Reflections on A Market Approach to Regulating the Energy Revolution

• Date: 01 August 2015

45 ELR 10760 ENVIRONMENTAL LAW REPORTER 8-2015

C O M M E N T

Ref‌lections on

A Market Approach to

Regulating the

Energy Revolution

by Tom FitzGerald

Tom FitzGerald is the Director of the Kentucky Resources Council Inc., and is an Adjunct Professor of

Energy and Environmental Law at the Brandeis School of Law, University of Louisville, Louisville, Kentucky.

ese reections are the author’s own and are not presented in either of his professional capacities.

As a practitioner who has represented low-income

individuals and community groups pro bono on

environmental and energy development issues for

over three decades, I appreciate the contribution of Profes-

sors Dana and Wiseman to the literature concerning the

regulation of those particular risks a nd eect s of the use

of hydraulic fracturing and horizontal drilling to develop

shale gas and oil from formations once considered inac-

cessible. Coming from a state that, like some 23 others in

our nation, has enshrined in law a misguided, discredited

policy of being “no more stringent than” minimum fed-

eral standards on air, water, and waste management, I can

appreciate the particular challenges of crafting adequate

mechanisms in state laws in the absence of a national regu-

latory framework with performance standards and com-

pliance assurance mechanisms sucient to assure that the

risks associated with each stage of shale gas development—

from exploration, well development, and stimulation to

closure and site reclamation— are internalized rather than

being shifted “o budget” onto those who live downhill

and downstream.

Kentucky is not unique in its current level of regula-

tion of the oil and gas industry. Most of the production

from shales in Kentucky has been through nitrogen foam

fracturing of more shallow vertical and horizontal wells,

though there has been recently-expressed interest in explo-

ration of deeper formations that would be hydro-fractured

and horizontal wells. In 1960, Kentucky became a signa-

tory to the Interstate Oil and Gas Compact and adopted

state regulations aimed at conservation of the oil and gas

resource, including well spacing, design, cementing, and

other basic standards for well closure. In the 1970s, in

response to the eort s of one county government to regu-

late gathering lines, the General Assembly preempted local

government regulation of the oil and gas industr y (other

than through planning and zoning). Kentucky requires

performance bonds intended to provide for proper closure

of wells; however, the allowance of “blanket bonds” and

the limitations both on the amount of the bond and the

uses that can be made of the bond monies leave the public

and landowners on whose property exploration a nd pro-

duction occur at risk in the case of non-performance.

I agree with the authors that, if engaged, the surety and

insurance industry could become valuable partners in assist-

ing in the mitigation of risks associated with hydrofractured

horizontal well production. We have a historical example in

Kentucky’s coal industry, where a coal surety rm, founded

and managed by a former state mining inspector, wrote pol-

icies and took an active role, uncharacteristic of the surety

industry, in inspecting the mining operations and suggest-

ing that actions be taken in order to mitigate risks through

better mining and reclamation practices.

ere are three main diculties I see in the proposal

to use insurance and surety mechanisms as a tool for mit-

igating risks. e rst, recognized by t he authors, is the

concept of “regulatory capture.” In both the legislative and

executive branches of state government, eorts to require

full internalization by t he industry of the costs associated

with permitting, inspection, regulatory compliance, and

site management and closure often face signicant opposi-

tion from those in government allied with the industry’s

interests. Overcoming regulatory capture is essential to

emplace bonding and other nancial assurance require-

ments suciently rigorous to cause changes in operational

performance in order to lessen or mitigate risks. One can

look to the bonding programs under the 1977 Surface

Mining Control and Reclamation Act to see the challenge.

In that ca se, there was a federal mandate for full-cost rec-

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