Saturday, November 13, 2010

Reality Bites: Energy companies will face tough times ahead in Washington as Congress cuts subsidies. (ADM; AEP; PEIX; GE)

From Barron's:

Obama's Green-Collar World Meets Reality  
LOBBYIST MICHAEL MCKENNA has a word of advice for his clients: If your business depends on federal subsidies for its existence, then you better design a new business model.

McKenna, a Republican, predicts that fiscally conservative Republicans in the next Congress will begin a multiyear process of cutting industry-specific and company-specific tax subsidies as part of their aggressive budget-paring aims. Tree-hugging investors beware: President Obama's beloved green-energy sector likely will be the first sector to feel the squeeze.

McKenna knows what he's talking about. He's a political jack of all trades and does lots of work in the energy industries. He's a registered lobbyist with clients that include American Electric Power (ticker: AEP), El Paso (EP), Southern Co. (SO), Suez S.A. (SZE.France) and Koch Industries. His company, MWR Strategies, Virginia, also provides public-relations services and political polling. He's been involved in political campaigns for more than three decades.

The most surprising trend he saw in the recent election was among voters aged 65 and older. In elections past, this cohort split nearly evenly between Democrats and Republicans. This year, the Democrats lost the demographic group by 21 points. If the GOP maintains this double-digit advantage among the oldsters, he says, there's little chance of Obama being elected in 2012 for a second term.

All energy sectors eventually will see their tax subsidies erased over the next two to five years, predicts McKenna. Green energy projects will get hit first because Congress likely will vacuum up unspent bailout money, which includes funding that had been set aside for green-energy loan guarantees.

Early next year, Congress will have to address the corn-based ethanol program as refinery subsidies end. The debate pits corn growers against environmentalists who have decided that biofuels degrade agricultural land and compromise air quality. McKenna predicts that Congress won't increase the amount of ethanol in gasoline above the current 10% blend.

Promoters of a green economy have been pressing Congress to legislate a Renewable Energy Standard, or RES, to require utilities to derive a fixed percentage of their power from generators powered by wind, the sun and renewable energy sources. Republicans in Congress will not vote for RES because in essence it's an energy tax, McKenna says. Utilities would have to hike their rates substantially to make up the cost of building and maintaining these expensive, inefficient sources of power and the new power lines required to tie them into the electrical grid. Instead, each state will have to decide whether or not it wants to require green-energy mandates for its power companies and whether to charge rate payers or utility shareholders to cover the increased cost, McKenna says. Thirty states and the District of Columbia already have adopted RES....MORE