What the GOP Wave Means for Utilities

The Republican takeover of the Senate that resulted from the recent midterm elections will have major implications for the utilities sector. Indeed, with control of both chambers of Congress, Republicans are expected to push back on proposed Environmental Protection Agency (EPA) emissions rules for existing and future coal plants.

Coal-heavy utilities that have been discounted for years in anticipation of the billions in costs they would incur to meet such rules could now see their valuations upgraded as a lower cost of regulatory compliance offers investors greater earnings visibility.

Meanwhile, utilities that have been playing a clean-technology strategy in anticipation of EPA carbon regulations making renewables or low-carbon emission investments more valuable could themselves be discounted if these investments prove costlier in the absence of such regulations.

To be sure, congressional turnover will not necessarily upset state-level efforts to encourage renewable energy through various mandates, but the EPA rule was seen as a major driver of the wholesale shift in utilities’ fuel mix toward lower carbon-emissions technologies.

That being said, some argue that a reversal in the EPA rule would have little effect on the industry’s move toward natural gas, which is cheap and abundant thanks to prolific U.S. shale plays. And being able to site a coal plant is near impossible these days as local politicians and regulators routinely yield to NIMBY (not in my backyard) sentiment.

Though market dynamics could be a countervailing force to any effort that would preserve the status quo, it remains to be seen to what extent Republican initiatives will curtail environmental regulations that it deems as an impediment to economic activity.

Republican have for years characterized President Obama’s climate plan as a “war on coal,” and threatened various tactics to kill the EPA rule, which would for the first time set limits on greenhouse gases emitted from electricity production.

And though the Supreme Court has affirmed the EPA’s authority to regulate carbon emissions, there are multiple ways that the initiative could be derailed.

According to a Bloomberg analysis, “The Senate could pass a resolution to nullify the requirements using Congressional Review Act procedures that allow Congress to overturn rules, or Republicans could attach language to appropriations bills that would block the EPA from using funds to develop or implement the regulations.”

Further, the analysis found that since the president would almost certainly veto any resolution to kill the centerpiece of his climate agenda, the greater threat to the regulation could be through the appropriations process. Spending bills could prove more difficult for Obama to veto, particularly must-pass measures needed to avoid a government shutdown.

And with a Senate majority, Republicans will now chair the powerful energy committees, including the Senate Committee on Environment and Public Works and the Senate Committee on Energy and Natural Resources, which are expected to be led by Sen. James Inhofe, R-Okla., and Sen. Lisa Murkowski, R-Alaska, respectively.

Control of these committees will allow Republicans to further reevaluate and change environmental rules and regulatory actions.

Certainly, these initiatives should not be viewed in a vacuum. Though there are segments in the utilities industry that would like nothing more than to reverse emissions regulations, many other utility executives have long espoused the view that carbon-emissions regulations are inevitable and have predicated their long-term strategies on this assumption.

In an effort to find out how the utilities industry plans to respond to possible changes in policy as a result of the Republican takeover, I will be attending the industry’s top finance conference next week and will be sharing any insights gleaned from this event in future editions of Utility & Income.

The annual Edison Electric Institute Financial Conference, which is attended by the vast majority of Utility Forecaster portfolio company executives and investor relations teams, has various meetings planned that will look at many of the issues facing the industry that we have covered over the past year. The conference will be focusing on utility strategies to enhance the grid, the role of distributed generation, and cyber security, among other areas.

We also plan to take in as many earnings presentations as possible and share with you any strategies or themes that could make for promising investments.

Subscribers to Utility Forecaster get to read the full update and learn which utility is best positioned for virtually any regulatory environment.