It has been said that governments do three things: tax, spend and
regulate, and regulation is the least understood. While every industry
is regulated to some degree, apart from those directly involved, most
people arenʼt aware of the day-to-day complexity involved in developing
and implementing an effective regulatory framework. Itʼs sort of like a
referee at a sporting event - while important to the game, the best are
the ones you never know are there.
Regulation occupies a unique role. It is intended to guarantee a balance
in meeting the goals and interests of government, consumers, and
industry in an impartial, transparent and accountable manner.
Governments want to ensure that their policy objectives are met.
Consumers want to be assured that they are being provided a safe and
reliable service or product at a fair price, while industry needs a
rational and predictable set of rules allowing a reasonable return. This
is a difficult balancing act, and usually works quite well until
something draws attention to the need for changes. It could be an event
that reveals an underlying deficiency in the regulatory process itself,
the introduction of new technologies, changes in economic or market
conditions, or simply evolving objectives and concerns of the actors
involved. Regardless of the cause, what typically follows is increased
attention to regulation and calls to "fix" the regulatory process.
Unfortunately, here is where regulation as the least understood of
governmentʼs roles comes into play, since sometimes these fixes threaten
the regulatory balance.
This is what is happening in the energy sector posing a major challenge
to implementing a sensible and balanced long-term energy policy. Three
selected cases over the summer starkly illustrate this dynamic and the
importance of regulation.
First, the oil spill in the Gulf of Mexico has led to clarion calls in
the government and amongst citizens and interest groups to strengthen
regulation of the oil industryʼs offshore drilling practices. The Obama
administration has imposed a moratorium on deepwater drilling in the
Gulf until November and revamped the regulator overseeing offshore
drilling. In addition, legislation in the House and Senate is under
consideration that would strengthen regulatory standards for offshore
drilling. Steps being discussed include stricter environmental
standards, enhanced operational reviews and inspection regime, and
changes in leasing federal lands and waters for energy production. The
oil and gas industry is worried. Bruce Vincent, chairman of the
Independent Petroleum Association of America has stated, "Letʼs hope
itʼs not our Three Mile Island," implying this move toward more
regulation could be draconian enough to threaten the sustainability of
the offshore drilling business.
Second, on June 21 the Public Service Commission of Maryland declined to
approve Baltimore Gas & Electricʼs (BG&E) proposed Smart Grid
initiative that included the installation of 2 million smart meters for
residential and commercial customers and a Smart Energy Pricing program
to replace its existing rate schedule. Competing regulatory interests
were again at play. The utility was looking to modernize its
operations, improve efficiency, and save consumers money in the
long-term - BG&E estimated that the initiative would save customers
$2.6 billion over 15 years. Moreover, the policy objectives of both the
federal and Maryland state governments strongly support the smart grid
as a necessary foundation for increased efficiency, expanded renewable
supplies, and the electrification of transportation. Specifically, the
regulatorʼs approval was required in order for BG&E to receive a
$200 million grant from DOE to help fund the initiative. BG&E was
also disappointed since it believed that the initiative would support
the Stateʼs EmPOWER Maryland initiative calling for a 15% reduction in
energy use by 2015.
But the Commission did not approve the initiative and its cost recovery
approach primarily citing the impact on consumers, stating the proposal
"asks BG&Eʼs ratepayers to take significant financial and
technological risks, and adapt to categorical changes in rate
design...in exchange for savings that are largely indirect, highly
contingent, and a long way off." BG&E has since re-submitted a
revised proposal, and on August 13, the Commission approved it. But
smart grid proponents warn that "without state commissions approving the
business cases for advanced meters and the smart grid, this is not
going anywhere," according to Ahmad Faruqui, an economist and principal
at the Brattle Group.
Finally, on August 3 the New York State Senate approved a measure that
would establish a moratorium on new drilling permits for shale gas in
the New York portion of the Marcellus shale formation until May of 2011.
The full Assembly has yet to take up this measure. Advocates of shale
gas point to the benefits of producing a clean, domestic energy source
that provides jobs and other economic benefits for the state. In
particular, natural gas from shale is viewed as an opportunity to
back-out the use of coal substantially in power generation thus reducing
CO2 emissions. Opponents warn of harmful environmental impacts -
especially on water resources - of a process that combines horizontal
drilling with the use of hydraulic fracturing.
The intention is not to debate the various viewpoints in each issue.
Rather, as we deliberate on the difficult task of formulating an energy
policy that balances security, environmental, and economic objectives,
letʼs not forget how critical regulation is. Virtually all of the most
important policy pathways under discussion require scaling what Peter
Fox-Penner has termed the "regulatory mountain." Look at any issue and
you see the vital role of regulation: carbon capture and storage,
nuclear power, electric vehicles, solar energy, and distributed
generation, to name a few.
The message here is: good regulation is key to a smart energy policy;
and good regulation properly balances the interests of government,
consumers and industry. Itʼs incumbent on all stakeholders to keep this
in mind, and work together to maintain regulatory balance and achieve
our energy goals.
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