The laws meant that the Bowen plant of the Southern Company had to reduce the amount of sulphur dioxide released during the production of electricity. Prior to the enactment of the laws, Bowen’s sulphur dioxide emissions amounted to thirty tons an hour (Reinhardt 2). This amount translated to an annual emission of 262800 tons assuming 8760 hours in a year. Between 1995 and 2000 during the first phase of the implementation of the laws, the plant would only be allowed annual emissions of 254,580 tons of sulphur dioxide.
This translates to hourly emissions of 29.06 tons (Reinhardt 2). During the second phase of implementation starting in 2000, Bowen would need to reduce emissions to 122,198 tons annually. This translated to hourly emissions of 13.94 tons (Reinhardt 2). Alternatively, the plant could purchase more allowances from other power producing companies in order to legally emit more sulphur dioxide than was specified in the limits (Reinhardt 2).
What alternatives does Southern Company have in complying with the new law?
There were various options that Bowen could explore to comply with the newly established emission allowances. One of the alternatives is maintain its operations using the coal from Kentucky which was characteristically high in sulphur and fail to install exhaust gas scrubbers (Reinhardt 2). This alternative would require the company to purchase emission allowances to compensate for the emissions above the set limits. Alternatively, the company could explore the installation of scrubbers to rid the exhaust gases of sulphur dioxide (Reinhardt 2).
The final alternative was to source for its raw material from West Virginia because the sulphur content in the coal was lower compared to the one sourced from Kentucky (Reinhardt 3). This alternative would have allowed the plant to meet the emission requirements during the first phase of implementation. However, the alternative would have required extra allowances to meet the emission limits during the second phase of implementation (Reinhardt 3).
What is Southern’s least cost alternative?
When the net present value of the three alternatives is considered, the first alternative which involves burning the raw from Kentucky which has a high concentration of sulphur without the installation of scrubbers and purchasing emission allowances is the least cost alternative.
What uncertainties does the company face that might cause it not to pursue the least cost strategy?
Some of the uncertainties that would impede the company include the unknown cost of the allowances. At present, the amounts given are projected estimates. Variances in their price might affect the bottom lines of the plant. The reputation of the company would be influenced negatively if the plant was to implement the least cost alternative. This is because the philosophy of the laws and the general trends in the market were aimed at reducing emissions and the implementation of the first option resulted in increased emissions of sulphur dioxide. Based on the assumptions on operational costs, discount rates, tax rates, and number of periods, cost coal, and the cost of installing scrubbers, it is arguable that the first option would also be the least cost alternative for other competitors. If all the players in the industry adopted the least cost alternative, the demand for the emission allowances would increase and the resultant effect would be an increase in the price of the allowances.
Work Cited
Reinhardt, Forest. Acid rain: The Southern Company (A). Boston. Harvard Business School.
