National Energy Policy in 50 Pieces

When it comes to energy policy, many Americans underestimate the power of state governments and overestimate the influence of the federal government. If anyone thinks Washington can develop a cohesive energy policy, forget it. It's just not in Washington's DNA. The only power the president and Congress have is the ability to offer incentives and issue regulations. That's about it.

For those not sure about the immense powers of state governments, look at what just happened to Duke Energy (DUK). North Carolina reached into a private enterprise and demanded the chairman, president, CEO and two executive officers be relieved of their duties. The state demanded that the company change its board of directors and its corporate governance.

With an enterprise value exceeding $80 billion, Duke is the largest private utility in the nation. With all its leverage, Duke felt forced to comply or it would no longer have a profitable business. Nobody is arguing Duke didn't deserve a reaction by state regulators to the board's outrageous behavior. But the state's response is a reach that surprises many in the industry.

It shouldn't be a surprise. Energy policy remains firmly in the hands of 50 individual state governments and the District of Columbia. They, not the federal government, decide if a new energy project is in their sovereign interests. They, not the federal government, decide what energy facilities will or will not be built.

Consider coal. Most eastern and many other states will not allow any company to build a new coal-fired power plant anywhere. It does not matter if the region needs additional jobs, a tax base, or new sources of safe, economic or reliable power; a new coal plant is not an option. If a neighboring state allows a utility to build a new coal facility, states may end up in federal court as they battle over sovereignty and cross-border pollution issues.

Now consider pipelines. States have the final say about permitting oil, gas and chemical pipelines. TransCanada (TRP) is trying to build an extension to its existing Keystone Pipeline. Nebraska must approve any portion of the project passing through its sovereign territory. Up to now, that approval has not been forthcoming. According to Reuters, Nebraska's Department of Environmental Quality is slated to hold public hearings as the last stage before finalizing its recommendation to Nebraska Governor Dave Heineman, who has final approval. Only after each state approves its piece of the project does federal approval to cross the international border become relevant.

Pipelines are easy compared to refineries. Few states would allow a new refinery to be built on a Greenfield site. Those that would consider a new refinery would impose restrictions and regulations that would challenge most pro formas.

And don't even think of building new nuclear power plants. Developers can have all the federal support they want, but without state approval, nothing happens. Many states with large population centers will not allow utilities to consider a new nuclear facility. Other states are enablers.

States such as Georgia and South Carolina help make the point. These states are strong supporters of building new energy projects and they are allowing Southern (SO) and SCANA (SCG) to build two new nuclear units. Unlike the federal government, individual states are actually helping utilities finance their new nuclear units by taking financial positions in the projects. Without this help, these nuclear projects would not be possible.

Even with federal incentives in place, states have the ultimate veto power and they frequently use it. A good example is solar power. The federal government currently offers solar developers investment tax credits and accelerated depreciation. It isn't enough. To make solar work financially, states must add incentives. In states where incentives were added, like New Jersey, Ohio and California, solar development has flourished. In states with limited to no solar program, solar projects languish. One reality is that individual states have enormous influence on energy development and production. They can kill a project or make it happen.

The other reality is the federal government's power is limited. True, the federal government can prevent interstate and international projects and can provide incentives. But it cannot decide when and where to build new energy projects.

A huge portion of the nation's energy policy is already in place. It's broken into 50 pieces and located in 50 state houses (and the District of Columbia, and certain territories). There is little chance those pieces can be brought together into one cohesive national energy policy.

At the time of publication, Williams had no position in any of the stocks mentioned.