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Regulated Utilities Have A Lot At Stake In November Elections

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Elections have consequences, but often they’re not what investors expect, or they’re in places where most aren’t looking. For most people, November elections are about which party will control the House of Representatives and the U.S. Senate. That’s important, but for regulated utilities, the most critical outcomes are always the state and local races.

This time around will be no exception. We count 46 states holding legislative elections, and 36 are also holding a vote for governor. It’s governors who choose the members of public utility commissions in most states. Legislatures, meanwhile, pass laws PUCs must follow when they set policy. They can also sweeten the deal for utilities to encourage policy or crack down in financially ruinous ways.

On the plus side, California’s Governor Jerry Brown announced last week that the state is moving a bill to “conference committee” that would limit utilities’ liability for future natural disasters, provided they adhere to tough new safety standards.

If the bill becomes law as seems likely, it will not affect potential liabilities for last year’s wildfires. PG&E Corp (PCG), for example, took a $2.5 billion charge after investigator Cal Fire named its equipment a cause of some damage. It could face as much as $15 billion in charges in a worst case.

A new law would, however, provide surety that utilities won’t be bankrupted by future disasters. That’s likely to be a much bigger deal for PG&E’s shares, which currently trade at a low 11.3 times expected 12 months earnings. A new law would also be a big plus for Edison International (EIX) and Sempra Energy (SRE), neither of which as yet have been named a cause of fires.

On the negative side of the spectrum is the South Carolina legislature. Last week, it passed a law reducing SCANA Corp’s (SCG) 15% rate increase to pay for the now cancelled Summer nuclear plant to just 3.8%. Even that wasn’t enough for the state’s Governor Henry McMaster, who has made bashing the utility a campaign issue.

SCANA could well win its challenge of the law in federal court. The company argues the action is an illegal taking, given previous legislation guaranteed a return on investment that’s already been made. Would-be acquirer Dominion Energy (D) is apparently negotiating with McMaster on a deal that would allow the merger to go through, and for the politicians to save face.

At this point, however, the damage has been done to SCANA shares, which for half of what they did in early 2017. Clearly, it doesn’t pay to run afoul of state politicians any more than it does regulators.

The good news for U.S. utilities in this election cycle: Most appear to be on the same page with the voters in their states. California utilities, for example, are pushing ahead with de-carbonizing energy. That includes a mass rollout of electric vehicle infrastructure, battery-based storage and eventually a “plug and play” grid enabling consumers and businesses to buy as well as generate power.

Xcel Energy (XEL) is orchestrating Colorado’s phase-out of coal-fired electricity in favor of wind, natural gas, solar and energy storage under a multi-year investment plan. New Jersey’s de-carbonizing goals have enabled Exelon Corp (EXC) and Public Service Enterprise Group (PEG) nuclear plants to obtain “zero emission credits,” so they can remain economic in the face of weak wholesale power prices. Exelon already benefits from ZECs in Illinois and New York.

NextEra Energy’s (NEE) Florida Power & Light unit is boosting rate base with an unprecedented rollout of solar energy, as well as with grid hardening measures against what appear to be storms of increasing intensity. And while North Carolina cut Duke Energy’s (DUK) recent rate request last month, it supported efforts to clean up coal ash waste, and deployment of solar power and energy storage.

Among potential trouble spots are where companies are building natural gas pipelines despite increasingly well-funded opposition. Dominion, for example, has come under rare fire in its home state of Virginia, as opponents of its Atlantic Coast Pipeline project argue it wields too much influence.

There’s no election this year in the Commonwealth and Governor Northam has so far supported the pipeline. There are, however, pending elections in Maryland, New York and Pennsylvania, where opposition to pipelines has grown. That’s an issue for utility investors to watch just as much as it is for pipeline developers like Williams Companies (WMB).

Utility rates can be a potent populist political tool. The low level of unemployment in the U.S., and the fact that utilities aren’t asking for big rate increases to pay for huge projects as they did in the 1970s, make it hard to see this becoming a real issue in November in most states.

In addition, natural gas sells for well under $3 per million British Thermal units. And it’s likely to stay cheap with the flood of associated gas hitting the market from west Texas. That’s a key factor holding electricity prices down as gas is now America’s number one fuel for generating electricity, as well as the benchmark for setting wholesale electricity prices.

Utility companies have also become a lot better at staying under the radar in most states. For example, recent responses to catastrophic storms have been generally good enough to avoid backlash.

That said, a particularly nasty storm season this year coupled with a tone deaf response could put a utility on the hot seat in a hurry this year. And with elections so tight this year, no one should underestimate politicians’ willingness to embrace the time-tested campaign tactic of utility bashing.

That’s why I’ll be keeping a close watch on the November races, as an early warning system for Conrad’s Utility Investor readers. Utilities that can successfully navigate this year’s vote have a clear path to investment that will boost earnings, dividends and share prices. Those that become an issue will drop just as surely as SCANA has.