As billions in government subsidies were at stake, the electric utility industry shed its opposition to clean-air regulation and put its lobbying muscle behind passing President Biden’s climate bill.
By Eric Lipton, New York Times, Nov. 29, 2022
WASHINGTON — Just two years ago, DTE Energy, a Michigan-based electric utility, was still enmeshed in a court fight with federal regulators over emissions from a coal-burning power plant on the western shore of Lake Erie that ranks as one of the nation’s largest sources of climate-changing air pollution.
But in September, Gerard M. Anderson, who led DTE for the last decade, was on the South Lawn of the White House alongside hundreds of other supporters of President Biden, giving a standing ovation to the president for his success in pushing a climate change package through Congress — a law that will help accelerate the closure of the very same coal-burning behemoth, known as DTE Monroe, that his company had been fighting to protect.
Mr. Anderson’s position reflects a fundamental shift among major electric utilities nationwide as they deploy their considerable clout in Washington: After years of taking steps like backing dark-money groups to sue the government to block tighter air pollution rules, DTE and a growing number of other utilities have joined forces to speed the transition away from fossil fuels.
Their new stance is driven less by evolving ideology than the changing economics of renewable energy, fueled in part by the sheer amount of money the federal government is putting on the table to encourage utilities to move more quickly to cleaner and more sustainable sources of energy like solar and wind.
In that way, it is a leading example of the effects of the Biden administration’s willingness to engage in what is often called industrial policy: providing public funding to bolster critical industries in support of the nation’s broad strategic goals.
But if industrial policy initiatives can provide powerful incentives to corporations to pursue those goals, they also inevitably raise questions about whether they are constructed in ways that reward companies for taking actions that market forces would lead them to take anyway — an issue that hovers over the legislation embraced by both Mr. Biden and the electric utilities.
With the passage of the climate and economic policy bill known as the Inflation Reduction Act, DTE and other big utilities like American Electric Power, NextEra Energy and Southern Company stand to benefit from the largest package of subsidies ever granted to the industry.
It is a 10-year, $220 billion hodgepodge of tax breaks and major changes in federal tax law and other climate-change-inspired inducements that amount to a kind of lobbyist wish list never before considered even remotely possible by the industry.
With so much on the line financially, the industry ramped up spending on lobbyists to help push the package through the House and the Senate. It has also directed at least $17 million in campaign contributions to lawmakers since last year, targeting in particular key players like Senator Chuck Schumer of New York, the Democratic majority leader, and Senator Joe Manchin III, Democrat of West Virginia, whose consent was vital to getting the measure passed.
The legislation will do more than just accelerate efforts to meet climate change goals, according to an analysis by The New York Times of the 273-page law.
Buried in the hundreds of pages are carefully crafted provisions that will eventually help electric utilities gain additional profits for years to come, totaling hundreds of millions of dollars per year for some of the larger players, according to Wall Street analysts.
In the course of its two-year lobbying effort, the industry managed to help knock out of the legislation measures that would have mandated actions to curb pollution, largely leaving only those provisions that rewarded it for doing so — in effect securing more carrots while tossing aside the stick.
“Let’s be honest — these guys can say all they want about the environment and how we are all aligned,” said Shahriar Pourreza, who has spent two decades studying the utility industry for Wall Street firms. “But you strip back the layers of the onion and this is also a major long-term growth opportunity for these utilities.”
Mr. Anderson, who stepped down as chairman of DTE this past summer but still serves as an officer with the utility trade association’s foundation, said his commitment to the package reflected a conviction that utilities must help confront climate change.
“Everybody figured out this is the future,” he said, while on the South Lawn, just before Mr. Biden celebrated the passage of the legislation. “This is something we need to be for. That we should be for. It was a sea change in our mind-set.”
But in a follow-up interview, Mr. Anderson, who participated in more than 120 personal appeals to members of Congress to help push the legislation through, agreed that the terms were attractive for the industry.
The benefits come in part from the extension of about-to-expire tax breaks for the industry for as long as two decades, a provision that alone is worth more than $120 billion. Lawmakers also significantly expanded the kinds of things utilities can spend money on and still get a generous tax break for, like new energy storage equipment.
The new law also allows utilities that build clean-energy installations to sell large chunks of their tax perks to other companies or Wall Street investors, even those that have no connection to the energy industry. In effect, the legislation is reviving a tax-law loophole that was revoked by Congress four decades ago after major American corporations — including General Electric — employed the provision so aggressively that it allowed them to avoid paying almost any federal income taxes despite enormous profits.
The law Congress passed is so generous — with tweaks pushed by industry lobbyists — that it surprised even some veteran corporate tax lawyers.
“The Capitol Hill tax staff, they tell us this is crazy, we are never going to do that,” said David Burton, a corporate tax lawyer whose clients include energy companies, recalling the reaction at first to the plan to revive the ability of companies to sell tax breaks to the highest bidder, known as transferability.
“It is like selling a used car,” he said. “I have the tax break and I can convey it to you. For a long time that has been absolutely contrary to U.S. tax policy. But now it is law.”
The energy companies are among the class of winners that is now emerging from the hundreds of billions in subsidies that the administration and Congress have approved over the last two years. Those winners also include battery makers, broadband providers, highway builders, mining companies, automakers and semiconductor manufacturers.
Mr. Biden’s acceptance of industrial policy initiatives is a defining feature of his administration. The result has been a federal government that has teamed up with the private sector at a scale unlike anything the United States has seen since at least the Depression or World War II, with potential economic and political risks as well as benefits.
Embracing Biden
They gathered in early February beneath a portrait of Abraham Lincoln in the White House’s State Dining Room, a room that has hosted countless world leaders over the decades. On that day it was filled by some of the top executives at the nation’s largest electric utility companies, including Mr. Anderson from DTE, as well as the bosses from Southern Company, American Electric Power, Duke Energy and several of the other giant utilities that dominate the nation’s power sector.
It was unseasonably mild for midwinter in Washington — the temperature reached 54 — and the agenda was global warming and what these companies could do, in an alliance with the White House, to help address it.
The power plants run by these executives are by far the single biggest source of carbon dioxide and other air pollution in the United States. The companies are all members of a powerful trade association called the Edison Electric Institute, which organized the gathering. Collectively, the members of E.E.I., as it is known, provide electricity to 235 million Americans in all 50 states plus the District of Columbia.
As members of the group sat around a large table, Mr. Biden was blunt about what was at stake as he pushed Congress to take steps toward meeting a goal of allowing the nation to produce all its electricity carbon free by 2035.
“I’ve spent too much time this last year flying in helicopters over areas of scorched earth,” Mr. Biden told them, referring to a rash of wildfires, blamed in part on climate change. “More territory is burned to the ground in the West Coast than the entire state of New Jersey in terms of square miles,” he added. “It’s just stunning. Absolutely stunning.”
Mr. Biden also let the assembled group know that he was well aware that many of them in the past were hardly ready to rally behind him, alluding to when he served as vice president during the Obama administration and also pushed, often in the face of industry opposition, for ambitious climate change measures.
During that period, utilities were secretly sending millions of dollars to a law firm that filed litigation on their behalf to block the Clean Power Plan, enacted during the Obama administration. They also made large donations to Republican attorneys general who filed their own lawsuits to overturn air pollution and climate rules.
E.E.I. members, in some cases, even organized their own sophisticated, but covert, political operations to try to block renewable energy mandates.
The owner of Arizona Public Service, the state’s largest electric utility, secretly donated more than $10 million to help elect state regulators who would sabotage renewable energy requirements it opposed.
The company denied for several years that it had played a role in the scheme, until the F.B.I. opened an investigation. The company was subpoenaed and then confessed in 2019 that it had bankrolled the dark-money push.
But despite that history of opposition to clean-air regulations, the industry in recent years has been abandoning coal, largely for economic reasons. Southern Company, which serves 4.4 million electric utility customers in Georgia, Mississippi and Alabama, has long had one of the largest fleets of coal-burning power plants, and it waged an intense fight to protect them, including donations to climate change skeptics.
But late last year, Southern Company announced that it intended to close all but three of its coal plants by 2028, cutting its coal fleet capacity by 80 percent compared with 2007, and replacing it mostly with solar, natural gas and nuclear power.
Part of the shift away from coal was driven by federal mandates that were going to force the company to spend hundreds of millions of dollars to upgrade the plants to reduce toxic water pollution sent into area rivers and streams. At the same time, natural gas had emerged as a plentiful, cleaner and more affordable alternative, and the costs of renewables like solar and wind were coming down rapidly.
By the time of the meeting with Mr. Biden in February, executives from Southern, like DTE and other utilities, were ready to tell the president that they were on board to support legislation that would accelerate the industry’s move away from coal by providing tax breaks and other inducements.
“Partners in the federal government can enable this industry to move much more quickly than we would have otherwise, particularly with the tax provisions,” Nick Akins, the chairman of American Electric Power, which serves five million customers in 11 states, told Mr. Biden.
Mr. Akins pointed out that much of the value of the tax breaks that were then under debate in Congress would be passed on to ratepayers, in the form of smaller future electric power rate increases, since the federal government would effectively be subsidizing the cost of the transition to cleaner burning fuels.
But renewables even without federal subsidies are now cheaper than coal, meaning that the market was already giving the utilities plenty of incentive to change how they produced power.
Nor did they mention at this meeting with Mr. Biden that credit rating agencies were pressuring them to move more quickly to clean up their energy production, or face higher costs to borrow money. They also did not detail how the federal subsidies, by changing the economics of the power industry, were going to increase their own profits.
Turning Tax Breaks Into Profits
No company is better positioned to cash in on the subsidies than NextEra Energy, which serves six million customers in Florida as well as millions more in 38 other states that rely on electricity produced from wind and solar installations it has built to supply other utilities.
For every dollar that utilities like NextEra spend to build solar installations, they should be able to get as much as 60 percent back in the form of a so-called investment tax credit under the new law, if they tap into various bonuses, like building in a low-income area where land has previously been polluted.
In regulated markets — where state officials control how much utilities can charge for electricity — that tax credit will directly benefit ratepayers because the utilities must pass on savings like this to customers. NextEra said in late October that tax credits on already negotiated solar projects in Florida will save customers nearly $400 million, compared with higher bills they would pay if the company made the same investments without the tax credit.
But this tax credit will eventually benefit NextEra’s bottom line as well, because the subsidies will also accelerate the utility’s own equity investments in solar and wind capacity and other renewables. And the company can take its approximately 10 percent profit on this bigger base of capital spending, as permitted by state regulation.
“If they now put $2 down instead of $1, instead of making 10 cents, now they are making 20 cents,” said Julien Dumoulin-Smith, who tracks NextEra for Bank of America. “The profits are going up that way.”
Elsewhere across the nation, NextEra plans to build an additional 37 gigawatts of renewable power over the next four years — enough to serve about 25 million homes — more than doubling its existing inventory, which is already the largest in the nation. It earns an even higher profit on those contracts as the investments are not regulated. It can also get tax credits on upgrades to its existing wind and solar projects and to add battery capacity to store renewable power — all again increasing profitability.
“We can put more capital to work at a good return,” said Rebecca J. Kujawa, the president of NextEra Energy Partners, the unregulated part of the company. “Now I have decades of visibility to being able to do that profitably.”
The tax subsidies have also increased the value of renewable projects owned by utilities, which is in part why many companies — including American Electric Power, North Carolina-based Duke Energy and Boston-based Eversource — are already putting some of them up for sale.
“It is a game changer,” Joe Nolan, the chief executive at Eversource, said in an interview, noting that it had spent $1 million six years ago to lease an offshore wind site that it now intends to sell, potentially for hundreds of millions of dollars. “There is no two ways about this.”
And that is just the start.
NextEra, based on previously granted subsidies, already has a $4.3 billion backlog of federal tax credits on its books — so much, in fact, that it has been unable to take advantage of them all, leading the company to carry them forward for use in future years.
The provision in the new law that will allow NextEra and other utilities to sell these tax credits to the highest bidder — including buyers that have nothing to do with the clean-energy business — gives them the opportunity to take in billions of dollars in cash payments in the coming years.
The offer is even sweeter when it comes to newer technologies, such as using hydrogen as a fuel source. Rather than waiting to claim the tax break after making certain kinds of these investments, utilities will be able to go to the Treasury Department and get a direct payment equal to the amount of the tax break as they bring it online — effectively a grant to cover part of the price tag.
The surge in inflation, interest rates and fuel prices has complicated the short-term profit picture, because regulated utilities will be under pressure to restrict capital spending as a way to limit rate increases, said Mr. Pourreza, the Wall Street analyst at Guggenheim Securities. The ability to use the tax credits years down the road also eliminates the urgency to shift further to renewables immediately.
But the overall financial benefits for many of these companies over the long term remains clear, he and other analysts said.
“More capital will be spent, and you’ll earn a higher return, which leads to higher margins and higher earnings growth,” Mr. Pourreza said. “It’s as simple as that.”
This smorgasbord of benefits inspired the big push by the utilities to persuade Congress to pass the proposals into law.
First came the tidal wave of campaign donations, which both shot up in total dollars and shifted from supporting Republicans who had worked to defeat climate change legislation to Democrats working to enact it.
NextEra, for example, whose political action committee and employees gave 90 percent of their campaign contributions to Republicans when President George W. Bush first entered office, has sent them only 43 percent in the 2022 political cycle, according to data assembled by the Center for Responsive Politics.
Its single biggest beneficiary this election cycle: Mr. Schumer, who has collected more than $300,000 from the company’s employees or political committee. The next two top members of Congress on the list this cycle are Mr. Manchin and Senator Kyrsten Sinema, Democrat of Arizona, whose votes were vital to getting the tax breaks passed into law.
Donors to Mr. Manchin — in the days after his announcement this summer that negotiations to reach a deal had stalled — included Dominion Energy of Virginia, NextEra, Exelon of Chicago, PG&E of San Francisco, and the parent company of Arizona Public Service, campaign finance records show.
Executives at Ryan L.L.C. — a Texas-based tax consulting firm that says it has helped electric utility companies secure more than $267 million in tax breaks — sent 40 separate contributions to Mr. Manchin last year, making the company one of his largest contributors, just above NextEra.
Brian Wolff, who oversees lobbying at E.E.I., the trade group, said he met with Mr. Manchin or his staff at least 30 times. The trade association brought in top executives from utilities that serve West Virginia to explain to Mr. Manchin and his aides why the legislation would benefit his constituents.
“We were working hand in hand with him,” Mr. Wolff said. “And I think it was really a perfect fit. There wasn’t anything that we were for that he wasn’t for.”
NextEra alone had at least 48 lobbyists registered on its behalf this year, more than half of whom previously worked on Capitol Hill or in the federal government. They include Don Nickles, a former Republican senator from Oklahoma.
The industry also managed to keep out of the plan a measure that would have imposed potentially millions of dollars’ worth of penalties on utilities that did not move fast enough to reduce air pollution that causes climate change.
“There was a carrot and stick approach, but that wasn’t very helpful,” Mr. Wolff said, summarizing arguments he made to members of Congress. “If you are punitive to our companies, then you are going to be punitive to our customers.”
The legislation, as passed, was hailed by environmentalists. The White House described the final package as “the most aggressive action to combat the climate crisis and improve American energy security in our nation’s history.”
The tax incentives, according to a recent analysis by a Princeton University energy research laboratory, could result in five times as much utility-scale solar and twice as many new wind farms compared with 2020 levels.
And beyond reducing carbon dioxide emissions, the legislation is expected to reduce other forms of air pollution from fossil-fuel power plants, like sulfur dioxide, that cause asthma attacks and other potentially fatal ailments.
DTE Energy, for example, announced early this month a move that would have been unthinkable just a few years ago, when it was still being sued by the federal government as it defended its continued operations at the DTE Monroe coal-burning power plant.
The company has now raised the white flag: It is going to start the closure of the plant a dozen years sooner than planned by shutting down two coal-burning units in 2028, and it will close the plant entirely by 2035, which will be the end of coal for DTE. The plant is the third-largest source of carbon dioxide in the United States, emitting 15.7 million tons of the climate-changing pollutant last year.
DTE executives note that for their company, embracing the reduction of carbon emissions started at least six years ago. But moves like this are now happening across the industry.
“For many years we would be sitting in a room and we’d be on opposite ends,” said Mr. Nolan, the chief executive at Eversource, who was among the industry executives celebrating the legislation’s passage at the White House in September. “Now, they got to get on board. They can’t deny climate change.”
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