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The Energy Bill—or Maybe Not?
(... qualifies for the “Onion Theory”)
Energy Comment, 06/29/2007

Alternative energy stocks enjoyed a brief rally after the Senate passed its version of the “Renewable Fuels, Consumer Protection and Energy Efficiency Act of 2007” on June 21, 2007(Senate Bill, S.1419). The legislation is muddled and its most redeeming value is that it is a “start” ( ... with a very long way to go to the finish). For the most part the stock gains were short-lived and the euphoria for alternative/Green Energy stocks quickly died down, especially for the small capitalization companies. The widely recognized Ethanol producers were the greatest beneficiaries of the Senate’s action, the day after passage of S.1419, for example, shares of Aventine, Inc. opened the day at $14.00 per share, reached a $14.85 intraday high and managed to hold its gains in the week following the news, with the stock settling out at around $15.40. Pacific Ethanol Inc. also rallied on the news—the stock advanced on the day to $13.25 after closing at $12.25 the prior day. Conversely, other companies such as VeraSun ($12.60) added 35 cents to the prior day’s close and U.S. BioEnergy down 51 cents to $10.16.

The Energy Bill is traveling through the House, where considerable debate is expected—in our view, the most redeeming feature of the Senate’s bill is its ambitious title: “Renewable Fuels, Consumer Protection and Energy Efficiency Act of 2007.” The S. 1419 title hits all the bases but upon closer investigation (...becomes 278 pages of pure, unadulterated bureaucratic gibberish). The cumbersome legislation yields few important tangible advantages but, even those, will not be realized until well into the next decade—making it difficult to characterize the Energy Bill as a strong positive for the Green Energy sector ( ... which clearly qualifies under the “Onion Theory”—namely, the more you peal away the layers, the more your eyes tear).

The Senate’s energy Bill seems likely to be a non-starter for investors and any meaningful endorsement of alternative energy seems, to us, destined to be on the next administration’s schedule. Despite our Congressional reservations, the Senate Bill includes the following features:

Begins to define what alternatives “are” and “are not” (... a task which is not as simple as one might think).
Provides financial incentives for research into the broader implications of relying on certain alternatives—specifically, feasibility and economic dislocations.
Established goals to reduce gasoline usage through the year 2030 (... along with my annual New Year's resolution to lose 20 pounds).

Final Alternative / Green Energy legislation in 2007 is complicated by review in the House—where it seems any energy act may not survive the political journey. Indications thus far, suggest that members of the House have their own agenda—which does not bode well for final passage of the Senate’s Bill or even the one that originated in the House. The Chairman of the House Energy committee, John Dingell (D., Michigan) hopes to have a Bill just after the July 4th recess whereas other Democratic leaders are less optimistic, signifying that a consensus cannot be reached until after the labor day recess. The Speaker of the House, Nancy Pelosi (D., California) appears to be at odds with Dingell as well as other Democratic members on the substance of the Green Energy legislation ( ... it’s comforting that our lawmakers can’t agree on “timing” and “substance”).

One cannot help but wonder if any substantive energy legislation will emerge from this Congress, given the multitude of special interest groups, the awkward nature of S.1419 and extended time frame for the effectiveness of many of its provisions, debate in the Senate promises to be no day at the beach. Investors should not, especially at this stage, underestimate the influence of the prominent industries such as the Auto-makers, the Oil & Gas contingent, and Environmentalists. The first-year, political climate of the Democratically controlled House is another factor to consider, not to mention that President Bush has come out and strongly endorsed green and alternative energy fuels. The House may want its “own” brand of green energy laws and could be reluctant to pass new laws under this President. Prospects for legislation next year are not helped by the fact that 2008 is a Presidential election year (... and why should Congress be expected to focus on anything other than partisan politics) and a new administration may have a very different approach to energy policy, thereby hampering a radical change in laws this year or next <

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