Cost of regulation

Oct. 4, 2010
A federal agency busy bringing industrial America to heel will get mathematics wrong from time to time—especially, it seems, when the calculations relate to costs of its manipulations.

A federal agency busy bringing industrial America to heel will get mathematics wrong from time to time—especially, it seems, when the calculations relate to costs of its manipulations.

So it goes at the US Environmental Protection Agency, which is regulating emissions of greenhouse gases despite a thunderous absence of public enthusiasm for its takeover of the energy economy. The agency is acting under a 2007 Supreme Court decision that ruled it had Clean Air Act authority to control greenhouse gases as pollutants if it determined they endanger the public. Naturally, the endangerment finding became an early item of business for activists President Barack Obama installed in key environmental positions. Since then, although congressional efforts to enact climate-change legislation fizzled once costs became clear and reasons to act turned cloudy, EPA has charged ahead.

Trumping interests

In the Obama administration, environmental regulation often trumps other national interests, including constitutional scruples. For the sake of regulatory expedience, EPA is implementing a rule that confines enforcement to large, conspicuous emitters of greenhouse gases, even though the enabling legislation makes no such distinction. Little stands in the way of this EPA.

Worry about economic consequences certainly does not. In some cases, EPA can't, by statute, let cost stop it from regulating. But since Obama became president, the agency has been looking for products of economic activity to regulate—from dust to dioxin to ozone (in yet another toughening of standards that already are sufficient and effective). And when it does consider cost, the otherwise swashbuckling EPA can be remarkably modest about the prospective effects of its endeavors.

The Gas Processors Association thinks EPA has underestimated costs by orders of magnitude in its proposed rule on mandatory reporting of greenhouse gases emitted by oil and natural gas systems. Its concern focuses on two parts of the rule.

One part would require oil and gas production, gathering, and processing operations to be aggregated for reporting purposes. GPA says this approach conflicts with current Clean Air Act regulations and would greatly increase reporting requirements. For example, the statute has a well-established definition of a gas processing plant, which doesn't include stand-alone gathering system compression facilities. The law treats those facilities separately for reporting and for testing against an applicability threshold of 25,000-tonnes/year (tpy) of carbon dioxide-equivalent. Other EPA programs treat gas processing plants discretely, too. Aggregating midstream segments for a single rule would create confusion and subject all midstream facilities, regardless of size, to new reporting requirements, GPA says.

GPA's other main concern is with a requirement for direct metering of greenhouse gases. The group says emissions can be estimated with established emission factors, process simulations, or engineering calculations.

The group has been communicating its worries about these and other parts of the rule to EPA and on Sept. 7 challenged the agency's cost estimates in a presentation to the Office of Management and Budget. EPA estimated its rule would impose capital costs of $53 million and operating costs of $21.4 million/year on the entire gas industry. GPA told OMB the 1-year compliance cost of the proposal—to just the midstream sector of the gas business—would be $4.5 billion.

Low-balling estimates?

Even GPA's suggestions for improving those rules would cost many times more than EPA's estimates for its proposal. The trade group says a requirement for emissions reporting by each individual source above 25,000 tpy would create 1-year compliance costs to the midstream industry of $1.1 billion. And assessing emissions by methods other than direct measurement would result in 1-year compliance costs of $335 million.

These are not minor discrepancies between cost estimates by the regulator and by the regulated industry. They raise the question whether the agency low-balls estimates in other areas in which it is pressing regulation. There are so many such areas, it is hard to keep track.

For the oil and gas industry, and for all US businesses, that's the biggest problem of all.

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