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A letter from the editor

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Not to frighten any shareowners or put a damper on any future CEO's spirits, but that kind of compensation package from this company may simply not be available for too much longer.  How can one say such a preposterous thing about the fiscal prospects of a corporate powerhouse whose revenue growth averages 15% per year?

The answer is simple: Natural Resource Damage, NRD for short. 

PCB's, Big G, and NRD
What carcinogens in cigarettes are to Big Tobacco, PCB's in the environment are to Big 'G'.  NRD is the legal tool that federal and states attorneys general are in the opening stages of using against G.E..  They are going to do to G.E. what was recently done to Big Tobacco using other legal methods, that being to hold the corporate entity responsible for actions that have proven deleterious to human health, and in G.E.'s case to the rest of the environment as well. 

In the matter of Big Tobacco, the industry defendants settled by agreeing on a multi-decade plan to fork over literally hundreds of billions of dollars for damages connected to smoking-related illnesses.  The big difference here though, is that instead of a slew of tobacco company defendants on the hook being able to spread amongst themselves the costs of monumental settlements, the list of defendants in this case begins and ends with just one company, General Electric (though once the legal pyrotechnics begin, G.E. will certainly attempt to implead its PCB supplier, Monsanto Chemical Company). 

Like being hit by a meteorite
Even with G.E.'s astronomical market capitalization, ranging this past year from a high of $600 billion to the current low of $392 billion (share price times number of outstanding shares), how much of a hit from a meteorite the size of the Big Tobacco settlement can one world-class company take without it making a dent? 

According to the New York State Dept. of Environmental Conservation ("NYS-DEC"):

"Natural Resource Damages (NRD's) are compensation for injuries which happen to natural resources in the course of a spill or release of contaminants into the environment.  The compensation pays for the cleanup and restoration of the injured resources.  Several federal and state statutes authorize New York State to pursue Natural Resource Damages. 

"The federal laws are: the Superfund law (Comprehensive Environmental Remediation, Compensation and Liability Act, or CERCLA), the Oil Pollution Act, and the Clean Water Act; the State laws are: Environmental Conservation Law, Navigation Law and Common Law (Public Nuisance).

"'Natural resources' include biological and geologic resources, and air, groundwater and surface water.  New York State is the trustee for those resources within its jurisdiction.  Frequently, NYS-DEC is a co-trustee with the federal government and also with native American (Indian) nations in particular cases."
To view NYS-DEC's Web page on this subject, Click Here!
To read excerpts from the CODE OF FEDERAL REGULATIONS,
Click Here!

In New York, PCB damage to the Hudson River has been highly publicized.  Yet, at the mouth of the Hudson lies New York Harbor, through which PCB's travel into the Atlantic Ocean on their southerly journey from Hudson Falls and Fort Edward where G.E.'s plants illegally dumped more than a million pounds of the compound into the waterway.  The State of New Jersey borders and shares the harbor with New York, so it too has standing to file NRD claims against G.E.. 

In Massachusetts, the Housatonic River runs through the City of Pittsfield where G.E.'s former transformer plant was the origination point for hundreds of thousands of pounds of PCB's illegally discharged into that body.  The Housatonic River flows southerly through western Connecticut before it  empties into Long Island Sound at the City of Stratford.  Both these states thus have standing to file NRD claims.

In addition, G.E. has full or shared responsibility for scores of Superfund sites throughout the United States.  Therefore, any of those other states wherein PCB or other pollution is wrought by actions of G.E., and where that pollution has had a significant detrimental impact on natural resources has standing to file NRD claims against the Company. 

Toxic torts by private citizens - a possible feeding frenzy
Add to this already impressive exposure the fact that G.E. can of course also be held liable in tort actions, lawsuits brought by private citizens either individually or collectively as a class-action for injuries sustained.

The prospect is quite real of a feeding frenzy when the country's ambulance chasing, contingency-fee'd tort lawyers realize that even minuscule levels of PCB's in mother's milk arguably can cause developmental effects in infants.  There exist a myriad of potential medical impacts that PCB's can have on the human body, either when the chemicals act alone, or in combination with other pollutants in the environment, or in the presence of drug medications. 

PCB cocktails and POP's
The biological reactions which occur under the influence of these chemical 'cocktails', and the processes by which these can affect various tissues in living organisms, are the subject of intense study around the world.  As with any science, some of the reactions and processes are better understood than others. 

PCB's are what are known as 'Persistent Organic Pollutants', or POP's for short, which bioaccumulate in the food chain, evaporate from sediments and their surrounding waters (a recent finding), and move into the environment. 

They are carcinogenic in animals and have been designated as 'probable' human carcinogens.  They are also known to cause endocrine disruption and reproductive and skin disorders.  Because of their neurotoxicity, they are also known to cause a dampening of intelligence and to increase learning disabilities.

(Imagine the prospect of the nation's top toxic tort attorneys obtaining blood serum drawn from Hudson valley kids, and milk drawn from their Moms, all in order to analyze for traces of PCB's, furans and dioxins.  What is it worth if a zillionth of a drop of polychlorinated biphenyls is found in breast tissue of a lactating Mom?  Ask a jury!) 

G.E.'s only response is 'Note 21'
G.E.'s only official word on the subject is written in dry legalese in the 'Notes to Consolidated Financial Statements' where, buried on page 68 of the fiscal 2000 Annual Report, is the footnote ('Note 21') entitled 'GE All Other Liabilities'.  The Company states: 

"GE is involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws.  Liabilities for remediation costs at each site are based on management's best estimate of undiscounted future costs, excluding possible insurance recoveries.  When there appears to be a range of possible costs with equal likelihood, liabilities are based on the lower end of such range.  Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop a meaningful estimate of the reasonably possible aggregate environmental remediation exposure. However, even in the unlikely event that remediation costs amounted to the high end of the range of costs for each site, the resulting additional liability would not be material to GE's financial position, results of operations or liquidity." (Emphasis and underline added.)

Editor's Note:  To download the Financial Section of G.E.'s Fiscal 2000 Annual Report in order to read Footnote 21 in the Notes to Consolidated Financial Statements:
First, Click here! 
Second, Click on 'Financial Section'.
Then, Click on 'Download the GE 2000 Annual Report Financials Now'.
You  will  find Note 21 on page 68 of  the Annual Report.

Thus, G.E.'s claim above that ".....liability would not be material to GE's financial position, results of operations or liquidity" rings somewhat hollow in the context of aggregate liability inclusive of remediation costs plus NRD claims plus possible tort actions.

Whether the total amount of G.E.'s exposure will ever approach the level of the Big Tobacco settlement is anybody's guess, but one thing is certain: the longer G.E. delays in taking steps to actually remedy the environmental damage it has caused, the longer the offending toxins will stay in the environment to create even more damage, and consequently more liability for the Company. 

G.E.'s delaying tactics -- 

Time and the natural processes of biology become the multiplier of damages in NRD proceedings.  So the ironic kicker to all this is that even if G.E. succeeds in its present anti-dredging advertising campaign, and even if the Company does manage to somehow stave off US-EPA's order to dredge the Hudson River, it becomes a Pyrrhic victory indeed once the NRD lawsuits commence.  Because the longer the toxins remain in the river to spread damage throughout the ecosystem, the higher will be the ultimate liability exposure.

A single example for the skeptics
For those who are doubtful of this thesis that G.E.'s future profitability will be strained because of NRD actions, consider just the single matter of the closures of the recreational fisheries in the Hudson River. Without remediation those closures are likely to continue indefinitely.  As more is learned about the potency and toxic effects of even trace doses of PCB's, the odds are that New York State will simply keep those fisheries off-limits.  Whose deep-pockets do you think are going to be held liable for those closures?

'A whole lot of shakin' going on'
What all this adds up to for the long-term is a whole lot of litigation and liability exposure for G.E., and the prospect of a lot of G.E.'s hard earned capital  changing hands. This is money that today would be used by the Company to maintain its share price by repurchasing shares, and/or used to pay higher dividends to shareowners, and/or used to pay generous bonuses to senior management. 

While PCB's are left to continue their migration from the sediments on the river bottom into the water environment, fish, wildlife and human beings in the Hudson valley, the natural resource damage and toxic tort claims have the potential of dwarfing the combined costs of EPA's proposed Hudson River clean-up, the Pyrrhic anti-dredge ad campaign, Dr. Welch's recent pay package, and just about every future stock option G.E. chairman-elect Jeffrey Immelt is planning to enjoy. 

The increased natural resource damages exposure, when combined with the likely increases in toxic tort exposure to the Company, could exceed, by a very large margin, any sum G.E. might save on the cleanup.  When one adds on the frosting, the cost of the advertising campaign, there could be a significant slice taken out of the Company's profits pie. 

Why would the Company pursue such a course of action?   Did you know that G.E. Chairman Welch was personally in charge of negotiations when the Company settled the enforcement action brought by the State of New York in 1976 involving the Hudson Falls and Fort Edward plants that illegally dumped the PCB's into the river?  It is Dr. Welch's signature that graces the settlement documents.  Dr. Welch probably used to think, and certainly might still wish, that this case ended a quarter century ago.  It is possible that on this issue, the fabled judgment of the Company's senior management is clouded. 

State and federal government agencies are currently in the process of assessing the money damages due to the people of the State and the nation for the past, ongoing, and future injuries to the natural resources of the river, and of the valley.  The goal is to restore the resources, to the extent possible.

Handling of New York matter aided rise to the top
His negotiating style and tactics, and the cagey diplomacy he exhibited at the bargaining table all impressed G.E.'s then chairman, Reginald H. Jones, enough so that in 1977, the young engineer was appointed a senior vice-president and sector executive of G.E.'s Consumer Products and Services Sector.  He served in that capacity until 1979 when he was appointed co-vice chairman and executive officer of the corporation, succeeding to the chairmanship and the post of chief executive officer in 1981. 

A strong personal stake 
It is clear then that Dr. Welch has a strong personal stake in the New York matter since it helped propel his rise in the Company.  This is perhaps one reason his judgment may be prejudiced in the current situation.  Some believe that he is not necessarily seeing the whole picture with the freshest eyes, nor appreciating the potential downside liability to the Company, at least not as clearly as he should given the circumstances. 

Full-time residents of the Hudson Valley region have expressed just how truly amazing is the onslaught of G.E.'s advertising campaign, and that upon being inundated by it, one quickly realizes that Dr. Welch must be absolutely obsessed with this matter.  People talk of scratching their heads wondering how the Company can justify spending maybe a quarter of the cost of the cleanup on  advertising and lobbying. 

The emperor's sartorial dilemma
Many have expressed the notion that this is not the most credible approach for a company like G.E. to take, when U.S. corporations ache to be identified with  environmental causes and all things green. Talk abounds that nobody at corporate must be willing to tell the emperor that he is wearing no clothes. 

It is the view of many that at the end of his reign, this deservedly admired business leader appears to be 'losing it' over this one case, a matter over which his, and any successor's, control becomes more limited with time -- since time is the mathematical constant that is multiplying the Company's NRD liability.

U.S. National Oceanic and Atmospheric Administration (NOAA) --
Damage Assessment and Restoration Program:
http://www.darp.noaa.gov/neregion/hudsonr.htm

New York State Department of Environmental Conservation (NYS-DEC) --
Hudson River Assessment:
http://www.dec.state.ny.us/website/dfwmr/habitat/nrd/index.htm
Hudson River Preassessment Screen:
http://www.dec.state.ny.us/website/dfwmr/habitat/nrd/screen.htm
Ecosystem Remediation & Restoration Section:
http://www.dec.state.ny.us/website/dfwmr/habitat/hoa1b2j.htm

§ 11.15 What damages may a trustee recover?

 (a) In an action filed pursuant to section 107(f) or 126(d) of CERCLA, or sections 311(f) (4) and (5) of the CWA, a natural resource trustee who has performed an assessment in accordance with this rule may recover:

 (1) Damages as determined in accordance with this part and calculated based on injuries occurring from the onset of the release through the recovery period, less any mitigation of those injuries by response actions taken or anticipated, plus any increase in injuries that are reasonably unavoidable as a result of response actions taken or anticipated;
(2) The costs of emergency restoration efforts under § 11.21 of this part;
(3) The reasonable and necessary costs of the assessment, to include:
    (i) The cost of performing the preassessment and Assessment Plan phases and the methodologies provided in Subpart D or E of this part; and
    (ii) Administrative costs and expenses necessary for, and incidental to, the assessment, assessment planning, and restoration, rehabilitation, replacement, and/or acquisition of equivalent resources planning, and any restoration, rehabilitation, replacement, and/or acquisition of equivalent resources undertaken; and
(4) Interest on the amounts recoverable as set forth in section 107(a) of CERCLA. The rate of interest on the outstanding amount of the claim shall be the same rate as is specified for interest on investments of the Hazardous Substance Superfund established under subchapter A of chapter 98 of the Internal Revenue Code of 1954. Such interest shall accrue from the later of: the date payment of a specified amount is demanded in writing, or the date of the expenditure concerned;

 (c) Where an assessment determines that there is, in fact, no injury, as defined in § 11.62 of this part, the natural resource trustee may not recover assessment costs.

 (d) There shall be no double recovery under this rule for damages or for assessment costs, that is, damages or assessment costs may only be recovered once, for the same discharge or release and natural resource, as set forth in section 107(f)(1) of CERCLA.

 (e) Actions for damages and assessment costs shall comply with the statute of limitations set forth in section 113(g), or, where applicable, section 126(d) of CERCLA.