State and US Regional Policies

Colorado’s Oil and Gas Task Force: Is the glass half full, half empty, or something else?

Mar 4, 2015 | Alan J. Krupnick

Colorado Governor John Hickenlooper deserves some credit for creating the state’s Oil and Gas Task Force as a means of reducing the heat around the November ballot. In an effort to cool tensions among Colorado’s oil and gas industry, some local governments, and citizen groups, and as part of a deal to create the task force, a handful of controversial initiatives were withdrawn. Those included a requirement for a 2,000 foot setback from homes (currently 500 feet) and the addition a local environmental bill of rights to the state constitution. Industry-supported measures to withhold oil and gas revenues from communities that ban drilling and to require fiscal impact analysis on all initiatives were also pulled back.

After five months of deliberations, the stakeholder-based task force has issued 9 recommendations to address community concerns with shale gas and tight oil development in the state. Out of 36 recommendations voted on, 7 of the 9 issued were unanimous among the 21-member task force and 2 passed with the required two-thirds majority.

The recommendations are certainly useful, and include discussion of the following:

  • The addition of state well inspectors and monitoring equipment;
  • Increased information flows from the operators to local communities (and the general public) to improve local planning;
  • Initiation of a study on how to reduce truck traffic;
  • Assistance for companies in complying with the slew of current and future regulations under the state Oil and Gas Commission; and
  • Most importantly, the creation of state authority to review and influence siting of large scale oil and gas extraction operations—such as those with 30 or more wells on a pad—requiring local government involvement, but not control.

But are these recommendations useful and fundamental enough to quell the debate? Clearly not, as evidenced by the promise of continued activism from supporters of local authority. The main issue revolves around local government control over oil and gas siting and other activities. The task force didn't get anywhere on this issue—several proposals to give locals more authority failed to pass the two-thirds vote rule. Supporters already are vowing to create ballot initiatives to grant such authority or even ban “fracking” in the state.

The appropriate degree of power sharing between state and local governments is very much an unsettled issue in many venues (such as education curriculum), not just as it relates to oil and gas. But in this area we have witnessed the Pennsylvania State Supreme Court throw out the heart of Rule 13, which gave local governments impact fee funds in return for their relinquishing control or attempted control over shale gas development. And, for the first time, we've seen a town that has really benefited from oil and gas development—Denton, Texas—vote to ban fracking.

Above the fray, economists view these tussles and their resolution through the lens of externalities, such as various types of pollution, and transaction costs. Institutions to address externalities should have jurisdiction over  the geographic areas that are affected. And so the federal government should worry about emissions of methane, for example, which is a global pollutant. By the same logic, states or river basin commissions should regulate pollution of major rivers.

But truck traffic, deep well injection of waste fluids, habitat destruction, and a host of other burdens from oil and gas development are local in nature. So the presumption is that locals should have regulatory authority. The problem comes with transaction costs. If significant regulatory authority rested with locals, oil and gas operators would face a complex patchwork of laws and regulation. Of course, they succeed under these conditions already, with development crossing state lines. But county lines would be far more numerous and some counties, even those with significant economic growth at stake, could well reject the opportunities. More substantive concerns exist about local technical expertise relative to that found at the state level, as well as the sheer cost of all the local government time it would take to regulate properly. Nevertheless, although the gap is likely to be huge on technical issues at the well site, on roads, traffic, and other community concerns, local governments would fare better.

Missed in these debates is a discussion of revenue distribution. In many states, severance taxes from oil and gas development go to the state, which then doles out funds to municipalities through general revenue sharing, which is often not tied to local impacts. Even Pennsylvania’s impact fee system does not distribute funds directly tied to local impacts. And in some states, oil and gas operations are exempt from property taxes.

The moral of this story: Regulating shale gas and oil development is a complex business, technically and economically. More attention needs to be paid to community impacts and control problems—with the heat turned off.