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Powering Down

Federal regulation is killing energy development.

Nov 21, 2011, Vol. 17, No. 10 • By ADAM J. WHITE
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American energy policy is increasingly defined in terms of what is prohibited, not what is promoted. Coal, nuclear, and natural “shale” gas all have been hampered by the current administration. And the last three weeks have offered two more examples of how America’s byzantine energy laws and policy deter innovation.

River in valley

Last Thursday, President Obama and the State Department announced that they would delay indefinitely the president’s final decision on the proposed Keystone XL pipeline to transport Canadian oil to American markets, despite the State Department’s thorough report and conclusion that the project would cause no improper environmental impacts. And on October 28, a federal court of appeals dealt a surprising setback to Cape Wind, the long-awaited Cape Cod offshore wind farm, which will further delay a project that has been pending before federal regulators for over a decade.

At first glance, these two examples might seem an odd couple. Keystone XL is oil infrastructure denounced by climate-change activists; Cape Wind is clean power championed by the Sierra Club and others as an alternative to fossil fuels. But in fact the two projects are manifestations of the same worrisome trend. The nation’s ability to foster large-scale energy innovation is severely undermined by a regulatory process that is too convoluted and rife with opportunity for partisan manipulation.

Of the two embattled projects, Keystone XL has dominated headlines in recent months, especially after opponents drew thousands of protesters to the White House in early November. The pipeline project could bring up to 830,000 barrels of Canadian crude oil daily—i.e., more than 4 percent of U.S. daily oil consumption—across the Saskatchewan-Montana border, through several other states en route to Oklahoma and Texas.

The pipeline’s economic benefit to the United States is impressive: The Canadian Energy Research Institute estimates that construction and operation of the Keystone XL pipeline would increase our gross domestic product by more than $200 billion between 2010 and 2035, and support close to 85,000 U.S. jobs in 2020.

What has aroused protests is not the pipeline’s immediate effect on the states it crosses; rather, the controversy is due to what lies at the Canadian end of the pipe: “oil sands,” a combination of clay, sand, water, and bitumen, from which crude oil is extracted. Oil sands—or “tar sands,” the detractors’ preferred name despite the actual lack of tar—face two main criticisms: First, there are the surface effects of the mining, including the removal of landscape and the creation of “tailing ponds” where sludge is deposited. Second, oil sands result in more greenhouse gas emissions than conventional oil drilling—perhaps 5 to 15 percent more carbon dioxide, according to Daniel Yergin’s new book, The Quest.

The responsibility for approving or rejecting this pipeline project ultimately falls to the president, under the peculiar legal framework governing international oil pipelines. No statute assigns a federal agency jurisdiction to approve or disapprove international oil pipelines, and since 1968 presidents have filled Congress’s silence by asserting their own authority over this form of international commerce.

The president (or, by delegation of his power, the secretary of state) ultimately determines whether an international oil pipeline will receive a “presidential permit.” The State Department, in turn, reviews the pipeline’s environmental impacts, preparing a detailed “environmental impact statement.” For Keystone XL, the State Department prepared an eight-volume report after consulting with 11 federal “cooperating agencies” (ranging from the EPA and the National Park Service to units of the Agriculture and Energy departments), various state agencies, Indian tribes, and Canadian officials, and after opportunity for public comment.

Keystone XL filed its permit application in September 2008. Three years later, the State Department issued its final environmental impact statement, recommending that the project be approved—or, in the parlance of environmental impact statements, declaring that State “does not regard the No Action Alternative to be preferable to the proposed Project.” And on the greenhouse gas question specifically, State conducted “a thorough review of recent scientific literature on greenhouse gas life-cycle emissions for Canadian oil sands crude” and concluded that the project would result in an additional 3 to 21 million metric tons of carbon dioxide emissions annually—i.e., no more than one third of one percent of the annual U.S. carbon emissions.

Under ordinary circumstances, this should have marked the effective end of the discussion. But protests outside the White House promptly ensued, with participants responding to the State Department’s thorough environmental impact statement with a banner announcing, “Obama: This Is Our Environmental Impact Statement.” Critics also claim that the State Department’s environmental review was corrupted by a third-party contractor with an alleged conflict of interest.

Reacting to the protests, President Obama intervened. Rather than allowing the State Department to make the final decision, pursuant to the governing executive order delegating power to Foggy Bottom, the president announced in early November that he would make the final decision, and perhaps not for “several months.”

While couching his concerns in terms of environmental protection, the president’s political motivations were obvious. The Los Angeles Times, in reporting that a final decision could be delayed until after the 2012 presidential election, observed that delay would allow the president “to at least temporarily avoid antagonizing either the unions that support the pipeline or the environmental activists who oppose it as President Obama gears up for his campaign.”

Finally, on November 10, the president and State Department announced that they would delay a decision until at least 2013, in order to undertake a study of “potential alternative routes in Nebraska.” Ostensibly, the delay would allow the State Department to consider the pipeline’s potential effect on aquifers. But the State Department already reviewed that issue, in detail, in the environmental impact statement.

The president further stressed the need for “an open, transparent process that is informed by the best available science and the voices of the American people.” But his remarks obscured the fact that the State Department’s three-year review had been open and transparent: The final environmental impact statement included a 100-page appendix responding to public comments. And the process’s scientific bona fides were not seriously in dispute. He may have wrapped his decision in the rhetoric of science and good government, but President Obama was simply bowing to environmental activists’ blunt demands for indefinite delay.

That outcome may be politically convenient for the Obama administration, but in the real world it imposes real costs. According to the corporate official overseeing the Keystone XL project, delays could cost the company $1 million per day. And if the State Department presses for rerouting the pipeline, one analyst warned Bloomberg, Keystone XL’s parent company would “abandon the project”—jeopardizing billions of dollars in economic growth and tens of thousands of new jobs.

In New England, some might joke that Keystone XL is getting off easy. For while Keystone’s project has been mired in regulatory chaos for three years, the Cape Wind offshore wind power project is now in its tenth year of trial-by-bureaucrat. Since first applying for federal approval in 2001, Cape Wind endured three years of review by the Army Corps of Engineers, before Congress transferred jurisdiction over offshore wind to the Interior Department, which then began its own review. Five years later, Interior Secretary Ken Salazar finally approved the project, but only after eleventh-hour waffling comparable to President Obama’s Keystone  politicking. Along the way, Cape Wind fended off efforts at obstruction by state officials, federal legislators, and environmental activists.

Unfortunately for Cape Wind, even the Interior secretary’s approval did not end the process. On October 28, the U.S. Court of Appeals for the D.C. Circuit ruled that the Federal Aviation Administration, acting at Interior’s request, had failed to study sufficiently the wind farm’s possible effects on air traffic. The court vacated the FAA’s study and remanded the matter to the FAA for another try.

Depending on how you count, the next round will be the FAA’s fifth bite at the apple. FAA signed off on the project in early 2003. When that approval expired in late 2004, the FAA approved it again. Another review occurred in 2007, when Cape Wind heightened its planned 426-foot wind turbines by a mere 14 feet. Two years later, the FAA terminated that review and began anew, to ensure that “all potential adverse effects are disclosed .  .  . and to ensure that there is no confusion to those desiring to provide comments.”

Cape Wind commenters may not be “confused,” but the rest of us should be. Looking at the regulatory obstacles confronting Cape Wind and Keystone XL––to say nothing of the regulatory mess that currently plagues the nascent shale gas industry—the public is left to wonder: How can any major infrastructure project be built today?

Peter Thiel, cofounder of PayPal, is among the worriers. Speaking recently on America’s declining ability to innovate, Thiel argued that a primary obstacle to innovation has been environmentalism, which “has played a much bigger role than people like”:

You are allowed to manipulate things in the world of bits but not in the world of stuff, because the world of stuff has environmental impacts. And so we’ve had tremendous progress in computers, as well as financial innovation, in the last forty years, but these were really the only things that one was permitted to do.

Similarly, author Neal Stephenson laments that “we have lost our ability to get important things done.” Writing at Wired.com, he argues that the public’s extreme aversion to risk-taking, coupled with bureaucratic inertia and over-lawyering, is “the true innovation-killer of our age.” Looking at the state of energy regulation, it is hard not to agree.  

The difference between yesteryear and today is startling. The Hoover Dam was built in just over five years, beginning with the government opening the bidding process in 1931, and ending with Interior Secretary Harold Ickes approving the finished dam in 1936. Cape Wind, by contrast, will celebrate its tenth year of federal review on November 22 with not a single completed wind turbine to show for its efforts, but a pile of regulatory paperwork almost as high as the Hoover Dam.

Adam J. White is a lawyer in Washington, D.C.

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