Archive for December, 2011

Natural gas production is the real deal for job creation. Seventy-two thousand new jobs have been created in Pennsylvania alone. Now Delaware, with no direct job potential, wants to slow economic development to placate powerful environmental lobbyist. Once again, the poor and middle class will pay the bill.

Plentiful natural gas is coming from new wells in Pennsylvania and neighboring states. The price for natural gas has dropped from $15.00/mft3 to $3.00. This lowers manufacturing costs, electricity prices, and heating costs saving Delaware homeowners money and makes our manufacturers more globally competitive. Natural gas may also replace expensive foreign oil in part of our vehicle fleet. Delaware will see great indirect economic benefit.

Environmental groups claim their opposition is simply to delay new gas production in the Delaware River Basin while regulations are refined. Read their blogs. The goal is to delay long enough to allow them to prohibit drilling permanently. The goal of this powerful lobby is clear, conventional energy prices must double so expensive alternate sources such as solar, fuel cells, and offshore wind can compete when we eventually tire of paying massive government subsidies for them. Low natural gas prices wreck that plan.

Governor Markell, as a voting member of the Delaware River Basin Commission (DRBC), has refused to support approval of new regulations for a natural gas drilling technique known as hydraulic fracturing or fracking. Water and sand are forced into wells in shale formations to form micro-cracks to allow gas to flow. Over one million wells drilled over the last sixty years have used fracking. The new twist is to combine fracking with horizontal drilling to minimize the number of well heads needed.

The Governor has based his decision on two issues; a short review period for last minute changes to the DRBC regulation, and unfinished state regulatory changes. A closer look shows these issues do not provide a sound basis for delay.

The proposed regulations have been worked on for the last year and a half with ample time for public review. It is odd our governor would be concerned the timing is rushed. He pushed the Fuel Cell Act through the state House and Senate in just nine days with few details available about the real cost. The Fuel Cell Tariff was then rushed through the Public Service Commission allowing only days for public review of complicated contracts before the final PSC vote for approval. Substantive changes were still being made the morning of the vote. Hundreds of public comments opposing the tariff were ignored. The reason for the rush was the questionable potential to create nine hundred new jobs in an industry that can sell nothing without massive government subsidies. The DRBC rules would un-questionably create over seven thousand new American jobs in Pennsylvania alone with no government subsidies needed.

The Governor also complained Pennsylvania and New York have not signed into law a number of regulatory recommendations made by the Pennsylvania Marcellus Shale Advisory Commission. The commission made ninety-six specific recommendations but only about a dozen had implications for interstate issues such as well setbacks, water withdrawal rates, and wastewater handling. Those dozen recommendations have been adopted in full by the DRBC and state approval is merely a duplicate effort. Most of the other recommendations had to do with issues such as in-state job training, transportation improvements, and the streamlining of the permit process.

The same document listed two-hundred state and federal regulations already in place to control the oil and gas industry. Remember, oil drilling started in Titusville, Pennsylvania in 1859 and natural gas was being drilled in New York even earlier in 1821. This is not exactly a new industry. Governor Markell wants to wait for state regulations to be complete but they never will be. In fact, one of the final Marcellus Shale Advisory Commission recommendations was for a periodic review process to constantly improve the regulations.

David T. Stevenson, Director

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A recent report by the Institute for Truth in Accounting confirms what Caesar Rodney Institute has been saying about the seriousness of Delaware’s state government debt. The state has accumulated bills of $8.6 billion.

How did this run up in debt happen? The Institute singles out the use of antiquated budgeting and accounting rules that are used to determine employee compensation costs. Good accounting includes the cost of retirement benefits as they are earned. Delaware, in order to adhere to its constitutional balanced budget requirement, ignores accumulated employee retirement obligations.

Further, the state only sets aside 55 cents to pay each dollar of the promised retirement benefits. The $8.6 million shortfall includes $775 million of reported retirement liabilities, another $417 of unfunded pension benefits, and $5.6 billion of unfunded retiree health care benefits.

According to the Institute, “unless these pension and retirees’ health care benefits are renegotiated, future taxpayers will be burdened with paying them without receiving any corresponding government services or benefits.”

The state government’s position up to this point is to disavow the existence of this looming benefit debt.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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Under Governor Markell the Delaware Economic Development Strategic Fund has gone wild. Annual loans and grants from the Fund are up almost three fold. Why the flurry of activity? Will it pay off?

The reason for the flurry of activity is straightforward. Delaware currently has a 67,000 job gap to regain the ground that has been lost is the past four years. This includes: an additional 32,000 jobs to climb back to the peak level of total employment, 20,000 jobs to regain the historical unemployment rate, and 15,000 jobs to absorb the discouraged workers who have left the labor force. At the state’s current projected annual job growth rate of 0.7%, closing this 67,000 job gap will take 21 years.

Will the loans and grants pay off? It is immaterial. Over the past 10 years the Strategic Fund has put $200 million of loans, grants and equity into Delaware businesses. Over the same time period, the total investment by businesses in Delaware has been over $57 BILLION. While places like the Riverfront cannot survive without state loans and grants, overall the state loans and grants are a fly speck to Delaware’s private sector.

While Strategic Fund investments in projects of opportunity are fine, the state’s primary focus should be on those factors that drive investment and long-term economic growth in Delaware. These factors include the tax burden and tax rate stability, the regulatory environment, the quality of public education, labor skills and costs, infrastructure, energy costs, and the incentives to create value, including entitlements that discourage work and contracts that encourage pleasing government officials rather than producing goods and services that meet the market test.

In the near-term one hopes that all the money and effort by state officials will have positive outcomes. And certainly it gives the appearance of action. It is should be noted, however, that the economic boom years for Delaware during the 1980s were spurred on by deregulation, lower taxes, and the institution of fiscal constraints on state government spending.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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