Energy Regulation a Delicate Balance Between Health and Economy - Business, Government Legal News from throughout WV

Energy Regulation a Delicate Balance Between Health and Economy

State and federal politicians leveling phrases such as "job-killing," "out-of-control" and "over-reaching" at federal agencies have prompted a complex debate on how to walk the line between over-taming business and letting industry run wild.

Animosity toward the Environmental Protection Agency boiled over in West Virginia when the EPA vetoed the Logan County Spruce Mine permit for what would have been the largest surface mine ever constructed in West Virginia. State officials from the top to bottom cried foul, claiming the EPA had reached into the affairs of the state and jeopardized its economic security.

Meanwhile, the EPA cited the mine operator's unwillingness to compromise and mitigate the mine's impact on the nearby environment. The EPA warned the site would kill wildlife and pollute nearby streams. It intervened to prevent potential environmental impacts the agency called "truly unacceptable."

The industry points to examples such as AEP's announcement this past summer it would prematurely shutter five coal-fired power plants to comply with EPA regulations. AEP said at the time of the announcement that the clean air regulations would raise electricity prices 10 to 35 percent and cost 600 jobs.

"The EPA's onerous regulations and unreasonable compliance timelines are hurting West Virginians ability to put food on their family's tables, and that has to stop if we are ever going to get this economy back on track," said U.S. Sen. Joe Manchin, D.-W.Va.

Proponents of stricter coal regulations say people should look at the proliferation of low-emission energy generation as proof that the economy and energy market can flourish under air and water pollution restrictions.

Roger Noll, an economics professor at Stanford University and co-director of the university's program on regulatory policy, recently told the Washington Post much of the argument is a matter of perspective.

"If you're a coal miner in West Virginia, it's not a great comfort that a bunch of guys in Texas are employed doing natural gas," Noll said. "Some people identify with the beneficiaries, others identify with those who bear the cost, and no amount of argument is ever going to change their minds."

Armando Benincasa, an energy/environmental law attorney with Steptoe and Johnson, said the argument itself is not doing the industry any favors.

"I think the biggest issue that you have right now is that there is a sense of uncertainty with regard to what exactly some of the regulations are going to look like," Benicasa said.

The debate between those supporting a heavy handed government versus those who don't prompts sensitive questions, particularly for West Virginians. If the Upper Big Branch mine had been shut down for safety violations before it exploded, killing 29 miners, would the Mine Safety and Health Administration have experienced a backlash from the same people who defended the Spruce Mine permit? Would the jobs created by the Spruce Mine permit have been more valuable than preventing what the EPA had identified as "unacceptable" destruction?

As pointed out by Noll in the Washington Post story, though West Virginia coal miners may be losing their jobs, in the bigger, federal picture, there is very little job loss resulting from regulations. According to the Bureau of Labor Statistics, only about three-tenths of 1 percent of the people who lost their jobs in layoffs lost those jobs due to government regulations or intervention. A drop in business demand, on the other hand, resutled in layoffs of about 25 percent.

Laws Without Lawmakers

Although regulations have the force of law, the details of those regulations are often not written or even passed by lawmakers. Writing laws giving that authority to regulatory bodies ensures those with the resources and technical ability to do so write the details lawmakers may not understand or have time to address.

In addition to broad authority, regulators, who often are not elected or required to answer to a voting constituency, are given flexibility to change and adapt regulations within various parameters outlined by the legislation.

"Such an approach recognizes that it is often much less efficient and less time-consuming to pass or amend a law than it is to change the course of regulation via agency rulemaking," said Patrick McGinley, a professor of law at West Virginia University.

The system allows regulations to be put into place with more efficiency than the sometimes tedious process of passing new legislation.

"Legislators may have majority agreement that regulation is needed, but there is no consensus as to how the regulation should work," McGinley explained. "Writing a law that gives broad general power to an administrative agency allows legislators to obtain sufficient consensus to pass a bill into law."     

While the customary process does increase efficiency, it also gives policymakers a means for escaping culpability for the effects of those regulations.

"A corollary rationale recognized by administrative law experts is that legislators realize that the broader and more general is a statutory mandate to regulate,  the easier it will be for them to deny responsibility when the agency seeks to implement the law by proposing regulations that receive criticism from some or many segments of the public," McGinley said. "The politician can say to his or her constituents, ‘The agency isn't following the intent of the law I voted for' – a relatively easy out that a politician can use to disassociate him or herself from a law they voted for."

Costs of Business

In response to recent regulations issued by the EPA, Chris Hamilton, vice president of the West Virginia Coal Association, argued in an opinion piece in the Charleston Daily Mail that hostile policy was to blame for recent declines in coal revenue. While acknowledging increasing geologic difficulty and struggles amid the recession, the ability to get a mining permit from the Obama administration, Hamilton said, has become "virtually impossible."

"… (E)ven permits that have already been approved have been cast into doubt by the action of the EPA in revoking a previously granted four-year-old permit for the Spruce surface mine in Logan County," Hamilton wrote. "That effectively says to any business that depends on obtaining permits from the federal government that promises are not worth the paper on which they are printed. How can this not have a chilling affect on investment and business activity?"

Manchin also pointed to the Spruce mine permit revocation as an example of EPA overreach, an action that angered a number of coalfield politicians.

"The permit had already been approved after an exhaustive, approximately 10-year regulatory process which included time for an extensive review by the EPA," Manchin said. "This irresponsible example of EPA overreach was not only bad for the coal mining industry and the more than 200 jobs that were expected to be created by the Spruce No. 1 Mine in West Virginia. Actions like these also have a chilling effect on other investments and our economic recovery.

"The Spruce Mine decision sent a very clear message to anyone doing business with the federal government: We have no intention of keeping our word."

Hamilton said if it wasn't for onerous and burdensome regulations leveled specifically at West Virginia miners, there would be no decline in coal production.

"West Virginia coal miners are the best in the world," Hamilton wrote. "They can compete with anyone in the world if the playing field is level and the rules of the game are defined. Today, however, the rules are different for miners in West Virginia than they are for miners in President Obama's home state of Illinois or those in western reserves."

Manchin also says the present administration is using its power not to broadly regulate business, but to pick "winners and losers" in the energy game. Many in the West Virginia coal industry believe Obama has pegged West Virginia's coal as a "loser" in the nation's energy future.

"The fact is that in 2010, coal generated 45 percent of our nation's electricity, and at the current time, we have nothing that can take its place," Manchin said. "But rather than working with those of us in energy-rich states like West Virginia to find cleaner and more efficient ways to use our base resources, this administration has focused on demonizing coal, creating a great deal of uncertainty in the energy industry that is jeopardizing job creation all across this country."

The concern of many businesses is often that costs will overburden their operation and affect their bottom line to the point they cannot compete – either with similar industries such as coal versus natural gas for electricity generation or with foreign markets of the same resource.

"This claim has the most resonance when the competition is foreign-made goods or services from countries where there is little or no regulation that forces foreign-based companies to internalize costs," McGinley said. "The issue in that context forces our state and nation to decide to what extent we want reduce regulation and allow a return to externalization of costs and harm to individuals, families and communities – goods and services are certainly much less expensive in countries where coal mines are unsafe, the safety of food and drink are not subject to regulation, and industry can freely pollute water and air and dispose of toxic chemicals without regulation wherever they choose."

Business Unregulated

Few argue that all government regulation should be removed. Those who defend government intervention point to the lack of regulation as the cause for the BP Gulf oil spill, the housing crisis and the banking crisis of recent years.

Ted Boettner, executive director of the West Virginia Center on Budget and Policy, said regulations may not necessarily benefit the economy, but there is very little evidence that regulations hurt the economy either.

"The repeal of Glass-Steagall was one of the precipitating factors that led commercial banks to play a vital role as buyers and sellers of mortgage-backed securities, credit-default swaps and other damaging financial derivatives," Boettner said. "Regulation is necessary for well-functioning markets, something that became abundantly clear when the housing bubble popped and left over eight million Americans and 40,000 West Virginians unemployed."

Manchin recently introduced legislation that would delay implementation of two EPA rules crafted to reduce air emissions.

"This bipartisan, common-sense bill would create reasonable timelines and benchmarks for utilities to comply with two major EPA rules to project jobs as well as the affordability of electricity and the reliability of the electric grid," Manchin said.

Todd Wynn, the American Legislative Exchange Council's energy, environment and agriculture task force director, said the act would not weaken the rules, but it would give companies a fair amount of time to comply with the regulations.

 "The bill does not change the stringency or reduction levels of any EPA regulations," Wynn said. "But it would help to minimize the damage of the train wreck that will happen if the regulations pile onto American consumers and manufacturing companies too fast."

Rep. Shelley Moore Capito, R-W.Va., has suggested that the EPA be required to include consideration of jobs lost in crafting new regulations. She has frequently requested West Virginia industry leaders to tell her specifically which regulations are burdening their businesses.

Rules that are overly onerous without any known benefits often face little support on the legislative floor. If they are overlooked in passage, often they are repealed. The problem is when competing interests have difficulty sacrificing or compromising on the regulation.

Boettner said often the issue is the conversation on regulation often focuses on the cost to a few businesses without looking at the broader effect on the economy. Opponents of regulations affecting a specific industry often cast the rules in the light of being broadly anti-business.

A New Model

With the boom of the state's natural gas industry as a result of Marcellus shale gas play discovery, the state has been pushed to create a new set of regulations. While being written, some of the mistakes of the largely unregulated coal industry in its beginnings have come forward in debate.

"It is in the industry's best interest to have a well-thought-out, scientifically based regulatory scheme," said Benincasa, an attorney who has worked closely with the industry. "I think that for the purposes of having certainty with regard to your operations, you don't want to operate within the Wild Wild West; you want to operate in an area where everyone follows a fair set of rules based on science that allows you to compete."

Benincasa said the natural gas drillers who are flocking to the state and surrounding areas with access to the gas-rich Marcellus shale are watching West Virginia's attempt to regulate the shale very closely. Ineffective policy, he said, could drive competition to other states.

Permit fees, he said, are one example of regulation that could hurt the growing industry.

"I think everyone in industry agrees that the permit fees have to be raised in order to support the regulatory programs but at the same time we don't want to raise them to the point that we become uncompetitive with the fee structures that are contained in Ohio and Pennsylvania, for example, which are substantially less than $10,000 a well," Benincasa said.

Language, Benincasa said, is what makes drillers so nervous about the current proposed legislation floating about in the West Virginia's statehouse. For example, depending on the definition of a stream, what may be a reasonable regulation could be used to shoo industry away from nearly everywhere in West Virginia.

"If you go to a USGS map of West Virginia and look at everything that is potentially labeled as a stream, you'll find that once start making circles of 500 to 1,00 feet away from those locations, you are basically sterilizing large portions of the state from potential development. Words mean something, especially in statute."

Benincasa also warns about writing regulations that could stifle innovation in a way that is counterintuitive to legislative intent. For example, he said, specific language about casing requirements could prevent developments in an industry where technology is being developed rapidly.

"The most important aspect of smart, innovative regulations is the ability of states (or countries) to get ahead of the curve rather than encouraging marginal responses that will make West Virginia less competitive," Boettner wrote in an e-mail response. "If West Virginia can move early, instead of digging its heels into the past, it will help businesses increase competitiveness and exports, as well as prepare them to meet standards imposed in other regions or countries. Setting the stage for successful negotiation about carbon emissions, state leaders and the business community can move beyond the stalemate and antagonisms that exist between government and industry and work toward a 21st century relationship grounded in shared valued that improves the quality of life in West Virginia."

According to Harvard Business Review authors Michael Porter and Mark Kramer, "the right kind of government regulation can encourage companies to pursue shared value; the wrong kind works against it and even makes trade-offs between economic and social goals inevitable.

Good regulations, the two write, set clear and measurable goals, set performance standards that do not limit methods to achieved them, define phase-in periods for meeting standards, put in place universal measurement and reporting systems and require efficient and timely reporting of results.

Leaving elements of the regulation open, the authors argue, encourages innovation on a level playing field that benefits society as well as business.

"To be sure, companies locked into the old mindset will resist even well-constructed regulation," Porter and Kramer write. "As shared value principles become more widely accepted, however, business and government will become more aligned on regulation in many areas. Companies will come to understand that the right kind of regulation can actually foster economic value creation."

Spin-off Benefits of Regulation

Regulations aimed at specific businesses, such as coal combusters, no doubt impose costs on those industries. In some cases jobs are added to meet compliance. In other cases, companies must make cuts to comply.

What is often overlooked is the indirect benefits of some regulation. Opponents of a given regulation often focus on the trickle-down effect of over-reach such as hikes in electricity prices, potential intermittency and other effects of what is thought to be as industry-crippling rule.

Boettner points to another downstream effect that is usually ignored – the addition of jobs and economic activity from increased requirements.

"Almost all of the federal government's regulations are subjected to cost-benefit analysis, and almost all have benefits that far outweigh the costs, so the economy as a whole benefits from regulation," Boettner said. "Individual companies might have to purchase new pollution control equipment, but that benefits a manufacturer of the equipment and the firm that transports it and the firm that installs or services it."

Boettner added the public sector can also benefit as a result of regulation. Health care costs that rely on taxpayer funding are often reduced through public health-focused regulation.

Sometimes, McGinley said, the costs cited by business are not new costs but instead are costs that were once taken on by someone else.

"As a general matter, many regulations are intended to force business and industry to internalize costs that previously were externalized to individual property owners, families and communities, and to taxpayers," McGinley said. "Externalization, in the context of regulations means allowing a person or company to cause harm or impose costs that the person or company doesn't pay for."

McGinley points to black lung benefits as an example. Medical costs were once the responsibility of the affected miner, but the black lung benefits act provided assistance for those miners and families.

Measuring Costs 

The anchor of much contention between the two sides of the debate is they mostly have different ideas of how to measure the success of legislation. Regulators, generally, are less concerned with job creation, at least as far their job description is concerned.

Sen. Jay Rockefeller, D-W.Va., said reconciling those groups is a matter of getting opponents on both sides of issues to "truly listen" to one another to find solutions.

"There's no question that lawmakers should take into account the effect energy policy has on our workforce," Rockefeller said. "But that doesn't mean we shouldn't look closely at industry practices that could have an impact on public health. I firmly believe that West Virginia can find a balance here. We are blessed with an abundance of natural resources, and there is no reason we can't properly use them to support our economy, protect working families and create jobs while ensuring our natural environment gets the protection it deserves and we all need."

Regulatory agencies such as the EPA and the Occupational Safety and Health Administration are charged with improving the health of workplaces and the environment.

"Costs and benefits, though, cannot be ascertained by pure economic analysis. For example, the dollar costs of black lung disease do not include the emotional and physical impacts on the victim and his family," McGinley said. "An economic dollar-based calculation of costs of mine safety regulation is not sufficient in assessing whether regulation should be imposed. One cannot place a dollar value on the loss of a father, son or brother in a coal mine explosion. Thus, proper consideration of whether and how to regulate should include serious consideration of costs and benefits that cannot be reduced to a dollar value."

The EPA estimates the Clean Air Act amendments of 1990 has saved 160,000 lives in the past year. OSHA rules are largely attributed for cutting workplace fatalities to less than half in 40 years despite exceptional growth in the numbers in the workforce.

"When it comes down to it, I know all West Virginians care about their environment," Manchin said. We all want clean air and clean water for ourselves, our children, and our children's children. The difference is that some of us are looking for that balance between the environment and the economy that allows us to prosper."

The difficulty faced by policymakers is comparing very measurable effects such as job loss, with less obvious health and environmental damage.

"Regulation is certainly not the answer to every ill of society, but it has an important role to play in the 21st Century," McGinley said. "Moving past the contentious arguments of various interests, the true test of a government and its citizens is whether the decision will be based on objective facts that accurately identify long and short-term costs and benefits of regulation. Achieving that goal, however, is easier said than done.

"Regulations generally are not as divisive as portrayed by the interest groups that are most frequently cited. Most policymakers, industry and other affected parties believe there is hope for a "happy medium," Benincasa said.

"It's always fair to say the louder voices seem to carry the publicity," Benincasa said. "There are reasonable people that can come to some sort of understanding and agreement with regard to these types of issues."

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