Realities of Big Government
No one who has recommended utility stocks as long as I have is a big fan of industry regulation. Governments can do things that promote investment and thereby healthy investor returns and reliable power, water, heat and communications systems.
All too often, however, the focus is on keeping customer rates as low as possible, at least until officials can reach a higher political office. Even the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC)–long considered basically apolitical–have become populated with former consumer advocates whose first instinct is to punish rather than cooperate with such large businesses.
Remarkably, most US states are still working with utilities to promote efficient and reliable systems at the lowest long-term cost, in large part by ensuring a fair return on investments made.
But with an election fast approaching too many politicians are finding utilities fair game for lambasting as fat cats prospering while average Americans are suffering.
Such regulator-utility confrontation is always to the long-term detriment of customers. Power, communications and water systems require hefty and regular investment as demand inexorably grows and Americans’ tolerance for outages shrinks.
And the surest way to prevent it is to beat up on the investors who will make it, primarily utilities.
My view is much of the bluster we’re seeing now will die down after the November election, no matter who wins. That may even be true of FERC and the FCC, though it’s less likely if the president is re-elected. But at least for now, two actions by Obama administration regulators pilloried in the press this week actually deserve some defense, at least from a facts first, non-partisan point of view.
The first is the FCC’s now official rejection of LightSquared’s application to run a wireless network from satellites. In today’s Washington Post is a front page headline charging “Politics soured a $14 billion bet, cellular investor says.” Quoting liberally from the investor–Philip Falcone of Harbinger Capital–the article implies the FCC decision is due to “inside-the-Beltway politics,” at the behest of AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) lobbyists who “pulled the rug out from under us.”
That’s pretty rich, considering LightSquared would never have acquired the spectrum to build a network back in 2010, had the FCC not effectively barred AT&T and Verizon from bidding on it.
Mr. Falcone certainly hasn’t been shy about using his Reston, Virginia, offices to lobby tirelessly for his project, notably with his fans at the FCC. Mr. Falcone has also been a major contributor to the president and Democrats since his election in 2008, just as he was a big spender on Republicans before that.
The facts are that the FCC resisted killing the LightSquared project for many months, even after the US Dept of Defense joined eight other government agencies charging it would interfere with GPS (global positioning satellite) based systems. As is typical of advocacy pieces that make the Post, this fact was conveniently positioned where the article continued on page A12.
The article’s final point was that by rejecting LightSquared’s project, the FCC was “chilling” the environment for future investment in US wireless communications. Mr. Falcone himself called it a “cautionary tale” and an “ominous signal” to future investors in startup communications networks.
As taxpayers and wireless communications users, we can only hope so. In the Feb. 10, 2012, UFW I likened the FCC’s promotion of LightSquared to the Dept of Energy’s sponsorship of failed solar power company Solyndra. That comparison seems more apt than ever now.
The key is what happens to the wireless spectrum the FCC basically gave away to LightSquared two years ago. Will they allow it to be auctioned to the two companies investing collectively upwards of $10 billion a quarter to improve their systems for an ever-expanding array of wireless devices, i.e. the “hated” AT&T and Verizon? Or will they hold to their “consumer advocate” mentality–i.e., a 1970s-style fear of big business–and try to shovel it off to another company that lacks for technical skills and capital to do anything with it.
The failure of LightSquared has increased pressure from the Republican Congress on the FCC to get spectrum where it’s needed to ensure reliability rather than pursue its own idea of industrial policy. I’m not holding out a lot of hope for a rational response given recent action. But on cancelling LightSquared, in any case, criticism of the FCC is wholly unfounded.
The other major regulatory issue provoking media outrage this week is the Environmental Protection Agency’s (EPA) release of its long-awaited rules on greenhouse gas emissions, particularly as they affect coal-fired power plants. Some, including The Wall Street Journal, have gone so far as to claim the rule effectively “kills coal” and thereby condemns America to higher electric rates in perpetuity.
More than a few investors, meanwhile, appear to have concluded that it’s time to unload any company whose fortunes depend on coal, presumably concluding that the black mineral’s future is nil. And we’ve seen a dramatic selloff in coal mining stocks as a result, including companies that do most of their business abroad where demand growth remains robust and any action from EPA almost an abstraction.
Oh yeah? Maybe someone should read the actual proposal as written. First, it only caps carbon dioxide emissions for plants yet to be built. The EPA has effectively dropped a previous pledge to issue new rules for existing plants, and EPA Administrator Lisa Jackson stated the agency has “no plans” to develop such regulations.
US utilities that burn coal do face the cost of upgrading plants to limit emissions of acid rain-causing gases, mercury and particulate matter, as per current law. Coal is more expensive than natural gas in North America, as it can be exported to energy hungry markets in Asia while gas can’t due to a lack of liquefied natural gas export capacity.
All of that has hurt the competitiveness of coal-fired plants versus gas plants. That’s a major reason for what appears to be the effective bankruptcy of Dynegy Inc (NYSE: DYN). That company’s management has announced a deal with creditors that virtually wipes out existing shareholders by exchanging debt for stock.
Coal versus gas economics have indeed convinced more than a few utilities to retire their older coal-fired plants, which would increasingly require expensive repairs to keep running anyway. And yes they are replacing them with natural gas plants, which can be built quickly provided there’s adequate pipeline and storage capacity.
Dominion Resources (NYSE: D), for example, recently announced a major investment in gas power, which it will fuel with cheap Marcellus Shale gas brought via its extensive pipeline network in Appalachia.
The decision by power companies to “dash for gas,” however, has nothing to do with carbon dioxide emissions. Any suggestion of a relationship is ludicrous, though it may make for good politics in some areas of the country.
What the EPA proposal does affect is any new coal-fired power plants proposed for the future. Specifically, the rule is new facilities can’t emit more carbon dioxide than the current technology for new natural gas power plants. That would certainly be a burden on the generation of coal-fired plants companies were proposing in the last decade.
Thing is, though, virtually all of these projects were cancelled years ago, and those that were built have been grandfathered under this ruling. Moreover, the three state-of-the-art coal-fired plants now being built in the US are all based on gasifying coal using a technology called “integrated gasification combined cycle” or IGCC, which will presumably comply with the ruling both as projects under construction and because they gasify coal.
The biggest problem these plants have is costs, as is the case with any new type of technology. Duke Energy’s (NYSE: DUK) Cliffside facility appears to be relatively on track in North Carolina. But the company’s Edwardsport plant in Indiana has already suffered cost overruns that Duke will have to eat at least some of when it’s completed.
Southern Company’s (NYSE: SO) Kemper County facility in Mississippi, meanwhile, has been repeatedly challenged in court, which will no doubt lift costs.
These plants will probably all get built. And we may indeed see more of them if they prove to run effectively and the current price gap between coal and gas narrows. But again, these are in compliance with what the EPA has proposed as IGCC plants. There’s no exposure for companies and investors.
Small wonder we haven’t seen much if any comment from coal-burning utilities such as American Electric Power (NYSE: AEP) and Southern Company following the decision. Their concerns that strict new rules on coal power would jack up rates and hurt the economy were heard. Meanwhile, their exposure to future regulation continues to drop as they replace older, less efficient facilities with new ones.
The rumor mill is, of course, working overtime now that after the election the EPA will come out with new harsh rules. And call me cynical, but this decision does smack strongly of the same motivation behind the Keystone XL ruling delay, i.e. the need to avoid a controversial decision that might depress constituency turn out.
On the other hand, politicians and other partisans now crying the president has launched a war on coal have no facts on which to base that charge, let alone justification for jumping to the conclusion coal is dead. Coal still contributes 40 percent of US power use, which will grow an estimated 10 percent over the next 10 years even under very conservative assumptions.
The bottom line is it’s going to be with us for a while, even as demand from Asia continues to ramp up. And call it what you will, this decision is a pretty clear sign EPA gets it.