The SEC Should Make It Easier to Give a **** About Climate Change

On Climate Change, Capital Markets and Securities Disclosures

By Brandon Kline, Energy Law Fellow

 

Former California Governor Arnold Schwarzenegger

A political heavyweight recently shared an open letter to his followers under the heading, “I Don’t Give a **** if we Agree About Climate Change.” This line was pulled, not from the journals of noted author and naturalist Henry David Thoreau. Rather, it's former California Governor Arnold Schwarzenegger, imploring his Facebook followers to open the door to “a smarter, cleaner, healthier, more profitable energy future.” The writing on the wall suggests that the Terminator is on point. 

The underlying sentiment here reflects increasing concerns about the effects of greenhouse gas emissions on the environment and the economy, which have spurred international accords, federal regulations, and state and local measures that have had a material impact in the United States. The movement to tackle climate change should compel business leaders to consider adaptation strategies that prepare investors for the new normal.

Fossil-fuel companies are profoundly vulnerable to this dynamic; particularly when it comes to publicly traded companies. As previously noted, ExxonMobil provides a recent example of the ambiguous standard that fossil fuel companies face for public disclosures about climate change.

The main issues surrounding SEC disclosure laws as they relate to climate change have to do with what level of ongoing disclosure and governance obligations are placed on issuers like Exxon whose shares are publicly traded. This is not an easy task but could certainly be better defined and enforced by the federal government.

The Reasonable-Investor Standard Determines Materiality.

Congress established a framework based on the mandatory disclosure of information by the major participants in our securities markets—issuers, underwriters, national exchanges, broker-dealers and insiders—according to a securities regulation expert who has studied more than 800 federal court cases. 
The core doctrine in federal securities law rests on a single word – materiality. As a general rule, facts or information must be material before a legal obligation to disclose is triggered.

Under federal securities laws, certain companies with exposure to climate change risks are required to disclose material risks posed by climate change in annual filings with the Securities and Exchange Commission (SEC). See the Securities Exchange Act of 1934. The SEC in turn reviews these filings from the perspective of the reasonable investor.

SEC Evaluates Materiality in Four Broad Areas.

In February 2010, the SEC released guidance acknowledging the material risk posed by climate change. The SEC noted that four broad areas may create new opportunities or risks for registrants – legal, technological, political and scientific developments about climate change – including potential “decreased demand for goods that produce significant greenhouse gas emissions.” 

For example, the U.S. Government Accountability Office (GAO) identified a beverage company that disclosed in its filing that extreme weather conditions could disrupt its supply chain, reduce water availability, or affect demand for its products, resulting in adverse impacts on its business.

The SEC’s 2010 Guidance was preceded by petitions for interpretive advice submitted by large institutional investors and others. While more companies started making climate-related disclosures after the SEC’s guidance was issued, as noted below, there does not appear to be much improvement since then.

A large number of companies fail to say anything about climate change in their annual SEC filings, according to independent industry observers.

A GAO report released last week concludes that SEC staff have not filed any actions concerning climate-related disclosure issues since releasing the 2010 Guidance. This suggests two possible inferences – either the clarity of the 2010 Guidance resulted in 100% compliance, or the SEC is falling down on the job.

Investor Response Suggests Materiality Standard is Fundamentally Flawed.

Local and state governments, as well as institutional investors, continue to argue that SEC rules enable oil and gas companies to provide little or no information to investors about the range of risks fossil fuel companies face from existing and future laws and trends, such as those related to carbon pricing, pollution and efficiency standards, removal of subsidies, fuel switching and other factors that may reduce demand for oil and gas.

The key standard imposed to trigger public disclosure of climate-change risks is fundamentally flawed because it hasn’t provided investors with sufficient information about material risks, which constitute “known trends” under SEC rules.

The response of industry watchdogs and large investors, together with the anemic number of climate-related disclosure violations referred to the SEC Division of Enforcement, leads to the conclusion that SEC should strengthen disclosure requirements through casting a wider net for climate-related information.

Common Sense Approaches to Increasing Disclosure.

There are a variety of straightforward approaches the SEC could take to increase disclosure and create a more robust materiality standard.

•               Track the number of comment letters sent to companies suspected of violating climate-related disclosure requirements, in addition to documenting the cases referred to the SEC Division of Enforcement; 

•               Compare a company’s annual filings with its voluntary reporting, public statements and lobbying activity;

•               Require companies to post all climate-related statements and SEC filings on either the registrant’s website or on EDGAR, the SEC’s online public disclosure system.

•               Monitor climate-related statements made by registrants in a variety of settings, including climate-related statements in administrative proceedings (e.g., notice and comment), court filings, press statements and lobbying activity (i.e., third-party, interest-group statements made on the company’s behalf to regulators).

This approach ultimately closes a regulatory loophole, creating potential liability for omissions and misleading statements attributable to organizations that act as a conduit for corporate interests. Adjusting the current standard to encourage companies to disclose more information about supply chain risks will ultimately lead to better investment decisions, as well as a means for consumers to pay closer attention to the risks of climate change.

Introducing Myself: What Brings Me to the Green Energy Institute

By Ben Swerdlow, GEI Policy Extern 

My name is Ben Swerdlow and I am a 2L extern at the Green Energy Institute. My first project for this semester is to research and craft an analysis of the transmission system in the west, with a focus on Oregon and its transmission siting policies.

As an undergrad I majored in Biochemistry and Molecular Biology, with which I was able to do a research project on Belizean Coral Reefs and the effects of ocean acidification. It was from this research that I sought a job where I could work to protect and conserve the environment.

This brought me to Waterton Residential, an apartment management firm. As the firm’s “environmental liason,” I was responsible for implementing energy efficiency measures in the multifamily housing that we managed. Through the course of my employment I was able to work with utilities, energy efficiency product manufacturers, and both solar and wind turbine installers. This work allowed me to gain a prospective on the operations side of energy usage, which motivated my decision to go to law school, where I could ultimately be apart of the policy decisions that lead to environmental conservation. 

Since entering law school I have worked with various environmental and energy efficiency groups located on campus, including the Lewis and Clark Sustainability Council, which works to promote sustainability campus wide. Our projects can range from educating Lewis & Clark students and staff on strategies to decrease one’s energy usage to implementing energy saving technology. 

Additionally, while in law school I have worked at CLEAResult, which is an energy efficiency and demand response consulting firm. At CLEAResult I was able to learn from the perspective of those implementing energy efficiency measures, which helped me gain an understanding of the policies that have been put into place to decrease energy usage nationally or on the state level. 

These experiences ultimately brought me to the Green Energy Institute, where I look forward to working on advocating for policies that I believe will have a significant impact on energy usage and production in the United States.

Senate Republicans Are No Better than B.o.B.

By Andrea Lang, Energy Fellow

Newspapers widely reported that 2015 was the hottest year ever recorded, making the five years between 2011 and 2015 the warmest period on record.  Of the thousands of scientists that have looked at whether climate change is occurring as a result of human activity, only a small handful (0.7%) have concluded that it is not. By contrast, over 97% of scientists taking a position on anthropogenic climate change in scientific literature conclude that humans are causing global warming. There is, as much as some try to argue otherwise, widespread consensus that climate change is occurring and that human activity is the cause.

Last week, a different group of individuals was asked the same questions about the existence of climate change and its anthropogenic cause: the United States Senate, which voted on these questions as amendments to a bill on the Keystone XL pipeline. The upside is that the Senate voted 98 to 1 that “climate change is real and not a hoax.” But it rejected the statement that “human activity significantly contributes to climate change” 50-49 (it required 60 to pass). By way of explanation, Senator Jim Inhofe from Oklahoma claimed that “[t]he hoax is that there are some people who are so arrogant to think they are so powerful they can change climate. Man can’t change climate.” 

Given the scientific consensus surrounding the issue, that vote puts 49 senate republicans (including presidential candidates Marco Rubio and Ted Cruz) in the same category as rapper B.o.B., who last week declared to Twitter that the Earth is flat. Except we can laugh about B.o.B., because he’s just a single celebrity, and because he doesn’t hold the fate of the planet in his hands the way the U.S. Congress does. The fact that 49 United States senators are willing to completely ignore scientific consensus on an issue as potentially life-threatening as climate change is terrifying.

As terrifying as it is, though, it’s also come to be expected of congressional republicans. The fact that B.o.B. seemed to get more media coverage denying the curvature of the Earth than did the Senate for denying the existence of anthropogenic climate change speaks volumes about our expectations of elected officials. But republicans weren’t always so stubbornly anti-environment. It was republican Richard Nixon who created the Environmental Protection Agency and signed the National Environmental Policy Act, the Clean Water Act, the Clean Air Act, and Endangered Species Act into law. I can’t imagine many congressional republicans would even vote for these laws today. 

I for one would love to see elected officials at least willing to acknowledge the reality of anthropogenic climate change, even if they ultimately vote against laws that would mitigate it. At least then we’d know our elected officials are better than B.o.B.

The Supreme Court Gives FERC's Demand Response Rule a Green Light

By Tyler Johnson, GEI Policy Extern

On January 25^th, the United States Supreme Court upheld the Federal Energy Regulatory Commission’s (FERC’s) demand response rule, established in FERC Order 745. For reasons shown below, The Supreme Court correctly applied the law and did a great service for energy conservation advocates and grid managers struggling to maintain the reliability of the 21^st century grid.

How Demand Response Fits Into the Wholesale Electricity Market

Since the late 1970s and the federal enactment of the Public Utilities Regulatory Policies Act (PURPA) of 1978, federal electricity policy has shifted from a monopoly model in favor of a competitive wholesale electricity market. Competitive wholesale markets have subsequently taken shape in the last few years with the development of various regional networks such as the Midcontinent Independent System Operator (MISO), the California Independent Service Operator (CAISO), and the PJM Interconnection. These approved regional transmission organizations (RTOs) are independently administered to ensure that monopolistic utilities—owning most of the nation’s transmission lines—provide non-discriminatory access to the various renewable energy producers and a competitive wholesale market. The operators do not generate electricity nor provide retail electricity to consumers; they simply manage the grid to ensure efficient regional management and renewable energy producers non-discriminatory access to it.

In the wholesale electricity market, electric utilities purchase wholesale power from independent power producers through an auction-based system. Under the auction system, generators bid power at a certain price to meet the projected demand of the utility. To encourage renewable energy development and ensure a competitive market, these bids to supply power are stacked from lowest to highest. The highest bid, known as the locational marginal price (LMP), is eventually what all the "bidding" power producers are paid.

Under wholesale demand response, independent operators of wholesale markets actually pay electricity consumers to NOT use power at certain times. Demand response developed because reducing demand is oftentimes cheaper and more reliable when electricity consumption is high, like during a Super Bowl, than it is to pay generators for more expensive electricity.

To streamline how this works under the wholesale market, FERC’s Order 745 allows consumers to bid “negawatts” into the  auction market, just as power producers would bid megawatts. Negawatts represent the assurance not to consume electricity over a given period of time. These consumers can receive money for the LMP, just as power producers would receive for their megawatt bids. The whole idea is that demand response lowers the overall price of electricity during peak times, reduces green house gas emissions by promoting conservation, and ensures grid reliability. For more information on how demand response works generally, see here.

FERC v. Electric Power Supply Association

Justice Kagan delivered the opinion of the Court, ruling in favor of FERC’s demand response rule by a 6-2 margin. The dispute in the case generally dealt with FERC’s authority to regulate the rates that demand response “negawatts” receive on the wholesale electricity market. Under the Federal Power Act, FERC is granted the exclusive authority to regulate “the sale of electric energy at wholesale in Interstate Commerce.” However, the Act leaves the states with exclusive jurisdiction over retail sales. The Electric Power Supply Association (EPSA) had argued that FERC exceeded its authority under the Federal Power Act by issuing Order 745. EPSA argued, and the federal Court of Appeals for the DC Circuit held, that FERC’s rule allowing demand response bids into the wholesale market, lured retail customers into the wholesale market, decreasing their retail energy consumption, and thus intruding state regulatory authority of the retail market.

The Supreme Court disagreed with EPSA’s arguments and overturned the D.C. Circuit’s decision. To dispel of EPSA’s argument, Justice Kagan correctly pointed out that wholesale market electricity rates necessarily affect retail market rates and vice versa. In other words, according to justice Kagan’s opinion, the fact that direct regulation of wholesale rates may affect retail rates doesn’t mean that FERC is directly regulating retail rates, which is reserved for the States. Allowing demand response bids into the market, Kagan explained, is nothing more than regulating wholesale rates.

Furthermore, the Federal Power Act demands that FERC ensure that wholesale electricity rates are “just and reasonable.” Kagan correctly explained that one of the primary goals of demand response is to lower the electricity rates paid by consumers. By reducing electricity demand during peak periods (the time when electricity demand and electricity rates are highest), demand response lowers wholesale electricity rates. This simple phenomenon fulfills FERC’s mandate to ensure that rates are “just and reasonable.” Thus, despite arguments from EPSA that FERC acted beyond its statuary mandate to ensure just and reasonable rates, FERC did exactly as the Federal Power Act commands of it.

Why The Court Got it Right

The Court’s opinion is legally valid and has important implications for future renewable energy development in the context of the 21^st century grid. First, the Court was correct that FERC’s demand response program only regulates wholesale electricity rates. While the electricity market is unique indeed, wholesale prices in all markets affect retail prices, but that doesn’t mean that they directly set retail prices.

Second, demand response is extremely important, if not essential, for grid reliability in the modern energy economy. As electricity generation has become more dispersed, grid managers have an increasingly difficult time matching demand and supply, which is necessary to maintain reliability and prevent blackouts. Demand response has proven to be very effective at supporting grid reliability by reducing demand at peak times.

Finally, transitioning to a more sustainable economy in an attempt to mitigate climate change will require a variety of creative efforts. Efficient technology can only go so far. Reducing human energy consumption should be encouraged wherever possible, and arguably could have the biggest impact on reducing the negative effects of climate change. Demand response thus provides a cost-effective means to reduce energy consumption and electricity prices, benefitting all.

Utilities Throwing Shade on Net-Metering Policies Across the West

By Andrea Lang, Energy Fellow

Recent decisions by Public Utility Commissions (PUCs) in Nevada and California illustrate the debate going on around the country about net-metering policies. A net-metering policy requires utilities to “net” out the amount of electricity that solar owners use versus what they provide back into the grid, essentially allowing their meters to run backwards when they are providing energy from solar panels and offsetting their retail electricity costs. More than 40 states have a net-metering policy in place, and while they have never been popular with utilities, the debate seems to be heating up lately. This is likely because as the cost of installing solar panels has dropped over the last several years, more and more homeowners have been installing rooftop solar and taking advantage of net-metering rules.

The biggest argument against net-metering is that it shifts costs from people that can afford solar panels onto those that cannot. That is, although solar owners are providing electricity that the utility doesn’t have to buy elsewhere, they aren’t paying for the transmission and distribution costs, either. Utilities argue that those costs unfairly shift onto non-solar owners, increasing their electricity rates.

It is this argument that led Nevada’s PUC to essentially abolish its net-metering program last December. NVEnergy, Nevada’s largest utility and biggest advocate against net metering, describes the new rule as establishing “new net energy metering rules and rates.” The Nevada PUC, too, describes its decision as establishing “net metering rates.” However, the whole idea behind net-metering is that it does not involve rates at all, but merely allows a customer’s meter to run backwards and offset some of the energy they use. Under the decision, Nevada doesn't allow true net metering because while it allows solar customers to use the power they generate, and thus offset their retail consumption directly with their own generation, it doesn't allow customers to net out their solar generation and retail purchases on a monthly basis. Instead, solar owners get to potentially consume some or all of the power they generate, and then earn the new tariff rates for the solar power they produce but don't consume onsite.

The PUC will replace Nevada’s net metering program with something that is more akin to a feed-in tariff program. The new program requires utilities to purchase solar power from their customers, charges solar customers a service charge, and gradually reduces solar customers’ bill credits from higher retail rates (which they effectively earn under the existing net-metering program by virtue of the meter running backwards) to significantly lower wholesale rates. 

Although the PUC had initially proposed to apply this rule not only to future solar owners but also to existing ones, it has since backed down from that position. It appears to be strongly considering a compromise position to “grandfather” existing solar owners under the net-metering program, but apply the new tariff program to new owners. If this grandfathering provision is not added, thousands of customers who expected to recoup the costs of their investment in solar panels through the net-metering program will be hit hard by the significantly less beneficial feed-in tariff program.

The decision is especially confounding in light of the findings of a report the Nevada PUC commissioned last year. The report concluded that although non-solar customers may have experienced some cost shifting in the past, it was unlikely to be an issue in the coming years due to the need for utilities to invest in green energy to comply with state’s renewable portfolio standard.

On the other hand, last week California’s PUC resisted the same arguments, deciding to keep its net-metering program in spite of utilities’ growing dissatisfaction with it. The 3-2 decision was a narrow but significant victory for solar advocates, and should allow California’s booming solar industry to keep growing.

As the cost of solar continues to drop and more homeowners opt to install solar panels on their homes, it seems likely that states will increasingly revisit their net-metering policies. I only hope PUCs are able to see through utilities’ self-interested arguments and realize that the benefits of incentivizing increased green distributed generation far exceed the costs.