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US ELECTIONS: Political polarization creating regulatory 'ping-pong effect' for US energy


Uncertainty seen in area of tax policy

Energy transition has momentum all its own

  • Author
  • Ellie Potter    Molly Christian    Jacob Holzman    S&P Global Market Intelligence
  • Editor
  • Jasmin Melvin
  • Commodity
  • Energy
  • Topic
  • 2020 US Elections Energy Transition Environment and Sustainability US Policy

As the US political climate has grown more polarized, the energy sector has faced increasingly significant shifts on the regulatory front every four to eight years, and the industry may have to ready itself for another pendulum swing after the November presidential election.

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In sharp contrast to incumbent President Donald Trump, Democratic presidential nominee Joe Biden has made aggressive climate proposals and pledged to reinstate regulations the Trump administration rolled back.

An ever-changing regulatory environment can threaten the certainty extractive industries require to plan and finance projects, especially those with long lead times, industry observers said.

"I think the ping-pong effect is the thing that worries me the most," said Scot Anderson, a natural resources attorney with Hogan Lovells. "Mining companies like stability and certainty, and if you've got a regulatory regime that shifts back and forth every four years, it's very hard to plan for that."

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Impact on industry

The Trump administration repealed existing regulations in a fashion that fostered "a regulatory uncertainty that never existed in previous administrations," according to former Environmental Protection Agency water official Betsy Southerland.

"When you went between [Presidents Bill] Clinton and [George W.] Bush or Bush and [Barack] Obama, you would have a change in priorities, but you would not have a decision that they were literally going to roll back everything the previous administration did," said Southerland, who spent decades in government before leaving the EPA in 2017. "It was really just a focus on those regulations or significant guidance documents that were still under preparation and had not been fully completed."

Regulatory uncertainty can drag on even long-standing energy titans, including major national and international oil and gas companies. These entities want the operational flexibility necessary to continue operating uninterrupted, said Kelly Johnson, a partner with the law firm Holland and Hart.

"They want to know 'this is the standard we are going to need to meet. This is the modelling we are going to need to do to demonstrate our emissions,'" Johnson said. "That's what they want."

With the election just around the corner, several trade groups spanning the energy sector — including the American Petroleum Institute, National Rural Electric Cooperative Association, American Council on Renewable Energy and American Wind Energy Association — noted the importance of regulatory certainty but said they can maintain their footing regardless of who wins the presidency.

"No matter who is in power, whether it's in Congress or the administration, our priorities remain the same, and our focus remains the same," said Louis Finkel, senior vice president of government relations for NRECA.

For those in dire financial straits, including US thermal coal companies, regulation is ultimately less of a factor than market conditions, according to S&P Global Ratings analyst Chiza Vitta. The Trump administration's deregulatory efforts did little to prevent the contracting industry from whittling down, he noted, serving only to "delay the inevitable."

Regulatory ricochet in tax policy

Tax policy offers one area of uncertainty in the upcoming elections that has the potential to affect utilities especially. Biden has proposed raising the top corporate income tax rate to 28% from the current 21%, reversing much of the decline that Trump enacted as part of the 2017 GOP tax bill.

Such an increase should only modestly decrease per-share earnings, mainly for companies with non-regulated assets, and "would improve cash flows/credit metrics across the board," Scotia Capital analyst Andrew Weisel said.

But with some utilities still grappling with changes from the 2017 tax law, another reversal in tax policy "is going to be a big burden from a regulatory standpoint," according to Lillian Federico, energy research director for Regulatory Research Associates, a group within S&P Global Market Intelligence.

The economic strain from the coronavirus pandemic could further complicate efforts to adjust utility rates. State utility regulators were keen to adjust electricity rates to reflect the lower corporate tax rate enacted in 2017, Federico said. But "it's questionable if they're going to be as eager to do so if tax rates go up, particularly during this coronavirus-fueled recession," with many businesses and households struggling to make payments.

If commissions delay reflecting the higher tax rates in customers' bills, some companies could end up paying more in cash taxes while not collecting more in revenue, potentially hurting their cash flow and credit ratings, according to Federico.

Companies in recent years have also had to adapt to both the current regulatory climate and multiple changes in trade policy, said Keith Martin, a tax and project finance lawyer at Norton Rose Fulbright. Small renewable project developers have been particularly affected by the Trump administration's changes to tariffs on certain imported materials.

"Trying to do business in this era is like trying to do business while bouncing up and down on a trampoline," Martin said.

Energy transition poised to continue

Biden's climate and clean energy plan, the most ambitious proposal put forth by a presidential candidate, could speed the shift to carbon-free and renewable electric power. But with a growing number of US utilities setting net-zero emissions targets and states and cities adopting their own clean energy goals, analysts expect that transition to proceed regardless of who wins the White House in 2020.

"We're viewing [the clean energy transition] as more of a grassroots, bottom-up state level initiative," Federico said. "I don't think that Trump being reelected would derail that, and I don't think Biden being elected would necessarily meaningfully accelerate that."

Even Trump's push to ease environmental rules for the power sector did little to slow the move away from more carbon-intensive energy resources. Renewable resources, including conventional hydroelectric output, provided 15% of US power generation in 2016 compared with 18% in 2019, while coal-fired electric output slipped from 31% to 24% over that period, according to the US Energy Information Administration.

Economics are driving the energy transition, and officials trying to skew the market are standing in the way of clean energy and energy efficiency, said John Norris, former Democratic commissioner with the Federal Energy Regulatory Commission. Companies view the Trump administration as "just a blip," he said, adding that some may try to make some money on coal plants in the near term but ultimately understand the sector's low-carbon trajectory.

"Their certainty comes from a Biden administration," Norris said. "It's not coming from a present or future Trump administration. The rate of change will always be an issue, but they know change is coming."