Energy Policy: Setting the Stage for the Current Debate

Order Code IB10080

Issue Brief for Congress

Received through the CRS Web

Energy Policy:

Setting the Stage

for the Current Debate

Updated January 14, 2003

Robert L. Bamberger

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

CONTENTS

SUMMARY

MOST RECENT DEVELOPMENTS

BACKGROUND AND ANALYSIS

Roots of the Current Debate

Some Historical Perspective

An Energy Policy Schematic

The Current Context: What’s Different?

Petroleum and Natural Gas

Electricity restructuring

Conservation, Alternative Fuels, and Improvements in Efficiency

Energy Policy Legislation in the 107th Congress

Conference Highlights

LEGISLATION

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Energy Policy: Setting the Stage for the Current Debate

SUMMARY

The Bush Administration issued its plan

for a national energy policy on May 16, 2001.

The plan was controversial, characterized by

some as lean on conservation and renewables,

and predisposed to trade off environmental

considerations to increase supply. Comprehensive energy legislation was introduced in

the Senate by both parties by late March (S.

388, S. 389, S. 596, S. 597). Bills reported by

several House committees (H.R. 2436, H.R.

2460, H.R. 2511, and H.R. 2587) were combined in a single bill, H.R. 4, passed by the

House, August 1, 2001.

The House version of H.R. 4 would have

required a 5 billion gallon reduction in lightduty truck and SUV fuel consumption and

would have opened the Arctic National Wildlife Refuge (ANWR) to leasing. The House

bill did not include electricity provisions.

Debate on comprehensive energy legislation, Amendment No. 2917 to S. 517, began

in the Senate in late February. Amendments

approved during the first days of the debate

included language to designate a southern

route for the proposed Alaskan natural gas

pipeline, and pipeline safety reform legislation

(S. 235), approved by the Senate in 2001. On

March 13, the Senate approved an amendment

to allow the National Highway Traffic Safety

Administration (NHTSA) to go through the

sort of rulemaking process used in the past to

set CAFE standards. The Senate also approved language to freeze “pickup trucks” –

yet to be defined – at the current light truck

standard of 20.7 miles per gallon.

On March 14, the Senate rejected a

proposal to require that 20% of the nation’s

electricity generation come from renewable

energy sources. An amendment to eliminate

the 10% requirement in the Democratic pro-

Congressional Research Service

posal was defeated. A package of amendments eliminated or scaled back language that

would have extended Federal Energy Regulatory Commission (FERC) authorities to guarantee reliability of the transmission system.

On April 10, an amendment to strike most of

the Senate bill’s electricity provisions was

defeated. A cloture motion to end debate on

an amendment to regulate energy derivatives

trading was also defeated.

Language in S.Amdt. 2917 would have

established a renewable fuel standard to increase the use of ethanol. Critics argued that

the standard would boost prices to consumers

and create shortages. An amendment to soften

the program was tabled April 11. Opponents

of opening ANWR filibustered. On April 18,

the Senate defeated (54-46) a procedural

motion to invoke cloture on the debate. An

amendment to ban Iraqi oil imports to the

United States passed (88-10). The Senate

passed S. 517 (88-11) on April 25, and inserted its text into H.R. 4. In its meetings

through September 19, 2002, the conferees

agreed on a number of provisions, including

CAFE, energy efficiency, reauthorization of

the Price-Anderson Act, pipeline safety, and

energy efficiency programs. More controversial issues awaited resolution after the election, including ANWR, the renewable fuel

standard, ethanol use, electricity and climate

change.

On November 12, 2002, there were

indications that the conferees would report a

bill including only the titles amending pipeline

safety laws and reauthorizing the Price-Anderson Act. However, it was decided there was

insufficient time to finish the bill. The new

chair of the Senate Energy Committee, Senator Pete Domenici, indicated his intentions to

work on a new bill in the 108th Congress.

˜ The Library of Congress

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MOST RECENT DEVELOPMENTS

In its meetings through September 19, 2002, the conferees on comprehensive energy

legislation, H.R. 4, agreed on a number of provisions, including CAFE, energy efficiency,

reauthorization of the Price-Anderson Act, pipeline safety, and energy efficiency programs.

More controversial issues awaited resolution after the election, including ANWR, the

renewable fuel standard, ethanol use, electricity and climate change. On Nov.12, 2002,

there were indications that the conferees would report a bill including only the titles

amending pipeline safety laws, and reauthorizing the Price-Anderson Act. However, it was

decided there was insufficient time to finish the bill. The new chair of the Senate Energy

Committee, Senator Pete Domenici, indicated his intentions to work on a new bill in the 108th

Congress.

BACKGROUND AND ANALYSIS

Energy policy has been a major issue during the first session of the 107th Congress. The

challenge to craft an integrated balance of energy policies – to reconcile legitimate but

competing policy objectives – is formidable. Addressing that challenge is proving to be one

of the major debates in the 107th Congress. It has also been re-focused and diverted by the

terrorist attacks upon the nation on September 11, 2001. Fresh and very broad concerns are

being raised about national energy security in both the short- and long-term. Economic

conditions are also likely to depress energy demand during the coming year, making the

supply problem less critical. At the same time, U.S. military actions and the fragile politics

among Arab, Muslim, and oil-exporting nations in the Middle East might also present

unanticipated complications affecting crude production and supply.

The House passed comprehensive energy legislation (H.R. 4) on August 1, 2001. Markup had begun in the Senate when Congress, and the nation’s, attention was diverted by the

terrorist attacks. Comment by the Democratic leadership that new priorities would postpone

final action on a comprehensive bill during the session provoked Republican criticism.

Senator Inhofe proposed to amend a pending defense authorization by adding provisions

from H.R. 4, notably those to authorize opening the Arctic National Wildlife Refuge to

leasing. A unanimous cloture vote ruled out amendments to the bill; the apprehension was

that amending the defense authorization would likely stall the bill at a time when the nation

was preparing for possible military action. A further attempt in early December 2001 to

amend energy provisions to railroad retirement legislation (H.R. 10) also failed.

Later on October 9, 2001, Senate Energy Committee Chairman Bingaman announced

that committee action would be suspended on all energy legislation and that any decisions

on major energy legislation to be considered prior to the end of the session would be vested

with the Democratic leadership of the Senate. Bingaman noted potential jurisdictional issues

among Senate committees and the prospect that any attempt to rush the legislation through

the committee process prior to adjournment would prove divisive. Bingaman was charged

with developing comprehensive legislation that the majority leader could schedule prior to

adjournment if legislation and economic stimulus packages triggered by the September

attacks did not consume the time that remains.

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Senator Murkowski was highly critical of Bingaman’s announcement, arguing that there

were sufficient votes in the committee to include provisions authorizing exploration in the

Arctic National Wildlife Refuge (ANWR) in any comprehensive bill that would be reported

to the floor. He argued that the Democratic leadership believed it might be more possible

to defeat an ANWR amendment on the Senate floor than to expunge an ANWR section from

the reported bill. The Republicans continued to criticize the Democrats for not expediting

Senate consideration of energy legislation. Though the Democratic leadership promised

consideration of energy legislation by mid-February, the Republicans proposed to amend a

railroad retirement bill (H.R. 10), scheduled for consideration on December 3 with

provisions from House-passed energy legislation, H.R. 4. A motion to invoke cloture on the

energy amendment was defeated 94-1, on December 3, 2001. Debate on the Senate

legislation began in late February 2002; during the course of the debate, ill feelings were

frequently expressed about the sequence of events and delay in bringing legislation to the

Senate floor.

Roots of the Current Debate

The renewed focus upon energy policy was initially triggered by a rise in oil prices that

began in the late spring of 1999. A crisis in some Asian and other economies in 1998, and

the resumption of oil exports from Iraq, brought crude oil prices to levels below $10/bbl in

early 1999. In March 1999, OPEC agreed to reduce production. In the past, OPEC has had

difficulty adhering to its quotas, but this time there was greater cooperation, at the same time

that world economic recovery was shoring up demand. The price of crude oil began to rise

sharply in the spring of 1999 to levels that even OPEC had not foreseen.

Mistakenly expecting that oil prices would fall, refiners drew down existing, lower-cost

inventories of refined products and crude, postponing replenishment of inventories until

prices softened. Problems in the Northeast during the winter of 1999-2000 put fresh

pressures on supply systems. Unexpectedly severe weather disrupted waterborne transport

of home heating oil to New England, leading to sharp increases in the price of home heating

oil that spread to diesel fuel as well. Then, in the summer of 2000, inadequate supplies of

blending components used in the manufacture of reformulated gasoline to meet clean-air

objectives, among other problems, led to shortages of gasoline in the Midwest with some

prices exceeding, for a time, $2.00/gallon.

As the nation headed into the winter of 2000-2001, anxiety remained about home

heating oil price and supply until early 2001 when stocks approached and then exceeded

year-earlier levels. Additionally, natural gas prices, which were relatively unaffected during

the winter of 1999-2000, were 30% or more higher during the winter of 2000-2001 as the

result of low inventories, limited extra production capability, and strong demand. The

unfolding of California’s restructuring program, its painful and complicated consequences,

and the subsequent difficulty in crafting a solution agreeable to the greatest number of

parties, have drawn renewed attention to this issue.

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Some Historical Perspective

The shakeup in fuel supplies and prices was the fourth significant episode since 1973

to jog American awareness of the extent to which the economy and our lifestyle is dependent

upon inexpensive and plentiful energy. When the United States experiences a period marked

by sharp increases in the price for energy and concern about the adequacy of essential

supplies – there is widespread belief that the nation has no energy policy. However, not

only does the nation have an energy policy, it has also adopted several distinct policy

approaches over the years.

In the aftermath of the Arab oil embargo in 1973, many looked to government to solve

the problem, for both the short- and long-term. By 1975, refiner acquisition costs for

imported crude oil had roughly tripled, rising from an average cost of $4/bbl (barrel) in 1973

to $12.50/barrel in 1974. However, refiner acquisition costs for domestic crude did not even

double – from $4/bbl to $7/bbl – owing to a system of federal price controls that kept the

price of domestic production below the market price. This insulated consumers from some

of the price increase, but had the companion effect of discouraging domestic production and

encouraging imports. Automobile fuel economy standards were enacted to reduce gasoline

consumption in the transportation sector. Hopes were invested in government-funded

research and development in conservation technologies and alternative fuels.

A second oil interruption and shortage was triggered in 1979 by the fall of the Shah of

Iran and the loss of Iranian oil to world markets for several months. Refiner acquisition costs

for imported oil surged from $14.50 in 1978 to $37.00 in 1981. In late 1975, Congress

enacted a phased deregulation for oil in the Energy Policy and Conservation Act (P.L. 94163). Some policymakers contended that lingering price controls on oil carried greater

liabilities than benefits. Letting the market set prices, many began to argue, would encourage

the development of additional domestic supplies of oil as well as the development of

alternative energy supply. Shortly after assuming office in 1981, President Reagan

accelerated the schedule for price decontrol. Energy policy, in general, became more marketoriented. The government role was lessened.

Sustained high crude oil prices contributed to a reduction in U.S. petroleum

consumption from 18.8 to 15.2 million barrels per day (mbd) from 1978 to 1982; there was

more fuel substitution, more efficient consumption of oil, and price-induced conservation.

Higher prices drew new oil production from outside the OPEC nations; the United States and

other nations diversified their sources of supply. Faced with a loss of market share and

revenue, OPEC sharply lowered the price for crude oil in the mid-1980s. In the course of the

year from 1985 to 1986, refiner acquisition cost for imported oil fell from $27/barrel to

$14/barrel.

Prices remained depressed until a fresh round of sharp spikes in oil prices occurred in

1990-91 following Iraq’s invasion of Kuwait in early August 1990, cutting off 4.3 mbd from

world markets. The price of oil, which had averaged $16/bbl at the end of July 1990,

exceeded $28 by late August, and reached $36/bbl in September 1990. In the face of the Iraqi

threat, Western and Middle Eastern nations found common ground that would have been

unimaginable even a decade earlier. By the late 1980s, recognition had grown of the mutual

interdependence of oil-producing and oil-consuming nations; the OPEC nations had come

to recognize that long-term demand for their oil was jeopardized by any prolonged period of

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high oil prices. Most did not wish to repeat the cycle of the early- to mid-1980s and boosted

their production to make up for some of the lost supply. Consuming nations also coordinated

the release of strategic stocks of crude and products. Prices began to fall in mid-October

when the U.N. approved the use of force against Iraq. Prices fell more sharply after the

United States and a consortium of nations conducted an air strike on Iraq in mid-January

1991. During 1999-2000, the Clinton Administration would also underscore the mutual

interests of producing and consuming nations as it urged OPEC to boost its production

quotas.

During all of these episodes, importance was placed on conservation, more efficient use

of energy, and development of alternative energy sources. The oil shocks of the mid- and

late-1970s spurred considerable spending on alternative fuels – including solar, geothermal,

wind, clean coal, synthetic fuels, alcohol-based fuels – and technologies to improve the

efficiency of energy use. Regulations were developed to improve the efficiency of home

appliances and to incorporate more energy-efficient designs in buildings. In the early 1980s,

states and utilities promoted energy efficiency as one form of “demand-side management”

to reduce the need for construction of new power plants. Conservation and efficiency were

championed by some as a lower-cost and more appealing way of achieving greater energy

security than policies to boost supply. Increasing efficiency was seen as a way of mitigating

air pollution and generation of greenhouse gases without penalty to quality of life.

As suggested earlier, each episode of short supply and higher prices spurs talk that the

nation lacks an energy policy and has ignored past lessons. However, it is apparent from a

review of the years since the time of the Arab oil embargo and first oil price shock in 1973

that it is more accurate to see this nearly thirty-year period as one of general price and supply

stability that is periodically broken with shorter episodes when price became volatile and

supplies of fuel less certain. It isn’t that energy policy has failed to be responsive to crises;

rather, it is hard in the face of lengthy periods of stability and declining prices for

conventional fuels to sustain certain policy courses that will shield the nation from the

occasional episodes of instability.

An energy policy that would most effectively shield the nation and the economy from

the worst effects of supply shortages would be a policy that might well deny the nation the

full benefits of cheap and plentiful energy when markets are stable. The periods of relative

calm and stability result in a markedly uncertain environment for investment in alternative

fuels, energy efficiency technologies, and in boosting the production of conventional fuels

in regions where production costs are significantly higher than in the Middle East. State and

local regulations and codes further cloud the climate for investment. Many agree that certain

regions of the country will need more power plants, new refineries and pipelines, but local

citizens often do not want to see these facilities in their communities and challenge their

necessity until shortages actually occur.

At the same time, awareness has grown about the complexity of constructing a balanced

energy policy that will not undermine other competing and equally legitimate policy goals.

How to boost energy supply without exacting a toll on the environment that some find

unacceptable? How, then, to reduce gasoline consumption, a commodity central to the

nation’s economy and lifestyle, when raising its price to achieve a meaningful reduction in

demand could be economically disruptive and politically unappealing? How, then, to

encourage the use of more expensive alternative fuels and technologies that heighten

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efficiency, when OPEC has the capacity to adjust the price of oil to keep it cheaper than its

substitutes?

An Energy Policy Schematic

Debate over energy policy has produced an enormous range of proposals, many of

which have been adopted at one point or another over the years. In general, however, it is

helpful to recognize the broad categories into which most proposals fall: Most energy

policies are designed to affect either the supply or the demand for energy products and they

are, at the same time, designed to have an effect either in the near-term or the longer-term.

Traditionally, debate has been the most vigorous over the balance struck between

increasing supply and support for conservation, but it became apparent in the weeks

preceding release of the Administration plan in mid-May that there was also concern about

the degree to which policymakers were addressing current energy problems in the short-term.

President Bush had advised weeks before its release that the report from the Energy Policy

Development Group (EPDG) would address long-term remedies for the nation’s energy

problems and that there would be no immediate relief for consumers paying higher prices for

gasoline, electricity, and other fuels.

This prompted criticism from those who contended that the plan offered no short-term

relief. Others, including the President, suggested that by setting out an action-oriented and

actionable comprehensive policy, markets and consumers should feel some short-term

reassurance. The President remarked on May 16, 2001, “My plan helps people in the short

term and long term by recognizing the problem and by expediting energy development.” The

various reactions to the plan underscored the difficulty of developing comprehensive energy

policy during a period of tight supply and high prices.

It is useful to clarify the differences between short-term and long-term policy initiatives.

For example, drawdown of oil from the Strategic Petroleum Reserve (which one Democratic

initiative calls for) affects crude oil supply in the near-term. However, enactment of tax

incentives for investment in new oil drilling technologies might add to domestic crude supply

in the future. Proponents of drilling in the Arctic National Wildlife Refuge (ANWR) argue

that region might yield anywhere from 300,000 to 1.4 mbd b/d to U.S. domestic supply, but

this, too, is a longer-term policy initiative.

Turning to the consumption side of the ledger, boosting the gasoline tax by $1.00/gallon

might be expected to reduce gasoline consumption in the short-term, but a rise in the

corporate average fuel economy (CAFE) standards on new vehicles will not begin to

introduce fuel savings until these more efficient cars are meaningfully introduced into the

motor vehicle fleet, a process that would take more than a decade.

The table below suggests a way in which many energy policies may be visualized along

these lines:

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A Schematic of Energy Policies

Short-term to Mid-term

Mid- to Long-term

Affecting Supply

Affecting Demand

Strategic Petroleum

Reserve (SPR)

High energy prices due to

unfettered market forces or

taxation

Allowing high prices to

allocate and price scarce

energy

“Green” policies

promoting conservation

and more energy-efficient

choices

Tax incentives to promote

production

Corporate Average Fuel

Economy Standards

(CAFE)

Open new areas to leasing

and exploration

Tax incentives to

encourage less, or moreefficient consumption

Research and development

Efficiency standards

Market pricing of energy

Efficiency labeling

Research and development

in efficiency technologies

The axis of long-term/short-term, supply/demand does not capture all policy options.

For example, one of the major issues in energy policy is the price for fuels. Energy policy

generally is designed to affect price indirectly – by having price follow, or reflect current

demand or supply for energy. There are a few exceptions. Tax policy may address energy

price directly to the extent that excise taxes on fuel products can be raised or lowered

(recognizing that these tax boosts or cuts may not be reflected penny-for-penny in the

“pump” price for fuels).

Short-term policies to affect supply, such as calls for the use of strategic reserves, have

been sometimes very controversial because, in the absence of a very clear-cut and widelyacknowledged physical shortage, such initiatives are perceived to be thinly disguised efforts

to grant price relief. Some suggest at times that high prices – left uninterfered with – are the

best policy of all, encouraging markets to provide more supply in due course, and that policy

should address those most adversely affected by sharply higher prices. The Low Income

Home Energy Assistance Program (LIHEAP) is one such program that provides direct

assistance to families whose quality of life is especially burdened by high energy prices.

LIHEAP is a short-term policy for addressing the impact of high prices for energy.

Supply and demand may also be affected by external events including political and

diplomatic dynamics between or among the producing nations. Weather, seasonal or

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otherwise, will affect supply and demand; policy cannot affect the weather, only its

consequences. Lastly, Congress always has the option to require study and analysis of a

problem before settling on a policy course. Appropriations legislation passed by the 106th

Congress required the National Academy of Sciences (NAS) to analyze and recommend an

optimum new car fuel economy standard (this study was released at the end of July, 2001).

Oil pipeline safety legislation passed by the Senate in early February would charge NAS with

studying the causes for the rapid escalation in natural gas prices, and to evaluate the

feasibility of establishing a strategic natural gas reserve.

The Current Context: What’s Different?

This is the fourth time since 1973 that energy policy will be debated broadly. One

question is a constant: How extensive a federal role is appropriate in energy policy? Even

prior to the terrorist attacks upon the nation on September 11, 2001, the context for this latest

debate was distinctly different from previous episodes.

!

U.S. energy policy has been primarily market-based for nearly 20 years, but

policy makers have been weighing whether problems in some sectors and

with some fuels are attributable to lingering inefficiencies interfering with

markets, or whether government intervention may be necessary to protect

consumers and the economy from problems to which markets cannot

flexibly respond.

!

Strong economic growth during the mid- and late 1990s at a time of

declining real energy prices resulted in growth in consumption even though

efficiency of energy use is dramatically better than during the 1970s and

1980s. Growth in petroleum consumption in the United States as domestic

production declines has meant a commensurate increase in oil imports.

!

There is recognition of the interdependence of producing and consuming

nations; however, the political balance among the OPEC nations is delicate

and can influence oil production decisions and whether OPEC is able to

exert market control at all.

!

There is growing recognition that the current difficulties have been, in large

measure, caused by, or compounded by, insufficiencies in the nation’s

energy infrastructure – refining capacity, gas and oil pipelines, transmission

lines, and electric generating facilities. This has drawn major attention.

!

Problems with gasoline supply and home heating oil stocks during 20002001 imply some need to develop additional refining capacity and transport

systems that will add both capacity and flexibility to distribution. However,

national and local environmental regulation and requirements, and local

community sentiment, affect the speed and ease with which such facilities

can be sited and built. Concerns about greenhouse gas emissions add an

additional measure of uncertainty, as does the depth of the economic

slowdown that carried into the second half of 2001.

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The experience with deregulation of the California electric utility industry

appeared to stall and certainly added uncertainty to the policy debate over

restructuring. The House did not include electricity provisions in H.R. 4.

The Senate bill does.

Looking now in some additional detail at a few of these developments:

Petroleum and Natural Gas. Demand for petroleum products in the United States

approaches 20 mbd. Increases in demand, as well as declining domestic production, have

been offset by increased crude and product imports, which now approach an average of 10

mbd. Cuts in world crude production in March 1999 by OPEC sent domestic refiner

acquisition costs for crude oil on a sharp ascent from less than $11/bbl in February 1999 to

$24.50/bbl by December of the same year. These costs peaked at over $31/bbl in the latter

part of 2000. Subsequently, after intense lobbying by the United States, the OPEC oil

ministers boosted crude production and settled upon $22-$28 per barrel (bbl) as a desirable

“price band.” In the wake of the terrorist attacks in September 2001, OPEC chose not to

defend crude prices too aggressively lest OPEC appear to be tipping the global economy into

recession. By late November 2001, prices had fallen below $20/bbl, and OPEC was seeking

production cuts from outside the cartel to bolster price. Crude prices breached $30/bbl as

prospects for war with Iraq grew in the fall of 2002, however, by November 2002, prices had

settled since into the price band designated by OPEC.

The ability of the OPEC cartel to exert influence upon oil prices at critical times

underscores that – with respect to petroleum – the problem is less that the world supply of

oil is tight, than that so much of it is concentrated in a single part of the globe. U.S.

dependence upon imported oil exceeds 50% of total consumption. On the one hand, absent

some presently illusive technical “fix,” there is little that can be done to significantly reduce

that figure without incurring great economic hardship and lifestyle compromises. On the

other hand, oil prices can take wide swings on the basis of modest gains or losses in total

world production or from changes in demand in response to economic conditions.

Attention has also focused Clean Air Act standards that regulate the oxygen content,

volatility, benzene and the sulfur content of gasoline. Refineries face state and local

standards on how to achieve compliance with federal requirements. The result is a

multiplicity of gasoline formulations, some using methyl tertiary butyl ether (MTBE) as an

oxygenate and octane booster, while other regions require ethanol. One consequence of these

regional variations is that gasoline supply has lost its fungibility; one region experiencing a

shortage may no longer be able to secure additional supply from a refiner servicing a nearby

locality with a different blend of gasoline. Distribution becomes more complicated because

different blends sharing the same pipeline must be carefully batched to avoid contamination.

Additionally, most foreign refineries have not made the investment to supply any but the

most general U.S. gasoline market. Some have urged a relaxation of Clean Air Act standards

that would permit a “harmonization” of U.S. gasoline standards. This would introduce

flexibility into the gasoline manufacture and distribution system that would bring prices

down. It would mean, however, temporarily compromising clean air objectives and,

depending upon where the harmonized standard is set, might actually raise prices for fuel in

regions that do not require the more exacting formulations. H.R. 4, as passed by the House,

would require EPA and DOE to study the effects of local fuel requirements and report to

Congress by the end of 2001.

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The greater the nation’s ability to produce its own fuels, the less vulnerable it is to

unanticipated international developments that can reduce or threaten supply. But, the policy

options on the supply side, such as opening up the Arctic National Wildlife Refuge (ANWR)

for exploration, are mostly long-term. Alaskan oil production, which once touched 2 mbd,

has now fallen below 1 mbd and, without new production, will continue to decline until

production levels can no longer support the fixed costs of transporting it through the TransAlaskan Pipeline.

Proponents of exploring ANWR point to advances in exploration and drilling

technology and methods that have significantly reduced the extent of surface disturbance.

While opponents concede this may be so, they argue that these advances are limited to

exploration and extraction, and that considerable risk to the environment remains during the

production and transportation phases. Opponents also suggest that the risks are not worth

bearing, especially if the resources in ANWR turn out to be at the lower range of estimates,

providing only an additional 300,000 b/d of supply. Some respond to this argument by

noting that the nation has experienced periods of tight supply when even an additional few

hundred thousand barrels of crude oil would have made for significantly lower prices at the

pump, and for home heating oil.

It should be noted that there are some environmentalists for whom any weighing of risks

and benefits are pointless because, citing the area’s pristine character; they argue that its

ecology and habitat should not be disturbed under any circumstances. In its Blueprint For

New Beginnings, the Bush Administration indicated that the FY2002 budget would show a

projected $1.2 billion in bonus bids, from the leasing of tracts in ANWR, to be applied

toward R&D in alternative fuels and energy technologies. On March 21, 2000, the House

Budget Committee adopted the framework of the Administration’s proposed budget, but did

not include revenues from ANWR leasing. H.R. 4, as passed by the House, would open

ANWR to leasing. Opponents of opening ANWR made good on their promise to filibuster

any attempt to include leasing in the Senate proposal. On April 18, the Senate defeated (5446) a procedural motion to invoke cloture on the debate. An amendment to ban Iraqi oil

imports to the United States passed (88-10). (For additional information, see CRS Issue

Brief IB10073, The Arctic National Wildlife Refuge: The Next Chapter.)

The broader issue raised by ANWR – that of access to public lands for energy

exploration and development – was the subject of hearings early in the 107th Congress,

largely in response to former President Clinton’s designation of 19 new national monuments,

and the expansion of 3 others. There is considerable disagreement about the potential

resources on federal lands, and some assessments are underway. The EPDG recommends an

examination of “land status and lease stipulation impediments” with the objective to

“consider modifications where appropriate.” (For additional information and background,

see CRS Report RS20902, National Monument Issues.)

For the past decade in the United States, natural gas consumption was encouraged, in

part to fuel efficient, gas-fired combined-cycle generation plants that could provide

supplemental electricity to the nation’s power grid at highly competitive prices and with few

environmental constraints. Plentiful supplies, and relatively low prices for several years,

discouraged additions to natural gas reserves. With surges in demand for electricity and a

colder winter in 2000-2001, residential and other consumers of natural gas suddenly faced

sharply higher prices as competition grew for gas supplies. Natural gas prices declined

sharply during the fall of 2001, underscoring the difficulty of crafting policy in volatile times.

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Expansion and refurbishment of facilities to accommodate liquified natural gas (LNG)

imports is underway. Additionally, there are a number of proposals for new facilities – some,

offshore in Mexico and the Bahamas – which would receive LNG produced abroad for

consumption in the United States. (For further information, See CRS Report RL30815,

“Natural Gas Prices: Overview of Market Factors and Policy Options.”) Both oil and gas

interests are hopeful of congressional action to ease environmental regulations on refiners,

lift prohibitions on leasing of certain federal lands, and amend the tax code to benefit

domestic producers. H.R. 4 included provisions to liberalize certain deductions for oil and

gas production. The Senate version included provisions to boost the likelihood for

construction of an Alaskan natural gas pipeline. (For additional information and background,

see CRS Report RL30781, U.S. Home Heating Oil Price and Supply During Winter 20002001: Policy Options, CRS Issue Brief 87050, The Strategic Petroleum Reserve, and CRS

Issue Brief IB10054, Energy Tax Policy.)

Electricity restructuring. The Enron debacle raised new questions and has slowed

the momentum of the electricity restructuring debate. However, it was the electric utility

crisis in California in early 2001 that shifted the focus of electricity restructuring legislation

away from comprehensive bills that dominated the electric utility restructuring debate in the

106th Congress. In the 107 Congress, the majority of electric utility legislation introduced

relates to reliability. Regulatory functions are currently divided between the states and the

federal government, and there has been considerable argument not only about which controls

need to be retained, but how to redraw the respective roles of the federal government and the

states to assure reliability. The House did not include language affecting electricity in its

comprehensive energy bill, H.R. 4, but indicated the issue would be addressed separately.

A reliable electric system depends on adequate transmission capacity. The regulatory

regime has shifted in the electricity industry to encourage competition in the generation

sector but investment in transmission infrastructure has not kept up with increases in bulk

power transfers and electricity demand. Additionally, transmission lines are congested in

several regions of the United States. Difficulty in siting the lines and the regulatory

uncertainty have dampened investor interest in the transmission system. FERC has approved

one Regional Transmission Organization (RTO) and is in the process of evaluating others.

H.R. 3406 would codify FERC’s authority to order participation in an RTO. H. R. 2814

would give FERC authority to develop voluntary RTOs.

Some have argued that transmission and wholesale power markets cannot be

competitive without additional market transparency, or access to market information. S.

1231 and S.Amdt. 2917 to S. 517 proposed to require FERC to issue rules establishing an

electronic information system to provide information about the availability and price of

wholesale electric energy and transmission services to FERC, state commissions, buyers and

sellers of wholesale electric energy, users of transmission services, and the public. During

the first full week of debate in the Senate, these proposals were significantly weakened out

of concern that they usurped too much authority from the states. An attempt to eliminate

most of the electricity provisions from the legislation was defeated on April 10.

Subsequently, the Senate approved amendments introduced by Senator Thomas that would

give the Federal Energy Regulatory Commission (FERC) additional review authority over

certain electric utility mergers; require FERC to apply cost-of-service rates when marketbased rates are unjust, unreasonable, unduly discriminatory or preferential; require an electric

reliability organization to develop and enforce mandatory reliability standards; provide

access to the transmission system for certain intermittent generators; and give states the

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authority to prescribe and enforce laws regarding the application of the Consumer Protection

Subtitle.

The Senate also debated language in S.Amdt. 2917 to establish a renewable portfolio

standard that would require that 10% of electricity generation come from non-hydro

renewable energy resources by 2020. An amendment to boost this proposal to 20% was

defeated on March 14; an amendment to strike the language altogether was subsequently

defeated.

Concern over electricity supply has also led to some reassessment of the relative roles

that natural gas, coal and nuclear energy may have in future electricity generation. In its

energy policy plan, the Bush Administration indicates its objectives to remove barriers to the

use of coal in electric power generation, though no new coal-fired generating capacity is

currently planned. The Administration proposes establishing a consortium of companies to

direct the research, and H.R. 4 would have provided $2 billion in funding over a 10-year

period.

Prior to the release of the its plan, the Administration indicated interest in nuclear

options. On March 21, 2001, Vice President Cheney described nuclear power as a preferable

means to meeting clean air goals than what he described as a “seriously flawed” Kyoto global

warming treaty. (A few days later, March 27, 2001, Environmental Protection Agency

Administrator Christine Todd Whitman indicated that the Bush Administration had “no

interest” in any further negotiations on implementing the Kyoto Protocol.) The EPDG

recommends an assessment of the potential of nuclear energy to contribute to cleaner air, and

that the NRC expedite nuclear re-licensing procedures. Nuclear, however, remains very

capital intensive, and it is not apparent that nuclear is poised for any immediate renaissance.

The terrorist attacks in September 2001 added fresh concerns about security. (For additional

information, see CRS Electronic Briefing Book: Electric Utility Restructuring

[http://www.congress.gov/brbk/html/ebele1.shtml].

Conservation, Alternative Fuels, and Improvements in Efficiency. As has

been noted, the energy policy debate has turned partly on perceptions of the balance between

supply-oriented and conservation-oriented policies that make up an appropriate energy policy

to address the current matrix of energy problems. While any final package enacted by

Congress will include a range of policies, some in the debate will likely posit choices to be

made between policies; e.g., why open ANWR to leasing if comparable savings can be

achieved by raising fuel economy?

The Energy Policy and Conservation Act (P.L. 94-163) established new car corporate

average fuel economy (CAFE) standards, beginning with model year 1978. Currently, the

standards are 27.5 miles per gallon (mpg) for cars and 20.7 mpg for light-duty trucks.

Proposals to stiffen the CAFE standards have been controversial. Beginning with enactment

of the FY1996 Department of Transportation Appropriations, Congress forbid the

expenditure of appropriated funds to make any change in the current CAFE requirements.

This rider was included in the appropriation for the current year (P.L. 106-346); however,

Senate conferees insisted on authorization of a study to be conducted by the National

Academy of Science (NAS) to recommend “appropriate” CAFE standards, subject to

approval by a Joint Resolution of Congress. In late June 2001, the Administration was

reported to be receptive to an increase in CAFE standards, and a proposal to save 5 billion

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gallons of gasoline between MY2004-2010 passed the House in H.R. 4. An amendment to

set a unified standard of 27.5 mpg for both cars and light-duty trucks was defeated.

Just before the debate on H.R. 4, the NAS study was released on July 30, 2001. While

it did not recommend a specific level for CAFE, it did conclude that “significant” reductions

in fuel consumption could be achieved within 15 years utilizing existing technologies. Were

increases in new car fuel economy achieved by reducing vehicle weight or disproportionately

encouraging the sale of small vehicles, the study allows that additional fatalities could result.

However, some members of the NAS panel dissented, suggesting that the analysis of the

relationship between fuel economy and vehicle safety is extremely complex. In the Senate,

Senators John Kerry and John McCain had reached a compromise to call for a fleet average

of 36 mpg by MY2015. However, on March 13, the Senate approved an amendment to allow

the National Highway Traffic Safety Administration (NHTSA) to go through the sort of

rulemaking process used in the past to set CAFE standards. The Senate also approved

language to freeze “pickup trucks” – yet to be defined – at the current light truck standard

of 20.7 miles per gallon.

There is little question that the price hikes during past episodes of tight energy supply

spurred many improvements in energy efficiency. Some argue, however, that the easiest and

lowest-cost efficiency gains have been achieved, and that expectations should be lowered

about the additional efficiency gains that can be captured in the present price framework for

energy. When the Reagan Administration redirected energy policy to a more market-oriented

framework, it was argued that R&D needed to be carefully focused on areas that were

promising, but unlikely to be explored by the private sector.

The Bush Administration energy policy recommended a review of the funding and

performance of energy efficiency research and development for the purpose of determining

appropriate funding for performance-based research in public-private partnerships.

Recommendations are also made to expand the scope of appliances covered under energy

efficiency standards. The Administration also proposed to apply revenue from the leasing

of ANWR to development of solar and renewable energy, a proposal approved by the House

in H.R. 4. Additionally, the language in S.Amdt. 2917 proposes a renewable fuel standard

that would ultimately triple the use of ethanol as an oxygenate in reformulated gasoline – a

provision supported by the oil industry, ethanol producers and environmental groups. Critics

argue that it will boost prices to consumers and create shortages. However, an amendment

to soften the program was tabled April 11. The conferees had agreed to the essential points

of the House language. (For additional discussion, see CRS Issue Brief IB10020, Energy

Efficiency: Budget, Climate Change, and Electricity Restructuring Issues, and CRS Issue

Brief IB90122, Automobile and Light Truck Fuel Economy: Is CAFE Up to Standards?)

Readers seeking current statistics on energy production and consumption in the United States

are referred to the Energy Information Administration (EIA) website,

[http://www.eia.doe.gov/.]

Energy Policy Legislation in the 107th Congress

Many of the problems described here do not lend themselves to fast or easy fixes. The

very volatility of energy prices complicates the investment environment. Modest changes in

world economic growth can create overhangs and “bubbles” in supply that can just as quickly

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evaporate. High prices, on the one hand, should encourage investment in exploration for

fossil fuels and development of downstream facilities to refine and transport products. At

the same time, if high energy prices are one of many conditions that may contribute to a

slowing of economic growth, it is possible that markets will not profitably support new

supplies and infrastructure when they become available. Whether public policy at the

national level can eliminate some of the uncertainty in energy investment is likely to be an

issue in the forthcoming debate.

While a number of narrowly focused bills have been introduced in the 107th Congress,

omnibus energy bills were introduced by both parties. A comprehensive proposal backed by

several Senate Republicans, the National Energy Security Act of 2001 (S. 388), was

introduced on February 26, 2001, as was a companion measure, which also included energy

tax provisions (S. 389). A Democratic measure, the Comprehensive and Balanced Energy

Policy Act of 2001 (S. 597), was introduced on March 22. The accompanying tax measure

was titled the Energy Security and Tax Incentive Policy Act of 2001 (S. 596).

The Republican proposal set as its goal a reduction of U.S. energy dependence to less

than 50% by 2011, and would require annual reports on progress toward that goal. The

Senate Republican proposal was characterized as having its greatest emphasis on boosting

production of conventional fuels. It did propose to lease ANWR, but a portion of bid bonuses

would be earmarked toward funding research into renewable energy research and

development. The use of coal would be encouraged, with credits available for emissions

reductions and efficiency improvements. The legislation would require an improvement of

3 mpg in the fuel efficiency of the federal motor vehicle fleet. Other provisions would have

provided support for renewable fuels, alternative technologies, residential energy

efficiencies, and new nuclear reactor designs.

The Senate Democratic legislation proposed to integrate energy and environmental

policy to identify energy policy options consistent with stabilizing greenhouse gas emissions.

A commission would be established to study and recommend appropriate measures. The

Democratic proposal did not embrace opening up ANWR, but the tax portion of the

legislation would establish incentives that would hasten development of pipeline capacity

to transport Alaskan natural gas. The Democratic legislation also did not include an increase

in CAFE, but proposed to cap automobile and light truck fuel consumption in 2008 at no

more than 5% above consumption in 2000.

In the face of a lessening sense of urgency and flagging momentum for consideration

of comprehensive energy legislation, House Majority Whip Tom DeLay established a House

energy action team at the end of June 2001 and instructed committees to approve their

respective contributions to comprehensive legislation by early July. Four bills emerged from

the House committees and provisions from the four were consolidated into H.R. 4,

introduced on July 27, 2001, and passed by the House on August 2, 2001.

On July 18, 2001, the House Science Committee reported out the Comprehensive

Energy Research and Technology Act (H.R. 2460). It would authorize $6 billion during

FY2002 for a number of different programs, including $2 billion over 10 years for the

Administration’s Clean Coal Initiative. Additional spending ranging from $172-$186 million

is authorized during FYs2002-2004 for research in other coal technologies, including

integrated gasification combined cycle and pressurized fluidized bed systems. The bill

would have provided $200 million in grants for the development and demonstration of

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commercial applications for alternative fuel vehicle (AFV) use. The committee approved

$600 million for FY2002 and an additional $1.5 billion for FYs2003-2004 for energy

conservation programs within the committee’s jurisdiction, including fuel cells, advanced

internal combustion engine generators, and combined heat and power systems. Renewable

energy programs would receive roughly $1.5 billion over the next three fiscal years as well.

On July 18, 2001 the House Ways and Means Committee approved legislation (H.R.

2511) authorizing new energy tax credits and conservation incentives. The oil and gas

industry would be able to expense more of the costs associated with marginal wells. Credits

would be provided for the use of energy-efficient appliances in homes and commercial

buildings, and to promote use of alternative-fueled vehicles, as well as solar and fuel cells.

Committee Democrats argued that there was no money in the budget to pay for these credits.

Amendments offered to raise the funds by raising income tax brackets, or making the bill’s

tax benefits contingent upon adequate surpluses outside the Social Security and Medicare

trust funds were defeated.

The House Energy and Commerce Committee approved a legislative package (H.R.

2587) on July 19, 2001, that included, among other provisions, language to achieve a 5

billion gallon savings in fuel consumption by light-truck passenger vehicles; to prohibit

approval of any natural gas pipeline from Alaska that traverses a route through northern

Canada; to improve the energy efficiency of air conditioners by 20%; and to increase annual

funding for the Low Income Home Energy Assistance Program (LIHEAP) to $3.4 billion

annually through FY2005. The provision to save 5 billion gallons of gasoline over a six-year

period does not specify how the savings shall be achieved, though some increase in the

corporate average fuel economy (CAFE) for light-duty trucks is presumed. How much of

an increase depends, in part, upon how much of the savings is captured at the beginning of

the period, or postponed until the end. Critics of the proposal argued that an increase only

in the range of 1.0 mpg would be required, though it could be higher if the savings are

“backloaded.” The full committee rejected two amendments to specifically raise CAFE

standards. An amendment to increase light duty truck fuel economy to 29.0 mpg by MY2011

was defeated (43-11) as was a proposal to combine auto and truck standards and boost them

to 40 mpg by MY2016.

Lastly, the House Resources Committee, on July 17, 2001, reported the Energy Security

Act (H.R. 2436). Its most controversial provision was language that would open the Arctic

National Wildlife Refuge (ANWR) to leasing. An amendment that would have banned oil

and gas leasing in ANWR was defeated, 30-19. The legislation would also expedite federal

action on geothermal energy leases and would expedite a review of barriers to onshore oil

and gas leases. The bill would require that an inventory be made of coal and renewable

energy resources on federal lands that are not parks or wilderness areas. The legislation also

included royalty incentives for onshore and offshore development.

Major provisions of these bills were included in H.R. 4, introduced on July 27, 2001,

and approved by the House on August 1, 2001 (240-189). The Senate took up comprehensive

energy legislation, S. 517, in late February 2002 and passed its own version of H.R. 4 on

April 25, 2002 (88-11). For a CRS-prepared side-by-side of the House and Senate versions

of H.R. 4, see CRS Report RL31427.

On July 5, 2002, the Administration sent a letter expressing its positions on features of

the House and Senate bills. The Administration opposes Senate language mandating utility

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use of renewable fuels in electricity generation, but supports the renewable fuels standard to

increase automotive use of ethanol blends and biodiesel fuels. The Administration also

opposes Senate language to encourage routing a natural gas pipeline through Alaska; the

Administration would prefer that market forces set the pipeline route.

Conference Highlights

House Energy and Commerce Committee Chairman Billy Tauzin (R-La.) was

designated the chair of the conference committee. At the committee’s first meetings prior

to the August recess, the chair set a deadline of completing work on the bill by September

30 to allow time for floor consideration. At a meeting on July 25, the conferees agreed to

less controversial elements in the legislation. Among these were reauthorization of assistance

to the poor to pay electricity bills, permanent authorization for the Strategic Petroleum

Reserve (SPR), a program to encourage energy production on tribal lands, and incentives to

promote residential energy efficiency.

On September 12, conferees agreed to provisions that would set goals for, and report

on, clean coal projects. Agreement was also reached on pipeline safety, requiring an initial

inspection of all pipelines by ten years after enactment. Additional appliances would be

subject to energy efficiency standards. The conferees agreed to a 15-year reauthorization of

the Price-Anderson Act nuclear liability system. However, House amendments that would

have required assessments of the vulnerability of nuclear power plants and greater security

were dropped in the face of firm Senate opposition.

.

On September 19, the conferees agreed essentially to the House language on CAFE that

would require a 5 billion gallon savings in light truck fuel economy over the period of

MY2006-MY2012. The CAFE credit for the manufacture of dual-fueled vehicles was

extended through MY2008. The conferees also began to discuss electricity, provisions for

which were included in the Senate, but not the House, bill. However, efforts to reach a

compromise on electricity were unsuccessful. More controversial issues awaited resolution

after the election, including ANWR, the renewable fuel standard, ethanol use, electricity and

climate change. On Nov.12, 2002, there were indications that the conferees would report a

bill including only the titles amending pipeline safety laws, and reauthorizing the PriceAnderson Act. However, it was decided there was insufficient time to finish the bill. The

new chair of the Senate Energy Committee, Senator Pete Domenici, indicated his intentions

to work on a new bill in the 108th Congress.

LEGISLATION

H.R. 4 (Tauzin)

Securing America’s Future Energy Act. Includes major provisions of H.R. 2436, H.R.

2460, H.R. 2511, H.R. 2587, described below. Introduced July 27, 2001. Approved by the

House, August 2, 2001 (240-189). Passed by the Senate, amended, April 25, 2002 (88-11).

Reached conference.

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H.R. 2436 (Hansen)

Energy Security Act. Would open ANWR to leasing, and includes royalty incentives

for onshore and offshore development. Requires that an inventory be made of coal and

renewable energy resources on federal lands that are not parks or wilderness areas.

Introduced July 10, 2001; reported from Committee on Resources July 17, 2001.

H.R. 2460 (Boehlert)

Authorizes $6 billion during FY2002 for several programs, including $2 billion over

10 years for the Administration’s Clean Coal Initiative. Provides $200 million in grants for

the development and demonstration of commercial applications for alternative fuel vehicle

(AFV) use; renewable energy programs would receive roughly $1.5 billion over three fiscal

years. Introduced July 11, 2001; ordered reported by voice vote, July 18, 2001.

H.R. 2511 (McCrery)

Provides tax incentives to encourage energy conservation, energy reliability, and energy

production. Reported (amended) by the Committee on Ways and Means (H.Rept. 107-157).

H.R. 2587 (Tauzin)

Enhances energy conservation, provides for security and diversity in the energy supply

for the American people, and for other purposes. Requires the Secretary of Transportation

to prescribe fuel economy standards that would require the light-duty truck portion of the

new vehicle fleet to achieve an aggregate savings of 5 billion gallons during the period of

MYs2004-2010 from the base level of consumption were the standards left unchanged.

Introduced July 23, 2001. Reported (amended) by the Committee on Energy and Commerce.

H.Rept. 107-162, Part I..

S. 388, S. 389 (Murkowski)

National Energy Security Act of 2001. Decreases America’s dependency on foreign oil

sources to 50% by the year 2011 by enhancing the use of renewable energy resources

conserving energy resources, improving energy efficiencies, and increasing domestic energy

supplies; improves environmental quality by reducing emissions of air pollutants and

greenhouse gases; mitigates the effect of increases in energy prices on the American

consumer, including the poor and the elderly; and for other purposes. Introduced February

26, 2001; referred to Committee on Energy and Natural Resources. (S. 389 also included the

Energy Security Tax Policy Act of 2001.) Introduced February 26, 2001; referred to

Committee on Finance.

S. 517 (Bingaman)

Originally the National Laboratories Partnership Improvement Act of 2001, it is now

the comprehensive energy bill on which debate in the Senate began in late February 2002.

Among other provisions, would significantly increase CAFE standards, provide $2 billion

in credits for ethanol and other renewable fuels; includes incentives for power generation

from clean coal technologies. Would require electric generators to provide 10 percent of

output from renewable resources by 2020.Tax provisions expected to be added as an

additional amendment.

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