Unconventional Compromises on Natural Gas Regulation

Posted by Thomas F. Puchner on March 22, 2013

While New York’s natural gas resources remain locked down between perpetual regulatory limbo and extreme polarization among interest groups, recent events have proven that compromise is possible.

Last month, a coalition of environmentalists, industry representatives and lawmakers in Illinois reached a tentative agreement that would allow development of that state’s shale resources, ironically named the New Albany formation, to move forward.  The negotiations were led by Illinois State Representative John Bradley, a democrat who lives in the area prospective for natural gas development.  The negotiations included equal representation from environmental groups, including the Natural Resources Defense Council and Chicago-based Environmental Law and Policy Center.  The so-called “Bradley Bill” (HB2615) is being touted as a “national model” and the “nation’s strictest.”  Provisions in the bill include container storage of waste fluids, management of drill cuttings, air emissions controls, frac fluid disclosure and water quality testing. 

Compromise is apparently not just a Midwest thing, however.  In the heart of Pennsylvania’s Marcellus Shale, a coalition of industry representatives, environmental groups and foundations created the Center for Sustainable Shale Development (“CSSD”), whose founding members include: 

  • Chevron
  • Clean Air Task Force
  • CONSOL Energy
  • Environmental Defense Fund
  • EQT Corporation
  • Group Against Smog and Pollution (GASP)
  • Heinz Endowments
  • Citizens for Pennsylvania’s Future (PennFuture)
  • Pennsylvania Environmental Council
  • Shell
  • William Penn Foundation

More importantly, the CSSD recently announced its development of a voluntary certification program based on performance standards established by CSSD.  Later this year operators will be able to obtain certification through CSSD qualified independent auditors.  The initial 15 performance standards focus on air, climate and water resources.

In light of these developments, it is notable that New York’s Revised Supplemental Generic Environmental Impact Statement and proposed regulations include many measures that are similar to the requirements in these groundbreaking compromises.

D.C. Circuit Issues Mixed Ruling on Biofuels Targets

Posted by Kimberly R. Barnashuk on February 05, 2013

The D.C. Circuit delivered a mixed decision recently regarding an American Petroleum Institute (“API”) challenge to the 2012 EPA Rule (“2012 Rule”) outlining blending requirements for cellulosic biofuels.  Cellulosic biofuel is an advanced biofuel that comes from sources such as switchgrass and agricultural wastes.

Background

Under the Renewable Fuel Standard (“RFS”) program, EPA must promulgate regulations to ensure that transportation fuel includes an increasing percentage of renewable fuel, including “advanced biofuels.”  Each year, EPA then makes “applicable volume” determinations estimating biofuel production for that year.  The applicable volume for a particular biofuel is used to determine how much of that fuel a refiner must purchase each year to comply with the RFS.

In the 2012 Rule, EPA projected 10.45 million ethanol-equivalent gallons of cellulosic biofuel would be produced in 2012, thereby requiring refiners to blend this amount into traditional transportation fuels.  If refiners do not blend the required amount, they must instead purchase “cellulosic waiver credits,” which essentially amount to a fine, for the difference. 

EPA stated it based this prediction on several sources, but also took into account the “objective of promoting growth in the industry,” and that the standard it set “helps drive the production of volumes that will be made available.”  The agency also noted concern that using a lower projection could hurt the market for cellulosic biofuel. In reality, only 22,000 gallons of cellulosic biofuels were produced in 2012.  API argued refiners were essentially forced to purchase credits for “phantom gallons” of cellulosic biofuel.

Ruling

The court held EPA exceeded its statutory authority by basing the unrealistic projections upon the desire to spur investment in the industry.  The court found EPA “did not take neutral aim at accuracy.”  While noting that agencies in the past have been allowed to base a standard or mandate upon future technology, the court explained there was always a connection between the regulated entity and the proposed innovation.  Because the refiners are not the producers of cellulosic biofuels, they have no control over whether or not production reaches a level high enough to allow them to come into compliance.

Despite vacating the 2012 Rule, the court rejected API’s argument that EPA should have lowered the applicable volume of all advanced biofuels.  The court also found that EPA may rely on information from producers of cellulosic biofuels in forming their projections, calling producers an “almost inevitable source of information.”

Implications

While a headline on E² Wire, The Hill’s Energy and Environment Blog, called the decision “a blow to the biofuel industry,” biofuel groups are downplaying the impacts of the decision.  Issuing a joint statement, biofuel producers and industry groups noted the rejection of the argument that EPA must reduce the applicable volume of all advanced biofuels.  The groups also noted EPA is not prevented from setting targets in the future as long as the information available demonstrates the volumes are reasonably achievable.

There is no denying the potential impact upon investments in cellulosic biofuel production that may result from such uncertainty in EPA targets from this point forward.  EPA is faced with the task of basing projections off of an industry in its early stages of growth, with little information available.  The potential exists for a significant reduction in the blending requirements in the future, which could halt, or at least depress, investment in the field. 

On January 31, EPA released its 2013 RFS proposal. To calculate the percentage standard for cellulosic biofuel for 2013, EPA used an applicable volume of 14 million ethanol-equivalent gallons. The API said in a statement that the proposed rule ignores the recent decision.  However Renewable Fuels Association President Bob Dineen has suggested that this number may ultimately prove to be a conservative estimate as cellulosic biofuel is now finally beginning to be produced on a commercial scale.

A Post-Tax Credit "Incentive" for Renewable Energy Development

Posted by Susan Marriott on July 25, 2011

The U.S. Senate’s recent vote to repeal $5.4 billion worth of ethanol subsidies indicates an uncertain future for many renewable energy incentives.  In fact, the current climate in Congress appears generally hostile towards subsidies for any energy sector, with Democrats calling on Republicans to cut oil and gas subsidies and Republicans calling for the elimination of renewable energy subsidies.  With renewable energy subsidies on the table as part of ongoing deficit-reduction negotiations, Congress will need to consider other policy options and tools if, after losing significant subsidy support, renewable energy is going to be able to compete economically with fossil fuels. 

There are other options for incentivizing renewable energy even if certain current subsides are reduced or eliminated.  A recent bi-partisan Congressional Research Service (CRS) report discusses allowing the renewable energy sector access to the master limited partnership (MLP) business organizational form which can have significant tax benefits, attract additional capital, and stimulate lower-cost investment in renewables.  The oil and gas extraction industry has had access to the MLP structure since it was first established in the 1980s.  The MLP structure would allow renewable energy companies to be treated as partnerships for tax purposes but behave as corporations with access to public equity markets to obtain greater amounts of capital.  The CRS report cites a number of concerns to consider, such as narrowing the U.S. corporate tax base and the possibility of renewable energy investments being used as a tax shelter.  Allowing the renewable energy sector access to the MLP structure would, however, level the playing field with fossil fuels, which have enjoyed this benefit for decades.

"Tailoring" of the Environmental Protection Agency's Greenhouse Gas Agenda

Posted by David P. Flynn on May 05, 2011

A key input into increased development of renewable energy projects in the U.S. is, and will continue to be, driven by U.S. EPA’s efforts to regulate greenhouse gasses (“GHG”).  The nature and scope of GHG regulation, and Congress’ role in that effort, will be a material input into the renewable energy market.  I encourage you to read an article authored by Susan Marriott and me, entitled “‘Tailoring’ of the Environmental Protection Agency’s Greenhouse Gas Agenda” in the April 2011 edition of The Metropolitan Corporate Counsel. This article discusses the ongoing saga of efforts to regulate GHG’s, and the potential impacts to renewable energy in the U.S.

Renewable Energy and Tribal Nations

Posted by David P. Flynn on March 18, 2011

On January 19th U.S. Energy Secretary Steven Chu announced a new initiative to promote tribal renewable energy development. According to the DOE’s announcement, up to $10 million will be made available through DOE’s Tribal Energy Program to support, among other things, renewable energy projects on tribal lands.

In many ways, tribal nations are well positioned to move forward with renewable energy projects that provide energy for their use as well as sale to off-nation consumers. These projects also can provide much-needed economic development opportunities for tribal nations. Whether it is available land to support closed-loop biomass projects, proximity to market, or the availability of other federal programs that encourage economic development or tribal lands, tribal nations can play an important role in expanding a sustainable renewable energy portfolio in the U.S.

A number of tribal nations have identified renewable energy as a viable, long-term economic growth opportunity. The just-announced DOE funding, in combination with other federal programs, may help create a viable renewable energy program for a number of tribal nations across the country, and help them grow and diversify their economy.

Will Obama's Regulatory Review Order Help Renewables?

Posted by David P. Flynn on March 14, 2011

On January 18, 2011 President Obama signed an Executive Order to improve federal regulation as well as review existing regulations that may be outmoded or ineffective.

The Order, among other things, looks to coordinate regulation across agencies, reduce duplicative or overlapping regulations, and to foster increased participation by industry, experts and other stakeholders in the regulatory process.

This regulatory review could be a significant benefit for the renewable energy sector. Given the myriad of complex regulations that touch on this space, across federal agencies and departments as diverse as agriculture, energy and defense, a systematic, comprehensive effort to coordinate and rationalize regulations, incentives and tax treatment across the federal government could be a significant benefit in moving projects forward.

Should procurement of renewable energy by the Department of Defense mesh with Department of Agriculture programs that impact biomass? Wouldn’t it make sense for IRS regulations that impact renewable energy to be consistent in definition and treatment across departments and agencies? These seem like common sense, but do not always work this way.

A more coordinated, less burdensome renewable regulatory program, that works across the whole of federal government, would lead to a more rapid development of an increasingly robust renewable energy sector in the U.S.