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Issue Analysis

    Why Is Business Cheering for New Regulations?

    Executive Order Memo

    While the Obama administration has played up its independence and indifference to big business, recent announcements with respect to energy policy suggest that the administration does, in fact, cozy up to business, working in hand and glove to craft potential new regulations on energy exploration and development. Recently, a memo authored by Senate Environment and Public Works Committee staff member George David Banks, a top aide to ranking member James Inhofe, R-Okla., sheds a light on the machinations between the administration and energy interests. Unfortunately, this opens the door for a host of new regulations that may be imposed on hydraulic fracturing—or fracking—the process that has unleashed the recent energy boom in America. To the cheers of big business, the Obama administration issued an Executive Order calling for an interagency group of regulators to oversee federal policies toward fracking and other “unconventional” methods of natural gas production.

    More specifically, Obama’s executive order creates an interagency working group that includes the Environmental Protection Agency, the Department of Interior, the Department of Energy, and ten other federal agencies in order to coordinate polices on the use of new technologies in energy markets. While acknowledging that states already have the authority to regulate hydraulic fracturing and all other forms of onshore oil and gas production, the executive order asserts that a federal role is required due to its authority to regulate oil and gas production on public lands and Indian trust lands. But make no mistake, the Obama administration intends to expand its regulatory authority above and beyond regulation by the states, including “setting sensible, cost-effective public health and environmental standards to implement Federal law and augment State safeguards.”

    A joint memo released by the Energy Department, the EPA, and the Department of Interior offers further insights into the potential regulations that this interagency group may adopt. Drawing on the core competencies of each agency, the memo highlights areas of interest, including air and water quality, environment and human health risk, the use of green technologies, as well as “land use, wildlife and economic impact.” The memo also refers to an earlier report, “Shale Gas Production Subcommittee 90-Day Report,” which highlights the potential regulations that may emerge. For example, the memo calls for eliminating the use of diesel fuel for surface production, something which can easily transform into a new mandate on producers. Additionally, calls for best practices improvements are a ready made call for new EPA regulations to establish “best available control technologies,” or mandate new “maximum available control technologies.” Such BACT and MACT regulations are contentious, as demonstrated by the EPA’s recent Utility MACT, which is perhaps the most expensive regulation ever issued by the agency.

    This cozy relationship brought a rare rebuke from Energy and Commerce staff member Mr. Banks, who challenged the sagacity of this newfound relationship between big energy and the Obama administration. The memo, which is available here, shows how the administration stood behind the shield of big business to create a new regulatory regime for energy. The memo further questions whether this interagency task force is needed in the first place. One reason is that states already possess the authority to oversee fracking operations along with all onshore oil and gas production, raising questions about the need for federal intervention. Additionally, having blessed this new federal interagency group, businesses will find it much more difficult to object to any regulations they may propose.

    This also raises the specter of “Baptists and bootleggers,” a term coined by economist Bruce Yandle to describe unlikely alliances between interest groups with different intentions pursuing the same goal. Both Baptists and bootleggers favored Prohibition, but for clearly different reasons: one group viewed the law as an exemplar of moral behavior while the other saw it as a means of eliminating their competitors from the marketplace. With respect to the new federal efforts on fracking, there is the possibility that the large companies lauding the executive order and the environmental groups opposed to fracking will eventually settle on costly regulations that make it difficult for smaller rivals to compete with the big energy companies. For example, the American Petroleum Institute has been vocal in its support of the Obama administration, but this interest group represents on a small percent of producers; roughly 95 percent of oil and gas wells are developed by independent producers. Businesses cheering the news of a new regulatory body should be enough to raise anyone’s eyebrow.

    Natural gas is an important component of America’s energy future. Currently, roughly 25 percent of the nation’s energy is derived from natural gas, and shale gas—the production of which relies on technologies such as fracking—is playing a significantly larger role in production. Just a decade ago, shale gas accounted for just 2 percent of natural gas production; by 2011 that figure had jumped to 30 percent. The rush for new federal regulations may impede such advances, unnecessarily increasing energy prices for consumers and businesses.

    New technologies such as hydraulic fracturing, 3D seismic imaging, and horizontal wells have revolutionized energy markets in the United States—to the point that the nation could become the energy powerhouse of the next century. Yet innovation and development require the flexibility to compete in the market for energy. Anointing a new group of federal regulators to oversee this emerging market all but assures that new and additional burdens will be placed on those trying to compete in this marketplace, reducing the potential benefits for American consumers and businesses.