by Roger Feldman --
Andrews Kurth, LLP
Eliot Spitzer, of this year’s Mayflower scandal fame, made part of his mark as New York State’s Attorney General by pursuing alleged violators of the securities laws, laws which are, of course, rooted in the disclosure of objective honest information and of ethical behavior with respect to such information. On his quest to steamroll to the governorship, sometimes he turned out to be mistaken, sometimes significantly, and often he was criticized for his tactics, which included using his official right to bring criminal as well as civil charges under a New York statute, the Martin Act.
Comes now his Attorney General successor, Andrew Cuomo, with the same gubernatorial ambitions but a new found target--the utility industry--which he alleges has committed a new crime, also characterized as securities disclosure; it involves power generation in compliance with existing environmental standards, and using (gasp!) coal. The allegations are portrayed as failure to disclosure “financial risks” implicit as a result of regulatory developments and further, failure to disclose how coal plants, by contributing to the future consequences of global warming--drought, rising sea levels--can impair future utility operations as well. Last month one of five defendants in the matter, Xcel Energy, caved to this pressure and agreed to disclose more.
You don’t have to be a believer that global warming has no man-made origins (indeed you can be a proponent of effective government policy in this area) to be concerned that carbon policy making by subpoena and press release is a bad idea. Worse, it obscures the underlying serious issues that confront America in dealing with the national challenge to utilize coal while controlling greenhouse gases.
Let’s leave aside completely the procedural and substantive nuances of prosecuting a public securities issuer for the failure to disclose the consequences of laws which have not been enacted, or as to the wisdom of requiring depiction of how scientifically defined global trends may someday affect the reporting company. Instead let’s focus on the substance of the real unanswered questions that affect us all: the coal/carbon challenge.
Every responsible energy forecaster has raised the red flag that coal-fired generation is, at a minimum, a key component of the U.S. mix for at least the next few decades. It is the clear reasoned intention of carbon “cap and trade” legislation to focus on both coal-fired generation emission reduction, and avoidance of new construction, as primary sources of total emissions reductions. Thus, at a time of projected power shortages and rising consumer prices (including presumably utility pass-through of what may better be understood as a “coal use” tax), we are creating a real world energy scenario that cannot be blown away by windmills or shrunk beyond likely concern, even by major demand response initiatives or targeted grid infrastructure investments. These are circumstances which will be exacerbated, in fact, if the government’s attack on foreign oil use--use of electric cars--and on U.S. economic doldrums really do, in fact, become the subject of meaningful policy action.
It may be equitable to urge that it is the duty of utilities to disclose potential dilemmas, where individual firm consequences are reasonable foreseeable. Equally fundamentally though, it’s the duty of government--and the political parties seeking to control it this election season--to disclose where policy may take us and to stimulate responses, private and public, to do something about it.
Yet, relative silence continues to engulf the land during this campaign season, crowded out by paeans to American ingenuity and ability to rise to the new energy challenges. The U.S. focus needs to turn to innovative environmentally acceptable coal-based solutions. Significant issues remain regarding technical and economic feasibility of doing so. The current virtual absence of programs to support such innovations is the “disclosure” that political platforms would have to make, if even modest securities disclosure standards were applied to the candidates. For example, Carbon Capture & Storage (“CCS”), the great “clean black hope,” is still mostly on the drawing boards in the United States. Except for a relatively narrow effort in the failed Warner Lieberman legislation to reward its use, the only Federal program currently extant is to be found in the smoking ruins of Future Gen.
Is there something substantive that can be done to support such development efforts, besides praying for scientific rain? On the regulatory side, the germs of some significant ideas are coming out of the European Parliament, which may be susceptible of adaptation to America. One would be to specifically earmark “allowances” for emissions to assist projects which sequester carbon, until such time as the CCS industry becomes economic and established. These allowances could help finance needed CCS infrastructure, such as CO2 pipelines and storage.
A second proposal would be to initiate issuance of some form of “CCS Certificates” for projects found to have validly sequestered carbon, which certificates would be convertible into carbon credits which could be applied to compliance requirements. It is contemplated that the use of such CCS Certificates could subsequently evolve into an analog to other offsets under Kyoto, which might be earned in developing countries as such countries introduce CCS standards.
These ideas could be given a variety of American twists, to deal with the likelihood that projected potential revenues from increased carbon prices are not likely to sustain the large investment needed for a U.S. CCS program. CO2 pipelines and storage might be deemed a type of infrastructure in which Federal investments in a public-private partnership with participating utility beneficiaries was created--in effect, the carbon “Big Inch.” Canada, for example, which has many enhanced oil recovery possibilities tied to CCS, has been more inclined to view the needed pipeline as “infrastructure” supporting economic growth. Or, suppose alternatively, utilities and other coal conversion project sponsors could qualify for usable domestic “offsets” as a part of the new “cap and trade” legislation (an idea somewhat analogous in purpose to loan guaranties in the nuclear plant guaranty context.)
In sum, disclosure of carbon risk by itself, even when properly approached, is not enough to deal with the serious energy engineering/economic issues presented. Indecent disclosure--pinning a big red “C” on some of the players in need of solutions--is merely diverting camouflage for absence of the hard serious thinking America needs today. While carbon “cap and trade” legislation is being formulated in America, it is necessary to think about how to make it work, consistent with all of our public interests.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.