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Shifting Sands: How Midterm Election Results Could Affect Energy

November 14, 2018 | Kevin Adler

Although federal energy policy was far from the forefront in the Nov. 6 midterm elections, the results of the election could change how the industry is treated in Washington, D.C.

From oversight of key agencies, to the Trump administration’s trade negotiations and tariff policies, to long-term issues such as climate change, Democrats are poised to use their power in the U.S. House of Representatives to challenge the direction that energy policy has taken in the last two years. And this is likely to come into direct conflict with the administration’s Energy Dominance and deregulation agendas.

In this issue of Get the Point, we look at the impact on the energy industry—primarily the natural gas industry—of this shift in power now that Democrats have reclaimed the majority in one chamber of Congress.

House leadership changes

It all starts with the U.S. House of Representatives, where Democrats will hold an advantage of 227-198 (with 10 seats undeclared as of Nov. 12).

 

Congressional leadership will shift to Democrats. So, at the most basic level, it seems clear that legislation to roll back environmental programs will be stopped in their tracks. This does not mean that agencies will be unable to continue the agendas they have pursued over the last two years to deregulate in order to support greater energy production, use and exports. But, as we have seen for two years, administrative actions are almost always slowed (or stopped) by litigation. Also (more on this below), administrative changes will receive greater oversight from House Democrats.

One question about the makeup of the new Congress is whether Nancy Pelosi (D-Calif.) will be the new Speaker of the House. There’s been some pressure to replace her, but Brian Wolf, executive vice president for public policy and external affairs at the Edison Electric Institute, said don’t expect a change at the top. “The fundamental question is Nancy Pelosi versus who—that’s what the caucus will have to consider,” Wolf said in a call with reporters on the day after the midterms. “Facing a president who is really forceful with his agenda, it will take someone who has been there before.”

Not only was Pelosi speaker of the House previously, but Wolf said she could be good for the energy industry, in the context of an infrastructure bill or other measures that have bipartisan interest. He observed that she and President George H.W. Bush “passed [the] largest energy bill in history of Congress.”

Wolf also noted that President Trump called Pelosi on election night to congratulate her, a gesture that surprised many pundits in Washington.

However, energy industry advocacy group the American Energy Alliance nonetheless expressed concern about the turnover of power in the House. “House Democrats will surely do everything in their power to thwart the president’s energy agenda. At the same time, the increased pro-energy majority in the Senate bodes well for the nomination prospects of conservative judges and administration officials,” the Alliance said on Nov. 7.

But the Alliance predicted, “Overall, the 2018 elections may slow but will hopefully not reverse the positive energy policy environment of the last two years.”

Oversight is coming

With leadership in the House, the Democrats will be able to exercise oversight that has been stifled for the last eight years.

“Democrats have promised a wave of investigative activity,” said Dee Martin, head of the Policy Resolution Group at DC lobbying and law firm Bracewell.

Several committees have jurisdiction that affects energy producers. The Natural Resources Committee likely will be led by Raul Grijalva (D-Ariz.). “This is not particularly good for Zinke,” said Wolf, referring to Interior Department Sec. Ryan Zinke. Zinke is under investigation for conflicts of interest and excessive travel spending, and it is widely expected that he will leave the administration very soon.

The Bureau of Land Management (BLM), a part of the Interior Department, will undergo greater scrutiny of its oil and gas lease sales on federal and Native lands. BLM has aggressively expanded leasing, and it announced on Nov. 2 that it disbursed a record $8.93 billion from energy production back to states and Native nations for FY2018.

Still, BLM has faced numerous lawsuits at the state level for proposed lease auctions, especially in or near national monument lands. In response, in the last month it has scaled back auctions in Colorado and Wyoming.

“The Natural Resources Committee will look at reforms, many of which have eased the process of permitting for energy projects,” EEI’s Wolf said. “They will ask if these changes are really efficiency improvements and transparency improvements – as the administration has stated -- or if they are environmental rollbacks in disguise.”

The Oversight Committee likely will be chaired by Maryland Democrat Elijah Cummings. “We have found him to be extremely fair and by the book,” said Scott Segal, co-chair of the Policy Resolution Group at Bracewell. Segal said that some of the wilder requests for investigation of the Trump administration are not likely to be pursued by Cummings.

But agencies’ decisions on a range of energy issues—such as the Clean Power Plan, onshore and offshore oil and gas drilling, energy security and tariffs—could receive new looks by Oversight and other committees.

The new chair of the Energy and Commerce Committee likely will be Frank Pallone (D-N.J.) “He knows manufacturing and energy. The regulated committee could do a lot worse,” said Wolf.

“Pallone cares about energy security, cybersecurity and methane emissions,” added Anna Burhop, a principal at Bracewell.

The U.S. EPA, whose former Administrator Scott Pruitt was criticized by both parties, will receive a great deal of scrutiny over its proposed rewrite of the Clean Power Plan, known as the Affordable Clean Energy (ACE) plan. Underpinning ACE is a new, much lower Social Cost of Carbon (SCC) index proposed by EPA in October 2017. The Obama administration had set it at $45/metric ton for 2020, with inflation adjustments going forward. The new EPA proposed to set it at $1-$6/metric ton in 2020, with inflation adjustments. “This is manipulation…a radical departure from established science and economics,” said the Natural Resources Defense Council at the time.

Democrats can be expected to challenge EPA’s new numbers, which affect the cost-benefit analysis of a variety of energy programs. The question of increased emissions could come into play if Democrats adopt the line of thinking of environmental groups that new gas pipeline projects are encouraging greater greenhouse gas emissions by incentivizing increased natural gas production.

Also of interest to the natural gas industry is the way that the new House will look at the directive by the Department of Energy (DOE) last year that the Federal Energy Regulatory Commission (FERC) find a way to subsidize coal and nuclear power plants to keep them operating. “I expect oversight on coal and nuclear industry plans, including the use of subpoena power for records on discussions with the coal and nuclear industry and the White House about FERC’s authority under the Federal Power Act to require operators to monetize and support resilient and reliable power,” Burhop said. “There’s a question of the relationship of the administration and FERC, which is independent, and whether or not federal coal and nuclear retirements are driven by federal policy or market conditions.”

Democrats’ opposition to a coal and nuclear bailout would be a positive for the natural gas industry. Also on the positive side for gas pipelines and oil and gas producers, analysts said that the president’s tariffs on aluminum and steel would be a likely target of Democrats. This could include challenging the national security justifications cited for the tariffs, as well as demanding reforms to the cumbersome exclusion process for companies needing to purchase steel and aluminum that they say is not available from U.S. manufacturers.

However, on tariffs and protectionism, it should be noted that politics cuts both ways. Democrats are not going to try to repeal the president’s tariffs, said Bracewell’s Segal. For example, Segal pointed out that U.S. Sen. Sherrod Brown (D-Ohio) won re-election, and he is a strong proponent of trade protection.

Climate change attracts more attention

Climate change will most certainly become an issue of greater importance. This will create headwinds for fossil fuels and support for renewables and, possibly, more power transmission lines. Democrats have said they intend to put back into place the House Select Committee on Energy Independence and Global Warming, which Republicans disbanded when they won the House in 2010.

Driving this is a genuine and rising concern over emissions of carbon dioxide. The latest major data point is a report released this fall by the UN Intergovernmental Panel on Climate Change. The report said that, “Global net human-caused emissions of carbon dioxide would need to fall by about 45 percent from 2010 levels by 2030, reaching 'net zero' around 2050,” if the world is to avoid major environmental impacts from climate change.

While the most radical climate bills won’t pass the House, they might get public airing. For example, Rep. Tulsi Gabbard (D-Hawaii) introduced in September 2017 “The OFF Fossil Fuels for a Better Future Act (OFF Act).” Her bill would mandate renewables for 80% of U.S. energy use by 2027 and 100% by 2035 (with some transportation exceptions). In addition, it would place a moratorium on new fossil fuel projects, and ban the export of oil and gas. Under Republicans, the bill did not receive a hearing.

But will new House members, such as progressive New York Democrat Alexandria Ocasio-Cortez, push to pass such a bill? Perhaps. Ocasio-Cortez’s campaign website said she supports moving the U.S. to 100% renewable energy by 2035 – just like the OFF Act -- and she has said, “Climate change is the single biggest national security threat for the United States and the single biggest threat to worldwide industrialized civilization.”

On Nov. 13, Ocasio-Cortez joined protesters outside Pelosi’s office, who said that merely reviving the old select committee is insufficient. Yet, also on Nov. 13, Pallone, the expected Energy and Commerce Committee chair, said the he believes current House committees, including his, are the appropriate venues for developing new legislation about greenhouse gases.

One thing seems sure: the House’s Climate Solutions Caucus isn’t going to be driving the action. Thirteen of the 45 Republicans on the Caucus lost elections in the midterms, including Co-Chair Carlos Curbelo (Fla.), and seven others retired. The Caucus had been the place for lawmakers to attempt to create bipartisan global warming policy, and it was popular: it grew from six Republicans prior to the 2016 election to 45 currently. But the defeat of so many moderate Republicans indicates that they couldn’t appeal to either Democrats or Republicans in a divided electorate.

Some environmental groups won’t miss it. "Our hope at the Sierra Club is that the Climate Solutions Caucus will be replaced," said Sierra Club Executive Director Michael Brune, at a post-election press conference. He criticized Republicans on the caucus for voting against climate-change measures.

Still, even with aggressive Democrats in charge of the House, this is not an issue on which movement will occur quickly. ClearView Energy Partners, a DC policy analysis firm, said, “We would not look for a climate bargain to emerge from the lower chamber.”

In fact, ClearView said that with so many environmental moderates on the Republican side losing their re-elections, they are “leaving behind a more conservative Republican residual.”

Congressional gridlock remains

Even before the new members arrive in January, Congress has two big issues to address: the FY2019 budget and the updated trade agreement with Canada and Mexico.

The government will shut down if a budget is not approved by Dec. 7 or a continuing resolution is not signed to keep the government funded. President Trump said he will not sign a bill that does not include funding to expand the wall on the U.S.-Mexico border, which Democrats will not support unless immigrants currently in this country are given easier paths to permanent residency and/or citizenship. And Freedom Caucus Republicans will oppose a continuing resolution that doesn’t have spending cuts. How the conflicts will play out is anyone’s guess.

Meanwhile, the update to NAFTA, known as the United States-Mexico-Canada Agreement (USMCA), could be in jeopardy. The USMCA must be passed by both houses of Congress, and it’s not clear that the measure has the votes it needs.

The Sierra Club has been leading a coalition of environmental groups fighting the USMCA. “The President’s signature trade accomplishment fails to adequately protect against air and water pollution or safeguard the health of communities that NAFTA has exposed to toxic pollution," said Ben Beachy, director of Sierra Club's A Living Economy project.

The energy industry’s position on it is lukewarm—an acknowledgment that a flawed USMCA is better than no agreement between the three countries. As one lobbyist told OPIS PointLogic, “Trade policy is a little more complicated than those at White House thought it would be at the outset. It is very technical and detailed. And there’s a huge gap between how it works and how it’s perceived by public.”

All of this comes into play for the energy industry. For example, President Trump has criticized the trade dispute mechanisms in NAFTA, calling them imbalanced against the U.S., and the USMCA would reduce their use. That’s the perception. But here’s the reality, said one lobbyist: “The U.S. has never lost a trade dispute under NAFTA, but it’s the U.S. that’s calling for changing it.”

IHS Markit (which owns OPIS PointLogic) pointed out another risk for Democrats if they pass the USMCA. “Support by Democrats following the elections for the United States–Mexico–Canada Agreement would open the door for further trade protectionism by the Trump administration, including additional tariffs on China and reconsideration of automotive tariffs directed at Europe,” the company said in a note to clients on Nov. 9.

Outlook

Summing it up, it’s clear that the atmosphere will change in Washington, D.C. in January when Democrats take control of the U.S. House. Oversight of the administration and its agencies will increase dramatically, and it will touch on issues of significance to the energy industry, and the natural gas industry in particular: pushback on a replacement to the Clean Power Plan; questions about the revised NAFTA; pressure against support of the coal and nuclear power industries, and more scrutiny of oil and gas leasing programs. But the energy industry as it stands today is well-positioned for continued Congressional and administration support.