Should Taxpayers Bail Out A Risky Investment?
During his January State of the State address, Governor John Engler unveiled a proposal to buy out privately-owned minerals in the Jordan Valley, as part of an effort to preserve Michigan's "very special, irreplaceable, unique areas."
To some, the buyout sounds like a good plan. But before it goes any farther, citizens must understand what it could mean to their tax money, and to Michigan's long tradition of environmental protection.
The Governor's announcement came after the furor caused when Walter Zaremba, an Elmira businessman, submitted plans to drill the first natural gas well on state-owned surface land within the Jordan Valley. Since 1975, the revered 22,000-acre natural area in Antrim County has been off-limits to industrial development, including oil and gas drilling, under the state-sanctioned Jordan Valley Management Plan.
At a recent hearing in Lansing, the Department of Natural Resources publicly opposed Mr. Zaremba's proposal, and emphasized that the Management Plan remains the guiding policy for the Jordan Valley.
Mr. Zaremba is seeking to drill on a 40-acre tract, where the minerals are privately owned, that is surrounded by miles of protected state forest within the Jordan Valley Management Area. He leased the mineral rights to the tract in 1994, and then a year later the DNR acquired the surface.
However, the well is only part of the infrastructure required for oil and gas development. At the time he leased the minerals, Mr. Zaremba was fully aware that drilling a well there would require installing a pipeline across state land that has been off-limits to oil and gas development for 22 years.
The problem with the Governor's proposal is that in buying out Mr. Zaremba, the state would be affirming that he has a legal right to drill. This assumption has by no means been substantiated.
According to many of Michigan's top legal experts, the environmental damage from Mr. Zaremba's well and pipeline would violate the state Environmental Protection Act. The law specifically requires regulators to protect the "air, water, and other natural resources of the state from pollution, impairment or destruction."
Furthermore, the law refers to the "public trust," and gives the state the authority and obligation to prevent such damage in the Jordan Valley to ensure that it remains a place citizens can enjoy for generations.
The legal scholars also say that Mr. Zaremba is not entitled to any public payment for his speculative investment, because he had no reasonable expectation of gaining economic returns. They cite a 1979 decision by the Michigan Supreme Court, involving a remarkably similar case in the Pigeon River Country State Forest. In that case, the court denied a drilling permit on protected public land without granting compensation.
The recent move to open up the Jordan Valley appears linked to a nationwide push from property rights advocates to weaken environmental laws. DNR officials say that until recently, such a proposal would have been soundly denied.
And consider this. Public records show that in 1994 Mr. Zaremba paid $400 to lease the minerals. Now Mr. Zaremba's attorney claims it will take a nearly $600,000 payment to stop his drilling plan.
Think about it for a minute.
A man leases out land in the middle of a public forest that is off-limits to oil and gas drilling. He pays $400. Then, after doing little more than submitting a drilling permit application, and responding to questions at an administrative hearing, he claims the legal right to $600,000 of our tax money.
It's preposterous. The state, and by extension the public, should not be held responsible for paying off a speculator for a risky investment that didn't pan out.
The DNR reports that there are 1,560 acres of privately held minerals in the Jordan Valley. These interests vary considerably. There are mineral owners. There are mineral leaseholders. And there are oil companies that hold state leases. Some of the parcels have been in private ownership for generations, and others were acquired well after the Management Plan was adopted.
To address these diverse situations, the Institute and other groups are recommending that Governor Engler form a committee representing state regulators, the oil and gas industry, public interest groups, and the state Attorney General's office. The committee would establish a process to evaluate each case of private property and, based on a comprehensive assessment, determine which of the mineral rights the state should acquire.
Some state officials may want to "solve" the Zaremba conflict with a buyout. But even they must realize that doing so would only open the door to more speculators seeking taxpayer-funded payoffs.
Any public payment in a property rights case should be made only after it is determined that the claim is legitimate.
In Mr. Zaremba's case, the prescription is clear: Deny the permit and challenge any pleas for compensation. The public doesn't owe him anything. G