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So You Think Smog Is Someone Elses Problem

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Ten years ago, Richardo Kilpatrick, Tom Salerno and I (John Ames) began writing articles for this column devoted to current issues in bankruptcy/environmental matters. Only recently did an environmental issue severely impact a sizeable case on which I was working. The Big Rivers Electric Corp. chapter 11 case (No. 96-41168, Bankr. W.D. Ky.) involved $1.4 billion of debt. It took approximately nine very contested months to confirm a plan to restructure the Western Kentucky utility. However, once the parties in this complex chapter 11 finally reached an agreement, the Environmental Protection Agency (EPA) indicated it would issue a rule that shattered the delicate compromise between the parties.

The following discussion focuses on the newly passed EPA rule innocuously labeled the NOX SIP CALL. This regulation will have a substantial impact on bankruptcies, especially for public utilities in the eastern half of the United States. Therefore, because of the NOX SIP CALL, smog is not someone else's problem anymore.

Discussion

On September 24, the EPA passed a smog reduction plan that will severely impact 22 states. The EPA blamed the Midwest and Ohio Valley for increased pollution in the eastern United States. According to the EPA, coal-producing power plants located mainly from Illinois to West Virginia produce high levels of nitrogen oxides (Nox), a major component of ozone. This chemical contaminates the air, flows east, and increases the smog levels, particularly in the northeastern states.

The new regulations will require 22 states from Massachusetts to Missouri to cut ozone emissions by 28 percent. The smog reduction plan does not mandate an exact procedure to reduce the ozone levels. However, each state must design a plan within one year and achieve the ozone reduction by 2003.

The EPA's plan will target primarily coal-burning power plants. Although cars and small factories also emit Nox, coal power plants generate the greatest quantities of this chemical. The regulations will require utilities to cut Nox emissions by 85 percent.

Utility officials foresee that compliance with the EPA regulations will cost the coal-burning plants billions of dollars. For instance, Ohio-based American Electric Power anticipates expenses of $1.6 billion, and Cinergy Corp. expects to pay $500 to $600 million to comply with the EPA plan. Most of these expenses will derive from the installation of pollution reduction equipment. In order to avoid the high compliance costs, power plant officials are contemplating major changes. First, the utilities may switch from coal to natural gas, a cleaner source of energy. To finance the added expenses, plants plan to shift the economic burden to consumers by raising rates. Some states, such as Kentucky and Indiana, derive 99 percent of their electricity from the coal-producing plants. Therefore, unless the utilities can decrease costs through a conversion to natural gas or other significant operating efficiencies, and unless state regulators act to limit such environmental cost recoveries from rate payers, almost every resident in states such as Indiana and Kentucky could face more expensive utility bills.

The amount of the rate increases is highly debated. EPA Administrator Carol M. Browner anticipates that the new regulations will increase the average consumer's utility bill by only $1 per month and claims that electric industry deregulation will offset the costs of compliance. However, utility officials have a much bleaker outlook. A representative for Consumer's Energy Co., a Michigan-based utility, projected that in addition to mandatory car emission testing and more expensive reformulated gasoline, the new regulations will cost the average Michigan family an additional $1,200 per year.

Few dispute whether the new EPA plan will reduce smog in the eastern half of the United States. Yet, the regulation's economic impact on the 22 states, coal-producing plants and utility consumers remains undetermined. Therefore, only time will reveal whether the smog reduction plan's health and environmental benefits will outweigh the financial burdens imposed upon the Midwest and Ohio Valley.

Conclusion

The number of significant bankruptcy cases with environmental issues has declined over the past several years. However, as the Big Rivers case illustrates, environmental issues can still seriously impact bankruptcy proceedings.


Footnotes

1 Ms. Ames is the daughter of proud John W. Ames. Return to article



Journal Date: 
Tuesday, December 1, 1998

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