News & Knowledge
Public Utility Disclosure of Impending Regulatory Changes for Coal Ash By Product Storage
Douglas A. Henderson
Hollister "Holly" A. Hill
Eric A. Koontz
EPA’s New Coal Regulations Imminent
On December 17, 2009, the United States Environmental Protection Agency (“EPA”) issued a press release that its pending decision on regulating coal ash by products (“CCB”) from power plants that was expected in December would be delayed for a short period “due to the complexity of the analysis the agency is currently finishing.” Testifying at her Senate confirmation hearing on January 15, 2009, Lisa P. Jackson, the EPA administrator, promised to assess hundreds of CCB sites immediately at power plants across the country and said the agency will reconsider ways to regulate the ash and how it is stored. The delay follows numerous reported meetings by Cass Sunstein, the director of the Office of Information and Regulatory Affairs within the Office of Management and Budget (“OMB”), with industry groups beginning in October to discuss the potential impact of proposed EPA rules to treat coal ash as hazardous waste after the EPA reportedly sent its proposed rule to the OMB for review.
For this issue, the ultimate question is whether EPA and the states will regulate coal ash as a “hazardous waste” under the federal hazardous waste law, the Resource Conservation and Recovery Act (“RCRA”). Since 2000, EPA has regulated coal ash as a non-hazardous solid waste, and power producers have not been required to comply with the host of technical and expensive “hazardous waste” requirements. Information from several sources late in 2009 indicates that EPA was considering a “hybrid” rule that will (a) treat coal ash destined for beneficial reuse as a non-hazardous waste, and (b) treat coal ash destined for storage in ash ponds or surface impoundments as a “hazardous waste,” subject to many of the requirements of the RCRA hazardous waste framework.
Under the Administrative Procedure Act, EPA would typically announce its proposed rule and provide a comment period of 30 to 60 days during which interested parties would submit comments, and after which the agency would publish its final rule in the Federal Register. Once the final rule comes out, it is likely to be challenged by industry participants and/or environmental groups, and it may not be final for a year or more. Many observers are predicting additional litigation over the health and environmental effects of existing products containing coal ash, no matter what the proposed regulations require.
Current Framework for Disclosure in SEC Filings
As utilities are preparing their annual reports on Form 10-K for the year ending December 31, 2009, they must develop a disclosure strategy under the current framework of the rules and regulations of the Securities and Exchange Commission (the “SEC”), taking into account the industry acknowledgement that a federal hazardous-waste ruling could impose logistical challenges and potentially add substantial new costs. The securities question is whether these regulatory developments require disclosure, and when.
On January 27, 2010, the SEC issued an interpretive release on climate change disclosure, in part prompted by the attention drawn to the issue by several large institutional investors who petitioned the SEC to undertake a review of climate change disclosure obligations. In addition, the SEC's October 2009 Staff Bulletin disallowing exclusion of certain shareholder proposals addressing climate change risks created a new mechanism whereby environmental groups could force a utility to disclose its position on climate change, a regulatory environment that remains in great flux and without uniform regulation. From this, there will likely be a similar movement requesting the SEC to issue guidance about the disclosure of coal ash storage, in light of the EPA’s anticipated ruling and the great publicity that this topic has received following the coal ash dike rupture at Tennessee Valley Authority’s Kingston plant in December 2008.
The SEC’s current framework for public company disclosure provides several places where companies anticipating material effects from coal ash storage regulation to address these potential risks.
Item 101 of Regulation S-K: Item 101 provides for a general description of a company’s business and requires disclosure as to “the material effects that compliance with federal, state and local provisions… regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the company.” This section also may require disclosure as to the anticipated impact of future environmental regulation.
Item 103 of Regulation S-K: Item 103 requires disclosure as to “any material pending legal proceedings, other than ordinary routine litigation incidental to the business.” The instructions to Item 103 state that disclosure is required regarding “an administrative or judicial proceeding … arising under any federal, state or local provisions... regulating the discharge of materials into the environment… for the purpose of protecting the environment.” Companies who have been notified of such legal proceedings should consider whether they are material and thus trigger disclosure.
Item 303 of Regulation S-K: Item 303 provides for management’s discussion and analysis of the company’s financial condition and requires disclosure of “known trends or uncertainties” that a company believes will result, or are reasonably likely to result, in material changes in the company’s liquidity, net sales, revenues or income from continuing operations.
Item 503(c) of Regulation S-K: Item 503(c) provides for the disclosure of risk factors that make investments in the company speculative or risky to the extent that they are not generally applicable to any issuer.
Risks and Benefits to Disclosing Early
If coal ash is regulated as a hazardous waste, the implications could be far-reaching and fundamental for those power producers who rely on coal, whether or not they have been storing the coal ash or selling it for beneficial uses.
While the EPA has yet to issue any proposed regulations, companies with significant coal ash handling and storage issues should consider whether the effects of compliance with anticipated regulatory requirements are material and whether disclosure is needed under any of the above SEC disclosure items.
Given the absence of EPA proposed or final rules, there is no absolute answer of whether companies should disclose such suspected impacts now or wait until after the EPA’s proposed or final rules are released. Companies will need to evaluate their own circumstances in light of the current state of regulation at the time such disclosure is required. Companies may consider factors affecting the impact of such regulation, including the various alternative forms of regulation under consideration by EPA, the viability and costs of continuing current storage and disposal methods, the potential impact of reduced sales of coal ash for beneficial use, the availability and cost of alternative storage and disposed methods, whether any generating units will no longer be economical, and the anticipated recoverability of additional costs of such regulation.
While disclosure now may or may not be warranted in certain circumstances, highlighting the worst case scenarios at this time without the mitigating effects permitted under state law could present an alarmist and inaccurate picture. Presenting an inaccurate picture at this time, either an overly optimistic or an overly pessimistic viewpoint, could be used against companies in future litigation. Companies should also beware that their disclosure now could serve as a benchmark for other companies upon the SEC’s review.
We believe that SEC interpretive guidance specifically addressing the disclosure of coal ash disposal is unnecessary. While this topic is garnering tremendous amounts of public attention, there is not enough certainty of regulation and consequences of historic CCB storage to require mandatory specific disclosure at this point. We encourage public utilities to look at the state of the regulation of CCB storage and anticipated impact on a case by case basis each time it makes disclosure in an SEC document and make independent materiality decisions.