Ah, the holiday season in Washington, D.C.—concerts, brightly lit trees and candles, snowflakes and fancy parties, not to mention frenzied activities in the House and Senate on critical bills, complete with veto threats, filibusters, cloture votes and last-minute substitute bills.

As highlighted in newspaper headlines and breaking news flashes, the highly controversial energy bill (HR 6) was signed by President Bush on December 19, 2007, as the Energy Independence and Security Act of 2007, after a roller-coaster ride through late-December politics. In this Alert, we address the turns and twists of this significant legislation and identify the lucky girls and boys who got the toys and those whose stockings were less stuffed!

The Year-Long Trek of Energy Legislation

By way of background, energy legislation has been a major topic in Washington for the past year. This past summer, two competing versions of energy bills were passed by the Senate and the House. Both bills were placed in conference with the hope that a compromise bill could be reached. Months of closed-door negotiations followed.

Close to the end of the Congressional session, the House acted first with an amended bill passed on December 6, 2007 which contained features from the two earlier bills, including the Senate-passed Corporate Average Fuel Economy (CAFE) standards as well as House-passed rollbacks in tax breaks for the oil and gas industry, extensions of tax credits for solar, wind and other renewable energy sources, and a national renewable energy standard. That bill passed the House easily and was sent to the Senate.

This new House version was immediately opposed, primarily due to the tax break rollbacks and a tax incentive and national mandates for renewable energy. The White House quickly promised a veto of any bill with the controversial items left in by the Senate. Following that, a Republican-led filibuster was invoked leading to a dramatic morning on Thursday, December 13, 2007, when a cloture vote to end the filibuster fell one vote short of the 60 needed. At that point, many thought that the bill had little chance of being voted out before the Senate went into holiday recess.

Later that afternoon, however, a minor miracle occurred. Through the day, Senate Democrats, led by Senate Majority Leader Harry Reid, worked on a substitute bill. The substitute bill eliminated several key components of the original bill: the rollback of the tax break to oil and gas companies, the extension or creation of tax incentives for wind, solar, and other renewable energy sources, and the implementation of the national renewable energy mandate. The much stripped-down bill returned to the Senate floor for a successful vote with bipartisan support. As expected, the House quickly voted in favor of the amended bill, and the legislation was driven to the White House in a hybrid sedan, a fitting end to the legislation's year-long journey. The new law was signed in a White House ceremony and touted as a major step forward toward independence, primarily for the increase in CAFE standards and a huge push for renewable fuel production.

Who got the toys?

Without making any judgments as to who were "bad or good" (or even who had the best lobbyists), clearly some interested parties received a few more goodies on their holiday wish list than others. Others left the holiday party with far less than hoped for and, perhaps, a hangover of dashed hopes from the frantic scrambling in the final days. Without doubt, the energy bill was a compromise effort with lots of trading behind the scenes.

The split in the toy pile closely followed the changes made (or not made) in the Senate bill. The big victory from the environmental side is the revision in CAFE Standards requiring fleet-wide average miles per gallon to increase to 35 mpg by 2020. The current standard of 25 mpg on a fleet-wide average has not been changed since 1975. Also related to transportation, the new law requires massive production of ethanol and other bio-fuels. The last-minute carve-outs from the bill provide the continuing tax breaks to oil companies, yet disappoint wind, solar and other alternative energy producers.

And the Clear Winners are...

• Corn Farmers and Agribusiness - The heavy focus on alternative fuels will greatly benefit corn farmers and agribusiness in general in order to meet a mandate of 36 billion gallons of annual production of renewable fuels by 2022. Corn-based ethanol production is projected to provide 15 billion gallons of that total. Current 2007 production of renewable fuel is approximately 1/7 of that total.
• Manufacturers of Energy-Efficient Appliances - A key component of the new law requires improvement on efficiency for cooling, heating and large and small consumer electronic products. Innovation in energy efficiency will likely be rewarded in the marketplace.
• "Green" Government Contractors - The new law will establish an Office of High-Performance Green Buildings to improve energy efficiency in federal and commercial buildings and achieve carbon-neutrality by 2030.
• Proponents of more efficient cars and trucks - While environmentalists may argue that the bill as a whole is not a complete package, proponents of increased CAFE standards ended up with an apparent big win. Detroit automakers have long opposed such increases but finally agreed to them as part of this package, presumably because the 35 mpg standard was perceived to be feasible.
• Oil Companies - The original bill before the Senate would have eliminated tax breaks worth roughly $13 billion to the oil industry. The elimination of these tax breaks would have been part of the funding for an overall $21 billion tax package covering tax incentives for alternative energy, research and other programs. By removing that provision in the Senate to end the filibuster and avoid a presidential veto, the existing tax breaks will continue into the future, and the other programs were cut for lack of funding.

While others are not quite so happy...

• Wind and Solar Energy Producers - As part of the Senate amendment to preserve the oil tax break, other tax-oriented provisions of the bill were slashed, mostly to the detriment of alternative energy producers. For years, tax incentives have gone through a stop-start cycle and there has been a corresponding bust and boom in the nascent alternatives industry. The original bill made long-term incentives available and provided certainty to new entrants. Without these provisions, financing for wind, solar and other renewable energy sources becomes more difficult.
• Renewable Energy Providers in non-RPS states - A key provision in the original bill was the creation of a national renewable energy mandate. As discussed above, this ended up as a scrap on the Senate floor. Although almost half of the states already have some sort of Renewable Portfolio Standard (RPS) which requires utilities to purchase increasing percentages of energy from renewable sources, the proposed language would have extended that on a national basis. For developers seeking to expand into non-RPS states, there will be no government incentive program to obligate the incumbent utilities.
• Automakers - United States automakers have successfully opposed increased CAFE standards for decades, but agreed to such changes as part of the negotiations leading up to the new law. Presumably, some automakers will respond better than others to the new standards and in new designs for engines run on renewable fuels. As noted below, actions by the EPA immediately after the law was signed suggest that the agreement may have protected automakers from state-by-state standards.

And what about the environment?

As with any compromise outcome, different people have different opinions. Almost everyone agrees that the increase in the CAFE standards and the reduction in oil demand will be useful in slowing the rate of increase in carbon emissions and the United States' reliance on foreign oil. For this reason alone, both sides of the aisle and the White House seem to agree that the increase in CAFE standards is a big step forward. Major environmental groups such as the Sierra Club strongly approve of the action.

On the other hand, the heavy emphasis on renewable fuels causes some concern in terms of higher corn prices, impacts on groundwater aquifers and fertilizer run-off, among other issues. Additionally, the omitted provisions on renewable energy production may impede the growth of the solar and wind industries if additional legislation is not passed in 2008.

Anyway, back to the holiday party...

With action on the omnibus spending bill afoot, most legislators are heading home for the holidays, and the late-December rush on legislation takes a short pause before the next session begins. As the new year progresses, history tells us, those who were disappointed in their toys this year will try to line up a new program, and those who got the good stuff will likely strive to hold tight. Speaker Pelosi and others have already indicated that there is more to do next year.

Indeed, almost immediately after the President signed the bill, the Environmental Protection Agency used the new law as its rationale for rejection of requests by California and other states to set stricter vehicle emission standards. EPA argued that the passage of the new law set a national standard for tailpipe carbon emissions which preempted more stringent state regulations. From that, new lawsuits will be immediately filed by the State of California and others and additional legislative fights undoubtedly loom ahead.

In the constantly partisan environment of 2007 Washington, D.C., it's easy to imagine that the same parties will be back for more play next year and, undoubtedly, legislation addressing energy and climate change will be on the front pages next year. But, for now, maybe, just maybe, Washington will settle down by the fireplace, sing some songs, raise some toasts to friends and foes and look ahead to the new year to come!

For Further Information

If you have any questions about this Alert or would like more information, please contact James W. McTarnaghan or any of the members of the Energy, Environment and Resources Practice Group or the attorney in the firm with whom you are regularly in contact.

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