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Emission Reduction and Competitive Position Strategy
Dominion’s Shareholders Bear Enormous Financial and Competitive Risks
For the electric power industry, climate change is much more than a “triple bottom line” issue. Dominion and its shareowners bear significant economic and competitive risks, while some electric power companies could also see noteworthy gains. Electricity is the nation’s second largest source of CO 2 emissions, accounting for 39 percent of total CO 2 emissions.
Economic and Regulatory Risks. Federal action on climate change is no longer a question of ‘if’ but now is a question of ‘when and how’. Senators Domenici (R-NM) and Bingaman (D-NM) are actively designing a mandatory, market-based greenhouse gas regulatory system for the electric power sector. Additionally, four states(1) are already regulating CO 2 from electric utilities, and others are considering it. Seven northeastern states(2) have agreed to a regional cap-and-trade emissions reduction program for the electric power sector, and California, Oregon, and Washington are working on a similar region-wide approach to limit greenhouse gases. This kind of patchwork quilt of state and regional regulations makes compliance costly and less certain.
Efforts to quantify the economic and competitive risks faced by electric utilities have shown:
- Losses of 24%—83% of EBITDA(3) ,(4) in companies with high-carbon fuel mixes that have not prepared for future costs of carbon emissions.
- Gains of 4%—139% of EBITDA(5) in more prepared companies with less polluting fuel mixes.
- Costs ranging from 1% - 30% of 2000 revenues(6) to comply with a proposed four-pollutant cap and trade scenario.
- Costs ranging from $2.6 to $9 billion(7) to comply with proposed federal GHG regulations for some large electric utilities (company size and fuel mix will influence cost of compliance).
Each power company’s risk varies based on its fuel mix, overall emissions footprint, investment in clean power technologies such as wind, geographic location, and general preparedness. Investors need confidence that companies are managing this risk carefully, and Dominion’s current disclosure—particularly on the company’s strategic planning and emission reduction goals—is severely lacking compared to peers.
(1) Massachusetts, New Hampshire, Oregon, Washington
(2) Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont
(3) Earnings Before Interest, Taxes, Depreciation, and Amortization
(4) Sanford C. Bernstein & Company, Bernstein Research Call. February 17, 2006.
(5) Sanford C. Bernstein & Company, Bernstein Research Call. February 17, 2006.
(6) Robert Repetto & James Henderson, Environmental Exposures, Transparency, and Strategic Management in US Electric Utility Industry. 2002.
(7) American Electric Power, Climate Risk Report. 2004.
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