Dukert Federalism

8/2/2019 Dukert Federalism

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Coping with theFederalist RealityIn North AmericanEnergy Trade

byJoseph M. Dukert

Independent Energy AnalystUnited States

Paper presented at the

Forging North American Energy Security

Conference, Monterrey, MexicoApril 1-2, 2004


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The author

Joseph M. Dukert

The author has been an independent energy consultant servinggovernment and corporate clients in the Washington, DC, area

for decades; and he has focused on the North American energymarket since 1990. He welcomes comments and questionspertaining to this paper at [email protected]

FORGING NORTH AMERICAN ENERGY SECURITY

is a conference organized by the North American Forum onIntegration, the Escuela de Graduados en AdministracinPblica y Poltica Pblica (EGAP) of the Instituto Tecnolgico yde Estudios Superiores de Monterrey (ITESM) and the ConsejoMexicano de Asuntos Internacionales (COMEXI).

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NAFI EGAP Comexi: Forging North American Energy Security 3

COPING WITH THE FEDERALIST REALITYIN NORTH AMERICAN ENERGY TRADE

Joseph M. DukertIndependent Energy Analyst

United States

uring much of my more than 30 years asan energy consultant, I have specializedin the formulation and analysis of

national energy policy. That has often involvedfrustration.

It is difficult to deal with engineers who knowvery little about economics. It is disconcertingto discuss energy policy with economists whodont understand technology. And it isinevitably challenging to discuss policy withengineers and economists who know and care

nothing about politics. But we need to do it . . .just as we ought to learn to get along with theeffects of federalism on the energy sector.

Federalism is part of the dynamic in energypolicy for Canada, the United States, andMexico. North America is increasinglyinterdependent especially in the energy sector;yet federalism means different things in eachcountry. Those who deal with energy mattersshould appreciate the interrelationships oftechnology, economics and politics. It is alsoessential for us to think about how thosefeatures factor into diverse regional interests in

various parts of Mexico, the United States, andCanada. Sometimes for better, sometimes forworse, regional interests underlie much of ourcontinental energy trade and our efforts tocooperate continentally in the interest ofmutual benefits through North Americanenergy security.

I define federalism as any explicit or implicitformula by which a national government sharesauthority and responsibility with its constituentparts. As Earl Fry has notedi, this sort ofarrangement for the energy sector is mostobvious in Canada. It is weakest in Mexico . . .

although I believe that the decentralization ofreal power may be a trend even here. In thatrespect, I am eager to get reactions from thisaudience in the question period.

Canadian provinces effectively control thatcountrys domestic energy resources; and thisprompts remarkably independent attitudes ontheir part in respect to an issue such as theKyoto Protocol to reduce the emissions of so-

called global warming gases. (Carbon dioxideand methane, of course, are both associatedclosely with energy production, delivery, anduse.)

Not only did a large majority of provincialpremiers send their nations leader a letter ofearly opposition to his endorsement of theProtocol. One premier read it aloud at JeanChrtiens news conference in the middle of atrade mission in Moscow, although theembarrassed Prime Minister himself had not yet

even received the written protest. The premierof Alberta (the province that contains most ofCanadas proved fossil energy reserves) has gonestill further on occasion. Ralph Klein sent hisenvironmental affairs minister to Moscow tolobby the Russians not to ratify either.

In the United States, by contrast, pressure fora more activist approach to the possibility ofclimate change from human activities has comefrom the bottom up. The attorneys general ofseveral U.S. states are suing the nationalEnvironmental Protection Administration in aneffort to compel EPA to publish limits on the

release of carbon dioxide.Canada did ratify the Kyoto Protocol. Still, I

have yet to meet an official from that countrywho believes that Canada will be able to meetthe goals set for reducing specified gaseousemissions by the target period of 2008-to-2012.Only a month ago, a leading official in Canadasenergy policy establishment at NRCanreiterated twice in a single speech the verycareful wording used in the most recent annualSpeech from the Throne. He said theGovernment in Ottawa will respect Canadasclimate change commitments in a way that

produces long-term and enduring results whilemaintaining a strong and growing economy.iiPerhaps Ive been living in Washington, DC, toolong; but that strikes me as hinting a moreflexible approach. In the end, I predict thatCanada will find a way to postpone or back awayfrom the rigid Kyoto timetable just asCalifornia has delayed, modified, or eliminatedits repeated pledges to achieve auto emission

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results and renewable energy quotas onschedules that were unrealistic from aneconomic or technological standpoint.

Still, this raises a federalism-type question:

Does Ottawa ultimately call the shots onclimate change policy, or do government and

corporate officials across Canada? If we coulddiscern a simple answer right now, it would bevery important to North American EnergySecurity.

- It might tell us something about the pace atwhich Canadas prolific oil sands will bedeveloped. (Remember that these depositsare now generally credited with 175 billionbarrels of economically recoverable,refinable product.)

- It can affect the speed with which a newpipeline will bring Arctic natural gas fromthe Mackenzie Delta.

- It could even affect international trade inelectricity, since Alberta has been a netimporter of power from the United Statesas well as from provincial neighbors, yet hasample coal of its own to fuel additionalgeneration capacity it might choose tobuild.

I wont try to offer a definitive answer to the

federalism question in this particular instance although any Canadians in the audience shouldfeel free to do so during the Q&A. I sketched outthis issue only as a backdrop to what many willfind a new way of looking at energy policyoverall. I think we all agree that policy, in turn,affects the evolution of the North Americanenergy sector (the title of this specific session).

More than a quarter century ago, a politicalscientist named Graham Allison proposed athreefold explanation of how a nationalgovernment reaches foreign policy decisions.iii Isuggest that it also applies to energy policy.

The first method of policy decisionmaking isrational choice by weighing all the optionsand potential consequences. Allison said thisrarely happens, and I agree. The second involveswhat he called bureaucratic politics. Thevarious players within a usually smallgovernmental circle (such as the nationalcabinet) argue for their respective preferredcourses; and the outcome depends not only on

their persuasiveness but on their relative powerwithin the group and in respect to the chiefexecutive. I can say from experience that thiscomes close to describing how a U.S. nationalenergy policy document (several of which I havewritten in their entirety) gradually takes shape.According to Allison, the third way of reaching

big decisions is through organizationalprocedure. In this case, an order is issued bythe top authority (with or without rationalchoice and bureaucratic politics); but it isimplemented at various levels throughout thefederal governmental structure, according tointerpretation and past habit.

This third possibility may not offer anedifying picture, but it comes closest to realityin energy policy as we see it from day to day . . .in all three countries. National energy policy canbe modified or possibly turned around at theregional (and even local) level. This is why it is

worthwhile to examine the respective federalstructures as Earl Fry has done. We also oughtto consider diverse (sometimes conflicting)regional interests, as I shall do in the rest of myremarks.

In the United States, wholesale transactionsof natural gas and electricity are regulated bythe Federal Energy Regulatory Commission(FERC). But the rates that most end-users payare set by state public utility commissions(PUCs). Those state authorities also have thefinal say on whether and where new pipelines,electricity transmission networks, andproduction facilities will be built, as well as howenergy companies will operate. This explainswhy the investment climate for the energysector in our two most populous states(California and Texas) can be so different fromone another.

State regulations on gasoline vary so muchthroughout my country that there are dozens ofdifferent formulations (called boutique fuels)that may not be legal for sale across the river inanother state. This has not only caused higherprices; it has occasionally produced localshortages. Regardless of what national statutessay about energy use and clean air, significantimplementation takes place in a distributedfashion.

Since the power blackout of August 2003,the need for mandatory reliability measures ingenerating and delivering electricity has seemedcrystal clear to most expert observers. Earl Fryhas already mentioned a unique, internationalentity that exists to carry this out. It is the


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North American Electric Reliability Council, anon-governmental (rather than supranational)entity. NERC involves representation from theprivate sector as well as governmental electric-power enterprises that range from ruralcooperatives and municipal utilities to crowncorporations and the Comisin Federal de

Electricidad(CFE) here in Mexico. It embraces allof the Lower 48 states and all Canadianprovinces; but it operates within regionalcouncils rather than as a single unit -- sincethere is no true national grid in any of the threecountries of North America, much less asynchronized and strongly interconnectedcontinental network.

My main point here in respect to federalismis that NERC must now rely on peer pressurealone to see that standards and proceduresagreed upon by consensus among its membersare observed. This is inadequate. Canadian

officials under both Prime Minister Chrtienand his successor (incumbent Paul Martin) haveexpressed support for a self-governinginternational organization with mandatorypowers. In the current Bush administration, thevery first recommendation of the CheneyReport regarding energy infrastructure calledthree years ago for legislation providing forenforcement by a self-regulatory organizationsubject to FERC oversight.ivYet that provisionwas stripped from the comprehensive energybill that is still stuck in Congress, along with anyreference to regional transmissionorganizations (except to try to delay theirimplementation). Why? Because of oppositionfrom certain states . . . through theirrepresentatives in Congress. Certain states(predominantly in the Southeast and Far West)fear that stronger transmission ties with otherparts of the country while it might improvereliability and efficiency overall could allowcompetition from outsiders for the relativelycheap electricity they have long enjoyed. Itsironic that much of that power comes fromfederally built and operated hydroelectric dams.

No wonder FERC has established its ownOffice of State and Local Outreach to try toimprove communication among various levelsof government within the U.S. on matters thatconcern it. Lets hope it succeeds.

Meanwhile, trans-border regionalism inelectricity supply and demand is a fact. SeveralCanadian provinces exchange more electricitywith U.S. states than they do with adjoiningprovinces. In 2003, four provinces (Alberta,

Saskatchewan, Manitoba and Ontario) were netimporters while four others (British Columbia,Quebec, New Brunswick, and Nova Scotia) werenet exporters.v The grids in some provinces aresynchronized with adjoining states rather thanwith neighboring provinces.

So much for examples from Canada and the

United States. There is only time here to hint athow national policy in those two countries isswayed during its implementation by regionalinterests a hallmark of federalism. What aboutMexico?

Surely, the states of Mexico have noinstitutionalized role in forging energy policy.Yet, if that is the entire story, why has thenational energy secretariat (SENER) courtedgovernors and their staffs with briefings aboutthe regional benefits to be enjoyed by enactmentof certain national initiatives? I think theexplanation lies in the fact that energy policy

must be implemented as well as enunciated.Legislative initiatives must be enacted . . . bySenators and Delegates who must themselves beelected from distinct constituencies -- whereparty predominance varies, and where regionalinterests are obviously not uniform. Airconditioning is more important in hot, lowareas around Juarez than it is on the highplateau of the Federal District. Natural gas ismore critical as a fuel for certain industriesaround Monterrey than it may be in parts of theYucatan except perhaps to generate electricity.

I am not close enough to Mexican politics tostate this as a fact; but I would be surprised if --when benchmark natural gas prices became sovolatile in Houston -- the decisions of Pemexand the Comisin Reguladora de Energa to offerreduced rates on long-term contracts withindustries that depended very heavily on thatfuel were not triggered by the importance ofMonterrey to the national economy. When Ispeak of a real-life trend toward federalism, Iam not talking only about what politicalscientists call the devolution of power. I speakof the decentralization of influence.

We would be nave not to realize that theremay also be established interests in Mexicoswidespread use of bottled gas which servesmore than four out of five households, but isvery slowly being replaced by natural gas forreasons of safety, convenience, andenvironmental protection. Astonishingly, somevendors of propane are even arguing (withoutany sound technical basis, so far as I candetermine) that the accident-prone trucks


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loaded with top-heavy cylinders are somehowsafer than piped gas.vi

New energy installations of any kind,anywhere, require property-use approvals. In allthree countries, they must meet environmentalstandards that are deemed appropriate to localcircumstances. If state and municipal officials

drag their feet handling applications, delays canlead to cancellations. This is especially relevantas applied to the receiving facilities for liquefiednatural gas (LNG) that are proposed for boththe Pacific and Gulf Coasts of Mexico. Not all ofthese planned facilities will be built; the firstones to move into the construction phase willlikely win an unofficial, winner-take-allcompetition.

Local acceptance of LNG facilities is a factorin all three countries. In Baja California, forexample, I understand that partisan divisionover the issue could play a role in Julys local

elections. In Harpswell, Maine, a few weeks ago,a mere handful of residents rejected a proposalby TransCanada and Conoco Phillips Companyto build a $350 million (U.S.) LNG terminal onthe site of an abandoned fuel depot. The votewas minuscule in continental terms something like 1,930 to 1,520.vii But that killedthe site.

Meanwhile, provincial premiers andgovernors may have something to say about thisas they reach across both the northern andsouthern international borders with the UnitedStates; and this may be quite positive. Regionalgroupings of sub-national chief executives fromCanada and the United States have met foryears in the Far West, the Great Lakes Region,and the East. More recently, yet another groupof Border Governors has started to cometogether. They govern California and BajaCalifornia, Arizona and Sonora, New Mexicoand Chihuahua, Texas, Coahuila, Tamaulipas,and . . . Nuevo Leon. They meet, and they talkabout a lot of things including jobs, water . . .and energy.

Moving back to the national level, I suggestthat differences in the regional effects on centralenergy policy are enhanced by the partisan splitin the Mexican Congress as well as by the factthat governors here no longer all represent asingle party. Mexicos gradual move towardrevenue sharing has begun to make this newgeneration of governors what one observer hastermed the modern viceroys.viii This may besomewhat exaggerated. I recognize sloganeering whether it is President Zedillos Nuevo

Federalismo, the PANs Autntico Federalismo, orthe Federalismo Democrtico of the PRD. But onepossible major structural reform (which seemsto have gained support in more than one party)would allow re-election in Mexico. I believe thatwould magnify the expression of divergentregional opinions, since there is general

agreement that it would make officials moreresponsible and responsive to their particularconstituents.

What can be done in any of the threecountries to cope with these federalisticrealities while doing energy business?Obviously, an entrepreneur needs to do morehome work before proposing a project,during development, and once in operation. Fora cross-border system (such as a pipeline apowerline, or any energy facility to serve morethan one national market in North America),one must feel the pulse of the public and local

public officials on both sides. Knowing the exact,intricate rules of the game in both countries isan absolute requirement. An ongoingintelligence system needs to keep track ofwhats going on in national capitals, but also inthe neighborhood.

Needless to say, the public officials involvedat various levels have a parallel responsibility.Energy security is a prime objective and duty ofthe three central governments. Energy securityis fostered in North America by smoothlyworking energy interdependence wheneverand wherever a consensus can be achieved onmutual benefits through trade and other formsof cooperation. But this means that central-government authorities need to reach out inunderstanding and good will to those whoexpress regional interests . . . and vice versa.

In Canada, this might involve using the newCouncil of the Federation to consider energymatters as well as health care in discussionsbetween Ottawa and the provinces. For theUnited States, perhaps there should be morecontact between the Department of Energy andits representatives on the North AmericanEnergy Working Group and the regionalgroupings of governors I have mentioned.Mexicos Secretariat of Energy might choose tocontinue and regularize contacts with governors(and even with local authorities, in some cases).There is no simple, magic, one-size-fits-allsolution. Many people must work at it.

There isnt time to spell this out any further,except for a few principles and myrecommended methodology of approach. Recall


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those three aspects I started with trying todetermine economic sense, technological sense,and political sense for any specific situation.National statistics (for example in relation tofuel-choice) cant be trusted to apply to allregions uniformly. The competition faced bycoal in West Virginia is nothing like the

alternatives in Washington State, much lessQubec or Guerrero.

Unfortunately, it is usually easier to oppose aproject than to initiate one. To complicatematters, what people seek from an energyproject involves disparate goals that mayconflict among themselves. They must bebalanced. I suggest making a check-list of fiveobjectives for any project proposal. I have foundthese goals to apply universally:

1) Affordability of the energy delivered (Thisdoesnt mean the same thing in Tabasco,

however, as it does in Toronto;2) Adequacy (Photovoltaics may suffice for a

remote village in the Sierra Madres or evenin certain Inuit outposts, but probably notfor Montreal or Minneapolis. A large wind-farm in Oaxaca makes sense only if excesspower can be delivered to a broadermarket.)

3) Reliability (Thats a major selling point foranybody who is fed up with blackouts . . .anywhere);

4) Environmental acceptability (This variesenormously by location and therequirement to achieve other goals); andfinally . . .

5) Timeliness (There will not be much popularinterest in an exotic source of natural gaslike methyl hydrates if we havent yet builtthe Mackenzie and Alaskan pipelines to tapmore readily available Arctic gas).

Whenever possible, it is wise to try to anticipatelocal attitudes toward each and every one ofthese goals. Then, one can prepare to rebutunfair criticisms and to use points with thestrongest local appeal to encourage a fairbalance.

By focusing on regional interests in thispresentation, I do not mean to discount thevalue of national goals . . . or even continentalharmonization to the extent feasible. Thetrilateral North American Energy WorkingGroup which I expect one of the speakers onthe final panel to mention has been at workfor some time on a document that is supposed

to present A Vision of the North AmericanNatural Gas Market. Personally, I believe it willbe even more important than the historicdocument NAEWG produced as its initial jointeffort two years ago and is now in the process ofupdating and improving. That was entitled

North America: The Energy Picture.ix

Still, a continental gas vision will not beimplemented unless those who carry it forwardrecognize that Canada, the United States, andMexico are all in one way or another -- federalsystems. During the question period andafterwards, I would welcome your individualexperiences of how this may be hindering (ormight help) specific projects you know of. Weare united in seeking a more energy-secureNorth America, so we should all learn to copewith realities.

i Earl H. Fry, The Impact of Federalism on the

Evolution of the North American Energy Sector,remarks prepared for delivery April 2, 2004, at theforum on Forging North American Energy Securityin Monterrey (Nuevo Leon), Mexico.ii Andre Plourde, keynote opening address at theNorth American Natural Gas Conference onProspects for Prices, sponsored by the CanadianEnergy Research Institute (CERI) at Calgary, Alberta,March 1, 2004.iii Graham T. Allison, Essence of Decision: Explaining theCuban Missile Crisis, Little Brown and Company,Boston, 1971.ivNational Energy Policy: Report of the National EnergyPolicy Development Group, Washington, May 2001, p.

7-17.v Canadian Electricity Association, Canadian Electricityand the Economy: The Integrated North American

Electricity Market, March 2004, p. 5.vi Ken Bensinger, Tradition bottles up gas market,Houston Chronicle, March 6, 2004.vii Kevin Cox, Tiny Maine town kills LNG project,Globe and Mail, March 11, 2004.viii Victoria E. Rodriguez, Decentralization in Mexico:From Reforma Muinicipal to Solidaridad to NuevoFederalismo, Westview Press, Boulder, Colorado,1997, pp. 25-27.ix This document was published in June 2002, inEnglish, French and Spanish. It is available from

the energy departments of Canada, Mexico, andthe United States on their respective Internetsites. The U.S. version is athttp://www.eia.doe.gov/emeu/northamerica
http://www.eia.doe.gov/emeu/northamericahttp://www.eia.doe.gov/emeu/northamerica

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Dukert Federalism