Southern Company: Largest Generators of Electricity in America

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Southern Company is one of the largest generators of electricity in American, serving the Southeastern United States for more than 100 years with clean, safe, reliable and affordable electricity. Its four subsidiaries: Georgia Power, Alabama Power, Mississippi Power and Florida Power, provide retail electric service to 4.4 million customers. This holding company’s operations cover all phases of the electric utility business capacity, as well as fiber optics and wireless communications both in regulated and in competitive markets.

The generation sources of Southern Company include coal, gas, nuclear and hydro, among which coal-related generation takes 58% of the total generation amount. Bowen plant is one of the coal fired plant of Southern Company. It was completed in 1975 and was capable of producing enough power for the demand of 1 million people at Georgia. In order to generate a considerable electric capacity, massive tons of coals were carried in everyday, contributing to a sufficient inventory. Burning coals leaded to a great quantity of sulfur dioxide leaving this plant each hour.

The time of this case was in 1992, after the passing of amendment to the Clean Air Act, which addressed acid rain, ozone depletion and toxic air pollution. This amendment also established a national permit of sulfur dioxide emission, which was highly related to the operation of Bowen plant.

The impact of the Clean Air Act amendments of 1990 on Bowen Plant

Admittedly, Southern Company didn't have the incentive to control its sulfur dioxide emissions until the acid rain provisions of the 1990 amendments to the Clean Air Act.

This provision specified the quantity of sulfur dioxide’s emissions of each company by granting them allowance each year, based on the electricity amount they had generated in the past years. If the sulfur dioxide emission exceeded the allowance, companies were allowed to buy allowance from other companies who can reduce emissions and generate surplus allowance. Allowances would be traded in an open market. This means that the company could incur some additional allowance costs if buying allowances from other companies and might receive some additional revenue by selling surplus allowance if taking measures to reduce emissions. The allowance market price was expected to be $250 per ton of sulfur dioxide in 1995 and would increase by 10% per year until 2010 and then stay stable.

The Clean Air Act amendments of 1990 would affect the operating cash flow of Bowen plant. According to the amendments, from 1995 to 2000 (“Phase one” defined by the law), the allowance for Bowen plant was 254580 tons of sulfur dioxide emission and from 2000(“phase two” defined by the law), the allowance would be 122198 tons. Neither of the allowance amounts was sufficient enough for the normal operating of Bowen plant, which means Bowen plant had to purchase additional allowance at open market if they decided to remain in the same generating process, or had to implement sulfur dioxide control project if they decided to apply with the amendments. Both solutions would cause additional operating cash out flow for the plant and decrease the revenue of Southern company, given the price of electricity and capacity generated each year were expected to remain constant and operation costs exclusive of fuel and pollution control expenditures would stay the same.

What possibilities does Southern Company have in complying with the new law?

Although it is very likely that this amendment will add cost and decrease revenue of Bowen plant, Southern Company will still take action to comply with this amendment to keep Bowen plant operating and making profit, because closing Bowen plant would certainly cost more.

The options include buying additional allowance and keep using high sulfur low cost coal(option 1), implementing sulfur scrubber and keep using high sulfur low cost coal(option 2.1and option 2.2), and using...
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