Pittsburgh Penguins Are the Energy Story of the Year!

By Michael Krancer
Follow: @MikeKrancer 

Pittsburgh coal may be dead, but the NHL’s Pittsburgh Penguins are the “energy” story of the year—maybe the century.

At the turn of the New Year, the Penguins were deader than a rusty, retired coal plant. The team appeared to be out of the playoffs and armchair pundits like me were saying that Penguins Captain Sidney Crosby was a spent force. Now, those same plucky Penguins have been producing more energy than a matter/antimatter reactor and moved at warp speed to take the Stanley Cup back to the Steel City.

It’s a story that has a lot in common with the U.S. energy sector. Eight years ago, the political debate in America was about us becoming more energy efficient and the need to reduce our dependence on foreign oil. Now, the U.S. energy sector is booming thanks to shale gas and the country is on the verge of becoming an oil exporter. Even dirty old coal has cleaned up its act and still has a valuable place in the U.S. energy generation stack. Meanwhile, Saudi Arabia and other oil producing nations of the Middle East are pondering ways to transition their economies away from an unhealthy reliance on oil to become knowledge-based economies.

The Penguins’ run to the Cup is an unlikely story about a likeable bunch—even to a lifelong Philadelphia Flyers fan like me. The Pens’ melting pot mix is about as eclectic as the U.S. energy generation stack. Mike Sullivan, a kid from Boston, took over as head coach in mid-December, coming up from being coach of the team’s American Hockey League affiliate, the Wilkes-Barre Scranton Penguins, affectionately called the “Baby Pens” by fans. Now, in front of him on the bench are a waddle of former Baby Pens who are playing lights out for the Penguins proper—Bryan Rust, Conor Sheary, Tom Kuhnackle, and Matt Murray. Murray, the 22-year old rookie goalie, is as cool as a cucumber and is looking like a combination of 1945 Hall of Famer Georges Vezina (“The Chicoutimi Cucumber”) and Ken Dryden, who won six Stanley Cups with the Canadiens from 1971 to 1979. Then there are the “retreads,” jettisoned from other teams and landed by the Pens, think Phil Kessel, Carl Hagelin, Nick Bonino, and Eric Fehr. To complete the gang are the veteran Penguin “usual suspects” like Crosby, Evgeni Malkin, Olli Maatta, Kris Letang, and Chris Kunitz. Crosby is playing like Superman in the playoffs and is proving me as wrong as those energy experts who predicted we would have run out of natural gas by now.

The Pens are as American as Apple Pie to boot; the majority of the roster are U.S.-born players. I predicted on Twitter back in March that the Cup would return to Pittsburgh. This rag-tag team of baby Pens, retread Pens, and veteran Pens who won this Cup are the best hockey story in North America since “do you believe in miracles” in 1980, when the U.S. Olympic men’s ice hockey team pulled off one of the biggest sports upsets ever by beating the Soviet Union.

The lesson from the Penguins and the U.S. energy sector is the same: never count out a fighter too soon. So “Elvis has left the building” and we do get an Ethane Cracker and a Stanley Cup in the same week!

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.

The Obama Clean Power Plan Nuclear Gap

By Michael Krancer
Follow: @MikeKrancer 

If we want to arrest climate change, all we need are more renewables like wind and solar, right? Not exactly, according to a newly published Canadian report from Hatch Ltd. on lifecycle greenhouse gas emissions (“GHG”). The report was commissioned by the Canadian Nuclear Association and compares lifecycle GHG emissions from nuclear power, natural gas-fired power, and wind power, all the way from fuel extraction through to plant construction, operation, and decommissioning.

Hatch says:

On average, emissions from wind and nuclear are similar within the accuracy of the study for all emissions except GHG emissions, where wind produces distinctly less GHG emissions on average than the combination of nuclear technologies considered.

No surprise there. But wind is an intermittent power source so it needs a back up. Hatch says that in a typical wind-natural gas hybrid, wind makes up 20% of the generation mix, with natural gas generation the other 80%. According to Hatch, the per kilowatt-hour GHG emissions from the wind/gas mix are 385 grams versus nuclear at 18.5 grams. That’s 20 times more GHGs for the wind backed by natural gas scenario.

The Hatch report has been criticized for focusing only on one power generation scenario: wind and natural gas in tandem. But the data is very relevant to us here in the U.S., especially in light of the Obama Climate Action Plan and the pending draft Clean Power Plan. If we have any hope at achieving success in reducing GHG emissions, all renewables and clean energy sources have a role to play, including nuclear power, and we have to get that right by treating them equally.

The Clean Power Plan calls for a near 20% reduction in U.S. carbon emissions from 2012 baseline levels by 2030. But here’s how the Clean Power Plan works—or doesn’t work, in the case of nuclear power. The draft rule sets forth an emissions rate baseline of carbon dioxide (“CO2”) emitted per megawatt-hour of fossil fuel generation. Each state can then lower that rate using the various so-called building blocks provided in the draft rule, which include: (1) tweaking fossil plants to be more efficient; (2) changing dispatch patterns of power sources so lower GHG plants are used more frequently; (3) using more zero and low-emitting sources like renewables (wind, solar, and geothermal) and nuclear; and (4) implementing energy efficiency measures. The draft rule allows for a 100% credit for all existing wind, solar, and geothermal sources, but only a 6% credit for nuclear. There’s no room at the inn for the other 94% of nuclear.

It’s puzzling why the Clean Power Plan is drafted this way given the key role that experts say nuclear will need to play in getting us anywhere close to the goal set forth in the Plan itself. In fact, the Energy Department has scenarios that project the retirement rate of nuclear as high as 33%. Even the Clean Power Plan’s own 6% figure for retirement would increase atmospheric emissions from 200 million to 300 million tons in the next ten years.

Nuclear power is the work-horse of power supply and of zero-carbon generation. Nuclear plants operate around the clock in all weather, providing nearly 20% of the nation’s electricity supply and comprising about 63.3% of all clean (zero-carbon emissions) energy, which is more than all other clean energy sources put together.

In formulating the final rule, the Environmental Protection Agency would do well to take a look at the Hatch Report, seriously consider its findings, and put nuclear on par with other zero-carbon generating sources.

To read more on this topic by Mr. Krancer, please click here to read his full article published in Forbes on October 27, 2014.

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.

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.

The National Climate Assessment and the Nuclear Energy Solution

By Michael Krancer
Follow: @MikeKrancer 

The White House released on Tuesday the long-awaited Third National Climate Assessment, Climate Change Impacts in the United States (“Assessment”), required by Congress.   It contains some stunning findings and does not mince words.   In the words of John Holdren, the White House Science Advisor, this is the “loudest alarm bell to date” on the need for climate action change.

The Assessment is the result of a prodigious and significant scientific exercise.  It is the product of the 60-person Federal Advisory Committee of distinguished scientists and other experts who oversaw the development of the Assessment, and an intense peer and public review process.  The bottom line is that climate change is here now, and time is running out to do something about it.

As can be predicted, the Assessment has received some push-back from the Cato Institute and others.  But regardless of whether one can nit-pick the 800-page report, one thing is for certain—we can do something about climate change here in America right now.  We can make sure our existing nuclear generation fleet remains intact and healthy.

Nuclear power is the zero-carbon workhorse of our electricity generation fleet.   Every time we lose a healthy nuclear plant, we are shooting ourselves in the foot on carbon emissions.  Climate scientists are telling us how critical it is to maintain our nuclear power capabilities in the face of the challenges that the National Climate Assessment talks about.  This important point should not be lost on those who call themselves environmentalists or “Greens.”  We simply will lose the battle to climate change if we surrender on nuclear power.

Germany is an object lesson.  For purely political reasons, Germany suddenly announced the closure of its nuclear power plants.  The result: carbon emissions from Germany are booming and Germany has gone from an electricity exporter to an electricity importer virtually overnight.  The irony: neighboring France has a healthy and safe nuclear power sector and Germany will import power from it.

The release of the Climate Assessment coincided with the Monday roundtable event in Philadelphia of Nuclear Matters. Nuclear Matters is a bipartisan effort co-chaired by former Senators Evan Bayh and Judd Gregg whose mission is to foster discussion and inform the public about the clear benefits that nuclear energy provides to America; raise awareness of the economic challenges to nuclear energy that threaten those benefits; and to work with stakeholders to explore possible policy solutions that properly value nuclear energy as a reliable, affordable, and carbon-free electricity resource that is essential to America’s energy future.

I contributed an op-ed article to The Philadelphia Inquirer that points out those benefits, with a particular focus on how they impact the Commonwealth of Pennsylvania.  Click here to read my op-ed.

A prime issue for nuclear power is the “free rider” problem.  Nuclear power provides the clear, simultaneously delivered benefits of: (1) extraordinary high reliability both with respect to the plants themselves and to the grid; (2) zero-carbon emissions power; and (3) being an economic engine of direct and indirect employment. However, distortions in the marketplace fail to place any market value on those critical, irreplaceable, and unique features of nuclear power.  I have discussed these points in more detail in my op-ed, and in an article I wrote for Forbes.com, which can be accessed here.

So if the National Climate Assessment offers sobering prospects, the potential of the U.S. and world nuclear power fleet provide off-the-shelf promise and good news, and even an antidote.  Our challenge is to make sure that we make the right policy decisions so we don’t poison the antidote.