Sparrows Point and Sensible Energy Policy

In a piece two days ago in this space entitled “Maryland PSC Chief Resigns-The Way Forward on Energy Policy,” I used the occasion of Maryland Public Service Commission Chairman Kenneth Schisler’s resignation to set forth some general principles that should guide Maryland’s role in establishing sensible energy policy. While the federal government has—and should have--the leading role in establishing and promoting an energy policy that will move the nation towards the goal of achieving energy security, I explained that states and local governments have a significant role to play as well.

Indeed, in this regard I stated: “Consistent with the above principle concerning the need to think long-term, the PSC and other parts of the state government--and, for that matter, local governments--have an important role to play in facilitating and promoting an increase in energy supplies. While certainly environmental and other legitimate local concerns need to be addressed, too often worthy projects, whether they will increase electricity or natural gas generation or distribution are stymied by state and local officials who are simply responding to a "NIMBY" (Not-in-my-backyrard") attitude by a small group of citizens. Again, legitimate environmental and other concerns should be addressed. But state and local officials have an important role to play in not obstructing the plans of utilities that are willing to invest capital in new plants and other necessary infrastructure, such as natural gas storage facilities or new power lines, to bring on new supplies of energy. Absent the ability to bring on new supply, there will be increased pressure to increase rates for the more limited supply of energy that does exist.”

Lo and behold, shortly after finishing that piece, I learned, as the lawyers say, of a case on point. A federal court in Baltimore held that the Natural Gas Act preempted a local Baltimore zoning ordinance that had the effect of denying an application by AES Sparrows Point LNG to construct a liquefied natural gas terminal at Sparrows Point. The link to the full decision is here. The court examined the text, legislative history, and context of the 2005 amendments to the Natural Gas Act (“NGA”) and concluded that all “clearly reflect the intent of the United States Congress to preempt local governments with respect to the siting of liquefied natural gas facilities.” While the NGA reserves to the states rights and obligations under certain environmental statutes, as the court explained, the act “now governs virtually every step of an LNG facility’s siting, construction, and operation.” In light of the need to increase energy supply consistent with national policy, Congress obviously wanted to give the Federal Energy Regulatory Commission (“FERC”) principal authority to make determinations concerning LNG terminal facilities.

The Baltimore Sun editorialized in “A Clear Message” that “it is hard to argue with the [court’s] legal reasoning.” Nevertheless, it urged local Baltimore officials to continue to try to stop the proposed LNG terminal from being built at Sparrows Point by invoking an environmental statue that is excepted from FERC’s exclusive decisionmaking authority. I don’t know enough about the specific situation at Sparrows Point to know whether such a course by local officials has any merit at all. What I do know is that the court’s decision sends a clear message regarding federal primacy regarding siting LNG terminals that should not be disregarded lightly. There is a more than a bit of a NIMBY tone to the editorial’s conclusion that the proposed LNG terminal “needs a more sensible location.”

There is another proposal involving a new LNG facility presently being held up by local officials apparently succumbing to a NIMBY mindset. Washington Gas wants to increase its natural gas storage capacity at a site it owns in Chillum, Maryland, by constructing a new LNG storage tank. Even though the new gas storage tank would be considerably smaller than two separate gas storage tanks previously located at the very same location until they were decommissioned several years ago, the proposal has run into opposition from close-by citizens expressing concerns about the safety of the facility. Local authorities thus far have stymied the project.

Washington Gas says the new storage tank is needed so that the utility will be less dependent on transporting gas through long-distance third party pipelines, and that by locating the facility close to WG’s pipes that already are in the ground, it will be able to avoid expensive pipeline construction projects that are disruptive to public roadways. And the company maintains that construction of the new storage facility will allow it to buy natural gas when demand and prices are lower and pass the cost savings, as well as the savings in transportation costs, on to consumers. Finally, and importantly, in the highly unlikely event a spill were to occur at the proposed Chillum facility, the project design incorporates numerous safety features that protect the safety of the community as well as the environment.

Because Washington Gas is proposing to construct an LNG storage tank rather than an LNG terminal, the provisions of the Natural Gas Act that were the basis of the court’s finding of federal preemption may not apply to the Chillum proposal in the same way they do with respect to AES’s Sparrows Point proposal. But putting aside the legalities, there is an underlying commonality of principle that is crucial, and that goes back to what I said two days ago: State and local officials have an important role to play in facilitating —not obstructing—projects that will increase the ability of utilities to meet consumers’ needs for energy in a safe, reliable, and environmentally-sound manner. Certainly, as a nation, we will never meet our goal of achieving greater energy independence if state and local officials simply respond to proposals for needed new facilities with a NIMBY mindset.

Maryland PSC Chief Resigns-The Way Forward on Energy Policy

Under intense pressure from new Maryland governor Martin O'Malley, Kenneth Schisler resigned yesterday as Chairman of the Maryland Public Service Commission. In its story headlined "PSC Chief Resigns at O'Malley's Demand," the Washington Post reports that the resignation will give the governor "the opportunity to make good on a campaign promise to create a more consumer-oriented agency." Rick Abbruzzese is quoted to this effect: "There is no time to waste getting professional regulators back on the job--to protect consumers and restore stability for business."

Last year the General Assembly passed a bill which gave the legislature the ability to replace--lock, stock, and barrel--all five members of the PSC, including Chairman Schisler. I criticized this ill-advised bill on the grounds that it was at odds with separation of powers principles that are key to sound governance. These principles prevent a concentration of power in the hands of one branch of government at the expense of a co-equal branch. Specifically, last year's bill represented legislative infringement on the governor's appointment and removal powers regarding agency officials.

The bill also constituted poor policy. It would have set a terrible precedent. The notion that the legislature may just fire all of the PSC commissioners because it disagrees with a rate decision or decisions would certainly not foster the stable regulatory environment that businesses need to make long-term decisions to invest in new infrastructure necessary to secure overall consumer welfare. You can read a few of my pieces from last year on the PSC situation here and here and here. Fortunately, a court agreed with the separation of powers arguments I was making and held the legislature's bill unconstitutional.

Under Maryland law, the PSC is an "independent unit in the Executive Branch of State government" and Chairman Schisler could be fired by the governor before the expiration of his fixed term only for "incompetence or misconduct." But a governor who wants to make life difficult for the head of any agency certainly can, so Chairman Schisler resigned, rather than prolong a nasty fight. His resignation statement on the PSC's website declares: "During my tenure at the Commission I have endeavored to implement the policies enacted by the General Assembly in a fair, impartial and effective manner. My resignation will facilitate the ability of the Public Service Commission to move forward in the important work it must accomplish."

To a large extent, Schisler was simply made a scapegoat for the heated reaction to last year's large proposed BG&E rate increases. The proposed rate increases came after more than a decade of rate stability. After the long-term rate freeze, they were consistent with the plan adopted by Maryland's General Assembly in 1999. That's what Schisler means when he refers to "the policies enacted by the General Assembly." But he is probably correct--hopefully correct--that his resignation will allow the PSC to move forward.

And make no mistake, with energy policy front and center on the national stage--as yet another declaration of the goal of "energy indepedence" is made by yet another president in yet another State of the Union message--it's way past time to approach energy policy with the seriousness it deserves. Obviously, the federal government has an important role to play in establishing sensible energy policy, but so do the state public utility commissions like the Maryland PSC. Over the next several months, the Free State Foundation will be addressing in a forward-looking way, and in more detail, the role the Maryalnd PSC and other units of Maryland government should play in establishing sound energy policy consistent with the national goal of securing our nation's energy indepedence.

But, for now, I just want to highlight the following points:

--Surely one of the important duties of the Maryland PSC is to protect consumers from unreasonable rate increases when marketplace competition does not exist to provide such protection. And, competition does not exist, for example, in all facets of the market for providing electricity to residential and business consumers. But, as a result of the law enacted in 1999 by the General Assembly, which the PSC implemented, the marketplace is working, albeit not as quickly as originally envisioned due to a spike in wholesle energy prices over the past few years, to bring consumers more choice regarding their energy supplier.

--Consumers are not benefited when regulators--or legislators--do not allow utilities to earn a reasonable return on their investment. No business will invest in new plant and spend money to develop innovative new ways to deliver services if it is denied the right to earn a reasonable return. In last year's brouhaha concerning BG&E's proposed 72% rate increase, it was often little-noted that there had been rate stability for over a decade. Sound regulatory policy depends on much more than focusing on one rate increase, however large, in one year. If consumers are educated, rather than used as political footballs, they will understand and appreciate that legislators and utility regulators must take a long-term view of consumer welfare. This is especially true with respect to market segments, such as utilities, that require heavy capital investment to build and maintain infrastructure.

--Consistent with the above principle concerning the need to think long-term, the PSC and other parts of the state government--and, for that matter, local governments--have an important role to play in facilitating and promoting an increase in energy supplies. While certainly environmental and other legitimate local concerns need to be addressed, too often worthy projects, whether they will increase electricity or natural gas generation or distribution are stymied by state and local officials who are simply responding to a "NIMBY" (Not-in-my-backyrard") attitude by a small group of citizens. Again, legitimate environmental and other concerns should be addressed. But state and local officials have an important role to play in not obstructing the plans of utilities that are willing to invest capital in new plants and other necessary infrastructure, such as natural gas storage facilities or new power lines, to bring on new supplies of energy. Absent the ability to bring on new supply, there will be increased pressure to increase rates for the more limited supply of energy that does exist.

Again, the purpose here was not to address specific rate proposals, plans for new facilities, or, more broadly, revisions to Maryland's own electricity and energy laws and PSC policies. There will be time enough for that. Rather, my purpose is simply to set forth certain fundamental principles that must be kept in mind as Maryland takes up the opportunity offered by Chairman Schisler's resignation to move forward to tackle the large energy challenges ahead. Maryland has an important role to play in promoting our nation's energy security, a goal that should be shared by all Maryland citizens.