Eminent Domain Basics with Ilya Somin – August 10, 2015

Today we talk about five things in the news from the week of August 3, 2015.

  1. Natural Gas a “Loser” in the Clean Power Plan?
  2. Republicans Use Small Stage to Unload on CPP
  3. Little Mention of Energy from Republicans on Big Stage
  4. Cheniere Gets New Investor, Could Slow Expansion
  5. Oklahoma Gets Serious About Earthquakes

Our interview this week is with George Mason University Law Professor and Author Ilya Somin.

Click below to listen or find us on iTunes or Stitcher.

1.  Natural Gas a “Loser” in the Clean Power Plan?

Last Monday, the President announced the final Clean Power Plan rule, which for the first time will regulate carbon emissions from powerplants.

The Administration appears to have looked to push back on a feeling that the proposed rule would cause a “rush” to natural gas that could stunt the growth of renewables.  The Financial Times, for example, put it this way:

In its landmark plan to cut greenhouse gas emissions from power plants, the Obama administration eliminated an earlier projection that natural gas would contribute much more electricity, and instead upped the role of renewables.

“I’m confused and disappointed,” said Marty Durbin, head of America’s Natural Gas Alliance, a trade group for gas producers. “It seems the White House is ignoring the market. Natural gas today is already primed to play a big role in power generation.”

This shift away from natural gas is largely written between the lines.  The Union of Concerned Scientists had a good blog post that highlighted four changes to the rule that target natural gas:

  • Creation of a new Clean Energy Incentive Program for renewables.
  • Delayed compliance initial compliance from 2020 to 2022, potentially giving states more time to ramp up with renewables and rely less on coal-to-gas switching.
  • According to the Union of Concerned Scientists, “The draft proposal included a big loophole that we and others pointed out: state could simply shut down existing fossil-fired generation (covered by this rule for existing power plants) and open new [Natural Gas Combined Cycle (NGCC)] plants (which are not covered under this rule, but under a separate rule for new power plants which a new NGCC plant would easily meet)….In the final rule, the EPA has taken steps to ensure that states don’t use this strategy to grow their emissions without accounting for them.”

The EPA, and news articles following the agency’s lead, have probably overstated how much the rule hurts gas.  Council on Foreign Relations scholar Michael Levi throws some cold water on the “gas-is-a-loser” narrative:

There is a lot of reporting, including by many who should know better, claiming that the plan will result in massive amounts of renewable generation and no increase in natural gas above business as usual in the long run (2030ish in this case). This reporting is based on two things.

First, the [EPA’s new state targets rely heavily on renewables.]  Many are concluding from this that states will be required to massively increase renewables use. But – and this is really important – the “building blocks” tell you nothing about what measures states will actually use to comply. Once the building blocks are used to determine state targets, the states decide how to meet those targets. At that point, it’s as if the building blocks never existed. If a state wants to use only solar to meet its targets, it can do that. If it wants to use only natural gas or nuclear, it can do that too.

The second reason you’re hearing that the final plan will rely largely on efficiency and renewables is that when the EPA models the real-world impact of the rule, it reportedly foresees lots of new efficiency and renewable energy, and not much new coal to gas switching. But this is a feature of the EPA model, not something that the rule requires. In particular, the EPA model is well known to predict huge increases in efficiency.

Politically speaking, the rule appears to unite Democrats and would likely remain largely unchanged in subsequent Democratic administrations:

Other issues to watch:

2. Republicans Use Small Stage to Unload on CPP

Republicans wasted no time in going after the plan.  Here is a sampling of twitter reactions:

Most of the candidates also appeared last week in Georgia at an event called the RedState Gathering, and several of them had worked the Clean Power Plan into their stump speech.  Scott Walker repeated his “Costly Power Plan” line and said it would cost his state 20,000 manufacturing jobs.

Marco Rubio said it would make “everything in America more expensive.”  On a somewhat related note, Mike Huckabee used the occasion to call for energy exports for geopolitical reasons.  This had been a top energy issue for many Republican candidates earlier in the year.  Jeb Bush also argued that America should fully embrace the energy revolution.

3.  Little Mention of Energy from Republicans on Big Stage

In their first debate of the 2016 election cycle (which drew a record 24 million viewers), the Republican candidates spent little time talking about energy.  President Bush repeated his stump-speech line that America needs to “embrace the energy revolution.”  Scott Walker also repeated his call for the ever-origional “all-of-the-above energy plan.”  Lindsey Graham was the only candidate asked an energy or environmental question, perhaps because he is the only Republican that has supported climate legislation.  He said he would not debate climate science with Hillary, he would debate the costs of various solutions.

4.  Cheniere gets a new investor

Last week, famed investor Carl Ichan disclosed an 8% stake in Cheniere Energy, leading to speculation about what he plans to do to the company.  Bloomberg said:

In a potential showdown with Cheniere, which has lost money for at least 21 consecutive years, Icahn is training his sights on an innovative and little-known company that is likely to become the first to export a bounty of gas from U.S. shale formations. He may also bring focus to Cheniere’s charismatic chief executive, Charif Souki, who drew fire last year after it was revealed that he received more than $140 million in 2013 compensation.

And the Wall Street Journal said:

A year ago, U.S. gas futures for 2017 averaged $4.25 a million British thermal units. This implied a cost to deliver LNG to Asia of $10.59. But Brent crude futures were about $100 a barrel, implying an Asian LNG price of $15, and hence a healthy margin for companies contracting capacity at Cheniere’s terminals.

Today, with Brent having collapsed, the implied spread is negative, by 44 cents. This undercuts Cheniere’s big expansion plans. And this may be what Mr. Icahn has his eye on: pushing Cheniere to scale back its ambitions and focus on churning out cash for distribution from existing contracts. An oil rally would turbocharge things.

5.  Oklahoma Gets Serious About Earthquakes

The News OK reports:

Gov. Mary Fallin on Tuesday acknowledged a link between Oklahoma’s earthquake swarm and wastewater disposal wells used by the energy industry….

Fallin and her Coordinating Council on Seismic Activity said Tuesday they have made progress toward understanding and reducing earthquakes in the state, but that more time and effort are needed….The council is not a regulatory body. Fallin created the group last fall to help coordinate research and protection efforts throughout the state.

The Oklahoma Corporation Commission took some additional action last week as well, according to the New York Times:

Oklahoma regulators have told energy companies to sharply reduce underground wastewater disposal across an earthquake-prone stretch of the state, a move that ratchets up a so-far unsuccessful effort to reduce quakes related to oil and gas production….

Regulators have previously taken action against some individual disposal wells and tightened requirements for new ones. But Monday’s action goes well beyond those efforts, requiring reductions in wastewater disposal for all wells in the earthquake zone, regardless of whether they have been linked to tremors.

Interview with Law Professor Ilya Somin (Starts at 21:25)

Prof. Somin has been active on eminent domain issues since law school, when he interned for the public-interest law firm called the Institute for Justice.  This May, he released a new book on the topic called “The Grasping Hand: “Kelo v. City of New London” and the Limits of Eminent Domain.”  He is also a prolific blogger on this topic and many others over at the Washington Post’s Volokh Conspiracy.  I had a chance to talk with Prof. Somin about the basics of eminent domain law, which is increasingly being used as an tool to block pipeline projects.

The Fifth Amendment to the U.S. Constitution says, among other things, “nor shall private property be taken for public use, without just compensation.”  This line probably wound up in the Bill of Rights at the request of James Madison, who probably just felt it would be an important safeguard to enshrine into the Constitution.  The question of what is a “public use” has been sharply debated over the last decade.

One of the earliest cases to shed some light on the topic is the 1798 Supreme Court case of Calder v. Bull.  In that case, the Court said that “It is against all reason and justice” for the government to take property from “A” to give it to “B.”  Prof. Somin classifies this as a narrow view of “public use,” where property taken by the government must be owned by the government or, if privately owned, at least available for public use.  A more broad view allows government takings for most any purpose that may have some indirect public benefit.

One of the first controversial uses of eminent domain came from “mill acts,” which often allowed the government to take land around a river to block up the water and build a water-powered mill.  These mills were typically privately owned, but often required to serve the public.  To an extent, they were like a public utility.  In that same period, many states allowed takings for private roads, but those were often required to be open to the public.  Prof. Somin’s research of state law found that most states adopted a narrow view of “public use” in the years leading up to 1868.  The meaning of “public use” at that time is important to many legal scholars, because the 14th Amendment was passed in 1868 and for the first time applied the Bill of Rights to the states.

In the early 1900s, the narrow view of “public use” began to fall out of favor.  Progressives argued that private property rights protected the rich and the expense of the poor, and that limitations on eminent domain stood in the way of rational social planning by expert government officials.  This view peaked during the New Deal era, after the Great Depression discredited property rights and capitalism in the eyes of many people.  A string of cases in the following decades cemented the broad view of “public use.”  This included the 1954 Supreme Court case of Berman v. Parker, which allowed the taking of a “blighted” neighborhood in Washington, D.C.; the 1981 Michigan Poletown case that allowed Detroit to take land from 4,000 people and give it to General Motors; and the 1984 Midkiff Supreme Court case that allowed the government to distribute land in Hawaii that was held by a few wealthy owners.

The Grasping Hand focuses on the story of Susette Kelo and her neighbors in the city of New London, Connecticut.  She owned a small, pink, waterfront home in the Fort Trumbull neighborhood.  The City of New London deputized a nonprofit group called the New London Development Corporation with the power to take homes in the area and replace them with a new development, which was to be anchored by new offices for the pharmaceutical company Pfizer.  With the help of the Institute for Justice, Ms. Kelo and some of her neighbors fought the New London all the way to the U.S. Supreme Court.  She was ultimately unsuccessful in court, and her former home is now a vacant lot inhabited by feral cats.

The Supreme Court’s 2005 decision in the Kelo case largely reaffirmed the broad view of public use.  This was not a surprise to most legal experts.  The decision was surprisingly close, however, and featured a strong dissent by Justice Sandra Day O’Connor, who had supported a broad view in the Mikiff case.  She wrote that under the current law “Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

Kelo did little to alter the federal Constitutional law on eminent domain, but it drove some important changes.  First, the four dissenting Justices gave credibility to Prof. Somin and others who argued for a narrower view of eminent domain.  Second, Kelo gave rise to what many call the strongest state-level backlash to any Supreme Court case.  45 states changed their eminent domain laws after Kelo.  Prof. Somin is skeptical of many of the state-level reforms, which turned out to be cosmetic in his view.  A strong minority of states, however, put strong restrictions on eminent domain, especially for economic development projects.

Pipeline takings are a bit of a different animal.  Most pipelines fit into the most narrow view of “public use,” because they are either publicly owned or required to serve any customer.  That is not always the case, though.  Prof. Somin noted a recent Texas case that struck down a taking for a carbon-dioxide pipeline because it connected two facilities owned by one company and therefore would not really serve the public.  One interesting reform put forward in Georgia is veto power for local elected officials.  Prof. Somin has mixed feelings on the idea in the pipeline context, as it gives more power to people most impacted, but may also allow “not-in-my-backyard” considerations to overshadow state or federal needs.

Pipelines have fewer options to deal with problems like holdouts, and so they have a stronger argument that they provide a public good that is only possible through government takings.  As a result, Prof. Somin sees eminent domain as being appropriate in more circumstances for pipelines than for other economic development projects, but he wants strong protections for property owners in any case.  He was also fairly skeptical that imposing restrictions on pipelines is a good way to deal with broader environmental concerns coming from developments at either end of the pipeline.

Prof. Somin’s Grasping Hand book is available from Amazon, the Chicago Press, and most other booksellers.  Next year, he will also have an updated version of another one of his books, Democracy and Political Ignorance: Why Smaller Government Is Smarter.