New Sweetheardt Deal

In early July, the new director of the DNR, K.L. Cool, reached into the succulent stew of the state's oil and gas policy and pulled out a piece of pork for the energy industry. In a consequential decision over state subsidies for natural gas development, Cool endorsed the continuation of a DNR policy that costs taxpayers millions of dollars.

The DNR has promoted Cool's decision as a reasonable compromise, since the subsidy was scaled back. In reality, the action delivers a disappointing message: despite a change of leadership, the DNR continues to shirk its responsibility to steward the public's resources.

At issue is the DNR's "post production cost" (PPC) agreement which has become one of the most controversial state policies in decades. Established in 1993, the agreement allowed oil and gas companies to write off processing costs before paying state royalties on natural gas production in Michigan. The agreement was the product of negotiations between the DNR and industry executives that went on for months without the knowledge of the Legislature, the Natural Resources Commission, or the public, and has cost taxpayers more than $12 million.

A recent DNR audit confirmed that Michigan's PPC policy was the most generous in the country. Other energy producing states, like Oklahoma and Illinois, do not allow PPCs. Neither did Michigan, until the DNR made its "sweetheart deal."

The Michigan PPC policy was the DNR's way of propping up the energy industry. Spurred by a generous federal tax subsidy, the energy companies have invested more than $1 billion since the late 1980s in constructing a complicated processing system to extract natural gas from the more than 5,200 wells drilled across northern Michigan.

Then, natural gas prices tumbled.

Taken aback by the potential loss, energy companies scrambled to find a way to protect their investment. The DNR bailed out the industry by signing on to the PPC agreement. The deductions included pipeline, compressor, and processing costs, legal and administrative expenses, and even those for snow removal and fencing.

When the agreement was discovered and made public last summer by the Michigan Land Use Institute, it ignited a public furor. In the past year there have been Legislative hearings, a state Attorney General investigation, and a full-fledged citizen campaign to end the subsidy outright.

Lack of Oversight

One might ask, How could such a poorly conceived agreement occur? Aren't there safeguards to enable some public review?

The sad response is there now is precious little public oversight in Michigan. In 1991, by executive order, Governor Engler eliminated most of the state's public oversight boards, and weakened the NRC.

K.L. Cool was hired to strengthen the DNR's credibility. His straightforward, get-down-to-business manner initially encouraged even the DNR's most embittered critics that he could lead Michigan's once proud DNR out of its demoralized and under-funded condition. Last May, one of his first acts as DNR director was to rescind the 1993 PPC agreement, although with the caveat that he would consider a substitute policy.

Citizens Object

In doing so, Director Cool was responding to a powerful public outcry. More than 400 people jammed the Grayling Holiday Inn last April to tell him, in no uncertain terms, that this time state regulators had gone too far. Citizens overwhelmingly called for an end to PPCs, and told their government to let the market, not subsidies, dictate the pace and scale of natural gas development.

They further tried to convince Cool that there is no rush for Michigan to sell off its natural resources. Attorney General Frank Kelley summed up this point when he said, "If the state-owned mineral rights don't sell as briskly as they did with PPC deductions, our gas will not be lost."

Industry Back Channel Politics

The PPC debate came to a head last month at the NRC meeting in Alpena. The DNR staff proposed two options: to scale back the allowed PPCs, or to essentially eliminate them altogether.

The oil and gas industry launched a massive back channel campaign to leave their subsidy untouched. It was successful. Mr. Cool's compromise, according to the current estimates of production, would preserve $1.5 million per year in subsidies, compared with the previous tab of $4 million per year.

It is hard to find a justification for this compromise. Cool's decision is a political placation, and not the firm stand against a wasteful policy that the public was calling for.

Nor does Cool's gray-shaded compromise answer the bigger black and white question. Is it valid for public funds to be used to help private industry reap vast profits from a publicly owned, non-renewable resource? Clearly, the fair and reasonable answer is no.

This story first appeared in the MCLUC Reporter, Summer 1996, Vol. 3, Number 2, and is used here with permission. This newsletter is published by the Michigan Land Use Institute, a non-profit, non-governmental, educational and policy research organization. For information regarding the Michigan Land Use Institute and its projects you can write the institute at P.O. Box 228, 845 Michigan Avenue, Benzonia, MI 49616. Telephone is 616-882-4723. Fax is 616-882-7350. E-Mail address is mlui@traverse.com. For the protection of our land and rivers in northern Michigan the active and financial support of this organization is highly recommended. - Editor

RWOL

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