The midterm elections changed the regulatory landscape for energy and the environment in several subtle yet significant ways. We see three key changes: First, the elections delivered increased regulatory uncertainty. This isn’t your usual “What’s around the corner?” uncertainty. It’s the uncertainty that comes from different levels and levers of government being pulled in different directions. Second, the elections shifted the oversight and enforcement dynamic. Democrats now have more ability to stop, slow and shape policy at the federal level through investigations and other tools, and the ability to drive more aggressive enforcement at the state level in certain jurisdictions. Third, the elections generated new policy-based investment signals for renewables and other alternative energy sources, while, generally, keeping the outlook for oil and natural gas steady. We see this in the way ballot initiatives broke on Election Day, and the campaign platforms that won.
More Regulatory Uncertainty
The elections likely will result in a widened gap between state and federal regulations and policies impacting the energy sector, creating misalignment and increased uncertainty.
A number of states will have leadership in the governor’s mansion, state legislature or chief law enforcement post more focused on advancing alternative energy sources and climate change-related measures, and stricter environmental enforcement. Six governors elected — in Colorado, New Mexico, Illinois, Maine, Michigan and Nevada — ran on platforms that would significantly shift their state’s policies with regard to energy from renewable sources, embracing new targets for 80 or 100 percent energy from renewable or alternative sources as well as the goals of the Paris climate agreement. A number of legislatures — at least six in Colorado, Connecticut, Minnesota, Maine, New Hampshire and New York — shifted to Democratic control, which means the possibility of new laws in these states limiting methane, hydrofluorocarbon and carbon dioxide emissions. And, finally, at least four attorney general offices — in Colorado, Michigan, Nevada and Wisconsin — are now occupied by Democrats, all of whom are likely to pursue more aggressive state-level enforcement as well as counteracting litigation on Trump administration initiatives.
At the same time, Congress changed only in part and the Senate remains closely aligned with the administration, meaning the federal government likely will pursue a much different energy and environment agenda than in these states. One important reason is the Republicans control of the U.S. Senate. With a number of critical executive branch positions vacant, it could be easier for the administration to secure confirmation for its nominees. The old Washington adage that “people are policy” still holds true — and individuals in these positions, especially at regulatory agencies (e.g., Federal Energy Regulatory Commission, U.S. Environmental Protection Agency, and U.S. Department of the Interior), possess significant discretion in establishing administrative policy and setting enforcement priorities. This means more people in line with the administration’s energy and environment priorities and, likely, a status quo approach to federal enforcement. In addition, given the divided control of Congress, broad new federal energy legislation is not expected, even if Congress can move forward on narrower bills or certain infrastructure initiatives. That said, look for Democrats to leverage the power of the purse, using must-pass government funding bills, tax extenders and the debt ceiling to create opportunities for previously marginal policies (e.g., tax credits for grid-scale electricity storage previously only passed in the Senate; now, that could become law).
New Oversight and Enforcement Dynamic
The elections likely will result in a more aggressive exercise of oversight powers by congressional Democrats at the federal level, and more aggressive enforcement by state officials in certain jurisdictions.
The takeover of the U.S. House of Representatives likely means that both the administration and the perceived beneficiaries of administration policies will be the focus of new congressional oversight efforts. These efforts may stop, slow and shape policy at the federal level, challenging implementation of the administration’s agenda on energy and the environment. This may mean new scrutiny for the current administration’s proposals on coal and nuclear generating facilities, as well as for efforts underway to reverse course on the previous administration’s energy, environmental and climate change agenda. We expect these oversight efforts to include investigations, exercise of congressional subpoena power, requests for information and invitations to testify before various committees. Although we expect administration officials to face most of the increased oversight, executives across various industries, including energy, likely will be under the microscope. The House may become a new venue where themes from debates about traditional and renewable energy sources and from “climate change litigation” (e.g., tort- and fraud-based claims being litigated in New York and California) play out.
Given a divided Congress, an important part of the dynamic will be in the states, where we expect more aggressive enforcement. For new state officials overseeing a shift from Republican to Democratic control in their states, we expect a focus on enforcement, often framed as counteracting the administration’s initiatives. For many environmental statutes, states have been delegated implementation authority — and that also means an ability to pursue entities that are potentially out of compliance. Although Democratic governors and their appointees are likely to drive much of this more aggressive enforcement, we expect new state attorneys general to also drive the action. Several attorneys general campaigned on platforms that included a commitment to robust environmental enforcement. For example, newly elected Phil Weiser of Colorado campaigned on a platform that included “[s]tanding up to failures of the EPA to protect our air quality and defend our clean energy future” and committed, among other things, to create “a special unit in the Attorney General’s office to support and counsel local governments in their negotiations and dealings with oil and gas companies.”
Mixed Signals on Energy and Climate Change
The elections provided a mix of signals on energy, the environment and climate change in the form of ballot measures and campaign platforms. Taken together, we see new policy-based investment signals for renewables and clean energy, while, generally, the outlook for oil and natural gas investment remains steady.
Ballot measures perhaps received the most attention given the obvious up-or-down result they draw out. A number of high-profile ballot measures failed, but a few passed.
Failed: Arizona’s Proposition 127 (requiring utilities to purchase 50 percent of power from renewable sources by 2030); Colorado’s Proposition 112 (expanding the setback distance for many oil and gas operations to 2,500 feet); Colorado’s Amendment 74 (compensating property owners for any reduction in property value caused by state regulation); Washington’s Initiative 1631 (establishing “pollution fees” or carbon tax for large sources of greenhouse gas emissions); and Nevada’s Question 3 (amending the state constitution to open retail electricity competition by 2023).
Passed: Florida’s Amendment 9 (amending the state constitution to ban offshore oil and gas drilling in state waters); Nevada’s Question 6 (providing preliminary provisional approval for a state constitutional change requiring utilities to purchase 50 percent power from renewable sources by 2030); and Virginia’s Question 1 (directing local governments to give property tax breaks for “climate resilience,” i.e., real estate subject to recurrent flooding that undertook improvements to prevent flooding).
For many of newly elected officials, a shift from traditional energy sources to renewable energy sources was a key platform promise. A few examples include:
Colorado: Jared Polis campaigned on a 100 percent power from renewable sources by 2040 platform; Illinois: J.B. Pritzker campaigned on a 50 percent power from renewable sources by 2025 and 100 percent by 2050 platform; Maine: Janet Mills campaigned on a 100 percent energy from renewable and other alternative sources by 2050 platform; Michigan: Gretchen Whitmer campaigned on a 100 percent energy from renewable and other alternative sources platform; New Mexico: Michelle Lujan Grisham campaigned on a 50 percent power from renewable sources by 2030 and 80 percent by 2030 platform; and Nevada: Steve Sisolak campaigned on a 50 percent power from renewable sources by 2030 platform (reinforced by Question 6).
For both ballot measures and campaign platforms, the impact of Nov. 6 is neither self-evident, self-executing nor self-sufficient. Take for example, the hotly contested “setback” measure in Colorado. Although Proposition 112 did not pass, we expect that with (a) the Colorado Senate now controlled by Democrats, (b) K.C. Becker (who supported Proposition 112) potentially the Colorado House Speaker, (c) Weiser incoming as attorney general, and (d) Polis (who previously advocated for other setback limits) incoming as governor, there may still be executive or legislative action limiting oil and gas operations within the state over the next year. In addition, given that New Mexico’s incoming governor Lujan Grisham made mitigation of methane emissions from oil and natural gas a central element of her campaign platform, we could see such an effort take the shape of a single or perhaps multistate initiative. This is just one example where the impacts of the elections will continue to unfold.
Although much remains to be seen, we know this much: the midterm elections already have changed the mosaic for regulatory policy and enforcement.
Ali Zaidi is of counsel and Paul Tanaka and Bob Fleishman are partners at Kirkland & Ellis LLP.