Effects of the US mid-term elections on the US power sector
America went to the polls on November 6. The Republicans held on to the Senate, but lost the House. In the Senate, where there are 100 seats, Republicans increased their majority from 51-49 to 53-47. There are 435 seats in the House. Democrats flipped 40 seats, wresting control of the House with a new ratio of 235 Democrats and 199 Republicans, with one seat still undecided while the local authorities investigate possible fraud in the vote count.
A group of veteran Washington insiders talked three days after the election about what the results mean for the US power sector, particularly renewable energy.
The panelists are John Gimigliano, principal in charge, KPMG Corporate Finance LLC, and a former Republican counsel to the House Ways and Means Committee, Tom Hassenboehler, partner, Coefficient Group, and former Republican chief counsel for energy and the environment, House Energy and Commerce Committee, Joseph Mikrut, partner, Capitol Tax Partners, and former tax legislative counsel, US Department of the Treasury, Jonathan Weisgall, vice president for government relations, Berkshire Hathaway Energy, and Kathleen Weiss, vice president for government affairs, First Solar. The moderator is Keith Martin with Norton Rose Fulbright in Washington.
MR. MARTIN: Without getting into all the details, how do you see the election results: positive, negative, or neutral for the power sector and particularly for renewable energy?
MR. WEISGALL: I would call it neutral. Some were expecting a Democratic tsunami in the House. I think it was merely a wave. Despite control of the House flipping, I do not see much change down the road. I think the polarization and legislative paralysis will probably continue in Washington. The state ballot initiatives were a mixed bag. I see some gains in state houses and governor’s races. On balance, I give it a neutral.
MS. WEISS: I think the results were more positive. The GOP-controlled House had some pretty powerful opponents that really did not support policies to help our sector grow. The Senate was always more balanced. We had some champions in the Senate who helped us move forward with some important policies over the last couple years. Now with Democratic control of the House, not only is there an opportunity to support positive legislation, but we also have a firewall against backsliding.
MR. HASSENBOEHLER: I view it slightly positive. There is an opportunity, with the Democrats taking control of the House, for Republicans who may have been a little gun shy about supporting renewable power or who may have been more inclined to support the party line under a completely Republican House to get a little more unconventional and bold in their thinking. There is an opportunity for new alliances to form. There is precedent in passage of the Energy Independence and Security Act in 2007 at a time when the parties split control of the White House and Congress. That said, I do not see anything big happening in the next two years.
MR. MIKRUT: It was a slight net positive. The presumptive new chairman of the House tax committee, Richard Neal, is more of a supporter of renewables than the current chairman, Kevin Brady. Moving to the Senate, the likely new chairman of the Senate tax committee, Chuck Grassley, has always been a supporter of renewables. That’s positive.
However, I also agree with Jon Weisgall. It is hard to see how the parties can get together with the White House to produce anything.
MR. GIMIGLIANO: I think it is positive. I largely echo what others have said.
Obviously Democratic control in the House is helpful. There was a lot of antipathy on the Republican side toward renewables. If Nancy Pelosi regains her post as speaker, she has been a pretty reliable supporter of renewables. Policy has tended to be set in recent years by the leadership.
On the Senate side, we are probably going to have Chuck Grassley move back to chairman of the Senate Finance Committee. He has been called the godfather of the wind tax credit, but it is really more than wind. The last time he was committee chairman, many of the provisions we have today in the tax code to encourage renewable energy were enacted.
MR. MARTIN: Was that a different era? It seemed like after Obama was elected, you had an entering class of Republicans who felt support for renewables must have started with Obama and, therefore, they were opposed. Have times changed?
MR. GIMIGLIANO: Yes, something did change. It has never been entirely clear why. The Democrats will be more or less able to do what they want in the House. On the Senate side, the outcome was about as good as could have been expected, including with Grassley moving over apparently to be the next chairman of the Senate Finance Committee.
MR. MARTIN: Let me posit this and get reactions. If there is a larger Republican caucus in the Senate, then the Senate will move to the right. Susan Collins and Lisa Murkowski, two moderate Republican Senators who have been moderating influences, will have less sway. Whether we get two years of gridlock or there is room to work together depends on whether the House Democrats vote as a bloc or there is a large enough blue dog caucus of more conservative Democrats that emerges that can combine with Republicans to put through part of the remaining Trump program. Reaction?
MR. WEISGALL: In general, moderates were hurt in this election. You are right that Susan Collins and Lisa Murkowski will have less influence. The blue dogs — the conservative Democrats — currently are at about 18 and are hoping to double in number. They could vote as a bloc on some of the more business-friendly issues. They were successful at this in the late 1990s. They want to get back to their heyday. I see them more as a bloc on non-energy issues than most energy issues.
MR. MARTIN: Does anyone disagree?
MR. HASSENBOEHLER: I have a slightly contrary view. The blue dog views on energy and climate issues will be less relevant given how much is decided by the House leadership, and so I also don’t think it makes a big difference in the Senate that Lisa Murkowski will have less influence.
The new House leaders will have to decide on what issues they want to work with the Senate and what issues they just want to be in pure partisan posturing. My guess is energy and infrastructure could be in the former category where there is room to work.
MR. MARTIN: Then let’s move to the infrastructure. Does anyone foresee action on infrastructure?
MR. WEISGALL: I can see infrastructure as a vehicle for incremental progress on climate change: investments in electric vehicle technology, for example. I think it can get bipartisan support. How you get there, I don’t know.
It reminds me of the expression, “Everybody wants to go to heaven, but no one wants to die.”
In polling, everybody is for infrastructure, but there is no agreement on how to get there. Democrats want direct spend. They want to maintain environmental rules and not ease permitting, and Republicans want pretty much exactly the opposite. And you have the opposition from fiscal conservatives.
I can certainly see a continued course of permitting reform, and I can see infrastructure being expanded from the usual roads, bridges and tunnels to include some renewable-energy issues, which could bring Democrats on board.
MR. MARTIN: Are the renewable energy issues more than just electric vehicles? Transmission, for example? All Trump proposed early in the year was basically to sell off federal transmission assets.
MR. WEISGALL: That isn’t going to happen, but there could be bipartisan progress on grid modernization. Throw in some cyber security, hardening of the grid and things like that. The devil will be in the details. I can’t remember the last time anyone decided the government should pay a utility to improve transmission. That is normally a private-sector job.
MR. MARTIN: The prospects are a little worse than you suggest, no? There is no agreement on how to pay for anything. Not only are they split on general approach, but there is also no money.
MR. WEISGALL: I think that’s right. Democrats want to spend. What the President proposed right after the election was private-public partnerships, tolls, tax incentives, things like that. It is very hard to see where the money will come from.
The Democrats are talking about raising the corporate tax rate above 21% and eliminating some tax benefits. That will be hard to get across the goal line.
MS. WEISS: I see this as the biggest challenge with doing something on infrastructure.
You could do a lot of good things that would benefit various sectors of the economy. The challenge is one of leadership and the ability to compromise. My biggest concern is that the last two years don’t provide any indication that the current group of leaders will be able to find common ground.
It could be done, but it is not clear who would be the driving force to force that compromise.
There is also no appetite to add more to the deficit. Whatever is done would have to be put together in a way that brings more private money into the sector.
MR. MARTIN: Let’s start with the lame-duck session and then work beyond this year. Congress will return in late November for a short lame-duck session. It has to pass new spending authority to allow a number of government agencies to remain open past December 7. A tax extenders bill is potentially on the agenda. Joe Mikrut, do you see the tax extenders bill passing, and do you expect anything in it to affect the power or infrastructure sector?
MR. MIKRUT: There is a chance that an expired provisions package will go forward in the lame duck. There are 30-some provisions that expired at the beginning of the year. Many of them are energy related. Democrats want the energy extensions. Republicans want to make technical corrections to the tax reform bill that was enacted last December. I don’t see technical corrections being done broadly, but there are a couple provisions that have become more important than others. Maybe there is enough there to make a deal. There are also a couple bipartisan pieces of tax legislation dealing with retirement savings and IRS administrative issues that are teed up and waiting for a vehicle on which to move.
MR. MARTIN: Do you see anything happening on production tax credits or investment tax credits?
MR. MIKRUT: The parts of sections 45 and 48 that have expired could be extended. I think that is a possibility.
MR. MARTIN: You are referring to tax credits for biomass and geothermal projects, correct?
MR. MIKRUT: Yes. Those are the primary ones.
MR MARTIN: John Gimigliano, some more time for biomass and geothermal projects to qualify for tax credits?
MR. GIMIGLIANO: I agree with everything Joe said. Congress has fallen into a pattern lately of extending tax benefits retroactively after they have already expired. It is sort of the worst possible tax policy to reward people with tax incentives for things they have already done. You almost wonder whether somebody might think it would be better to wait until January in the hope of getting a longer-term, prospective extension. You always hate to leave behind a chance to get them extended when you can, but it seems like the biggest impediment to getting extenders through has always been House Republicans and, in January, if you have House Democrats dealing with Senate Republicans, you might get a better deal. I would not be shocked to see somebody come up with the idea that maybe we should wait until January.
MR. MARTIN: It seems like there are two areas where the parties might truly find common ground. One is prescription drug prices. Another is trade. Ironically, Trump will pick up support for import tariffs among the Democrats. So is a rollback of import tariffs now out of the question?
MR. WEISGALL: My general view is that the tariffs have a lot more to do with US-China relations and US security policy than pure trade policy. Trump himself has talked about economic security as national security. This is one area where he has flipped the Republicans. Traditionally there has been more Democratic support for tariffs, but their use in this context is more complicated. There will be a lot of stops and starts. Trump is using tariffs to put his foot on and off the gas pedal on other issues.
MS. WEISS: I agree, but I also think it is really a strategy to reset trade practices. It is appropriate periodically to relook at the rules of engagement. The administration has not wavered on this. The unknown is at what point does the economic disruption become so great that the administration is forced to claim victory and back off.
MR. MARTIN: The tariffs that Trump imposed in September on $200 billion a year in Chinese imports at 10% bump automatically to 25% on January 1. The 25% steel tariffs that were imposed last March are also starting to affect the broader economy. They are hurting the wind tower manufacturers; there are 200 tons of steel in a wind tower. Also some solar companies may not have anticipated them when bidding to supply power at contracted prices. Some of these companies are hoping that the revamped NAFTA trade agreement will provide some relief from the 25% steel tariff by allowing steel to come in through Mexico. When do you see this revamped NAFTA treaty moving through the Senate?
MR. GIMIGLIANO: It doesn’t seem like a sure thing. We will have to see when the new Congress comes back in January how quickly the Senate majority leader, Mitch McConnell, moves to put it on the agenda and whether, if he does not feel he has the votes, what happens next.
MR. MIKRUT: My understanding from talking recently to committee staff is they are still going through the treaty text and finding new details that may be challenging to put through the Senate.
MR. MARTIN: There have been conflicting stories since the election about whether House Democrats will press for action on climate change. Some people say Nancy Pelosi will insist the House lie low on this issue because tackling it now would be a fruitless exercise. What do you think? Is action on climate change possible in the next two years?
MR. WEISGALL: I do not see anything crossing the finish line. Pelosi would like to revive the now-defunct House Select Committee on Energy Independence and Global Warming that was scrapped in 2011, but she still has war wounds from the effort to put through a cap-and-trade program to limit greenhouse gas emissions in 2010 when a number of Democrats were defeated after a bill passed the House.
Having said that, Paul Tonko of New York, who will chair the House subcommittee on environment and the economy, will probably work on a cap-and-trade bill. There may be pressure from some rank-and-file Democrats for a carbon tax and to reopen debate about US participation in the Paris climate accord, although nothing could happen there since foreign policy is totally up to the President. Pelosi is clever enough not to bring up bills that have no chance of becoming law, even though she may feel pressure on these issues from a more left-leaning House.
MR. MARTIN: Tom Hassenboehler, you were chief counsel for the House Republicans on these issues until late 2017.
MR. HASSENBOEHLER: Yes. I have a few thoughts. The likely incoming chairman of the House Energy and Commerce Committee, Frank Pallone, put out a press release yesterday that shows what will be on the Democrats’ agenda. They have about eight issues: health care, undoing the Trump administration’s efforts to roll back Obamacare, lowering health costs, strengthening Medicare, rebuilding America by investing in green energy, drinking water. Climate change does not even get on the agenda until number five, and it is presented in terms of looking at the impacts on communities and holding the administration accountable for its policies.
I can foresee individual efforts by some members. There will be conversations about how to bring about the next wave of climate solutions. But the primary organized effort by the Democratic majority, when it comes to climate change, which again is issue number five on the list, will be about holding the Trump administration accountable, doing a lot of oversight, and then maybe taking some of the types of incremental actions — on grid modernization and electric vehicles — that we talked about earlier in an infrastructure bill.
MR. MARTIN: Let me ask a few questions of the tax guys. Trump called, in the last two weeks before the election for another tax cut bill. He said at his press conference after the election that he would be open to increasing the corporate tax rate to pay for a middle-income tax cut. How much risk is there of a change in the corporate tax rate in the next two years and in which direction?
MR. GIMIGLIANO: The direction is easy. I can’t imagine it going down. If it moves, it will go up. I think there is a meaningful risk that it could go up. We have already seen Senate Democrats put out proposals to pay for infrastructure by raising the rate to 25%. The rate in President Obama’s framework on tax reform was 28%. I think those are all plausible scenarios that we can see Democrats propose.
I am still trying to pick my jaw up off the floor when I heard the President say that he would be willing to consider that scenario to pay for middle-class tax cuts. I am sure it was not a happy day for Mitch McConnell when he heard that statement. Nothing is likely, but it is something that cannot be ruled out in the coming years.
MR. MARTIN: Joe Mikrut, not likely, but possible. Do you agree?
MR. MIKRUT: Yes. It was surprising to hear a President, who was pushing just last year for a 15% corporate rate, say he would not mind raising the current rate to something above the current 21%. The incoming House tax committee chairman, Richard Neal, has said that he would willing to do a middle-class tax cut, but he would not look necessarily at the corporate rate but at raising the top individual rate, which suggests the Democrats may be reserving the corporate rate to pay for something else. Perhaps it becomes the funding for an infrastructure bill.
MR. GIMIGLIANO: It does not get you that much money. Here’s the problem. Say the rate goes from 21% to 25%. Raising the corporate tax rate does not bring in as much money and you lose when lowering it, for technical reasons. The reality is a rate increase does not raise the trillion or more dollars needed to fund a large middle-class tax cut, so there has to be more money elsewhere.
MR. MARTIN: Kevin Brady, the outgoing chairman of the House tax committee, suggested before the election that the House might address misuse of tax credits as one way to pay for the Trump middle-class tax cuts. Do you think he was referring to anything specific?
MR. GIMIGLIANO: That mostly dealt with the individual refundable credits.
MR. MARTIN: The Solar Energy Industries Association wants to make tax credits for renewable energy easier to transfer by borrowing from language in the tax code for nuclear production tax credits. The Edison Electric Institute, which is a trade group for the utilities, wants to bring back the equivalent of Build America bonds to fund utility and other infrastructure improvements. A bipartisan group is promoting tax credits for energy storage. Another group wants a longer period for offshore wind projects to be built to qualify for tax credits. Do you see any of these proposals moving in 2019?
MR. GIMIGLIANO: Refundable tax credits are something that was considered in 2009. We got the Treasury cash grant program instead. True refundability or transferability was considered a bridge too far. I could see Build America bonds or something like them getting into an infrastructure bill. They have to be wrapped into something bigger. These are not the kind of thing that will move on their own.
MR. MIKRUT: Refundability is very difficult, but you could see something more in the nature of transferability if it is patterned after what was done for the nuclear industry. There is a lot of support for storage on a bipartisan basis, so you could see an investment tax credit for energy storage moving. Jon Weisgall mentioned changes, perhaps, in the electric-vehicle credit. There is a lot of activity there. Unfortunately, it is in both directions. Some members want to repeal it immediately. Some want to extend it.
None of these items moves on its own. They need to hitch a ride on a larger vehicle.
Perhaps it is an infrastructure bill since energy provisions can be supported as infrastructure. Traditionally there would have been a separate tax title to such a bill. It is hard to see such a tax title in the short term. The problem with tax provisions is they are like a fine wine. They have to sit and mellow for a few years before they are ripe to be included in something.
MR. WEISGALL: It is possible to see something happening on tax credits for offshore wind. There were no offshore wind projects in the US until the Block Island project a couple years ago off Rhode Island, and it is still the only operating project. So you could view offshore wind as a newer technology. Offshore wind is also the one area of renewable energy that is getting remarkably strong support from the Trump administration.
MR. MARTIN: The Federal Energy Regulatory Commission is effectively down to three commissioners: two Democrats and one Republican. President Trump nominated a pro-coal Department of Energy official, Bernard McNamee, to fill a slot. His confirmation requires, 60 votes in the Senate. Do you see him getting through and, if so, when? And what difference does it make whether FERC has another commissioner?
MR. WEISGALL: I think he will get through by the end of this year, and another commissioner will be important. We could have a flip. For example, the two Democrats, Cheryl LaFleur and Rich Glick, have big issues on permitting for new natural-gas pipelines. Bringing on another Republican will make a difference. LaFleur will reach the end of her term next year and Kevin McIntyre, who has health issues, could retire. We may see next year a pairing of a Democrat and a Republican to move both through the Senate to get the commission back to full strength with five commissioners: three Republicans and two Democrats.
MR. MARTIN: Both PJM and FERC have suggested that renewable generators should be required to bid at least a minimum offer price to supply capacity to PJM. They can bid $0 today and be certain to be selected and then get a capacity payment at the same market-clearing price that others receive, but FERC has seemed unable to reach a consensus. The 2019 auction is expected at this point to be delayed by three months. Is this a big deal for renewable generators?
MS. WEISS: Yes. Existing renewables projects probably will not be subject to the minimum-offer rule. There seems to be a fundamental misunderstanding at PJM about the cost of renewables. The first attempt at creating a minimum-offer price for solar was based on taking 2011 capacity costs and then escalating them to 2023, which is essentially the opposite of what is happening in the real world where costs have declined significantly year over year. This is definitely an important issue to watch.
MR. MARTIN: In the same vein, the plan by the US energy secretary, Rick Perry, to require grid operators to dispatch coal and nuclear plants ahead of other generators and pay them enough to keep them profitable appears to have stalled at the White House due to the potential effect on electricity prices. Is the plan dead or are we going to see some other version of it?
MR. HASSENBOEHLER: I do not think it is dead, even though it has lost air.
There are a lot of things in the works at the Department of Energy that could affect the market. They include the new NERC assessment of capacity margins and lack of excess capacity for the next three to five years and new studies on grid and gas pipeline security.
The administration has been working on an inventory of critical assets. I think you will see it try to steer the overall debate in that direction. The revamped Perry plan will not look like it did when it was first proposed a year ago.
RTOs and ISOs are starting to receive a lot more attention from Congress as the issues of grid reliability and grid security are moving into the mainstream. They are potential oversight issues for the House Energy and Commerce Committee. I can see House Democrats taking on everything from how the Trump administration is handling the critical infrastructure designations and the ideas behind the need, or the lack thereof, for these kinds of capacity-market interventions all the way to looking into how the RTOs are handling new technologies and looking at their boards and oversight.
MR. MARTIN: The Perry plan, the FERC minimum-offer-price proceeding, and lawsuits in Illinois and New York to block zero-emissions credits that keep nuclear power plants operating are all manifestations of a battle among different types of generators for market share in what is otherwise a stagnant market for electricity. Where else do you see this battle playing out?
MR. HASSENBOEHLER: There is emerging interest in where and how data can be aggregated. There is talk about this at the state level and at the RTO level about using industrial data, smart-meter data and upstream data to differentiate products. This is part of the food fight among generation classes about how to market and how to value their energy in an evolving market.
MS. WEISS: Another potential new battlefront is a report in the works by the Department of Energy on the accelerating retirements of coal and nuclear plants. How the study was performed, the results and what will be done with the information will be of interest in the battle for market share.
MR. MARTIN: Let’s move to the state level briefly. There were three big state ballot initiatives with potential effects on the power industry. All three lost. One is a carbon tax in Washington state. It went down for the second time. Another is a target of 50% renewables by 2030 in Arizona. That failed. The third was a move to end the monopoly that utilities have on the retail electricity supply in Nevada. That failed. There was a modest increase in the renewables target in Nevada. Jon Weisgall, you were in the thick of a lot of this. What should one make of this pattern?
MR. WEISGALL: Well, it is not a pattern. That is the problem. Look at the contrast between those two purple states where Nevada votes to move to 50% renewables by 2030 and the identical ballot initiative, 50% by 2030, fails in Arizona. Both were backed by billionaire Tom Steyer. The Nevada proposal is a constitutional amendment. It will have to go another round.
One lesson in all of this is that the most money spent on a ballot initiative wins. That lesson holds when you throw in the anti-fracking measure in Colorado.
It was really very much a mixed bag. Washington tried a new version of a carbon fee, not a carbon tax, but that still didn’t work. In Colorado, while the anti-fracking ban lost 57% to 43%, the proponents were outspent something like 40-1. The spending was something like $38 million to less than $1 million.
I think voters in general were concerned about the impact on pocketbooks. The ballot initiative that failed in Nevada was very close to my company and is a complicated issue that is hard to put into soundbites, but a matter that would have dismantled and deregulated Nevada’s existing electricity system. I think voters were affected by a report from the public utility commission that suggested adoption of the initiative would lead to higher electricity rates and make it harder to make rapid progress on renewable energy.
MR. MARTIN: We have to mention the gubernatorial races. Democrats were elected in Illinois, Michigan and Colorado, all of whom support 100% renewables. Maine and Kansas elected Democratic governors who may also push their states toward more renewables. That does seem to be a positive. On balance, at the state level, despite the fact three ballot initiatives went down, was the result mainly positive?
MR. WEISGALL: I think it was. Maine and New Mexico will make some changes in renewables. The count is now 23 Democratic governors and 27 Republicans. Illinois, Kansas, Michigan, Maine, Nevada and New Mexico all flipped to Democrats who want to act on renewable energy. You had Democrats winning attorneys general positions and a couple of new trifectas where both branches of the legislature and the governor’s house are now in the hands of the Democrats. That is the one clearly positive trend line for renewables.
MR. MARTIN: Last question. Is Trump now in a stronger position to be reelected in 2020? The electoral college, which determines who is elected president, works more like the Senate than the House, and Trump did well in the Senate races.
MR. GIMIGLIANO: It is a good question. When you ask, “Is he in a stronger position,” the first question is relative to what? Is it relative to 2016, when he first won, or relative to his position in 2018 going into the mid-term elections?
By almost any measure, he will be in a better position in 2020 than he was in 2018, just because history tells us that first-term mid-term elections are always terrible for the President and the President’s party. So if history stands, the playing field should be more in his favor.
The real question is whether it will be better than it was in 2016. We expected him to do reasonably well in the Senate, but some of these races are still not resolved. If, in the end, with the very favorable math that the Republicans had going into the mid-terms for control of the Senate with so many more Democratic seats up for vote, the Republicans manage only to maintain the status quo of 51 Republicans and 49 Democrats, then I am not sure you can point to that as really a successful outcome for the President. Let’s see how those races settle.
MS. WEISS: I completely agree.
MR. WEISGALL: You had in the Senate races this year 25 Democrats and only nine Republican seats up for votes, and something like 10 of the Democrats were running in states Trump won in 2016.
The math changes in 2020 when you will have 22 Republican and 12 Democratic seats up for votes, but the challenge for the Republicans may not be as great as it looks. I believe 20 of the 22 Republicans are in Trump-carried states. The exceptions are Maine and Colorado that Clinton had carried in 2016. Something like 10 of the 12 Democratic seats are in Clinton-carried states with only two in Trump states: Michigan and Alabama.
It is interesting that 2016 was the first time in the history of popularly-elected Senators that the Senate outcomes completely matched the Presidential outcomes. In that sense, you are right that the results in Senate races are a better guide to Trump’s prospects since they matched the outcome in the 2016 electoral college.