Market-based approach will best protect the Straits from spills

With the 2014 elections over, Michigan lawmakers can no longer ignore the ticking time bomb of Michigan’s oil and gas pipelines. This aging statewide pipeline network threatens our multi-billion-dollar fishery, boating and tourism industries, not to mention 20 percent of the world’s fresh water.

The disastrous Kalamazoo River spill should remind us what happens when an oil pipeline bursts. Enbridge Energy Partners’ pipeline break (Line 6B at Kalamazoo) cost over $1 billion to clean up, and its 61-year-old Line 5 pipeline that crosses the Straits of Mackinac and Lake Huron between Lake Huron and Sarnia, poses an even greater threat to our priceless Great Lakes.

A task force created this year, headed by Michigan Attorney Bill Schuette and Department of Environmental Quality Director Dan Wyant, is charged with studying the pipelines transporting petroleum around the state. We expect they will look at such government-centered options as requiring double-wrapped pipelines, increasing Coast Guard and emergency-response funding, or perhaps more government monitoring of underwater pipelines. However, we do not expect that they will order the replacement or removal of these aging pipelines, which is the only sure way to dodge the threat of an environmentally disastrous oil spill into the Great Lakes.

We suggest the state instead consider a more market-based approach, such as a modified two-tiered liability model suggested by Profs. W. Kip Viscusi of Vanderbilt and Richard Zeckhauser of Harvard. Instead of further regulating the potential polluter (in this case Enbridge), Enbridge instead would sign an agreement with the state that they would be solely and strictly liable for any spill caused by their pipeline. This agreement would put the financial burden of responsibility, as well as the economic incentive, to protect the Straits pipeline on Enbridge itself.

It would avoid Enbridge passing the liability buck in case of a spill, and also puts the responsibility for safety and costs clearly in the company’s hands. We would also suggest an annual tax to be paid to the state Natural Resources Trust Fund to cover potential catastrophic risks beyond the financial capabilities of Enbridge.

We feel this approach – short of shutting down the pipeline altogether – would be a more effective economic and political way to control unknown risks than solutions, if any, likely to arise from the task force findings. Setting up such an agreement prior to a spill minimizes the politics that otherwise would occur after a spill occurs, provides a long-term incentive for Enbridge to maintain pipeline safety without the need for a large-scale state regulatory presence, and saves the state considerable expenses in terms of additional emergency response funding and staff oversight expenses.

We would argue that the state should negotiate such a private agreement with Enbridge, and that doing so would be consistent with the terms of the 1953 easement that the state granted to Enbridge in order to place the Line 5 pipelines under the Mackinac Bridge. Since Enbridge professes that the chance of such a spill is remote, let them back their words with their corporate checkbook.

The bottom line might very well be that, after fully calculating the enormous cost of a possible catastrophic event at the Straits, Enbridge may on their own determine that re-routing much of the oil now travelling through Line 5, building a newer and safer pipeline across the Straits to reduce the risk of a spill, or even closing the Straits pipeline altogether might be the wiser choices than the status quo. But this decision would be market-based rather than government imposed.

If Enbridge decides that closure is in their own economic interests, such a market-based decision should please both anti-regulation lawmakers and environmentalist alike.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

Sat, 12/06/2014 - 8:16am
I don't advocate pouting oil onto the ground gratuitously; it costs too much. On the other hand, I don’t understand the commotion surrounding a potential oil spill. Oil has always oozed out of the ground to foul land, lakes and oceans. That’s how people first discovered the stuff.    In nature some oil on the surface evaporates off as naphtha (probably the basis of Greek fire). Other oil is digested by bacteria converting it into simple organic compounds that other organisms feast on, leading to a localized exuberant biodiversity. Few noted the explosion of fish catches in the Gulf after the BP bruhahah a few years back. The heavier components of oil remain as lumps called bitumen or asphalt. The Dead Sea was called Lake Asphaltites because of the gooey pebbles that floated onto the surface from underwater seeps. This asphalt was used on Egyptian Mummies. Oil found floating on lakes or in puddles was used by Indians to caulk canoes, and as medicines.  In ueber environmentalist Santa Barbara County in California an estimated 11 to 160 barrels of oil seep into the ocean daily and have for countless centuries; the locals have made attempts at capping it. Oil exists under the surface of the earth under pressure that causes it to seep to the surface by any available route. When a well is drilled into a pocket of contained oil, the pressure forces it to gush out and over the wellhead. The pressure in the pool of drilled oil gradually falls, and the seep ceases. In this way, oil drilling actually has stopped numerous spills of oil onto the surface where it fouled land and water for eons. The Enbridge's leaks allow environmentalist to make arguments against the rest of us using oil. Bad idea; if environmentalists really wanted to preserve pristine nature, they would be appalled that drilling for oil has interfered with widespread oil seeps that enriched the environment before Rockefellar messed things up.
Duane
Sun, 12/07/2014 - 12:59am
This sounds like Mr. Winter and Mr. Hill see what they want and have little regard for any other considerations. “Enbridge instead would sign an agreement with the state that they would be solely and strictly liable for any spill caused by their pipeline.” They want EEP to give up legal rights they currently have simply because these two want it so. This has nothing to do with market-based approach, it is pure and simple an attempt at government control. They seem to ignore that when the pipelines were built such requirements even current technology was not available and yet they want to force EEP to act as if everything begins today since that is when they said it to be so. I notice neither make any consideration of unintended consequences, they make no consideration of the value of such pipelines in our state, they make no consideration to the value of pipelines to our residence, they offer no concern for how such a rule would be seen by other businesses involved in transporting materials, they show no concern how this would affect the perceive State attitude toward business (if forcing a particular company to forfeit its legal right to due process, what companies would be next). I am disappointed in their seeming lack of thinking beyond what they want, they don’t seem to have considered the potential of unintended consequences of what they want. They don’t seem to have consider other aspects of what could happen if they got their wants. I wonder if there was any consideration how that could open EEP up to bogus claims on EEP having signed a letter of sole liability, how other companies would become concerned about the business environment in Michigan (being forced to give up their rights to the legal system). I wonder if they have considered if this was so discouraging to EEP that they did leave the pipeline business in Michigan (as the authors seem to suggest,” short of shutting down the pipeline altogether” as there only suggested alternative to this proposal) who would replace them or would pipelines across Michigan be closed and what the impact would be. Have they considered that whoever took over the pipelines may not be financial stable enough to provide ever improving maintenance or to pay a billion dollars for cleanup thus being unable to mitigate a release and causing the cost of such mitigation to shift to the state and taxpayers? I doubt they thought about what the impact on the Michigan economy could be if the pipelines were shutdown, consider the risks associated with alternative delivery system. I have doubts Mr. Winter and Mr. Hill thought about anything other then what they want. I believe there is a concern about pipeline integrity, rather than try to force EEP out of the business I would start by asking how they identify the risks, analyze the risks, and how they address them. I see much more value in engaging the knowledgeable people instead of attacking them, for trying to force them to give you due process of law is an attack.
Jim
Mon, 12/08/2014 - 8:35am
Interesting perspectives! Just to be sure I understand the value of the pipeline, or any pipeline in Michigan, what are the economic benefits or other values of pipelines to the citizens of Michigan?
Duane
Wed, 12/10/2014 - 7:13pm
Jim, I apologize for the late response, you ask a fair question. I offer that benefits to transporting material through pipeines include; they provide high volume at a lower cost (cheaper to pump then truck), even though pipeline failures are more visible the nature of the events versus truck events is less emotionally impactful (i.e. fatalities versus cleanups), the reliability of high volume deliveries is better from a pipeline, the regulations are simplier and more effective (fixed location versus mobile), security is more manageable, etc.
Earl Newman
Sun, 12/07/2014 - 10:15am
And if the costs of cleaning up the spill exceed the company's resources, the company can just declare bankruptcy and go out of business.. Neat. This is what's wrong with "market" solutions.
Phil Bellfy
Sun, 12/07/2014 - 10:38am
What??!! "Market-based" so-called solutions have worked so well in the past, haven't they?? The problem is simple --so-called "voluntary agreements" are unenforceable, relying simply on the "goodwill" of the company. Case in point --the Enbridge pipeline in Kalamazoo was also "perfectly safe" and the company guaranteed it!! And we all know how well that's worked out (not!). But, the biggest problem with such a stupid idea is that, in the event of a devastating spill in the Straits, the company could simply declare bankruptcy and walk away, "reorganizing" themselves as "Embridge" and go about its business as usual. And, it is already out of compliance with the terms of its Easement --shut it down!!
Chuck Jordanj
Sun, 12/07/2014 - 12:03pm
Department of Environmental Quality Director Dan Wyant doesn't have a great track record for protecting our dunes. Name should be changed to Department of Economic Quality.
Chuck Jordan
Sun, 12/07/2014 - 12:05pm
Department of Environmental Quality Director Dan Wyant doesn’t have a great track record for protecting our dunes. Name should be changed to Department of Economic Quality. I'm sure we can depend on the good will of Enbridge.
Peter von Ann Arbor
Sun, 12/07/2014 - 3:03pm
I respectfully disagree. The "market" cannot repair and repay us for a leak into an invaluable resource. Furthermore, even if ownership includes ALL liabilities, too big to fail corporate welfare would likely make taxpayers pay. However a X million or billion dollar insurance bond the market can afford. But I doubt the insurance industry would underwrite unlimited risk. Therefore Enbridge should be required to buy a technological fail-safe. Specifically a new underwater pipeline which is double walled (like tankers) plus a redundant underwater pipe into which petroleum would be diverted immediately and automatically upon detection of a pressure drop in the primary pipe. Emergency suction pumps could be designed in to further limit the volume of oil escaping from a pipe. The risk and quantity of a spill (scope of disaster) will always be unknowable using a simple single pipe. Anybody (or committee) who tries to tell us that "markets" can factor in and protect us from rebuilding pipelines like Pollyanna, especially in our Great Lakes, is blowing smoke into our eyes. That's why even atheist lawyers like to protect their clients from "acts of God."
chuck gehrke
Sun, 12/07/2014 - 4:15pm
The suggested approach to protecting the Straits is worthy of consideration and discussion. However, in order to accurately evaluate the costs, viability, practicality or usefulness of any suggested response to a threat to the Straits It seems to me we should first decide how valuable are the Straits to the State of Michigan? Only then can an accurate evaluation of all the costs, real or potential, of a proposed solution be made. There may be costs we, the citizens, are willing to pay, others we are unwilling to pay. One of the respondents to the article notes the proposed solution is "an attempt at government control". Yep, that's what is and in this circumstance it is appropriate, necessary and much needed. The track record of uncontrolled/unregulated business and industry is at best dismal. The need for government control is particularly necessary when the consequences of corporate neglect, disregard for the public welfare, a primary emphasis on profit and the potential for corporate escape from any financial liability exists would be catastrophic. The questions and concerns raised by the respondent certainly deserve discussion however, all seem economic with little attention to other factors which should be considered. It seems very unlikely EEP would shut down Michigan operations related to the issues at hand but then again if they did - might we ask the question, Do we want them as a corporate partner if this is their response to our concerns? They are not the only party in town. Reassurances from corporate America regarding their concern for the public's health and well-being ring hollow and meaningless without the enforcement power of government in our corner. Collectively they long ago lost their credibility.
VOR
Mon, 12/08/2014 - 9:11am
What a foolish idea! Crooks & people with no integrity, sometimes wear white collars. If these market based solutions work so well, maybe we should allow market based solutions, for when people rob your house, too, sir. I mean, if people get caught robbing your house, then they and their family should pay for the full clean-up and replacement cost. That would stop them from robbing anything very valuable, that they couldn't pay for. It's almost the same, except you're saying that we need not worry about any crooks in white collars. They'll make smarter decisions, that protect OTHERS. Because crooks in white collars are so thoughtful.
Michael P
Mon, 12/08/2014 - 12:06pm
What a terrible idea. The 60 year old pipe under the Straits should be closed immediately and never used again. Certainly not to carry tar sand oil which is far more corrosive. Have we learned nothing from the Superfund site in St. Louis Michigan. Velsicol Chemical put up $20 million and then went bankrupt. The cost of remediation is estimated at $500 million. And since the "Superfund" is no longer funded by corporate taxes so guess who is stuck for the cleanup costs? Tallk about "corporate welfare".
Harris
Mon, 12/08/2014 - 2:36pm
Given the catastrophic nature of any spill in the Straits, to ask any company to guarantee liability amounts to a de facto taking. The potential downside risk is so high as to forbid investment. For Enbridge's sake, they should be demanding stronger, clearer regulation.
Tony
Mon, 12/08/2014 - 6:50pm
This is a foolish and poverty stricken argument. It pre-supposes that the State of Michigan could take a forceful (and questionable) action, that Enbridge would agree to terms that can't be adequately defined (about a potential disaster) and most importantly that a "market based" penalty (laughable) ought to appeal to any sane person rightfully concerned about the stupidity of leaving in place or replacing the pipelines lying under the Straits of Mackinac.
Greg Thrasher
Tue, 12/09/2014 - 1:46pm
These professors are enablers of the ruling class instead of constructing some solutions they instead offer up a contractual solution which advances only the interests of the company!!!
Wed, 12/24/2014 - 3:08am
It sounds good, but, just a pledge may not have enough teeth. The Dane Co. WI Zoning Committee wanted Enbridge to purchase insurance for a pump station there, but, Enbridge turned them down: http://insurancenewsnet.com/oarticle/2014/11/30/oil-pipeline-insures-aga... "To provide protection in the event the company became insolvent or cleanup costs exceeded its resources, county officials are considering making insurance a condition of a permit Enbridge Energy needs for part of a project aimed at tripling the amount of tar sands petroleum running through Wisconsin." If pipelines are so safe, them insurance should be cheap.