May 25, 2010

Alternative Energy Production and Alternate Uses of Existing Facilities on the Outer Continental Shelf

Proposed Rule
Summary

Score: 27 / 60

Additional details
Agency
Department of Interior
Regulatory Identification Number
1010-AD30
Agency Name
Department of Interior
Rule Publication Date
07/09/2008

RULE SUMMARY

Establishes mechanisms to lease the outer continental shelf for alternative energy development and regulations to govern such projects.

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The RIA could be found by RIN number in the Advanced Docket Search at Regulations.gov. The RIA was in a document entitled "Fiscal Cost-Benefit Analysis to Support the Rulemaking Process for 30 CFR 285 Governing Alternative Energy Production and Alternate Uses of Existing Facilities on the Outer Continental Shelf." This document is labeled "AD30 Final Tech. Report Ice MMS 2008-0627" in the Advanced Docket Search results. It could not be found using the keyword search "alternative energy." The MMS.gov site search did not readily return a page about the rulemaking using several searches for "alternative energy," "rulemaking," etc. A Google search for the name of the proposed regulation returned a page that had directions to the advanced docket search and links to several of the related documents such as the environmental assessment, but it does not link directly to the cost-benefit analysis.
2/5
2. How verifiable are the data used in the analysis?
Many, but not all, pieces of data are sourced.
2/5
3. How verifiable are the models and assumptions used in the analysis?
The origins of some input assumptions (e.g., low, intermediate, and high payment levels) are not clear. The assumptions work in concert with each other and it is unlikely that they will all hold simultaneously in the future. The RIA has an appendix that guides the reader through use of the spreadsheet model, but it doesn't say how the reader can get the model. Numerous assumptions are based on findings in government or technical studies.
2/5
4. Was the analysis comprehensible to an informed layperson?
It is not clear what the low, intermediate, and high results mean—are these regulatory alternatives or possible alternative scenarios that will occur for some other undisclosed reasons? (This is explained better in the rule.) The general nature of what they're doing in the analysis is understandable. It is decently organized, yet the sheer number of variables in the model (along with a horde of abbreviations) made for a difficult read.
2/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
3/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
The outcome is federal lease revenues, but the analysis explicitly acknowledges that these are transfers, not net social benefits. On page viii, the report says, "These regulations will serve an important social purpose by establishing a payment structure to ensure a fair return to the United States for any lease, easement, or right-o-way granted; by creating a comprehensive 'cradle-to-grave' regulatory program with provisions for regular inspections and environmental monitoring; and by providing a degree of regulatory certainty to those proposing, planning, or potentially financing an offshore alternative energy project." This list of objectives hints at outcomes much broader than lease revenues but does not really develop them.
3/5
Does the analysis identify how these outcomes are to be measured?
The analysis addresses mostly the increase in revenue the federal government can expect from the new leasing structure. However, the benefits of the new "cradle-to-grave" monitoring system and the regulatory "certainty" are not developed meaningfully.
3/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Revenues are produced by applying payment schemes to cash flows from projects that are mostly assumed to occur regardless of whether this regulation is adopted.
3/5
Does the analysis present credible empirical support for the theory?
Payments appear to be small compared to total project revenues. The analysis calculates that only a few projects drop out under the high payment scenario. All of these figures are projections, rather than actual past empirical experience.
2/5
Does the analysis adequately assess uncertainty about the outcomes?
The RIA assesses how a lot of uncertainties will affect lease payments, but this all involves uncertainties about factors external to the regulation. There is a sensitivity analysis of how variations in the price of energy (and the costs of providing it) will change the revenue stream. The analysis uses Monte Carlo simulations to develop the various possible outcomes (given the tenuous assumptions about an unknown future of an undeveloped industry).
4/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
3/5
Does the analysis identify a market failure or other systemic problem?
The rule is clear that the problem is the lack of a framework for assigning property rights to use the OCS for things other than oil and gas production. There are some vague claims in the RIA that the current system creates uncertainty that inhibits investment, but the analysis shows no increase in investment as a result of improved certainty. The more definite "systemic" issue is that the government wants to have a means of collecting revenues from these projects, while at the same time it is trying to subsidize them.
3/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
It is true that there is no system for collecting revenues. The problem is, by its nature, systemic: If the government's scheme to collect revenues currently is less than it would collect under a new scheme, it is an institutional problem. Why the government would want to reduce the profitability of projects it is trying to encourage is not explained.
3/5
Does the analysis present credible empirical support for the theory?
Having a system to collect revenues will lead to revenue collection. No analysis or empirical support for the uncertainty claim is provided.
2/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
A lot of these projects may be speculative, but they are treated as certainties. In the context of this analysis, this question in part is, in the absence of the new regime, would the federal government make less money than with the regime? Answering that question relies on an assessment of the viability of wind and wave energy projects. The analysis provides several estimates for the successful development of offshore energy production. The low success option would lead to greater losses to the federal treasury than the current policy, according to the analysis.
2/5
7. How well does the analysis assess the effectiveness of alternative approaches?
2/5
Does the analysis enumerate other alternatives to address the problem?
The analysis only addresses no action as an alternative to the proposed regulation.
1/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
Proposed regulation vs. no action—it examines three alternative "payment cases" for the chosen alternative.
2/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
The analysis calculates alternative revenue streams under the alternative payment cases.
3/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
The analysis largely assumes the proposed regulation will have no effect on the number or type or projects. It considers effects of state renewable energy mandates on the results. The analysis could do a better job of describing the current state of affairs. How the situation would develop in the absence of any regulation is not analyzed.
2/5
8. How well does the analysis assess costs and benefits?
2/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The analysis only identifies costs to federal government and lease payments by industry—there are no compliance cost estimates for industry.
2/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
See above.
2/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The analysis assumes no effect but does not justify this assumption.
1/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
Very limited; a few projects drop out under the high-revenue scenario.
2/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
No uncertainty is associated with costs of the regulation.
0/5
Does the analysis identify the alternative that maximizes net benefits?
When benefits are defined as federal revenues, the chosen alternative has higher net benefits than the baseline. But these are not net social benefits.
2/5
Does the analysis identify the cost-effectiveness of each alternative considered?
Not explicitly, but the results could be used to evaluate cost-effectiveness.
1/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
The analysis considers effects on small businesses.
3/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
The benefits accrue to the population at large (assuming rental agreements offset taxation) and that the public will benefit from new uses of old facilities. It does not discuss incidence.
1/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
MMS chose "intermediate" payment case and says the economic analysis guided this decision.
4/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
The agency did not maximize calculated net financial benefits to the government, but it may have maximized net social benefits by choosing an option that produces lower net revenues but does not make any projects unprofitable. The rationale for each decision on payments, however, is usually explained by reference to rates MMS charges for oil and gas leases, plus some comments to the effect that MMS does not want to discourage renewable energy. Thus, the rationale is somewhat vague. The proposed rule discusses the RIA, saying that it identified scenarios in which the federal government would make money by allowing use of the OCS (the intermediate and high payment scenarios) but then on 39444 says "Given the assumptions agreed upon with OMB, the industry would have developed, with or without the new rule; therefore, this rule would not determine the amount of money to be generated and spent, but rather who would spend it." This is odd because the whole point of the RIA is to evaluate the effect of the regulation, whether the industry will develop or not isn't the question but whether it will develop as much as it would without.
3/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
Measures and goals are not established. If the primary concern is lease revenues, then the proposed rule could have established goals for these.
1/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
There are no explicit provisions. Lease revenues and projects actually undertaken would, presumably, be easy ways to track this. However, the RIA does not project effects related to greater certainty of property rights, so the comparison would not provide a complete assessment of the regulation's effects.
1/5
 
Total 27 / 60