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Clean Air Act of 1990

In the late 1980s, various states and the US Congress debated placing limits on sulfur emissions to reduce the impact of acid rain. Utilities that generated electricity using coal-powered plants felt they would suffer the brunt of any such legislation. This case reflects the discussions that took place at one electric utility. The case is on a much smaller scale than the actual situation faced by the utility, and the numbers reported as annual numbers are actually smaller than real values would be. However, the relative analysis is consistent with the analysis faced by the utility. Since the numbers are small, it would be prudent to express any increase in costs as a percent of current costs. The case describes an early conversation among utility executives and managers. Again, the names, titles, and words are not exact but reflect the nature of the conversation. Adam Bellars, the president of Blue Power Energy, has called a meeting of several company executives and managers to discuss the potential impact of proposed acid rain legislation. Bellars opened the meeting by stating that legislatures suggested various forms of acid rain legislation. Some proposals could require utilities to reduce sulfur emissions anywhere from fifty to ninety percent. He wants to determine Blue Power’s strategy for dealing with the legislation. Louis Avers, vice president for corporate relations, indicated that various utilities were arranging a meeting with key legislators. In preparation for that meeting, she suggested that the company determine the actual cost to Blue Power and translate that into the resulting rate increase that customers would face if the legislation went into effect. Bellars asked John Smalt, the vice president for operations, what technical options were available for reducing sulfur emissions. Smalt indicated that the most efficient were scrubbers. Blue Power has two generation stations, East James and Henderson. East James is the larger unit. Scrubbers for East James would cost $400,000 a year to operate (including annualized acquisition costs) and could remove 5,440,000 lbs of sulfur per year, about 85% of the current emission levels. Scrubbers for the smaller Henderson unit would only cost $100,000 a year to operate and could remove 2,652,000 lbs of sulfur, again about 85% of the current emission levels. This would add $500,000 a year to the current production costs. And if the legislation required a 90% reduction, scrubbers alone would not be sufficient. Edna Furst, coal purchasing manager, was asked about purchasing low-sulfur coal. She indicated that low-sulfur coal was an option but that it costs about $9 more per ton, and since it is mostly mined in the west, it costs almost three times as much to ship. How many tons of coal do we currently purchase, Bellars asked. About 92,000 tons, Furst answered. Including the extra shipping costs buying all low-sulfur coal would be about $1,200,000 more per year. And low-sulfur coal averages about a half percent sulfur while our current coal averages about 5% sulfur. So, we could obtain the 90% reduction level with just low- sulfur coal.

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But at a cost increase of over $1,200,000, asked Bellars. What do we spend on coal now? Somewhere around $3,000,000, Furst responded. So that is an increase of about 40%. After a pause in the conversation, John Smalt asked, does low-sulfur coal burn more efficiently? Edith Alexander, the efficiency analysis manager, interjected that yes low-sulfur coal has a higher heat content and in general costs less to burn. We actually have a program that will calculate the cost to burn a ton of any coal. We can use that to check any advantages of burning low-sulfur coal. In addition, we should be buying coal based on the number of MBTUs (Million British Thermal Units) we need, not the number of tons. How many MBTUs do we generally need annually, Bellars asked. About 1,280,000 MBTUs at East James and 696,000 MBTUs at Henderson, Smalt replied. And what are our current sulfur emissions? About 9,520,000 pounds, Smalt asserted. Bellars interjected one last concern. It is one thing to determine how much our costs will increase. The proposed legislation will impact everyone, but companies with more nuclear and hydro generation will be impacted less. If our costs jump substantially from where they currently are, we could lose power sales to other utilities on the regional grid. Bellars summarized what he wanted. John, I’d like you to perform an analysis of all our options and what it would cost us to meet a 50%, 60%, 70%, 80%, and 90% reduction in our sulfur emissions and how each of them compares to our current costs. We can’t determine the impact easily on other companies but understanding our options is a start. Edna, I want you to provide John with a list of the coals we currently buy and a list of low-sulfur coals we might consider. That list should include sulfur content, heat content, cost per ton, and transportation costs. Edith, I want you to determine the cost/ton to burn each of the coals on that list. After John has performed and shared his analysis, I want a recommendation from each of you regarding the position we should take when Louis meets with the legislators. Can that all be done within a week? Everyone nodded and quickly left the room to take on their tasks.

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Data gathered by Edna and Edith are below.

The following needs to be done: Task 1: Build a spreadsheet model to analyze the situation. The objective is to minimize the total cost while satisfying the max sulfur emission requirement (50%, 60%, 70%, 80%, or 90%) and other constraints. The optimal results from your analysis with the model should be entered in The Summary What if Analysis section in the spreadsheet. Task 2: Please write a one-page memo that addresses the following issues: 1) Discuss the ethical issues and corporate social responsibilities Blue Power and its executives face. 2) Broadly speaking, what options are available to Blue Power? 3) Discuss any implications for the various stakeholders in this situation. 4) What approach do you recommend Blue Power take when they meet with the legislators? Using the specific results of your analysis (from The Summary What if Analysis section in Excel), provide a rationale for your recommendation.

Brown Ajax BlackHills Farley West River Rockford Dakota Sandy Creek heat content (mbtu/ton) 21 23 22 21 24 28 27 26 sulfur content(%) 3.00% 8.00% 4.00% 7.00% 0.40% 0.70% 0.08% 0.01% cost to burn $/ton 3.00$ 3.45$ 3.25$ 3.80$ 1.80$ 1.20$ 0.85$ 1.10$ purchase cost per ton 32.00$ 28.00$ 30.00$ 27.00$ 36.00$ 37.00$ 38.00$ 42.00$ delivery cost to East James 2.00$ 3.00$ 2.00$ 2.00$ 5.00$ 6.00$ 5.00$ 5.00$ delivery costs to Henderson 3.00$ 1.00$ 2.00$ 2.50$ 7.00$ 8.00$ 7.00$ 7.00$ tons available 35,000 12,000 20,000 30,000 20,000 10,000 20,000 50,000

Brown Ajax BlackHills Farley Current East James Purchase 10,000 20,000 30,000 Current Henderson Purchase 20,000 12,000

Current Coals Low Sulfur Coals