Environmental disclosures: electric utilities and Phase 2 of the Clean Air Act

In 1999, American Electric Power, anticipating its future need to comply with Phase 2 of Title IV of the 1990 Clean Air Act (CAA), spent about $37 million to purchase sulfur dioxide emissions allowances on the spot and futures markets [EPA, 2004. Emissions tracking site for acid rain. ETS/CEMS, website: http://www.epa.gov/ardpublic/edata.html]. This information was not disclosed in the company's 1999 annual report to shareholders or in its Form 10-K annual report to the U.S. Securities and Exchange Commission (SEC). No information was included in these reports regarding how the firm planned to achieve the emission standards of Phase 2. Potomac Electric Power Company disclosed in its 1999 Form 10-K that it planned to spend $5 million to comply with Phase 2 and would sell its remaining electric-generating plants [PEPCO, 1999. Potomac Electric Power Form 10-K report]. Stakeholders and regulators might view these two “events” and wonder why there is no consistency in disclosure concerning the CAA requirements. This is especially so given that the Clean Air Act mandates specific remedies for non-compliance and is known to have given rise to significant capital expenditures.In this study, we examine 1999 and 2001 CAA Phase 2 disclosures made by the owners of the named Phase 1 coal-fired plants to assess how they informed their stakeholders about plans for Phase 2 compliance. This analysis includes the emissions, along with allocated and banked allowances for each of the plants, so that a fair assessment can be made as to each owner's status in terms of Phase 2.