May 31, 2005

May 31, 2005 | WebMemo on Energy and Environment

Will the Energy Bill Get Better or Worse?

No energy bill is better than a bad bill, and the Senate should be wary of proposed changes to the already-problematic House version that could make the final product even worse. Even better, it should take steps to improve upon the House bill-especially because this year, unlike in the past, there is actually a chance of getting a final version through the Senate and onto the President's desk.

Things to Avoid

Ethanol. The House included an ethanol mandate in its version of the bill. This ill-advised provision would require that 5 billion gallons of corn-derived ethanol be added to the gasoline supply annually by 2012. The mandate is good news for Midwestern corn farmers and ethanol producers like Archer Daniels Midland but will raise the price of gasoline for the driving public.

Some analysts estimate that the 5 billion gallon mandate will increase prices at the pump by no more than one cent per gallon-a modest increase but still reason enough to oppose this special-interest giveaway. But the Senate has decided to increase the mandate to 6 or even 8 billion gallons. Such a large mandate may increase the expense of ethanol significantly because it would require ethanol use far from the Midwest. Ethanol cannot be piped through pipelines, and a larger mandate would mean that more of it would have to be transported by relatively expensive means (rail, barge, and truck) for use outside of the Midwest. Moreover, EPA requirements would force sellers in many metropolitan areas that are not in compliance with the Clean Air Act's smog standard to make costly modifications to gasoline blends so that ethanol could be added to them. The higher the mandate, the more ethanol will have to be used in areas where clean air regulations make it expensive to do so.

For these and other reasons, a small increase in the ethanol mandate would lead to a disproportionate increase in costs. A study prepared by MathPro Inc. for the American Petroleum Institute estimates that a 5 billion gallon mandate would cost consumers $0.9 billion per year, but a 6 billion gallon mandate would cost twice as much. The 8 billion gallon mandate would cost four times as much. In line with this cost escalation, the Energy Information Administration (EIA) projects an increased price at the pump of 1.9 cents per gallon by 2012 for the 6 billion gallon mandate and 3.6 cents for 8 billion gallons.

For all this expense, the mandate would not make America significantly less dependent on foreign oil. After taking into account the energy consumed to grow the corn and distill the ethanol, even the 8 billion gallon mandate would reduce oil imports by no more than 0.5 percent, according to the MathPro study. EIA puts that amount of foreign energy displaced at 2 percent.

Congress should do the right thing and eliminate the ethanol mandate altogether. At a minimum, the Senate should not go above the 5 billion gallon amount in the House bill.

PUHCA. The Public Utility Holding Company Act (PUHCA) is an outdated depression-era law that restricts investments in electric utilities. Among other things, it places limits on who can invest in transmission lines in a given region. Although there is debate about the extent of PUHCA's impact, there is reason to believe it is part of the reason that the electric grid is not in better condition to meet America's growing electricity needs. The House version of the energy bill repeals PUHCA entirely-a positive step for those who want to see greater investments in the grid to help alleviate bottlenecks and reduce the likelihood of blackouts. Unfortunately, the Senate has decided to tie PUHCA repeal to enhanced Federal Energy Regulatory Commission (FERC) oversight of electric utility mergers.

Rather than taking one step forward with PUHCA repeal and then one step back with additional FERC meddling (or perhaps two or three steps back, according to many FERC critics), the Senate should join the House in offering a clean repeal of PUHCA.

Something to Add: Offshore Drilling

Federal moratoria prohibit drilling for oil or natural gas offshore of most of the Atlantic, Pacific, and eastern Gulf of Mexico. Growing need for that energy, combined with technological advances that make such drilling environmentally safer, has led to a reassessment of this policy. America could and should do more to make better use of domestic energy sources.

The House energy bill would not alter the moratorium, but it would reward those few states that have drilling off their coasts with a share of federal leasing revenues. Currently, all outer continental shelf leasing revenues go to the federal government.

The Senate has the chance to improve on the House bill by including provisions that would allow states that want drilling off their coasts to opt out of the moratorium. This would be a step in the right direction towards a pro-energy policy.

The Senate will likely wrap up its energy bill in the weeks ahead. Then the many differences between the House and Senate versions will have to be reconciled before a final bill is voted on and sent to the President. There is still time for the Senate to create a better bill-or at least avoid the pitfalls that would turn it into something worse than no bill at all.

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies