Topic: Regulatory Studies

FERC’s Prosecutorial Tactics

Joseph Rago of the Wall Street Journal reports on an outrageous enforcement action by the Federal Energy Regulatory Commission against brothers, Rich and Kevin Gates.  Excerpt:

[FERC] began demanding information and taking depositions in fall 2010. At first, the Gates brothers tried to adhere to the insider playbook and hired an attorney from White & Case, a D.C.-based law firm that does frequent business in front of FERC. The insular Washington energy bar trafficks in political connections, but those aren’t so useful for clients who maintain their innocence.

Things started to turn for Kevin Gates, he recalls, during his second full-day deposition with the lead FERC enforcement lawyers on the Powhatan matter, Steven Tabackman and Thomas Olson. “I would suggest that it was intimidation tactics, aggressive behavior, which I guess is natural for a federal prosecutor, maybe what you would expect,” he says. “But there were also a lot of questions asked and behavior that suggested to me that we were seeing the world very differently and—I would suggest—they didn’t know what they were talking about.”

Mr. Gates was asked to leave the room and sat in the hallway while his lawyer conferred with the feds. The lawyer emerged to relate what the FERC enforcement team had proposed: “Kevin’s a businessman, isn’t he? He knows that it’s cheaper to settle than it is to fight this investigation.” Right then, Mr. Gates says, “I realized that we had a big problem on our hands. This was unlike anything we’d ever seen before at a regulatory agency.”

The Gates brothers fired the white-shoe practice and brought on Bill McSwain of Drinker Biddle, a Philadelphia-area lawyer who “didn’t interface much with FERC. He also used to be a Marine sniper, so he had a different approach to the world.” Mr. McSwain introduced himself to FERC by calling their conduct contrary to “established law, as well as common sense,” and that was one of his subtler letters…

[FERC’s regulators] have specialized in retroactive punishments for conduct that was legal at the time. Most of these cases never go to court and end with settlements against politically disfavored defendants like J.P. Morgan (that one, like Powhatan, was led by Mr. Olson). Most companies roll over because their future business interests depend on preserving good regulatory graces and favorable FERC rulings. The Gates brothers are unusual in that their livelihoods are elsewhere, but the illogic, intimidation tactics and erosion of due process in their investigation are typical. [Emphasis added].

Read the whole thing.  As the article notes, most business people surrender to the bullying tactics of regulators.  By taking their case public and fighting back, the Gates brothers may not only win their case, but might establish some favorable legal precedents that will help others in the future.  And for that, they deserve our thanks.

For related Cato work on the erosion of due process, go here, here, here, and here.

Courts Must Put Administrative Agencies in Their Place

In order to govern the sprawling reach of the U.S. administrative state—its countless agencies, bureaucracies, departments, and other regulatory bodies—our courts have come to rely greatly on what is called Chevron analysis. Taking its name from the 1984 Supreme Court case in which it was pronounced, Chevron v. National Resources Defense Council, this doctrine advises when and to what extent courts are to defer to agency actions.

Since agencies can only exercise the legislative powers granted to them by Congress, Chevron counsels that where Congress has spoken clearly on an issue, the statutory text controls, but where Congress is ambiguous or silent, the agency is permitted to fill the gap with its own rules and decisions.

Naturally then, agencies that want more rulemaking power than has been “clearly” granted to them by Congress—so, all of them—find ways to invent ambiguity. In a recent ruling, a panel of the U.S. Court of Appeals for the Fifth Circuit appears to be trying to help them.

Here’s the case: Seeing that the IRS’s definition of “taxable compensation” differed from Congress’s, BNSF Railway sought a refund of overpaid taxes on certain elements of its employee compensation plans—and won on all counts before the district court. On appeal, however, a Fifth Circuit panel reversed, employing the “dictionary rule”—a truncated version of the full, traditional statutory analysis typically required, and an approach that has already been rejected by an en banc (full) Fifth Circuit. This short analysis skips the important, rigorous examination into whether Congress has spoken on the issue (an examination required by Chevron) and looks merely to see if the word can have more than one dictionary meaning. As tends to be much more likely with this type of scant analysis, the Fifth Circuit panel found that Congress was ambiguous, which in turn allowed the IRS’s discretionary definition to prevail.

BNSF has now filed for a rehearing of the case before the en banc Fifth Circuit. Cato has filed a brief supporting this request, joined by tax law expert Patrick J. Smith and administrative law professors Michael Moreland, Jeffrey Pojanowski, and Nathan Sales. As the administrative state continues its unending spew of rules and regulations, the role of the courts as a gatekeeper of administrative authority becomes increasingly vital to maintaining any kind of sanity. That role requires courts to apply Chevron diligently and not to skimp on the considerable duty of determining where Congress’s authority ends and the domain of unelected bureaucrats begins.

By failing to make a rigorous examination, the Fifth Circuit panel adopted an approach that, if allowed to gain a foothold, could threaten a (further) massive shift of governing power away from our elected Congress to a faceless, hardly accountable bureaucracy. In our brief, we urge the Fifth Circuit to send the message that it takes Chevron and its job of checking agency authority seriously by rehearing the case and reversing the panel decision.

The Fifth Circuit will be deciding later this spring whether to take up BNSF Railway Co. v. United States. If it doesn’t, the next step is a petition to the Supreme Court.

This blogpost was coauthored by Cato legal associate Julio Colomba.

New Frontiers in Regulatory Overreach

In most cases, excessive regulation doesn’t surprise me all that much.  It usually focuses on familiar industries, such as automobiles.  So, for example, when the National Highway Traffic Safety Administration came up with a rule mandating that all cars and light trucks sold in the United States have rearview cameras, it wasn’t a great shock.

But every now and then, regulators do something that catches me off guard.  This is from the Economist:

Vancouver’s ban on doorknobs in all new buildings, which went into effect last month, … has provoked a strong reaction from the door-opening public and set off a chain reaction across the country as other jurisdictions ponder whether to follow Vancouver’s lead. 

Wait, what?? They are banning doorknobs? I confess that this threw me when I first read it. Were they going to require some sort of Star Trek-like eyeball scanning device, along with an automatic door?

Turns out it wasn’t anything quite so techonoligcally advanced. They just want “levered doorhandles” instead. Here’s their rationale:

The war on doorknobs is part of a broader campaign to make buildings more accessible to the elderly and disabled, many of whom find levered doorhandles easier to operate than fiddly knobs. Vancouver’s code adds private homes to rules already in place in most of Canada for large buildings, stipulating wider entry doors, lower thresholds and lever-operated taps in bathrooms and kitchens.

I would have thought doorknobs were pretty easy to deal with, but OK, maybe levers are easier. But I’m not sure how you go from “some people find levers easier” to “everyone must use levers!”

Furthermore, perhaps levers are too easy:

True, elderly and disabled people find it easier to operate doors with handles. But so do bears. In British Columbia, bears have been known to scavenge for food inside cars—whose doors have handles, knob advocates point out. Pitkin County, Colorado, in the United States, has banned door levers on buildings for this very reason. One newspaper columnist in the pro-knob camp has noted that the velociraptors in “Jurassic Park” were able to open doors by their handles.

Obviously, bears don’t vote (nor do velociraptors), so we probably can’t attribute these developments to regulatory capture by the bear lobby, which wants easier access to people food (are campers getting more careful with their “pic-a-nic” baskets these days?). Nevertheless, something seems a little off in the regulatory process in Vancouver.

Liberalizing Investment in Cuba

I’m no Cuba expert, but I have followed the events of recent years with interest. It seems that there have been tentative steps towards liberalizing the Cuban economy, as well as slightly better economic relations between the United States and Cuba. I’m hopeful the long-term trend is towards Cuba becoming a free market democracy, with normal relations with the United States.

In the short-term, though, I’m frustrated by how the “liberalization” of foreign investment is being carried out there. Here’s the Economist:

But on March 29th Cuba’s parliament approved a new foreign-investment law that for the first time allows Cubans living abroad to invest in some enterprises (provided, according to Rodrigo Malmierca, the foreign-trade minister, they are not part of the “Miami terrorist mafia”). The aim is to raise foreign investment in Cuba to about $2.5 billion a year; currently Cuban economists say the stock is $5 billion at most.

The law, which updates a faulty 1995 one, is still patchy, says Pavel Vidal, a Cuban economist living in Colombia. It offers generous tax breaks of eight years for new investments. However, it requires employers to hire workers via state employment agencies that charge (and keep) hard currency, vastly inflating the cost of labour.

Welcoming new foreign investment is great. Here’s the problem, though: In order to liberalize investment, a government really doesn’t need to do anything fancy. It can just say, “foreign investment is permitted, and will be treated like domestic investment.” Very simple. Furthermore, lower tax rates and reduced regulatory burdens can help encourage such investment. Again, very simple.

In practice, though, governments make this process difficult and less liberalizing. Here, what Cuba seems to have done is offered special tax breaks for new foreign investments, and then subjected receipt of these tax advantages to certain hiring conditions. In effect, it introduces two distortions as part of the liberalization process: favoring new foreign investors over other investors through the tax code and then subjecting the favored investors to additional regulation.

To be clear, Cuba is not the only country who does this; this is what many countries do. But there’s just no reason to approach it this way. The simpler way, with low tax rates for all investors, is the more economically beneficial way. Unfortunately, it seems as though “liberalization” is often just a catchword, and governments insist on using their power to intervene in private economic transactions, even when ostensibly moving away from interventionist policies.

More Drinking Hours, Fewer Accidents

Does restricting access to alcohol reduce traffic accidents? Not necessarily, according to a recent study by economists from the University of Lancaster: 

Recent legislation liberalised closing times with the object of reducing social problems thought associated with drinking to “beat the clock.” Indeed, we show that one consequence of this liberalization was a decrease in traffic accidents. This decrease is concentrated heavily among younger drivers. Moreover, we provide evidence that the effect was most pronounced in the hours of the week directly affected by the liberalization; late nights and early mornings on weekends.

The authors also suggest that the restrictive closing times caused more traffic congestion (everyone left the pubs at the same time), increasing the scope for accidents.

So more freedom seems to generate better outcomes, presumably because most people use increased freedom sensibly.

BLM vs. the Nevada Rancher

The battle between Nevada rancher Cliven Bundy and the Bureau of Land Management (BLM) might be viewed as an overly aggressive federal bureaucracy enforcing misguided environmental regulations vs. an oppressed individual and his overly enthusiastic supporters with guns.

However, like the ongoing battles in California between farmers and environmentalists over water, the Nevada story is more complex than that. The issues are not divided neatly along left-right political lines. In both cases, the property rights issues are complicated, and the federal government has long subsidized the use of land and water resources in the West. The first step toward a permanent solution in both cases is to revive federalism. That is, to transfer federal assets to state governments and the private sector.

To understand the Nevada situation, it is useful to consider the history of federal land ownership in the West. From an essay by Randal O’Toole and myself:

“From the founding of the nation, the federal government began accumulating large tracts of land … As the federal government was accumulating land, it was also trying to unload it. The government’s general policy for more than a century was to sell or transfer its western lands to settlers, railroad companies, and state governments … With the rise of the Progressive movement at the turn of the 20th century, federal policy began to change toward land retention and land additions. Progressives believed that federal agencies would manage western lands better than states, businesses, or individuals.”

It turned out that the Progressives were dead wrong. In his book Public Lands and Private Rights, Robert H. Nelson describes how the Progressive ideas of scientific management and federal land planning have failed repeatedly. The last century of federal land management has been “filled with laws that had lofty purposes and achieved dismal results,” he concludes. He also notes that “federal ownership of vast areas of western land is an anomaly in the American system of private enterprise and decentralized government authority.” Federal policymakers should start fixing that anomaly.

The BLM faces a complex task in juggling all the competing uses of its timberlands, rangelands, minerals, watersheds, wildlife, water, and other resources located across a huge area. Livestock grazing, timber cutting, and mineral extraction all potentially conflict with wildlife habitat, watershed protection, and outdoor recreation.

The situation is made worse by BLM officials operating in a nonmarket environment. Essentially, they run a giant socialist enterprise in trying to centrally plan vast lands and resources. The decisions the agency makes are often infuriating to Westerners because they are made by unaccountable officials on the other side of the country.

The solution is to transfer most federal lands in Nevada to the State of Nevada. Charges for the use of the land—such as grazing fees—should be set in the marketplace. Where feasible, environmentally significant land should be owned and managed by private non-profit land trusts, as discussed here. But these sorts of decisions should be made by the Nevada legislature. Politicians in Washington lack the knowledge to make the crucial land-use decisions that affect the lives of people such as Cliven Bundy, and they are far too distracted with all the other issues on the federal agenda.

California Shouldn’t Be Able to Impose Regulations on Businesses Outside of California

One of the several failures of the Articles of Confederation was the incapacity of the central government to deal with trade disputes among the states. The Constitution resolved this problem by empowering the federal government to regulate interstate commerce. It has since become a basic principle of American federalism that a state may not regulate actions in other states or impede the interstate flow of goods based on out-of-state conduct (rather than on the features of the goods themselves).

That principle was axiomatic until the U.S. Court of Appeals for the Ninth Circuit upheld one particular extra-territorial California regulation. California recently established a Low Carbon Fuel Standard (“LCFS”) that attempts to rate the “carbon intensity” of liquid fuels, so that carbon emissions can be reduced in the Golden State. California considers not only the carbon emissions from the fuel itself being burnt, however, but also the entire “lifetime” of the fuel, including its manufacture and transportation.

This has led to complaints from Midwestern ethanol producers, whose product—which is in all other ways identical to California-produced ethanol—being severely disadvantaged in California’s liquid fuel markets, simply because it comes from further away. Groups representing farmers and fuel manufacturers sued, arguing that the LCFS constitutes a clear violation of the Commerce Clause (the Article I federal power to regulate interstate commerce) by discriminating against interstate commerce and allowing California to regulate conduct occurring wholly outside of its borders. The Ninth Circuit recently upheld the LCFS, finding the regulation permissible because its purpose was primarily environmental and not economic protectionism (although judges dissenting from the court’s denial of rehearing pointed out that this is the wrong standard to apply).

The farmers and fuel manufacturer groups have now submitted a petition to have their case heard by the Supreme Court. Cato has joined the Pacific Legal Foundation, National Federation of Independent Business, Reason Foundation, California Manufacturers & Technology Association, and the Energy & Environmental Legal Institute on an amicus brief supporting the petition.

We argue that the lower court’s ruling provides a template for other states to follow should they want to evade Supreme Court precedents barring obstruction of interstate commerce and extraterritorial regulation. As the Founders fully recognized, ensuring the free flow of commerce among the states is vital to the wellbeing of the nation, and California’s actions—and the Ninth Circuit’s endorsement of them—threaten to clog up that flow. Not only does the appellate ruling allow California to throw national fuel markets into disarray, it invites other states to destabilize interstate markets and incite domestic trade disputes—precisely the type of uncooperative behavior the Constitution was designed to prevent.

The Supreme Court will likely decide whether to take Rocky Mountain Farmers Union v. Corey before it recesses for the summer. For more on the case, see this blogpost by PLF’s Tony Francois.

This blogpost was co-authored by Cato legal associate Julio Colomba.