The Kyoto Protocol, which went into effect this month for signatory countries, will have relatively little direct impact in the United States, other than for multi-national companies that operate in countries where the Protocol’s greenhouse gas (GHG) emission stipulations are in force. However, while regulatory action on CO2 is still some ways off in the United States, the pressure to address global warming issues in the power sector is steadily building, and this pressure is being applied by an expanding field of constituents.
This past July, for example, a group of eight state attorneys general filed suit against five utilities that emit significant quantities of CO2: AEP, Cinergy, TVA, Xcel and Southern Company. The lawsuit, which does not seek monetary damages, calls on the utilities to reduce CO2 emissions, and contends that the courts could and should order them to do so. Whether or not this type of action has a legal leg to stand on is unclear. What is clear, however, is that such actions serve as potent wedges in influencing public opinion and policy debate.
Shareholder resolutions have also become particularly prominent in recent years. In 2004, resolutions filed – or threatened to be filed – by a host of investor, religious and environmental groups, compelled AEP, Cinergy, Southern Company and TXU to agree to assess their preparedness for GHG limits. These resolutions emphasize the growing convergence of environmental risk awareness and corporate behavior. Allen Franklin, Southern Company chairman and CEO, acknowledged the critical nature of this issue: “We share the position with the shareholders that the company’s management and the Board of Directors have a fiduciary duty to carefully assess and disclose to shareholders appropriate information on the company’s possible environmental risks.”
“It’s hard to say no to disclosure,” says Dan Bakal, Director of Electric Power Programs for CERES, a coalition of investment funds and environmental organizations. “That’s why we’re seeing movement toward frank utility assessments of their exposure to GHG issues. AEP and Cinergy, which are both on record as saying that a well-designed GHG regulatory policy is manageable, almost seem to be competing for leadership on this issue.”
Leadership is probably exactly what these utilities are aiming for. Leadership confers leverage, which conceivably can be used to optimize flexibility and minimize proscriptive controls related to global warming and GHG emissions. Cinergy’s GHG report, released on December 1, 2004, summarizes the utility’s plans to proactively work with its shareholders and other interested parties in “shaping the climate change debate.” While some might read into those words an attempt to talk the talk without walking the walk, the report does contain some fairly strong language – language that supports a market-based GHG management program, reiterates Cinergy’s commitment to reduce GHG emissions 5 percent below 2000 levels between 2010 and 2012, recognizes the growing role of renewable energy, and acknowledges that current voluntary GHG emission programs will ultimately give way to mandatory programs.
If nothing else, the candid self-assessments that utilities have had to conduct in response to shareholder actions have opened their eyes to the short- and long-term dangers they face in making capital investment decisions without regulatory certainty. Prominent among such capital investment decisions are those related to upgrading aging coal plants and developing new baseload power capacity. It’s hard not to see, for example, global warming’s fingerprints on AEP’s and Cinergy’s decisions to pursue high-efficiency integrated gasification combined-cycle technology.
Public utility commissions and siting agencies are even getting involved. “A few of the coal-fired power plants currently under development around the country were required to factor into their financial analyses a cost of carbon, and I see this trend increasing in coming years,” says CERES’ Bakal. “A given power plant may look attractive financially for five years under current carbon pricing projections, but what happens if carbon prices shoot up in 10 years? These are the questions investors are beginning to ask, and power companies will need to be prepared to answer.”
The insurance industry also is beginning to apply the screws. It has been reported that Swiss Re, one of the world’s largest reinsurers, may tie directors and officers (D&O) insurance coverage to the development of a global warming management program. Meanwhile, Marsh Inc., a leading insurance broker, is working with insurers to develop insurance policies that mitigate the uncertainties associated with the evolving emissions trading market. “Many U.S. emitters that are developing three- to five-year business plans for estimating capital expenditures may be assuming that a global emissions trading program will be in place,” says Lawrence Heim, Senior Vice President with Marsh’s Environmental Risk Consulting Practice. “However, they face the risk that the trading program won’t develop in a manner that’s anticipated – for example, if Kyoto countries won’t accept a U.S. emission credit or vice versa. These are the types of business situations that complicate risk management and will drive power companies to seek new insurance products.”
Interestingly, the debate surrounding global climate change is being divorced from the scientific validity of the effect of manmade emissions on climate change. For better or worse, the question of whether mankind can materially alter Mother Nature has been pushed to the periphery.
As an engineer, this uncertainty disturbs me, but that is almost beside the point. Uncertainty is now a given in our industry, particularly with respect to environmental issues, and in this realm of uncertainty, inaction is no longer accepted as a safe path. Whether you’re being pushed or doing the pulling, being out front on the global warming debate is probably the only safe place to be. p