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Regulatory: No regulation is sometimes the best option

There is always an economic cost associated with regulation, and it’s not always worth it

When regulation is imposed there is almost always a corresponding discussion of its cost. Regulation, almost by definition, detracts from economic production and therefore results in a cost. The regulation may be justified on other grounds, such as safety, health, security and the like. However, rarely does regulation result in increased economic output, although some may argue that certain regulations ultimately result in increased production.

Representative Rob Portman has written in the Wall Street Journal about the coming “regulatory cliff” which he argues would greatly harm the economy. The regulatory cliff refers to numerous proposed federal regulations that could go into effect in 2013. Among the examples he cites is a proposed EPA ozone rule, which would cost manufacturers and other employers an estimated $90 billion annually. The rule has been withdrawn for now.

Due to the economic cost, there are times when no regulation is best. Professor Thomas DiLorenzo of Loyola University has written about the forgotten benefits of deregulation. He cites two clear examples where deregulation of industries provided clear benefit without significant detriment to the public.

The first example is airline deregulation. Following deregulation, airfares fell by about 45 percent, leading to the modern boom in air travel. While air travel was either a luxury or a business necessity prior to deregulation, it is now a staple in the lives of many ordinary citizens.

The other example cited by Professor DiLorenzo is interstate trucking regulation. Under trucking regulation, a carrier was required to obtain a “certificate of public convenience” from the Interstate Commerce Commission (ICC) prior to transporting goods by truck. Certificates were difficult to obtain and often resulted in trucks making deliveries and returning empty to their bases of operation. Once trucking was deregulated, it became more efficient and additional competitors entered the market, driving costs down. It is estimated that ICC trucking regulation was costing consumers as much as $8.9 billion per year.

Which brings us to the most significant recent example of the benefit of deregulation: hydrofracturing (fracking). Fracking involves injecting large amounts of sand, water and chemicals deep underground at high pressures to extract oil and natural gas from rock formations. The injected fluids create or enlarge cracks in subterranean rock formations, which allow oil and gas to be removed.

EPA regulation of this procedure was specifically limited in the Energy Policy Act of 2005. The act included a provision which excluded hydrofracturing from the EPA’s underground injection control (UIC) regulatory authority. The statute excludes from regulation “the underground injection of fluids or propping agents (other than diesel fuels) pursuant to hydraulic fracturing operations related to oil, gas, or geothermal production activities.”

With modern fracking and drilling techniques, coupled with the regulatory exemption mentioned above, oil, and especially gas production from these previously unreachable sources of oil and gas has exploded. DOE reports that domestic fossil-fuel production will reach an all-time high in 2012. The U.S. will produce enough energy to meet more than 80 percent of its domestic needs. One author has noted that over the last four years U.S. natural gas production has increased by 20.5 percent and oil production is up 24 percent. North Dakota alone will soon produce more oil and gas than OPEC member Qatar. At the same time, new shale fields continue to open up across the country.

The EPA, not to be left out, is undertaking various studies of fracking and its effects on the environment. In one recent EPA publication, the agency set forth its regulatory framework as follows: “Hydraulic fracturing for oil and gas production wells is typically addressed by state oil and gas boards or equivalent state natural resource agencies. However, EPA retains authority to address many issues related to hydraulic fracturing under its environmental statutes. The major statutes include the Clean Air Act; the Resource Conservation and Recovery Act; the Clean Water Act; the Safe Drinking Water Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Toxic Substances Control Act; and the National Environmental Policy Act. “

In summary, while EPA is working to develop a regulatory framework for fracking, the current exemption from EPA regulation has led to a massive energy boom in the U.S. The lack of regulation is quickly leading to U.S. domestic energy independence, once again proving that sometimes no regulation is the best regulation. 

Contributing Author

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Craig Metcalf

Craig Metcalf is a Shareholder with Kirton McConkie. His practice emphasizes intellectual property and appeals as well as mediation and arbitration. He can be reached...

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