Cover Story

Power struggle

For years, Americans were in the dark about the true costs of environmental regulation. With rising gasoline prices and rolling blackouts that have left Californians-literally-in the dark, those costs are coming to light. On the brink of a serious energy crisis, politicians are feeling the heat. And the Bush administration will have to summon all its energy to push a comprehensive energy policy through a reluctant Congress.

Issue: "Power struggle," May 26, 2001

in Washington-For the younger George Bush, it must seem like "déjà vu all over again." Concern about oil prices and supplies helped push his father's administration into war with Iraq. Now oil prices are spiraling again, pushing the new administration toward a war with Capitol Hill Democrats and their environmentalist allies. And it's not just oil this time. With electrical blackouts already rolling across California and threatening to darken other states as well, energy is emerging as the most explosive issue in Washington this summer. The president brought out his big guns on May 17, unveiling a comprehensive energy policy that he promised would help to stabilize prices, lower consumption, and reduce American dependence on foreign oil. Touting what he called "21st-century conservation," Vice President Dick Cheney, the administration's point man on energy policy, called for greater use of energy-efficient appliances, tax credits for electric-hybrid cars, and tax incentives for businesses that convert to more efficient heat and power systems. But 20th-century politics quickly overshadowed 21st-century conservation. Before Mr. Bush could even outline his plan, Democratic congressional leaders marched to a nearby gas station to condemn it. Senate Minority Leader Tom Daschle claimed the president was interested only in production, not conservation. "'GOP' seems to stand for 'gas, oil, and plutonium,'" he said in a slap at Republican plans to build more nuclear power plants while expanding oil and gas exploration. For Democrats, energy policy represents a prime opportunity to drive up the president's negative poll numbers. With both Mr. Bush and Mr. Cheney coming from oil company backgrounds, many voters are naturally suspicious of an agenda that seems to favor drillers and refiners. Add in the $3 per gallon that motorists may pay at the pump this summer, and some begin to imagine the vague outlines of a conspiracy. No doubt energy prices-both gas and electric-are starting to hurt on Main Street. Barbara Irwin, a real estate agent in Merrillville, Ind., says she's spending twice as much to fill up her tank as she did just a few months ago. Driving less isn't an option, since her job requires her to show properties in 10 nearby towns. Her husband, Bruce, a self-employed flooring contractor, drives a work van that costs $63 to fill up-and needs filling twice a week. At current levels, Mrs. Irwin estimates her family will spend $4,800 more this year than last just to keep their vehicles running. Then she gets started on electricity. With summer approaching, Mrs. Irwin wants to turn on the air conditioning, but says she can't afford to. Her heating bills were up 75 percent this winter, and she's afraid to see what summer will bring. "With the extra amount that we are spending on gas, I instead open the windows and have my shorts on. It's not comfortable, but it's acceptable," she says. Factor in a teenager at home and widowed mothers on both sides of the family, and Mrs. Irwin feels squeezed. "Neither one of us is lazy; we both put in a good 12-hour day," she says. "Somebody needs to do something about this." The battle in Washington over just what to do will likely drag on at least through the congressional summer recess. The Democrats' approach may well appeal to people like the Irwins who are watching their disposable income go up in fumes. Mr. Daschle and his colleagues have proposed a series of quick fixes, including tapping the nation's Strategic Petroleum Reserve to bring down prices at the pump, and federally mandated price caps to keep electric bills under control. But Republicans insist that the nation's current energy crisis has been years in the making and won't be reversed with a few stop-gap measures. While Democrats point fingers at Big Oil (which has recently supplanted Big Tobacco as the villain du jour), Republicans place the blame somewhere else entirely: Big Government. During the early Clinton years when energy was cheap and plentiful, environmentalists secured sweeping new regulations with relatively little opposition. EPA regulations mushroomed, yet energy costs stayed low-for the time being. Environmental "stewardship" seemed easy when the emphasis was on benefits, not costs. Indeed, on those few environmental issues where costs were immediately apparent, even Democrats feared angering the voters. For instance, when the Clinton EPA proposed cutting the allowable levels of arsenic in drinking water by 80 percent, Sen. Daschle and a dozen of his colleagues balked. With the EPA's own studies showing that such a stringent standard could cost more than $300 a year for many families, Democrats urged the president to delay the regulation pending further analysis. Many other environmental regulations, however, received no further analysis. Instead the regulations simply piled up, as did the hidden costs to consumers. Take gasoline, for example. Washington has tinkered with formulations for a decade, requiring states and localities to sell different grades and blends depending on their air quality, geography, and even the season of the year. The result: Refineries have to make, store, and ship 45 different kinds of gasoline, sometimes in very small quantities that drive prices up. "The problem is that lots of regulations were viewed in isolation," said Ben Lieberman, a senior policy analyst at the Competitive Enterprise Institute, a free-market think tank. "When they were writing these regulations, they said, 'Oh, it's just a penny extra or two pennies extra per gallon.' But you start to add them up and look at the cumulative effect, and now you're seeing a noticeable increase in the price we pay at the pump." Mr. Lieberman says the underlying price of crude oil accounts for only about 40 percent of the price at the pump. Neither crude oil nor government taxes have risen enough in the past 30 days to account for the 20-cent-a-gallon jump that motorists are seeing. Instead, the current price spiral is largely the delayed result of bureaucratic meddling. In making the required switch from winter to summer blends, refineries haven't been able to keep up with demand in some areas-especially California and Illinois, with their draconian environmental regulations. Strong demand and tight supply drive prices up: Many Californians are already paying $2.50 for a gallon of regular, and both states are expected to see $3-a-gallon gas this summer. In a free market, producers would notice the shortage, see a profit opportunity, and build new refineries or convert old ones to take up the slack. But environmental regulations have largely nullified the profit motive that lures companies to spend billions of dollars up front in constructing new facilities. Thanks to thousands of pages of clean-air rules, construction is now so expensive that no new refineries have been built in the past 20 years. To make matters worse, regulators constantly add new environmental requirements to existing facilities already groaning under the regulatory burden. At some point, those facilities simply become too expensive to operate: A major refinery was forced to shut down last year outside of Chicago, further restricting an already tight oil supply there. The story is much the same for electric power. In California-which some experts predict could experience up to 20 hours of blackouts every week throughout the summer-environmental and lifestyle concerns have halted the construction of major new power plants for the past 10 years. Despite being warned of potential power crises since at least 1996, California politicians were confident they could avoid the anger of environmentalist voters by simply buying electricity from plants in other states. But a drought in the Northwest has cut hydroelectric power there, and other states fear they might go unpaid by California's bankrupt utility companies. Without sufficient power plants and transmission lines of its own, California simply cannot keep up with demand. Other states, particularly in the Northeast, may soon find themselves in the same situation. Clinton-era rules required older coal-fired power plants to install billions of dollars in environmental technology whenever plants were renovated or expanded. Rather than spend the money, most utilities simply left the plants alone, cutting back on planned construction that would have increased capacity. Now comes the fallout: Facing a hot summer, cities like New York may find themselves in the dark as older plants strain to provide power to millions of air conditioners. The Bush energy plan, with its call for more production and less regulation, would almost certainly provide long-term solutions to some of these problems. Arriving at those solutions won't be easy, but the recent blackouts and price increases have at least gotten the attention of Americans long lulled into believing that environmental regulations were free. "Love your mother," the environmentalists urged throughout the Clinton years, in reference to Mother Earth. With polls showing that 90 percent of Americans now believe the country is facing an energy crisis, however, the Bush administration is reminding people that love isn't cheap-and that the time has come to express our devotion in a different way.

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