Case Study #1
Situation: The acid rain provisions of the 1990 amendments to the Clean Air Act were to being in 1995. Currently, it is 1992 and The Southern Company (a electric utilities holding company operating in Georgia, Alabama, Mississippi, and Florida) had to decide what actions they were going to take in order to comply with the new regulations. Before the Clean Air Act, firms did not have incentives to reduce emissions below the government specification. If a firm exceeded the amount, it would just simply pay a fine. Maximum limits were put into place and allowances could be bought and sold on the open market. This means that companies that were able to reduce their emissions, could make money off the allowances they sold. That provided firms incentive to reduce emissions to more appropriate levels. In contrast, a company that could not reduce would have to spend more money to buy additional allowances. The allowances would start at $250 per contract but increase by 10% each year. One of the Southern Company’s Georgia plant, Georgia Power’s Bowen a coal fired plant, had a couple options to choose from to abide by the new laws. The options included either adding scrubbers in order to drastically reduce their emissions and sell the extra allowances or spend more money to buy additional allowances. Either way, Bowen was looking to spend more money in the near future with the Clean Air Act.
Question/ Decision: What is the lowest cost option for the plant? Knowing the plant will be extinct in 2016, what estimations can we assume from 1995 to 2016? What are the unknown factors? How long will it take to implement the scrubbers? Do we have the man power to handle the maintenance for the scrubbers? What is the best option for the company that still makes us look good to the public? Will allowance prices increase by more than 10%? Will there be enough allowance contracts on the open market for Bowen to...