Energy Regulation: Cost-Saver or Wallet-Buster?

With gas prices on the rise and no short-term relief in sight, new federal fuel rules and regulations are causing unexpected hiccups in supply and could add price pressures during the hunt for cleaner and cheaper fuels.

Last month, fuel prices spiked at the same time several stations up and down the East Coast suffered temporary shortages as a result of new rules that forced them to change over from one type of fuel additive to another.

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"When these new rules take effect, you never know what type of bugs need to be worked out, so it's always a surprise when these rules are being implemented," said Ben Lieberman, an energy policy analyst for the Heritage Foundation, a conservative think tank in Washington, D.C.

Last year's far-reaching energy legislation signed by President Bush called for several changes to fuel contents and energy production in the coming years. The first to take effect required increased use of ethanol, a corn or beet sugar-based fuel praised for its renewable qualities but derided because of its ties to the agri-business lobby. The bill at the same time lifted requirements to use MTBE.

MTBE, or methyl tertiary butyl ether, has been the subject of a number of lawsuits claiming the compound leached through underground gas station holding tanks, contaminating ground and drinking water, said American Petroleum Institute spokesman John Bisney.

The chemical also has been the subject of cleanups overseen by the Environmental Protection Agency. Concern is widespread that MTBE causes cancer but questions about the chemical's health effects remain undetermined.

The sweeping energy bill did not offer lawsuit protection for MTBE producers despite industry officials' hopes. Federal regulators set May 5 as the sunset for the problematic additive, which led to the shortages last month.

Bisney said that in addition to seasonal supply shortages due to annual spring maintenance at refineries — made more difficult this year because of 2005's record-breaking hurricane season — last month's problems were compounded by the fact that ethanol must be transported separately from gasoline and can't be pumped through the ground because additional water would damage its chemical composition.

But not everyone buys the line that the ethanol switch forced higher gas prices.

"This changeover has nothing to do with the gas price," said Bernie Horn, policy director at the Center for Policy Alternatives, a liberal lobbying organization. "Opportunism and greed" on the part of oil producers is leading to their arbitrarily hiking gas prices as high as the market will bare.

Bisney disagreed, saying market forces are driving the costs, and those who use diesel fuel could be facing the next price swing.

This fall refiners and retailers must switch to new "ULSD" standards — ultra low sulfur diesel —from the current low sulfur diesel standards. The standards were adopted in 2000 while President Clinton was still in office.

When fall arrives, drivers of big rigs and European sports diesel cars could have their turn at disruptions. Retailers across the country start selling ULSD in California in September and nationwide in October.

If problems arise with the diesel switch, Bisney said he expects they would be short term.

"It's just a matter of people getting used to new routines," Bisney said. "We feel optimistic that that's going to straighten itself out given enough time."

Coming up in June, the first set of electric appliance efficiency standards laid out in the energy bill will begin taking effect. Under the schedule adopted last year, the rules will take place incrementally over the next six years — well into the next administration.

This year's changes will affect small electric motors, but over the course of the process, the Energy Department will set new standards for things like commercial refrigerators and freezers, residential dishwashers, air conditioners and heating units and vending machines.

According to an Energy Department report handed to Congress in January, the department was stepping up its efforts to complete the rule-making process for products designed to reduce energy use. Those rules have been put off for years as a result of administrative delays.

Horn said consumers might face a short-term price pinch reflected in more expensive technology in appliances, but it's unlikely to shock since several states already have standards in place and residents already are buying those appliances. In addition, consumers will face cost savings in the long run by buying appliances that lower their electric bills.

"The appliances may cost more up front, but the efficiency will pay for itself over time. How quickly depends on which appliance it is and how expensive it is, but they are all efficiency standards that are designed to pay for themselves," Horn said.

Horn said states are enacting their own energy policies that could push up prices in the short term. Those policies include increasing the use of solar, wind and other renewable fuels and offering incentives for builders to construct more environmentally friendly or "green" buildings.

"There's very little that states can do in the short term but to save energy," Horn said.

He added that assuming gas prices stay high, in the long run the laws of supply and demand should eventually help consumers. As demand for gasoline weakens with the advent of alternative fuels, "that would have an effect of pushing down price."

Heritage's Lieberman — who is no friend of the push for ethanol — said that while regulations generally tend to add to the cost of energy, it's not necessarily always a bad thing. Prices increased as lead was phased out of gasoline in the 1970s and 1980s, but no one is looking to put lead back into gasoline.

"The cumulative effect of all these regulations is starting to add to the price at the pump," Lieberman said. As for any expected drop in prices, "it can happen, but whether it will, I have no idea."

The Politics of Consumption

With Republican power in jeopardy and November's general election around the corner, politicians aren't holding back on allegedly cost-cutting energy proposals.

The Bush administration's proposed energy budget for the 2007 fiscal year includes $1.1 billion in energy efficiency and renewable energy expenditures, slightly less than the administration slated to spend through this fiscal year, which ends Sept. 30.

Republican members of Congress have indicated interest in further expanding the availability of ethanol. An aide to Sen. Rick Santorum, R-Pa., said Republicans are also continuing to push their initiative, first announced in April but now minus a $100 gasoline rebate and gas tax holiday that didn't win public support. The initiative still includes increasing domestic fuel production and refining capacity and takes a look at fuel efficiency standards and gas price gouging.

On Wednesday, Senate Democrats introduced the "Clean EDGE Act."

That proposal would increase research investment into alternative energy vehicles, seek to hike the availability of such vehicles and boost the amount of renewable fuels used by the federal government and the general public, among other things.

The act "is a major step forward on America’s path to energy independence,” Senate Minority Leader Harry Reid said in a written statement.

Another bill introduced Wednesday came from Sens. John Thune, R-S.D., and Ken Salazar, D-Colo. Their proposal gives cash incentives to gas station owners to switch their equipment to be able to provide ethanol and other renewable fuels.

Thune spokesman Kyle Downey said the bill offered by his boss would help to fine-tune the energy bill passed last year. He noted that Thune's office worked on the energy bill for some time and won strong Republican support. He said Wednesday's announcement was the first time he heard of a Democratic energy plan.

"It's interesting that they didn't unveil a plan until it was an election year -- a heated election year," Downey said.

Santorum's aide added that Democrats have repeatedly blocked Republican efforts to increase oil and natural gas supplies, which she said are important to increasing energy independence and lowering costs for American consumers.

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