May 22, 2001 | WebMemo on Energy and Environment

The President's National Energy Policy Report

America faces severe energy problems in some areas because unwise policies and neglect have prevented the supply of energy rising to meet the demands of a growing economy. In some cases federal policies have raised the cost of production, discouraged new production, and ignored the need to improve energy transmission. In other cases, states such as California have compounded these problems with their own unwise restrictions and with futile attempts to ignore the laws of economics by imposing price controls. The country is now experiencing the results of these policies -- rising utility bills, rolling blackouts and brownouts, and higher gasoline prices. Failure to deal with these problems will threaten America's economic prosperity, quality of life, and national security.

President Bush has proposed a long-term energy plan designed to increase domestic supply to meet increasing demand by upgrading the nation's aging infrastructure to facilitate the delivery of energy to consumers, improving conservation, encouraging new technologies, and expanding energy trade with Mexico, Canada, and other friendly countries. While not perfect, the plan would help American families look forward to a future of affordable, reliable and environmentally sound energy.

The President's National Energy Policy report contains 105 recommendations. The main problems that need to be addressed are summarized below, together with an assessment of the key components in the President's plan. It cannot be emphasized enough that a successful energy plan must recognize basic economics. The President's plan takes a giant step forward in allowing the market to correct the current imbalance between supply and demand. By contrast, manipulation of the market through price controls, subsidies and excessive government regulation has failed in the past - as California's current plight demonstrates - and will fail in the future.

Problem

Symptom

Solution

The Bush Plan

Demand up

By the 1980's, the U.S. had 25-30 years of excess capacity thereby reducing the immediate need to build more power plants and lay more pipelines to meet demand.  As the economy slowed in the late 80's and early 90's, investments in the energy sector slowed as well due to a low return on capital. During the 90's the U.S. worked off its excess capacity.  Demand is now rising faster than supply after a period of plentiful supply.

Price rises hampered by  retail price controls in California and many other states, leading to blackouts during peak times.  In-state utilities in California facing market prices for out-of-state supplies and retail price controls have gone bankrupt.  The California government is now buying supplies while retaining retail controls and consequently is rapidly depleting its budget surplus.

States should de-regulate retail prices using Pennsylvania as an example of a successful approach.  Price rises will encourage conservation.  As demand and revenue increases, there will be an incentive to build up supplies to meet demand, if prices are allowed to reflect supply and demand.

President Bush has repeatedly stated his opposition to price controls.  He stated that price controls drive supply down, encourage consumption and impede investment.  Price controls do more harm to consumers and the economy than good. 

Assessment: The President's position on price controls is correct.

New long term supplies needed

Clean Air emissions regulations

Increases cost of construction, maintenance and operation, compliance, and expansion of current plants.  Increases costs while discouraging new plants.

Revise or delay phased-in reductions; withdraw EPA's recent re-interpretation of New Source Review (NSR) "modification rule"; suspend enforcement actions based on EPA's re-interpretation of NSR policy; replace NSR with an approach that encourages increased investment at existing facilities; move from a patchwork system of boutique fuels to a system of fuels that provide for flexibility and adequate back up.  

Eases regulatory barriers, orders EPA to develop a market-based multi-pollutant approach to reduce emissions; directs EPA to review regional reformulated gasoline standards requiring multiple boutique fuel blends; and instructs EPA and DOE to review the NSR program.

Assessment: The President's Plan is going in the right direction.  Any multi-pollutant approach to reduce emissions, however, must be truly market-based and not include soft caps and trading mechanisms which would only provide the framework for eventual mandatory reduction levels.  

 

New sources of supply have been discouraged.  Need to encourage more sources of supply.

Supply shortages and restrictions to development leads to rising long term costs and short term spikes.

Open ANWR to oil and gas development; allow off-shore drilling; permit road access to areas approved for development; open up federal lands for access; complete Alaska Pipeline to lower 48 states; expand trade with Canada and Mexico for oil and natural gas; promote nuclear power; keep dams operational for hydropower; encourage development of new technologies for alternative and renewable fuels.

Expedites study of impediments to oil and gas exploration on federal lands; promotes enhanced oil and gas recovery from existing wells on federal lands using new technology; expedites process for renewal of Trans-Alaska Pipeline System rights-of-way to ensure that Alaskan oil flows uninterrupted to the West Coast of the U.S.; expedites construction of a pipeline to deliver natural gas to the lower 48 states; opens 2000 acres in ANWR for oil and gas exploration and additional oil and gas leases in the National Petroleum Reserve-Alaska; streamlines nuclear plant and hydropower licensing procedures; continues Outer Continental Shelf (OCS) oil and gas leasing and calls for a review of existing rules; proposes environmentally sound off-shore oil and gas development; encourages U.S. participation in Caspian Sea oil and gas development; strengthens and expands energy trade alliances with Mexico, Canada, and other countries; orders a comprehensive review of  U.S. sanctions.

Assessment: The President's plan is correct.  It ensures development of a diversity of available resources to meet increasing demand.

NIMBY (Not in my backyard).

Difficult to find sites for new power plant construction and power lines due to local opposition, interference from radical environmentalists and excessive restrictions to access on federal lands.

Encourage state and local governments to provide incentives for local communities to site a plant or allow power lines to be built, such as providing lower property taxes to homeowners in areas where plants and power lines are proposed to be built; encourage states to work together to upgrade the infrastructure; remove  obstacles that prevent access to federal lands.

Expedites Department of Interior study of impediments to federal oil and gas exploration and development on federal lands; reviews public lands withdrawals and lease stipulations with local input to make modifications where appropriate; grants federal government eminent domain authority for electricity power lines.

Assessment: Removing excessive restrictions to access to federal lands is long overdue and consistent with existing public land laws (Multiple-Use, Sustained-Yield Act of 1960; Federal Land Policy and Management Act of 1976).  Federal eminent domain authority infringes upon state's rights.  States should encourage local communities to allow lines to be erected in the community by providing sufficient incentives.  Individual states should work together through the National Governor's Association (NGA) and the National Council of State Legislatures (NCSL) to ensure that needed power lines are erected without unreasonable delays.  If the states collectively believe, however, that federal eminent domain offers the best solution to erecting power lines, they need to officially notify the federal government of their collective willingness to yield their authority to the federal government.

Permitting process lengthy and expensive for new plants

Shortage of new construction.

Streamline federal permitting processes.

Directs federal agencies to expedite permits and other federal actions necessary for energy-related approvals on a national basis; establishes interagency task force chaired by the Council on Environmental Quality (CEQ) to ensure agencies coordinate these efforts.

Assessment:  This streamlining process is long overdue.  The interagency task force should also make recommendations on ways to improve the federal permitting process to make it more timely and efficient.  

Mandated power purchases for utilities.

PURPA (Public Utility Regulatory Policies Act of 1978) requires utilities to execute contracts to purchase power from qualifying facilities, or "QFs". (The intent of PURPA was to encourage alternative sources of electricity beyond traditional generation facilities, without theses facilities being subject to all existing federal and state utility regulations.  To qualify as a QF, facilities must meet certain rules on fuel use, size, fuel efficiency, and reliability.)  The contract is based on the avoided cost (costs that the purchasing utility would have incurred if it had to provide its own generating capacity).  These rates are not based on actual costs of production of electricity and shift the price basis for wholesale electricity from the seller's cost to the purchaser's.

Repeal PURPA, or, alternatively amend it to ensure full competition in the supply of electricity, particularly at existing industrial locations (co-generation).

Directs the Secretary of Energy to propose comprehensive electricity legislation that includes reforms to  PURPA.

Assessment: This is long overdue and a measure that many in Congress support and which Congress has considered for several years, but failed to enact due to disagreements on comprehensive electricity legislation.

PUHCA (Public Utility Holding Company Act of 1935) inhibits competition in the electric utility industry.

PUHCA is antiquated, has achieved its goal by making holding companies manageable, other regulations since PUCHA prevent holding company abuse, and it discourages diversification.

Repeal PUHCA.

Directs the Secretary of Energy to propose comprehensive electricity legislation that includes repeal of PUHCA.

Assessment:  This is long overdue, a measure which many  in Congress support, and one which Congress has considered for several years, but failed to enact due to disagreements on  comprehensive electricity legislation.

Insufficient infrastructure investment

Low return on capital investments; New Source Review (NSR) Program discourages construction of new units and expansion of exiting ones.

Review tax and fiscal policy to determine disincentives that currently exist for investment; enact permanent capital gains tax cut; withdraw EPA's re-interpretation of the NSR "modification rule"; suspend NSR enforcement actions; revise NSR.

The Bush Plan proposes various taxpayer subsidies (tax incentives) for activities such as: development of clean coal technology, research and development of renewable energy resources; purchase of nuclear power plants; electricity produced using wind and biomass; purchases of solar panels for homeowners; purchases of hybrid gas-electric vehicles; and co-generation plants. 

Assessment: This proposal goes in the wrong direction.  It would place the government in the position of choosing winners and losers rather than the market.  A better policy alternative is to remove unnecessary regulatory barriers and uncertainty.

Insufficient refinery capacity.

Low profitability and rates of return on investment for over a decade; significant environmental regulations, such as requirements under the clean air act inhibit investment; EPA's NSR program discourages increased efficiency. 

Encourage expansion of refinery capacity by streamlining the permitting process, replacing  the NSR program.

Directs DOE and EPA to ensure that the U.S. has adequate refining capacity to meet needs; streamlines permitting process; provides more regulatory certainty to refinery owners; and proposes a multi-pollutant approach to reduce emissions.

Assessment:  This proposal moves our nation in the right direction.  Any multi-pollutant approach to reduce emissions, however, must be based on market-based principles.

Removing restrictions on other forms of power

Nuclear Power

Expensive and lengthy process coupled with local opposition.

Streamline licensing procedures; encourage the Nuclear Regulatory Commission to extend plant life; educate public on advantages and safety of nuclear power.

Streamlines nuclear plant licensing procedures; proposes  reauthorization of Price-Anderson Act that limits industry liability from a nuclear accident; and provides tax breaks for purchase of nuclear plants.

Assessment:  The President's proposal on nuclear power is correct. Nuclear power currently supplies about 20 percent of all U.S. electricity generation.  Upgrades  to exiting plants could add about 12,000 MW of nuclear electricity generation.  Nuclear power is the cleanest source of energy because it does not cause plants to emit pollutants into the air.  Other countries, such as France and use nuclear power to meet many of their energy needs. 

Nuclear Power Spent Fuel

State of NV and its representatives are adamantly opposed to the Yucca Mountain Storage site.

Work with stakeholders to resolve this critical issue

Urges use of a national nuclear waste repository.

Assessment:  The Department of Energy (DOE) is over a decade behind schedule for accepting nuclear waste from facilities.  This waste is currently stored at local plant sites, many located near large population centers.  DOE needs to promptly  complete the procedures necessary to proceed with the safe disposal of nuclear waste at Yucca Mountain and upon completion of this process, file an application with the Nuclear Regulatory Commission for its approval.   

Enhance national energy security

The U.S. depends upon foreign oil, particularly from the Middle East, for about 56% of our nation's oil.  

Expand Trade opportunities to enhance global exploration and development of energy resources in friendly foreign markets.

Strengthens trade alliances with major oil producers; increases production and cooperation with Canada and Mexico; work for greater oil production in the Western Hemisphere, Africa, the Caspian, and other regions to diversify sources of supply; work with International Energy Agency (IEA) to continue to meet their obligations for emergency supply reserves; work with IEA, the Asia-Pacific Economic Cooperation (APEC) forum and others to encourage large importers to consider measures to augment their oil reserves; increases international cooperation on finding alternatives to oil; increase energy efficiency; promote use of new technology.

Assessment:  This policy is correct.  Energy is an international commodity.  The United States must ensure we have access to these global markets and alliances with  energy markets in other  countries.   

Alternative/Renewable Fuels

Despite billions of taxpayer dollars already spent on research and development for wind, solar, biomass and fuel cells, the technology to supply sufficient and cost-effective alternative sources of power only supply about 3% of our nation's energy demands.

Encourage industry to conduct  R&D efforts. As technology advances, costs decrease and consumer demand for these sources increases, the market will respond.

Subsidizes clean coal technology, wind, solar, organic waste and  biomass power, co-generation, and hybrid gas-electric vehicles. 

Assessment:  This proposal takes energy policy in the wrong direction.  If there is a demand for renewable and alternative sources of fuel, the market will meet that demand.  The   government should not interfere with the market by picking winners and losers.



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