Our Energy Policy Uncertainty Continues

A year ago as we approached the first Energy Inc. symposium in Charlotte, we were engaged in a serious dialogue, both nationally and here in Charlotte, about the need for policy and regulatory certainty to support our energy industry’s growth.  The need for such certainty was underscored at the symposium by the chief executives who comprised the symposium’s CEO panel.  Today, the lack of a national energy policy, including with regard to carbon regulation, continues to significantly hinder the long-term planning for developing our energy infrastructure.

During the past year, we have witnessed a remarkable shift in the policy and regulatory landscape.  First came the demise of the “cap and trade” legislation that Senators Kerry, Lieberman and Graham were drafting, which many had believed might bring some certainty.  Then the EPA continued or perhaps escalated its efforts to implement a highly ambitious agenda.  This was followed by the dramatic results in last November’s elections, which was followed immediately by the report from National Commission on Fiscal Responsibility and Reform, often referred to as the deficit commission.  Charlotte’s Erskine Bowles co-chaired the Commission.  His February 17, 2011 Op-ed in The Hill (written with his co-chair Senator Alan Simpson), can be accessed here and urges greater, more comprehensive action by our political leaders than is now being undertaken.

Perhaps in response to the changed political climate, the EPA appears to be proceeding more cautiously in 2011.  Notwithstanding, legislative initiatives have been increasingly proposed in the new Congress to reduce the EPA’s funding or authority, especially with respect to greenhouse gas regulation.  How these EPA matters will play out longer term remains unclear.  What does seem clear is the mounting pressure to reduce our federal deficit, which will necessitate both substantial spending reductions and significantly enhanced revenues (whether by new taxes or fees, tax reform, elimination or reduction of tax incentives, subsidies or deductions, or a combination of the foregoing).  Almost every energy sector has benefited over the years from federal spending or special tax treatment, and their reduction or loss could pose a significant burden for the energy sectors that may be affected, which will be greatly exacerbated by the current lack of policy and regulatory guidance.  As a reference point, the 2009 Recovery Act allocated over $40 billion for energy infrastructure, energy efficiency, renewables and other energy spending (exclusive of vehicles and transportation), plus almost $20 billion in tax incentives for renewables and energy efficiency (again, exclusive of vehicles and transportation).

Thus, the heightened uncertainty.  And, whether due to the changed political climate or otherwise, there seems to be no consensus on what approach should be taken to achieve some degree of policy and regulatory clarity on energy and environmental matters.  The possibility of a “clean energy standard” (an expanded version of a renewables portfolio standard that would include nuclear, clean coal and natural gas, along with renewables) has been raised by the administration and others, but the idea seems unlikely to gain traction on Capitol Hill in the next year or two.  This policy and regulatory limbo is occurring at a time when roughly 60% of the nation’s 700 power-generating plants are 30 years old or older, there are other substantial energy infrastructure needs, and extended lead times are necessary for the planning, approvals and construction of almost all of these very costly capital expenditures.

Dr. Alan Blinder, the former Vice Chairman of the Federal Reserve, wrote a thought-provoking Op-ed in the Wall Street Journal on January 31, 2011, which can be accessed here.  In his op-ed, entitled “The Carbon Tax Miracle,” Dr. Blinder proposes a carbon dioxide tax “that starts at zero and ramps up gradually over time” so that the economic recovery will not be threatened.  What is critical, he states, is to “lock in higher future costs today” even though the initial tax impact is delayed.  Businesses will then know there is a future low-carbon market and “start investing right away – and in ways that make the most economic sense.”  While some may quarrel with any proposal with “tax” in its name, it is hard to argue with the value of the proposal’s expected side effects as identified by Dr. Blinder:  decision-making is left in private hands, good jobs with good wages are created in the private sector, oil imports and our trade deficit are reduced, our economy becomes more efficient, global warming is ameliorated, and eventually the federal budget is reduced significantly.

There is no silver bullet to solve our energy challenges, as most recognize.  Nor will the needed certainty be achieved in the next year or so.  And while these challenges can be characterized as this generation’s “sputnik moment,” the efforts required must be much broader and more comprehensive than our “moon shot” initiative in the 60’s.  The debate and formulation of a national energy policy to guide such efforts must start in earnest soon and reflect today’s realities, including both our federal deficit and the need to address carbon emissions.  The longer term health of our national and regional economies – and of our energy industry – demand it.  All thoughts and comments are welcome.

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This column was written by Steve Rhyne, a corporate, M&A and energy partner in the Charlotte office of K&L Gates, LLP.  K&L Gates is an international law firm with 37 offices on 3 continents, including offices in Charlotte, Raleigh and the RTP.  The information in this column is for informational purposes, does not contain or convey legal advice, and should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.