(FORTUNE Magazine) – A thick White House report, aimed at an industry that affects the lives of all Americans, is concocted in secret by one of the President's closest advisors. It contains a welter of complicated proposals that require support on Capitol Hill and cooperation from big business. Naturally there's an immediate storm of objections from politicians and special-interest groups.

No, it isn't a flashback to 1993 and Hillary Clinton's ill-fated scheme to fix the nation's health-care system. The Bush Administration's new energy plan, designed largely by Vice President Dick Cheney, has somehow united the libertarian Cato Institute and the Sierra Club in protest. Just wait until Capitol Hill starts parsing it: Even smart suggestions--such as changing eminent-domain rules to make it easier to build new electric lines--will face resistance from within the President's own party. "This plan impacts every sector of the energy industry, just as the Clinton plan affected the entire health-care industry," notes Kim Wallace, chief political analyst for Lehman Brothers. The blueprint calls for increasing oil and gas production by loosening regulations and opening up federal land for new drilling, along with a smattering of tax credits and subsidies for environmentally friendly cars and the use of solar power and clean coal. "It puts a lot of power in Washington, just like health-care reform did," Wallace adds.

But the most significant parallel between the two proposals--and maybe the most alarming--is the reliance on heavy-handed government solutions rather than free-market ones. "For an Administration that believes in the market, this report doesn't show a lot of faith that the market actually works," says Severin Borenstein, a professor at the University of California's Haas School of Business and director of the university's Energy Institute. The Cato Institute's Jerry Taylor is even more blunt: "There's as much market intervention here as there is deregulation," alluding to the tax breaks and credits for industry.

Despite the Bush team's warning of a looming energy emergency, there's mounting evidence that the market is already fixing many of the problems the report identifies. For starters, there's a massive wave of power-plant construction in California; generator Calpine Corp. plans to open two big plants next month. While that may not be enough to help the state avert blackouts this summer, so many plants are now on the drawing board that experts like Merrill Lynch utilities analyst Steve Fleishman expect the California crisis to ease by 2003. "Despite the hysteria, the competitive market is working," says Fleishman. He forecasts that 25,000 to 35,000 megawatts of new power generation will come online annually over the next few years in the U.S., well ahead of projected growth in demand. Over the long term he thinks there's the risk of a domestic power glut.

There is also reason for cautious optimism on the oil and natural gas front. (We'll get to gasoline in a minute.) Borenstein says that futures contracts on both commodities for 2002 and beyond are trading at a discount to current levels, a signal that the market expects prices to head south. Plus, natural gas drilling is running at full tilt, a textbook response to the recent spike in natural gas prices.

The outlook for gasoline--probably the single biggest energy issue for most Americans--is a bit murkier. Gas is more expensive now because of a combination of factors--higher crude oil prices, a long rise in gas demand as refinery capacity remained flat, and a crazy quilt of laws requiring refiners to make dozens of different gas blends to reduce pollution. Bush uses those and other environmental laws as scapegoats, but they are not entirely at fault. More significantly, producers delayed expanding refinery capacity in the 1990s because the return on investment was so low. "Profit margins in 1998 and 1999 were terrible, so discretionary capital for refineries was minimal," says Gene Edwards, senior vice president of Valero, the nation's largest independent refiner. "It's the poor margins that had the biggest impact, not the environmental rules."

Bush's proposals to ease the regulatory burden on refineries could improve the situation over time, but higher prices are already encouraging refiners to produce more gas. Edwards says Valero plans to spend roughly half a billion dollars over the next three years to increase the company's refinery capacity by about 10%. That kind of private-sector investment is likely to benefit consumers much more quickly than regulatory changes in Washington.

Free markets are even taking care of conservation: Higher prices always get people to conserve more than lectures from environmentalists or politicians do. Companies like Gap and Albertson's are turning down lights and adjusting thermostats to reduce power consumption.

Eight years later, Hillary Clinton's health-care plan is still fodder for late-night comedians, and the free market has helped tame rising costs. Dick Cheney's energy proposal likely faces the same fate.

REPORTER ASSOCIATE Ellen Florian

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