Acid Rain: The Southern Company (A) Introduction of Southern Company: An American electric utility holding company based in southern United States. It is headquartered in Atlanta, Georgia with executive offices also located in Birmingham, Alabama. The company is currently the 16th largest utility company in the world and the fourth largest in the U.S. Its operating units were electric utilities in Georgia, Alabama, Mississippi and Florida. Georgia power Bowen coal-fired plant producing enough power to serve the residential commercial and industrial demand of one million people. Clean Air Act 1990: New legislation name as “Clean Air Act 1990” was introduced in 1990 to overcome the pollution in the air. This legislation was aimed at controlling acid rain, passed by congress and signed by President Bush in Nov 1990. This act would regulate the emission of SO2 which was planned to be starting in 1995. The purpose of this legislation was to reduce total national sulfur dioxide (SO2) emission to half of 1990 level. In this legislation companies are permitted to pollute the air by certain amount of SO2. If the companies remain in the limit spelled out in the act, special allowances are given in the form of incentive. Before this legislation companies faced fine if its emission exceeded the permitted level, but it had no incentive to reduce its emission below the level specified in the permit. In this new legislation companies follow the Cap and Trade approach. In this approach if companies wish utilities could reduce their emission below the amount for which they had been given allowance and sell the extra allowance to other utilities. Alternatively they could purchase additional allowance from other firms which would permit them to release larger quantity of sulfur dioxide. Executive Actions: The southern company manager was remixing their strategy for compliance with the acid rain provisions of the 1990 amendments to the clean air Act. To make implement on this legislation time was getting shot. If the companies were planning to install scrubber they should start their work by 1992, as this installation was required three years. If the coal was required to be replaced aging it requires new contracting with the suppliers. Bowen plant: Bowen plant was largest electricity plant in Georgia of South Western Company. The Bowen plant sat on the banks of the Etowah River near Taylorsville, Georgia northwest of the city of Atlanta. At Bowen power plant coal was burned in massive vessels. Pipes were used for traveling of heat. Adjacent turbine converts the heat into mechanical energy which then converted into electricity. Inventory of coal was one million tons coming from southern Kentucky by railroad cards and its consumption was 8.338 million ton per year. It was
generating 21151 million kilowatt of electricity. Southern company realized an average of 5.6 cents per kilowatt hour in revenue. This plant was having four generators to produce elect city at its full capacity. The plant was having life till 2016, after that it would be having no salvage value. Presently it was emitting 266550 tons of SO2. Sulfur Dioxide during 1990: All the plants in America working on coal were emitting sulfur dioxide. Bowen plant was emitting 30 tons of sulfur dioxide per hour. This sulfur dioxide was depositing in the atmosphere which will cause to acid rain. This acid rain can cause damages of lakes, forests, ecosystems and manmade materials. New legislation signed by Bush to control acid rain, named as Clean Air Act 1990. Before this legislation of Clean Air Act, companies faced fine if their emission exceeded the permitted level, but it had no incentive to reduce this emission below the level specified in the permit. As per new law Bowen plant was permitted to realize 254580 ton per year of SO2 from 1995 – 99 and 122198 ton per year from 2000 – 2016. Permission of SO2: As per this law American Congress was planning to half the emission of SO2 to the level of 1990. For this purpose they have chalked out a comprehensive plan to gradually reduce this emission and have spell out two phases as under: In phase 1 (1995 -1999), all plant of United State working on coal were told to reduce their emission level of SO2 by 5-10%. A new emission level was given to all coal plants. Bowen plant was given an emission level of 254580 ton per year. Now all plants including Bowen can trade their allowances if their emission level is below or above the permitted level. In phase 2 (2000 - 2020), all plant of United State working on coal, will further reduce their emission level of SO2 by 50%. A new emission level was given to all coal plants. Bowen plant was given an emission level of 122198 ton per year. Now all plants including Bowen can trade their allowances if their emission level is below or above the permitted level. Prediction of Allowances Prices: Prices of allowances would probably be $250 per ton as these were not announced by the government. Price would rise at 10% per year through the year 2010.Purchasing and selling of allowances in open market was allowed. The organizations like Southern Company can trade these allowances within their plants. Federal and state income taxes at a combined effective rate of 37.7% .Discount rate of 10% in evaluating investment opportunities
Execution Options: There were three main options available with the Bowen plant which can be executed. Details are as under: Option 1: Burn high sulfur coal without scrubber; purchase allowance Without using the scrubber, 266,550 tons of SO2 will be emitted to the atmosphere against the authorization of 254580 ton till 1999 and 122198 ton from 2000-2016. This mean Bowen plant will purchase the allowances till 2016. Operation cost of the plant was already high to meet input requirement of 8.338 tons of coal. Bowen coals varied widely both in delivered prices per ton and in heat content per pound. From 1992-1995 high sulfur Kentucky coal burned at Bowen cost. On average $41.46 per ton delivered to the plant. From 1995-2016 the price was expected to fall to $29.82 per ton. They would have to purchase pollution allowances in addition to paying the operating cost. Option 2: Burn high sulfur coal with scrubber; sells allowance Wet-limestone flue gas desulfurization (FGD) equipment, commonly known as scrubber will be installed starting from 1992- 1994 with a cost of 719.43 million. The scrubbers will absorb 90% of the sulfur dioxide and only 10 % will be vented to the air. If the Southern company could install the scrubbers during phase 1 period, then Bowen plant will be able to sell allowances to other utilities and other Southern company plant. If the scrubbers are installed during phase 2 periods to save the outlays of 719.43 million for five years then Bowen plant will be running on high sulfur coal and require buying the allowances or shift to the low sulfur coal from 1996. Installation of scrubbers would be requiring additional operating cost of 0.13 cent per kw-hour for line stone inventory and removal of sludge. Revenue loss of 2% will be in addition as the scrubbers will consume the elect city. Option 3:Burn low sulfur coal: Compared with the coal burned at Bowen contained average 1.6% sulfur by weight. Low sulfur contained 1% sulfur by weight that will cost less. Cost $22.1 million to change the electrostatic precipitation used to control airborne particulate matter. Price of low sulfur coal will rise after 2000 as in phase 2; its price was expected to rise. It would take lower sulfur coal per year to generate electricity than high sulfur coal to meet Bowen’s input requirement. Low sulfur coal would still emit 167,650 tons sulfur dioxide per year. Other Consideration: The effect of such changes were small, however it did not materially alter the company’s appraisal of its option. Once the company installed scrubber at Bowen, The Company will have
to make modest investment in working capital. Or the company switched to low-sulfur coal for phase 1. Net Present Value: The NPV of all the available options have been worked out to find the best option. The detailed calculations are attached. Main terms used and their equations are as under: SO2 emission permitted – SO2 actual emission
a.
SO2 emission difference:
b.
Allowances cost:
SO2 emission Difference x rate of allowances
c.
After tax cost:
Pretax cost (1 - .337)
d.
Depreciation Rate:
14% 2%
e.
Financial Calculator:
f.
Main Data Available: Cost: operating cost of Bowen plant $ 0.00281/kw-h Income tax 37.7% Discount rate after tax 10% High sulfur coal price $ 41.46/ton (till 1995) $29.82/ton (1996 and onward) Low sulfur coal price $ 30.37/ton (by 1996) $34.92/ton (by 2000) Increase in operations cost with scrubber $ 0.0013/kw
CMPD mode Cash mode
SO2: permitted emission Low coal emission High coal emission Scrubbers:
(1995- 1999) (2000- 2016)
254580 ton 122198 ton 167650 ton 266550 ton
Total cost: $ 719.43 million Revenue reduction: 2%
Precipitators:
Cost: 22.1 million
(1995-1999) (2000-2016)
Financial Analysis: After detailed working of the options following NPVs have been worked out: High Sulfur/ No Scrubbers
$ 267
High Sulfur/ with Scrubbers
$ 436
Low Sulfur (from 1996)
$ 177
The NPV of high sulfur with scrubber is greatest ($ 436) among the worked out options. So we will go with this option.
