On Monday, the Supreme Court heard oral arguments in several climate change cases that will decide if the Obama Administration and Environmental Protection Agency (EPA) overstepped their authority by regulating power plant and factory greenhouse gas emissions. The cases challenge an EPA program that requires companies to obtain a permit anytime they build or expand a facility that will emit 75,000 or 100,000 tons of greenhouse gases.
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The EPA created the permit program under the Clean Air Act, a federal law that allows the agency to regulate buildings emissions that exceed 100 or 250 tons. Since small businesses can easily produce 250 tons of greenhouse gases, the EPA raised the threshold to higher numbers common to large factories and power plants. The agency’s unilateral decision and the broader picture concerning the limits of its powers lies at the center of the cases heard on Monday.
The Two Sides
Some opponents of the permit requirement view its enactment as an abuse of executive power. House Republicans criticized the program in a brief filed to the Supreme Court, lambasting the Obama administration for bypassing Congress in its efforts to reduce carbon emissions. Al Jazeera America reports that in a separate brief, thirteen states described the regulation as “one of the most brazen power grabs ever attempted by an administrative agency.”
The US Chamber of Commerce, utility companies, and industry trade associations have also voiced their opposition to the program, insisting that the burden will be too great in cost and scope. In December, the Chamber of Commerce filed a brief with the Supreme Court that described the EPA regulation as “economically devastating” for all sectors. The lobbying group said that energy prices will rise as the program leads companies to build fewer plants, leaving the country’s energy infrastructure ill-equipped to meet demand.
Calpine Corporation (CPN), a natural gas and geothermal power plant operator, supported the EPA regulation in a brief filed last month. The company applied for six permits as part of a development and construction effort and characterized the experience as “neither overly burdensome nor unworkable.” Calpine also refuted claims of excessive costs, stating that the program promotes “available and cost-effective” measures.
Click on the interactive chart below to see Calpine's earnings data over time.A coalition of fifteen states also backed the EPA’s program in another brief, which stated that the agency was right to regulate greenhouse gas emissions in order to protect public health.
Though the court's ruling won't be issued until June, we decided to take a closer look at stocks to buy within the energy industry. We began by constructing a universe of US energy stocks. Our group included firms belonging to the utilities sector as well as stocks listed on the following clean energy indices: Ardour Global Alternative Energy, NASDAQ Clean Edge Green Energy, NASDAQ Clean Edge Smart Grid Infrastructure, and Renixx Renewable Energy Industrial. We then looked for stocks with more profitability than the industry average as illustrated on the basis of three trailing twelve month (TTM) profitability margins:
TTM Gross Margin: The percent of revenue left over after paying expenses. This margin measures the percent change in trailing 12 month revenue and trailing 12 month cost.
TTM Operating Margin: The percent of revenue that remains after paying variable costs associated with the production of a good.
TTM Pretax Margin: The company’s earnings, with all expenses incorporated, before taxes. It is also expressed as a percentage.
We applied this metric in response to critics who insist that the permit program places a heavy financial burden on companies. Profitable energy stocks with high margins have more money than their peers, so it’s likely that the program will have less of a devastating impact on their finances.
On the other hand, companies with below-average margins aren’t as equipped to handle additional expenses, so we also screened for energy stocks with less profitability than the industry average, again using three TTM profitability margins as our basis.The List More Profitable Energy Stocks Click on the interactive chart below to see sales data over time.
Do you think these energy stocks will be able to keep their high margins if the Supreme Court rules in favor of the EPA? Use this list as a starting point for your own analysis.