by Kirk Philipich University of Michigan - Dearborn The Impact of EPA Regulation and U.S. Supreme Court Oversight on the Shareholders of U.S. Utilities Utilizing Coal by Kirk Philipich University of Michigan - Dearborn

Historical Background (Five Events of Interest) Regulatory Actions Potentially Affecting Coal-burning Utilities: (1) EPA applied Clean Air Act regulations to utilities (2012), and (2) EPA’s Clean Power Plan (2014 and 2015)

Historical Background (Five Events of Interest) U.S. Supreme Court Actions Affecting Coal-burning Utilities: (1) Ruled that the Clean Air Act applied to the greenhouse gases emitted by utilities (2014), (2) Struck down the 2012 EPA regulations regarding mercury emissions by coal-fired power plants (2015), and (3) Delayed the implementation of the Clean Power Plan (2016)

Historical Background => Prior Coal Company Results Philipich, Bublitz, and Ramanan (2017) found: (1) Significant (-3%) market reaction to the release of the final Clean Power Plan regulations, (2) Significant (-2%) market reaction to the release of the Department of the Interior’s plan to prevent coal mining on public land, and (3) Significant (+5%) market reaction (but only for the most financially weak coal companies) to the U.S. Supreme Court ruling striking down the EPA’s attempt to regulate mercury emissions

Research Method Event study using daily stock returns (January 2014 through March 2016) Analyze an equally-weighted portfolio of 42 U.S. utility stocks all of which employ coal Basic Model: Utility Portfolio Return (RP) = a + bM(Market Return (RM)) + bNG(%DNatural Gas Spot Price) + bO(%DOil Spot Price)

Research Method Expanded Model: Basic Model + Dummy variables for the announcement date and the following day for: EPA’s Clean Power Plan: (1) Initial plan, and (2) Final plan U.S. Supreme Court Rulings: (1) Ruled that the Clean Air Act applied to utilities, (2) Struck down the 2012 EPA regulations regarding mercury, and (3) Delayed the Clean Power Plan implementation

Basic Results Negative market reaction (-1.85%) the day following the release of the final version of the Clean Power Plan (a = .05 level) Positive market reaction (+1.72%) the day the U.S. Supreme Court struck down the EPA regulations limiting mercury emissions by utilities (a = .05 level)

Basic Results Formed a value-weighted portfolio with the 42 utility firms: Negative market reaction (-0.04%) the day following the release of the final version of the Clean Power Plan (a = .05 level)

Results => Sensitivity Formed two equally-weighted portfolios: (1) smallest 21 U.S. utilities and (2) largest 21 U.S. utilities Negative market reaction the day following the release of the final version of the Clean Power Plan for both portfolios (a = .05 level) Positive market reaction the day the U.S. Supreme Court struck down the EPA regulations limiting mercury emissions only for the small firm portfolio (a = .01 level)

Results => Sensitivity Formed two equally-weighted portfolios: (1) most thinly traded 21 U.S. utilities and (2) least thinly traded 21 U.S. utilities Negative market reaction for both portfolios the day following the release of the final version of the Clean Power Plan (a = .05 level) Positive market reaction the day the U.S. Supreme Court struck down the EPA regulations limiting mercury emissions by utilities only for the most thinly traded portfolio (a = .01 level)

Results => Sensitivity Formed an equally-weighted portfolio of the 12 firms that are both small and thinly traded Negative market reaction (a = .05 level) the day following the release of the final version of the Clean Power Plan that is approximately the same size as found for the size and thin traded portfolios (-1.86% versus -1.76%, -1.95, -2.07%, and -1.65%) Positive market reaction (a = .01 level) the day the U.S. Supreme Court struck down the EPA regulations limiting mercury emissions by utilities that is almost twice the size of that found for the small firms and the thinly traded firms (+5.18% versus +3.13% and +2.93%)

Conclusions (1) Immediate, negative market reaction to the release of the final version of the Clean Power Plan (2) Immediate, positive market reaction, for the smallest and/or most thinly traded firms, to the U.S. Supreme Court ruling striking down the EPA’s regulations on mercury emissions by utilities (3) An apparent interaction effect to the U.S. Supreme Court ruling striking down the EPA’s regulations on mercury emissions by utilities