Several years ago, a major US electric utility, wrote in its 10-K , a document filed annually with federal securities regulators, that it could not “currently estimate the financial impact of climate policies… or litigation alleging …” damages, but admitted they could require “material capital…” (FirstEnergy, 2018 10-K. Fast forward to the 2020 document, FirstEnergy said it could not predict “timing and ultimate outcome..” of environmental actions. Not much progress.) Was that cautionary verbiage a hint? (Not being forthcoming in documents like the 10-K carries significant legal penalties, so take it seriously.)
Next point of information: a long, detailed report, “Utilities Knew: Documenting Electric Utilities’ Early Knowledge and Ongoing Deception on Climate Change from 1968-2017” issued by the Energy and Policy Institute, an organization with explicitly progressive political aims. The study’s authors combed through decades of corporate and industry information.
The Policy report paints a disturbing picture. US electric utilities had plenty of warning, beginning in the 1960s during the Presidency of Lyndon Johnson, that greenhouse gas emissions could adversely affect the climate. However, rather than take corrective action, they joined in lobbying efforts to discredit those conclusions and support research that would engender skepticism about the GHG-climate connection.
We doubt that we are the only ones thinking that this behavior resembles that of the Tobacco Institute in enlisting MDs to discredit the link between smoking and lung cancer. The US Surgeon General’s report connecting smoking to lung cancer was issued in 1964. Roughly thirty years later, the tobacco industry settled the health claims for about a quarter of a trillion dollars. Virtually all the states’ Attorneys General sued the tobacco companies on the grounds that they caused the medical harm to smokers, so they should pay for the remedies. Imagine what will happen when a state hands the bill for its trillion dollar climate remediation program to the local utilities stating, “You guys caused the problem, you (and your investors) pay for it”.
There is a difference, though, between an electric utility and an oil company that knew about GHG- climate linkages, but chose to pretend otherwise and actively issue disinformation. The utility is a regulated entity with a public service obligation. We are not lawyers, but we suspect that actively deceiving state regulatory officials about potential problems, especially problems that affect the operations and viability of the biggest and cheapest fossil-fueled power plants, has ethical if not legal implications. It will certainly have adverse financial implications as well.
Regulators are obliged to pass on to customers the utility’s prudently incurred costs. They expect and can tolerate reasonable mistakes. But what about investment decisions made where the full adverse implications for the climate were never fully disclosed? Regulatory repercussions may well occur if regulators angrily ask, “You built that coal-fired power plant when you already knew that climate change was a serious matter, and you didn’t tell us? And now that you have to close it down prematurely, you want us to charge consumers for the loss on the plant?”
The bigger risk, as in the tobacco settlements, is if the various litigants adopt the same position vis a vis the utility industry: you caused the harm, (denied it for decades) and now you have to pay remediation costs. That logic could lead to a multi-trillion dollar exposure.
Therefore, are some investor owned utilities compromised and financially exposed, as were the tobacco companies and as may be the oil companies? We believe that lawsuits are inevitable. The question is: How much increased financial exposure do utilities incur from this litigation overhang? We could find out at the moment when increasing economy-wide electrification could jumpstart a relatively safe but traditionally low-growth industry.
If the “Utilities Knew” report is correct, then It wasn’t simply that electric utility officials were wrong about CO2 and climate change, but rather that they were right, and they misled the public and their regulators about its harmful effects. There are multiple avenues of redress here, none of them positive for investors in the US utility industry.
Lastly we are reminded of another public interest crusader from a previous generation. Large corporations attempted to humiliate and otherwise silence him but Ralph Nader ultimately prevailed over GM. Seat belts and vehicle passenger safety are no longer subject to debate.
In the Netherlands recently, public interest lawyers for Friends of the Earth, Greenpeace and others prevailed over oil giant Royal Dutch Shell in a landmark climate case. The court linked the company’s activities to harmful climate change and stated that they could be more aggressive in limiting the environmental harm that use of their fossil fuel products were causing. European courts obviously provide no definite guidance for the U.S. However, lawsuits like this encourage others to follow suit.
In short, suspicions lead to lawsuits, which in turn lead to discovery, which dredges up old emails and barely decipherable notes at the bottom of file folders and who knows what else? Even if “Utilities Knew” is only partially accurate in its allegations, U.S. utility investors could face a level of financial risks not even remotely priced into present valuation levels. Buckle up.
By Leonard Hyman and William Tilles for Oilprice.com