Carrots and Sticks in the Utilities Sector

 | Jun 20, 2014 | 6:20 PM EDT  | Comments
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Many people are unaware of the tight grip states have over energy policy. Most of us have been conditioned to believe that all energy issues have their roots in Washington, D.C. While Washington plays a central role, it is part of a larger cast. In fact, states have far more sway than Washington does.

Natural gas is an example. Upstate New York is marinated in natural gas. The region sits on top of two separate layers of shale gas. The top layer is the Marcellus. A few feet deeper is the Utica Shale, named after the city of Utica. Yet the state has a de facto moratorium on fracking, so it's impossible for exploration-and-development companies to extract natural gas from either shale. Of the 1,854 active drilling rigs in the U.S., Baker Hughes' rig counts show that New York State has zero.

New Yorkers watch neighboring states pursue shale gas, which bolsters their economies and increases employment, land values and tax bases. And New York's constituents struggled to access natural gas to heat their homes, fuel their power plants and leverage their industries. Like other Northeastern states, New York is frequently forced into paying premiums for its natural gas.

Pennsylvania, West Virginia and Ohio took a different path. Pennsylvania currently has 59 active rigs. West Virginia has 26 active wells, 24 of which are natural gas. Ohio has 38 active rigs, half of which are natural gas.

New England is a net importer of energy. Most of its fuels originate from other states and Canada. Incredibly, some of its natural gas originates from Trinidad and Yemen. Considering all the natural gas that saturates neighboring states, it would seem appropriate that New England would consider building a natural gas pipeline to the Marcellus region. Several pipeline companies, such as Spectra Energy (SE) and Kinder Morgan (KMI), offered to build one if consumers or states would commit to buy. So far, no one has stepped up.

Speaking of pipelines, New England has an opportunity to cut the umbilical cord from Russia's oil fields. Behind Canada, Russia is the largest source of imported crude oil for the nation's East Coast. For the last two months, more than 4 million barrels per month were shipped to East Coast refiners at Brent crude's elevated prices. Yet New England has an opportunity to tap Canadian oil at lower prices.

While everyone is focused on TransCanada's (TRP) Keystone pipeline, New Englanders are focused on the Montreal-Portland pipeline (PMPL). This pipeline moves crude oil from Maine to Montreal through New Hampshire and Vermont. It has been operating for decades. Canada wants to reverse the flow and move Canadian oil from Montreal to Portland. All three states are considering how to intervene and prevent Canada's oil from reaching the energy-starved East Coast. Call it Keystone II.

States' influences are not limited to gas and oil. Nuclear power also faces stiff blockades from several states. California, Connecticut, Illinois, Kentucky, Maine, Massachusetts, New Jersey, Oregon, Pennsylvania, Montana, West Virginia and Wisconsin have moratoriums of one form or another against the building of new nuclear power plants. States such as New York make nuclear power so difficult, they might as well have a moratorium. Still other states may permit building a new nuclear plant, but they cannot offer cooling water, transmission lines or other critical infrastructure needed to make a new nuclear plant economic.

While Illinois is reluctant to allow new nuclear plants, it is considering measures to protect existing nuclear plants. According to the Chicago Tribune, legislators are considering pro-nuclear policies. One resolution asks state regulatory bodies to prepare reports that explain the "societal cost" of increased greenhouse gas emissions in the state if nuclear plants close, and asks the Department of Commerce and Economic Opportunity to outline job losses that would come from closing nuclear plants.

Then there is coal. North Carolina is considering measure that would make coal uneconomic. According to the Charlotte Observer, the Senate's agriculture and environment committee endorsed a measure to close Duke Energy's (DUK) 33 coal ash ponds. Duke already retired seven of its 14 coal-fired power plants in North Carolina. All but three units converted from wet ash to dry ash. Unlike wet ash, dry ash can be placed in landfills.

The Sunshine State does not like solar power. The State of Florida prefers to build new gas turbines. However, it is not really about solar vs. turbines. It is about regulating utility assets by keeping competition at bay. This policy benefits NextEra Energy (NEE), TECO Energy (TE) and Duke Energy. It also allows NextEra and Duke to invest in solar and wind power assets in other states.

Florida is not the only state that does not embrace solar or wind. Other than North Carolina, most Southeastern states have been slow to adopt renewable energy.

The federal government has a role in energy policy. In most cases, their role is limited to carrots and sticks. However, in many cases, their role is supplemented or diminished by state and local policies.

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