Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Ms. Kateri Callahan

President, Alliance to Save Energy

Testimony of Kateri Callahan, President
Alliance to Save Energy

Senate Energy and Natural Resources Committee
June 22, 2006

S. 2747, the Enhanced Energy Security Act of 2006
The Alliance to Save Energy is a bipartisan, nonprofit coalition of more than 100 business, government, environmental and consumer leaders.  The Alliance’s mission is to promote energy efficiency worldwide to achieve a healthier economy, a cleaner environment, and greater energy security.  The Alliance, founded in 1977 by Senators Charles Percy and Hubert Humphrey, currently enjoys the leadership of Senator Mark Pryor as Chairman; Washington Gas Chairman and CEO James DeGraffenreidt, Jr. as Co-Chairman; and Senators Jeff Bingaman, Byron Dorgan, Susan Collins and Jim Jeffords along with Representatives Ralph Hall, Zach Wamp and Ed Markey, as its Vice-Chairs. Attached to this testimony are lists of the Alliance’s Board of Directors and its Associate members.
The Alliance is pleased to testify at a hearing on legislation to promote energy efficiency.  Despite some positive steps in the Energy Policy Act of 2005, the need for energy efficiency and the potential contribution of new energy-efficiency policies have never been greater.
The Need for Energy-Efficiency Policies
Gasoline and natural gas prices have doubled in the last few years, and electricity prices also reached all-time highs. All told, recent energy price increases cost American families and businesses over $300 billion last year.  These high prices have caused plant closings and loss of manufacturing jobs, and have made many low-income homeowners unable to pay their heating bills.  President Bush recognized that our long-term energy security and environmental issues due to our wasteful use of fossil fuels are equally serious when he called for ending our “addiction” to oil.
The problems are likely to get worse.  The Energy Information Administration projects that oil use in the United States will grow by another 7.5 million barrels a day by 2030, about one-third of current consumption.  While there has been a great deal of attention recently to growing oil demand in China and India, it is worth noting that projected growth in oil demand in the United States is nearly as great as in China, and three times that of India.  Natural gas use in the United States is projected to grow by a fifth by 2030, and electricity use by half.  Such growth will lead to higher prices, greater volatility, and increasing dependence on foreign natural gas as well as foreign oil.
Energy efficiency has the potential to slow the growth in demand significantly, and thus moderate the associated price volatility, energy security concerns, and environmental impacts.  Energy efficiency is the nation’s greatest energy resource—we now save more energy each year from energy efficiency than we get from any single energy source, including oil, natural gas, coal, and nuclear power.  The Alliance to Save Energy estimates that if we tried to run today’s economy without the energy-efficiency improvements that have taken place since 1973, we would need 43 percent more energy supplies than we use now.  Much of these savings result from federal energy policies and programs like appliance and motor vehicle standards, research and development, and the Energy Star program.  The existing car and light truck CAFE standards alone saved an estimated 2.8 million barrels of oil a day in 2000.
And tremendous, cost-effective, potential energy savings remain.  Vehicle efficiency has continued to improve even after CAFE standards were largely fixed in the mid-1980’s, but, paradoxically, vehicle fuel economy has actually gone down—the efficiency gains have been eaten up by increased weight and power.  The EPA estimates that if automakers had applied the technology gains since 1987 to improving fuel economy, average fuel economy would be 20 percent higher.  The National Research Council found that much greater vehicle efficiency gains are possible with existing, cost-effective technologies that have not been widely applied yet, not even including hybrid-electric engines.  A 2000 study by several of the national labs found that overall the United States could save 19 percent of anticipated energy use by 2020, essentially halting growth in consumption.  This includes 12 percent savings for natural gas, 21 percent savings for petroleum, and 24 percent savings for electricity.
Oil Savings Measures
Perhaps the largest gap in the Energy Policy Act of 2005 was on oil savings and efficiency in the transportation sector.  The Alliance estimates that last year’s energy bill, as it emerged from the conference committee, likely will save no oil at all, as the small savings from the hybrid-electric vehicle tax incentive and other provisions will be canceled out by increased gasoline use due to extension of the CAFE loophole for dual-fueled vehicles.  Our dependence on foreign oil has steadily increased under the policies and programs in place today.  If we truly wish to end our ”addiction” to oil, Congress and the President must take further action.
S. 2747, the Enhanced Energy Security Act of 2006, includes aggressive targets for national oil savings, enough to make a real difference in oil markets and on our oil dependence.  The Alliance supports these targets, but does not believe that passing fine goals is enough.  Although the Energy Policy Act of 1992 included goals that alternative fuels would replace 10 percent of light duty vehicle fuel by 2000, and 30 percent by 2010, petroleum still accounts for 97 percent of transportation fuel.  While S. 2747 details procedures by which the administration is to achieve the goal, the Alliance believes greater support and likely additional legislation will be needed from Congress.  Administration action is needed, but Congress should not wait.
Perhaps the surest route to oil savings would be through increases or reforms in CAFE standards.  Standards increases could be relatively quick, cost-effective, and could have a major impact on energy use.  Although there is near-universal support for boosting the standards among the public, the Alliance recognizes that CAFE standards are much more controversial in the halls of Congress, and are outside the jurisdiction of this committee.  Other smaller, but positive, measures in S. 2025 and tax provisions in S. 2748 also are outside this Committee’s jurisdiction.
Vehicle “Feebate”
One new approach to oil savings that could be within the committee’s purview is a vehicle “feebate.”  The idea is simple: provide an incentive (rebate) to make and buy fuel-efficient vehicles; a premium (fee) on gas guzzlers will discourage that choice and pay for the incentives.
In one approach the Department of Energy would apply a fee or rebate to the manufacturer of each new car and light truck.  For each vehicle the amount would be based on the gallons of gasoline estimated to be used over the lifetime of the vehicle; the less gasoline a vehicle uses, the larger the rebate (or smaller the fee).
The fee or rebate would then be determined relative to a dividing line, the midpoint mpg.  The dividing line between fees and rebates would be set each year such that the total fees would just pay for all the rebates, so there would be no net revenue or cost to the government. Consequently, about half the vehicles would receive a rebate, and about half the vehicles would be assessed a fee.  If you do not wish to influence the kind of vehicles customers buy, cars and trucks could be divided into several categories based on size, with a separate midpoint mpg for each category.
A feebate would improve fuel efficiency because it would encourage manufacturers to use more fuel-efficient technologies in their vehicles, and encourage consumers to purchase more efficient vehicles.  One study finds that a feebate slightly different from that described above would save 1.2 million barrels a day of oil by 2020; a larger feebate could save considerably more.  Although improved technologies may increase the average price of cars and light trucks, the savings in gasoline should be greater than the added cost.

There are several benefits to the feebate approach:
? Revenue neutral: The program can be designed to cost the government NO money, and it would not be a tax increase.
? Market-driven policy: The financial incentives will help push the market to more efficient vehicles, to align consumer demand, manufacturer requirements, and national policy.
? Continual improvement: As fuel economies increase, the midpoint mpg is ratcheted up, encouraging continual improvement, but never out of line with the existing market. 
? Not tied to CAFE standards: If the feebate is large enough, market forces will drive up fuel economies beyond the current fuel economy standard.
? Reduces oil consumption and greenhouse gas emissions. 
Natural Gas Savings Measures
S. 2747 also properly focuses on saving natural gas.  Because supplies of natural gas are so tight in the United States, reducing demand for natural gas by just a few percent points could yield significant price reductions over the next several years.  S. 2747 includes several provisions for natural gas efficiency and electricity efficiency (which can yield significant savings of natural gas as an energy source), notably a renewable portfolio standard.
But many utilities have found that helping their customers to save a kilowatthour of electricity is cheaper than producing that kilowatthour from renewable sources or even from traditional sources.  While estimates vary widely, utility end-use energy-efficiency programs often cost around 3-4 cents per kilowatthour.  S. 2747 recognizes the potential of these programs by requiring state public utility commissions to consider policies to promote utility energy-efficiency programs, taken from last year’s Senate energy bill.  The Alliance strongly supports this provision, but would urge the committee to consider further federal action as noted below.
Energy Efficiency Resource Standard
Several states are already developing innovative policies to set performance standards for utility energy-efficiency programs alongside standards for generation from renewable sources. Renewable and efficiency requirements can reinforce each other in several ways.
? Texas has separate renewable and efficiency requirements,
? Connecticut and Pennsylvania have alternative energy portfolio standards with separate tiers for renewables and efficiency and other sources,
? Hawaii and Nevada have combined standards for renewable and efficiency resources (Nevada caps the amount efficiency contributes),
? California has a “loading order” that sets efficiency as the preferred resource; once cost-effective efficiency measures have been exhausted, utilities are to use renewable sources, and only then traditional sources.
Like a renewable portfolio standard, an energy efficiency resource standard is a performance-based approach that gives utilities broad flexibility about how and where to achieve the energy savings.  Utilities are required to implement energy-efficiency programs sufficient to save a specified amount of energy, such as one percent of the previous year's sales.  They can implement their own programs, hire energy service companies or other contractors, or sometimes pay other utilities to achieve the savings by buying credits.  Usually, the costs of the energy-efficiency programs must be recovered from energy customers through utility rates, but the savings from avoided energy supply are greater than the efficiency cost.  Note that an energy efficiency resource standard is not a requirement that the utility's sales decrease in absolute terms or a limit on their sales at all; it is a requirement that utilities implement programs that are estimated to save a specified amount of energy.
As a focus for federal policy, the energy efficiency resource standard has several advantages:
? It is readily available in all parts of the nation,
? It is available for direct natural gas use as well as for electricity,
? It is cost-effective today, and
? The potential savings are enormous—if 0.75 percent savings were achieved annually nationwide, by 2020 electricity and natural gas use would be reduced by 8 percent, with an estimated net cumulative savings to consumers of $64 billion.
Appliance Standards
Perhaps the only other federal policy to achieve that level of electricity and natural gas savings is appliance standards.  While EPAct 2005 included a set of important new standards, additional action by Congress is needed.  First, the greatest potential natural gas savings are from a standard requiring efficient residential furnaces in the Northern states, but these furnaces may not be cost-effective in all of the warmer states.  Legislation would be useful to clarify that the Department of Energy, if warranted, could set separate levels for heating and cooling equipment in two climate regions.  Second, the Alliance is working with manufacturers and other stakeholders to reach agreement on proposed federal standards for additional categories of equipment, and hopes these standards will be legislated as agreement is reached.  Finally, the Alliance urges you to maintain vigilant oversight as DOE attempts to meet the requirements for rulemakings in EPAct 2005 while issuing long-delayed standards required in earlier bills.
Energy-Efficiency Tax Incentives
Other important measures to save electricity and natural gas are outside the jurisdiction of this committee.  But the Alliance will not let an opportunity go by to emphasize the importance of extending and building on the tax incentives for energy-efficient buildings, equipment, and vehicles that were in EPAct 2005.  These incentives have great potential to transform markets for energy-efficient technologies, but they are in effect for too short a time.  A large commercial building initiated when the bill was signed last August will not be finished before the commercial buildings deduction expires in December, 2007.  For Toyota hybrid vehicles, the tax credit will expire even earlier, phasing out between October 2006 and March 2007.  The Alliance strongly supports the extensions that are in S. 2748, with some modifications that have been worked out with other stakeholders—notably a performance-based incentive for whole-home energy-efficiency retrofits that picks up where the current home improvements credit leaves off.  The Alliance also supports updates to federal standards for certain buildings, particularly manufactured housing and homes with federally subsidized mortgages.
Consumers and businesses in this country have been hit by the worst energy price shocks in many years for gasoline, natural gas, and (in some areas) electricity.  These price increases hit the rest of the economy, as chemical plants move overseas and, according to polls, about half of American households cut back on other household spending.  There are measures we could take, such as consumer education, which would have an immediate impact.  But polls also show that a large majority of Americans are rightly more concerned that Congress find long-term energy solutions than that Congress quickly address current prices.  There is an opportunity now, due to the high prices, to enact significant energy-efficiency measures that will benefit the economy, the environment, and energy security for years to come.  If Congress does not act, the price volatility and supply shortages will continue to plague us.  The Alliance urges you to seize the opportunity to take really significant measures to reduce energy waste in this nation.