, since it takes the market-based approaches that lowered the costs of emission reductions for the other gases and applies them to greenhouse gas emissions.

Heydlauff said that through the CCX, AEP hopes to demonstrate the viability of a multi-sector greenhouse gas-trading program. “The CCX also serves as a mechanism for the company to participate in the Bush Administration’s voluntary climate change program.”

AEP expects to meet its reduction commitment cost-effectively through a broad portfolio of actions, potentially including power plant efficiency improvements, renewable generation such as wind and biomass co-firing, off-system greenhouse gas reduction projects and reforestation projects. The company will also use direct purchase of emission credits from the CCX.