Tag Archives: Law

Praise for a New York Times article on natural gas fracking (Or, How property rights help mitigate potential environmental harms)

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Michael Giberson

I’m writing in praise of a New York Times article on natural gas fracking. Yes, really! Even more surprising, I’m writing in praise of a New York Times on fracking written by Ian Urbina. Yes, really!

What is this marvel, you ask? I answer, ”Rush to Drill for Natural Gas Creates Conflicts With Mortgages.”

What is so marvelous about this article? I answer, the way it highlights how property and contract laws can serve to regulate potential environmental harms from gas drilling and hydraulic fracturing.

Of course, as the headline suggests, the focus of the article concerns mortgage restrictions which may be violated if a property owner leases part or all of the property for oil or gas development. Mortgage lenders usually include such limiting provisions in loan contracts to help ensure protection of the property, which typically serves as collateral for the loan. Obviously mortgage contracts differ and the article notes that only sometimes will leasing violate a mortgage. The article further notes that lenders who don’t secure such restrictions in their mortgages, or who fail to closely police compliance with such restrictions, may find it difficult to resell their mortgages in the secondary market.

But here is the deal: almost all of the well-documented environmental harms from natural gas drilling and hydraulic fracturing happen within a few hundred feet of an active well: cases of methane in groundwater, spills from holding ponds filled with produced water from fracking, and so on. If the landowner owns the surface and mineral rights free and clear, and owns a large enough piece of property that effects on neighbors are unlikely, then most of the potential hazards from drilling and fracking are faced by the property owner who can weigh the trade-offs between the costs and benefits and negotiate reasonable protections within the lease with a developer. Actions taken by the developer in response to such a contract to mitigate the likely harm to the property-owner will also almost inherently serve to mitigate any possible harm to neighboring properties. If methane doesn’t migrate from the well into the groundwater immediately around the well, it can’t subsequently migrate across a property line some tens or hundreds of feet distant.

When a landowner borrows against the land, the lender naturally gains an interest in protecting the land’s valueas a tool to help ensure the loan’s repayment. In may be the case, as the article mentions, that the a lease enhances the value of a property and the resulting income makes loan repayment more likely. On the other hand, gas drilling and fracking may reduce the value of the surface property. The point is that – working in the context of contracts and property law –  landowners, lenders, and gas development companies have a natural interest in trying to work out these issues in an way that should naturally reflect most of the potential costs and benefits from exploitation of the shale resource.

Not every potential hazard will be well contained within a mortgage contract and a mineral lease. For example, the landowner may not care too much what the developer does with produced water from fracking operations so long as it is safely removed from her property. Other issues may depend on rights to surface water crossing a property or the contribution to any local air pollution hazards. In such cases liability rules and potential litigation by neighbors might be the efficient regulator, but government-provided regulation is also sometimes the efficient response.

I praise the New York Times article for highlighting (even if only indirectly) the way that decentralized decision making in the context of the rights and responsibilities attendant to property and contract law can serve to regulate environmental harm. The next step, from the view of government policy, is to refocus the efforts of government regulators on just those harms that are not well addressed within the scope of voluntary decentralized decisions.

[NOTE: For additional commentary on Urbina's NYT reporting on natural gas fracking, none of it laudatory, see this search of the KP archives.]

“Sanitized by lawyering”

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Michael Giberson

Al Roth draws attention to a New York Times column, “The art of blackmail,” which includes the curious phrase, “sanitized by lawyering” (pointing out that blackmail is illegal, but negotiating a settlement in lieu of filing a lawsuit in which the unpleasant matter would be disclosed is legal). Apparently blackmail is one of the few things that becomes cleaner after contact with lawyers.

Does FERC have jurisdiction over installed capacity requirements in wholesale power systems?

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Michael Giberson

Does the Federal Energy Regulatory Commission’s (FERC) asserted authority over the Installed Capacity Requirement, on the ground that it is “a practice affecting rates,” contravene the Federal Power Act’s specific limits on FERC’s authority, and express preservation of State authority over generation facilities and system adequacy?

That is the question for the U.S. Supreme Court to decide in Connecticut Department of Public Utility Control and Richard Blumenthal, Attorney General for the State of Connecticut v. Federal Energy Regulatory Commission, at least as presented in a brief by the National Association of Regulatory Utility Commissioners (NARUC). In case you don’t know, NARUC is the association of state level regulatory commissioners, which should tell you what answers they favor to the question posed above.

Is “First in Time, First in Right” the best way to allocate rights to wind energy?

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Michael Giberson

At EnergyPulse, Ron Rebenitsch discusses the unsettled foundation of the wind power industry: uncertain rights to use the energy present in the wind. Currently the industry seems to work on a “capture what you can” model, but the approach has its problems and the problems are likely to become more pronounced as the industry grows.

Because a wind turbine extracts energy from the wind, the wind downwind of a turbine will be less powerful and more turbulent than the wind entering the turbine. As a rule of thumb, expect that these downwind effects continue for a distance up to 10 times the size of the turbine’s rotor diameter. As Rebenitsch mentions, a 1.5 MW turbine might have a 77 meter rotor diameter, so the downwind effects of the turbine could extend 770 meters (or just over 2500 feet). If a wind power project’s turbine is closer than 2500 feet to the landowner’s property boundary, it may be subject to interference from development of wind power (or other construction) on the neighboring property.

As a practical matter, I understand that financiers typically seek to enforce a buffer zone around a project before participating in funding. Project developers, too, are obviously interested in the long term value of an installation. Still, the industry would benefit from additional clarity.

The article is only one of two parts that Rebenitsch intends to publish. This first part explains the problem and cites two possible legal models: the “First in Time, First in Right” approach sometimes used for water rights, and the unitization model frequently used for oil and gas. In the second part he intends to address the pros and cons associated with differing legal models.

I’m looking forward to it.

UPDATE: A link to part two of Rebenitsch’s essay on rights to capture wind energy.