Reform Don’t Eliminate Energy Regulation

Industry (and the public) are anticipating a major upheaval in energy regulation, as Donald Trump has made it clear that he favors domestic production of energy and especially fossil fuels. Anyone who is involved in the industry knows that regulation has become onerous, partly because of paperwork requirements but also the poor construction of regulations. Don't think so? Read John Lowe's Oil and Gas Law in a Nutshell, which is a mere (sic) 592 pages. Not sure what tree produces nuts that large.

One of the oldest lessons in policy-making is that blanket reversals of a previous Administration's stances, as tempting as that might be, is inefficient. The perfect example of how this approach fails was in 2003, when the Secretary of Defense Donald Rumsfeld denounced the Clinton Administration for having the U.S. military engage in nation-building. Thus, in 2003 he ordered U.S. troops in Iraq to stand aside as looters rampaged across the country, which significantly damaged the country's ability to recover from the reign of Saddam Hussein. Now we have Trump Adviser Myron Ebell saying, "We'll look at what Biden did and put a 'not' in front of it." With Ready Orders and an Energy Czar, Trump Plots Pivot to Fossil Fuels - The New York Times .

A blanket rejection of a previous Administration's policies is based on the assumption that all policies are ideological and not logically designed. Without a doubt the Biden Administration was much more pro-regulation than most Republican governments, but a blanket condemnation of their actions, while easy, has two shortcomings. First, it would undo those regulations which have admirable goals, but also, by making the core motivation for change ideological, it invites a future administration to similarly enact blanket reversals. Industry and the public are then whipsawed by dramatic regulatory reversals and uncertain about the future economic environment.

The automobile industry is facing such a problem now, with the possibility that the subsidy for electric vehicle purchases will be eliminated, reducing demand and forcing automakers to write off some of their investments. Yet the next administration might reinstate the subsidies, forcing another, expensive investment shift in the industry. Regulatory stability is a good thing all else being equal, but if all else is not equal and when regulations are bad, they should be phased out or eliminated, but based on sound economics and science, not popular opinions.

The other lesson for regulation reform comes from the political left, where some argued to 'defund the police.' This was both simplistic policy and an overreach, in effect arguing you can't save a system so destroy it, using a sledgehammer instead of a scalpel. In the real world, numerous police departments have found success by improving training and hiring social workers and psyciatrists to deal with people suffering from mental health crises.

And we've been here before, most notably following the Great Depression. Better regulation of the banking system would have greatly minimized the depth and breadth of the downturn, but many argued instead that capitalism had failed and should be replaced with fascism or communism. Both of those approaches proved to be astonishing failures, expensive in money and more importantly lives.

So, what to do? The first shortcoming in our current approach is not so much the lack or presence of regulation but the tendency to make regulation accretive, that is, constantly adding to existing regulation to create something more like a Rube Goldberg machine (look it up). In part, this is because regulation is not made in a holistic manner, that is, trying to design rules from the ground up, but rather adding new rules to existing ones as problems real or perceived arise. Compare this to the 'Pottery Barn rule' of 'you broke it you bought it.' Colin Powell was said to have warned Rumsfeld of this maxim before the second Gulf War, although apparently not only did he not say that but it isn't a rule at Pottery Barn, nonetheless, there is a simple wisdom to that.

There is a growing public recognition that the regulatory burden has reached a tipping point. A recent New York Times story commented about a proposed housing development, "Every one of its 193 parking spaces is prescribed by the city's zoning code, in dizzying detail." Why Does This Building by the Subway Need 193 Parking Spots? (Yes, Exactly 193.) - The New York Times

Similarly, while some point to the NIMBY problem (Not In My BackYard) as raising costs for, among other things, housing, there are also significant costs added by regulators who are making value judgements for their citizenry. "The state [of California] predicts that mandatory solar panel installations and other new improvements will add nearly $10,000 in the upfront cost of a home — a cost that officials say will balance out over time, due to lower electricity bills. A homeowner will save $19,000 over the course of a 30-year mortgage, [Drew] Bohan said at Wednesday's meeting of the building commission." [Executive director of the California Energy Commission]. California Gives Final OK To Require Solar Panels On New Houses : NPR

A simple calculation shows that even the proponent of the regulation is predicting a 6% rate of return, which is anemic at best and suggests that residential solar panels are not an attractive investment. It also should generate a surge in sola panel investments driven by regulation rather than the marketplace, and as such could easily be reversed under a different state government, causing the solar power industry in the state to collapse.

At a recent U.S. Association for Energy Economics conference in Baton Rouge, Louisiana Attorney General Liz Murrill complained that requiring cost-benefit analysis of new regulations had not proved very helpful because it was so easy to cherry-pick studies to support one's opinion. This is very true, although the answer would seem to be requiring detailed scrutiny of the analyses rather than abandoning the effort altogether. (Which would have the side effect of generating more fees for economists, so maybe I'm biased.)

Ultimately, the point is that regulation is difficult given uncertainty about the science and the economics, but also the interference from interested parties (aka lobbyists) and politicians who rely on ideology first, logic second (or maybe fourth or fifth). I guess my plaintive cry is not 'Woodsman spare that tree/regulation' but 'woodsman, prune that tree/regulation.'