Indecent Disclosure

Though former New York attorney general Eliot Spitzer may be remembered for one type of indecent exposure, the current New York attorney general is promoting a more damaging type of indecent exposure for coal-fired power plant owners.

Eliot Spitzer, of this year’s Mayflower Hotel scandal fame, made his mark as New York State’s attorney general by pursuing alleged violators of the securities laws, laws that are, of course, rooted in requiring the disclosure of objective, honest information and of ethical behavior with respect to such information. On his quest to steamroll all in his path, he often made mistakes, sometime big ones, such as misusing his official right to bring criminal as well as civil charges under a New York statute, the Martin Act.

Strong-Arm Politics

Comes now his attorney general successor, Andrew Cuomo, with the same gubernatorial ambitions but with a newfound target—the utility industry. Cuomo alleges the utility industry 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 to investors via Form 10-K filings the “financial risks” implicit as a result of current and future regulatory developments and failure to disclose how coal plants, by contributing to the future consequences of global warming—including drought and rising sea levels—can impair future utility operations. 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 believe that global warming has no manmade 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 that have not been enacted. Also set aside the wisdom of requiring the depiction of how scientifically defined global trends may someday affect the reporting company. Instead, let’s focus on the substance of the real unanswered question that affects us all: What shall we do about 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. Yet it is the clear reasoned intention of carbon cap-and-trade legislation advocates to focus on both coal-fired generation emission reduction and the avoidance of new construction as primary sources for 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 even by major demand-response initiatives or targeted grid infrastructure investments. These are circumstances that will be exacerbated, in fact, if the government’s attack on foreign oil use—by promoting the use of electric cars—and on U.S. economic doldrums really do, in fact, become the subject of meaningful policy action.

Let’s Play Fair

It may be fair to argue that it is the duty of utilities to disclose potential dilemmas, where specific material consequences are reasonably foreseeable. An equal duty though, is that of government—and the political parties seeking to control it this election season—to disclose where policy may take us.

Yet, silence on this issue continues to engulf the land during this campaign season, crowded out by paeans to American ingenuity and the 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 the technical and economic feasibility of creating such solutions. 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 and storage (CCS), the great “clean black hope,” is still mostly on the drawing boards in the U.S. Except for a relatively narrow effort in the failed Lieberman-Warner legislation to reward its use, the only extant federal program is to be found in the smoking ruins of FutureGen.

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; those ideas may be adaptable to America. One would be to specifically earmark “allowances” for emissions to assist projects that 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 the issuance of some form of “CCS certificates” for projects found to have validly sequestered carbon. Those certificates would be convertible into carbon credits, which could be applied to compliance requirements. The use of such CCS certificates could subsequently evolve into something analogous to the offsets created under the Kyoto Protocol, which might be earned in developing countries as such countries introduce CCS standards.

Made in the U.S.A

These ideas could be given a variety of American twists to deal with the likelihood that projected potential revenues from increased carbon prices are unlikely to sustain the large investment needed for a U.S. CCS program. CO2 pipelines and storage might be deemed a type of infrastructure meriting federal investments in a public-private partnership, with participating utility beneficiaries. 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, that 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, forcing disclosure of carbon risk by itself, even if it were properly approached, is the wrong approach. Indecent disclosure—pinning a big red “C” on some of the players that are in need of solutions rather than just blame—is merely a delay tactic for an 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 D. Feldman is cochair of the Clean and Renewable Energy Group at the law firm of Andrews Kurth LLP. He is also a director of the American Council on Renewable Energy and cochair of the Climate Change Committee of ACORE.

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