But the actual damage goes far deeper.

The now-fallen Republican majority was built on a patient, relentless, state-by-state effort galvanized by men like Ronald Reagan and Barry Goldwater, who stuck to principles despite his own wipeout in the 1964 presidential election. Sometimes the conservative movement lost ground. But over the years, Middle America largely turned red. By the time the GOP took Congress in the election of 1994, its power on the state and local level all but ensured it would remain the majority for years to come.

All that hard work was wiped out on November 7. Democrats now control a majority of state governments after seizing control of six governorships and nine state legislatures. The party now controls 28 governors’ mansions, both houses of 22 state legislatures and one house in another 10. Shockingly, candidates won by double-digit margins in former Republican strongholds like Arizona, Arkansas, Colorado, New Hampshire, New Mexico, Ohio, Oklahoma and even Kansas.

It’s way too soon to say if this new Democratic majority will hold for more than an election cycle or two. But it’s safe to say they control their destiny. Gaining control of state governments, for example, means Democrats will control future redistricting for House seats. Meanwhile, the K Street lobbying industry--which had largely shut out Democrats for most of the past six years--has decidedly turned blue.

WHAT CHANGED FOR UTILITIES

Anytime a political tsunami like this hits, there are repercussions in Corporate America. This time around, several industries could come under pressure from Congress, including big pharmaceutical companies, health care providers and oil and gas producers.

High-profile companies like WAL-MART STORES (NYSE: WMT) may also take a hit. Also, we’re likely to see efforts to regulate CO2 emissions blamed for causing global warming.

Fortunately for investors in these sectors, whatever Congress does will be constrained by the remaining 49 Republicans in the Senate.

And there’s always the presidential veto, which was almost never used in the first six years of the Bush administration. In addition, many--if not most--of the new Democrats elected to Congress this time around fit the description of the Reagan Democrats of an earlier era. Virginia Senator-elect Jim Webb, for example, actually worked in Reagan’s cabinet.

It’s true that no incumbent Democrat lost on Tuesday and there are a lot of holdovers from the last Congress. Most of the key House and Senate committee chairmanships will go to these old-timers, some of whom will operate quite differently from the previous chairmen. But with recently re-elected Joe Lieberman basically holding the balance of power in the Senate, it’s hard to imagine a new era for socialism.

That’s very good news for utilities, which rank among the most highly regulated companies in America. Utes always have a lot riding on elections. And while some are vulnerable after the voting this time around, most came through with few worries.

On the national level, the election changed little for utilities.

Energy policy is still set by the Federal Energy Regulatory Commission (FERC), still controlled by a 3-to-2 Republican majority by virtue of holding the White House. Ditto the Federal Communications Commission (FCC), which sets national regulation for communications companies.

Moreover, while they’ve opposed industry on some issues, the Democrats on both the FERC and FCC have a reputation for being fair-minded. On the AT&T (NYSE: T)/BELLSOUTH (NYSE: BLS) merger, for example, the two Democrats on the FCC are demanding some conditions along the lines of the AT&T/SBC deal that they voted for. But both are generally seen as willing to ultimately grant approval.

As for legislation, the previous one-party Congress passed two editions of energy legislation, including the landmark package that eliminated the 1935 Public Utility Holding Company Act. Speculation is high the new Congress will want to pass additional taxation onto the oil and gas industry, while granting subsidies to alternative energy.

It’s far more likely we’ll see affirmative action for wind and solar and symbolic rather than truly punitive moves against Super Oils.

And even in a worst case, it’s difficult to see what Washington can really do to that group. AES CORP (NYSE: AES) and FPL GROUP (NYSE:FPL) remain the leaders in developing wind production in the US.

CHEVRON (NYSE: CVX) and TOTAL (NYSE: TOT) are my favorite Super Oils. One Super Oil that may have trouble is BP (NYSE: BP), which has developed numerous safety and operational difficulties this year, particularly in the US.

Past Democratic Congresses have been unrelentingly hostile to nuclear energy. This one, however, is likely to be starkly different, largely because of growing concerns about global warming and the fact that nuclear is the only realistic alternative to fossil fuels when it comes to mass production of electricity.

In any case, incentives to build new nuclear plants and to continue running older ones are firmly embedded in national energy policy. It would take an action by Congress approved by the president to wipe it out, and that doesn’t seem likely.

On the other hand, increased penalties for not burning coal cleanly are virtually certain, and will be difficult for Congressional Republicans to block or President Bush to veto. In fact, the courts may settle this issue long before the Democratic Congress has a chance to. That’s a pretty good reason to ease up on the more vulnerable big coal guys like AMEREN (NYSE: AEE) and ALLEGHENY ENERGY (NYSE: AYE).

Last summer, the current Congress made a last ditch attempt to pass comprehensive communications legislation to update the 1996 Telecom Act. They ultimately failed in the US Senate, in part due to the debate over net neutrality, or whether all comers have the right to use any broadband Internet network.

On one side of that debate are Big Telecom and Big Cable, who want the right to earn big returns as they construct state-of-the-art networks. On the other are Internet giants like GOOGLE (NSDQ: GOOG) and MICROSOFT (NSDQ: MSFT), who don’t want to pay more to move their products and services.

Conventional wisdom is that the incoming Democrats will side with the Microsofts against the communications network owners. But as I’ve pointed out in Utility & Income, that’s not necessarily the case, as many House Democrats joined Republicans in resoundingly defeating net neutrality provisions earlier this year.

We’ll probably see some sort of compromise on this issue in the new Congress, allowing network builders like VERIZON (NYSE: VZ) to earn a decent return on their investments and ensuring open access.

Anything else seems doomed to fail, in which case we’ll just have the status quo. That would be OK with Verizon, which continues to expand its FiOS network rapidly. At last count, the company controlled 5.5 million of the 6 million fiber optic connections in the US, and that advantage continues to widen.

The one area where utility investors--and indeed all income investors--could be affected on the national level is with tax rates. Specifically, under current law, the cut in the maximum rate on long-term dividends to 15 percent is slated to sunset after 2010, unless it’s extended. That seems considerably less likely under a Democratic Congress.

The silver lining here is US income investments in general have never really priced in this tax advantage, in large part because it’s never been viewed as permanent. As a result, if the lower rate is not renewed, there should be relatively little fallout on share prices.

Conceivably, the Democrats could try to repeal the tax outright, given their avowed goal of closing the yawning federal deficit. But they’d likely face stiff resistance from the remaining Republicans in Congress as well as a veto threat, making it far easier simply to let the rate expire.

It’s also not wholly out of the question that Democrats could be convinced to support a lower rate on long-term dividends in some form. For example, US Democrats’ counterpart in Canada--the minority Liberal Party--has emerged as the ruling Conservatives’ chief critic about the new taxation of income trusts, charging the government’s broken campaign promises have chiefly hurt small savers.

Individual savers are the main beneficiaries from the lower dividend tax rate in the US. And as the baby boomers age and traditional retirement income sources shrink, the ranks of income investors are getting larger all the time. Also, more than a few boomers supported the Democratic wave.

In any case, this is an issue I’ll be watching closely as the new Congress irons out its priorities. But however it comes out, it shouldn’t have an inordinate impact on income investments, and by extension utilities.

IN THE STATES

States set utility rates. That’s why the most important elections every year for the sector are always on the state level. That’s especially true this year, given that little is likely to change on the federal level.

The key position in every state is the governor. Governors typically appoint all the members of state regulatory commissions.

Consequently, they set the tone for whether a state’s policy will be supportive for utilities, or will stick it to them in order to promote lower customer rates in the short term.

The good news is--despite spikes in the price of natural gas in recent years--most states are still trying to build relationships, rather than promote confrontation. And with a few notable exceptions, utilities managed to avoid becoming campaign issues, which would have set them up for trouble if the election didn’t fall their way.

One race I was watching with particular interest this time around was in Nevada. There, a popular Republican candidate nearly blew a big lead in the final days of the campaign due to a personal scandal involving a Las Vegas cocktail waitress, but eventually won the governor’s mansion by a narrow margin.

This race was potentially important for the state’s dominant electric utility SIERRA PACIFIC RESOURCES (NYSE: SRP), which has been able to recover much of its financial strength thanks to favorable regulation in recent years. A Democratic upset wouldn’t necessarily have upset the apple cart. But the Republican victory does ensure continuity, and hence more progress.

The day after the vote, state regulators approved the ute’s $3.7 billion long-term plan to build new power plants and transmission lines to meet Nevada’s burgeoning power demand. That means an expanding rate base for the company and financial stability--the formula for a return to investment grade status and eventually to begin paying a dividend. That may still be a year or more off. But the stock will appreciate greatly along the way.

Another state where utilities won big was California, where incumbent Republican Governor Arnold Schwarzenegger cruised by appealing to the state’s majority Democrats and Independents. Under the Governator, regulation has dramatically improved for the state’s energy and water utilities, as well as for communications companies.

That should now continue.

Utilities are exhaling in Florida, where Republican Charlie Crist won a comfortable victory to succeed Jeb Bush as governor. Florida has historically had a strong relationship with its utilities, and that doesn’t appear to have changed. Neither will relations in any other southern state, with the possible exception of Arkansas. Even there, however, ENTERGY (NYSE: ETR) has managed to keep out of the limelight for the most part, which should keep it in good stead with that state’s incoming Democratic governor.

Outside of Arkansas, the other states where governors’ mansions went red-to-blue should all be watched. In Colorado, XCEL ENERGY (NYSE:XEL) has had a positive relationship with the Republican-appointed commission in recent years. But its focus on alternative energy and conservation should serve it well under the incoming Democratic one.

Massachusetts is also unlikely to do a 180-degree turn on what have become stable utility/regulator relations.

Ohio’s market is now deregulated. Conceivably, regulators appointed by the state’s new Democratic governor could make things more difficult for FIRST ENERGY (NYSE: FE), though the company has come a long way toward repairing its image. In New York, power producers aren’t too concerned about radical action from incoming governor Elliott Spitzer. But transmission and distribution utilities like CONSOLIDATED EDISON (NYSE: ED) and ENERGYEAST (NYSE: EAS) could have a tougher time of it.

Maryland and Illinois are easily the most problematic states for their biggest utilities. In Illinois, both the defeated Republican challenger and victorious Democratic incumbent supported extending a retail customer rate freeze, despite a quantum leap in wholesale power prices following the recent capacity auction. That’s the same formula that drove PACIFIC G&E (NYSE: PCG) into bankruptcy in California in 2001, and nearly put EDISON INTERNATIONAL’S (NYSE:EIX) utility unit Southern California Edison into Chapter 11 at the same time.

In this case, such a feel-good move would likely trigger bankruptcy for the state’s regulated transmission and distribution utilities owned by Ameren and EXELON (NYSE: EXC). Neither holding company will file Chapter 11 and--with regulated Commonwealth Edison only a tiny portion of its profits--the impact would be relatively minor on Exelon in any case. Ameren, however, has a larger portion of its business in Illinois and is therefore a good deal more vulnerable.

The greatest risks probably lie with the utilities operating in the state of Maryland, where the GOP was basically wiped out this week.

Like Exelon in Illinois, CONSTELLATION ENERGY’S (NYSE: CEG) exposure to the state is limited, but is nonetheless enough to hurt it if the climate turns too negative. POTOMAC ELECTRIC (NYSE: POM), meanwhile, is much more exposed to its regulated utility in the state.

Before the election, Maryland’s Democratic-dominated legislature was locked in battle with defeated Governor Bob Ehrlich over the issue of utility rates. The state’s rate freeze was expiring and regulated utilities were asking for massive rate increases to pay for higher wholesale power costs.

That battle has now been resolved in favor of the Democrats. As a result, times may get tough for both Constellation and Potomac. At the least, it looks like they’re not going to recover their purchased power costs in a timely way.

SUMMING UP

Whether we’re talking about a state government, national body or foreign state, a change in the ruling regime always brings uncertainty. We won’t really know what’s going to happen to utilities or any other sector until several months down the road.

Based on what we’ve seen so far, however, the positive trends in regulation that began in the depths of the utility bear market of 2001-02 should continue to hold up. Democrats in many states have been reliable supporters of fair treatment and utes’ financial health. Many of the newcomers show every sign of sharing those principles.

Consequently, the only states that truly present a clear and present danger to utility investors are those that did so before Tuesday’s election. As long as a utility strategy is focused on the most reliable states, investors have little to worry about. That includes companies with large future environmental expenditures like SOUTHERN COMPANY (NYSE: SO), which may actually be able to grow earnings as it adds the cost of needed improvements to its rate base.

Finally, unlike the last time Democrats held power in the US Congress, there’s absolutely no push for destabilizing deregulation.

In fact, having a blue Washington is almost surely the final nail in the coffin for radical industry restructuring. That means less uncertainty for utility investors and greater stability.