Statement by Douglas G. Cogan

Investor Responsibility Research Center

U.S. Senate Committee on Environment and Public Works

Subcommittee on Clean Air, Climate Change and Nuclear Safety

June 5, 2003

My name is Douglas G. Cogan. I am the Deputy Director of Social Issues for the Investor Responsibility Research Center. IRRC is an independent research firm, based in Washington, D.C., that provides impartial information on corporate governance, social and environmental issues affecting investors and corporations worldwide. Founded in 1972, IRRC serves more than 500 institutional investors, corporations, law firms, universities, foundations, religious institutions and other organizations.

IRRC does not take advocacy positions on public policy issues. Accordingly, I will not be commenting on the merits of specific clean air bills being considered by this committee. I will address three broader issues as they relate to the merits of legislation that includes CO₂ emissions controls. These issues are:

1. The inevitability of carbon dioxide controls.

2. The need for more corporate disclosure and investor certainty on the climate change issue.

3. The connection between climate change and good corporate governance practices.

Inevitability of carbon dioxide controls

IRRC has long served as an early warning system for the business and investment community. In the 1970s, IRRC published reports on the coming deregulation of the electric utility industry and obstacles facing nuclear power. In the 1980s, IRRC issued studies on the advent of renewable energy and utility energy efficiency programs. In 1992, IRRC published a book written by me on business and investment responses to climate change.

Climate change is playing an increasingly important role in capital investment decisions, especially for the electric power industry. Our nation’s electricity providers account for nearly 40 percent of America’s — and 10 percent of the world’s — manmade CO₂ emissions. Addressing global warming necessarily involves this industry. Companies and investors that ignore this fact do so at their own peril.

The question is not whether there will be CO₂controls on power plant emissions, but when. Investors need more disclosure and guidance on this issue. Congress can help by passing legislation that enables utilities and investors to plan effectively for the future and reduce prevailing uncertainties.

Need for more corporate disclosure and investor certainty

Climate change is the greatest environmental challenge facing the electric utility industry. Yet many companies still hardly acknowledge the issue in their disclosure statements to investors. At best, companies say CO₂emissions controls could have a material impact on their financial condition, but cannot gauge the magnitude of the effect. At worst, they say virtually nothing at all.

Investors are left to wonder whether this paucity of disclosure reflects a lack of guidance and foresight, or a reluctance to acknowledge the strategic and material risks posed by climate change. Neither answer is acceptable to investors.

Electric utilities are committing tens of billions of dollars to upgrade their coal-fired power plants and install modern pollution control equipment. Yet these investments do nothing to address carbon dioxide emissions. The most expensive climate change response strategy will be to institute CO₂ emissions controls after investing in equipment to control sulfur dioxide, nitrogen oxide and mercury emissions. A more prudent and cost-effective approach would be to consider these four emissions sources together as part of an integrated strategy.

Consider what James Rogers, Chairman and CEO of Cinergy Corp., one of the nation’s largest coal-burning utilities, told this committee two years ago. Chairman Rogers said: “Who will make a decision to invest a billion dollars in a new coal plant if you can only guess about future regulation?…. [A] new power plant bill that fails to address CO₂ will be as dated in five years as current law is today.”

Investors have raised this very issue with electric utilities over the last 10 years through the filing of shareholder resolutions. With mounting support from large pension systems and endowments, shareholder support for these resolutions has increased dramatically. In the 2003 annual meeting season, the average support level for climate change disclosure resolutions averaged almost 25 percent at three of the nation’s largest electric utilities — AEP, Southern and TXU. No other type of proposal in the 32-year history of shareholder activism on social and environmental issues has garnered this level of investor support. Such institutional backing is consistent with voting trends that IRRC is seeing across most industries on the global warming issue. (See Figure 1.)

Corporate governance – climate change connection

Utilities are under pressure from many quarters to address climate change. States are enacting legislation to fill the policy vacuum at the federal level. Overseas, the Kyoto Protocol is poised to enter into force, affecting U.S. utilities and other multinationals with operations abroad. The Bush administration is pressing for more voluntary corporate commitments to control greenhouse gas emissions.

What can utilities do to respond to these pressures? And can you do to help them?

In terms of what utilities and their investors can do for themselves, IRRC—in a soon-to-be-released report commissioned by CERES—finds that companies can integrate climate change into good governance practices. Our study lists 14 specific actions. I highlight three vitally important ones here:

· First, companies should provide regular assessments of the climate change issue to shareholders, based on systematic board reviews of company risks and opportunities. In place of blanket statements in securities filings that climate change poses undeterminable material risks, at a minimum companies should identify the risk factors and parameters involved in board assessments.

· Second, companies need to set CO₂ emissions baselines and provide annual emissions data by which investors can gauge prevailing emissions trends. Utilities have been reporting such data to the U.S. Environmental Protection Agency for 10 years. They should make this information directly available to shareholders as well. (Some are already doing so.)

· Most important, utilities should be making forward-looking disclosures of their CO₂ emissions. As an industry, electric utilities have pledged to reduce the carbon intensity of their emissions by 3 to 5 percent by 2012. But actual emissions projections and the effects of proposed CO₂ controls vary substantially from company to company, and such information typically is not shared with investors. (See the attached IRRC Proxy Issues Reports on Southern Company and TXU Corp. as examples.) Investors cannot begin to make meaningful evaluations of the potential impacts of CO₂ legislation on their portfolio holdings until they have access to such forward-looking information.

Congress can facilitate this disclosure process by requiring utilities and other major carbon emitters to report not only past emissions data, but also future projections in securities filings. To be fully transparent in this disclosure, aggregate emissions data as well as emissions intensity ratios should be provided.

The most helpful thing this Congress can do, however, is to establish once and for all that carbon dioxide is an emissions source that will be controlled. Many investors see this coming. Regardless of the targets and timetables, this act alone would provide essential guidance for investors and company directors that have put climate change on their corporate governance agenda.

What has made this issue so difficult to address is a gap in governance decisionmaking. A CEO typically looks out only three to five years when making a big capital investment, or about as long as he or she normally serves in office. The investment planning horizon for a long-lived asset like a power plant may extend up to 15 years. But the power plant will operate for 30 years or more. Carbon dioxide emissions from that power plant will stay in the atmosphere for 100 years or more—long after the CEO and even the plant itself is retired. (See Figure 2.)

Institutional investors suffer the consequences of this governance gap. The are the ones entrusted with pension, insurance and endowment assets designed to span generations. These investors have a fiduciary duty to advance governance reforms to ensure the long-term viability of these assets—and the economy as a whole. As our nation’s elected representatives, you play a complementary role and are in a position to bridge this governance gap.

A more detailed treatment of these issues appears in the forthcoming IRRC report commissioned by CERES, Climate Change and Corporate Governance: Making the Connection. Excerpts are attached to my written testimony. They include profiles of the top five carbon emitting investor-owned electric utilities. These profiles illustrate the wide divergence in board oversight and current reporting mechanisms used by these companies and demonstrate the need for a more concerted approach. Thank you for this opportunity to testify. I am happy to answer your questions and assist you in any way I can.

In 2002, filings tripled, è

support levels doubled

Figure 1. Rising Investor Support for Corporate Disclosure on Climate Change

Source: Investor Responsibility Research Center

Figure 2. Capital Life Cycles vs. Natural Life Cycles

100 years è

*Source for capital cycles: U.S. Department of Commerce, Bureau of Economic Analysis

5 years

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Social Issues Service

2003 Company Report – J2

24.2% OF SHARES VOTED AT TXU’s 2003 ANNUAL MEETING

WERE CAST IN FAVOR OF THIS PROPOSAL

TXU Corp.

Global Climate Change

by Doug Cogan

April 24, 2003

Resolution

RESOLVED: That the Board of Directors report by August 2003 to shareholders on (a) the economic risks associated with the Company’s past, present and future emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the company regarding efforts to reduce these emissions and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

Similar resolution last year? No

Proponents

Benedictine Sisters Charitable Trust (200 shares), Congregation of the Sisters of Charity of the Incarnate Word and Congregation of the Holy Cross, Southern Province (70). The proponents are church groups affiliated with the Interfaith Center on Corporate Responsibility.

At Issue / New Developments

TXU is the nation’s seventh largest investor-owned electric utility, with more than 19,000 megawatts of generating capacity in Texas. Largely reliant on natural gas and coal, TXU is the #5 industry emitter of carbon dioxide, accounting for 3.2 percent of U.S. utilities’ CO₂ emissions in 2000, according to an independent benchmarking study. TXU also is a large industry emitter of sulfur dioxide and nitrogen oxides—pollutants that contribute to acid rain, smog and human health problems. Management opposes the requested report as being “unreasonably speculative with respect to any future emissions reductions” of these pollutants.

TXU is making substantial investments in pollution control technology to comply with the Clean Air Act. Management does not say what portion of its overall capital expenditures are being spent to meet these requirements, however. TXU notes in its 2002 Form 10-K that a “significant portion” of its generating fleet was constructed “many years ago” and “may require significant capital expenditures” as well as “periodic upgrading and improvement.” Future government controls of CO₂ emissions could threaten the economic viability of some of TXU’s planned power plant retrofits.

New developments at the company: In October 2002, TXU announced plans to terminate and write off its European operations. TXU’s stock plunged on the news. The company and its managers now are defendants in several derivative shareholder lawsuits.

Economic Impact on the Company

While TXU is making large investments to meet Clean Air Act requirements—likely totaling hundreds of millions of dollars a year—such investments will not reduce TXU’s CO₂ emissions. New government controls on such emissions could render some of its power plant upgrades uneconomic. Management does not provide shareholders with a clear sense of how much it is spending on pollution control, nor does it indicate whether future CO₂ emissions controls would have a material impact on the company. The requested report seeks more definitive answers to these questions.

TXU Corp. is the nation’s seventh largest investor-owned electric utility, serving 5 million electricity and gas customers in the United States and Australia. (TXU is working with creditors to sell its operations in Europe.) TXU also provides wholesale energy sales, merchant energy trading and risk management, energy-related services and telecommunications.

TXU owns or leases 19,000 megawatts of generating capacity in Texas, where 2.7 million of its electricity customers are located. (TXU’s Texas operations are subject to competition, beginning in 2002.) TXU also sells about 200 billion cubic feet of natural gas annually to 1.4 million customers. TXU Australia serves about 1 million electricity and gas customers, and owns and operates 1,280 MW of generating capacity. As of Dec. 31, 2002, TXU employed 14,600 people.

Financial Performance
	*2002*	*2001*	*% change to 2002*
Revenues (in billions $)	10.034	10.049	(0.1)
Net income (in millions $)	(4,232)	655	NA

2002 financial results: TXU lost $4.2 billion in 2002, and the company’s book value was cut in half. On a per share basis, TXU’s 2002 loss was $15.23 per share, compared with earnings of $2.52 per share in 2001. This most difficult year in the company’s 121-year history included a decision last October to discontinue and write off its European operations. On Oct. 12, management announced it was cutting the company’s common stock dividend by 80 percent, to 12.5 cents per share, in response to capital market concerns regarding the liquidity of TXU Corp. and its U.S. and Australian subsidiaries. TXU and its top executives now are defendants in several derivative shareholder lawsuits, alleging (among other things) false and misleading statements in company securities filings, breach of fiduciary duty, abuse of control, mismanagement, waste of corporate assets, and breach of the duties of loyalty and good faith.

Investment Performance
	*Total returns (%)*
Data as of 12-31-2002	1 yr	3 yr	5 yr

TXU Corp.	-58.6	-38.1	-40.8
S&P 500 index	-22.1	-37.6	-2.9
Industry group	No information

Industry description: Electric Utilities
No. of companies in group: 200

Source: Compustat

Environmental expenditures and liability: TXU does not provide a breakdown of its expenditures for capital projects related to the environment, nor does it provide a projection of future such expenditures. In its 2002 Form 10-K, management notes that a “significant portion of TXU Corp.’s facilities was constructed many years ago. In particular, older generating equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep it operating at peak efficiency. This equipment is also likely to require periodic upgrading and improvement.”

TXU reported a total of $996 million in capital expenditures in 2002, down from $1.248 billion in 2001. Total capital expenditures are expected to be $1.1 billion in 2003, substantially all of which are for maintenance and organic growth of existing operations.

Under the Clean Air Act and state electric utility restructuring legislation, “grandfathered” power plants (built before 1978) must achieve a 50 percent reduction in nitrogen oxides (NOx) emissions and a 25 percent reduction in sulfur dioxide emissions by May 1, 2003. This requirement will be met through emission reductions at these facilities or through the purchase of credits from other permitted facilities as an alternative to achieve the same reductions. TXU reports in its 2002 Form 10-K that it has obtained all of the necessary permits to meet these requirements, and says it can expect recovery of reasonable environmental improvement costs as part of the state-approved electric restructuring plan.

As part of the State Implementation Plan for the Clean Air Act, TXU also must comply with a requirement calling for an 89 percent reduction in NOx emissions in the Dallas-Fort Worth ozone non-attainment area and a similar 51 percent reduction from power plants in East and Central Texas. TXU says the cost of compliance will be reduced because of the emission trading provisions in the rules.

TXU and Its Environmental Affairs

Board oversight: TXU’s nine-member board of directors has seven standing committees. No board committee is charged with explicit oversight of the company’s environmental affairs. The board of directors has not conducted a formal review of the climate change issue. The company has not set targets to reduce carbon dioxide or other greenhouse gas emissions, but says it strives to develop and implement workable and economically viable emissions reduction projects.

Staff level: TXU employs about 150 environmental, health and safety professionals. The top EHS executive is Paul Plunket, Executive Vice President, who reports to Tom Baker, TXU Corp. Executive Vice President and President of TXU’s Oncor energy distribution business. There is one reporting level between Plunket and the CEO of the company. TXU has conducted company-wide environmental audits since 1987; audits of major facilities are conducted every year. Its business units are benchmarked against the ISO 14001 environmental management system standard. The audit committee of the board of directors reviews audit results; audit summaries are not made pubic. TXU says environmental performance is a factor in the compensation of top executives, plant managers and other employees.

TXU is one of three U.S. utility companies listed on the Dow Jones Sustainability Index. In June 2002, Innovest Strategic Value Advisors, Inc. recognized TXU as the fourth highest-ranking company out of 28 utilities evaluated based on environmental risk factors, enviornmental management capacity and environmental opportunity factors. Innovest also found that TXU was below the industry average in terms of its exposure to a possible carbon tax relative to its stock market capitalization (as of Jan. 1, 2000).

Environmental principles and reporting: TXU has issued an environmental report annually since 1991. (The report and its Statement of Environmental Principles is available in printed form and on the Internet at www.txucorp.com/globcit/envcom/globalreport/principles.) The latest report includes a brief policy statement on climate change and carbon savings/offsets achieved in the United States and Australia. The report also includes statistics on TXU’s sulfur dioxide, nitrogen oxide and carbon dioxide emissions rates as compared to national electric utility averages and the company’s investments in wind energy.

Under the Clean Air Act Amendments of 1990, TXU is required to collect hourly emissions data on carbon dioxide, nitrogen oxides and sulfur dioxide. The power plant emissions data are recorded in a database maintained by the U.S. Environmental Protection Agency. The company also provides a summary of annual mercury emissions from its lignite/coal generating facilities on its website and annually reports these emissions to the EPA, which makes the information publicly available on the Internet in the Community Right-to-Know database.

TXU and Global Climate Change

As part of its Statement of Environmental principles, TXU says it will “continue to take prudent steps to voluntarily reduce our emissions of greenhouse gases and to promote carbon sequestration programs.” It says it has set “challenging sustainability targets in the medium and long term” that include increased use of renewable fuels, reducing greenhouse gas emissions through more efficient electricity production and use, assisting carbon sequestration through reforestation and other technologies, and actively promoting conservation and load management programs. Quantitative targets have not been set, however.

In its 2002 annual report, TXU says it “supports a balanced, flexible, comprehensive and international approach to the global climate change issue.” It does not comment on the Kyoto Protocol, an international agreement that seeks a 5 percent cut in industrialized nations’ CO₂ emissions below 1990 levels by 2012. In its 2002 Form 10-K, management says, it is “unable to predict the impact of the [Bush] Administration proposal or related legislation” on climate change.

Carbon dioxide emissions: As noted above, TXU reports information to government agencies about its CO₂ emissions, but it does not make this information readily available to shareholders. Through use of Continuous Emissions Monitors on its major power plants, TXU reported carbon dioxide emissions equal to 66.8 million metric tons (MMT) in 2000. Separately, TXU told IRRC that its operations in the United States and Australia emitted 72.8 MMT of CO₂ in 2001. TXU also collects data on emissions of two other greenhouse gases, methane and sulfur hexafluoride.

According to an independent benchmarking study conducted by the Natural Resources Defense Council, TXU was the fifth largest utility emitter of carbon dioxide in 2000, accounting for 3.2 percent of U.S. utilities’ CO₂ emissions. That year, natural gas provided 61 percent of its generation; coal/lignite, 28 percent; and nuclear, 11 percent. TXU’s high ranking in the benchmarking study was mainly a function of its large generating base, totaling more than 19,000 megawatts of capacity. Because its main source of fuel is natural gas (which has a lower carbon content than coal or oil), it ranked 56^th out of 100 utilities studied in terms of CO₂ emissions per megawatt-hour (MWh) of generation, and it ranked 71^st out of 100 in terms of CO₂ emissions per MWh of generation from fossil energy plants. Other utilities with lower rankings (i.e., closer to #1) had higher CO₂ emissions per unit of power produced.

TXU reported in its 2001 environmental report that its CO₂ emissions rate in 2000 was 11 percent below the national average (based on tons of CO₂ emitted per million Btus of energy produced). Similarly, its sulfur dioxide and nitrogen oxides emissions rates were 33 and 15 percent below the national average, respectively. The NRDC benchmarking study reported that TXU ranked fifth in terms of total utility emissions of nitrogen oxides in 2000, and 12^th in terms of sulfur dioxide emissions.

Emissions savings: TXU has been a member of the U.S. Department of Energy’s Climate Challenge program since 1995, and it has reported emissions savings under the Section 1605(b) reporting program established by the 1992 Energy Policy Act. TXU reported savings/offsets of 23 million metric tons of CO₂ equivalent in 2001 and a total of 196 MMT of savings since 1991—more than any other U.S. investor-owned electric utility. TXU says its CO₂ emissions would have been 28 percent higher in 2001 were it not for savings and offsets achieved since 1990.

Most of TXU’s savings are from operation of its Comanche Peak nuclear units, which came on line in the early 1990s. The Energy Policy Act allows utilities to count as savings any new generation from nuclear power plants that began operation or increased their output after 1990. (Comanche Peak is the only U.S. investor-owned nuclear plant completed after 1990.) Other sources of TXU’s emissions savings include heat rate improvements in its fossil energy plants, demand-side management programs, methane recovery, sulfur hexafluoride reduction programs and tree planting.

In 2001, TXU reported 527,400 tons of emissions savings through its demand-side management programs. The company has planted more than 20 million trees since the early 1970s, including 1.3 million in 2002. TXU Australia reported savings/offsets of 230,000 tons in 2001. TXU Australia is expected to achieve a 16 percent reduction in its total greenhouse gas emissions by 2004.

Renewable energy: TXU says it encourages “research and development of more efficient, environmentally benign sources of energy and, whenever warranted by market opportunity, to offer customers the benefits of energy produced from renewable resources.” TXU offers a “green pricing” option in each jurisdiction it serves. TXU has contracts for 382 megawatts of wind power in Texas, making it the fourth largest purchaser of wind power in the United States. It also has contracts for approximately 20 MW of wind power in Australia and 30 MW of hydro and landfill gas generating capacity. TXU says it is also evaluating photovoltaic, solar thermal, waste-to-energy and biomass technologies.

This is the second time that shareholder proponents affiliated with the Interfaith Center on Corporate Responsibility have submitted a global warming resolution to TXU Corp. In 1997, a resolution filed with its predecessor, Texas Utilities, was withdrawn. TXU was targeted again this year because it has been identified as one of the top five carbon-emitting investor-owned electric utilities. The proponents met TXU’s corporate secretary and members of the company’s environmental staff in March 2003. Though the discussions were amiable, the proponents elected not to withdraw the resolution on the basis that TXU was not willing to provide sufficient forward-looking information on the climate change issue.

The resolved clause of the resolution has two elements. It asks the company’s board of directors to report on:

(a) the economic risks associated with the Company’s past, present and future emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the company regarding efforts to reduce these emissions and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

In a presentation by Ceres, a coalition working closely with the Interfaith Center on the 2003 shareholder campaign, arguments made in favor of the global warming resolution filed with electric utilities are as follows:

1. Health and environmental risks from pollutants: Electric utilities account for two-thirds of the nation’s sulfur dioxide emissions, one-third of its mercury emissions and nearly one-quarter of its nitrogen oxides emissions. These pollutants contribute to asthma, lung and heart disease and mercury bioaccumulation in humans, and cause extensive damage to the environment, including acid rain, smog and mercury bioaccumulation in fish and other species. At the same time, electric utilities account for 37 percent of the nation’s carbon dioxide emissions, the main gas tied to global warming.

2. Government regulation of these pollutants: Emissions of sulfur dioxide and nitrogen oxides are regulated under the Clean Air Act. This federal law will require substantial additional reductions of these emissions as well as mercury in the years ahead. Utilities will have to make major new investments in pollution control technology, but this technology will not control carbon dioxide emissions.

3. Risks of not factoring in carbon dioxide controls: The proponents believe domestic regulatory controls of CO₂ are inevitable. Two states (New Hampshire and Massachusetts) have already passed laws restricting utility emissions of CO₂, and federal legislation has been introduced as well. At the international level, the Kyoto Protocol is likely to go into effect this year (although the Bush administration has pulled the United States out of the agreement).

According to studies cited by the proponents, the most expensive choice utilities could make is to retrofit existing fossil energy plants with new pollution control equipment and then have to reduce CO₂ emissions from these plants. The proponents argue that utilities should factor future CO₂ controls into their investment strategies now, since it could alter decisions about which power plants to retrofit with new pollution control equipment and which to replace with new, cleaner energy sources.

4. Need for greater disclosure by utilities: By some estimates cited by the proponents, many electric utilities face a “carbon exposure” of between 10 and 35 percent of their total market capitalization. (In other words, the cost of achieving carbon dioxide emission controls as specified by the Kyoto Protocol equals 10 to 35 percent of the current value of their stock.) Many factors go into making this calculation, including a utility’s generating assets, fuel mix, installed pollution control technologies and whether it is competing in a deregulated electricity market. “Investors cannot assess this risk without more disclosure” from utilities, according to Ceres.

That is why the proposal calls on management to conduct a thorough economic assessment of the risks and benefits of achieving substantial emissions reductions of the four pollutants listed in the proposal. “We believe that taking early action on reducing emissions and preparing for standards could better position companies over their peers, including being first to market with new high-efficiency and low-emission technologies,” the proponents argue. “Changing consumer preferences, particularly those relating to clean energy, should also be considered. Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk,” it concludes.

SmartVoter Guidelines

Voting guidelines for this resolution are presented under issue number 3425 in IRRC’s SmartVoter product.

Questions Raised

· Is TXU reporting adequately on the global warming issue?

· Could TXU do more to respond to this issue?

Adequacy of reporting: The proponents believe that management should provide shareholders with more information on the company’s response to global warming. In particular, the proponents want management to lay out the costs and benefits of reducing greenhouse gas emissions as it invests in other pollution controls at its fossil-fired generating facilities. Management says it is already making information on its emissions publicly available and that the additional information requested by the proponents would be “unduly speculative.”

Management can legitimately say that it is providing some information to shareholders on this issue:

· Disclosure: It makes reference to the global warming issue in its 2002 annual report and Form 10-K.

· Emissions: Its 2001 environmental report provides comparative statistical information on its emissions of carbon dioxide, sulfur dioxide and nitrogen oxides, and its efforts to reduce these emissions.

· Databases: Its proxy statement cites government databases where shareholders can find more detailed information on the company’s emissions.

Shareholders who wish to conduct more than a cursory analysis of the company’s response to global warming and its exposure to risks from controlling emissions may find management’s level of disclosure inadequate, however. Here are some examples:

· Disclosure: Management says in its 2002 annual report that it “supports a balanced, flexible, comprehensive and international approach to the global climate change issue.” But it does not make any mention of the Kyoto Protocol, the pending international agreement to address climate change, or indicate whether the company has any targets to reduce its greenhouse gas emissions. The Form 10-K statement also sheds little light on these questions. It says only that management is “unable to predict the impact of the [Bush] Administration proposal or related legislation” on climate change.

· Emissions: Management says in its environmental report that its emissions of CO₂, SO₂ and NO_x are below the national average per unit of electricity produced. But it does not provide absolute emissions figures, which reveal the company to be one of the nation’s largest emitters of each of these substances. Among U.S. electric utilities in 2000, TXU ranked fifth in CO₂ and NO_x emissions, and 12^th in SO₂ emissions.

· Databases: Management makes reference to government databases where its aggregate emissions figures can be found. It says in its 2003 proxy statement that such databases demonstrate the company’s “support for, and progress toward, voluntary reductions of greenhouse gas emissions….” But management does not provide links or Internet addresses to these government sites, which would assist interested parties in tracking down this information. Moreover, management does not explain why it omits aggregate emissions figures in its own reports to shareholders and instead normalizes the data based on electricity production. Providing aggregate data would enable shareholders to better scrutinize management’s claims of progress toward absolute emissions reductions.

· Financial implications of regulatory controls: Finally, management provides very little information to shareholders about its capital expenditures related to environmental protection. It provides figures for recent and projected total capital expenditures for the company. It also notes that many of its power plants have had to obtain permits to come into compliance with new Clean Air Act standards. But it does not break out how much of its capital expenditures are being used for such environmental purposes. Separately in its Form 10-K, management warns that a “significant portion of TXU Corp.’s facilities was constructed many years ago” and that these facilities “may require significant capital expenditures” as well as “periodic upgrading and improvement.” But it attaches no dollar figures to such warnings. Shareholders are left to ponder whether these expenditures may be material to the company’s operations and future financial condition.

Could TXU be doing more to respond to this issue? From the preceding discussion, it is clear that TXU could be doing more to enlighten shareholders about the risks and opportunities posed by efforts to reduce greenhouse gas emissions.

· Disclosure: Management could state in its annual report whether or not it believes the Kyoto Protocol reflects a “balanced, flexible, comprehensive and international approach” to the global climate change issue. It could list in its Form 10-K examples of issues and uncertainties that render it “unable to predict the impact” of climate change proposals, and provide at least a broad outline of the possible magnitude of such impacts.

· Emissions and databases: Management could provide links or website information to government databases to which it submits aggregate emissions data. Better still, it could provide this information in its own company reports. Best of all, it could provide historic and projected emissions data so that shareholders can judge for themselves how well the company is doing in “support for, and progress toward, voluntary reductions of greenhouse gas emissions.”

· Financial implications of regulatory controls: Management could provide a breakdown of its capital expenditures related to environmental protection—as most other companies do in their Form 10-K reports. In particular, management could provide information on its past investments and future projections to keep its fossil energy plants in compliance with the Clean Air Act. In order to satisfy the proponents’ request regarding the effects of cutting greenhouse gas emissions, management also could give some indication of how efforts to achieve the goals of the Kyoto Protocol or comparable U.S. legislation might affect its investments in retrofitting and upgrading its older plants.

In the final analysis, shareholders who believe the global warming issue does not yet pose a major policy and financial concern for TXU—or who agree with management that further statements on the issue would be “unduly speculative”—will be inclined to vote against this proposal. Shareholders who believe the issue does pose concerns—despite the legislative uncertainties that remain—will be inclined to vote for the proposal. This latter group of shareholders may conclude, in fact, that the uncertain financial consequences of still-evolving response strategies to climate change makes the issuance of a forward-looking report all the more valuable.

Shareholder Proposal Related To An Environmental Report:

“ELECTRIC UTILITY RESOLUTION

WHEREAS:

In 2001 The Intergovernmental Panel on Climate Change concluded that “there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.”

In 2001 the National Academy of Sciences stated that the “degree of confidence in the IPCC assessment is higher today than it was 10, or even 5 years ago…there is general agreement that the observed warming is real and particularly strong within the past 20 years.”

The United States government’s “Climate Action Report – 2002,” concluded that global climate change may harm the country. The report highlights risks to coastal communities in the Southeast due to sea level rise, water shortages throughout the West, and increases in the heat index and frequency of heat waves.

In July 2002, eleven Attorneys General wrote President Bush, outlining their concern over the U.S. Climate Action Report’s failure to recommend mandatory reductions of greenhouse gas emissions. They declared that States are being forced to fill the federal regulatory void through state-by-state regulation and litigation, increasing the ultimate costs of addressing climate change. They urged a reconsideration of his regulatory position, and adoption of a “comprehensive policy that will protect both our citizens and our economy.”

U.S. power plants are responsible for about two-thirds of the country’s sulfur dioxide emissions, one-quarter of its nitrogen oxides emissions, one-third of its mercury emissions, approximately 40 percent of its carbon dioxide emissions, and 10 percent of global carbon dioxide emissions.

Scientific studies show that air pollution from U.S. power plants causes tens of thousands of premature deaths and hospitalizations, hundreds of thousands of asthma attacks, and several million lost workdays nationwide every year from pollution-related ailments.

Standards for carbon dioxide emissions and other air pollutants are emerging across multiple fronts. Ninety-six countries have ratified the Kyoto Protocol, requiring carbon dioxide reductions. Massachusetts and New Hampshire have enacted legislation capping power plants emissions of carbon dioxide and other air pollutants. In June 2002 the Senate Environment and Public Works Committee passed a bill seeking to cap emissions from the generation of electric and thermal energy.

We believe that taking early action on reducing emissions and preparing for standards could better position companies over their peers, including being first to market with new high-efficiency and low-emission technologies. Changing consumer preferences, particularly those relating to clean energy, should also be considered.

Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk.

(b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e. potential improvement in competitiveness and profitability).”

The Board of Directors recommends a vote AGAINST this proposal for the following reasons:

The Company believes that adoption of the shareholder proposal would unnecessarily duplicate ongoing Company reporting activities, would needlessly increase costs and require unreasonable speculation with respect to the economic risks and benefits of emissions and future emission reductions.

The Company routinely reports to regulatory agencies and the public regarding significant environmental matters. Since 1991, the Company has voluntarily published an annual environmental report, available in printed form and on the Internet, which sets forth its Statement of Environmental Principles and presents statistics on the Company’s sulfur dioxide and nitrogen oxide emissions rates as compared to national electric utility averages, voluntary reductions in greenhouse gas emissions (including carbon dioxide), and investments in zero-emission wind energy.

The Company also annually reports emissions of sulfur dioxide, nitrogen oxide and carbon dioxide, which are continuously monitored at the generating facilities as required by law, to the state and federal environmental agencies, including the U.S. Environmental Protection Agency (EPA), which makes this information publicly available through the Emissions Scorecard database on the Internet.

The Company also provides a summary of annual mercury emissions from its lignite/coal generating facilities on its web page and annually reports these emissions to the EPA, which makes the information publicly available on the Internet in the Community Right-to-Know database.

The Company’s public stance regarding efforts to reduce these emissions is embodied in its Statement of Environmental Principles and is further reflected in its record of compliance with state and federal sulfur dioxide and nitrogen oxide emissions requirements and reductions, which is summarized in the Company’s annual environmental report. The Company’s public support for, and progress toward, voluntary reductions of greenhouse gas emissions (including carbon dioxide) is reported annually to the U.S. Department of Energy, which makes the information available in the Public Use Database on the Internet.

The Company routinely discloses the economic risks associated with emissions in its public reports filed with the Securities and Exchange Commission. The reports address capital construction costs for sulfur dioxide and nitrogen oxide emissions control equipment necessary under current regulations, certain material risks associated with environmental compliance, and certain legislative and regulatory initiatives that may, in the Company’s determination, materially impact its operations.

In its normal course of business, the Company evaluates possible additional emissions reductions beyond those required by state and federal regulations. The Company believes that a more detailed report on the economic risks and benefits of emissions and emissions reductions would be unreasonably speculative with respect to any future emissions reductions. For example, the Company cannot accurately predict the outcome of future federal or state legislative actions to regulate emissions.

In summary, adoption of the shareholder proposal would unnecessarily increase costs and duplicate ongoing Company reporting activities.

The Board of Directors Recommends a Vote AGAINST This Shareholder Proposal.

Southern Company is the nation’s second largest electric utility, serving 4 million customers in Georgia, Alabama, Florida and Mississippi, with 27,000 miles of transmission lines. Its regulated utility companies—Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric—provide nearly 90 percent of earnings. The remaining portion of Southern’s business activities includes wholesale power generation, a competitive retail natural gas business, energy-related products and services, fiber optics and wireless communications, and leveraged leasing activities. Southern employed 26,178 people as of Dec. 31, 2002.

Southern had 34,739 megawatts of owned and leased generating capacity in its retail system at the end of 2002. Southern Power, its electric wholesale generation subsidiary, had 1,612 MW of natural gas-fired generating capacity in commercial operation. Southern Power expects to have a total of 6,600 MW on-line by the end of 2005. Southern’s generation sources in 2002 were coal, 69 percent; nuclear, 16 percent; natural gas, 12 percent; and hydro, 3 percent. Average fuel costs in 2002 were 1.61 cents per kilowatt-hour. Southern’s retail electric rates are 15 percent below the national average.

Financial Performance
	*2002*	*2001*	*% change to 2002*
Revenues (in billions $)	10.549	10.155	3.9
Net income (in millions $)	1,318	1,262	4.4

2002 financial results: Southern says its financial performance in 2002 was “very strong and one of the best in the electric utility industry.” Net income of $1.318 billion from continuing operations increased 17.6 percent over income from continuing operations reported in 2001. Diluted earnings per share from continuing operations in 2002 were $1.85 per share, up from $1.61 in 2001. Dividends paid per share on common stock in 2002 were $1.355, up from $1.34 in 2001. The company had an average of 708 million shares of common stock outstanding in 2002, an increase of 2.7 percent.

Future construction and environmental expenditures: Southern provides projections for construction expenditures, including environmental capital expenditures, over the next three years. Its projected construction expenditures are as follows: $2.075 billion in 2003, $2.308 billion in 2004 and $2.354 billion in 2005. Its projected environmental capital expenditures are $257 million in 2003, $300 million in 2004 and $346 million in 2005. Southern forecasts electricity demand growth of 3.5 percent a year, and customer growth of 1.5 percent a year.

Investment Performance
	*Total returns (%)*
Data as of 12-31-2002	1 yr	3 yr	5 yr

Southern Co.	17.6	123.8	124.9
S&P 500 index	-22.1	-37.6	-2.9
Industry group	No information

Industry description: Electric Utilities
No. of companies in group: 200

Source: Compustat

Southern and Its Environmental Affairs

Board oversight: Southern’s 10-member board of directors has five standing committees. No board committee is charged with explicit oversight of the company’s environmental affairs. The audit committee is responsible for reviewing environmental compliance audits along with other regulatory matters affecting the company. The entire board receives updates on environmental management issues periodically. The 2003 proxy statement makes no reference to environmental issues discussed by the board of directors.

The board of directors has not conducted a formal review of the climate change issue. The company has not set targets to reduce carbon dioxide or other greenhouse gas emissions, but says it is considering them. It has provided projections of carbon dioxide emissions out to the year 2020.

Staff level: Southern employs about 250 environmental, health and safety professionals at the corporate level. The top EHS executive is Dr. Charles H. Goodman, Senior Vice President, Research and Environmental Affairs. Goodman reports to Paul Bowers, President, Southern Co. Generation and Energy Marketing; and Dwight Evans, President of External Affairs. There is one reporting level between Goodman and the CEO of the company. Southern says environmental performance is a factor in the compensation of top executives, plant managers and other EHS employees.

Southern has conducted company-wide environmental audits since 1992. Audits of major facilities are conducted every one to two years, and are conducted by corporate and facility staff. The audit committee of the board of directors reviews audit results. Audit summaries are not made public.

Environmental principles and reporting: Southern issued its first environmental policy statement in 1992 and its first environmental report in 1993; it has issued the environmental report periodically since then. The report includes a climate change policy statement, summary of greenhouse gas reduction efforts and a projection of future emissions trends.

Southern’s most recent statement on climate change was issued in August 2000. Among other things, the policy statement says:

· Climate change is global and long-term in nature.

· Policies should seek to resolve climate change scientific uncertainties.

· Solutions must incorporate unrestricted use of market-based flexibility mechanism, and consider the broadest range of sources as well as sinks of greenhouse gases, both domestic and international.

· Policies must protect a secure, economic and diverse energy supply, and promote long-term research, development and dissemination.

· Public and private partnerships should support development and commercialization of higher efficiency, lower emitting power generation technologies.

· Cost-effective means should be pursued to reduce, avoid and sequester greenhouse gas emissions.

Southern says in the statement that it is committed to “establishing and maintaining dialog with public and private interest groups to expand the understanding of the climate change issue and to enhance the development and implementation of appropriate climate change policy.” The full policy statement is available at: http://www.southerncompany.com/planetpower.asp.

Global Climate Coalition: Southern Company was a founding member of the Global Climate Coalition (GCC), which formed in 1989. For more than a decade, the GCC was the leading industry group opposed to mandatory greenhouse gas controls and U.S. adoption of the Kyoto Protocol. Southern was one of five companies that withdrew from the GCC in late 1999 and early 2000. A Southern spokesman told IRRC that the company was concerned the GCC was “as strident as its most strident member” and that Southern had decided not to align itself with other groups on the climate change issue.

At the time it pulled out of the lobbying group, Southern was facing a global warming shareholder resolution that highlighted its membership in the GCC. That resolution subsequently was withdrawn. The GCC ended its corporate membership program in March 2000, one month after Southern left the group, and it disbanded altogether in January 2002.

Renewable Energy Development

Southern is not optimistic about the prospects for renewable energy development, especially in its service area. It says on its website that “renewable energy is more expensive—and sometimes dramatically so—than power generated by fossil fuels than coal or natural gas. Even if costs weren’t a factor, some renewable energy sources aren’t available on a large scale in the Southeast.” A shareholder proposal filed with

Southern on developing renewable energy was supported by 9.5 percent of shares voted in 2001 and 9.2 percent in 2002.

Southern does offer an “EarthCents green pricing” option that allows customers in Alabama and Mississippi to purchase 100 watt blocks of renewable energy for $5-6 per month. Similar programs are awaiting regulatory approval in Georgia and Florida. The energy will come from a portfolio of sources, including landfill methane, wind and solar power. In addition, Southern is conducting research on biomass, solar and landfill methane technologies. For example, Southern is adding switchgrass (a biomass fuel) at two of its power plants to reduce the use of coal and related emissions. It has also installed a 250-kW fuel cell demonstration plant. Fuel cells emit less greenhouse gases inherently than boilers or engines that provide the same energy.

In its 2002 Form 10-K, Southern acknowledges that commercial success of fuel cells and renewables would pose a competitive threat to the company and its shareholders. Management states:

A key element of Southern Company's business model is that generating power at central power plants achieves economies of scale and produces power at relatively low cost. There are other technologies that produce power, most notably fuel cells, microturbines, windmills and solar cells. It is possible that advances in technology will reduce the cost of alternative methods of producing power to a level that is competitive with that of most central power station electric production. If this were to happen and if these technologies achieved economies of scale, Southern Company's market share could be eroded, and the value of its electric generating facilities could be reduced. Changes in technology could also alter the channels through which retail electric customers buy power, which could reduce Southern Company's revenues or increase expenses.

Southern Company is the nation’s second largest electric utility and the nation’s second largest consumer of coal (behind American Electric Power). According to an independent benchmarking study conducted by the Natural Resources Defense Council, Southern was the second largest U.S. utility emitter of carbon dioxide, sulfur dioxide, nitrogen oxides and mercury in 2000. That year, Southern had 32,000 megawatts of capacity and coal provided 76 percent of its power generation. With 128 million metric tons of carbon dioxide emissions, Southern accounted for 6.4 percent of U.S. utilities’ CO₂ emissions in 2000, according to the NRDC study. Southern has told IRRC that it is considering the adoption of CO₂emissions control targets.

To date, Southern has spent considerable sums to comply with the federal Clean Air Act, which addresses sources of air pollution. It estimates that its construction expenditures have totaled $400 million to achieve significant reductions in sulfur dioxide and nitrogen oxide emissions under the first two phases of the Clean Air Act Acid Rain provisions. In the 1990s, Southern cut its sulfur dioxide emissions by 40 percent and its nitrogen oxides emissions by 28 percent, even as its electricity generation has increased by 20 percent.

In addition, Southern has spent $980 million to reduce nitrogen oxide emissions from power plants in nonattainment areas around Atlanta, Ga., and Birmingham, Ala., to meet a regulatory requirement that goes into effect in May 2003. Additional construction expenditures for compliance in the Georgia nonattainment area are estimated at $305 million to achieve standards that will go into effect in May 2005. Altogether, Southern expects to spend an additional $4 billion or more by 2015 to further reduce its overall emissions—not including carbon dioxide.

Outlook to 2020: Unlike most utilities, Southern provides a long-term outlook for its power supply and projected emissions, dating to 2020. Its key projections are as follows:

· Power generation—Southern expects its annual power generation to increase from 172 million megawatt-hours in 2000 to approximately 250 MWh in 2020, an increase of 45 percent.

· Fuel mix—Southern expects its power supplied from coal to decrease from 76 percent in 2000 to 38 percent in 2020; its power from natural gas to increase from 4 percent to 53 percent; its power from nuclear energy to fall from 16 percent to 6 percent; and its power from hydro and oil to stay at about 3 percent.

· Sulfur dioxide and nitrogen oxide emissions—Southern expects its emissions of sulfur dioxide to fall from nearly 1.5 million tons in 1990 to about 300,000 tons in 2020, a decrease of about 80 percent. It expects its emissions of nitrogen oxides to fall from 400,000 tons to about 127,000 tons, a decrease of about 68 percent.

· Carbon dioxide emissions—As a result of generation growth, Southern expects its carbon dioxide emissions to increase from 128 million metric tons in 2000 to approximately 148 MMT in 2020, an increase of about 16 percent. It says, “Although our current projections indicate a rise in the years ahead, much focus is being placed on how we can continue to meet the energy needs of our customers while addressing emissions of greenhouse gases such as CO₂.” From 1990 to 2020, Southern projects that its CO₂emissions will increase by a total of 45 percent.

Carbon dioxide emissions reduction programs: Since 1991, Southern has avoided or offset a total of 55 million metric tons of CO₂equivalent. It has registered these savings with the Department of Energy under Section 1605(b) of the 1992 Energy Policy Act. The savings have been achieved mainly through improved performance of three nuclear power plants, thereby offsetting generation and emissions from coal-fired units. Southern has received 20-year license extensions for two of its three nuclear power plants, which will extend their expected life of operation past 2030.

Southern has also sequestered carbon through a reforestation program that has planted more than 35 million trees. Other carbon dioxide emissions savings include 3.6 MMT from demand-side management programs, 0.2 MMT from biomass co-firing in coal-fired power plants, 0.6 MMT of CO₂ equivalent from methane reductions and 0.8 MMT of CO₂ equivalent from reductions in sulfur hexafluoride, a potent greenhouse gas.

Congressional Legislation

Several major bills have been proposed in Congress to impose more stringent emissions limitations under the Clean Air Act. Three of these bills—the Bush administration’s Clear Skies Act, the Clean Power Act of 2002 and the Clean Air Planning Act of 2002—propose to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also propose to limit emissions of carbon dioxide. Though none of these bills was enacted into law in the last Congress, similar bills have been introduced in 2003.

Carbon dioxide legislation: In addition to the Clean Power Act and Clean Air Planning Act of 2002, other bills have been introduced in Congress, including the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions by 2010 and returning them to 1990 levels by 2016. In its 2002 Form 10-K, Southern does not indicate whether these bills would have material impacts on the company’s operations and financial condition. It says the cost impacts of such legislation would depend upon the specific requirements enacted.

Management does say in the Form 10-K that domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. Southern is involved in a voluntary electric utility industry initiative in partnership with the Bush administration, which does not support ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation. The Bush administration’s voluntary climate initiative seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. Electric utilities have pledged a 3 to 5 percent reduction in the carbon intensity of their emissions by 2012. Absolute emissions of carbon dioxide would continue to rise. Because this initiative is still under development, Southern says it is not possible to determine the effect on the company at this time.

New Source Review and Related Lawsuits

If Southern fails to comply with environmental laws and regulations, even if caused by factors beyond its control, that failure may result in the assessment of civil or criminal penalties and fines against the company. The U.S. Environmental Protection Agency has filed civil actions against Alabama Power, Georgia Power and Savannah Electric alleging violations of the New Source Review provisions of the Clean Air Act. The EPA has also issued notices of violation to Gulf Power and Mississippi Power. Management says in its Form 10-K that an “adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could require payment of substantial penalties,” ranging up to $27,500 per day, per violation at each generating unit.

The New Source Review provisions of the Clean Air Act address older power plants that do not meet the more stringent emissions control requirements imposed on newest plants. The provisions were meant to require the installation of best available pollution control technology on older power plants if they were overhauled and underwent major modifications. Questions have arisen, however, over what constitutes major modification and what is considered routine maintenance for these plants.

In December 2002, the EPA issued final and proposed revisions to the New Source Review program that are intended to clarify which maintenance expenditures do not warrant obtaining new Clean Air Act permits. Several Northeastern states petitioned the District of Columbia Circuit Court in February 2003 for a stay of the final rules. The stay was not granted. The proposed rules were open to public comment and may be revised before being finalized by the EPA. Any final regulations must be adopted by the states in the company’s service area in order to apply to its facilities. Management says it cannot determine the effect of these proposed and final rules concerning the New Source Review at this time.

Lawsuits: In November 1999, the EPA began a civil action against Alabama Power, Georgia Power and Savannah Electric alleging violations of the New Source Review provisions of the Clean Air Act. The lawsuit requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at six affected units. The EPA has issued a notice of violation relating to each of these facilities as well as two others owned by Alabama Power.

The cases against Southern’s operating units have been stayed since the spring of 2001. A ruling is pending by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority. Because the outcome of the TVA appeal could affect the lawsuits pending against Southern’s operating units, Alabama Power and Georgia Power have become parties to the TVA case as well. Southern believes its operating units were engaged in “common and traditional maintenance activities” of its power plants and “complied with applicable laws and the EPA’s regulations and interpretations in effect at the time the work in question took place.”

Other Clean Air Act Issues

Southern’s 2002 Form 10-K addresses a number of other requirements concerning the Clean Air Act and state clean air standards. These requirements are likely to result in additional capital expenditures, although in each instance management says it does not have enough information to characterize the possible impact on the company’s operations or financial condition. These include:

National ambient air quality standards for ozone and fine particulate matter: The U.S. Environmental Protection Agency will issue final implementation rules in 2004 that are expected to designate several areas within the company’s service area with nonattainment under the new ozone and fine particulate matter standards. State implementation plans to bring those areas into compliance could be required as early as 2007. Those state plans could require further reductions in nitrogen oxide and sulfur dioxide emissions from power plants sometime after 2007. Management says the impact of any new standards will depend on the development and implementation of applicable regulations.

Regional Transport Rule: The EPA also is expected to issue final rules for a Regional Transport Rule for the fine particulate matter standard in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify other state implementation plan requirements for attainment of the fine particulate matter standard and ozone standard referenced above. Management says it is not possible at this time to determine the effect such a rule would have on the company.

Regional haze: Further reductions in sulfur dioxide also could be required under the EPA’s Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. Southern says it has a number of plants that could be subject to these rules. State Implementation Plans for these rules are due in 2007 and 2008. Because new BART rules have not been developed and state visibility assessments are only beginning, management says it is not possible to determine the effect of these rules on the company at this time.

Compliance assurance monitoring: The EPA’s Compliance Assurance Monitoring (CAM) regulations require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. Four of Southern’s operating companies will be applying for renewal of operating permits between 2003 and 2005 that will likely be subject to CAM requirements for at least one pollutant (in most cases particulate matter). The company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, management says it cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements.

Mercury: The EPA plans to issue final rules regulating mercury emissions from electric utility boilers by the end of 2004. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. Compliance could be required as early as the end of 2007. Because the rules have not yet been proposed, management says the costs associated with compliance cannot be determined at this time.

Coal Research

Southern is committed to the continued use of coal as one of its main sources of generation. It says on its company website that is pursuing development of coal technologies that “could one day generate energy from coal while producing dramatically fewer emissions or no emissions at all.” Southern has managed more than $400 million in research and development efforts over the last 10 years, much of it on clean-coal technologies. “During the transition period to new clean coal technologies and other cleaner generation, it is critical that existing units be kept in efficient, operational order to maintain the reliability of our electric power system,” the company says. “Utilities must be able to operate and maintain their plants to meet increases in demand for electricity.”

At a facility in Alabama, Southern has successfully tested a technology that turns coal into gas, which could be used to produce electricity more cleanly than traditional coal plants. Coal gasification would cut carbon dioxide emissions by more than one third, relative to conventional coal plants, and emissions of sulfur dioxide, nitrogen oxides and particulate matter also would be “significantly reduced,” according to the company. The research program is a partnership with the U.S. Department of Energy in which $271 million has been invested.

Southern is also one of eight large coal-burning utilities and coal companies to form an alliance that seeks the creation of a “near zero-emission” coal-fueled power plant. The alliance is in support of President Bush’s FutureGen Initiative, a 10-year public-private partnership that seeks to advance the use of hydrogen through extraction from coal. An April 22, 2003, press release announcing the alliance states that “The U.S. has more than a 300-year supply of coal; therefore, the effort to design near zero-emissions power plants promises to create a new way in which coal can power our economy with minimal environmental impacts.”

Southern also became the first utility to join the Zero Emission Coal Alliance. The aim of the alliance is to test technology that generates electricity with coal in a process that stores carbon dioxide in a solid, mineral carbonate form, thereby eliminating greenhouse gas emissions. Hydrogen extracted from coal through an anaerobic process is used in a fuel cell to generate electricity. Rights to the proprietary technology are now held by ZECA Corporation, which aims to be “the premier owner and supplier of Zero Emission Coal and Carbon solutions.”

This is the fourth time that shareholder proponents affiliated with the Interfaith Center on Corporate Responsibility have submitted a global warming resolution to Southern Company. Shareholder proponents withdrew resolutions asking the company to report on the costs and liabilities of climate change in 1997, 1999 and 2002. The withdrawals came because “the company was willing to be forthcoming with data we were asking for,” according to Sister Patricia Daly, executive director of the Tri-State Coalition for Responsible Investment, who has been one of the lead filers at Southern.

Earlier this year, the company once again sent representatives, including Dr. Charles Goodman, Southern’s senior vice president for research and environmental affairs, to meet with Daly and other shareholder proponents in New York. Daly told IRRC that this year’s meeting was not as productive as in years past, “because they clearly had not done their homework on what our new resolution is about.” Company executives presented an update of Southern’s environmental progress and initiatives. “But we’re in a whole new ballgame now,” Daly explained. “We want the company to evaluate its data in terms of climate change risk, and we don’t have any indication that anyone at the company is doing this.”

The resolved clause of the 2003 global warming resolution has two elements. It asks the company’s board of directors to report on:

In a presentation by Ceres, a coalition working closely with the Interfaith Center on the 2003 shareholder campaign, general arguments made in favor of the global warming resolution filed with electric utilities are as follows:

5. Health and environmental risks from pollutants: Electric utilities account for two-thirds of the nation’s sulfur dioxide emissions, one-third of its mercury emissions and nearly one-quarter of its nitrogen oxides emissions. These pollutants contribute to asthma, lung and heart disease and mercury bioaccumulation in humans, and cause extensive damage to the environment, including acid rain, smog and mercury bioaccumulation in fish and other species. At the same time, electric utilities account for 37 percent of the nation’s carbon dioxide emissions, the main gas tied to global warming.

6. Government regulation of these pollutants: Emissions of sulfur dioxide and nitrogen oxides are regulated under the Clean Air Act. This federal law will require substantial additional reductions of these emissions as well as mercury in the years ahead. Utilities will have to make major new investments in pollution control technology, but this technology will not control carbon dioxide emissions.

7. Risks of not factoring in carbon dioxide controls: The proponents believe domestic regulatory controls of CO₂ are inevitable. Two states (New Hampshire and Massachusetts) have already passed laws restricting utility emissions of CO₂, and federal legislation has been introduced as well. At the international level, the Kyoto Protocol is likely to go into effect this year (although the Bush administration has said the United States will not be bound by the agreement).

8. Need for greater disclosure by utilities: By some estimates cited by the proponents, many electric utilities face a “carbon exposure” of between 10 and 35 percent of their total market capitalization. (In other words, the cost of achieving carbon dioxide emission controls as specified by the Kyoto Protocol equals 10 to 35 percent of the current value of their stock.) Many factors go into making this calculation, including a utility’s generating assets, fuel mix, installed pollution control technologies and whether it is competing in a deregulated electricity market. “Investors cannot assess this risk without more disclosure” from utilities, according to Ceres.

SmartVoter Guidelines

Voting guidelines for this resolution are presented under issue number 3425 in IRRC’s SmartVoter product.

Questions Raised

· Is Southern responding adequately to the risks of global warming?

· Could Southern do more to report on these risks to shareholders?

Risks of global warming: As the nation’s second largest electric utility, and one of the most heavily reliant on coal, Southern has a tremendous amount at stake in the global warming debate. Carbon dioxide emissions from its power plants account for nearly 2.5 percent of the nation’s CO₂ emissions. As it expands its power generation, Southern expects these emissions to grow by another 16 percent by 2020—for a total increase of 45 percent between 1990 and 2020.

Legislation proposed in Congress calls on companies to “cap and trade” their emissions. Under the Climate Stewardship Act, for example, companies would be required to return to 1990 emissions levels by 2016. The Kyoto Protocol (which the United States has not endorsed) calls for more stringent controls—a 7 percent cut in CO₂ emissions below 1990 levels by 2012. Management says it is focused on “addressing emissions of greenhouse gases such as CO₂,” but it has not indicated to shareholders the extent of such controls and whether they would have a material impact on the company’s operations and financial condition. It says the cost impacts of CO₂ controls would depend upon specific requirements of government legislation.

Meanwhile, Southern continues to make extensive investments in its aging fleet of coal-fired power plants. As the utility industry’s #2 emitter of sulfur dioxide and nitrogen oxides, Southern has spent $1.4 billion to install pollution control equipment under the acid rain and ozone nonattainment provisions of the Clean Air Act. It expects to spend an additional $4 billion or more by 2015 to further reduce these and mercury emissions. However, its spending on pollution control could be higher and come sooner if it loses a series of court cases now before U.S. Court of Appeals. At issue is whether Southern’s older coal plants must install best available pollution control technology when they receive modifications. Management says that an adverse outcome in any one of these cases could require “substantial capital expenditures” and could require payment of “substantial penalties”—ranging up to $27,500 per day, per violation at each generating unit.

The proponents are concerned that Southern may find itself making costly investments to retrofit existing fossil energy plants with new pollution control equipment and later have to reduce CO₂ emissions from these plants, compromising the future value of these investments. The proponents argue that utilities should factor possible CO₂ controls into their investment strategies now, since that could alter their decisions about which power plants to retrofit and which to replace with new, cleaner energy sources. Accordingly, they are asking management to issue a report on this issue.

Adequacy of reporting by Southern: Southern provides a much clearer outlook for its power generation than most electric utilities. With projections out to 2020, management has informed shareholders that it expects its power generation to grow by 45 percent, even as it reduces its emissions of sulfur dioxide and nitrogen oxides by 68 to 80 percent of 1990 levels. These reductions will be made possible not only by investments in pollution control equipment at its coal-fired plants, but also by construction of new gas-fired plants to meet incremental power demand. Natural gas is expected to account for about half of Southern generating mix by 2020, while coal’s contribution is expected to fall from about two-thirds to just over one-third. Because natural gas has a lower carbon content than coal and burns more efficiently, Southern also expects to reduce the “carbon emissions intensity” of its power production. For every 3 percent increase in power generation, it is projecting only a 1 percent increase in its CO₂ emissions.

As detailed as this reporting is, it still does not answer the proponents’ fundamental question, however: What will the company do if it has to achieve stabilization or reductions in its CO₂ emissions over the next 10 to 20 years? By 2020, Southern’s CO₂ emissions are projected to be 45 percent above 1990 levels. Accordingly, even achieving stabilization at 1990 levels would entail a substantial emissions reduction from the levels now being projected.

On this vital contingency, management offers very little guidance in its Form 10-K or other securities filings. With respect to government policy, management says the effects on the company would depend on the terms of legislative controls. With respect to technology, management does acknowledge that the commercial success of low-emitting technologies, such as fuel cells and renewables, could erode its market share and reduce the value of its electric generating facilities, if they achieve economies of scale. But again management gives no indication of whether these developments would be material to the company and its shareholders. By inference, the suggestion is that they could be.

By reviewing the company’s environmental report, shareholders are able to glean some other useful pieces of information. With respect to renewables, Southern does not see them posing much of a threat—or opportunity—in its service area because the available resources are limited and the costs of generation are higher than power from coal or natural gas. (This assumes no costs of carbon emissions will be added to these fuels.) With respect to coal, Southern says it is pursuing development of cleaner-burning technologies that “could one day generate energy from coal while producing dramatically fewer emissions or no emissions at all.” It does not give a clear sense of the generating costs or technological hurdles that remain with clean coal technologies, however, so it is not possible for shareholders to compare their prospects with those of renewables. Finally, with respect to the issue of climate change, Southern continues to regard it as “global and long-term in nature,” and believes that policies “should seek to resolve climate change scientific uncertainties.” Management’s key point is this:

During the transition period to new clean coal technologies and other cleaner generation, it is critical that existing units be kept in efficient, operational order to maintain the reliability of our electric power system. Utilities must be able to operate and maintain their plants to meet increases in demand for electricity.

Herein lies the dilemma for investors. The proponents say management must provide better information on the costs and risks of this strategy, given that the cost of achieving carbon dioxide emission controls ranges from 10 to 35 percent of the current value of utility companies’ stock, according to some estimates. Management says, however, that the detailed information requested by the proponents would require knowledge of future governmental or other legal action beyond what is already discussed in company reports.

In the final analysis, shareholders who are satisfied with Southern’s current level of reporting—which at least provides a clear outlook for the company’s generating mix and projected emissions through 2020—will be inclined to side with management and vote against this proposal. Those who feel that management could set some better financial parameters around the uncertainties in its outlook—especially what legal, regulatory and legislative developments could be material to the company and its shareholders—will be inclined to support the proponents’ call for a more detailed report on the costs and benefits of Southern’s evolving response to climate change.

Shareholder Proposal Related To An Environmental Report:

“ELECTRIC UTILITY RESOLUTION

WHEREAS:

Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk.

RESOLVED: That the Board of Directors report (at reasonable cost and omitting proprietary information) by August 2003 to shareholders on (a) the economic risks associated with the Company’s past, present and future emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the company regarding efforts to reduce these emissions and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e. potential improvement in competitiveness and profitability).”

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" ITEM NO. 3 FOR THE FOLLOWING REASONS:

The Company is committed to complying fully with all environmental laws and regulations as well as maintaining our commitment to environmental stewardship in such a way that appropriately considers our customers and stockholders.

The proposal requests a report to our shareholders on the "economic risks associated with the Company's past, present, and future emissions." The Company currently provides details regarding its risk factors including historic and anticipated environmental costs and known future contingencies. This information is included in the Company's Annual Report on Form 10- K for the year ended December 31, 2002 ("Form 10-K"). The Form 10-K is available on the Company's website and the website of the Securities and Exchange Commission and may be obtained from the Company. (See page 2 of this Proxy Statement for information on requesting a copy of the Form 10-K from the Company.)

Details on the Company's risk factors, including historic and anticipated environmental costs and known future contingencies, are also included in the Annual Report to stockholders in the Management's Discussion and Analysis of Results of Operations and Financial Condition section and in the Notes to Financial Statements.

In addition, the Company's environmental commitment and achievements are described in our Environmental Progress Report. This report is available for viewing and downloading on the Company's website and will be sent to stockholders or others upon request.

The Company opposes this proposal because the information the Company would report is largely duplicative of information already provided. We also believe the detailed information requested on future costs and risks would require knowledge of future governmental or other legal action and is too speculative to report and quantify as requested by the proposal, beyond what is discussed in the reports noted above. We believe that it is in the best interests of our stockholders that the Company not be required to incur the additional expense of producing and distributing such a report.

The vote needed to pass the proposed stockholders' resolution is a majority of the shares represented at the meeting and entitled to vote.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" ITEM NO. 3.

Proxy Statement Proposal		Related IRRC report
1.	Elect directors	CG Proxy Report
2.	Ratify selection of auditors	CG Proxy Report
3.	SP- Index stock options	CG Proxy Report
4.	SP- Report on greenhouse gas emissions	SI Background Rpt. J2

Proxy Statement Proposal		Related IRRC report
1.	Elect directors	CG Proxy Report
2.	Ratify amendment of by-laws permitting book-entry of shares	CG Proxy Report
3.	SP- Report on greenhouse gas emissions	SI Background Rpt. J2