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

Critical Perspectives on Accounting 19 (2008) 466–486

Environmental disclosures: electric utilitiesand Phase 2 of the Clean Air Act

Martin Freedman a,∗, A.J. Stagliano b

a Towson University, Towson, MD 21252, United Statesb Saint Joseph’s University, Philadelphia, PA 19131, United States

Received 6 January 2006; received in revised form 1 June 2006; accepted 1 January 2007

Abstract

In 1999, American Electric Power, anticipating its future need to comply with Phase 2 of TitleIV of the 1990 Clean Air Act (CAA), spent about $37 million to purchase sulfur dioxide emis-sions 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 disclosedin 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 regardinghow the firm planned to achieve the emission standards of Phase 2. Potomac Electric Power Com-pany disclosed in its 1999 Form 10-K that it planned to spend $5 million to comply with Phase 2and would sell its remaining electric-generating plants [PEPCO, 1999. Potomac Electric Power Form10-K report]. Stakeholders and regulators might view these two “events” and wonder why there is noconsistency in disclosure concerning the CAA requirements. This is especially so given that the CleanAir Act mandates specific remedies for non-compliance and is known to have given rise to significantcapital expenditures.

In this study, we examine 1999 and 2001 CAA Phase 2 disclosures made by the owners of thenamed Phase 1 coal-fired plants to assess how they informed their stakeholders about plans for Phase2 compliance. This analysis includes the emissions, along with allocated and banked allowances foreach of the plants, so that a fair assessment can be made as to each owner’s status in terms of Phase 2.© 2007 Elsevier Ltd. All rights reserved.

Keywords: Pollution disclosure; Electric utilities; Emission trading; Emission allowances; 1990 Clean Air Act;Environmental accounting

∗ Corresponding author.E-mail addresses: [email protected] (M. Freedman), [email protected] (A.J. Stagliano).

1045-2354/$ – see front matter © 2007 Elsevier Ltd. All rights reserved.doi:10.1016/j.cpa.2007.01.006

http://www.epa.gov/ardpublic/edata.html

mailto:[email protected]

mailto:[email protected]

dx.doi.org/10.1016/j.cpa.2007.01.006

M. Freedman, A.J. Stagliano / Critical Perspectives on Accounting 19 (2008) 466–486 467

1. Background

The CAA named 110 coal-fired electric utility plants that were required to deal with theirhigh rate of sulfur dioxide emissions in Phase 1. Each of these plants received an allocationof allowances that permitted sulfur dioxide emission of 80% of the firm’s historical averagefrom the 1985–1987 period. It was expected that economically rational managements wouldchoose the least-cost method to reduce emissions to comply with the law.

Based on disclosures made during 1989 and 1990 by some of the companies impactedby the CAA, significant expenditures having negative material effects on stakeholders wereexpected (Freedman et al., 2004). Phase 1 started in 1995, and although some firms incurredmajor capital expenditures by installing scrubbers or reconfiguring generators to handlea changed fuel mix, most firms either utilized low-sulfur coal or purchased additionalallowances to deal with their sulfur dioxide emissions. In hindsight, it appears that mostfirms did choose the least costly way of reducing emissions.

Phase 2 began in 2000. Emissions levels were specifically delineated in the Act, andfirms were aware of the emissions standard they needed to achieve under Phase 2 when thelaw was enacted during 1990. Part of the Phase 1 strategy for compliance would have beento prepare for Phase 2. Some firms did make appropriate preparations. A number of firmsinstalled scrubbers and/or began to burn low-sulfur coal; these actions permitted them tobank their allowances in Phase 1 for future use (presumably, in Phase 2). Some firms at thebeginning of Phase 2 were able to reduce their emissions below the Phase 2 standard. Afew firms (like American Electric Power) purchased additional allowances on the marketfor current and future use.

At the start of Phase 2 (January 2000), of the 43 entities that owned the impacted 107power plants that were still operating, 24 had an average lbs/mmBTU greater than the 1.2standard that was needed by the end of the year.1 The consequence of this was that the firmsneeded to find alternatives to cover the shortfall (i.e., their excess emissions).

In Table 1 below, the firms, plants, 1999 sulfur dioxide emissions, and allowancesbanked/used for 2000 are provided.

The assumption that is made in calculating the allowance shortfall in Table 1 is thatthe plants will emit the same amount of sulfur dioxide in 2000 as they did in 1999. If thefirms that will be short allowances did not wish to purchase them during 2000 (allowancemarket price at the start of 2000 was $135 t−1), then they needed to reduce their emis-sions. Furthermore, a number of firms that had banked allowances in Phase 1 were goingto use up many of them to meet the year 2000 emission requirements. These firms alsowould need a plan to deal with a potential allowance shortfall in the years beginning after2000.

There are a number of firms that have excess allowances and will continue to generate netbankable (or, unused) allowances in the future. Although all firms with excess allowances inany given year hold assets and should record these allowances as valuable ownership rights(see Grinnell and Hunt, 2002), for firms with no foreseeable need to use them such assets

1 Although the allocation of allowances is based on tons of sulfur dioxide emissions, with each allowancepermitting the plant to emit 1 t of SO2, the legislative intent of Phase 2 is achievement of an average emissionslevel of 1.2 lbs/mmbtu.

468 M. Freedman, A.J. Stagliano / Critical Perspectives on Accounting 19 (2008) 466–486

Table 1Sample by firm and plant

Company and plant 1999 Emissions Allowances Potential 2000

lbs/mmBTU Tonnes BTU Total Banked Shortfall (+)

AEPW.C. Beckjord 1.62 68602 84693827 23268 19168 26166Cardinal 2.18 62092 56965138 48605 30283 −16796Conesville 2.98 144933 97270470 45744 5437 93752Gen. J.M. Gavin 0.04 20 1000000 68837 29515 −98332Kammer 5.25 104230 39706667 23971 4973 75286Mitchell 1.27 55046 86686614 38585 35055 −18594Muskingham River 3.50 100639 57508000 41070 124162 −64593Picway 4.95 9385 3791919 2128 472 6785Tanners Creek 2.16 34708 32137037 20359 107454 −93105Total 2.52 579655 4.6E+08 312567 356519 −89431

AESGreenridge 2.17 8865 8170507 5147 6724 −3006Milliken 0.59 7524 25505085 10143 17726 −20345Total 0.97 16389 33675592 15290 24450 −23351

Ipalco 99/AES 2001Petersberg 0.80 50196 1.25E+08 54094 665 −4563H.T. Pritchard 2.05 15469 15091707 5242 435 9792E.W. Stout 2.12 44580 42056604 13915 1838 28827Total 1.21 110245 1.83E+08 73251 2938 34056

Allegheny EnergyAlbright 2.35 16663 14181277 8626 3402 4635Armstrong 2.87 27596 19230662 12869 4884 9843Fort Martin 2.57 99101 77121401 35702 991 62408Harrison 0.09 6835 1.52E+08 58766 502 −52433Hatsfield’s Ferry 3.31 141872 85723263 49772 1419 90681Total 1.68 292067 3.48E+08 165735 11198 115134

AlliantBurlington 0.98 6502 13269388 4499 17815 −15812Edgewater 0.71 7980 22478873 23092 44404 −59516George Neal 0.74 21058 56913514 38832 7272 −25046M.L. Kapp 0.81 4437 10955556 5795 38964 −40322Nelson Dewey 1.89 13280 14052910 5332 13584 −5636Prairie Creek 0.75 3773 10061333 4159 20715 −21101Total 0.89 57030 1.28E+08 81709 142754 −167433

AmerenCoffeen 2.13 47611 44705164 20466 193 26952Grand Tower 4.18 12396 5931100 3030 123 9243Total 1.19 160658 2.69E+08 117990 48799 −6131

Associated ElectricNew Madrid 0.41 16433 80160976 26187 42489 −52243Thomas Hill 0.42 21126 1.01E+08 30110 21744 −30728Total 0.42 37559 1.81E+08 56297 64233 −82971

BGE/Constellation EnergyCharles P. Crane 2.37 31063 26213502 8392 58501 −35830


Table 1 (Continued )



CinergyCayuga 2.66 83462 62753383 30203 13814 39445Gallagher 3.22 49877 30979503 11795 3672 34410Gibson 1.57 140943 1.8E+08 88393 161426 −108876Miami Fort 1.64 78086 95226829 42036 31547 4503Wabash River 1.69 71381 84474556 13140 25262 32979Total 1.87 423749 4.53E+08 185567 235721 2461

CMS EnergyJ.H. Campbell 1.15 24089 41893913 45264 2410 −23585

Conectiv/Atl. City Elec.B.L. England 1.98 15302 15456566 11162 7789 −3649

Dairyland PowerGenoa 1.23 12513 20346341 8019 28678 −24184

Dominion ResourcesKincaid 0.50 23744 94976000 28578 5428 −10262Mt. Storm 2.73 104605 76633700 54839 185694 −135928Total 1.50 128349 1.72E+08 83417 191122 −146190

Dynegy/IllinovaBaldwin 5.07 245243 96742801 55620 3627 185996Hennepin 4.64 46342 19975000 9958 2497 33887Vermillion 2.44 10833 8879508 6668 2167 1998Total 4.82 302418 1.26E+08 72246 8291 221881

East Kentucky Energy CoopCooper 1.95 19882 20391795 9818 22501 −12437H.L. Spurlock 1.44 16444 22838889 26415 37610 −47581Total 1.68 36326 43230684 36233 60111 −60018

Electric Energy Inc.Joppa Steam 0.50 23744 94976000 28992 211037 −216285

Empire District AquilaAsbury 1.22 8046 13190164 6975 37145 −36074Sibley 1.60 26183 32728750 8791 5893 11499Total 1.49 34229 45918914 15766 43038 −24575

First Energy (Cnt + OH Ed)Ashtabula 5.46 22153 8114652 15232 1300 5621Burger 5.15 49189 19102524 17261 2460 29468Eastlake 4.09 115386 56423472 34273 5769 75344Edgewater (OH) 0.04 20 1000000 4004 180 −4164W.H. Sammis 1.97 98884 1E+08 72492 5234 21158Total 3.09 285632 1.85E+08 143262 14943 127427

Great Plains Egy K.C. P&LMontrose 0.55 9669 35160000 11073 8139 −9543

Henderson, KentuckyHMP&L 0.56 7073 25260714 11694 12114 −16735





Hoosier Electric CoopF.E. Ratts 2.24 17180 15339286 7253 8996 931

Kansas City MunicipalQuindaro 0.62 2411 7777419 4111 5407 −7107

KeyspanNorthport 0.49 18544 75689796 335369 57349 −374174Port Jefferson 0.47 4350 18510638 10551 21724 −27925Total 0.49 22894 94200434 345920 79073 −402099

Mid-American EnergyRiverside 0.63 1879 5965079 1745 9453 −9319

PECO ’00/MirantChalk Point 0.68 12180 35823529 37726 27450 −52996Morgantown 2.15 75520 70251163 33121 29179 13220Total 1.65 87700 1.06E+08 70847 56629 −39776

Nisource (Nipsco)Bailly 0.22 3813 34663636 11683 43042 −50912Michigan City 0.86 10512 24446512 12990 66601 −69079Total 0.48 14325 59110148 24673 109643 −119991

Northeast UtilitiesMerrimack 2.31 34799 30129004 13530 710 20559

Northern States PowerHigh Bridge 0.41 3482 16985366 7622 13359 −17499

NRGDunkirk 3.04 47567 31294079 17270 7986 22311

Ohio Valley Elec. CoClifty Creek 1.22 52676 86354098 50488 51904 −49716Kyger Creek 3.73 135529 72669705 39155 2318 94056Total 2.37 188205 1.59E+08 89643 54222 44340

Orion Power (from DQE in 2001)Avon Lake 1.68 32868 39128571 25045 3575 4248Niles 3.06 19257 12586275 6919 923 11415Total 2.06 52125 51714846 31964 4498 15663

Owensboro MunicipalElmer Smith 0.51 8402 32949020 9018 17976 −18592

Powergen/Kty Util ’00E.W. Brown 2.24 45563 40681250 20127 98749 −73313Coleman 2.36 37437 31726271 15714 6898 14825Ghent 1.25 45020 72032000 52666 129456 −137102Green River 3.65 11122 6094247 7923 3857 −658Total 1.85 139142 1.51E+08 96430 238960 −196248

PA Power & LightBrunner Island 2.00 71118 71118000 4859 4884 61375Conemaugh (many Ownrs) 0.13 7893 1.21E+08 54690 17450 −64247





Martins Creek 1.37 19529 28509489 36295 1813 −18579Sunbury (sold WPS ’01) 2.37 13578 11458228 16550 16100 −19072Total 0.96 112118 2.33E+08 112394 40247 −40523

Reliant/DQECheswick 2.55 41602 32629020 16891 7531 17180

Sithe EnergiesPortland 2.61 26319 20167816 6973 58769 −39423Shawville 2.91 51786 35591753 21067 738 29981Total 2.80 78105 55759569 28040 59507 −9442

Southern CompanyBowen 1.43 140154 1.96E+08 109781 354381 −324008Crist 1.42 45701 64367606 25866 134525 −114690Gaston 1.60 101128 1.26E+08 57811 45997 −2680Hammond 1.40 29925 42750000 27835 134888 −132798McDonough 1.59 24212 30455346 17469 76764 −70021Wansley 1.66 80707 97237349 58728 150897 −128918Jack Watson 1.75 46589 53244571 23585 32303 −9299Yates 1.34 35406 52844776 38220 228973 −231787Total 1.52 503822 6.63E+08 359295 1158728 −1014201

Springfield MunicipalJames River 0.62 5027 16216129 12039 13150 −20162

TECOBig Bend 1.89 95614 1.01E+08 44567 16561 34486

TVAAllen 0.81 13681 33780247 20596 94749 −101664Colbert 1.85 69573 75214054 41776 120440 −92643Cumberland 0.18 15921 1.77E+08 78282 465376 −527737Gallatin 2.20 84841 77128182 32872 12573 39396Johnsonville 2.82 119778 84948936 34763 19335 65680Paradise 3.56 181065 1.02E+08 48638 98428 33999Shawnee 0.70 15765 45042857 37929 24797 −46961Total 1.68 500624 5.95E+08 294856 835698 −629930

Vectran/SIGECOF.B. Culley 0.60 8634 28780000 9904 38919 −40189Warrick 3.31 36413 22001813 99281 4240 −67108Total 1.77 45047 50781813 109185 43159 −107297

Wisconsin EnergySouth Oak Creek 0.53 18128 68407547 21642 23709 −27223

Wisconsin PSCPulliam 0.43 3460 16093023 7179 782 −4501

Source of data: EPA websites available at http://www.epa.gov (Some of the data is calculated based on raw dataavailable from EPA).

http://www.epa.gov/


Table 2

Company Potential shortage Market value 1/1/00 ($millions)

Panel A: firms facing the greatest allowance shortage in 2000Dynergy 221881 29.954DQE 119696 16.159Allegheny Energy 115134 15.543Ohio Valley El 44340 5.986Teco 34484 4.655Ipalco 34056 4.598First Energy 30925 4.175NRG 22311 3.012Northeast Utilities 20559 2.775

Company Est. 2000 Emissions Allowances in 2000

Current Banked Residual

Panel B: firms potentially depleting allowances shortly after 12/31/00AEP 579655 312567 356519 89431Amereen 160658 117990 48799 6131Cinergy 423749 185567 235721 −2461Conectiv 15302 11162 7789 3649Empire District 34229 15766 43038 24575Hoosier Electric 17180 7253 8996 −931Sithe Energy 78105 28040 59507 9442

Company Surplus allowances Market value ($millions)

Panel C: firms with surplus (marketable) allowancesKeyspan 402099 54.283Electric Energy Inc. 216285 29.198Alliant 167433 22.603Nisource 199991 26.999Vectran/Sigeco 107297 14.485Associated Elec. 82971 11.201E. Kentucky Coop 60018 8.102PA P&L 40523 5.471Wisconsin Energy 27223 3.675CMS 23585 3.184Springfield Muni 20112 2.715Owensboro Muni 18592 2.510Henderson Muni 16735 2.259Kansas City P&L 7107 0.959Wisconsin PSC 4507 0.608

are investments subject to a market-based fluctuation in value. There is an expectation thatthey would be accounted for as such and disclosed in the financial statements provided tostakeholders and the SEC.

Table 2 provides the breakdown of firms by their allowance situation.Firms in the most drastic situation in terms of a potential deficiency in allowances are

included in Table 2 Panel A. In the year 2000, these companies had two choices in dealingwith their sulfur dioxide emissions: either reduce emissions or purchase allowances. In Panel


A, the cost of purchasing allowances that was known at the time the financial statementswere issued in March of 2000 is provided.

In Panel B of Table 2, firms that have a longer-term problem in dealing with emissionsare listed. These firms can still emit as much sulfur dioxide in 2000 as they did in 1999and be fully covered for these emissions. However, in the years beginning with 2001 theywould need to either reduce emissions or buy allowances. For example, American ElectricPower would still have almost 90,000 allowances even if it emitted as much SO2 as in 1999.The problem here is that the company used over 267,000 of its banked allowances; in 2001there would not be enough newly issued and banked allowances to cover emissions at the2000 year’s level.

Panel C in Table 2 shows the firms that do not need their banked allowances. The plantsowned by these firms are collectively emitting less sulfur dioxide than the annual allowanceallocation provided by the government. Therefore, every year these companies will havesurplus allowances to bank. Some states require that if these allowances are sold the proceedsmust be used to reduce the price of generated power (Wisconsin Public Service Company,2000), but most states do not have such a restriction. Whatever the case may be, these firmsare, effectively, creating an investment asset each year.

In Table 3, the emissions and allowance situation for 2001 is provided. Even with theextensive preparation time allowed in the CAA Phase 1 period, some firms may have neededtime to adjust to Phase 2. Thus, the allowance situation they faced entering 2002 may bemore indicative of the steady state situation. Although some firms have made dramaticchanges (e.g., Dynergy), many firms still need to deal with a shortage of allowances in thenear future.

From the perspective of either an investor or creditor, how these firms choose to dealwith Phase 2 is of significant interest. Many of the electric utility firms directly impactedby Phase 2 face short- and long-term decisions that have implications for future economicperformance. Disclosing these plans would help investors and creditors better assess riskand aid in projecting future returns.

In addition to investors and creditors, other stakeholders have an interest in the electricutilities’ plans to deal with Phase 2. Employees would like to know if the plans includeshutting down of plants, or reduction/increase of electricity generation at other facilities.Given the nature of the electric utility industry, with generating plants being traded almostas if in a “fire sale,” it is especially important to know how Phase 2 might contribute to thestability and salability of generating facilities.

Suppliers also may be impacted by the Phase 2 plan. If a company chooses to reduceemissions using different fuel or uses a scrubber and higher sulfur coal for example, thenthat impact would be felt by the supplier. Customers (rate-payers) are affected because evenin this time of deregulation (2000 and 2001), costs are still being passed along to them. Ifthe company installs scrubbers or buys allowances, rate-payers will be the ones who mustcover the costs. However, if the company sells excess allowances, the rate-payers may ornot benefit from this sale.

People affected by sulfur dioxide emissions—whether in the immediate community ordownwind of the pollution source—are impacted by how the company chooses to dealwith Phase 2. If the company decides to deal with emissions by purchasing allowancesand not by reducing pollution, the emissions will contribute to dirtying the air, land, and


Table 32001 emissions and allowance situation

Company and plant 2001 Emissions Year 2001allowances

Year 2001allowanceshortfall

Allowancesbanked at12-31-2001

Potential year2002 shortfall

lbs/mmBTU Tonnes

AEPW.C. Beckjord 1.93 61797 23268 38529 2641 35888Cardinal 2.20 100182 48605 51577 25331 26246Conesville 2.28 96741 45744 50997 3382 47615Gen. J.M. Gavin 0.51 46300 68837 −22537 1387 −23924Kammer 2.20 38905 23971 14934 1168 13766Mitchell 1.30 49905 38585 11320 1429 9891Muskingham River 3.65 135935 41070 94865 4082 90783Picway 4.96 9183 2128 7055 275 6780Tanners Creek 2.18 55431 20359 35072 37806 −2734Total 1.79 594379 312567 281812 77501 204311

AESGreenridge 3.15 18484 5147 13337 5 13332Milliken 0.21 2497 10143 −7646 2640 −10286Total 1.18 20981 15290 5691 2645 3046

Ipalco 99/AES 2001Petersberg 0.64 42000 54094 −12094 26553 −38647H.T. Pritchard 2.08 16462 5242 11220 654 10566E.W. Stout 2.14 43053 13915 29138 1047 28091Total 1.08 101515 73251 28264 28254 10

Allegheny EnergyAlbright 2.46 21540 8626 12914 500 12414Armstrong 3.01 30876 12869 18007 400 17607Fort Martin 2.42 79661 35702 43959 1000 42959Harrison 0.11 7137 58766 −51629 1199 −52828Hatsfield’s Ferry 3.33 185496 49772 135724 1800 133924Total 1.88 324710 165735 158975 4899 154076

AlliantBurlington 0.69 4968 4499 469 15471 −15002Edgewater 0.67 17892 23092 −5200 54118 −59318George Neal 0.72 39217 38832 385 4883 −4498M.L. Kapp 0.67 4269 5795 −1526 30858 −32384Nelson Dewey 1.88 12116 5332 6784 3299 3485Prairie Creek 0.66 4549 4159 390 15560 −15170Total 0.77 83011 81709 1302 124189 −122887

AmerenCoffeen 1.91 37687 20466 17221 5573 11648Grand Tower 0 1 3030 −3029 1638 −4667Labadie 0.55 44229 66987 −22758 5178 −27936Merodosia 3.11 22421 7192 15229 7704 7525Sioux 1.44 39741 20315 19426 2774 16652Total 1.07 144079 117990 26089 22867 3222

Associated ElectricNew Madrid 0.39 14509 26187 −11678 11895 −23573Thomas Hill 0.40 18924 30110 −11186 11458 −22644Total 0.40 33433 56297 −22864 23353 −46217







lbs/mmBTU Tonnes

BGE/Constellation EnergyCharles P. Crane 1.30 32051 8392 23659 324 23335

CinergyCayuga 1.74 58827 30203 28624 2955 25669Gallagher 3.13 47511 11795 35716 2376 33340Gibson 1.58 148331 88393 59938 14914 45024Miami Fort 2.28 73539 42036 31503 3190 28313Wabash River 2.26 52777 13140 39637 1443 38194Total 1.92 380985 185567 195418 24878 170540

CMS EnergyJ.H. Campbell 0.87 43513 45264 −1751 17445 −19196

Conectiv/Atl. City Elec.BL England 1.69 13944 11162 2782 279 2503

Dairyland PowerGenoa 1.29 12116 8019 4097 12031 −7934

Dominion ResourcesKincaid 0.54 17805 28578 −10773 854 −11627Mt. Storm 1.62 73452 54839 18613 25794 −7181Total 1.17 91257 83417 7840 26648 −18808

Dynegy/IllinovaBaldwin 0.40 23130 55620 −32490 775 −33265Hennepin 0.46 4173 9958 −5785 3287 −9072Vermillion 0.36 15114 6668 8446 1040 7406Total 0.39 42417 72246 −29829 5102 −34931

East Kentucky Energy CoopCooper 2.20 23388 9818 13570 3421 10149H.L. Spurlock 1.33 37383 26415 10968 46762 −35794Total 1.57 60771 36233 24538 50183 −25645

Electric Energy Inc.Joppa Steam 0.48 22180 28992 −6812 223393 −230205

Empire Dist./AquilaAsbury 0.40 2216 6975 −4759 43894 −48653Sibley 0.63 10530 8791 1739 1792 −53Total 0.57 12746 15766 −3020 45686 −48706

First Energy (Cnt + OH Ed)Ashtabula 1.54 11882 15232 −3350 363 −3713Burger 4.87 50657 17261 33396 573 32823Eastlake 1.90 46852 34273 12579 616 11963Edgewater (OH) 0.04 12 4004 −3992 18 −4010W.H. Sammis 1.76 115479 72492 42987 1156 41831Total 2.07 224882 143262 81620 2726 78894

Great Plains Energy./KC P&LMontrose 0.86 15174 11073 4101 5529 −1428







lbs/mmBTU Tonnes

Henderson KYHMP&L 0.53 6404 11694 −5290 5290 −10580

Hoosier Electric CoopF. E. Ratts 2.28 21423 7253 14170 524 13646

Kansas City MunicipalQuindaro 0.55 3033 4111 −1078 7422 −8500

KeyspanNorthport 0.66 25488 335369 −309881 48416 −358297Port Jefferson 0.51 4904 10551 −5647 30616 −36263Total 0.63 30392 345920 −315528 79032 −394560

Mid-American EnergyRiverside 0.62 1819 1745 74 517 −443

PECO ’00/MirantChalk Point 2.61 38442 37726 716 2269 −1553Morgantown 2.19 75335 33121 42214 3719 38495Total 2.32 113777 70847 42930 5988 36942

Nisource (Nipsco)Bailly 0.36 6076 11683 −5607 6819 −12426Michigan City 0.75 10279 12990 −2711 419 −3130Total 0.53 16355 24673 −8318 7238 −15556

Northeast UtilitiesMerrimack 2.45 38400 13530 24870 773 24097

Northern States PowerHigh Bridge 0.36 3616 7622 −4006 21528 −25534

NRGDunkirk 3.01 51131 17270 33861 1896 31965

Ohio Valley Elec. CoClifty Creek 0.96 39164 50488 −11324 3001 −14325Kyger Creek 3.31 118307 39155 79152 2500 76652Total 2.06 157471 89643 67828 5501 62327

Orion Power (From DQE in 2001)Avon Lake 1.68 33530 25045 8485 769 7716Niles 3.46 25901 6919 18982 497 18485Total 2.17 59431 31964 27467 1266 26201

Owensboro MunicipalElmer Smith 0.35 6370 9018 −2648 22586 −25234

Powergen/Kty Util ’00E.W. Brown 2.31 49106 20127 28979 39661 −10682Coleman 2.84 49120 15714 33406 3057 30349Ghent 0.77 52235 52666 −431 92788 −93219Green River 3.25 19353 7923 11430 3290 8140Total 1.51 169814 96430 73384 138796 −65412

PA Power & LightBrunner Island 1.58 44273 4859 39414 92 39322







lbs/mmBTU Tonnes

Conemaugh (many ownrs) 0.11 6453 54690 −48237 15076 −63313Martins Creek 1.47 25197 36295 −11098 50 −11148Sunbury (sold WPS ’01) 2.33 28785 16550 12235 85 12150Total 0.90 104708 112394 −7686 15303 −22989

Reliant/DQECheswick 2.53 49003 16891 32112 1039 31073

Sithe EnergiesPortland 2.63 16621 6973 9648 15 9633Shawville 2.77 42015 21067 20948 10 20938Total 2.73 58636 28040 30596 25 30571

Southern CompanyBowen 1.57 154081 109781 44300 122145 −77845Crist 1.69 45235 25866 19369 88688 −69319Gaston 1.88 120165 57811 62354 34167 28187Hammond 1.20 27016 27835 −819 135059 −135878McDonough 1.66 23584 17469 6115 59876 −53761Wansley 1.42 75650 58728 16922 144813 −127891Jack Watson 1.21 31751 23585 8166 23994 −15828Yates 1.50 44496 38220 6276 215813 −209537Total 1.56 521978 359295 162683 824555 −661872

Springfield MunicipalJames River 0.65 5262 12039 −6777 5953 −12730

TECOBig Bend 0.27 13439 44567 −31128 15518 −46646

TVAAllen 0.64 15455 20596 −5141 10122 −15263Colbert 1.81 63002 41776 21226 86436 −65210Cumberland 0.16 15550 78282 −62732 196672 −259404Gallatin 1.59 56182 32872 23310 13856 9454Johnsonville 2.25 94198 34763 59435 20395 39040Paradise 1.43 111232 48638 62594 35432 27162Shawnee 0.61 31428 37929 −6501 15140 −21641Total 1.07 387047 294856 92191 378053 −285862

Vectran/SIGECOF.B. Culley 0.73 9795 9904 −109 31391 −31500Warrick 3.12 87885 99281 −11396 12579 −23975Total 2.35 97680 109185 −11505 43970 −55475

Wisconsin EnergyS. Oak Creek 0.60 19997 21642 −1645 243 −1888

Wisconsin PSCPulliam 0.45 6474 7179 −705 749 −1454

Source of data: EPA websites available at http://www.epa.gov (Some of the data is calculated based on raw dataavailable from EPA).

http://www.epa.gov/


water. A company might reduce emissions at certain plants and still emit a huge amount(in both absolute and relative terms) of sulfur dioxide. Communities downwind from thesehigh-emission plants may be severely impacted, even though the company as a whole hasreduced its pollution.

2. Hypotheses

Disclosure of information concerning how electric generating firms plan to deal withcompliance of Phase 2 of Title IV of the CAA is important to stakeholders of impactedfirms. However, as the U.S. General Accounting Office (GAO) discovered in its recentstudy on environmental disclosures (GAO, 2004), there is little guidance as to what must bedisclosed. SFAS No. 5 requires that contingent liabilities be disclosed if they are reasonablyprobable, estimable, and material in amount. The SEC does not have a materiality constraintper se, but it does allude to the need for disclosure if a “reasonable person” would need theinformation for an investment decision.

Using the reasonable person criterion of the SEC, but recognizing that there are stake-holders in addition to investors who would find Phase 2 compliance information useful, weformulate the following null hypotheses:

H1. There is no association between the amount of sulfur dioxide emissions by firms andthe extensiveness of disclosures about Phase 2 of CAA.

H2. There is no association between firms meeting the 1.2 lbs/mmBTU sulfur dioxidestandard and the extensiveness of disclosures about Phase 2 compliance.

H3. There is no association between firms needing additional sulfur dioxide emissionallowances to meet the standard and the extensiveness of disclosures about Phase 2 ofCAA.

Why should we expect that electric utility firms would provide information about theirplans for compliance with Phase 2? In the accounting literature, several alternative theorieshave been posited as explanations for disclosure concerning firms’ environmental steward-ship. Patten (1991), Savage et al. (2000), and Lindblom (1994) all believe that one reasonfirms make environmental (or social) disclosures is for legitimation purposes. In termsof environmental stewardship, firms try to provide congruence between society’s expec-tation of environmental performance and the firm’s perceived performance. A firm in anenvironmentally sensitive industry that ignores the public’s demand for a certain level ofenvironmental stewardship is put at risk as being labeled a “bad corporate citizen.” Such acharacterization could have negative economic consequences. By managing environmentalinformation so that the firm appears to be doing well in meeting society’s environmentalgoals, the firm is seen as being legitimate. Thus, by disclosing environmental informationto meet society’s expectations the firm can avoid some negative consequences even if it hasa poor environmental record. This manipulation of information has been labeled by Savageet al. (2000) as legitimation.


Stakeholder theory (Ullmann, 1985; Roberts, 1992; Clarkson, 1995) posits that dis-closure is a function of stakeholder demand for environmental (and social) information.Management responds to stakeholders’ public pressure through the voluntary disclosure ofthe environmental (or social) information demanded. Although it is similar to legitimacytheory in that there is a reaction to public pressure, each stakeholder constituency seeksinformation that is tailored to its needs. Furthermore, stakeholder theory does not assumethat the information disclosed will necessarily be self-serving or distorted.

Electric utility companies that have not yet met the Phase 2 standard, that need to pur-chase allowances, and/or are emitting relatively more sulfur dioxide than permitted by CAAstandards will need to incur additional costs to solve these problems. From a social stand-point, these firms are all in jeopardy of being perceived as poor corporate citizens. From alegitimacy theory framework, companies that are perceived to have environmental problemsand do not disclose their plans to deal with these problems would be looked upon unfavor-ably by society. From a stakeholder theory perspective, the various stakeholder groups thatwere previously discussed would have an interest to know about the firms’ environmentalstewardship. For example, investors and creditors would be interested to know what addi-tional costs will be incurred to meet the Phase 2 requirements and whether these costs canbe passed along to the electric utility’s customers.

3. Research design

3.1. Sample selection and time period

As was stated earlier, Phase 1 targeted 110 coal-fired power plants for reduction ofsulfur dioxide emissions. These plants were among the plants that emitted the mostsulfur dioxide (in both absolute and relative terms) in the country. Although Phase 2included all the fossil-fuel power plants above 25 MW capacity level, most of the plantsincluded were quite small and emitted little sulfur dioxide (Ellerman, 2003). Of the 110Phase 1 plants targeted, 107 were still operating in year 2000 when Phase 2 went intoeffect. At the start of Phase 2, these plants were owned by 43 different entities; 11of these entities were not publicly reporting energy cooperatives, closely-held corpora-tions/partnerships, or municipalities for which full public disclosures generally are notavailable. Thus, the sample of companies consists of 32 electric utility companies and theTennessee Valley Authority, a U.S. government company that does make public financialdisclosures.

Phase 2 commenced in year 2000 with plants receiving their annual emission allowancesbased on the Phase 2 allocation formula. Plants had until the end of the year to meet the Phase2 guidelines. Disclosures made in annual reports and Form 10-Ks for 1999 should providesome indication on how these companies expected deal with the Phase 2 requirements.Therefore, 1999 is the first year for study.

Given that it may take these firms some time to decide what the implications of Phase 2 are(even though they knew as early as 1990 that it was going to occur), examining disclosuresmade in 2001 should provide for a clearer statement as to the Phase 2 implications. Thus,2001 becomes the second study year.


3.2. Emissions data, allowance data, and environmental disclosure data

Every U.S. fossil-fuel electric power generating plant is required to have installed acontinuous emissions monitoring system in each smokestack. Measurements of effluentsare obtained and transmitted to the U.S. Environmental Protection Agency (EPA). Thus,actual emissions data for sulfur dioxide by smokestack at each plant are publicly available.The EPA provides an annual compilation for sulfur dioxide emissions by plant some timeduring the year following data collection. Emissions allowance data also are available fromthe EPA; these data are by smokestack and are not compiled by plant. SO2 allowancesare traded regularly on the Chicago Board of Trade (CBT). The EPA publishes all CBTtransactions regarding emissions allowances, showing units and prices, and also compilesand publishes information on private trades of allowances that do not occur on the CBT(EPA, 2002, 2003, 2004).

Information on company disclosures concerning Phase 2 was searched for in Form 10-Ks,company annual reports to stockholders and environmental reports, as well as on variouswebsites. However, since we were looking for data that would be available some timeduring 2000 or 2002, unless the environmental reports were issued within the appropriatetime frame or the websites reflected data from the years of the study, that information wasnot included.

3.3. Disclosure index

To facilitate analysis of disclosures concerned with Phase 2 by the impacted firms, adisclosure index using content analysis was developed. The type of index constructed forthis study is based on categorizing disclosures; this content analysis technique has beenutilized in numerous environmental accounting studies (see, for example, Wiseman, 1982).There are two major issues involved in developing and implementing the disclosure index:(1) determining the categories for classification, and (2) determining the weights to giveeach category.

The issue concerned in this study is disclosures made by electric utilities to deal withPhase 2 of the CAA. To meet the requirements of Phase 2, firms had to reduce emissions oracquire enough allowances to cover their shortfall. Disclosing their current sulfur dioxideemissions, how they plan to meet the Phase 2 standards, and the future cost of implementingthe plan would enable stakeholders to properly assess the implications of Phase 2 on thefirm. Firms with current or future surplus allowances should disclose how they plan todispose of the allowances, a method for their valuation, and the carrying value of theasset.

Unlike most prior environmental accounting studies using content analysis, this studyfocuses on disclosures about only a single aspect of one major piece of environmental leg-islation. Prior studies dealt with all environmental disclosures (see, for example, Wiseman,1982; Freedman and Wasley, 1990; Patten, 1991). Focusing on just one aspect of theenvironment significantly limits what can be included in the disclosure categories.

Based on the firm’s potential responses to Phase 2, stakeholders’ needs, and the previousenvironmental studies concerned with a specific law (see, for example, Freedman et al.,2004) the following disclosure categories were developed:


(1) mention of something about Phase 2;(2) mention of emission allowances;(3) provision of quantitative information about allowances;(4) provision of dollar value for allowances;(5) provision of a plan to meet Phase 2 requirements;(6) provision of an estimate of future costs to meet Phase 2 requirements;(7) provision of other information that clarifies the compliance situation;(8) provision of sulfur dioxide emissions data.

In determining weights for disclosures, the literature provides limited guidance. Mostextant studies utilize an equal weighting scheme; the main justification for this seems to bethat it is much more difficult to defend a differential weighting scheme than one withoutweights. However, it is fairly clear in this instance that some categories of disclosure containmore information content than others. For example, disclosing details for a plan to meetPhase 2 requirements is much more informative than simply mentioning something aboutthe existence of Phase 2. There is, therefore, a compelling argument for using differentialweights. Although it is evident that specific information is more important than generalstatements, and that quantitative data usually are more informative than a narrative, it stillis difficult to determine specific metrics for each item of disclosure.

Despite the inherent limitations of justifying differential weights, the following weightingscheme is proposed for use in the present study:

Item Weight(1) Mention of something about Phase 2 1(2) Mention of emission allowances 1(3) Provision of quantitative information about allowances 2(4) Provision of dollar value for allowances 2(5) Provision of a plan to meet Phase 2 requirements 3(6) Provision of an estimate of future costs to meet Phase 2 requirements 3(7) Provision of other information that clarifies the compliance situation 1(8) Provision of sulfur dioxide emissions data 2

Maximum Score 15

We also computed the index score using equal weights by giving each item of disclosureone point (for a maximum score of eight). In the results shown below, both index-creationmodels are analyzed.

In Table 4 (Panels A and B) the total disclosures by firm for 1999 and 2001 and bothunweighted and weighted is provided. The table also includes emissions in lbs/mmBTUand the allowance situation faced by the company at year end for each year.

3.4. Mandated versus voluntary disclosure

The environmental disclosures described above fall in a gray area between disclosuresthat FAS #5 requires or the SEC “reasonable person” criterion and non-mandated disclo-sures. If the event is material then clearly it should be disclosed (FAS # 5) and if it wouldimpact the investors’ decisions regardless of materiality it should be disclosed based onthe SEC guidelines. Unfortunately, the SEC does not seem to recognize the needs of other


Table 41999 and 2001 disclosure scores

Company Unweightedindex

Potentialallowanceshortfall/(excess)

Met Std’99(yes = 1)

Emissionslbs/mmBTU

Weightedindex

Panel A: 1999 disclosuresAEP 4 (89,431) 0 2.52 7AES 0 (23,351) 1 0.97 0Ipalco 0 34,056 1 1.21 0Allegheny Energy 5 115,134 0 1.68 8Alliant 3 (167,433) 1 0.89 5Ameren 2 (6,131) 1 1.19 4BGE/Constellation 4 (35,830) 0 2.37 6Cinergy 4 2,461 0 1.37 8CMS Energy 3 (23,585) 1 1.15 7Dominion resources 3 (146,190) 0 1.5 5Dynergy/Illinova 0 221,881 0 4.81 0DQE 3 15,663 0 2.17 5Empire District 3 (24,575) 0 1.49 4First Energy 3 127,427 0 3.09 5Keyspan 0 (402,099) 1 0.49 0Mid-American Energy 1 (9,319) 1 0.63 1Pepco 4 (39,776) 0 1.65 9Nisource 2 (119,991) 1 0.48 3NE Utilities 3 20,559 0 2.31 6Northern States Power 3 (17,499) 1 0.41 7NRG 0 22,311 0 3.04 0Kentucky utilities 3 (196,248) 0 1.85 5PP&L 0 (40,523) 1 0.96 0Reliant 0 17,180 0 2.55 0Southern Co 5 (1,014,201) 0 1.52 9TECO 4 34,486 0 1.89 8Sigeco → vectren corp 5 (107,297) 0 1.77 9Wisconsin Energy 2 (27,223) 1 0.53 2Wisconsin PSC 4 (4,501) 1 0.43 6TVA 4 (629,930) 0 1.69 8Atlantic City Electric 1 (3,649) 0 1.98 1KC P&L 0 (9,543) 1 0.55 0

Mean 2.43 4.31

Panel B: 2001 disclosuresAEP 4 281,812 0 1.79 7AES 0 5,691 1 1.18 0Ipalco merged w/AES 0 28,264 1 1.05 0Allegheny Energy 5 158,975 0 1.88 8Alliant 1 1,302 0 0.77 2Ameren 2 26,089 0 1.07 4BGE/Constellation 3 23,659 0 1.3 5Cinergy 4 195,418 0 1.92 8CMS Energy 1 (1,751) 1 0.87 3Dominion resources 2 7,840 0 1.17 2Dynergy/Illinova → Ameren 0 (29,829) 0 0.39 0DQE 0 27,467 1 2.17 0Empire District 3 (3,020) 0 0.57 6



Company Unweightedindex

Potentialallowanceshortfall/(excess)

Met Std’99(yes = 1)

Emissionslbs/mmBTU

Weightedindex

First Energy 1 81,620 1 2.07 3Keyspan 1 (315,528) 1 0.63 1Mid-American Energy 1 74 1 0.62 1Pepco 1 42,930 0 2.32 2Nisource 2 (8,318) 1 0.53 3NE Utilities 3 24,870 0 2.45 6Northern States Power 0 (4,006) 1 0.36 0NRG 0 33,861 0 3.01 0Kentucky utilities 4 73,384 0 1.51 7PP&L 2 (7,686) 1 0.9 3Reliant 1 32,112 0 2.53 1Southern Co 4 162,683 0 1.56 7TECO 1 (31,128) 1 0.27 3Sigeco → vectren corp 1 (11,505) 0 2.35 1Wisconsin Energy 2 (1,645) 1 0.3 3Wisconsin PSC 2 (705) 1 0.6 2TVA 3 92,191 1 1.07 7Atlantic City Electric 0 2,782 0 1.69 0KC P&L 0 4,101 1 0.86 0

Mean 1.69 2.97

stakeholders and therefore disclosures that do not fit into either of the above needs wouldbe considered voluntary. For purposes of this study we did not classify disclosures intomandated or voluntary.

3.4.1. Research modelIn order to test the three hypotheses for each study year we constructed the following

regression model:

P2DISCit = a + B1Metit + B2ALLOWit + B3EMMit + eit

where P2DISC is the disclosure index of firm i in period t; Metit is an indicator variabletaking the value 1 if firm i met the Phase 2 standard in year t and 0 otherwise; ALLOWit

is the allowance situation for firm i during year t, if the number is positive it is a shortfall,with a negative number indicating a surplus; EMMit is the amount of sulfur dioxide thatfirm i emitted in lbs/mmBTU during year t.

4. Results and discussion

The means for the Phase 2 weighted (unweighted) disclosure indexes for 1999 and 2001were 4.31 (2.43) and 2.79 (1.69), respectively. With a maximum score of 15 (8) it wouldappear that, in general, while firms provided some disclosure in 1999 about Phase 2, theyprovided even less in 2001. At best the disclosures can be categorized as minimal.


Table 5Regression Results for 1999 and 2001 for Phase 2 Disclosures: P2DISCit = a + B1Metit + B2ALLOWit +B3EMMit + eit

Variable Equal weight model Unequal weight model

Coefficient t Statistic Coefficient t Statistic

Panel A: 1999Intercept 5.669 5.653** 9.869 4.989**

Emissions −2.103 −2.566* −1.225 −2.948**

Met Std. −3.229 −4.167** −5.659 −3.702**

Allowance −4.77E−07 0.400 −1.32E−06 −.580Adjusted R2 = 0.38 F = 7.213** Adjusted R2 = 0.33 F = 5.978** N = 32

Panel B: 2001Intercept 2.663 4.332** 4.448 3.958**

Emissions −0.566 −1.666 −.969 −1.560Met Std. −1.014 −2.031* −1.492 −1.635Allowance 8.52E−06 3.367** 1.74E−05 3.754**

Adjusted R2 = 0.35 F = 6.568** Adjusted R2 = 0.37 F = 6.954** N = 32

** Significant at the 0.01 level.* Significant at the 0.05 level.

In Table 5, Panels A and B provide the regression results for 1999 and 2001, respectively.For 1999 the results do not support the null hypotheses H1 and H2 that pollution dis-

closures are not associated with emissions or with meeting the 1.2 lbs/mmBTU standard.The results indicate that there is a negative association between the amount of sulfur diox-ide emissions and disclosures and that there is also a negative association with meeting the1.2 lbs/mmBTU standard and disclosures However, the results do support the null hypothesisH3 that the potential shortfall in allowances is not associated with disclosures.

Since firms were faced with a new phase of the CAA in 2000 that resulted in a morestringent sulfur dioxide emission standard and a reduction in annual allowances, firms mayhave wished to disclose information to reassure their stakeholders. Those companies thatemitted relatively less sulfur dioxide compared to the other firms, but had not yet met thestandard, may have felt a greater need to assure their stakeholders that the impact of Phase2 would be limited. It also could be argued that these firms may have felt that they neededto make their stakeholders aware of the future risks. However, based on the nature of theactual disclosures, this latter view does not seem to be correct. Most of the disclosures werereassuring and the plans did not indicate that stakeholders (other than rate-payers) wouldsuffer negative consequences from the firms’ compliance efforts.

Another interesting finding here is that the companies’ allowance situation was notassociated with environmental disclosures. It is possible that firms were not aware whatimpact a shortfall in allowances would have in Phase 2. That is, since allowances wererelatively inexpensive during Phase 1 the expectation might have been that purchasingallowances during Phase 2 would not put much of a burden on the firm. However, firms likeAmerican Electric Power tried to limit the risk of higher prices by purchasing allowancesin 1999 at Phase 1 prices.

Panel B of Table 5 provides the results from the 2001 analysis. The outcome for H1indicates no association between emissions and disclosure. For H2, there is a mixed result.


Using the unweighted index, there is a significant (at the 0.05 level) negative associationbetween meeting the standard and disclosure, but the weighted index is not statisticallysignificant in the model.

The results for 2001 do not support null hypothesis H3 that pollution disclosures are notassociated with the relative shortfall in allowances. Firms that will need to acquire the mostallowances in the future disclose more about Phase 2 than do the other firms. Since thesedisclosures were made after two years of Phase 2, firms are able to better assess the impactof an allowance shortfall and could more clearly convey this to their stakeholders.

5. Conclusion

Fossil-fuel burning electric utilities have been impacted by Phase 2 of the 1990 CAAthrough its requirements to reduce overall sulfur dioxide emissions to a level that is abouthalf of the previous standard. Plants most severely affected by this standard have coal-firedgenerators. Most of these coal-fired plants were targeted in Phase 1 of CAA. These are theplants and owning entities that were analyzed in this study.

The findings here show that at the start of Phase 2, 36 of the 107 targeted plants alreadyhad met the Phase 2 sulfur dioxide emission standard. By 2001, eight more plants achievedthe standard. These plants that were owned by publicly disclosing corporations and TVAcomprise the sample to assess disclosures made concerning the Phase 2 impact. Of the 32sample firms, 13 met the 1.2 lbs/mmBTU standard for their collective plants at the start ofPhase 2, and two other companies were added in 2001.

Although most of the companies in the sample needed to take some action to meet thePhase 2 standard by the 2000 start date, there was little disclosure of their plans prior tothe inception of Phase 2. Firms needed to reduce sulfur dioxide emissions and/or purchaseadditional allowances. Each of these events could be costly to the firms. Despite AmericanElectric Power spending $37 million on allowances in 1999 and Dynergy installing scrubbersin three plants—at a cost of tens of millions of dollars—in 2000, there was no disclosureof these events in the financial statements.

The study shows that in 1999 and 2001 there was some level of disclosure concerningPhase 2 of CAA, but it was not very great. The disclosure found was associated withemissions, whether the standard was met, and what the company’s allowance situation wasat year end. Since the 1999 disclosures are linked to not meeting the standard while emittingrelatively less pollution, and the 2001 disclosures are associated with the level of potentialshortfall in disclosure, no overall basis for disclosure can be determined.

What is clear from this study is that firms that face nearly the same externally imposedoperating challenges differentially disclose their status/response to stakeholders. Some ofthe disclosure can be linked to the environmental situation in which the firm finds itselfwith respect to Phase 2. In that sense, disclosure is a function of pollution performance andnot of legitimation. However, with a small sample size, an industry that is still regulated inmany ways, and a unique set of stakeholders, it is not possible to generalize a great dealfrom these findings.

Yet, disclosures by companies impacted by Phase 2, like those concerned with the impactsof other environmental legislation, is relatively poor. Despite the GAO’s protestations to the


contrary, what companies seem to perceive as voluntary environmental disclosures are notsufficient to inform stakeholders. Unless the SEC mandates specific disclosure guidelines,this set of circumstances is not likely to change.

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

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