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sharing in governance of extractive industries

EITI in the US: leaning on Dodd-Frank (Part 2)

In a blog post last week I asked why the United States’ implementation of the Extractive Industries Transparency Initiative (EITI) should be limited to federal lands, responsible for about 30% of oil and gas production, and not cover private or state-owned areas, where most US oil and gas are produced.

Today I look in more detail at whether the federal government could force states to adopt EITI-type reporting standards for their oil, gas and mineral revenues. My research has shown that, legally, the US Congress probably could pass such legislation and enforce it through one of many federal agencies.

But states’ rights are too delicate an issue in the current political climate for any such bill to pass both houses of Congress. The federal government would be better served by extending current principles and using a law already in place – the Dodd-Frank financial regulatory reform bill – to increase federal oversight of oil, gas and mineral revenues at the state and local level.

Here’s how it shakes out:

There are enough legal precedents to give the federal government authority to force states to comply with EITI if it wants to. The constitution grants it the power to regulate interstate commerce – commerce that moves between states or affects commerce between states – and oil, gas and mineral activities certainly fit this bill: crude oil and gas are regularly transported across state boundaries through pipelines spanning from the fields to the refineries or plants; a federal agency, the Federal Energy Regulatory Commission (FERC), already establishes the rates and terms of services for interstate transportation of oil; and pipeline companies are subject to various state regulations in each state they pass through.

So state-level oil, gas and mineral activity does not happen in a vacuum; it qualifies as interstate commerce. Congress probably possesses, therefore, the authority to legislate over these activities and could even seek to preempt existing state policies on revenue stream reporting.

But a web of political contingencies makes this unlikely. The hyper-partisan political climate in Washington, fueled in part by loud conservative and Tea Party grumblings about states’ rights, would discourage congressional leaders from sticking their necks out on so divisive an issue, especially in an election year. And beyond partisanship, members of the US Congress – who represent the interests of their constituencies first, national interests second – would be loath to expend political capital enacting legislation that risks antagonizing political and business elites at the state or local level.

Then there is the issue of what such legislation would add to what is already there. Less than two years ago Congress passed the Dodd-Frank bill, of which section 1504 – whose scope is still in debate – contains language requiring the disclosure of data covering revenue streams between oil, gas and mining companies and governments. These disclosure requirements were drawn up to be compatible specifically with EITI and, depending on how exactly it is implemented, section 1504 would apply to oil, gas and mining operations exclusively on federal lands in the US – much like EITI.

But unlike Dodd-Frank, EITI allows some flexibility in its implementation. So even if new federal legislation is out of the question, the federal government may be able to use an extension of current principles to increase federal oversight of the oil, gas and mining revenues of individual states.

Federal agencies already possess oversight of extractives at the state level, but generally only as it relates to the enforcement of federal laws on issues like environment, health, safety, emergency response and national security. Federal agencies delegate responsibility to the states to monitor and enforce compliance to these policies; so, for example, the Environmental Protection Agency (EPA) charges state agencies with the enforcement of federal environmental law, while the Pipeline and Hazardous Materials Safety Administration (PHMSA) enforces federal pipeline standards through its oversight of relevant state agencies.

But federal agencies cannot act beyond their legislative directive; that is, they need legislative backing to legitimize their oversight of state activities. The EPA has several federal laws – the National Environmental Policy Act (NEPA) of 1970 and the Superfund (CERCLA) Act of 1980, to name just two – sanctioning its supervision of state environmental regulations pertaining to oil and gas. The PHMSA oversees state regulatory agencies by force of the federal Pipeline Safety Act. Likewise, the FERC regulates oil pipeline companies pursuant to the interstate commerce clause in the US Constitution.

Until Dodd-Frank, no legislative directive existed to grant a federal agency like the FERC or the Securities and Exchange Commission (SEC) oversight of states’ extractive industry revenues. Once it is fully implemented, section 1504 could provide federal agencies with legal backing to do just that.

Outgoing EITI chair Peter Eigen said in March 2011 that Dodd-Frank bolsters EITI’s aims, and he may be proven right. Federal agencies could extend their oversight of state oil and gas activities beyond the areas of environment and interstate commerce if the federal government, just as the EPA has done with federal environmental regulations, were to point to Dodd-Frank as a directive through which it could monitor and enforce EITI-type revenue reporting standards through individual state agencies.

The federal agency selected to supervise and harmonize revenue reporting standards across states may not require a new legislative directive to do so – because with Dodd-Frank 1504, that directive would already be in place.

For some states with strict revenue reporting laws today, like Texas, which has devoted a website to providing access to machine-readable raw financial datasets from oil and gas companies, federal oversight of revenue reporting may not present a big change. For other states, like Pennsylvania, whose Budget and Policy Center appeared surprised to find out in April 2011 that 85% of natural gas drilling companies who filed corporate net income tax returns in 2008 paid nothing in state taxes, federal oversight would require more of an adjustment.

Whether or not subnational implementation of EITI happens this way, the oil, gas and mineral revenues of states deserve the same level of scrutiny currently limited to federal revenue streams.

States’ rights are powerful, as they should be – but taxpayers in these states have just as much right to know what they are receiving in return from their state and local government contracts, as they do from contracts signed by the feds.

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Tags: Dodd-Frank, EITI, States, United, transparency

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