David B. Spence

Managing Delegation Ex Ante: Using Law to Steer Administrative Agencies

This work addresses the question of how, and how effectively, elected politicians can exert ex ante influence over the policy choices of regulatory agencies. In order to test the hypothesis that politicians can use choices about the agencys structure and process to influence subsequent agency decisions, I analyze two sets of decisions made by the Federal Energy Regulatory Commission (FERC) in its hydroelectric licensing program during the 1960–90 time period. I find, among other things, that (1) some (but not all) of the tools of ex ante political control were used to effect noticeable changes in the content of FERC decisions over time; (2) among the so‐called structural controls, those that were designed to influence agency preferences appear to have exerted the most significant and lasting effects; (3) among the so‐called procedural controls, those that were designed to increase the transaction costs of making particular decisions appear to have been more effective than those that merely increased the transaction costs of decision making generally; and (4) despite these effects, the FERC appears to have resisted political control, sometimes successfully, during the study period.

Federalism, Regulatory Lags, and the Political Economy of Energy Production

The production of natural gas from formerly inaccessible shale formations using hydraulic fracturing has expanded domestic energy supplies, lowered prices, and could stimulate the replacement of dirtier fossil fuels (coal and oil) with cleaner natural gas. At the same time, shale gas production has proven controversial, triggering intense opposition in some parts of the United States. State and local regulators have scrambled to adapt to the boom in natural gas production, raising the question of whether federal regulators should step in to supplant or supplement state regulation. This article takes a policy-neutral approach to the federalism questions at the center of that inquiry, asking which level of government ought to resolve these policy questions, rather than which level of government is likely to produce a particular favored policy outcome. Consequently, this analysis begins with four economic and political rationales that we typically use to justify federal regulation: (i) the presence of interstate “spillover” effects, (ii) the so-called “race to the bottom, (iii) the need for uniform standards for manufacturers, and (iv) the presence of an important national interest in developing and regulating an energy resource. Applying each of these rationales to the regulation of hydraulic fracturing yields several important conclusions. First, while a few of the externalities of shale gas production cross state boundaries, most are experienced locally. Second, existing federal regulatory regimes offer ample authority to address those impacts that have interstate or national scope. Third, the race to the bottom rationale does not justify federal regulation of shale gas production because shale gas states are not competing for quantity- or time-limited capital investment. Fourth, given that the impacts of hydraulic fracturing are still under study and the subject of considerable ongoing debate, there is no overriding national interest supporting the creation of a comprehensive federal licensing/regulatory regime for shale gas production, at least not yet.

Corporate Social Responsibility in the Oil and Gas Industry: The Importance of Reputational Risk

David B. Spence discusses the magnitude of risks assumed by actors engaged in and affected by oil and gas development. Oil and gas companies face environmental risks, health and safety risks, liability risks, and reputational risks, the management of which is central to the companies’ long-term success. Part I of this article examines the origins of corporate social responsibility (CSR), its rationale, and its growth in the business world. Part II explores some of the dimensions of reputational risk facing modern oil and gas companies, using several high profile examples. Part III explains some of the ways in which oil and gas companies use CSR initiatives to manage the reputational risk.

Backyard Politics, National Policies: Understanding the Opportunity Costs of National Fracking Bans

Some local communities in the United States, particularly in the Northeast, are scrambling to oppose natural gas production enabled by hydraulic fracturing (or fracing, fracking, or hydrofracking) in shale formations. Local opposition to the impacts of fracking is understandable, but recent proposals for national bans ignore a key, more potent threat. Due to a mismatch between the benefits and costs of fracking, on the one hand, and the distribution of political and legal influence, on the other, the voices of those opposed to extraction may drown out the more distant voices of those suffering from the widespread future effects of coal—the primary fossil alternative to gas. Energy policy processes must recognize the opportunity costs of banning gas, including the consequences of continuing to rely on coal as our primary electricity source. The negative environmental impacts of natural gas extraction must be addressed, and our focus on gas ought not to divert attention from the need to develop more sustainable energy alternatives. However, policymakers should not adopt the myopic view advocated by some anti-fracking activists. Rather, policymakers should formulate energy policies that fully weigh the costs and benefits of alternative courses of action and consider the interests of those under-represented in the policy process.

The New Political Economy of Regulation: Looking for Positive Sum Change in a Zero Sum World

Economists and others have long argued that the American regulatory system is unnecessarily inefficient. Critics charge that the system is both substantively inefficient, in that it sometimes specifies inefficient means for achieving a regulatory goal, and procedurally inefficient, in its over-reliance on rules. These arguments have led to a wave of regulatory reform experiments in the federal bureaucracy, many of which seek to promote positive-sum changes in regulatory policy through bargaining among private- and public-sector stakeholders. As several commentators have noted, most of these regulatory reforms have not met expectations in that participants in the bargaining process sometimes forgo positive-sum changes in the status quo. Those same commentators have offered a variety of explanations for these failures, most of which (we argue) are unpersuasive. We propose an another explanation drawn from the standard bargaining literature in economics. We argue that in the context of political conflict over policy changes, participants in these bargaining processes view positive sum policy changes in zero sum terms. That is, they bargain strategically, using their power to veto these positive-sum changes in order to extract further policy concessions from other stakeholders. This revelation has important implications for the future of this kind of regulatory reform.

Ideology vs. Interest Group Politics in U.S. Energy Policy

The political economy of energy policy in the United States is dominated by partisanship and industry lobbying. Both are reflected in the widespread belief that the Environmental Protection Agency (EPA) is engaged in a misguided “war on coal”—despite decades of regulatory delays, the coal industry’s status as the leading industrial source of air pollution, and compelling evidence that the benefits of EPA’s regulations vastly exceed their costs. The politics are compounded by tensions between electricity managers and environmental regulators. Much of this is driven by competing perspectives: EPA tends to have a national focus, whereas grid managers operate regionally. This Article resolves the apparent conflicts by downscaling the regulatory analyses of three high-profile EPA rules that cover conventional pollutants, air toxics, and greenhouse gases associated with climate change. We utilize complementary EPA databases and draw on several model estimates to examine the regional impacts, both costs and benefits, of regulations targeting coal-fired power plants.The political economy of energy policy in the United States is dominated by partisanship and industry lobbying. Both are reflected in the widespread belief that the Environmental Protection Agency (EPA) is engaged in a misguided “war on coal” - despite decades of regulatory delays, the coal industry’s status as the leading industrial source of air pollution, and compelling evidence that the benefits of EPA’s regulations vastly exceed their costs. The politics are compounded by tensions between electricity managers and environmental regulators. Much of this is driven by competing perspectives: EPA tends to have a national focus, whereas grid managers operate regionally. This Article resolves the apparent conflicts by downscaling the regulatory analyses of three high-profile EPA rules that cover conventional pollutants, air toxics, and greenhouse gases associated with climate change. We utilize complementary EPA databases and draw on several model estimates to examine the regional impacts, both costs and benefits, of regulations targeting coal-fired power plants.Overall we find little evidence of significant regional disparities, as the distribution of compliance costs and benefits is roughly commensurate with each regions’ reliance on coal-fired power, and particularly older facilities. This result follows naturally from the benefits of reducing emissions under these rules being predominantly local; as a consequence, regulatory benefits exceed costs at the regional level and typically by large margins. Further, with a few important caveats, we find that while the EPA rules will encourage many power-plant closures, most will occur in electricity markets that have sufficient excess capacity to mitigate potential threats to electricity supplies and reliability. We conclude that while interest group opposition and political partisanship are clearly both important in this context, the latter appears to hold greater sway based on varying levels of political opposition regionally and may - incrementally - be shifting in EPA’s favor.

The Regulatory Contract in the Marketplace

For decades, energy policy has struggled to reconcile two distinct visions for the future: the first seeks ever-more-competitive, efficient, and dynamic electricity markets; while the second seeks an ever-greener mix of electricity generation sources. Caught within this push-and-pull dynamic is the regulatory contract — a nineteenth-century concept that stands more for ordered regulation than competitive markets. This Article examines how piecemeal pursuit of two energy visions has produced mismatches between rapidly evolving markets and governance institutions that cannot change as quickly. To better evaluate these mismatches, the Article develops a framework that accounts not just for market operation and environmental externalities, but also the technical constraints of grid operation and electricity fuels. Relying on the experience of nuclear power, the Article creates an account of how a fuel source can be priced out of the market despite its apparent advantages in reliability and air emissions. With this understanding, the Article evaluates the political economy and governance challenges associated with diverse policy options aimed at better capturing valuable attributes of electricity. Ultimately, this analysis furthers our understanding of the regulatory contract in the marketplace, suggesting an updated vision for its role in mediating the competing goals for electricity markets.

Naïve Electricity Markets

The push toward competition, market pricing, and less regulation in the electricity industry embraces the logic and elegance of markets. It means that participants are exposed to more price risk than in the past, and it represents a narrowing of both the notion of the public interest and the government’s role in protecting that interest. But electricity markets can never resemble the idealized markets of economic theory that have become so popular in conservative policy discourse. This chapter explores why that is. More specifically, it (i) reviews the work of economic thinkers whose work shapes the conservative challenge to regulation and the push for further deregulation, (ii) explores why the economist’s goal of allocative efficiency does not subsume elements of fairness and risk management that are important to voters and policymakers and why economic models continue to have trouble incorporating important lessons from behavioral research, and (iii) explains why these lessons are important to understanding the operation of electricity markets and to an understanding of the problem of ensuring a reliable, reasonably priced energy supply.