Energy Reform: A Legislative Washout?

Deck: 

Congress is shifting U.S. energy policies toward green alternatives. Is the new direction temporary or permanent?

Fortnightly Magazine - August 2007

The late Congressman Morris Udall, D-Ariz., coined his First Law of Politics when observing his colleagues in action: “If you can find something everyone agrees on, it’s wrong.”

Udall’s Law aptly describes recent trends in energy policy on Capitol Hill. Fundamental questions about fuel supply, efficiency standards, and environmental performance have splintered both parties into warring factions. As a result, the only proposals legislators can agree upon seem to be watered down half-measures. Case in point: The corporate average fuel economy (CAFE) standards passed by the Senate technically mandate no changes until the year 2020.

“It’s very disappointing that even now, with oil at $70 a barrel, we can’t enact sensible guidelines for automakers,” says Gregg Easterbrook, a visiting fellow at the Brookings Institution in Washington, D.C.

Considering the political difficulty of enacting populist and timely legislation like fuel-economy standards, the likelihood of major legislative initiatives affecting electric and gas utilities seems even more remote—especially if conflicts or delays push legislation into 2008, when national election campaigns will begin in earnest (see sidebar “Electrifying the Electorate: Energy Policy and the 2008 Campaigns”).

“Given the number of people in the Senate who are running for president, I’d say 2008 is a total wash, legislatively,” says John Shelk, president and CEO of the Electric Power Supply Association (EPSA) in Washington, D.C. “If energy legislation isn’t signed into law this year, it’s hard to see anything significant getting done next year.”

At the same time, however, recent trends on Capitol Hill suggest the political winds are shifting in ways that eventually will yield major changes in energy and environmental policies—changes that will hit utilities squarely in the balance sheet.

For example, the Senate came just a few votes short of enacting a federal renewable portfolio standard (RPS). The bill, sponsored by Energy & Natural Resources Committee Chairman Jeff Bingaman, D-N.M., proposed requiring 15 percent of the nation’s electricity to be generated from renewable sources by 2020. Republican opponents, led by Sen. Pete Domenici, R-N.M., derailed the bill by proposing to allow nuclear and clean-coal technologies to meet the requirement. Nevertheless, the federal RPS came closer to enactment than ever before, and lawmakers in both parties are working more cooperatively to draft climate-change legislation that could garner majority support. These developments—particularly in the context of the bills that still are moving forward—might portend a shift toward greener energy.

“What we see in energy legislation debate today is a microcosm of a generational move favoring the environment,” says Dana Contratto, a partner with Crowell & Moring in Washington, D.C. “These societal trends began in the late 1960s, and today they are bringing a sea change, a confluence of environmental implications for energy policy that have grown up over 35 or 40 years. They are evolving into a pragmatic approach to seriously promote renewable energy and address carbon emissions.”

On the other hand, these trends might also represent a short-term liberal resurgence—filling the vacuum left by a beleaguered Bush administration, and reacting to public anger over high oil prices and the Iraq war. Such resurgence might not translate into lasting policy changes—most notably because any major changes likely will raise energy costs and upset legislators’ most vocal and influential constituencies.

“The hard truth is costs are only going to go up,” says Bert Garvin, of counsel with Foley & Lardner in Madison, Wis., and a former commissioner on the Wisconsin Public Service Commission. “Everyone is concerned about the environment, and wants to make the world a better place. But fulfilling that objective will require the resolve to tackle these issues and make tough choices. In this country, that’s hard to do.”

Seeing Green

In mid-summer, as legislators were preparing to leave town for the July 4th holiday, energy-policy legislation was in a holding pattern.

In June the Senate passed H.R. 6, an amended version of a bill the House passed in January, which primarily advances appliance-efficiency standards and biofuel production. A few measures address utility issues—for example, encouraging smart-grid investments and interconnection standards for plug-in electric vehicles. Meanwhile, lawmakers in the House of Representatives were negotiating another energy bill. The Energy & Commerce Committee approved language supporting grid modernization and electric transportation, along with a grab bag of other initiatives (see sidebar “Summer Snapshot: Utility Related Legislation in Congress”).

These bills illustrate the policy trend emerging in Congress—namely, green-centered legislation is gaining favor at the expense of fossil-fuel-oriented policies.

Those policies, of course, are encountering their share of conflict. The most contentious debates involve money—specifically, how to pay for the green investments and priorities lawmakers are advancing. The putative answer is to make oil companies pay for it. A distinctly pro-green, anti-petroleum tax package fell just short of the 60 votes required to end debate and move forward in the Senate—probably because a few key senators weren’t present to vote on it. It enjoyed some Republican support, however—including the Finance Committee’s ranking Republican, Sen. Chuck Grassley, R-Iowa. And at press time, a similar package—albeit half as big—was awaiting action on the House floor.

Hill watchers expect some form of the House tax package will survive a floor vote. But to become law, a resulting House-Senate conference bill will need to win either Bush administration support or a veto-proof 67-vote majority in the Senate. That likely will require substantial compromise. Nevertheless, the relative success of the oil-money-for-renewables concept illustrates the dramatic difference between energy-policy legislation in 2007 versus 2005. In addition to the tax policy, the legislation is notable for the absence of any incentives for oil and gas development—or significant support for coal.

“Regardless of the tax controversy, the shape of the bill is apparent,” says Joe Colaneri, public affairs director with Foley & Lardner. “The winds have shifted toward renewable energy and conservation.”

Part of the legislative trend arises from high gasoline prices and record profits in the oil industry. “Looking at the annual reports of oil companies, it isn’t clear they need a lot of incentives to do their work,” says Randall Swisher, executive director of the American Wind Energy Association (AWEA). “Paying for a renewable energy future with some existing oil incentives probably makes a lot of sense.”

Additionally, the idea of reclaiming Republican giveaways to oil companies has become a central plank in the Democratic Party’s platform. In a press release timed to coincide with Congressional floor debates in June, the Democratic National Committee (DNC) accused Republicans of allowing “our nation’s energy policy to be guided by special-interest cronies,” and excoriated Republican lawmakers for clinging to the “same old failed policies” that support petroleum companies.

Such strident rhetoric explains, at least in part, the political momentum away from petroleum and toward renewables and conservation. “It is perhaps a reflection of the Democratic party’s anger against Big Oil,” says Jim Liles, a regulatory adviser with Milbank, Tweed, Hadley & McCloy in Washington, D.C., and formerly an economic and regulatory analyst for FERC. “That may be a short-term effect, but the bigger question is what energy sources we’ll use in the future, especially if we have to look at this greenhouse-gas problem.”

Indeed, growing environmental concerns, and specifically well-orchestrated PR campaigns, have accelerated the pendulum now swinging against fossil fuels—not only petroleum, but also coal. For example, earlier this year a national advertising campaign featuring somber-looking models with soot-blackened faces proclaimed, “Face It: Coal Is Filthy.” The campaign sparked controversy when the identity of its sponsor—gas company Chesapeake Energy—was revealed, but not before ad placements in popular Capitol Hill publications helped to put coal on the blacklist with oil, and push green policies further into the legislative spotlight.

As a result, the chief accomplishment of the current energy legislation may be to set the stage for bigger policy shifts in the future—namely, carbon constraints.

“This bill is very important to create a bridge and strike a better balance,” says Michael Zimmer, a partner with Thompson Hine in Washington, D.C. “It will emphasize efficiency, increase the focus on renewables, and lay the groundwork for more advanced-stage renewable energy, carbon sequestration, and nuclear energy. That’s the market ordering I see happening. Least-cost strategies will evolve once climate legislation is enacted, and least emissions ultimately will become least cost.”

Climate Calculus

Even if explicitly anti-fossil attitudes diminish somewhat with the ebb-and-flow of politics, the trend toward green policies seems to be gaining bipartisan support. With public sentiment growing in favor of greenhouse-gas (GHG) constraints and energy independence, conservation and renewable energy have become standard talking points for politicians in both parties.

“All candidates are talking about renewables, energy efficiency, and dependence on foreign oil,” says Toni Johnson, a New York staff writer for CFR.org, the Web site of the Council on Foreign Relations. “Energy efficiency in particular is seen as a cheap fix. It’s less complicated politically than other topics, and it’s an easy way to look good on energy.”

This political talk, however, seems unlikely to translate into major policy action before the Bush administration leaves office. The most obvious case in point is climate change—the 500-pound gorilla of energy policy.

This summer, legislators in both parties were promising to bring a serious effort to enact mandatory GHG constraints, probably in the form of a cap-and-trade program, in the fall of 2007. This promise results directly from horse trading among House Democrats that allowed the earlier measures to move forward.

Specifically, House Energy & Commerce Committee Chairman John Dingell, D-Mich., urged his colleagues to remove the most contentious aspects of the energy bill—namely CAFE standards, incentives for coal-to-liquids (CTL) projects, and a federal RPS—and leave them for a “good bare-knuckle fight” in the fall. The result of that fight, in theory, would be a comprehensive climate-change bill that would aim to reduce U.S. GHG emissions 60 to 80 percent by 2050.

Addressing climate change as part of a package, including these other issues, sets the stage for both conflict and compromise. Lawmakers from coal-producing regions, such as Rep. Rick Boucher, a Democrat from a coal-producing area in Virginia—might look more favorably on GHG constraints if the government finances CTL infrastructure. Lawmakers that oppose CTL—because it would increase GHG emissions—might accept CTL incentives for the price of a federal RPS. And Dingell’s Detroit constituents might be more prepared to accept CAFE standards if their fuel-economy efforts earn them carbon credits.

Other major constituents—especially petroleum and power companies—will negotiate compromises based on their particular interests. Coal-burning utilities will argue for a credit-allocation formula that rewards them for reducing emissions from their current baseline, and nuclear generators will favor a system that rewards them for being more climate-friendly at the outset. In any case, a consensus is building for enacting carbon constraints sooner, rather than later.

“Utilities are favoring early action on global warming,” says Keith Martin, a partner with Chadbourne & Parke in Washington, D.C. “The political calculus suggests they are better off working something out while Bush is still president than they are waiting for a Democrat.”

Any climate-change bill President Bush would sign, however, seems unlikely to inspire support from Democratic legislators.

“The political dynamic would be similar to what it was on the Bush administration’s Clear Skies proposal,” says Easterbrook of the Brookings Institution. “It would give environmental advocates two-thirds of what they want, making it politically essential for Democrats to fight it to the death, so they can say the Republicans did nothing on climate change.”

The most likely scenario, therefore, seems to be a legislative debate on comprehensive climate-change legislation that falls short of a veto-proof majority, but allows candidates in 2008 elections to campaign on the basis of their voting positions in the debate.

“I’d lower expectations of getting anything meaningful done on climate change for the rest of this year,” Garvin says. “I’ll believe it when I see it, because of the obvious political difficulties that arise with major policy changes. Whether it’s an RPS for the nation or a tighter CAFE standard, everyone has a different point of view.”

Power of the Purse

Implicit in all conversations about adopting greener energy sources is one question: Who pays?

Although the tax packages most recently proposed in Congress would shift tax burdens onto the petroleum industry, in practical terms even the Senate’s failed $32 billion package only would nudge the transition away from fossil fuels. Ultimately, a major shift toward green energy will increase costs for consumers.

How cost factors affect policy trends depends largely on those policies themselves—how aggressively lawmakers push the transition, and how willing they are to disrupt energy markets that depend on existing regulatory and tax structures remaining more or less the way they are. Every change in energy policy yields winners and losers, and lawmakers are challenged to weigh the costs and benefits honestly, at the risk of alienating one group or another.

“Most politicians are selling free lunches,” says Jerry Taylor, a senior fellow with the CATO Institute in Washington, D.C. “They are happy to justify market-rigging exercises as a means to secure energy independence, and that just shows the ignorance of the American public about energy. The government’s ability to reduce prices and promote alternative technologies is nearly zero, and we should leave these markets alone—but you won’t hear most politicians making that argument.”

Instead, legislators work to enact policies that protect their most important constituencies, while balancing the risks and rewards as fairly as possible. The results, as the late Congressman Udall observed, aren’t necessarily effective. And the really tough job—implementation—is left to power companies and regulators who must make policy changes work, while ensuring utility services remain reliable and affordable.

“An emphasis on green energy is just a component of our national energy strategy,” Garvin says. “Renewables have become much more economic and are being widely deployed. But the notion they will displace baseload units is just fiction. As a nation, we have a long way to go to ensure our energy security.”