Forum Experts Comment on Proposed Fracking Rule

We appreciate the opportunity to comment on the Environmental Protection Agency’s (EPA) proposed regulation, titled “Oil and Natural Gas Sector: New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants Reviews.”  Our comment addresses three aspects of EPA’s proposed rule.

First, we are concerned the proposed rule does not accurately take into account potential employment impacts from an entirely new regulatory apparatus.  The President’s Executive Order (13563) made clear that agencies should focus on “promoting economic growth, innovation, competitiveness, and job creation.”  Yet, this proposal makes tenuous employment claims and prescribes strict new emission limits rather than structuring a regulatory environment that promotes a robust, clean natural gas industry.

Second, the proposed rule imposes more than 625,000 annual compliance hours, some of which will fall disproportionately on small well owners and operators.  We are concerned that significant paperwork requirements on small entities could impose a “significant economic impact” under the Regulatory Flexibility Act. 

Finally, we are concerned that these rules attempt to regulate stationary sources of greenhouse gases beyond the expressed target of volatile organic compounds (VOCs) under the Clean Air Act (CAA).  The proposed rule aims to reduce more than six times the amount of methane (3.4 million tons) as it does VOC emissions (540,000 tons).  Because EPA is still in the process of regulating greenhouse gases, we believe it is premature to establish a competing regulatory structure for an industry that could face a new set of rules in 2012.  

Executive Order 13563

In President Obama’s EO 13563, he ordered, “Our regulatory system must protect public health, welfare, safety, and our environment, while promoting economic growth, innovation, competitiveness, and job creation.”  However, as EPA concedes in its formal cost-benefit analysis and Regulatory Impact Analysis (RIA), there are considerable costs for the proposed action.

With more than 625,000 annual paperwork burden hours, and a mean hourly wage of roughly $29.88 for regulatory compliance officers (according to the Bureau of Labor Statistics), natural gas firms face labor costs of  more than $18 million for compliance alone.  This burden is dwarfed, however, by $740 million in capital and “annualized engineering costs.”  We will further address our concerns over these costs in Section III, below.

Regarding the employment analysis, EPA expressed greater benefits than costs related to the proposed regulation and noted that the new rules could create jobs.  After rejecting Morgenstern, et al. (2002), used in previous studies to suggest that environmental regulations generally have a statistically insignificant impact on employment, EPA calculated that the proposal could have a stimulative effect on employment.

“Because of the estimated fall in prices in the natural gas sector due to the proposed NSPS, prices in other sectors that consume natural gas are likely to drop slightly due to the decrease in energy prices.  This small production increase and price decrease may have a slight stimulative effect on employment in industries that consume natural gas.”

We view this qualitative job creation claim as somewhat specious.  After rejecting what has been to-date the most cited study in EPA’s employment analyses, the Agency derives a tenuous causal chain utterly devoid of empirical support.  In our view, EPA is now claiming that billions of dollars in long-term regulatory costs and 625,000 annual compliance hours will create, not eliminate, jobs.  We urge EPA to examine the proposal’s job creation claims and the potential employment impact within the affected natural gas sector.

Compliance Burden on Small Businesses

The Small Business Administration (SBA) calculates that compliance costs for environmental regulations are 365 percent more expensive per employee for small firms than larger firms.  The oil and natural gas industry is dominated by small firms, with well more than half of firms employing 20 or fewer individuals.  Small firms also drive investment in and development of energy technologies, which means that the same innovative companies that are sparking a boom in natural gas development will be crippled by new compliance costs that weigh heaviest on their finances.

Despite this significant burden, which EPA estimates could impact 16 percent of small oil and natural gas firms, the Agency certified that neither the proposed NESHAP nor the proposed NSPS standards will have a “significant economic impact on a substantial number of small entities” (SISNOSE).  We urge EPA to take into account SBA’s data during promulgation of the final rule.

In addition, we recommend that EPA reconsider its finding that the proposed rule does not impose a SISNOSE.  EPA calculates that entities subject to NSPS would take 110 hours per response, with 16 responses per year (1,760 annual hours).  Although there is no official definition of “significant impact,” there are several examples in the legislative history of the Regulatory Flexibility Act.  For example, as few as 175 hours per year for record keeping could trigger the significant impact threshold, though burdens below 175 hours could also be significant depending on the industry and other factors.

We are aware that “significant economic impact” is not statutorily defined and is an inexact standard for agencies.  However, we urge EPA, like the Department of Health and Human Services (HHS), to adopt a flexible, but quantifiable standard for small entities.  HHS determines that a rule is significant “if it would reduce revenues or raise costs of any class of affected entities by more than 3 to 5 percent within five years.”  As HHS details, a burden as little as one to two percent could also be significant, depending on the industry’s share of profits as a percentage of revenue.  Inclusion of profit data as a percentage of revenue would be helpful in determining whether new regulations constitute a significant impact.

For EPA’s proposed rule, estimates of “annualized compliance costs to revenues” range from less than one percent to greater than three percent.  Yet, EPA conducted no analysis on how paperwork burdens would affect at least 62 firms considered small entities, and EPA admits that several firms would “have impacts greater than 3 percent” of revenue.

We urge EPA to determine whether 1,760 response hours per entity constitutes SISNOSE and if EPA can fashion a more exacting standard for “significant economic impact.”  

EPA’s Regulation of Stationary Sources of Greenhouse Gases

We are concerned that the focus of the New Source Performance Standard (NSPS) under this rule is not VOC emissions, but methane emissions.  Although EPA is under a consent decree to issue a rule, EPA’s sole legal responsibility under the decree is the regulation of sulfur dioxide and VOC emissions.  EPA’s analysis suggests that the proposed methane reduction is roughly 3.4 million tons, compared to VOC reductions of 54,000 tons.  In light of these reductions, this proposed regulation seems to exceed the scope of the consent decree with a hastily constructed regulatory apparatus for methane emissions from oil and natural gas operations.

Considering that EPA has not yet finalized comprehensive regulation of stationary greenhouse gas sources, we find it premature to regulate methane emissions from this industry.  We are particularly concerned because of the compliance burden resulting from reporting and examining more than 20,000 well completion and recompletion events each year.  Though we commend EPA for suggesting and seeking comment on several innovative compliance approaches, we also note that each approach would still add a considerable burden to the regulatory agencies and owners and operators of hydraulically fractured wells. 

Similar concerns about burdensome compliance costs prompted EPA to issue a proposed tailoring rule for greenhouse gas emissions from stationary sources.  Perhaps a similar restriction in compliance requirements – or an incentive mechanism outside the regulatory process – is appropriate.

EPA’s own Natural Gas STAR program has eliminated more than 904 billion cubic feet of methane emissions since 1993 through voluntary participation.  Industry responded so well to this program precisely because of the intertwined environmental, economic, and operational benefits of emissions reductions.  As the RIA for this proposed rule indicates, industry stands to make money under this regulation because of factors similar to those that have made Natural Gas STAR so successful.  If this were the case, we should expect to see the industry rushing to employ the tactics included in the regulation.  That they are not indicates that EPA’s analysis may be overly optimistic.

Nevertheless, if the industry does stand to gain from the prescribed technologies and processes included in this regulation, EPA, regulatory agencies, and owners and operators of wells should find it far more cost effective to expand voluntary programs through similar mechanisms.  Perhaps EPA should evaluate the efficacy of an expanded Natural Gas STAR program for VOC reductions or consider similar, nonbinding programs to encourage industry participation and reduce the costs of emissions abatement in advance of pending greenhouse gas regulations. 

Conclusion

Thank you for the opportunity to express our views to EPA on this important issue.  We support sensible regulations to improve the development of domestic fossil resources through hydraulic fracturing, and implore EPA to consider our comments as they craft the final rule.  If you have any questions about our comment, please do not hesitate to contact us via phone or email.   

Sincerely,

Sam Batkins                                                           

Catrina Rorke

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