End Of Crude Oil Export Ban Could Have Negative Unintended Consequences

By Michael Krancer
Follow: @MikeKrancer 

The repeal of the crude export ban, which Congress just passed and the president signed as part of the omnibus appropriations bill (read “budget”), may end up being one of those “watch out what you wished for” events. The ban goes back to 1975 when OPEC, in charge of oil supply, liked to deny us the resource from time to time with embargoes. The thinking at the time was that, by keeping all domestic crude oil inside U.S. borders, supply and national security would be protected.

Back then, the United States could easily use all of the oil it produced, and America’s daily production was already waning. But the dramatic increase in U.S. crude production from hydraulic fracturing of shale formations has altered those circumstances. Domestic producers, finding a crude glut at home, have been clamoring for access to international markets where their product might fetch higher prices. Environmentalists and domestic refiners, however, wanted exports to remain off-limits.

U.S. refiners, who have been investing billions to increase state-side refining capacity for the lighter, sweeter domestic crude, say refining jobs will be lost in the United States. Environmentalists say that more crude on the world market means that more refining and producing will take place, thus feeding the world addiction to hydrocarbon fuel and upping carbon emissions, and that the increased refining will happen in countries with little or no environmental regulations.

The playing field is made even more uneven against domestic refiners by a piece of 95-year-old legislation called the Jones Act. The Jones Act mandates that cargo being moved between U.S. ports can only be carried by ships that were built in the United States and that are owned by U.S. companies flying U.S. flags. This means that refiners on the East Coast pay about three times the transportation costs to acquire ship-born U.S. crude than do their competitors in Canada, Europe, or Asia.

It’s worth noting that, just in the Southeastern Pennsylvania region, refineries that were on the brink of shuttering just a few years ago at the estimated cost of 24,000 jobs, today pump $2.5 billion in wages into the local economy and account for an economic impact of $15 to $20 billion.

Some very credible people are also warning that a major assumption in the equation to repeal the crude export ban, namely the low price of crude, is not going to stick for much longer. As they say, the cure for low prices is low prices. Rob Kaplan, the president of the Federal Reserve Bank of Dallas, gave everyone a dose of reality in his public remarks on November 18, 2015, at the University of Houston. Kaplan pointed out that it is expected that the current imbalance in oil production versus consumption, which is driving and keeping oil prices low, is expected to come more into balance by late 2016 or early 2017.

It’s a complicated issue with myriad implications, a fact outlined in a longer piece that I recently wrote with Blank Rome Partner Matthew J. Thomas for The Legal Intelligencer, where we dissected the case for both sides.

How will lifting of the ban affect this currently vibrant domestic refining sector of our economy? Will the ban do more harm than good? It can’t be said for sure right now. But we can only hope that Congress takes less than 40 years to course-correct if it turns out that the law of unintended consequences hoists us by our own petard.

 

Support the PA PUC Proposed Rule on Solar Net Metering

By Michael Krancer
Follow: @MikeKrancer 

The PA PUC proposed rule on solar net metering has drawn a lot of press lately from major newspapers across the state. (See http://triblive.com/business/headlines/8449120-74/solar-cap-power#axzz3biKjb410 and http://articles.philly.com/2015-04-25/business/61497727_1_the-puc-power-production-commission-chairman-robert-f.)

Net metering is where a solar system (on a house, for example) generates more electricity than the homeowner uses that day, the homeowner then sells the electricity back to the grid, and he or she receives a credit on their electricity bill. Basically, it turns the homeowner’s solar PV system into a revenue generator.

Problems arise when net metering becomes overused and costs to maintain the grid, which all of us pay, become higher. So for those of us who don’t own a solar PV system, we end up subsidizing those who do.

To help mitigate this issue, the PA PUC proposed rule puts limits on what can be net metered. In my view, this proposed rule is a basic, common-sense proposal that is important public policy on a couple of levels. First, without the rule, the cost of operating the grid would become higher for people who don’t have rooftop solar panels on their houses, which would be especially detrimental to low-income households. Second, the rule prevents a few well-heeled folks from using the grid for their own personal profit without contributing to the upkeep of the grid. Those screaming the loudest against the rule want the “freeload” effect for their own profit, at the expense of all the rest of us and especially to those who can afford it the least.

The full PUC rulemaking appears here, and it covers more than just solar net metering. I encourage readers to weigh in and support the PA PUC proposed rule.

Reality Check on the Auditor General’s Report on DEP’s Oversight of Oil and Gas Operations

By Michael Krancer
Follow: @MikeKrancer 

The expected chorus of politically driven indignation is raining down in response to the Auditor General’s report released this Tuesday on the DEP’s performance in monitoring potential impacts to water quality from shale gas development, 2009-2012.

I’m in the process of digesting the Report which is lengthy (118 pages), along with the DEP’s 27-page response which, per standard procedure, is appended to the Report itself.  A few things strike me as notable though off the bat.

First, of the 15 “case studies” of water complaints the Auditor General looked at, 4 of the 15 were unrelated to oil and gas operations at all.  That’s 27% of the investigation that had nothing to do with what was supposedly being investigated.  Of the remaining 11 matters, 10 had full water replacement or restoration from the responsible operator.  That’s a 91% rate of success on resolution.  The 11th matter has a water replacement plan under review right now by the DEP.  That raises the resolution rate to 100% of the matters reviewed by the Auditor General.

In another case the Auditor General highlighted, where animals had supposedly gotten sick, the matter was determined to be unrelated to oil and gas operations.

Second, the Auditor General also focuses quite a bit on the DEP’s technology and personnel capabilities, alleging shortages and deficiencies.  But it was under the Rendell and Hanger regime that 183 bodies were axed from the DEP in the 2009-2010 budget, mostly impacting IT (information technology) and clerical functions.  Also, the report conveniently ignores completely the brand new oil and gas fee program that the administration brought into fruition.  The fee increases on shale wells will result in revenue of $4.7 million.  This will support new technology, including things like electronic review, mobile digital inspections, reporting system upgrades, and modernized forms and databases.  It will also support the hiring of about 25 new personnel, many of whom will be inspectors.

Third, I would agree with the Auditor General that the General Assembly should review whether the current 45-day clock for resolution of water impact investigation is realistic.  Earlier this year we wrote about Fred Baldassare’s report that methane from deep shale formations, like the Marcellus, has been found as a natural condition in the shallow drinking water aquifer system of the Northeastern Pennsylvania region.  One takeaway for me on that report, and my own experience as DEP Secretary, is that these investigations are long and complicated and putting unrealistic time frame expectations on them is not a good thing.

Lastly, despite the Auditor General’s and the chorus’ protestations to the contrary, the Report is a shot at the dedication and efficaciousness of hard working DEP personnel, especially inspectors.  In one particular case for example, the Auditor General rips an inspector for being too “conciliatory” where that inspector had successfully achieved compliance and a restored water supply and the DEP issued a fine of over $145,000 to boot.

Of course the Auditor General’s Report will, unfortunately, be used as a political football.   It will most certainly be referenced in this year’s gubernatorial race and perhaps in one down the road by the Report’s author.  As veteran Harrisburg reporter Don Gilliland put it in his insightful article about the Report in this morning’s Patriot News: “[t]here is a long tradition in Pennsylvania of audits being vehicles for the political ambition of the Auditor General, and [this] promised investigation of the Department of Environmental Protection’s oversight of Marcellus Shale drilling is no exception.”

I will continue my review of the Report and the DEP’s responses and I may chime in with more as time goes by.

Big SCOTUS Win for EPA on Greenhouse Gases

By Michael Krancer
Follow: @MikeKrancer 

No matter how you slice it (and we are all still studying it), yesterday’s Supreme Court omnibus decision on greenhouse gas (“GHG”) regulation (the lead case being Utility Air Regulatory Group v. EPA, No. 12-1146, decided June 23, 2014) is a huge win for the core of the President’s Climate Action Plan and the Environmental Protection Agency’s (“EPA”) implementation of it through the final Rule for new power plants and the proposed Rule for existing ones.  Though the case does not directly involve those Rules, the result, rationales, and line-up of the Supreme Court Justices convincingly show that the pair of power plant Rules rest on solid legal ground.  The bottom line is that the seven Justices have forcefully upheld the legality of control and regulation of GHGs from power plants under the Clean Air Act.

What the Justices struck down was something the EPA never wanted anyway, i.e., to subject every Dunkin’ Donuts to GHG regulation.  The EPA won the day on GHG regulation of so-called “anyway” sources, i.e., those already subject to Clean Air Act regulation.  Power plants are the quintessential “anyway sources.”  By any fair account, that’s like the EPA “giving the sleeves off their vest.”

And the main opinion giving the green light to GHG regulation of “anyway sources,” like power plants, was written by Justice Scalia.  This is the same Justice Scalia who has been the “great dissenter” in Clean Air Act cases.  He dissented in the landmark Massachusetts v. EPA case in 2007, which upheld the EPA’s position that GHGs actually are “air contaminants” under the Clean Air Act.  He likewise dissented in the recent Homer City Generation v. EPA case, which upheld in toto the EPA’s Transport Rule.

So ignore all the rhetoric you are hearing from some corners crowing that this is a “setback for the EPA” on GHG regulation.  It’s nonsense.  For those folks, yesterday’s decision is the cue for “Dandy Don” Meredith’s famous crooning of “♫ Turn out the lights, the party’s over. ♫”

EPA’s Clean Air Act Litigation Scorecard and What It Portends for Carbon Emissions Reduction Regulations

By Michael Krancer
Follow: @MikeKrancer 

The Environmental Protection Agency (“EPA”) is running the table in the courts on its key Clean Air Act initiatives: (1) the MATS Rule; (2) the Transport Rule; and (3) the Soot Rule.

  • On April 15, 2014, the D.C. Circuit upheld the 2012 Mercury and Air Toxics Standards (“MATS” Rule) in White Stallion Energy Center LLC v. U.S. Environmental Protection Agency, No. 12-1100.
  • On April 29, 2014, the U.S. Supreme Court reinstated the Cross-State Air Pollution Rule (“Transport Rule”) in U.S. Environmental Protection Agency v. EME Homer City Generation, LP, No. 12-1182.
  • On May 9, 2014, the D.C. Circuit affirmed the EPA’s discretion to tighten standards on particulate matter from coal power plants, refineries, manufacturers, and vehicles (“Soot Rule”) in National Association of Manufacturers (NAM) v. EPA, No. 13-1069.

The MATS Rule. The D.C. Circuit, by majority decision, upheld MATS, which requires coal- and oil-fired power plants to reduce emissions of mercury, arsenic, chromium, and other air pollutants.  The court gives wide latitude to the EPA’s discretion to act under the Clean Air Act.

The Transport Rule.  The “Good Neighbor Provision” of the Clean Air Act requires the EPA and individual states to prohibit upwind states from significantly contributing to the nonattainment of National Ambient Air Quality Standards (“NAAQS”) in downwind states.  42 U.S.C. § 7410(a)(2)(D)(i).  The D.C. Circuit, in a 2 to 1 decision with a vigorous dissent, vacated the Transport Rule on several technical grounds.  Per Justice Ginsburg, the Supreme Court reversed.  The court gives a very wide berth to the EPA’s discretion and judgment calls under the Clean Air Act in accordance with the landmark Chevron U.S.A. Inc. v. NRDC decision.  The court plainly rebukes the two-judge majority of the D.C. Circuit for not doing so.

The Soot Rule.  The D.C. Circuit upheld the EPA’s decision to revise the annual standard for particulate matter in order to address what the EPA believes to be a public health threat.  After considering NAM’s arguments, the court again decided in the EPA’s favor, basing its decision on the wide discretion that courts must give to the EPA in its decision-making under the Clean Air Act, especially when making science-related judgments.

With the EPA’s two big greenhouse emissions reduction rules on the brink of coming out, i.e., the final rule for new power plants and the proposed rule for existing power plants, what do we think the courts might do?  In the investment industry, it is said that “past performance is no indication of future results.”  In the legal business, it’s the opposite.  The challengers are starting this series down three games to none—and arguably down by two goals in the first period of game four.  First, the Supreme Court and D.C. Circuit have sent clear messages that the EPA will be given wide deference when it comes to the Clean Air Act.  Second, the new greenhouse gas rules come with the backdrop of the Supreme Court having already ruled in Massachusetts v. EPA that greenhouse gases are “contaminants” under the Clean Air Act, along with the D.C. Circuit having already upheld the EPA endangerment finding (with that decision now pending for review in the very Supreme Court that decided the Transport Rule case)—thus compelling the EPA to act on greenhouse gases.

Odds, anyone?

Read about the three recent Clean Air cases and what they mean in more detail in Blank Rome’s Client Alert by clicking here.

Obama Energy Official: Nuclear Plants Essential To Our Carbon Reduction Goals

By Michael Krancer
Follow: @MikeKrancer 

Peter Lyons, the Department of Energy’s (“DOE”) assistant secretary for nuclear energy, outlined the Obama Administration’s reasons for supporting nuclear power in the United States at the Platts 10th Annual Nuclear Energy Conference earlier this month.

Lyons, who is also a former Nuclear Regulatory Commission member and science advisor to the former Senator Pete Domenici, emphasized that nuclear power is a key contributor to our country’s goal of reducing greenhouse gas emissions (“GHG”). Moreover, he sounded the alarm that the growing list of perfectly healthy and well performing nuclear power plants being shut down for political and/or commercial reasons, or being slated for shutdown, is a serious climate-change threat.

He stated that he is gravely concerned that the loss of existing healthy nuclear plants will cost us dearly in terms of increased carbon emissions. The DOE studied a scenario where 30 percent of the county’s 100 reactors would be shut down. If those closures were to go ahead as per that scenario, there would be no way to meet our goal of cutting GHG emissions and, in fact, GHG emissions from the U.S. would skyrocket. Unsurprisingly, Lyons supplied that the DOE regards many of the nuclear plant closures currently on the calendar as premature.

The bigger problem, Lyons added, is that the market presently has no mechanism to sensibly recognize the value of carbon-free power generation, particularly nuclear power. He stated: “When well-run, clean [nuclear] energy sources are forced out of the marketplace due to a combination of reduced demand, low natural gas prices and market structure…our markets are providing the wrong signals.”

Nuclear power accounts for 20 percent of the electricity generated in the U.S. and for 64 percent of all zero-carbon emission sources. But many nuclear power plants are seeing their profits squeezed these days. There’s very little growth in the demand for electricity, thanks to energy efficiency, demand response, and a hobbled economy. Low gas prices have further reduced energy prices—and the profitability of the existing nuclear fleet.

Nuclear plants aren’t subsidized like other non-carbon-emitting energy plants are. Solar and wind are doubly subsidized; they receive direct taxpayer dollars—about $12.1 billion in the last round of the renewal of the Production Tax Credit. And in about 30 states and the District of Columbia, Renewable Portfolio Standard laws mandate that consumers buy a certain amount of wind and solar power.

Meanwhile, the U.S. has recently seen the closing of viable plants like Wisconsin’s Kewaunee, which in 2008 had won a license extension to 2033, and Vermont Yankee, which in 2011 had its operating license extended for 20 years. Replacing these two plants, even with new, highly efficient plants that burn natural gas, will lead to millions of tons of new carbon emissions. Many other plants are in danger of closing early as well.

This is terrible news for our GHG reduction goals. Just look at the case of Germany when it rushed to shutter its nuclear plants after Fukushima. The result: an estimated whopping increase of 15 million tons in GHG emissions if the gap in power demand is replaced by natural gas burning plants, and 30 million tons if the gap were to be filled with coal-fired plants.

How might policymakers and business people seek to prevent something similar from happening here? Lyons suggests measures that would help the markets recognize the value of carbon-free power generation—a carbon price or a cap-and-trade mechanism, in other words. A Stanford Woods Institute for the Environment review of survey data has shown that the public would favor those measures. The CDP, a U.K.-based environmental data group, recently reported that most big companies are ready, too.

For further insight from Michael Krancer on this issue, please read his recently published Forbes.com article by clicking here.

Report: Big Companies Ready for EPA Climate Change Regulations

By Michael Krancer
@MikeKrancer 

First came the news that a majority of the American public and many big investors are increasingly open to curbing the effect of global warming and supportive of mitigating carbon emissions by government action. Now comes a new report from the CDP revealing that many of the largest U.S. and global companies are ready for it, too.

The CDP, which released its report last week, analyzed data from many of the biggest companies headquartered in the U.S. or doing business here. They included oil giants like ExxonMobil, Chevron, BP, and Shell, and industrial behemoths like GE, DuPont, and Duke Energy, just to name a few. The CDP found that many are planning their fiscal futures around a price on carbon. A price on carbon—whether through a simple tax or a market-based cap and trade type system—is the most likely mechanism regulators would use to reign in greenhouse gas (“GHG”) emissions and, ultimately, climate change.

This is a big deal both politically and from a business standpoint. The CDP (formerly the Carbon Disclosure Project) is an international, not-for-profit organization that provides the only global system for companies and cities to measure, disclose, manage, and share vital environmental information. The CDP works with institutional investors with assets of $87 trillion. The study is based on the CDP’s annual voluntary disclosure process. The conclusion: a broad, diverse group of American and global companies have accepted a price for carbon and incorporated it into their normal business planning.

The CDP says companies fully expect an eventual regulatory approach in some form that addresses climate change. Accordingly, companies are using a price for carbon to plan for identifying revenue opportunities, risks, and to incentivize the achievement of maximum energy efficiencies to reduce costs and guide capital investment decision.

What happened to the claim that business opposes a price on carbon or a carbon tax? While some politicians call any effort to control carbon a “job killer,” lots of big companies are apparently saying “get over it.” The New York Times published an article on December 5 analyzing some of the political ramifications. Its take was that coalitions are shifting, and that business leaders, even those who count themselves as conservative Republicans, have sensed the direction of climate change policy in America and have decided to prepare to profit from it. They’re voting with their business plans.

The kicker is that no company thought that any business disruption would result from achieving GHG reductions or from carbon regulatory regimes. That may come as an inconvenient truth—so to speak—to politicians and pundits who’ve labeled efforts to control carbon job killers. It’s becoming increasingly clear that big business is not afraid of a regulatory regime for carbon. In fact, most companies are planning for it and even see opportunities for growth.

This also may have very significant legal ramifications because the politics are shifting at an interesting time—the Environmental Protection Agency (“EPA”) is about to promulgate its new rules for requiring states to apply the “best system of emissions reduction” for existing power plants. Just a short time ago, the nine densely populated Northeast and Mid-Atlantic states that make up the Regional Greenhouse Gas Initiative (“RGGI”) submitted comments to the EPA regarding those upcoming rules. RGGI is a proven and effective system of carbon emissions control that raises revenue for participating states to boot through its auctions. The gist of what the RGGI states said is that membership and participation in the RGGI would satisfy the “best system of emissions reduction.”

For further insight from Mike Krancer on this issue, please visit his Forbes.com article by clicking here.