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In energy policy, a year marked by clashes in federalism

By Jim Malewitz, –

Stateline’s annual look at the major budget and policy developments in state legislatures across the country.

At a time when market forces are driving huge changes in America’s energy production, federal regulators sparked debate in many state capitals this past legislative session by rolling out new rules for power plants and natural gas drillers.

Environmentalists have largely praised the new regulations, which would limit emissions from coal-burning power plants and restrict hydraulic fracturing, the hotly debated method of breaking apart shale to extract huge amounts of natural gas. But some state lawmakers have described the rules as a “regulatory train wreck” that will do real damage to energy-producing states struggling to recover from the recession.

To public health and environmental advocates, the federal government’s announcement of one of the most influential new regulations seemed like an early Christmas present.

On December 22, 2011, the U.S. Environmental Protection Agency announced it had finalized its Mercury and Air Toxics Standards, the first federal limits on mercury and other types of toxins — such as arsenic, acid gas, nickel, selenium and cyanide — that power plants belch into the air. It’s a rule that requires plants to upgrade technology that captures those pollutants.

“The Mercury and Air Toxics Standards will protect millions of families and children from harmful and costly air pollution and provide the American people with health benefits that far outweigh the costs of compliance,” Lisa Jackson, the EPA administrator, told reporters in a statement echoed by environment and public health experts across the country.

By the agency’s math, reducing emission reduction will prevent thousands of cases of heart and lung disease across the U.S., and more broadly, prevent some 11,000 annual early deaths.

But many in coal-powered states say the rule–set for implementation in 2013 — will eliminate jobs at threatened coal plants, creating new challenges for states still wading in recession.

Five months earlier, the EPA unveiled another landmark regulation: the Cross-State Air Pollution Rule, which will limit smog-forming emissions in 28 states. That action prompted 16 states to take the agency to federal court, in a case that was argued in April and may soon be decided. (Nine states and the District of Columbia, who benefit from the rule, filed a brief in support of the EPA.)

EPA rules, particularly those related to air quality, carry higher costs to states — by far — than any other federal regulations. But the benefits of related healthcare savings are even larger, sometimes measured in billions of dollars per year, according to the U.S. Office of Management and Budget.

Protecting King Coal

But the new federal pollution rules have caused particular angst in coal-producing states such as Wyoming and West Virginia. West Virginia Governor Earl Ray Tomblin, a Democrat, even accused the president of threatening his state’s lifeblood.

“This move by the EPA can lead to only one conclusion–the Obama administration is trying to end the use of coal as we know it,” Tomblin said in a statement after the EPA finalized its greenhouse gas limits for new coal plants. To the joy of environmentalists, the rule is expected to halt the permitting of new coal-fired plants because technology needed to ensure compliance is costly and makes construction uneconomical. “We should be working to make our country more energy independent and create jobs, not harm them,” Tomblin said.

Sensitivities over federal regulations are particularly high in West Virginia, which remains involved in a two-year legal dispute with the EPA and U.S. Army Corps of Engineers over policies that have hindered the permitting of mountaintop mining. Such mining requires the blasting apart of mountaintops to reveal coal seams, a widely used practice in Appalachia and is said to foul local water supplies.

“The EPA has overstepped its bounds, taken that right away and we’re simply fighting to get it back,” Gov. Tomblin said in a March statement after the state filed its final brief.

This year, coal’s market share in the U.S. continued to fall, a trend that is likely to persist, experts say. Aging coal-fired power units are shutting down, and few new coal plants are likely to be built in the future. The U.S. Energy Information Agency predicts U.S. production of coal to fall about 9 percent in 2012, as consumption falls.

Looking at Exports

That reality has spurred coal states to look overseas for new markets. Despite domestic setbacks, coal producers are enjoying a surge in exports, particularly to rapidly growing Asia. Exports to Asia have more than doubled since 2006.

With hopes of expanding Wyoming’s share of that growth, Governor Matt Mead spent several days this month speaking with local officials in China’s Shaanxi Province

But Wyoming and other Western coal producers, such as Montana, will need additional help to further grow their coal exports, because current export terminals are too small to accommodate global demand. New terminals proposed along the coasts of Washington State and Oregon would boost that capacity, as would a port expansion in Texas, where companies are courting investors.

Surging Natural Gas

Coal’s decline in the U.S., which has accelerated since 2008, has been caused by a collision of factors, not just new regulations, experts say.

A prime factor is the abundance of natural gas. Recent discoveries of new shale deposits and the advent of horizontal drilling and hydraulic fracturing — or fracking– pushed natural gas prices to record lows this year, fueling a shift in consumption.

The natural gas industry’s growth might add jobs and tax revenue to sleepy state economies. That has sparked excitement among legislators, especially in gas-rich states like Ohio and Pennsylvania, which are struggling to rebuild their manufacturing sectors. But increased use of horizontal fracking has worried environmental watchdogs, who say it leaves local water supplies vulnerable to contamination. Energy industry representatives dispute that claim.

A Frenzy of Fracking Regs

Environmentalists’ concerns, along with the realization that few state regulatory agencies are equipped to regulate the advanced extraction technique, prompted lawmakers this session to propose a flurry of fracking legislation –130 bills in at least 24 states, according to the National Conference of State Legislatures. Several states enacted regulations dealing with a range of issues, including those requiring chemical disclosure, protection of water quality and fees on the industry, as lawmakers tried to balance economic and environmental concerns.

In May, Vermont became the first state to ban fracking. The Democrat-led New Jersey Legislature also passed a ban in late 2011, but Governor Chris Christie, a Republican, conditionally vetoed it, opting instead for the one-year moratorium he signed this year.

Meanwhile, neighboring New York is planning to lift a moratorium on fracking the state originally enacted in 2008 to give it time to craft new environmental regulations. However, the release of the draft rules last fall prompted vigorous protests from environmentalists, casting doubt on when — or if — Governor Andrew Cuomo would lift the moratorium.

The New York Times reported on Wednesday (June 13) the governor is pursuing a compromise that would permit fracking only where shale deposits reach depths of more than 2,000 feet — an effort to shrink the risk of groundwater contamination while still adding revenue to struggling rural communities. Under the still-developing plan, communities would have a say over whether to allow drilling, a senior official with the State Department of Environmental Conservation told the newspaper. (Several towns in and outside New York enacted bans this year.)

In North Carolina, a new fracking battleground, lawmakers are poised to open the state to fracking. But estimations of the state’s natural gas reserves have been dramatically downsized, meaning the industry’s arrival is unlikely to jolt the economy as originally expected.

The economic prospects appear much better in Ohio, home to the Utica Shale Formation, which contains mostly “wet” gas, a highly coveted resource mixed with several other valuable chemicals that drillers can sell separately. Ohio’s success may come at the expense of Pennsylvania, which offers mostly “dry” gas.

But Ohio is also wrestling with environmental concerns. Governor John Kasich has said he wants to develop the nation’s most environmentally responsible fracking regulations, but environmental groups have criticized the state’s recently enacted rules regulating well construction, handling of water and chemical disclosure. At the same time, Kasich has angered industry representatives and some of his fellow-Republicans by proposing a severance tax on natural gas to offset proposed income tax cuts.

Trend in Disclosure

Chemical disclosure has emerged as a key issue in fracking legislation. Lawmakers in at least 16 states want to require drilling companies to reveal the contents of fracking fluid, the mix of sand, water and toxic chemicals that drillers blast into the ground.

Advocates of the requirement say it will give crucial information to physicians and other responders to drilling accidents. In the past, they argue, a lack of information has prevented regulators from determining if fracking is linked directly to water contamination.

A handful of states, including Wyoming, Texas, Pennsylvania and Colorado enacted disclosure rules before this year’s legislative session. Ohio, and Oklahoma followed suit this year, and Pennsylvania added additional requirements. In February the Indiana Legislature passed a law requiring regulators to draw up such rules.

But environmental and public health groups have criticized most state disclosure rules as too weak. That’s because most state rules allow for companies to decide which chemicals will be classified as trade secrets and therefore remain undisclosed. Rules enacted this year in Ohio, and Pennsylvania require drilling companies to disclose all chemical information to physicians treating a patient who has been exposed, but the rules have come under fire because they prohibit doctors from sharing the information with their peers.

Feds Move in on Fracking

As states continue to enact a patchwork of regulations related to hydraulic fracturing, many environmental health advocates are calling on the federal government to take more regulatory control over an industry long exempted from most parts of the federal Clean Air Act and Clean Water Act.

The Obama administration this year has taken small steps toward regulating natural gas extraction, moving on two rules: one that limits methane emissions during drilling, and a second proposal unveiled in May that sets standards on well integrity and water management on public lands, while requiring disclosure of chemicals. Those moves have angered officials in natural gas producing states, especially those living in western states with wide swaths of public lands.

“These proposed rules will push operators more than they already are to develop other locations where there are no federal lands,” Shawn Reese, policy director for Wyoming Governor Mead, testified to a U.S. House committee in April. “The consequences will be seen in fewer jobs and decreased revenues in western states.”

State officials call the federal rules redundant, saying they will slow the industry’s expansion. States are better equipped to police the industry, they argue, because local regulators have more knowledge of local resources and geography. Lawmakers in Kansas, South Dakota and Utah enacted resolutions calling on Congress to leave fracking rules to the states.

“What results is a federal program that does not easily fit the circumstances in each state, and generally creates extra work for all states,” Reese testified in April. “We think this will be the case for the new air rules, and likely hydraulic fracturing rules as well.”

But proponents of more federal oversight say states are unable to do the job, especially as many state environmental regulators deal with ongoing cuts. In Colorado and West Virginia, for example, just handfuls of inspectors are in charge of overseeing tens thousands of oil and natural gas wells in operation. And state regulators largely reliant on company data to do their jobs.

“You have a downturn in the ability of states…to police the public interest,” says Henry Henderson of the National Resources Defense Council.

That echoes the findings of a report released last year by the EPA’s inspector general. States “frequently do not meet national goals, and states do not always take necessary enforcement actions,” the report says. “In states where enforcement actions are lacking, citizens may be exposed to inequitable health risks.”

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