In big U.S. energy bill, who will pay?

Conservation measures may lead to most fuel savings since 1970s.

If the last energy bill was about squeezing remaining drops of oil from US soil, the newest is still a nascent, muddy legislative donnybrook over one question: Who will pay to shift the US energy mix to green and lean?

Energy-conservation measures in House and Senate bills approved earlier this year could by 2030 save the US twice as much oil as it now imports from the Persian Gulf, slash greenhouse-gas emissions by 40 percent, and reduce electricity use by at least 10 percent.

If key elements of the two bills now being reconciled behind closed doors make it into the final version, the result would be the biggest shift in US energy use since the 1970s – and underpin larger greenhouse-gas cuts in future legislation, observers say.

"We haven't seen any plan this significant in terms of oil savings since the 1970s," says Bill Prindle, deputy director of the American Council for an Energy Efficient Economy in Washington. While electric-efficiency gains would be more modest, they would save consumers billions of dollars on utility bills and eliminate the

need for dozens of new power plants.

Senate majority leader Harry Reid and House Speaker Nancy Pelosi are pushing to give the president a bill to sign no later than Christmas – before the 2008 election cycle hits. To do that, they must reconcile two starkly different energy bills – and avoid a White House veto.

Two key but controversial measures hang in the balance: tougher Corporate Average Fuel Economy (CAFE) standards for cars and trucks as well as a national Renewable Portfolio Standard (RPS) for utilities to require more green power. Three other important pieces enjoy broad legislative support: the "Renewable Fuels Standard" requiring more ethanol use in gasoline, tougher electrical efficiency standards for appliances and lighting, and a production tax credit for renewable energy.

But industry groups – oil, coal, auto, and electric utilities – worry that they will have to foot most of the cost of any new energy legislation, which could run up to $32 billion. Most new green measures would be paid for by repealing tax incentives of $16 billion (House bill) to $32 billion (Senate version) that now flow to the oil and gas industry.

"Neither of those bills answers the question of how we produce more energy or how we get more energy into this country," says Mark Kibbe, senior policy analyst for the American Petroleum Institute, a Washington trade association representing large oil companies. "While there might be some good in these bills, the negatives outweigh it."

Even those not hit by tax break repeals worry over anticipated higher costs of compliance. The House bill, for instance, includes a new national RPS, requiring all electric utilities by 2020 to generate at least 15 percent of their power from renewable energy sources, such as biomass, wind, or geothermal.

Although 25 states already have such requirements – many of them far tougher than the proposed national RPS – utilities in the Southeast and elsewhere oppose a federal standard that doesn't take geography into account.

"We oppose any federal legislation that does not recognize regional differences because it would be an unfair burden," says Mike Tyndall, a spokesman for the Southern Company, an Atlanta-based utility serving the Southeast. "We have extremely limited cost-effective solar and wind resources compared with other parts of the country."

A recent compromise plan in the House-Senate negotiations would permit utilities to count energy-efficiency gains for roughly a quarter of the 15 percent mandate. That could broaden support for the measure, which is considered likely to survive in the energy bill despite a presidential veto threat, observers say. The leadership in both the Senate and House favor it and it has passed the Senate three times since 2002.

"I think it's most likely there will be an RPS," says Leon Lowery, a staffer on the Senate Committee on Energy and Natural Resources. "The South has one of the best renewable-energy sources in the country, and it's not wind, it's biomass."

Mr. Tyndall agrees biomass is promising but says its immediate prospects are small. "To attain a 15 percent level with biomass would be very difficult to achieve as a practical matter," he says.

A key part of the legislation is the Senate's provision for new CAFE standards in which cars and light trucks achieve a fleet average of 35 miles per gallon (m.p.g.) by 2020, a 40 percent increase that would slash greenhouse-gas emissions from cars by about 15 percent, experts say.

Automakers support a softer bill pending in the House that would keep the dual auto and truck mileage system, while raising fuel economy by a combined fleet average of 32 to 35 m.p.g. by 2022.

The automakers may hold a trump card. In a shot across Congress's bow, Allan Hubbard, director of the president's National Economic Council, wrote Speaker Pelosi Oct. 18 threatening a presidential veto if a final energy bill did not meet a laundry list of concerns and "maintain separate attribute-based standards for cars and light trucks."

Some observers see a compromise brewing.

"What we're seeing is probably the auto industry's best break in a generation for how things could come out for them," say Kevin Book, a senior vice president at FBR Capital Markets, an Arlington, Va., investment firm.

While Mr. Hubbard's letter also includes a threat to veto any bill with an RPS mandate, Mr. Lowery and others see some wiggle room. "It was a very carefully worded letter," Lowery says. "It said that senior advisers would recommend veto – not that the president himself would veto this bill."