Summary

The case study is a deep insight of the comparative analysis of the three different business
strategies to be adopted by The Southern Company after there were acid rain provisions
emphasized by the government under the Clean Air Act. The company’s Georgia Power’s
Bowen coal-fired plant was quite efficient in terms of electrical output, but the main issue was
the high emissions of hazardous sulfur dioxide gas. The acid rain provisions were implemented
to control these sulfur dioxide emissions from plants and the law allowed firms to choose their
own emission levels, based on their electrical output and allowance limits. The allowance limits
could be purchased or sold to other companies. In order to comply with the new acid rain
provisions, Southern Company researched and developed three options which could offer them a
solution. They could either stick to their old methods and purchase allowances, install new
scrubbers to remove sulfur dioxide from the exhaust gases, or switch to purchasing low-sulfur
coal from Kentucky or West Virginia. The executives wanted a cost-minimizing method that
complied with the Act.

Q: What is the impact of the Clean Air Act Amendments of 1990 on the
Southern Company’s Bowen Plant?

The Southern Company's senior management are reevaluating the company's policy in order to
comply with the 1990 Act of Clean Air rectification of acid rain installations. The company's
many managers are working on the compliance policy, but the time for observation is quickly
running out and a lengthy period of command is needed to control the polluting equipment.

The company's coal-fired power plant in Georgia is having difficulties. The company needs to
operate this plant while following the provisions laid out under the Clean Air Act (ACC). This
coal-fired power station is a huge facility. A lot of smoke is produced when burning coal in big,
bulky vessels, and it passes through surfaces that get burned by the heat of burning charcoal or
carbon. Contiguous rotor coils convert the steam and smoke energy to mechanical energy, which
is ultimately converted into electrical energy in the plant's engine driver.

The Clean Air Act Amendments are envisioned to rectify acid rains by reducing the number of
emissions of sulfur dioxide from plants. The Act will be effective from 1995. The Act sets a
fixed sulfur dioxide emission limit for plants. The new acid rain law allows companies to choose
their own emission levels, based on their electrical output and emission limits. Companies could
purchase or sell their allowance limits in the open market.

The Act impacted Southern Company’s Bowen plant as it had high sulfur dioxide emissions. For
the Bowen plant, it had to reduce emissions by 1995 or purchase allowances. Moreover, after
2000, the Act implemented further reductions in emissions so Bowen will have to further reduce
emissions or increase its purchases of allowances. Only 254,580 tonnes of annual emission
allowance through 1995 to 1999 and 122,198 tonnes of annual emission each year after
2000 were issued to The Southern Company's Bowen facility. Bowen had to come up with a
practical solution to adhere to the Amendments' requirements.

Q: What options does Southern Company have in complying with the new
law?

The Southern Company has three possible alternatives to comply with the new Clean Air Act
Amendments of 1990. They could either stick to their old methods and purchase allowances,
install new scrubbers to remove sulfur dioxide from the exhaust gases, or switch to purchasing
low-sulfur coal from Kentucky or West Virginia. The executives wanted a cost-minimizing
method that complied with the Act. The three proposed alternatives all have their own
advantages and disadvantages. Under the high-sulfur coal option, Bowen would have to buy the
additional sulfur dioxide allowances even if it could save the expenses of the investment to
install scrubbers. The scrubber installation option demanded a high 3-year installation investment
and scrubber running fee. However, under this Bowen could save from selling the excess
allowances to other utilities or other company plants. Finally, the last option to replace high-
sulfur coal with low-sulfur coal required further capital investment, even though Bowen did not
need to buy much sulfur dioxide allowance.

The first option was that the company continue operating its Bowen facility by burning high-
sulfur Kentucky coal without scrubbing the exhaust gases. This results in Bowen’s annual sulfur
dioxide emission amounting to 266,550 tonnes, which exceeds the emission limit. As a result,
Bowen would have to buy allowances from other Southern Company plants or alternatively from
the open market. The excess amount of sulfur dioxide annually till 2000 would amount to 11,970
tonnes and 144,352 tonnes every year after 2000.

The second option was that Southern Company installs scrubbers at their Bowen facility which
would remove sulfur dioxide from the exhaust gases of the generators. As a result of installing
the scrubbers, Bowen would significantly reduce its sulfur dioxide emissions and can sell the
excess allowances to other companies or plants. If they manage to install the scrubber before
1995 (by Phase One start), the capital investment expense would amount to $143.85 million in
1992, $503.61 million in 1993, and $71.97 million in 1994 in a 3-year investment installation.
Alternatively, if they choose to delay the installation by 1999, it will require Bowen to purchase
the extra allowances from 1995 till 1999.

The third and final option for Southern Company would be to switch Bowen to low-sulfur coal
from Kentucky or West Virginia. Compared to high-sulfur coal, low-sulfur coal has a
sulfur content of just 1%. With additional allowance available for sale, Bowen would no longer
be required to purchase allowance prior to the year 2000. After 2000, Bowen would have to
purchase allowances, nevertheless. Low-sulfur coal might save on installation and operating
expenses for scrubbers, but the cost of low-sulfur coal was greater. From 1996 to 1999, the price
would be $30.37, and from 2000 onward, it would be $34.32 per ton. Compared to high-sulfur
coal, which cost $29.82 per ton, this was significantly more expensive.

Q: What is the Southern Company’s least cost alternative? In answering this

question, you should focus on the two high-sulfur coal options (i.e., with and
without a scrubber). You should look at the present value of both scenarios,
using the data in the exhibits. You should ignore in your calculations the
´interest on construction alluded to in the case. You should also ignore plant
operations for the years 1992-94, which will be the same in both scenarios.

Under the first option in which Southern Company continues producing electricity through its
high sulfur coal without scrubbing, there would be no investment in machinery. The only
operating costs would be the costs of fuel. However, significant costs of purchasing allowances
for sulfur dioxide would be needed after 1995 and further increased allowances after 2000. These
allowance expenses annually increase at a rate of 10%. 8.338 million tonnes of high sulfur coal
would be required annually from Kentucky. This makes the cost of coal to be $345.69 million.
The operating costs are constant at $0.06 million. The allowance costs rise at a rate of 10% from
$2.99 million in 1995 to $4.38 million in 1999. Thereafter, the costs for allowances significantly
increase since there is less allowance for sulfur dioxide emissions. The costs rise to $58.12
million annually which further increase annually at a rate of 10%. Overall, the net income is on a
constant decline after a steep rise in 1996 due to the reduced price of high sulfur cost. Net
income for the company decreases annually after 1996. The Net Present Value for this option is
calculated to be $3.075 million.

Under the second option in which Southern Company installs the flue gas desulfurization
equipment, or essentially scrubbers to remove sulfur dioxide from the exhaust gases, there would
be heavy capital outlay for the investment. The investment would be 3-year investment
installation. The benefit of it is that 90% of sulfur dioxide is removed from the exhaust gases. If
the company decides to have the scrubbers ready by 2000, it will need to purchase allowances.
However, since from the years 1995 to 2000, the excess sulfur dioxide emitted by the Bowen
plant is very little over the limit, the allowance cost is low so it would be suitable for the
company to have its scrubbers ready for Phase Two onwards. The costs of coal are the same as
the option with no scrubbers. In essence, until 1997, the net income for the company is same if
no scrubbers are installed. From 1997, the cost of installing the scrubbers is accounted for with
$143.85 million in 1997, $503.61 million in 1998, and $71.97 million in 1994. Moreover, with
the scrubbers having slag as waste, the costs to dispose of slag is also accounted for which
increases operating costs to $0.09 million per year. From there onwards, the company can also
sell their allowances. This revenue increases annually at a rate of 10%. Net Income reduces from
1997 to 1998, even having lowest net income in 1998 but from there onwards there is a steep
increase in net income. Depreciation expense for the machinery is also accounted for. The Net
Present Value for this option is calculated to be $3.106 million.

After analyzing both the options, Southern Company should go with the second option and
install the scrubbers by 2000 at the Bowen plant as it is least costly over the long run with a
greater net present value than the option with no scrubbers.

Q: What uncertainties does the company face that might cause it not
to pursue the ´least cost solution?

Pursuing the least cost solution might have some uncertainties for the Southern Company’s
Bowen plant. Starting off, with the heavy initial outlay during the 3-year investment installation,
there could be uncertainty over where the funds for the investment come from. This will depend
on the decisions made by the senior executives and the majority shareholders. Moreover, during
the 3-year investment installation, net income for the company is at its lowest point over the
period of 1992-2015. This can cause concerns of liquidity and be risky if something goes down
or unexpected capital is required.

Moreover, there is a market risk. In this scenario, power is shared between the government and
the businesses that may sell allowances. The government is putting in place the change that
Bowen must follow, and Bowen can sell permits to other utility companies if its sulfur dioxide
production is below the limit. Additionally, the Public Service Commission has the authority to
approve or reject any possible rate increases. Moreover, there is uncertainty over if there will be
market for the excess allowances as years go by which could affect the sales from the excess
allowances for Southern Company.

These are effectively the uncertainties that Southern Company’s Bowen plant faces that might
cause it to not pursue the least cost solution as mentioned above.

Q: What should the Southern Company do at the Bowen Plant?

The Southern Company's senior management are reevaluating the organization's acid rain
policies in order to make them compatible with the Act of Clean Air. While the company's
managers and executives are working on the conformity or compliance policy, there are still
many tasks that need to be completed since the contaminated equipment requires a practically
extended commanding time management. To fulfil the rising demand for oil and gas, the Bowen
facility is running at a high level. The corporation should construct a controlling system on its
contaminated accessories, and it needs to create surplus authorizations on its sale to other
organizations, according to the accommodative policy's concluding advice.

Furthermore, according to all available information, the Southern Company is a very successful
business with locations throughout Georgia, Alabama, Mississippi, and Florida. However, since
the Clean Air Act was passed, companies must make some difficult choices over whether to
adapt and cut emissions or purchase allowances for their present output. The value-maximizing
choice is to install the scrubbers for usage starting with Phase Two of the Act after reviewing the
data from their Bowen facility, which was acting as a test case. The second alternative, to install
scrubbers starting with Phase Two of the Act, adjusts for varying degrees of cleanliness and plant
size while maintaining the other Bowen factors (from 2000).

Moreover, the net income after Phase Two of the Act is implemented with scrubbers installed
continues to rise at a steady rate. This is beneficial for the company as there will be no liquidity
concerns and can portray a profitable outlook to the senior executives and shareholders. The net
present value for this option is also the highest among the alternatives, furthering the decision to
implement this.

The option to invest in the installation of scrubbers as Phase Two of the Act starts emerges as the
optimal course of action across all plant kinds examined after considering these additional
concerns. Again, with the understanding that Southern Company would evaluate other factors
and state regulatory standards through a plant-by-plant review that are unable to be accounted for
here.