Climate disclosure sought by environment groups

Two environmental groups critical of coal-fired electric plants are urging the Securities and Exchange Commission to encourage broker-dealers that underwrite municipal bonds for such projects to provide more disclosure about the regulatory and fiscal changes stemming from climate change.

The Natural Resources Defense Council made the request in a comment letter sent to the SEC just before Christmas, endorsing a September letter from the Sierra Club that called for improvements to both primary and continuing disclosures for these types of bonds.

While several market participants said that climate change disclosures are already being provided for at least some muni deals, representatives at both groups are arguing that the level of disclosure by municipal utilities and tax-exempt electric cooperatives are insufficient and fail to account for the full expected cost of a cap-and-trade regulatory system that Congress may authorize this year.

The groups contend the most important risk that is not adequately disclosed is the utilities' potential future costs of having to acquire allowances for carbon dioxide emissions that would be regulated under the proposed cap-and-trade system.

Further, unless the SEC takes action, they said large disparities will develop in the reporting of climate-risk disclosure between publicly traded companies that are beginning to provide such disclosures and municipal utilities or tax-exempt rural electric cooperatives that are not.

"NRDC believes a level playing field should exist between publicly traded companies and municipal securities when it comes to disclosure," the group said in a December 15 letter signed by executive director Peter Lehner.

Both letters come as the SEC is moving forward with a proposal to generally expand on the types of disclosures issuers must provide on a continuing basis to comply with its Rule 15c2-12.

The environmental groups say the SEC's proposal falls short by not addressing climate change. They want the agency to provide interpretive guidance under 15c2-12 "clarifying the substance and scope of climate-risk disclosure as material information which would be included in the official statement," as well as in annual financial information provided on a continuing basis.

"Despite clear evidence of materiality for publicly traded companies, these proposed [changes to 15c2-12] are silent concerning the need for climate risk disclosure in municipal bond documents," said the Sierra Club letter, which was signed by Mark Kresowik, who runs the group's "Coal is Dirty" blog, Lisa Anne Hamilton, a Sierra Club attorney, and Tom Sanzillo, a consultant at T.R. Rose Associates.

"Some of the largest contributors to greenhouse gas emissions are coal-fired power plants operated and supported by tax-exempt rural electric cooperatives, municipal utilities, and finance authorities... which utilize the municipal bond market and are exempt" from SEC registration, they said.

John Steelman, program manager for NRDC's Climate Center, said that municipal power plants typically sell long-term contracts to a number of states and localities, which in turn are usually on the hook for any future regulatory costs.

"We believe this future risk is not being disclosed to the municipal governments that will be entering into these power contracts," he said.

The calls for enhanced disclosure comes about 18 months after California Treasurer Bill Lockyer and then-New York City Comptroller William Thompson asked the Treasury Department to consider banning the use of tax-exempt debt to finance new coal-fired plants, calling them environmentally risky and among the most costly power projects in the country.

The environmental groups are turning their attention to the SEC after the Treasury failed to formally respond to those earlier requests. In the meantime, the groups note that the Department of Agriculture's Rural Utility Services has enacted an effective moratorium on providing federal loans to help finance new coal-plant loans, underscoring the regulatory and financial uncertainty in the industry.

Seeming to buttress those concerns, a report on the proposed cap-and-trade system issued last year by at least one rating agency, Standard & Poor's, said a "substantial" decline in coal-based electricity generation is possible through 2026. The agency estimated that coal-based electricity would fall to about 30% of the market, from 51% in 2007.

But some market participants are skeptical about the groups' calls for improvements to primary disclosure. Dan Aschenbach, a senior vice president at Moody's Investors Service, noted that there was "quite a bit" of climate change disclosure in the offering documents for bond deals sold by six different issuers to finance the massive Prairie State Energy Campus, the $3 billion coal-fired plant under construction in southwest Illinois.

Aschenbach said that an extensive feasibility study, with a number of different risk assessments, was included in offering documents, including for $469 million of bonds issued by American Municipal Power Inc. of Ohio in October.

However, he said there is room for refinement on continuing disclosures. That could include more rigourous forecasts for how plants incorporate energy efficiency and renewable technologies into their so-called strategic integrated resource plans, he said.

Asked about the feasibility study in the American Municipal Power offering documents, Sanzillo, who helped write the Sierra Club letter, claimed it contains flawed analysis that fails to address the cumulative risk factors of the coal investments.