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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The Supreme Court Case That Could Transform Energy Markets

We think the US Supreme Court, with its 6-3 conservative majority, is considering one of the most sweeping changes to federal regulatory policy that we can imagine. The court is hearing a case in which it could vote to overturn the so-called Chevron deference. Simply stated, the Chevron deference, resulting from a 1984 court case involving Chevron and Natural Resources Defense Council  (NRDC), states that in matters of complex federal regulatory and administrative procedure, the courts should defer to the respective federal agencies involved. This court deference has been broadly applied to all U.S. federal administrative agencies (FDA, SEC, FERC, and EPA, among others) many of which had their origins during President Roosevelt’s New Deal in the 1930s.

What would overturning the Chevron deference mean? The deference says that the U.S.  Supreme Court defers to Congress in delegating broad powers to administrative agencies and agrees not to accept challenges to those broad grants of authority. Four of the sitting justices on the court (Thomas, Gorsuch, Kavanaugh, and Alito) have publicly expressed dissatisfaction with the Chevron deference and they have accepted a case for review, American Hospital Association v Becerra, which affords them an opportunity to dramatically revise it (The case involves the FDA and the appropriate application of variations on a hospital reimbursement formula). But most importantly, we believe the court’s broader goal here (of which it has made no secret) is to challenge the ability of Congress to make broad delegations of administrative authority to federal agencies. We don’t mean to shout but this is HUGE! The court may tell  Congress that, instead of broad delegations of authority to administrative agencies—which has been permissible since 1984—it must be specific in writing laws. What this may mean in practice is that the high court swats down what it views as unduly broad environmental and other regulations while a divided Congress fails to rewrite new, more specific legislation.

Related: Tight U.S. Oil Inventories Prop Up Oil Prices

What might this mean for us in the energy industry? EPA’s authority to regulate derives from numerous Congressional laws like the Clean Air Act and the Safe Water Drinking Act. But evolving regulations pertaining to newer concerns like CO2 or methane—issues not specifically written into the statutes authorizing the agency back in 1970 and subsequently— would be subject to court review and challenge. What we may be witnessing is a wholesale rollback of federal authority over broad segments of the economy. More specifically this seems like a huge win for natural gas and perhaps coal producers if environmental regulations are subject to increasing challenge (As an aside, Justice Gorsuch’s mother, who headed the EPA under President Reagan, was accused of trying to dismantle EPA regulation).

Historically, legislatures attempted to regulate economic activity by passing specific laws, so much for a loaf of bread or a ferry ride. In the early 1800s, when the British developed the concept of the public utility, Parliament set prices, competitive conditions and dividends for each public utility. When conditions changed, somebody always ended up a loser, whether customers or the utility, but usually the customers because the utility found a way to wiggle around the old restrictions. Conditions change faster than laws. We tried that method here and gave up due to its impracticality. For a while the courts took charge, setting regulatory rules that defied all logic. Finally, legislatures set up expert regulatory bodies, and that system worked well for over one hundred years. It can continue on the state level, but we have to wonder what will happen to federal regulation if the Supreme Court strikes down the Chevron deference. 

The court has recently generated considerable outrage over its efforts to overturn legal abortion. But in our view, restricting federal, bureaucratic oversight of business in the US via review of the Chevron deference is high on this court’s agenda. This is our big business surprise for 2022.  Maybe great news for gas drillers and coal miners, but potentially great confusion as states try to regulate locally what the federal government can no longer regulate nationally. Watch for the decision, unheralded on cable news, but with really big potential.

By Leonard Hyman and William Tilles for Oilprice.com

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