Bush Energy Plan: Add More Juice

As President Bush prepares to hit the trail to sell the administration's energy plan to the American people, one thing is certain: Washington's in for a real power play.

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Bush Energy Plan: Add More Juice

While pols on both sides of the aisle agree it is time for America to develop a new energy policy, the ability to make real changes depends on the capacity of liberals and conservatives to reach meaningful compromises on divisive issues. However, while political wrangling and pontificating are inevitable, the level of initial, bipartisan support for general concepts suggests action on energy policy is a real possibility this year.

The proposed changes may have a profound impact on a number of energy companies. Today, we look at the Bush agenda as it relates to power and potential beneficiaries.

Building a New Power Base

A central theme of Bush's energy agenda is expanding the power infrastructure -- developing thousands of new power plants and more than 50,000 miles of new power transmission lines.

That means significant capital from private industry. "The Bush Energy Policy will be heavily supply-focused and rely on market forces and investment incentives to build infrastructure," notes Lehman Brothers power analyst Daniel Ford. "It will help reinforce the need for significant spending in the sector."

The push to develop new power plants will serve first to benefit the new merchant power producers, companies in the business of developing electric generation. The established are AES (AES) and Calpine (CPN). Other merchant power generators include Duke Energy (DUK), Dynegy (DYN), Mirant (MIR), NRG Corp. (NRG), Orion Power (ORN) and Reliant Energy (REI).

While the independent power merchants stand to benefit from the Bush energy plan, many already have new generation projects under way and the benefits are figured into current earnings estimates.

Also benefiting from the rush to build new generation: companies that construct the plants. Leaders in that business include Shaw Group (SGR), Fluor (FLR) -- in its partnership with Duke -- as well as Emcor Group (EME) and Jacobs Engineering (JEC). In addition, Halliburton's (HAL) Kellogg, Brown & Root construction subsidiary will play an increasingly important role as natural-gas fired generation continues to grow. Universally, these companies have construction backlogs through at least 2002.

Going Nuclear

While the politics of nuclear power remain volatile -- especially regarding the disposal of nuclear waste -- nukes have clearly crept back into the power vernacular. The Bush plan is likely to call for the extension of operating authorization for existing nuclear plants and the extension of liability restrictions for contractors and operators. In addition, Vice President Cheney has hinted nuclear power should be a part of future generation development.

Two beneficiaries of the resurgence of nuclear power should be Exelon (EXC) -- the combination of the former Unicom and PECO Energy -- and Entergy (ETR), companies that have been purchasing existing nuclear plants for "pennies on the dollar" and stand ready to continue to grow their nuclear presence.

Fixing Garbled Transmission

The Bush plan also focuses on modernizing the transmission grid by developing more than 50,000 miles in new transmission lines, allowing power to criss-cross the country.

The plan will likely call for new financial incentives and propose giving the Federal Energy Regulatory Commission, or FERC, the authority to condemn land for new power lines. Currently, the FERC has eminent domain authority in the placement of natural gas pipelines.

"Regarding new transmission, we look for tax benefits to provide for higher returns and a new approach on eminent domain to speed siting [and] permitting," notes Lehman's Ford. "Rules could allow for accelerated depreciation from 7-15 years, from 30-40 years currently for tax purposes. Some key beneficiaries are owners of big networks including American Electric Power (AEP), Entergy and Southern (SO)."

Bigger Lumps for Your Stocking

Potentially one of the biggest -- and most controversial -- provisions in the Bush plan would ease a host of environmental regulations that have limited the ability to expand existing coal-generation plants. Under former President Clinton, the Environmental Protection Agency sued eight utilities for allegedly violating the law. "The law states that that plant maintenance resulting in a material output increase requires the best available environmental controls regardless of cost," notes Ford.

The Bush plan would significantly relax those regulations, encourage the continued development of clean coal technology and also would propose guarantees that generators developing new coal generation under current environmental guidelines be protected from future liability resulting from new environmental restrictions.

Utilities with large coal portfolios will benefit the most from the Bush plan. They include AEP and Southern, as well as Allegheny Energy (AYE), Cinergy (CIN) and First Energy (FE).

However, most utilities stand to benefit from Bush's stand on coal. While natural gas has stepped into the power generation spotlight, more than half of all power generation in the U.S. is coal-fueled. Even with new gas-fired generation, a resurgence in nuclear power and alternative power projects, coal will remain the dominant fuel for power generation for decades.

From PUHCA to Price Caps

The Bush plan also will likely support repeal of the Public Utility Holding Company Act, or PUHCA, and oppose any price caps on electric power in California or elsewhere.

"The officials we met with voice strong opposition to price caps and a desire to leave market forces alone," noted Ford after a Washington trip that included stops with members of the administration, the Federal Energy Regulatory Commission and members of Congress. "Parties were concerned with discouraging new generation and providing the correct signals to retail customers."

Again, the independent generators are the likely beneficiaries of Bush's strong opposition to price caps.

Implementation Is Key

While the Bush plan will raise awareness and likely give a lift to many companies mentioned, the long-term benefits come only from implementation.

Ford came back from his Washington visit doubting that immediate action is likely. "While parties agree there are significant problems in the energy arena including a shortage of power supply and transmission and high commodity prices, there still does not seem to be enough urgency. More widespread hardship outside of California may be necessary to spur action."

Yet, he remains hopeful. The "debate seems to be headed in the right direction."

Coming next: A look at the potential beneficiaries of Bush's focus on increasing oil and gas supply.

What do you think of the Bush energy policy? Shoot me an email with your comments -- including your full name and home state -- and I'll report back with your responses.

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