The 118th Congressional Session
Rapid Changes Expected
Estimated Read Time: 9 mins. 40 secs.
With election day now behind us and questions over control of the U.S. House of Representatives and U.S. Senate divided but determined, a clearer picture now emerges over the policy and direction for the 118th Congressional Session. Unlike some of our colleagues in the Nation’s Capital, we do not believe that changes in Congressional control will harken back to the complete gridlock era of the Obama Administration during the last recession. While there are strong areas of disagreement, particularly in the economic, tax, and oil/gas sectors, common ground and a desire to work together on specific issues does exist between the parties. This is particularly true of cybersecurity policy, cryptocurrency/blockchain regulatory structures, supply-chain, and federal data privacy laws. Capitol Core expects these policy areas to serve as a catalyst for potential other areas of common ground which will drive other issue areas into discussion. Energy is one of those areas where Congress will continue to work toward agreement despite the early divisions and current focus in the House centers on emissions, affordability and security.
But what’s keeping the third-house in Washington D.C. up at night? Bloomberg Government asked hundreds of in-house government relations and lobbying firms to tell them “what they feel will be the biggest legislative and policy risks and threats to their public affairs strategy in 2023.” Congressional inaction, election outcomes, energy and climate issues, and inflation are the largest issues facing the Nation.
For the most part, Capitol Core is in full agreement although our word cloud would have increased energy, data privacy and supply chain while decreasing election results, and climate.
THE TRENDS: Why we picked cyber, crypto, and supply chain
As electronic attacks increase in strength and continue to focus on supply-chain, financial sectors, education and health care, the Congress has bipartisan agreement with White House support that cybersecurity needs to be addressed. A debate will ensue, but a legislative deal will likely be struck in the 118thSession. The regulatory wheels have not stopped grinding with federal agencies continuing to promulgate draft rules for cybersecurity in the infrastructure, transportation, and energy sectors.
One thing was clear during the December oversight hearings on FTX…regulation is coming. How cryptocurrencies and blockchain will be regulated remains under fierce debate. But the FTX debacle has sealed the fate of the immediate need for oversight. Calls for a hands-off approach will be overshadowed following FTX as lawmakers work to gain an understanding of how things unfolded as well as how much money was lost. For cryptocurrencies, that means regulations, and for industries utilizing blockchain computing, it means tougher security and privacy requirements. Much hullaballoo has been given to the subject during the Lame Duck Session of the 117th, but passage of legislation will occur in the next session.
Speaking of oversight…Elon Musk’s purchase of Twitter may end up breaking some deadlock among policymakers for (re-) regulating “big data?” Some Democrats in the Senate are now calling for stricter guidelines and repeal of social media’s protections under the law that were more common among Republican Members. We expect some re-regulation of the industry despite Meta’s and Google’s opposition and calls for a moderate approach.
The complex range of federal data privacy is being explored. From the government’s use of consumer data providers to the purchase and compilation of personally identifiable information from government sources. Now add on the banks concerns that CFPB plans for consumer data sharing with fintech upstarts failed to spell out how to spread out liability in the event of fraud. This goes back to what we stated in terms of blockchain regulation.
Infrastructure…most important to many of our clients is the status of spending directed by the Infrastructure Investment Act of 2021 (“IIJA”), the Inflation Reduction Act, and the Water Resources Development Act. The center of our 2018-word cloud, in 2022 infrastructure is slowly moving to the backburner of Congressional activity. The IIJA is now in its third year of the 5-year appropriation cycle, and we do not foresee repeal of the mandatory appropriations included in the Act. While some discretionary spending programs may not be fully funded in FY2024, due to economic conditions, a normal appropriations cycle or a Continuing Resolution would allow for continued spending in these discretionary programs. 2023 will mark the last large infrastructure investment of the IIJA. The two remaining years will contain smaller appropriations for programs across the board. U.S. Bureau of Reclamation spending through the “Western Waters Program” and U.S. Army Corps of Engineers spending through WRDA are the notable exceptions, with FY2024 and FY2025 (2023-2024) marking large investment in water infrastructure, particularly for the western states.
One area of hope for infrastructure funding in the West exists and that with a handful of Senators with their eyes on water. That’s wading into a potential clash with fellow Democrats and Administration officials over climate resources amid the mega-drought hitting the West. Led by California Senator Alex Padilla, the group is arguing the Agriculture Department is failing to prioritize drought issues as it pushes to fight climate change through the agriculture sector, as unrelenting drought is killing off crops and livestock across the West.
What is up for grabs is the $20 billion pot of conservation funds from the Inflation Reduction Act, which the USDA is expected to start rolling out in the coming months. The Administration has heralded the new “climate smart” funding largely designed to fund practices that limit greenhouse gas emissions from the agriculture sector. While water was part of the strategy, and included $4 billion in drought funding in the Act, western state senators are now arguing it’s not enough. They are putting heavy pressure on Agriculture Secretary Tom Vilsack to make water more of a priority as USDA prepares to roll out the billions in funding. The pressure isn’t lost on the White House as it must be careful to pay attention to needs in rural communities and the farm sector ahead of the 2024 presidential election.
Attempts to curtail spending by repealing the spending provisions in IIJA and Inflation Reduction Act will fail. Mandatory appropriations will continue with some potential reductions in discretionary spending programs if the Congress can pass the normal spending bills.
Expect influxes in cybersecurity spending for critical infrastructure, USBR Western Waters spending (particularly under Title XVI), and USACE spending under WRDA for water projects. Our Western Water clients should keep a close eye on Senator Padilla’s efforts to see if it develops into a real brouhaha discussion or fizzles out.
While 2023 will mark the last large appropriations cycle under the IIJA, once those funds are gone, they are not coming back for quite some time. Also, 2023 will mark the first year since COVID that states will not be receiving an aid package. If you have infrastructure projects, your time is quickly running out!
Energy… “While a shift in the congressional balance of power could change legislative priorities, both at the federal and state levels, respondents reflected on what their top focus areas are in 2022. Energy and environmental policy [are] the most tracked area by public affairs organizations, selected by one in two respondents (50%). Energy and environment policy is also viewed as presenting the greatest opportunity in the future.”
At the forefront of the Republicans’ agenda will be the economy and reversing the economic downturns which have led the Country into a recession. Energy will be at the leading edge of the economic discussions. With the Administration’s Halloween suggestion to tax what is seen as oil producers’ windfalls, the gauntlet has been thrown in the debate between fossil fuels and renewable energy sources. The Congress will be divided on the issue, which will hamper economic recovery by failing to diminish the U.S. pain at the pump and the high cost of heating fuel during the winter of 2023. The Biden Administration’s windfall tax is a non-starter during the 118th.
We believe that first priority discussions will relate to the economy first and secondarily takes on the overall energy policy. Congress has not updated overall U.S. energy policy since 2005, the U.S. updated its energy policy statutes and has instead hobbled together an energy policy which flips based upon the Administration’s policy. The 118th may mark the start of discussions on the larger subject while tackling short-term items that may provide relief.
Efforts to repeal renewable energy subsidies, spending, and incentives contained in the Inflation Reduction Act will fail. This will give way to strong oversight of energy spending and tax incentive utilization. Members of Congress are already heard in the hallways talking about “the next Big ‘S’” referring to the Solyndra scandal of 2009. Concerns over removal of protections which prevented foreign companies from using tax incentives to game the system were removed in the Inflation Reduction Act against the better judgment of Members on both sides of the aisle but were accomplished at the request of the White House which puts any misuse fully in the election blame category for the 2024 Presidency.
As a tightening of the belt, we do expect to see reductions in direct government spending on renewable energy. Items authorized but not appropriated will be left stranded. That will also hold true of foreign spending (such as the Ukrainian aid package) which will be reduced in 2023.
Winter fuel isn’t going to help in early 2023 as New England’s largest utility is imploring the Administration to start preparing emergency measures to prevent a potential wintertime natural gas shortage.
With over 50% of the lobbying corps tracking energy (Capitol Core never stops tracking energy), news services are whispering about a energy policy bill. House Republicans have unveiled an outline of energy policy discussion points and Democrats in both Chambers are countering that outline. The discussion over an energy policy bill in the 118th really has already begun
Budget and Appropriations… We said the word a couple of times, so let’s talk about appropriations for FY2024. What many of our clients refer to as budget is the normal appropriation cycle. Republicans know all too well the damage done to economic markets caused by Continuing Resolutions. They have been chomping at the bit to start the process even delaying and creating short-term spending measures in an attempt to push appropriations into the 118th. In a recession year, the majority will look to successfully complete a spending package prior to September 2023 deadline. What’s not clear is whether or not far-sides of each party will want to complete negotiations on a spending deal where they do not completely get their way. Working with the Administration is also in question let alone the differences between the House and Senate. For our part, Capitol Core is going to agree with the dire warning to both side of the aisle given by Representative Ken Calvert (R-CA, Riverside) who is the likely incoming Chair of the Defense Subcommittee, part of the House Appropriations Committee. He emphatically stated how appropriations gridlock for the next two years will be catastrophic to needed defense, cybersecurity, and supply chain spending. He also stated that our foreign opponents are laughing at us every time such gridlock occurs.
Completion of a full appropriations package for FY2024 is a toss-up at this point. Congress does understand that a Continuing Resolution is ugly for the economy.
Then there is the debt-limit. While a shift toward fiscal tightening now might help the battle to cool U.S. inflation, the debt limit fight is expected to come around the 3rd quarter of 2023, by when most economists see price gains coming down. Expect the debt-limit fight to literally suck the air out of the room and stop most policymaking for several weeks. The fights really began in the Lame Duck Session with Democrats split on the subject.
So, what is our outlook? Capitol Core has its concerns over Congressional inaction but believes that 2023 will find common ground on cybersecurity, cryptocurrency/blockchain regulation and some consumer data privacy issues. Early debates over energy will get caught up in partisan politics but will give way to a robust debate over U.S. energy policy. The FY2024 Budget is uncertain at this point but infrastructure spending through the IIJA will continue. We do not believe, that all IIJA funds will be spent by the agencies prior to the FY2026 deadline. Water infrastructure has a glimpse of hope through the Inflation Reduction Act climate-smart funding, but western Senators are going to need some help to get that across the line. Lastly, we are only going to get a partial year of policy debate because when the Budget Ceiling talks start, it will suck the air out of the room and everything else will stop.
From the Hill is an industry snapshot for Capitol Core Group clients in select industries of interest. It is compiled from Capitol Core research and discussions as well as outside resources.