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A Classic Example of Regulatory Overreach

April 9, 2019

Senate Bill 181 is the latest attempt by special interests to impose stringent regulations on the oil and gas industry. An earlier attempt, Initiative 97, was rejected overwhelmingly by voters.

Senate Bill 181 is the latest attempt by special interests to impose stringent regulations on the oil and gas industry. An earlier attempt, Initiative 97, was rejected overwhelmingly by voters.

Under current law the Colorado Oil and Gas Commission is charged with ‘fostering’ the responsible, balanced development, production, and utilization of oil and gas consistent with public health, safety, and welfare, including protection of wildlife resources. The Commission has worked closely with the industry, local governments, and citizens in what is considered one of the most effective regulatory systems in the country. These regulations are consistent with the long history of Colorado as a producer and exporter of oil and natural gas.

Senate Bill 181 would eliminate the charge to the Colorado Oil and Gas Commission to ‘foster’, and replace it with a charge to ‘regulate’, the oil and gas industry. The proposed law would expand the power of local governments to regulate the oil and gas industry. Also eliminated is the current law requirement that regulations must be ‘cost effective’ and ‘technically feasible’.

When a law says that state and local governments can impose regulations that are neither ‘cost effective’ nor ‘technically feasible’ this creates uncertainty and risk for the industry, something economists refer to as an incomplete contract. The outcome is a regulatory maze in which few businesses will choose to venture. We should expect firms in the oil and gas industry to respond to Senate Bill 181 by reducing and eliminating investments in Colorado.

We know what the outcome of regulatory over reach is, there are many precedents for this in Colorado. For example, at one time air quality standards were imposed on some extractive businesses that were more stringent than air quality before they began operations. The requirement that regulations be ‘cost effective’ and ‘technically feasible’ were written into current law to prevent such regulatory overreach.

Lawyers love a regulatory maze in which enforcement is determined in a grey area of litigation. Indeed, what Senate Bill 181 will create is a new cottage industry for lawyers, ‘experts’, politicians, bureaucrats, and special interests who benefit from regulatory overreach. We can refer to these folks as the ‘transfer society’, because they don’t produce anything of value, all they do is transfer income from the ‘productive society’. Senate Bill 181 will create a safety net for this ‘transfer society’.

When legislation such s Senate Bill 181 is proposed, the Legislature conducts a sham called a Fiscal Note. Fiscal Notes purport to estimate the impact of the legislation on state revenues and expenditures. In the case of Senate Bill 181 the Fiscal Note estimates that it will generate $3 million in revenue, and increase expenditures by about $1 million in the next fiscal year.

The Fiscal Note estimates the cost to the state to administer the new law; it does not estimate the impact of the law on the economy. The fact is that the propose legislation would have a negative impact on the private sector, and the result would be a significant reduction in revenues at all levels of government, especially local governments that are dependent upon revenue generated from the oil and gas industry.

Senate Bill 181 is a classic example of regulatory overreach by the state government.

It would replace a law which has worked well in fostering growth in the oil and gas industry, while protecting the public interest. Politicians deny that the regulations imposed by Senate Bill 181 would have a negative impact on the economy, but you can’t make a silk purse out of a sow’s ear.

[Originally Published at the Colorado Springs Gazette]

Article Tags
Regulation Energy
Author
Barry W. Poulson is Emeritus Professor of Economics at the University of Colorado.
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