Most people would agree that a certain amount of government regulation is necessary for a society to function efficiently. However, go beyond that basic premise and people are all over the map about what should be regulated and how far it should go. For instance, what is the right amount of control that a government - federal, state, or local - should exert over the marketplace? And when does a governing body go too far?
Nowhere is that more obvious than in the energy arena. By and large, the business community wants less regulation because compliance can cost a company a lot of money. Excessive regulation can make certain activities uneconomical. Social activists and environmentalists, on the other hand, typically want the government to step in and control activities they think are detrimental to the health and well-being of the public regardless of its impact on business.
As federal regulations on energy expand, two PhDs with the Pacific Research Institute recently studied this geographic bias and have written an energy study that attempts to measure attitudes toward regulation in each of the 50 US states. "The 50 State Index of Energy Regulation" by Wayne Winegarden and Mark A. Miles measures the regulatory climate for energy production, distribution, and consumption and which states are more economically efficient. Alabama, Alaska, South Dakota, and Texas are tied for the best (#1), while California (#49) and New York (#50) are at the bottom.
"As economists, we have adopted a basic economic perspective - economic efficiency - defined as allocating resources to their most productive uses," says Winegarden. "The effects of policies are evaluated as objectively as possible, solely from that perspective. Policies that promote economic efficiency receive higher scores; those that reduce economic efficiency receive lower scores."
Examining the regulatory variation across states determines where in the country the regulatory environment is optimal. "This economic efficiency approach supplies a useful perspective on state energy regulations," adds Miles. "It also provides an important contribution to uncovering what data exist for defining and measuring the relative regulatory implications across the states."
The PRI's Index based its conclusions on seven component indices or sets of questions that form the core of the Index scoring and rankings. The lower the score, the more economically efficient it is. A higher score means less efficiency.
Here are the states with the top scores with respect to energy regulation:
- Alabama - Rank 1
- Alaska - Rank 1
- South Dakota - Rank 1
- Texas - Rank 1
- Delaware - Rank 5
- North Dakota - Rank 6
- Georgia - Rank 7
- Kansas - Rank 7
- Missouri - Rank 7
The lowest-scoring states on energy regulation, according to Winegarden and Miles:
- New York - Rank 50
- California - Rank 49
- Wisconsin - Rank 48
- Connecticut - Rank 47
- Maryland - Rank 46
- Washington - Rank 44
- Michigan - Rank 44
- New Jersey - Rank 43
Several patterns emerge from the overall index, according to the authors. First, there is little relationship between whether a state has substantial energy resources like oil, gas, and coal, and whether its regulations are economically efficient. Some big-producing states like Texas and Alaska are ranked at the very top, yet California, another major energy-producing state, is at the very bottom.
However, a geographic pattern is visible, as mentioned and some regions have regulatory environments more conducive to efficient allocation in production and consumption of energy.
The most interesting relationship is between a state's ranking and its economic growth rate. High ranked states on average grow faster than those ranked low. Moreover, the higher rate of economic growth is associated with faster economic growth. Energy regulation can, therefore, be an important factor in determining the eventual prosperity of a state, say the authors.
The oil and gas industry has been fighting excessive regulation for decades. The Independent Petroleum Producers Association has been leading the charge in North America. Swift Energy president Bruce Vincent recently sent out a letter on behalf of the IPAA Wildcatters Fund, which contributes to pro-business, pro-industry candidates for public office. In the letter, Vincent said, "A constant stream of ill-conceived, and often redundant, regulations continue to create an atmosphere of uncertainty across the country. Despite the tremendous success of independent producers on private lands, regulatory uncertainty has hindered the true economic potential of America's energy renaissance."
PwC, in its recent Annual Global CEO Survey, found that 83% of energy CEOs are concerned that over-regulation could put the brakes on economic growth. Yet the same survey showed that 88% of energy CEOs are somewhat or very confident of growth during the next three years. Of those CEOs, 56% said they plan to increase their employee headcount, 29% say it will remain approximately the same, and only 15% say they expect to lay off employees. So there appears to be optimism in the industry despite a more challenging regulatory environment.
