May 23, 2023
On May 19, The Capitol Forum’s Teddy Downey, Daniel Sherwood and Sharon Kelly held a conference call to discuss the most pertinent issues impacting energy markets and policy. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Well, thanks to everyone for joining our call today. I’m Teddy Downey, Executive Editor here at The Capitol Forum. Joined today by Daniel Sherwood and Sharon Kelly of our Energy Team. And we have a lot to cover today. If you have questions, please email them to editoria@thecapitolforum.com or you can enter them into the GoToWebinar app. Although, I encourage you to send an email because that makes it more likely that we’re going to see it and get to it. So, Sharon, Daniel, thanks so much for doing this today.
DANIEL SHERWOOD: Thanks for having us. We’re excited. Got some boots on the ground reporting. We visited a site that we’ll be talking about today. We have an exclusive scoop we published this week, we have a hot take on MVP and the SPR. So for those of us tuning in, we have a lot to talk about.
TEDDY DOWNEY: I know. We’ve got some of my favorite things. We get to highlight an article. We get to talk about the SPR, which is one of my favorite things to do. And then Mount Valley Pipeline, another hot topic that I like to get to. So this is going to be a great conversation. So, let’s get into first the big story this week from us, our first ESG related story about an investment firm Pictet divesting from FirstEnergy. And we did a lot of work on why, okay, might they have divested from Pictet and then obviously got some good quotes from Pictet. And I would love for you to walk us through the article and then tell us about what this means for FirstEnergy, other utilities, and then how this could be kind of a theme going forward for ESG.
DANIEL SHERWOOD: Absolutely. So this is an active investigation for us in ESG. We have a bountiful number of leads and hopefully, I won’t be jinxing ourselves here. Why have we given ESG our lens at this point and why haven’t we in the past? There’s been this whole debate on whether ESG is real. It’s so toothless. There’s no guidelines but then it’s becoming politicized with a lot of concerted effort saying we don’t deal with ESG banks and ESG is tanking the market. And there’s just a lot of rhetoric and not a lot of substantive aspects behind that rhetoric, in our opinion.
As we were watching ESG grow in significance, we wanted to see, hey, how does this impact the market in reality? And Sharon and Julia led this investigation and are continuing to lead it, and are doing a great job, navigating the different types of Article 9 and Article 8 funds in the EU and navigating where the SEC process is in the United States and navigating how these factors are considered, company eligibility requirements.
Pictet disclosed at the end of the first quarter that they exited their FirstEnergy position as it related to the firm’s Clean Energy Transition Fund and realized gains, but they didn’t say anything else. And so, we obtained information that confirmed that a factor in Pictet’s decision-making, in addition to market forces, we were able to gain further insight into what guidance informs their own policies, which helps us see what does this look like for the market in near real-time? And FirstEnergy is a case study of how far a company can go until it gets barred by an internal policy like Pictet’s. So, Sharon, if you want to take us through what we found, I’d love that.
SHARON KELLY: Absolutely. So it’s very straightforward according to the information that we obtained and reviewed. You know, ESG factors played a role in in the divestment decision, which is pretty interesting. You don’t usually get a window or insight into – or any kind of understanding – around an internal decision like that.
So the company that they divested from was FirstEnergy. It’s a U.S. utility, based in Akron, Ohio. Pictet Clean Energy Transition had been among FirstEnergy’s top investors in 2021. And they’re also the largest investor in FirstEnergy that has a readily apparent ESG theme, right? The fund’s name reflects an ESG theme.
And so this decision is noteworthy, in my view, not just if you want to understand the impacts from an ESG perspective. Like, what are the rules going to do as they evolve and emerge? But it’s also significant for FirstEnergy. FirstEnergy is largely held by institutional investors. They’re about 84 percent of the shareholder base. And the ESG concerns that are here, it’s not difficult to see where you might see some ESG red flags when it comes to FirstEnergy. You know, the concerns there could have revolved around coal power generation. The power that FirstEnergy generates is primarily derived from coal. They also have a connection through a holding company to a Montana coal mine. That coal mine has also had a bit of a troubled history in recent years. And then, of course, FirstEnergy was also connected to what federal prosecutors dubbed the largest public corruption scandal in Ohio history, which in March led to the recent conviction of the former Ohio Speaker of the House.
DANIEL SHERWOOD: And Teddy teased out in the process of getting this across the finish line – separating those three pillars of ESG, the environmental, social, and governance. And those findings of what Sharon reviewed, when people say that there’s no market impact, it’s like we want to look at this. And doesn’t it seem kind of incredible that a clean energy fund would ever have a holding in a coal fired utility in the first place? Yeah, it does. But then seeing that it went from one of the top holders to exiting its position as far as that fund is concerned, that’s a material change.
And for regulators who are trying to determine how to formalize these processes, this serves as a case study or as a benchmark if anyone was interested in codifying something like that. And in separating the E and the S and the G factors and talking about the coal mining exposure and talking about power generation by megawatts. Because, Teddy, a lot of these guidelines, they use different metrics that are kind of easy to—I don’t want to say slide by because I don’t want to imply intent. But for a sharp person who’s got a lot of data, it would be easy to sort things in a way where it could be classified as clean but in reality, the company’s operations or conduct wouldn’t really strike you that way. So, we’re excited to keep going. Do you have any other questions, Teddy?
TEDDY DOWNEY: Well, what I love about this is, first off, ESG, I’ve always kind of thought of it as a complete joke. Like it doesn’t have any teeth. You can invest in a dirty company or whatever you want to call a problematic, from an environmental standpoint, company. There is no teeth to the rules. There’s no clarity on what it means. And what I loved about this piece is actually – that’s going to change, right? That’s going to change with Europe. That’s going to change with the FTC. So there’s going to be some clearer disclosures, some clearer rules of the road.
But even before those are in place, there is behavior so egregious that they’re just like, look, we can’t own this anymore. What’s interesting to me is there’s still dozens of other ESG‑related funds that own this same company. And so, I’m eager to find out what they have to say about owning it in these funds. And as you pointed out, this is just going to be a gray area to watch.
Because, look, there are big consequences for these companies if huge investors just sort of take their money and go somewhere else. And these incentives from these rules, instead of being a joke, become a real—sort of steer money away from certain companies. I think it raises their risk profile pretty dramatically. So from my standpoint, I think there’s going to be a great beat. I don’t know if that’s a fair way to talk about it, Daniel, but that’s kind of how I see it.
DANIEL SHERWOOD: I think that’s spot on. And I think to that second bullet point in the invite about utilities writ large. Sharon brought this up to me – there’s a disconnect, isn’t there? So we’ll be looking at some of these other funds and we’ll be looking at their guidelines and we’ll be seeing—just as a cursory review, and stay tuned in here—but just as a cursory review that Sharon started, there’s already things that pop out as it relates to some funds with exposure to FirstEnergy, it looks like, regardless of whether or not you want to be a good and proactive fund, it’s like this holding doesn’t look like it complies with the fund’s policy, just on its face.
And so I think when we see EU funds, for instance, holding these, like this is a utility issue. Utilities have—I’m just quoting Sharon. So Sharon feel free to kind of take the mic here. But utilities have a very clear marketing arm for defining their exposure to renewables. But the truth of it is that all their operations, for the most part, are predicated off of a fossil economy, with large fossil generating resources, which is just a fact of the past. That’s fine.
But the plans in the United States, stereotypically from the utility level, are slower than the plans in the EU. And we see a lot of exposure to these U.S. utilities out there. So, if you have a higher exposure to utilities in the United States, this is something that you genuinely need to be focused on.
There are other instances where utilities in other areas in the United States have gotten similarly involved in the politics in ways that have led to federal investigations like in FirstEnergy’s case. I’m not sure if it’s to the same level as it’s been here with FirstEnergy. And, of course, we’ll look into that. But this is just the very beginning of what’s going to be a decades long process of watching how these legacy operators who have legacy fossil assets in the country adapt to a new way of doing business – and how electricity is generated and distributed in so many ways.
TEDDY DOWNEY: I also think it’s interesting, as ESG becomes more real – more of a regulated space with real incentives or what have you. It will, I think, make the whole discussion more credible, right? Because right now, it’s two sides talking about kind of nonsense, as I would take it. It’s the environmentalists who are pretending that it’s a real thing. And then the Republicans are complaining about collusion, but there’s not anything behind the rules. So, there’s nothing actually for Republicans to really argue about.
Now, you’re going to have legitimate rules with legitimate incentives from, I think, non-silly environmental policy people. And you’ll have Republicans who either don’t want that and they can actually say this is bad regulation. And then the whole debate becomes at least a little bit more sane and a little bit more evidence based. Which, of course, is a great opportunity for us to actually get in. Because we don’t really participate in silly conversations, but we’re happy to dig in when it’s a real one. So I’m excited. I think it’ll be interesting and I think it’s an important space, as you point out, to watch going forward.
Well, let’s move onto another topic that I think is mostly silly in terms of how people talk about it, but it’s actually a pretty strategic, I think, proven to be pretty strategic, which is the Strategic Petroleum Reserve. And there’s been a lot of, you know, we’ve talked about this in the past, how the Strategic Petroleum Reserve is largely treated in Washington as ineffective and not really accomplishing any real strategic goals.
But the Department of Energy under Biden has now sold high with the Strategic Petroleum Reserve and is buying low now, which sounds strategic to me. But I would like to get your take on what’s going on with the Strategic Petroleum Reserve. Who’s criticizing them? Why are they criticizing the DOE right now? And I think there’s also been a lot of talk about price caps and inflation in energy. Again, as sort of a silly thing that wouldn’t work. But we’ve actually seen that have some real-world implications here. So we’d love to get your take on all of that. Sorry for throwing all the questions at you, but I’m very passionate about this stuff. So I’m excited to learn.
DANIEL SHERWOOD: Absolutely. And Sharon, maybe while I go through some of that, if you’d want to touch on some of the erosion aspects. I read through the materials you sent. You let me know on the side here. So, yes, Teddy sent an article last week about the economist Isabella Weber. And her work getting a lot of scrutiny in the past on this notion of price caps working in fighting inflation. And it’s one of these aspects, the way Teddy and I discuss how regulatory mechanisms can be effective. And bureaucrats, though, generally they seem maybe slothful. We see here with the SPR and price mechanisms – that there can be some strategy and that regulators can be proactive and they can take advantage of some of the tools at their disposal.
And so, Teddy, we’ve seen that with the SPR. The dissidents, I don’t understand very well what they’re complaining about. Before the Department of Energy delayed the purchases, people said, hey, that’s so stupid. You need to go through on the purchases. They wanted the demand. But before, they said it didn’t impact the market. I think now people are happy that they’re buying. The people will say that the volumes are low at this point, which is the case proportionally. But the DOE might ramp. Or even if the DOE doesn’t, sometimes what we’ve observed, at least, is that the market seems to be signaled by just, okay, look. This is something we can count on. And sometimes it can increase a little bit there.
So yeah, that would be my summary of what’s going on the ground. And Teddy, anything that you want to add? And then Sharon said she could touch quickly on the saline issues, something that we’re watching as far as the ability to re‑inject. So, Teddy, what do you think?
TEDDY DOWNEY: Yeah, I think the theme between the two is that there are these economic consensus or neo‑liberal kind of consensus views that the Strategic Petroleum Reserve is dumb and doesn’t work and government can’t be strategic. And the same as with price caps. They’re dumb. They don’t work. They don’t make economic sense, according to whatever Chicago School type of economics you’re talking about or neo‑liberal consensus view.
And it just so happens that these things are being used in the real world to good effect. I mean, exactly why they exist. I mean, particularly with the price caps on Russian fossil fuels. It seems like it’s working. And I guess I turn that back to you, Daniel. Are they working as intended? Is that a legitimate, I mean, this economist who was sort of mocked for calling for the price caps now seems vindicated.
DANIEL SHERWOOD: Right.
TEDDY DOWNEY: So that makes sense to me. But I’m wondering if you agree with that as well. And then I’d love to hear from Sharon about the erosion issues and the SPR.
DANIEL SHERWOOD: Yeah. I mean, I would defer to the economists. It would seem from an economic perspective that aspects of the price controls have worked. But then I guess from a market perspective, when I look at has the Russian policy worked, I’d say no, not fully because they’re shipping it all to India and China. You know, but on the other hand, oil is not at $100 a barrel.
That’s the other thing too. It’s like trying to figure out like what is the ideal price? I mean, there seems to be consensus that where oil is at right now, for instance, is an okay price. But it’s still elevated. You could always say it’s higher or lower than it’s been. I’m not implying that it needs to drop $25 a barrel. And we know that natural gas has dropped. But my question to an economist would be – is that because of price caps? Or is that because of a warm European winter? And the answer is likely a little bit of everything, you know?
Which I think ties back into the SPR and why we like to look at it. I remember Tom Loughrey at FLOW, a friend of the firm, so to speak, liked to talk a lot about those SPR volumes at the end of the year last year because the market was super tuned into that. And at the beginning of the year, when the DOE announced that they were planning to release those barrels, the market laughed at them. And there was all of these graphs and modeling that was saying, oh, it’s not going to do anything.
And so these are complex systems and you pull a lever over here and it’s going to impact something else over there. And nothing is happening in a vacuum. Which I think is another reason why, in a classic Capitol Forum fashion, we focus a little bit on this kind of side issue of the re‑injection rate because it is at an historic low. And so they’re going to have to buy a lot of oil to put it back in eventually. And there aren’t any mechanical issues to the point that they are like raising the alarm, but they are monitoring it to a degree and Sharon stays on top of that. And so, Sharon, if you want to give a quick summary. I know this is off the cuff so thanks for bearing with us. And then we can transition to our last discussion topic.
SHARON KELLY: Just from a nuts and bolts perspective, if you’re looking at the mechanics of physically storing that much oil, the lever that economists are trying to pull is affected by these physical concerns too. And one of the things we’re keeping an eye on is the physical condition for Strategic Petroleum Reserve salt caverns in Texas and Louisiana. There has been some concern raised. Although, as Daniel mentioned, there is no evidence of a structural integrity problem with any of the caverns. There are issues with well deformation and shearing. And there’s also a significant amount of money that’s been spent to do the maintenance and lifetime extension for these salt caverns. So there may be physical factors that limit the capacity, or the rate at least of injection, for SPR. But I think from a market perspective are pretty interesting to keep an eye on.
DANIEL SHERWOOD: Absolutely.
TEDDY DOWNEY: And just so everyone knows, these are the sort of practical complications of taking all the oil out to sell it and then buying it back and putting it back in. It’s not like a video game where you just buy it and put it in a never-ending chest full of stuff. There’s physical oil, where we’ve got to do something with all of it. And so you’re saying, just so I’m clear, it’s not really, really a huge problem at this stage. But there is something to watch. There’s some maintenance being done. And it could affect how quickly they can buy back the oil and get it back into these salt caverns.
DANIEL SHERWOOD: What we have found in the past is, generally speaking, if there’s a little bit of cracks in the pavement and then something is used, then that that thing is maxed out, stereotypically, it exacerbates those cracks. And so the fact that there’s a certain amount of awareness already, that the relevant agencies are studying it, saying, hey, you know, we’re struggling a little bit with this issue and there’s something here. It’s not structurally messed up yet, but we should continue to look at this and we need to collect data. So, it’s just something to flag.
TEDDY DOWNEY: I love it. Very interesting. And I think this tees up nicely for our big conversation on Mountain Valley Pipeline. There is so much optimism in the D.C. lobbyist, think tank, political strategist world that the grand debt ceiling bargain is going to involve Mountain Valley Pipeline or permitting reforms that will really help Mountain Valley Pipeline. I know, Daniel, we want to be very clear. We are very open to anyone on the call or reading the transcript here, let us know why you disagree with our, I think, sort of persistent pessimism here. But I think you said you actually went down to Mountain Valley Pipeline, one of the permitting areas. So we have some on the ground intelligence to share. And I’d love to just get your update, just given all the developments in the last week on the Mountain Valley Pipeline.
DANIEL SHERWOOD: I’m wiggling out of my chair I’m so excited. So there’s the Congressional issue at play here. There’s the underlying permitting timing issue at play here. And then there’s a brand new record of decision that was issued last evening. And then just talking about our on the ground observations this week. Because I decided it was high time for me to get eyes on it. And we have been talking about this for so long.
And the first, as we’ve been saying, the very first piece I ever wrote with The Capitol Forum was about erosion issues as it relates to Appalachian development of pipelines. And that is on of the two central issues of these permitting decisions along with the stream crossings.
So where to begin? Let’s talk about the brand-new record decision that came out yesterday from the Bureau of Land Management that’s moving forward. The thing that we teased in our invite. So it’s related, but separate. So what we teased in the invite, also happened this week. So folks, for those of us keeping track at home, that’s a hundred pages and more of paper issued by the dear U.S. federal government – that is pretty impressive.
And so our interpretation of that is that when you hear Podesta and when you hear Granholm kind of coveting Manchin’s MVP aspirations and saying, hey, we want this pipeline too—Granholm just doubled down on it yesterday, I believe, at a Politico event—how we interpret this is on the bureaucratic level. On the administrative level, they are pushing people and saying, hey, we’ve got to get this done.
Which politically, Teddy, I don’t think is necessarily the best calculus. I think it’s an empty gesture. Because the more they align themselves with Manchin, the more toxic he becomes as a negotiating partner with the Republican House. And Manchin, you know, he’s a tactician, in my view. And he knows that what we’ve been saying is the case, that he can’t undemocratically waive all NEPA permitting processes for example. Or he can’t say the Fourth Circuit must stand down for any legal scrutiny. And so he knows that he can’t—like what’s he going to do with the debt ceiling negotiation?
So what do I think Manchin’s Chief of Staff is focused on right now? He’s focused on the West Virginia Department of Environmental Protection and saying, get this done, get this done, get this done. And that that’s how we’re getting this narrative that the second the WVDEP finishes this, we’re good and construction is a go. And let’s just say everything goes exactly the way that they want it to, I wonder if they’d even be able to mobilize construction crews to finish by this year.
So that’s where we’re at. So this Record of Decision from the Bureau of Land Management, it’s further evidence that the Jefferson National Park will be able to be crossed. It’s a 3-mile crossing. It’s been challenged two or three times in the Fourth Circuit, for the same reasons that other permits have not been able to succeed, which I think is a good segue into our visit.
So I was in the southern cluster of the Jefferson National Forest. So, technically not the exact location of the crossing, though it’s incredibly similar and very close. So, I hiked a seven mile ridge line just south of the area where the permit is under review. The route was two times longer than the path that they’re trying to cross but, I mean, it is steep. Like it is steep. I have some pictures. But I mean, I can’t imagine in any direction, I kept thinking, no wonder these regulators are struggling so much. And if you look at the cover page of this record of decision—and thank you, a sharp source of ours passed along some of the documents, otherwise, I would have missed this filing.
And the cover page on this RoD, this kind of amazing little picture of the way that MVP has designed a very steep incline construction of the pipe. And I mean, it looks like a beautiful piece of Maya artwork. But it’s like they’ve had to kind of innovate this process. Because, again, what we’ve been reporting and talking about for years now is that this project is unique, there’s a lot of things that they’re going to have to—that’s why the legal processes have dragged on so much is because the courts say, hey, you’re not you’re not applying enough rigor in thinking about how you can mitigate erosion when building this pipe. And they’re like, but we’re doing what we said we did in 2001 and that’s not good enough? And the courts are saying, no, it’s not.
And yeah, walking there, I see why. Because they’re trying to make—the site that I walked at was a reclaimed mine/rail site that the U.S. Forest Service has revitalized and is a designated conservation area – parts of it back country. And I found the little old mining cart that was abandoned next to the stream. You know, it’s just kind of crazy.
So I think the fight will go on and as far as the deadline is concerned, what people are tuned into, how quickly can the WVDEP issue this permit? Look, maybe they do it in the next three weeks. But for every week that they do it more quickly, in my view, that’s the more scrutiny that the judicial system is going to give them and these are going to get challenged. You know, even this record of decision from the Forest Service could get challenged, in my view. That’s a guess. I’m not reporting that out. But I’m just saying I bet you it will. And again, the WVDEP permit, then that goes up to the federal level.
So it’s like these things take a long time. So we remain skeptical. And yes, there’s an open invite for anybody. I would love, Teddy, I’m sure would let us host a little kind of different perspectives interview. And I would, of course, engage with the utmost respect and I’d love to hear the other side. But I am incredibly skeptical.
TEDDY DOWNEY: I think what’s interesting from our perspective is that we’re not saying they can’t get anything on permitting done. We’re actually not saying that. We’re saying, look, even if they do get that done, there are still all of these challenges. But all things being equal, the White House sticking to their party line of helping Manchin, the White House kind of caving on the debt ceiling and just being open to Republican tactics there. And to your point, these new documents that show momentum. It is good for Mountain Valley Pipeline, that it’s more likely they’ll get something right? So it’s good for the pipeline, but it really doesn’t materially advance things. There’s still so many challenges to get this done quickly, both pragmatically and in the legal system. And we just don’t see those going away. Is that a fair way to kind of characterize the recent developments?
DANIEL SHERWOOD: Yeah, I’d say.
TEDDY DOWNEY: Yeah. I mean, look, I’ve been in Washington doing this for 15 years. I don’t think any of these people who are touting this legislation have actually gone down to see how difficult installing the pipeline will actually be. So I think we have a big competitive advantage from that standpoint in terms of being realistic here.
DANIEL SHERWOOD: And anyone – I’d be glad – to take you. And I mean, in the hike, the last three miles were the least challenging from a terrain perspective. There was the smallest change in altitude. And we followed the path of this principal stream for three miles, all right? So that’s the same distance a little less than the distance that the pipeline is going through just a spell North. We had to cross the stream—just one little stream. I mean, you know, you couldn’t swim in this thing—ten times on foot because of how much it meandered despite us being in a relatively flat portion of the ridge.
So it just made me think I was like, holy crap. And there’s endangered species around there. And one of the things, they’re trying to figure out how to bore a 42-inch pipe. As a respecter of industry, it’s a marvel. It truly is. But just from a logistical perspective, think about a 42 inch – but that’s a big boring that you have to put underneath one of these streams and even just one crossing, I mean. And I kept thinking how do you get a backhoe back here? You know, I could barely walk back there.
So, it’s crazy. And I do think it will get completed eventually. I think eventually there will be this new natural gas artery running through and Mountain Valley Pipeline will be online. I mean, I’m saying 2025 now, if nothing else, just to differentiate ourselves from the few people who are saying 2024 still. So, stay tuned, I guess. And we’ll see where The Capitol Forum Energy Bureau goes next.
TEDDY DOWNEY: Maybe we could host a Mountain Valley Pipeline, Legal and Logistical Day, where we take people on that little hike, and then we bring them back to D.C. and have them meet with some legal experts. That would be fun. I don’t know how many people would really take us up on that, but I would enjoy it.
Well, thank you so much, Sharon and Daniel. As always, a pleasure. And I learned a lot. And I’m excited to keep covering all of this stuff with you. And thanks to everyone for joining us today. And have a great weekend. Bye.
