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Wall St. Journal: Wake Up Call on US Energy Policy
Apr 29, 2006 (From the CalCars-News archive)
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http://online.wsj.com/­article/­SB114627176825239491.html Wall St. Journal Saturday, April 29, 2006 PAGE ONE

'Wake-Up Call' Gas-Price Uproar Is Likely To Shift U.S. Energy Policy Anxious Congress Weighs Tougher Fuel Standards, Ethanol and Hybrid Cars Little Short-Term Impact Seen

By JOHN J. FIALKA and LAURA MECKLER in Washington, and STEVE LEVINE in Dallas Staff Reporters of THE WALL STREET JOURNAL April 29, 2006; Page A1

The surging price of oil and gasoline has sparked a wave of jockeying in Washington that could presage the biggest change in federal energy policy since the 1970s.

Suddenly, ideas that have languished on various wish lists for years have a realistic chance of becoming policy, as motorists in many parts of the country face $3-a-gallon gasoline even before the summer driving season starts. Among those getting serious consideration for cutting gasoline costs and reducing foreign-oil dependence: higher fuel-economy standards for cars, new incentives to shift cars away from gasoline, a crackdown on energy-price manipulation and inducements to encourage more refining.

All aim to appease voters, who will go to the polls to elect members of Congress in just six months. But none would produce immediate relief. (See related article.1)

Short of price controls, which the Bush administration flatly rejects, policy makers can do little to affect energy costs in a matter of days or even weeks. Prices are driven largely by factors beyond their control -- as underscored Friday, when crude-oil futures rose nearly $1 a barrel on escalating nuclear tensions with Iran, settling at $71.88 on the New York Mercantile Exchange. (See related article.2)

President Bush said Friday that the U.S. has had a "wake-up call" about energy in recent weeks, and in Washington doing nothing isn't a palatable option. Here's a look at what could be coming, from new regulations on cars that run on gasoline to farm-waste-derived fuels:

Higher Fuel-Economy Standards

Federal rules require auto makers' fleets to average 27.5 miles a gallon, a fuel-economy standard that hasn't gone up since 1990. Higher standards would force auto makers to make more fuel-efficient vehicles. But every proposal to raise the bar since has been blocked by car manufacturers, for whom efficient cars are more expensive and have been less in demand, and free-market Republicans who oppose government mandates.

But the political ground shifted this past week when both President Bush and Senate Republican leaders said they'd be willing to act, and quickly. House Republicans also plan hearings.

The outcome, however, may not necessarily lead to significantly higher mileage standards. The Bush administration doesn't favor increasing fuel-economy targets unless it can overhaul how the Carter-era program works as well.

A guide to how it might do that can be seen in recent new rules for sport-utility vehicles, minivans and pickup trucks. In revamping mileage standards for those vehicles, the administration increased mileage targets modestly.

But they also changed the system in a way that helped manufacturers generally, and aided struggling General Motors Co. and Ford Motor Corp. in particular. Previously, a company's fleet had to meet an overall corporate average. That forced GM and Ford, which make a lot of big trucks that get low mileage, to balance their fleets with less-popular but more fuel-efficient smaller vehicles.

Now, instead of taking the whole fleet into account, there's a sliding scale on each individual vehicle. Big SUVs, for example, have more lenient standards than small SUVs. The bottom line: a modest increase in fleet-wide economy -- but also an effective reduction in the cost of producing big guzzlers, now measured on their own terms rather than in relation to the whole fleet.

The administration would consider a similar reform for passenger cars, said Jackie Glassman, administrator of the National Highway Traffic Safety Administration, which oversees the program. That has U.S. auto makers reacting with cautious optimism. DaimlerChrysler AG issued a statement Friday saying it "could support reasonable and achievable increases in fuel economy."

Environmental groups are more skeptical. "I would love to believe the president has come to realization he must increase... standards," said Dan Becker of the Sierra Club. "Given this administration's track record, I suspect it is more evasion than epiphany."

Ethanol

Backed by Senate Republicans and the White House, the fast-growing ethanol industry is charging beyond traditional corn-based ethanol into a relatively new area of research that could vastly extend supplies of nongasoline motor fuel: cellulosic ethanol, a fuel made by extracting sugar from cheap and plentiful farm wastes, such as corn stalks, wood chips and wheat and rice straw.

Until now, growth has been hung up by high costs. When President Bush first highlighted the fuel in February, it cost the Energy Department $2.30 a gallon to make ethanol from corn wastes. At the time gasoline was retailing at $2.35.

But with gasoline over $3 a gallon in many places, the calculation may have changed. Senate Republican leaders now propose to authorize $1.1 billion for research over the next five years. Senate aides say that the Agriculture Department will get more research money in next year's farm bill to study the potential for various farm wastes and also for fast-growing crops such as switch grass that could be grown for energy purposes.

Corn-based ethanol, blended with gasoline, poses difficulties when shipped outside the corn belt. It must be moved by tank truck or rail cars because small amounts of water that exist in pipelines can cause it to become unblended. Farm wastes, such as rice hulls in California and wheat and barley straw in the Great Plains states, could cut the need to ship ethanol into some areas.

Plug-In Cars

Senate Republicans and electric utilities want to jump-start research, development and market awareness of "plug-in hybrids." Designed to operate as much as 90% of the time with motors powered by electric batteries, the vehicles use their small gasoline engines only as a backup in case of long trips.

The energy bill introduced by Senate Republican leaders this past week would earmark $1.8 billion over the next five years for more research. DaimlerChrysler has already converted a European delivery van called the Sprinter into a plug-in and plans to allow a variety of U.S. businesses to test 40 of the vehicles over the next two years.

Unlike conventional hybrids, which use gasoline engines to recharge their batteries, the plug-in hybrid can be plugged into a wall socket at home. That allows the average driver to go as far as 60 miles without using gasoline.

The Electric Power Research Institute, financed by utilities, is among the chief backers of the plug-in. Under the Senate initiative, the Energy Department would conduct research with battery manufacturers to speed development and production of plug-ins.

Refining

"One reason there's tight gasoline supplies is because we haven't built any new refineries since the 1970s," Mr. Bush said Friday, adding that Congress needs to provide regulatory relief. Senate Republicans are pushing new tax incentives.

Those changes have a good chance of passage. Their impact is less certain.

Last year's energy bill already included a tax break effectively reducing the cost of construction of certain refineries and expansions by about 17%, according to Neal K. Earnest, vice president of Muse Stancil, an energy consultant. But while some companies seem to have included the incentive in plans for possible expansion, it's not clear if the break will spur any new production, he said.

Indeed, Mary Rose Brown, a spokeswoman for Valero Energy Corp., the largest U.S. independent refiner, cautioned that even with incentives, building a refinery is done on a 20-year time line. "We aren't going to build a new refinery," she said.

Price Gouging

As oil companies rack up record profits, even pro-business Republicans are talking about sticks as well as carrots for energy producers.

Senate Republican leaders propose giving the Federal Trade Commission and state prosecutors new powers to penalize oil companies and gasoline dealers for price gouging. Until now, gouging cases have been handled by 29 states with a variety of laws on their books. Most require a governor to declare that a particular event has caused a state of emergency, such as the shortages of gasoline along the east coast last September after the Gulf Coast hurricanes.

A federal law would give the president for the first time the power to declare an emergency for any area in the U.S. where "an abnormal market disruption has occurred or is reasonably expected to occur." An order would last for no more than 30 days, but could straddle state lines and give prosecutors the power to punish gasoline sellers for charging "an unconscionable amount" during that period.

It also would boost fines from most state laws to as much as $500,000 for independent dealers and small-scale marketers of gasoline and as much as $5 million for larger companies guilty of gouging. State prosecutors could bring cases in U.S. courts if their own laws are inadequate.

Still, prosecutors have found price gouging difficult to prove.

Administration officials are skeptical of the concept that market-based prices can be described as "gouging." Mr. Bush on Friday said, "I have no evidence that there's any rip-off taking place."

Oil Taxes

Mr. Bush ruled out a windfall profits tax on Friday. But congressional Republicans are taking a serious look at broad new taxes on oil producers -- which is worrying big business beyond the oil patch.

Senate Majority Leader Bill Frist proposes a repeal of a widely used inventory accounting method known as last-in, first-out, or "LIFO." The method allows goods in inventory to be sold at current prices, which reduces the taxable gain. That appeals to companies when inflation is rising and they face higher inventory costs.

Since economy-wide inflation is only modest -- while oil prices are surging -- a repeal of LIFO would most directly affect energy companies. But sectors from retailers to manufacturers also use LIFO, and the proposal this week shocked corporate lobbyists and tax lawyers.

"To call into question the basic accounting methods that we use is staggering," said James Lucier, analyst for Prudential Securities in Arlington, Va.

--Rob Wells in Washington contributed to this article.

Write to John J. Fialka at john.fialka@..., Laura Meckler at laura.meckler@... and Steve LeVine at steve.levine@...


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