Federalism, regulatory lags, and the political economy of energy production.

Author:Spence, David B.
Position:Introduction through III. Federalism and Energy Regulation B. Federalism and Energy Facilities, Generally, p. 431-477
 
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The production of natural gas from formerly inaccessible shale formations through the use of hydraulic fracturing has expanded domestic energy supplies and lowered prices and is stimulating the replacement of dirtier fossil fuels with cleaner natural gas. At the same time, shale gas production has proven controversial, triggering intense opposition in some parts of the United States. State and local regulators have scrambled to adapt to the boom in natural gas production, raising the question of whether federal regulators should step in to supplant or supplement state regulation. This Article takes a policy-neutral approach to the federalista questions at the center of that inquiry, asking which level of government ought to resolve these policy questions, rather than which level of government is likely to produce a particular favored policy outcome. Consequently, this analysis begins with four economic and political rationales typically used to justify federal regulation. Federal regulation is necessary (1) to address spillover effects that cross state boundaries, (2) to prevent economic forces at the state level from initiating a "race to the bottom" in environmental regulation, (3) to promote business efficiencies through uniform national standards, and (4) to respond to national interests in the development of natural resources through a federal licensing system, Applying these rationales to the regulation of fracking yields several important conclusions. First, while a few of the externalities of shale gas production cross state boundaries, most are experienced locally. Second, existing federal regulatory regimes offer ample authority to address those few interstate externalities. Third, the race-to-the-bottom rationale does not justify federal regulation of shale gas production because shale gas states are not competing for quantity- or time-limited capital investment. Fourth, given that the impacts of fracking are still under study and the subject of considerable ongoing debate, there is currently no overriding national interest supporting the creation of a comprehensive federal licensing or regulatory regime for shale gas production.

INTRODUCTION I. SHALE GAS PRODUCTION AND FRACKING A. Fracking, Generally B. Environmental Impacts II. THE EXISTING REGULATORY ENVIRONMENT A. Federal Regulation 1. Overview of Oil, Natural Gas, and Environmental Regulation 2. Regulatory Exemptions for Oil and Gas Development B. State Regulation III. FEDERALISM AND ENERGY REGULATION A. Federalism and Regulation, Generally 1. Logical Rationales for Federal Regulation 2. Political Rationales for Federal Regulation B. Federalism and Energy Facilities, Generally IV. FEDERALISM AND FRACKING A. Spillovers and the Geographic Scope of Fracking Externalities 1. Water Supply 2. Neighborhood Character Issues 3. Fugitive Greenhouse Gas Emissions 4. Wastewater Disposal 5. Groundwater Contamination B. State Capacity and the "Race to the Bottom"? C. National Interest in Shale Gas Development? CONCLUSION: THE CASE FOR NARROW FEDERAL REGULATION ONLY INTRODUCTION

The American energy policy landscape is undergoing a revolution. (1) The production of natural gas from formerly inaccessible shale formations through the use of hydraulic fracturing (2) (also known as "fracking") has transformed American energy options. Only a few years ago, American policymakers foresaw a future increasingly dependent upon natural gas imports; (3) they now foresee that domestic production will be sufficient to serve the country's needs for as many as 100 years. (4) That ample supply, in turn, has tamed natural gas markets. Natural gas prices have always been volatile (and frequently high), but forecasters now predict low prices into the foreseeable future. (5) Low natural gas prices could stimulate the replacement of dirtier fossil fuels (coal and oil) with cleaner natural gas (in electricity generation and transportation, respectively), hastening the long-held dream of the industry's proponents that natural gas would serve as a bridge fuel to a renewable energy future. (6) According to the International Energy Agency (IEA), emissions of greenhouse gases in the United States fell in 2011, in large part because of shifts from coal-fired electric generation to gas-fired generation--a change that the IEA attributed to increased shale gas production. (7)

At the same time, however, shale gas production has proven very controversial. The rapid increase in this type of production has been driven in large part by production techniques (horizontal drilling and fracking) that are now in use on a much wider scale than ever before. (8) Use of these techniques produces negative externalities (9)--pollution and other byproducts borne mostly by the community in which shale gas production occurs--which have generated intense opposition to shale gas production in some parts of the United States and the world. (10)

State and federal regulators have scrambled to adapt to the boom in natural gas production and the controversy it has spawned. (11) That scramble has produced a significant amount of regulatory change in states from Texas to New York. (12) Some states have reacted cautiously, banning shale gas production pending further study of its risks. (13) Others have opened their shale gas formations ("shale plays" in the industry vernacular) to development under existing state regulatory regimes, adjusting those regimes to address new or newly recognized risks. (14) While the process of state regulatory adjustment continues, it has not quieted opponents of shale gas production. (15) At the national level, the Environmental Protection Agency (EPA) is engaged in a multi-year study of the industry, which may yield additional federal regulation. (16)

These observations raise important questions: What, if anything, should the federal government do about fracking? Should Congress pass comprehensive federal licensing rules or standards governing the industry? Should the EPA use existing regulatory authority to impose further restrictions on fracking or to fill gaps in state regulatory regimes? Or is the regulation of this industry better left to the states, whose varied regulatory approaches represent a series of experiments from which all can learn? These questions are located at the intersection of federalism and regulation. Specifically, Congress, the EPA, and state and local government actors may all have preferences regarding fracking policy, which raises the question of which level of government is the most appropriate regulator. This Article will address these questions by exploring the commonly employed theoretical rationales for regulating at the federal level, and applying those rationales to the risks associated with fracking and shale gas production. The analysis shows that a comprehensive federal licensing or regulatory regime for shale gas production is probably unnecessary--and, at least premature--but that the federal government might appropriately regulate specific aspects of shale gas production that implicate national or global interests.

Part I of this Article examines the process of fracking, including the technological advances that have made it cheaper to produce natural gas from shale, and the effect of fracking production in three states containing large shale gas plays--Texas, Pennsylvania, and New York. Part I also explores the external effects of shale production on air, water, groundwater, community character, and other public goods, and further notes the ongoing debate over their significance and magnitude.

Part II examines fracking's existing regulatory environment. It describes the major federal regimes that regulate fracking operations and notes that Congress has exempted the fracking process from some of those regimes. It then compares the state regulatory regimes governing fracking in Texas, Pennsylvania, and New York. The analysis notes differences in these states' regulatory strategies, including their coverage, stringency, and use of either detailed prescriptions or general performance standards. It is evident from this snapshot of state regulation that state rules have lagged behind the development of the industry. Part II also examines the effects of regulatory agency structure on a state's regulatory approach. Specifically, it explores the implications of assigning primary regulatory jurisdiction to an oil and gas commission (as in Texas), or to a state environmental agency (as in Pennsylvania and New York). While it is difficult to reach general conclusions in response to this question, it appears that the Texas regulations governing technical issues (such as construction) are more specific than those promulgated by the New York and Pennsylvania environmental agencies. Conversely, the New York and Pennsylvania agencies seem to focus more of their attention on environmental protection than does the Texas commission.

Part III addresses the federalism questions at the heart of the regulation of energy facilities. The federal government clearly has the power to regulate fracking under the Commerce Clause because of the industry's substantial effects on interstate commerce. (17) That observation, however, does not answer the question of where regulatory authority ought to lie. The analysis approaches this normative question in policy-neutral terms, placing the question of who ought to regulate prior to questions about what the regulation should be. This approach reveals four rationales that we typically use to justify federal regulation. Federal regulation is necessary (1) to address spillover effects that cross state boundaries; (2) to prevent economic forces at the state-level from initiating a "face to the bottom" (18) in environmental regulation; (3) to promote business efficiencies through uniform national standards; and (4) to respond to national interests in the development of natural resources through a federal licensing system...

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