April 21, 2021 Columns

Editor’s Column

By William R. Drexel

Our current issue of Infrastructure addresses issues that are at the forefront of public policy debate, or likely will be, due to regulatory change resulting from climate, environmental, competition, or other public policy considerations that render obsolete historic investment in regulated property, plant, and equipment. IRIS members active in the telecom sector have been to this play before. The silicon-based gales of creative destruction upended historic investment that had been subject to regulated depreciation lives set without proper regard for the force or speed of those destructive gales.

In our first article, Charlie Read and Marc Campopiano examine how the premature obsolescence of regulated investment has been treated under the historic regulatory compact in the electric and gas sectors. This analysis primarily focuses on the regulatory history in California but also draws insight from several other states. Charlie and Marc specifically analyze how the regulatory compact, which emanates from the seminal Supreme Court case of Munn v. Illinois, constrains regulatory discretion to terminate all or part of a public utility service based on public policy considerations.

The authors conclude that the regulatory compact alone does not create enforceable rights that preclude such a termination of service. In some jurisdictions, however, the compact provides a basis for balancing the interests of investors and consumers in a manner that allows some recovery for the stranded plant associated with the discontinued service.

In our second article, Eric Gallon and Dan Conway assess the potential impacts of climate change on regulatory policies that address natural gas electric generation. During the Obama and Trump administrations, natural gas was viewed as a clean energy. Natural gas has become a significant component of our base load electric generation capacity, particularly with the early retirement of significant coal-fired base load generation plants due to environmental concerns. The rise of natural gas corresponded to a concomitant reduction in CO2 emissions as the United States achieved emission reductions by 2019 that the Obama Administration projected would not be achieved until 2030.

Despite that history, there is increasingly a push by federal and state regulators to end reliance on natural gas for electric generation. Eric and Dan analyze those forces and the implications on long-held public policy objectives. Specifically, they conclude that committing to a future without natural gas–fired generation is fraught with risk for three core objectives: adequacy, reliability, and just and reasonable prices. Until the technical and economic feasibility challenges to renewable reliability are demonstrated, the authors suggest that regulators hedge their bets by maintaining dispatchable base load generation resources, including natural gas-fueled generation plants.

We hope you enjoy this issue, as well as our associated podcasts, the most recent of which was on the Texas electric crisis. If you have suggested topics for future issues or podcasts, or would like to submit an article for consideration, please contact me at billdrex@yahoo.com.

For Further Reading: “Materiality” Under the Securities Laws

The two articles in this Spring issue of Infrastructure address stranded-plant concerns that may arise from new environmental regulations being adopted in many states or from the new Administration’s climate change agenda. Environmental regulatory changes also seem likely in view of the D.C. Circuit’s recent invalidation of the Affordable Clean Energy regulations. As an aid for companies assessing such environmental law changes and the associated disclosure obligations they may entail, we are including in this issue a link to a paper by Anthony J. Terrell, a vice chair of the Committee on Infrastructure Finance, Mergers & Acquisitions, on the materiality standard for disclosures under the federal securities laws.

Tony’s article, “Materiality in Review—Probability, Magnitude and the Reasonable Investor,” addresses:

  1. concepts of materiality enunciated by the U.S. Supreme Court;
  2. definitions of materiality contained in SEC regulations and various disclosure requirements in Regulation S-K based on differing levels of probability;
  3. notions of probability and magnitude contained in certain accounting principles of the FASB, as well as in auditing standards established by the PCAOB and the AICPA; and
  4. attributes of the elusive reasonable investor implied by judicial decisions, critiques of such attributes by behavioral economists, and suggestions for reform.

The paper is available on the IRIS website.

Copies can also be obtained by contacting Tony Terrell directly at tony.terrell@bracewell.com or Whitney Hutchens at whitney.hutchens@bracewell.com.

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