Playing the Long Game on Energy: Avoiding Pendulum Politics and Regulatory Risk
Last week, the Donald Trump administration announced its decision to leave the Paris Agreement. The decision was treated by many government and corporate leaders around the world as an immediate and abrupt abandoning of the global climate effort. In reality, the process for withdrawing from the agreement is lengthy, and the concrete steps for meeting the U.S. commitment under the agreement were already being targeted for reconsideration through the deregulatory agenda launched during the first 100 days. Indeed, the Trump administration has embarked on an ambitious agenda to roll back regulation that it considers “harmful to U.S. workers, energy production, and the U.S. economy.” This includes a long list of policy actions, among them dialing back methane emission regulations, modifying the Waters of the United States rule, revisiting greenhouse-gas emission standards for new motor vehicles and power plants, and revising the 2017–2022 oil and gas leasing program. The Trump administration has also committed to streamlining permitting for major infrastructure projects and has instituted a government-wide review of any and all regulations that fit the description of harm outlined above. Relative to what the energy industry expected under a Hillary Clinton administration, the impact of the shift in regulatory approach feels immediate. In reality, a great deal more work needs to be done to advance this agenda, and the more ambitious the administration’s aims the more risk they introduce into the reform process. While the assumption is that many in the energy industry will be in favor of rolling back regulation as much as possible, the reality may be quite different once the process plays out, and early signs of support for a more cautious approach are already evident. Following are four main reasons why deregulation won’t be as simple or straightforward as some have assumed.
Process, Process, Process
On the one hand, the first 100 or so days of the Trump administration have been remarkably industrious. The president has published almost a dozen executive orders or memoranda calling for changes to policies affecting the oil and gas sector.
However, executive orders mostly constitute calls to action. They direct agencies to undertake a process to implement modifications. For existing policies that take the form of regulations or other actions subject to the Administrative Procedures Act, the process of modification involves several steps that are circumscribed by law.
For example, in order to change the Waters of the United States rule, the Environmental Protection Agency (EPA) will need to issue a proposed rule; take comment on the proposal; issue a final rule; and then defend the final rule against the inevitable legal challenges. In that litigation, the Trump EPA will bear the burdens of providing a “reasoned explanation” for reversing course and demonstrating that its modified approach is consistent with the Clean Water Act.
In other words, revising multiple rules requires multiple rulemakings. Each will take time to implement. And each will be subject to the uncertainties of litigation. For these reasons, oil and gas companies are hedging their bets on the Trump deregulatory agenda.
Personnel Is Policy
Carrying out the ambitious rule-making agenda contemplated by the Trump administration not only will take time, it will also require a full complement of officials at multiple agencies. In particular, promulgating litigation-proof rules will require not just able cabinet secretaries, but also a full roster of qualified “doers”—deputy secretaries, assistant administrators, general counsel, and senior advisers.
Yet, the Trump administration is woefully behind in staffing these positions. The administration is currently an army of generals without colonels. Most of the key slots are currently held by career civil servants acting in senior positions. Furthermore, the high-profile controversies facing the White House might start discouraging qualified people from putting their names forward for consideration.
Understaffing in senior agency posts is putting the Trump deregulatory agenda at risk in two ways. First, it will delay what already will be a multiyear process modifying regulations. Second, it could mean that the deregulatory rulemakings are not crafted with the kind of care needed to withstand legal challenges.
Understaffing could also jeopardize another element of the Trump agenda of particular interest to the energy industry: streamlining the permitting process for major infrastructure projects. The most often cited example of this is the slowness with which the administration has filled the vacant commissioner positions at the Federal Energy Regulatory Commission (FERC), leaving FERC without a quorum and unable to carry out its role in moving infrastructure forward. Most recently, the Trump administration has made a point of submitting a budget proposal with steep cuts in agency personnel. At EPA, for example, the Trump administration has proposed reducing staffing levels by a fifth or more. Administration officials have touted these cuts as necessary to reduce waste and to curb the tendency of agencies to extend their policy reach beyond their statutory missions. However, there is a fine line between rightsizing and undersizing; at some point, staff cuts could undermine the objective of expedited permitting. To be sure, in many instances, permit reviews are held up by temporizing agencies engaged in “paralysis by analysis.” But delays sometime result from resource constraints. If the Trump administration follows through on its proposed staffing cuts, it might discover that its permit streamlining agenda suffers.
Federalism and Its Discontents
A key plank of the Trump administration’s deregulatory agenda is devolving regulatory and permitting authority from the federal government to the states. The theory is that states have better knowledge about local resources and the needs of local stakeholders.
Shifting more authority to the states could have different consequences for different segments of the energy sector. On the oil and gas side, it could make life easier for producers in some instances. For the most part, states in the shale regions are knowledgeable about and hospitable to production activities. But producers only benefit if their product can get to market, which requires pipelines and ports. In those segments, state permitting authorities often have proved to be more of an obstacle than their federal counterparts. For example, New York has recently wielded authorities delegated to states under the Clean Water Act to block or delay a number of interstate natural gas pipeline projects. And projects to develop liquefied natural gas terminals and coal terminals have encountered heavy weather in obtaining needed approvals from state officials in Oregon and Washington. In the final analysis, greater devolution of regulatory and permitting authority to the states is not a panacea for the energy sector. North Dakota is one thing. New York is quite another.
On the electric power side of the equation, utilities and power producers will increasingly face an even more complex patchwork of policies and regulations as states seek to advance or roll back a series of environmental and clean energy policies that were once notionally coordinated at the federal level. This is not entirely new for the electric power sector, but the burden on state and regional entities in the power sector is only likely to increase.
Increasingly companies and policymakers are talking about “pendulum risk”—this is the idea that each successive administration seems to be going further than the last in over- or under-regulating the energy industry. This pendulum effect has an overall negative impact on the investment outlook in North America. In this instance, many in the industry are worried that an effort by the Trump administration to shift aggressively to the right on regulation could spur a future administration to shift just as or more aggressively to the left. Energy companies necessarily have long planning horizons and make large capital investments that they need to be resilient; such investments fare better in a somewhat stable regulatory environment. To be sure, most companies generally prefer less and more-reasonable regulation to the alternative, but most are also averse to having public policies lurch from pole to pole with each change of governing party.
Increasingly, some voices in industry are advocating a “mend it, don’t end it” approach to regulatory reform. This position is motivated by three concerns. First, it reflects a calculation that the most aggressive deregulatory options will not survive court challenges. Companies seek regulatory certainty; they prefer changes that will endure across administrations and Congresses. Advocating reasonable regulation rather than deep deregulation is also more consistent with business planning for many energy companies. A number of energy companies have been adjusting their portfolios in anticipation of an increasingly carbon-constrained global economy. These companies prefer a gradual regulatory transition over an oscillating regulatory environment.
Finally, companies are concerned about reputational risk from being associated with any kind of stark assault on environmental, health, and safety regulations. Companies building interstate natural gas pipelines, for example, care deeply about their “social license to operate.” For many of these companies, it is important to demonstrate to communities in which they want to site pipelines that they are taking reasonable steps to minimize methane emissions. Similarly, many large energy companies operate in countries that have deep commitments to addressing climate change and would prefer the existence of a global regime that serves to coordinate and communicate on climate policy.
Neither the decision to pull out of the Paris Agreement nor the regulatory rollback in the United States will play out in immediate terms—both are subject to long lead times, a good deal of work, and likely litigation. As so often goes missed in conversations about policy and regulation, the energy sector is experiencing an immense amount of disruptive change right about now, and the environment for all energy goods and services is hyper competitive. It is an environment in which heightened regulatory risk due to the pendulum-like nature of the U.S. political system is particularly unwelcome. Moderating forces that are committed to the long game will likely have their hands full.
Kyle Danish is a nonresident senior associate with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) and a partner in the office of Van Ness Feldman in Washington, D.C. Sarah Ladislaw is a senior fellow and director of the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). In addition, this publication does not necessarily represent the views or positions of Van Ness Feldman, LLP, or its clients.© 2017 by the Center for Strategic and International Studies. All rights reserved.
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