The Latest Expense to Hit Utility Companies From the EPA

The long-overdue removal of PCBs from electrical equipment may soon become required by the EPA, and utility companies will have to foot the bill.

Apr 10, 2014 at 3:49PM

When the Environmental Protection Agency (EPA) takes action regarding the use of toxic chemicals, the decisions are typically swift and have an immediate impact on manufacturers and end-users of the compounds in question. When the EPA banned the manufacture of Polychlorinated Biphenyl (PCB) compounds in 1979, the few major American manufacturers still making or using the compounds had no choice but to suspend production of PCB products.

However, the 600,000 tons of PCBs that had been synthesized in the U.S. since their discovery up until the ban were not all immediately removed from public use. As the EPA reconsiders how to handle the disposal of PCB-containing products, the expenses incurred in their removal could mount for Utility Companies required to remove transformers and capacitors that still contain PCB.

Why the fuss?
BPA, CFCs, PCBs? Regulating the production of all of these have hazardous chemicals is overseen by the EPA per their authority granted by the Toxic Substances Control Act (TSCA), allowing them to control any substances that were determined to cause unreasonable risk to public health or the environment. The EPA and the Food and Drug Administration (FDA) both are yet to classify BPA as a substance in need of controlled oversight.

Though the EPA is yet to restrict production of BPA (bisphenol A), plastics manufacturers responded relatively quickly to remove BPA from consumer water and baby bottles. If or when the EPA takes action on BPA, manufacturers will quickly adapt, similar to the response by manufacturers when CFCs (chlorofluorocarbons) were phased out of use under the Montreal Protocol on Substances that Deplete the Ozone Layer.

The phasing out of CFCs like DuPont's (NYSE:DD) Freon refrigerants remains a long-term regulatory effort due to the prevalence of CFCs in refrigerants and the lack of a safe and suitable substitute for CFCs (HCFCs were originally used to replace CFCs, but a phasing-out plan for HCFCs has since been established by a UN-sponsored Montreal Summit).

The regulation of PCBs has encountered difficulties in enforcement in much the same manner as CFCs. The U.S. Congress banned the domestic production of PCBs in 1979 over toxicity concerns, and the phasing out of PCB-containing products began soon thereafter. However, the use of PCBs in closed systems, mainly in electrical equipment such as transformers and capacitors, was allowed with the intent of replacing PCB-containing equipment through normal attrition. After three decades of such practice, recent PCB contamination in South Carolina wastewater sludge paired with massive leaks from electrical transformers on an ExxonMobil (NYSE:XOM) offshore oil and gas platform demonstrate the potentially increased risk of spills, and has the EPA reconsidering its rules on the matter.

New rules and new expenses
The previously established rules set by the EPA regarding the phase out of PCB in closed systems had no effect on electrical utility companies, as they were allowed to continue using existing PCB-containing equipment until it needed replacing. A change to a fixed date phase-out of PCB-containing equipment could, however, have a significant financial impact on publicly traded utility companies and electrical cooperatives alike. Following an open commenting period, an EPA notice of proposed rule making (NPRM) is slated for November of this year regarding governance of the use and servicing of PCBs in electrical equipment.

The EPA argues that PCB-containing equipment that is currently in-use is at least 30 years old, as new equipment containing the chemical has been banned since 1979. They add that transformers typically have a maximum useful lifespan of no more than 40 years, making a set-date phase-out of PCB-containing electrical equipment a mostly inoffensive action to mitigate environmental and human health concerns. While the overall risks of PCB contamination may be decreasing due to the amount of equipment that has already been phased out, the equipment still in use is becoming increasingly vulnerable to leaks as it ages.

The nation's largest electrical utility companies, including Pacific Gas and Electric Company (NYSE:PCG) and Florida Power and Light (NYSE:NEE) have dealt with a share of PCB leakages long after the ban on production in 1979, and the expenses of servicing, removing, and insuring against the liabilities of using PCB-containing equipment will only grow as remediation efforts are delayed.

While moving to a fixed-date phase-out of PCB-containing equipment would result in immediate expenses incurred by utility companies, replacement of existing equipment that is over three decades old will not significantly hurt companies with annual revenues in excess of $10 billion.

The takeaway
Environmental remediation expenses will inevitably fall upon most every major corporation at some point and time. The removal of outdated PCB-containing electrical equipment is a reasonable mandate by the EPA that may actually save large utility companies money over the long run as disposal and insurance costs rapidly increase. As it seems to happen more often than not, the greatest relative expenses will be placed on the smaller companies and cooperatives that may lack the massive customer and financial base to easily adhere to new EPA regulations.

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Shamus Funk has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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