Federal Incentives for Energy Production - 1980

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Revised

PNL-2410 REV. I1

An Analysis of Federal Incentives Used to Stimulate Energy Production

February 1980

Prepared for the U.S. Department of Energy under Contract EY-76-C-06-1830

Pacific Northwest Laboratory Operated for the U.S. Department of Energy by Battelle Memorial Institute

LEGAL NOTICE

This report was prepared by Battelle as an account of sponsored research activities. Neither Sponsor nor Battelle nor any person aning on behalf of either:

MAKES ANY WARRANTY O R REPRESENTATION, EXPRESS O R IMPLIED, with respect to the accuracy, completeness, or usefulness of the information contained in this report, or that the use of any information, apparatus, process, or composition disclosed in this report may not infringe privately owned rights; or

Assumes any liabilities with respect to the use of, or for damages resulting from the use of, any information, apparatus, process, or composition disclosed in this report.

PNL-2410 REV I 1 UC-59

REVISED

AN ANALYSIS OF FEDERAL INCENTIVES USED TO STIMULATE ENERGY PRODUCTION

B. W. Cone, D. L. Brenchley, V. L. B r i x , M. L. Brown, K. E. Cochran, P. D. Cohn, R. J. Cole, M. G. Curry, R. Davidson, J. Eas te r l i ng , J. C. Emery, A. G. Fassbender, J. S. F a t t o r i n i , J r . , 6. Gordon, H. Harty, D. Lenerz, A. R. Maur iz i , R. Mazzucchi, C. McClain, D. D. Moore, J. H. Maxwell, W. J. Sheppard S. Solomon, P. Sommers

February 1980

Prepared f o r D i v i s i o n o f Conservation o f So la r App l i ca t ions Department o f Energy Washington, DC 20545 under Contract EY-76-C-06-1830

P a c i f i c Northwest Laboratory Richland, Washington 99352

ACKNOWLEDGMENTS

This research effort was interdisciplinary. As each investigator had an

opportunity to review the total manuscript, all contributed to the total prod-

uct. Major emphasis was given by specific investigators to particular chapters. The introductory chapter was written by the team leader, Dr. Bruce W.

Cone, economist; and John C. Emery, economist. The section describing current

legal thought on solar incentives was written by John S. Fattorini, Jr., law-

yer. The theoretical chapter was written by Dr. Roland J. cole, public policy

analyst and lawyer; Dr. Cone; and James Easterling, political scientist. The

analysis of generic incentives was written by Dr. Cole and Dr. Paul E. Sommers,

economist. Earlier versions had help from Martha G. Curry, governmental plan-

ner; Mr. Easterling; Mr. Fattorini; Charles McClain, lawyer and business ana-

lyst; and James H. Maxwell, political scientist. The nuclear chapter was

written by Harold Harty, nuclear engineer; Paul D. Cohn, nuclear engineer; and

Virginia L. Brix, economist. The chapters on hydro power and electricity were

written by Alex G. Fassbender; Richard P. Mazzucchi; and Dr. David L.

Brenchley, engineers. The chapters describing incentives to coal, gas and oil were written by Dr. William J. Sheppard, fuels analyst; Kenneth E. Cochran, fuels specialist; David E. Lenerz, energy economist; Mary Lou Brown, environ-

mental analyst; Richard Davidson, environmental scientist; Benjamin Gordon,

systems analyst; Seymour Solomon, economist; David D. Moore, fuels economist;

and Mr. Fattorini. Dr. Cone and Mr. Emery wrote the final chapter describing

the application to solar energy policy. Linda R. Friery, Pacific Northwest

Laboratories; Renate Lammermann, Human Affairs Research Center; and Isabel

Oakes, Columbus Laboratory, prepared the working papers and draft reports.

The investigators drew on a broad spectrum of resources to assemble the

information presented in this report. The authors wish to acknowledge the con-

tribution of the original idea, upon which this research was based, to Dr.

Roger H. Bezdek of the Department of Energy. The continued guidance of Dr.

Bezdek and Robert C. Spongberg, now of SERI, is gratefully acknowledged.

Dr. Cole, Dr. Cone, and M r . E a s t e r l i n g appreciate the he lp o f Dr. A. Henry

S c h i l l i n g , Martha G. Curry, Charles McClain, and John S. F a t t o r i n i , J r . i n pre-

pa r ing e a r l i e r versions o f the t h e o r e t i c a l and generic chapters.

D r . Cole and Dr. Sommers acknowledge the he lp o f the f o l l o w i n g people w i t h

t h e chapter d e f i n i n g gener ic incent ives . REA: C. A. Jewel, D i rec to r , O f f i c e

o f the Budget; Thomas A. Scanlon, Ass is tan t D i rec to r , O f f i c e o f the Budget;

Richard Bulman, Power Supply O f f i c e r . Forest Service: D r . Harry Brown, Water-

shed and Aquatic Hab i ta t Research; S. W. Van Doran, Recreat ion S t a f f , Recrea-

t i o n Management. NOAA: Dick Langlo i s, Deputy D i rec to r , Coastal Zone Manage-

ment Program. DIBA: P a t r i c i a Spencer, I ndus t r y Programs D iv i s ion , Energy

Programs Of f i ce . Corps o f Engineers; M r . Jerontonis, Budget and Finance, Bud-

get Branch. Defense Nuclear Agency: L t . Colonel Walter Scot t . Housing and

Community Research: Joseph Sherman, Energy B u i l d i n g Technology and Standards

D iv i s ion . Bureau o f Land Management: Donald P. Touesdell f o r Frank Edwards,

Ass i s tan t D i r e c t o r o f Minera ls leasing. Bureau o f Reclamation: Clark L. Rose,

Systems Engineering Branch f o r Raymond E. Harmon, Power D iv i s ion . U.S. F i sh

and W i l d l i f e : Rod Ha l l , O f f i c e o f B i o l o g i c a l Services. Geological Survey:

L inn Hoover, Ecologic D iv i s ion . Bureau o f Mines: Leonard Westerstrom, Coal

Economics Branch; Walter Dupree, I n t e r f u e l s Studies o f Fuels D iv i s ion ; W i l l i am

Oyler, Budget D iv i s ion . MESA: Herschel Po t te r and Charles Luxmore, Sa fe ty

D iv i s ion , Coal Mine Heal th and Safety; and Levy E. Brake, Safe ty D i v i s i o n Metal

and Nonmetal Hea l th and Safety. OCS Porgram: Alan Powers, Outer Cont inenta l

She l f Program Coordination. Power Adminis t rat ions: B i l l Bettenberg, Former

Ac t ing Ass is tan t Secretary f o r Minera ls and Energy. Just ice-Legal A c t i v i t i e s :

F loyd L. France, Head, General L i t i g a t i o n Sect ion. Just ice, A n t i t r u s t A c t i v i -

t i e s : Cheryl Peck, Pub l ic In fo rmat ion O f f i c e r . Transportat ion Department:

W i l l i am J. Devereaux, O f f i c e o f Systems Engineering. I n t e r n a l Revenue Service:

Randel Blankenship, Ass is tan t D i rec to r , L e g i s l a t i v e Analys is - Research and

Operations Analys is D iv i s ion . Council on Environmental Qua l i t y : Edwin H.

Clark 111, Senior Economist. OMB: J e f f S t ru thers , Energy Pol icy. EPA: David

Graham, Energy Processes i n Energy Minera ls and Industry . NASA: A l b e r t P.

L i t t l e , Ass is tan t t o the Comptro l ler f o r NASA. General Services Adminis t ra-

t i o n : Dorothy S. Gregor, Preparat ion and Review Divsion, GSA Budget O f f i c e .

SBA: Tony Robinson, Energy Environment Economist, Competi t ive Structure. Fed-

e r a l Trade Commission: James A. Wilson, Budget and Finance D iv i s ion . I n t e r -

s t a t e Commerce Commission: Dave Heggerstad, Chief o f the Budget Branch; and

Richard Chais, Chief , Energy and Environment Section. Secu r i t i es and Exchange

Commission: Lawrence Haynes, Comptrol ler. O f f i c e o f Technology Assessment:

L ione l (Skip) Johns, Energy P ro jec t Manager; and Linda Parker, Energy P ro jec t

A c t i v i t i e s . General Accounting O f f i c e : John Bachkosky, Supervisor Audi tor ,

Planning and Admin i s t ra t i on S ta f f , Energy and Minera ls .

M r . Harty, M r . Cohn, and Mrs. B r i x wish t o acknowledge the f o l l o w i n g con-

t r i b u t o r s t o t h e chapter d e f i n i n g i ncen t i ves t o nuclear power: F. W. Albaugh,

consu l tan t t o B a t t e l l e Memorial I n s t i t u t e ; J. N. Longton, O f f i c e o f the Con-

t r o l l e r , ERDA; and W. J. B a i r and R. D. Widr ig o f Bat te l le-Northwest .

M r . Fassbender, M r . Mazzucchi, and D r . Brenchley wish t o acknowledge t h e

f o l l o w i n g c o n t r i b u t i o n s t o t h e chapter descr ib ing incent ives t o hydro power:

Orval W. Bruton and Richard L. M i t t e l s t a d t , U.S. Army corps o f Engineers, Por t -

land, Oregon; Leon Joroulman and John H. Schimmelbusch, Bonnev i l le Power Admin-

i s t r a t i o n , Por t land, Oregon; Jesse C. M i l l s , Tennessee Va l l ey Author i ty , Knox-

v i l l e , Tennessee; Gordon Hallum, Kathleen Berry, and Lenore Melin, Alaska Power

Adminis t rat ion, Juneau, Alaska; Mary George Bond, Ed E. Riggin, and H. Wright,

Southeastern Power Adminis t rat ion, Elber ton, Georgia; J. Lopez and 0. P. P i t t s ,

Tennessee Va l l ey Author i ty , Chattanooga, Tennessee; B. E. B i g g e r s t a f f and W.

L. Webb, Federal Power Commission, Washington, D.C.; J e r r y Dinan, Bonnev i l le

Power Admin is t ra t ion , Port land, Oregon; Lee C. Sheppard, Tennessee Va l l ey

Author i ty , Knoxv i l l e , Tennessee; and Lyman Harr is , ALCOA, Vancouver, Washing-

ton; R. Olsen, USBR Lower Colorado Region, Boulder City, Nevada; Ed Spear, USBR

Upper Missour i Region (Eastern D i v i s i o n ) , B i l l i n g s , Montana; Fred Hosen and

Bruce Glenn, USBR Lower Missour i Region (Western D iv i s ion ) , Denver, Colorado;

Robert Ortego and Jim Wedeward, USBR R io Grande, E l Paso, Texas; Pat Shippley,

USBR Cent ra l V a l l e y Pro jec t . Sacramento, C a l i f o r n i a ; Reed Ashton, USBR Upper

Colorado Region, S a l t Lake City, Utah.

D r . Davidson acknowledges h e l p f u l d iscussions w i t h Lane E. Murphy, Chief,

D i v i s i o n o f Coal, Bureau of Mines, U.S. Department o f I n t e r i o r ; Joseph De Carlo,

coal Specialist, Mitre Corporation; and Gerald Dotter, Economist, National Coal Association. Dr. Sheppard acknowledges helpful discussions with Dr. Haskell

P. Wald, Chief Economist for the Federal Power Commission; Frederick W. Lawrence, Federal Power Commission; Dr. George Patton, American Petroleum Institute; and Dr. William Gibeaut and Robert Kalisch, American Gas

Association.

FOREWORD

In March 1978, Battelle published "An Analysis of Federal Incentives Used to Stimulate Energy Production." Since that time, considerable discussion has

centered around the analysis contained there. A two and a half day workshop was organized which brought together twenty-eight contributors to energy policy,

representing a wide variety of professional skills and training. Insights gained from this discussion, coupled with additional interaction and research by the Battelle team, have been incorporated into the revised versions of "An

Analysis of Federal Incentives Used to Stimulate Energy Production."

A number of significant changes were made for the first revision, pub-

lished during December, 1978. A chapter was added which analyzes federal

incentives to encourage public utility generation and transmission of elec-

tricity. This chapter was added primarily to identify the incentives provided

by the Rural Electrification Administration (REA) since its incentives were

considered to be beyond the scope of the hydro-energy chapter of the first doc-

ument. The nuclear energy chapter was expanded to include estimates of the

incentives provided the nuclear industry from government sponsored educational

programs and the Naval Reactors Program.

The current revision brings the information up to date with the inclusion

of 1978 incentive data to the various tables and the revision of dollar values previously in terms of constant 1977 dollars to constant 1978 dollars. These

revisions maintain the accuracy, viability, and usefulness of "An Analysis of

Federal Incentives Used to Stimulate Energy Production."

ACKNOWLEDGMENTS . FOREWORD

TABLES . - FIGURES .

I. INTRODUCTION . PURPOSE OF THE RESEARCH . CURRENT THOUGHT ON SOLAR INCENTIVES

Economic F e a s i b i l i t y

Legal Factors . I n s t i t u t i o n a l Forces

F i s c a l P o l i c y .

iii

v i i

x v i i

x i x

Conclusions . DEFINITION OF THE PROBLEM

APPROACH TO THE ANALYSIS . REFERENCES CHAPTER I

11. A THEORETICAL APPROACH TO ANALYZING INCENTIVES FOR ENERGY PRODUCTION . "POLICY" VERSUS "POLICIES"

Boundaries o f the Discussion . Determining Cause and E f f e c t .

THE ECONOMIC VIEWPOINT . Causes o f Governmental Act ions

E f f e c t s o f Governmental Act ions

Summary o f t h e Economic Viewpoint

POLITICAL VIEWPOINT . Causes o f Governmental Act ions

E f f e c t s o f Governmental Act ions

Summary o f t h e P o l i t i c a l Viewpoint

THE ORGANIZATIONAL VIEWPOINT . Causes o f Governmental Ac t ion . E f f e c t o f Governmental Act ions

Summary o f t h e Organizat ional Viewpoint . 36

THE LEGAL VIEWPOINT . 36

Causes o f Governmental Act ions 37

E f f e c t s o f Governmental Act ions . Summary o f t h e Legal Viewpoint

THE INTERRELATIONSHIPS AMONG THE FOUR VIEWPOINTS . TYPES OF POSSIBLE GOVERNMENTAL ACTIONS .

Creat ion and P r o h i b i t i o n o f Organizat ions . Taxat ion . Fees . Disbursements . Requirements . T r a d i t i o n a l Government Services . Non t rad i t i ona l Services . Market A c t i v i t y

USE OF THE VIEWPOINTS AND THE TYPOLOGY TO IDENTIFY ENERGY ACTIONS . REFERENCES CHAPTER I1 . REFERENCES TABLE 1 .

111. GENERIC ANALYSIS OF ENERGY INCENTIVES

IDENTIFICATION AND DESCRIPTION OF ENERGY ACTIONS . Organizat ional Types

Congressional Committee J u r i s d i c t i o n . Major Energy Form and Stage . Major Types o f Ac t ion . FY 1978 Out1 ays

ANALYSIS OF ENERGY ACTIONS . ENERGY-RELATED EXPENDITURES OF VARIOUS FEDERAL ORGANIZATIONS . ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY PROFESSIONAL TYPE . ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY COMMITTEE JURISDICTION . ENERGY-RELATED ORGANIZATIONS AN0 OUTLAYS BY ENERGY FORM

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY ENERGY STAGE

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY MAJOR TYPE OF ACTION . CONCLUSIONS . REFERENCES CHAPTER I 1 1 .

I V . NUCLEAR ENERGY INCENTIVES

BACKGROUND

INCENTIVES

RESEARCH AND DEVELOPMENT ACTIVITIES

LIABILITY INSURANCE . INCENTIVES TO THE URANIUM INDUSTRY .

Procurement P o l i c i e s

R e s t r i c t i o n on Import o f Fore ign Ore . Enrichment P o l i c i e s . Tax P o l i c i e s .

FEDERAL INVESTMENT I N ENRICHMENT PLANTS . Foreign Imp l i ca t i ons

Enrichment Services . FEDERAL REGULATION OF THE NUCLEAR INDUSTRY

WASTE MANAGEMENT . CONCLUSIONS . REFERENCES CHAPTER I V . HYDRO-ENERGY INCENTIVES . CONSTRUCTION .

Army Corps o f Engineers . Bureau o f Reclamation . Tennessee Va l l ey A u t h o r i t y .

MARKETING . Bonnev i l l e Power Admin is t ra t ion . Southwestern Power Admin is t ra t ion . Southeastern Power Admin is t ra t ion . Alaska Power Admin is t ra t ion .

Tennessee V a l l e y A u t h o r i t y . 156

Western Area Power Admin i s t ra t i on . 157

REGULATION OF HYDROELECTRIC FACILITIES . 159

ANALYTICAL METHOD . 160

CONCLUSIONS . 164

REFERENCES CHAPTER V 167

V I . COAL ENERGY INCENTIVES . 169

RESEARCH AND DEVELOPMENT . 169

Min ing Methods and Techniques . 169

U t i l i z a t i o n . 171

EXPLORATION . 173

Tax Rules App l icab le t o Exp lo ra t i on 176

Leasing and Development o f Federal Coal Lands i n the West . 178

Development o f Coal i n t h e East . 182

M I N I N G . 183

Dep le t ion Allowance . 183

Minimum P r i c e C o n t r o l s - - S t a b i l i z a t i o n . 183

Data C o l l e c t i o n 185

Hea l th and Safe ty . 187

T r a i n i n g Programs . 189

Product ion and P r o d u c t i v i t y . 189

Powerplant and I n d u s t r i a l Fuel Use Act . 190

Small Operators 191

RECLAMATION . 192

TRANSPORTATION . 193

WASTE DISPOSAL . 197

CONCLUSIONS . 198

REFERENCES CHAPTER V I . 200

V I I . OIL ENERGY INCENTIVES . 203

RESEARCH . 203

OIL AND GAS EXPLORATION AND PRODUCTION . 203

Geologica l Survey Data . 205

O i l Leasing P o l i c y . 205

Bureau of Land Management 207

Interstate Oil Compact Act--1935 . 207 InformationGathering . 209

Connally Hot Oil Act-1935 209

Stripper We1 1 Incentives--1944, 1973 . 210

Incentives for New Oil Production--1973 . 211 Entitlement Program . 215

Economic Regulatory Administration . 216

Strategic Petroleum Reserve . 216

Intangible Drill ing Expenses--1918-1978 . 217

Percentage Depletion--1926-1978 . 217

Recapture of Intangible Expenses on Disposition of Oil and Gas-Producing Property . 220

Western Hemisphere Trade Corporations . 222

Foreign Tax Credits . 223

Oil Import Quotas--1959-1973 . 226

PETROLEUM REFINING AND TRANSPORTATION . 228

Oil Pipeline Rates--1921-1951 . 229

Cost of Oil Pipeline Regulation--1950-1978 . 229

Maintenance of Inland Waterways--1950-1978 . 229

Maintenance of Coastal Ports--1950-1978 . 231

The Jones Act of 1915--1915-1978 . 231

Deepwater Ports Act of 1974 . 233

Trans-Alaska Pipeline Authorization Act . 234 Merchant Marine Act of 1970 . 234

World War I1 Pipeline Construction . 235

1973 Program to Encourage Energy Resource Development . 237

Federal Support of Highway Construction--1916-1978 237

Waste Disposal and Environmental Problems . 238

CONCLUSIONS . 239

REFERENCES CHAPTER VII . 241

V I I I . NATURAL GAS ENERGY INCENTIVES . RESEARCH AND DEVELOPMENT . EXPLORATION . PRODUCTION

Wellhead P r i c e Cont ro ls . Na tu ra l Gas P o l i c y Act . R o l l - I n P r i c i n g o f Supplementary Gas Supplies

I n d u s t r y Purchases o f I n t r a s t a t e Gas Transmit ted i n I n t e r s t a t e P ipe l i nes . I n t e r s t a t e P i p e l i n e Purchase o f I n t r a s t a t e Gas

TRANSMISSION . Natu ra l Gas Act o f 1938 . Overa l l Est imate o f t he Cost o f Gas Regulatory Agencies . P i p e l i n e Safe ty Programs .

UTILIZATION . Regu la t ion o f Imported L i q u e f i e d Natura l Gas . P r i o r i t i e s Es tab l i shed on Gas Purchased and Transmit ted i n I n t e r s t a t e Systems . The Clean A i r Act o f 1970

The Energy Supply and Environmental Coord inat ion Ac t o f 1974 .

WASTE DISPOSAL . CONCLUSIONS . REFERENCES CHAPTER V I I I .

I X . ELECTRICITY . INTRODUCTION . ORGANIZATIONS . TYPES OF ACTIONS .

Expenditures f o r E l e c t r i c i t y as an Energy Form

TAXATION . L i b e r a l i z e d Deprec iat ions

Absence o f Federal Tax on t h e Income o r P u b l i c l y Owned U t i l i t i e s

I n t e r e s t Subsidy from Tax-Exempt Bonds . MARKET ACTIVITY

E l e c t r i c Loans . Loan Guarantees

I n t e r e s t Rates . A Revolv ing Fund f o r Loan Cap i ta l . Technical Assistance

Federal Power Admin is t ra t ions and the TVA . CONCLUSIONS .

REFERENCES CHAPTER I X . X. CONCLUSIONS WITH RESPECT TO SOLAR ENERGY POLICY .

THEORETICAL APPROACH

GENERIC INCENTIVES . NUCLEAR INCENTIVES . HYDRO INCENTIVES . COAL INCENTIVES

OIL INCENTIVES . NATURAL GAS INCENTIVES . ELECTRICITY INCENTIVES . POSSIBLE SOLAR INCENTIVES

Accelerated Depreciat ion . D i r e c t Subsidies . Low I n t e r e s t Loans . Value-Added Tax

Tax-Free I n d u s t r i a l Bonds

Government L i a b i l i t y Insurance f o r Solar Technology

Special Gas P r i o r i t i e s . Redi rec t ion o f the Rural E l e c t r i f i c a t i o n Admin i s t ra t i on . Formation o f a Solar TVA .

Federal Cons t ruc t ion o f Large So la r F a c i l i t i e s . 293

Bonus f o r I nnova t i ve Uses o f So la r Energy . 293

Manhattan P r o j e c t f o r So la r Energy . 294

Power P l a n t Demonstration Program . 294

CONCLUSION 295

APPENDIX A . A - 1

APPENDIX B . B-1

APPENDIX C . C - 1

APPENDIX D . D- 1

APPENDIX E . E - 1

BIBLIOGRAPHY . B i b-1

DISTRIBUTION . D i s t r - 1

Prominent Users of the Four Viewpoints . 35

Causes and Effects of Governmental Actions . 39

Ident i f icat ion and Description of Energy Actions . 59

Federal Organizations by Major Type of Action 73

Energy-Related Out1 ays of Federal Organizations . 82

Energy-Related Organizations and Outlays by Organizational Types 84

Energy-Related Organizations and Outlays by Committee Jurisdiction . 84

Energy-Related Organizations and Outlays by Energy Form 90

Federal Organizations by Energy Form . 91

Energy Outlays by Energy Form . 92

Energy-Related Organizations and Outlays by Energy Stage . 93 Energy-Related Organizations by Energy Form and Energy Stage 94

FY 1978 Energy Outlays by Energy Form and Energy Stage . 95

Energy-Related Organizations and Outlays by Major Type of Action . 96

Federal Organizations by Major Type of Action 97

Energy-Related Organizations and Outlays by Action Type and Energy Form . 99 An Estimate of the Cost of Generic Incentives Used t o Stimulate Energy Production FY 1978 . 101

Steps i n the Nuclear Fuel Cycle . . 110

Research and Development Expenditures for the Nuclear Power Program 1950-1974 . . 112

Research and Development Expenditures for the Nuclear Power Program 1975-1978 . . 113

Mixed Program Contributions t o Civilian Nuclear Power . . 116 The Value of Government Indemnity t o the Nuclear Power Plant Owner . 122

Percent of Foreign-Origin Uranium Ore Permitted f o r Use i n U.S. Plants . 129

DOE Uranium Enrichment Contracts as of September 15, 1978 . . 133

Separat ive Work Un i t s and Revenue from Enriched Uranium Sold Through 1978 . AEC and NRC Regulatory Costs . An Est imate o f the Cost o f Incent ives t o St imulate C i v i l i a n Nuclear Power Product ion

Est imate o f t h e Tota l Net Federal Investment i n Hydroe lec t r i c Power Development . Est imat ion o f t h e Federal I ncen t i ve Provided t o Hydro-Energy Development by Exemption from Federal Income Taxes

Est imat ion o f t h e Subsidy Provided t o t h e Development o f Hydro- e l e c t r i c Power Generation and E l e c t r i c i t y Transmission by Low I n t e r e s t Federal Appropr iat ions . Federal Incent ives Used t o St imu la te t h e Development o f Hydro- Energy and E l e c t r i c i t y Transmission

Federal R&D Expenditures f o r Coal I ndus t r y . Revenue Equivalent o f Percent Deplet ion Allowance f o r Coal . Cost o f Data C o l l e c t i o n and Analysis, A l l Minera ls- - Bureau o f Mines

Expenditures on Mine Heal th and Safe ty Excluding R&D . Domestic and Foreign Waterborne Shipments . Summary o f I ncen t i ves t o Coal by Type . Federal R&D Expenditures Related t o the Petroleum Indus t r y . Geological and Minera l Resource Surveys--Direct Expenditures by the Geological Survey

Expenditures b y t h e Bureau o f Land Management f o r F o s s i l Fuel A c t i v i t i e s

Incen t i ves Under O i l P r i c e Contro ls

Value o f I ncen t i ves . Revenue Equivalent o f Percentage Deplet ion Allowance and I n t a n g i b l e D r i l l i n g Expensing . P i p e l i n e Company Return on Investment . U.S. Army Corps o f Engineers Expenditures f o r Navigat ion P ro jec ts

Subsidies from t h e Merchant Marine Act o f 1970 . Summary o f O i l Incent ives by Type . Data f o r Es t imat ing Amount o f Subsidy f o r Promotion o f Natura l Gas Use by I n t e r s t a t e P i p e l i n e P r i ce Regulat ion

Est imated Net I n c e n t i v e Due t o FERC Regulat ions o f t h e Natura l Gas P ipe l i nes and I n t e r s t a t e Producers .

Summary o f Natura l Gas Incent ives by Type . . 259

Summary o f Investment Tax Cred i ts Generated and U t i l i z e d Dur ing the Years 1962 through 1976 by Method o f Accounting . . 265

Incen t i ve Provided t o Class A and B P r i v a t e l y Owned U t i l i t i e s by Deferred Income Tax Due t o L i b e r a l i z e d Depreciat ion . . 267

Incen t i ve Provided t o t h e Tennessee Va l l ey A u t h o r i t y by t h e Exemption o f Federal Tax . 269

Incen t i ve Provided t o S ta te Power A u t h o r i t i e s and Munic ipal U t i l i t i e s by the Exemption o f Federal Taxes . . 270

Incen t i ve Provided t o REA Cooperatives by t h e Exemption o f Federal Taxes . . 272

Tax-Free Bond Subsidy Provided t o P u b l i c l y Owned Class A and Class B E l e c t r i c U t i l i t i e s . . 273

REA Loans Granted i n t h e E l e c t r i f i c a t i o n Program by Purpose . . 277

Repayment o f REA Loans . . 278

Net Annual REA Loans Outstanding . . 279

Tota l Net Cumulative Outstanding REA Loans f o r the E l e c t r i c Program . . 280

REA Admin i s t ra t i ve Funds Obl igated t o t h e Program . . 281

Federal I ncen t i ves Used t o St imu la te the Development o f E l e c t r i c Energy 283

An Est imate o f t h e Cost Incent ives Used t o St imu la te Energy Product ion . 296

FIGURES

1. The Real and Apparent Market f o r Energy . 17

2. A Diagram o f Organizat ional Decis ion Making . 33

3. Types o f Tax i n Production-Consumption Cycle . 45

4. Annual Sur face D r i l l i n g and Reserve Addi t ions. 126

5. Nuclear Fuel Cycle - Options f o r Waste Fuel . . 142

AN ANALYSIS OF FEDERAL INCENTIVES USED

TO STIMULATE ENERGY PRODUCTION

I. INTRODUCTION

The amount o f so la r energy t h a t reaches the e a r t h ' s surface every two

weeks i s equ iva len t t o a l l o f the known reserves o f coal, gas, and o i l . (1)

Yet, t h e use o f t h i s energy source t o generate e l e c t r i c i t y and heat and cool

b u i l d i n g s i s n e g l i g i b l e . Debate over so la r energy 's share i n the na t i ona l

energy budget has caused policymakers t o speculate on t h e reasons f o r t h e l a r g e

d i f f e rence between present and p o t e n t i a l use. The reasons appear t o be bur ied

i n complex techn ica l , economic, lega l , i n s t i t u t i o n a l , and p o l i t i c a l i n t e r r e l a -

t ionsh ips . The research presented here i s intended t o c o n t r i b u t e t o a c l e a r

understanding o f t h a t r e l a t i o n s h i p and t o enhance the design o f so la r energy

po l i cy .

PURPOSE OF THE RESEARCH

The purpose o f the research presented i n t h i s r e p o r t i s t o a s s i s t the

D i v i s i o n o f Conservat ion and So lar Appl icat ions, Department o f Energy (DOE),

i n the study and recommendation o f f ede ra l incent ives f o r the development o f

so la r energy. A f ede ra l i n c e n t i v e i s any a c t i o n t h a t can be taken by t h e gov-

ernment t o expand r e s i d e n t i a l and commercial use o f so la r energy. The develop-

ment o f s o l a r energy p o l i c y cou ld be enhanced by i d e n t i f i c a t i o n , q u a n t i f i c a t i o n ,

and ana lys is o f f e d e r a l incent ives t h a t have been used t o s imulate the develop-

ment o f other forms o f energy. The t e x t o f t h i s r e p o r t i d e n t i f i e s , q u a n t i f i e s

and analyzes such incent ives and r e l a t e s them t o cur ren t thought about so la r

energy.

A b u i l d i n g con t rac to r o r p rospect ive homeowner contemplat ing the purchase

o f s o l a r energy equipment f o r heat ing and c o o l i n g can be expected t o consider

i n i t i a l expense, i n t e r e s t ra tes , and the l i f e o f the system when choosing among

competing energy sources. If t h e p r i c e o f a l t e r n a t i v e sources o f energy were

set i n a p e r f e c t l y compet i t i ve market, p r i c e would be an i m p a r t i a l and e f f i -

c i e n t a l l o c a t o r o f t he n a t i o n ' s energy resources. Such i s no t t h e case. His-

t o r i c a l l y the Uni ted S ta te has created i ncen t i ves t o increase produc t ion o f

s p e c i f i c energy sources, r e s u l t i n g i n an i m p e r f e c t l y compet i t i ve energy

economy. A r a t i o n a l so la r energy p o l i c y i s t he re fo re p red ica ted on a knowl-

edge o f e x i s t i n g i ncen t i ves t h a t have been created t o increase produc t ion o f

o ther forms o f energy.

CURRENT THOUGHT ON SOLAR INCENTIVES

The o i l embargo o f 1973 s t imu la ted concern over energy suppl ies. As p o l -

i c y makers sought U.S. s e l f - s u f f i c i e n c y i n energy product ion, t h e o p p o r t u n i t i e s

and advantages o f u t i l i z i n g so la r energy were considered. One r e s u l t o f t h i s

concern was t h e development o f a body o f thought on t h e c r e a t i o n o f f e d e r a l

i ncen t i ves t o increase the n a t i o n a l use o f so la r energy.

Bezdek and Maycock p o i n t o u t t h a t i n c e n t i v e programs designed t o reduce

t h e h igh i n i t i a l c o s t o f s o l a r systems have rece ived t h e most a t t e n t i o n . Eco-

nomic i n c e n t i v e programs, p r o p e r t y and sales t a x waivers, investment t a x

c r e d i t s , and accelerated dep rec ia t i on have a l l been proposed. P r e l i m i n a r y

f i n d i n g s i n d i c a t e t h a t t a x c r e d i t s and low i n t e r e s t loans would have t h e most

~ i g n i f i c a n ~ impact on s o l a r market penet ra t ion . The most important non-

economic i n c e n t i v e program was found t o be the development o f t he c r i t i c a l

s o l a r / e l e c t r i c a l u t i l i t y i n t e r f a c e . ( 2 )

B u t t i s one o f t he s t rongest advocates f o r f ede ra l a c t i o n t o s t i m u l a t e

accelerated s o l a r development. He argues t h a t t he re i s a need t o redress

e x i s t i n g d i s t o r t i o n s i n t he compet i t i ve energy marketplace. The i n d i v i d u a l ,

as a producer o f s o l a r energy, does no t rece i ve t h e compe t i t i ve b e n e f i t s o f

investment t a x c r e d i t s and dep rec ia t i on allowances prov ided by present t a x law

t o corpora te producers o f a l t e r n a t i v e energy sources. A l l producers o f so la r

energy are c o m p e t i t i v e l y disadvantaged by l e s i s l a t i o n and r e g u l a t o r y p r a c t i c e s

which r e s t r i c t convent ional energy p r i c e s t o below marginal cos ts o r market-

c l e a r i n g pr ices . ( 3 , a )

Economic Feasi bi 1 i ty

The National Plan for Energy Research, Development, and Demonstration

states that the principal constraint on successful commercialization of solar

systems is their inability to compete economically with conventional systems

and fuels. Competitive use of solar systems depends on many technical and economic factors, including the unit cost for purchase and installation of avail-

able solar equipment, the climate and average available sun flux, the initial

and operational cost of conventional heating and cooling systems, the avail-

ability of capital funds, and the cost of conventional energy. (5)

Bennington, Bohannon and Spewak state that solar water heating and solar 2 space heating installed at an equivalent cost of $20/ft of collector system

could compete today with electric resistance systems throughout most of the 2 United States. If the cost is reduced to $15/ft solar systems become com-

petitive with oil, hot water heating, and/or oil and electric heat pump space heating in many cities. (6) Lof, Tybout, Davis and others state that solar

heating and cooling systems for residential buildings are nearly, but not quite, economically competitive with fossil fuel and electric systems. (7-9)

A TRW report states that total installed solar energy system costs, converted to a cost per unit area of collector and including all markups, gener-

2 2 ally range from about $20/ft down to $13/ft depending on system size and

function. It further states that solar cooling of buildings using current

lithium bromide gas adsorption refrigeration systems will not be cost competi-

tive to any significant extent during this century. However, modest reduc-

tions in peak cycle temperature costs could reverse this situation. (10)

A Westinghouse Electric Corporation report states that solar heating systems can become competitive for residential use in the California region in

1975-80 and for commercial and institutional structures in several regions by

1980. Solar heating and cooling can become competitive in most regions of the

country by 1985-90. (11)

Scott, Melicher and Sciglimpaglia found that solar heaters were once

widely used for heating water in southern Florida. By the early 19501s,

however, the so la r i n d u s t r y was reduced t o a few f i r m s whose p r i n c i p a l a c t i v i t y

was t h e r e p a i r o r replacement o f water storage tanks. This dec l i ne i n t h e

so la r i n d u s t r y resu l ted from the r a p i d decrease i n e l e c t r i c i t y ra tes , an

increase i n t h e i n i t i a l i n s t a l l a t i o n cos ts o f s o l a r systems, maintenance costs

f o r so la r systems, and the increas ing s i z e o f f i r m s i n the b u i l d i n g i ndus t r y . (12)

Wilman showed t h a t the present value o f a 20-year stream o f heat ing

expenditures f o r an average home w i t h a s o l a r system was $12,907, as compared

w i t h $3,659 f o r o i l and $2,582 f o r gas. Thus, t h e so la r system i s 3.5 t imes

as expensive as a l t e r n a t i v e systems. (13)

I n a r e s i d e n t i a l case study t h a t assumed a c l ima te s i m i l a r t o Madison,

Wisconsin, Ruegg found t h a t i ncen t i ves are requ i red t o make s o l a r energy cos t

e f f e c t i v e i f $2 f u e l o i l i s 38$/gal o r e l e c t r i c i t y i f 1.5$/kWh. A commercial

case study a lso showed t h a t s o l a r i ncen t i ves would be needed as a l t e r n a t i v e

energy sources increased i n p r ice . (14)

These sources i n d i c a t e the d i v e r s i t y o f thought about t h e economic f e a s i -

b i l i t y o f s o l a r energy. There i s considerable d i f f e rence o f op in ion about

whether so la r heat ing and c o o l i n g i s o r w i l l be p r i c e compet i t i ve w i t h o ther

forms o f energy i n t h i s century. Th is l ack o f consensus cou ld be due t o mar-

ke t imperfect ions r e s u l t i n g from weak i n s t i t u t i o n a l fo rces associated w i t h a

r e l a t i v e l y new energy technology. Strengthening o f i n s t i t u t i o n s , i n p a r t ,

deals w i t h l e g a l p r o t e c t i o n o f p rope r t y r i g h t s and r u l e s o f t ransac t ion . Fur-

t he r i n s i g h t s can be gained from a rev iew o f t h e l e g a l l i t e r a t u r e .

Legal Factors

Thought about the l e g a l i m p l i c a t i o n s o f so la r energy development and use

has focused on: 1 ) t h e r i g h t o f s o l a r users t o unobstructed sunshine and 2)

s ta tu to ry , regu la tory , and i n s t i t u t i o n a l r e s t r a i n t s a f f e c t i n g f inanc ing , con-

s t r u c t i o n and marketing. Incent ives associated w i t h t h e l a t t e r would c o n s i s t

o f changes i n e x i s t i n g laws and regu la t i ons t h a t take so la r energy and associ-

ated technology i n t o considerat ion. Th is would r e q u i r e a l t e r a t i o n o f e x i s t i n g

i n s t i t u t i o n a l forces.

The Environmental Law Ins t i t u t e (ELI) reviewed the exis t ing Sunrights Laws

and ident i f ied new approaches t h a t might be used t o encourage development of

solar energy systems. They concluded tha t establishing sunshine r i gh t s , solar

zoning schemes and land use planning compatible with solar access, developing

municipal regulations, and passing a basic policy s t a t u t e could encourage solar

energy development. Mandatory ins ta l la t ion laws, b o t h f o r construction and

exis t ing buildings, would probably survive a court challenge b u t could be

unwise because of economic factors .

ELI s t a t e s t h a t property tax, mortgage and insurance laws should consider

assessment of backup heating systems, define solar energy systems, determine

whether solar systems are e l i g ib l e fo r exemption, t r e a t solar easements as they

r e l a t e t o assessments, and determine whether solar systems under construction

are e l i g i b l e fo r an exemption. I f property taxes are assessed on real e s t a t e

according to i t s income production, solar systems should e i ther be exempted or

given other, more appropriate incentives. Mortgage barr iers affect ing new

solar energy systems include: 1) federal laws tha t regulate the s i z e of new

home loans granted by savings and loan ins t i tu t ions , 2 ) borrowers' under-

writing c r i t e r i a t h a t do not consider the cost of heating and cooling homes

when they assess a loan appl icant ' s a b i l i t y t o pay, and 3) secondary market

r e s t r a i n t s on lending in s t i t u t i ons attempting t o s e l l t h e i r mortgages. Financ-

ing of r e t r o f i t s of old homes i s affected by the Home Owners Loan Act of 1933

(48 STAT. 128, 1 2 USC 1461 e t seq., as amended), which allows federa l ly char-

tered savings and loan companies t o make f i r s t l i ens on res ident ia l properties.

As a r e su l t , the person seeking r e t r o f i t financing must pay higher i n t e r e s t

r a t e s on homeowner improvement loans and personal installment loans, thus

increasing the cos t of the solar system.

ELI found no exis t ing major legal barr iers associated with the insuring

of solar s t ructures since solar systems are not exp l i c i t l y excluded i n the

standard homeowner's insurance contract. Regulatory jur isdic t ion over solar

heating and cooling i s a t the s t a t e level; the Federal Power Commission and

other federal agencies apparently do n o t have jur isdic t ion. U t i l i t y involve-

ment i n the sale , financing, ownership or servicing of so la r col lectors for

heating and cooling is a key policy question. Although there is strong oppo-

sition to public utility involvement in the marketing of solar energy, ELI believes public utilities could have a role in the public acceptance of solar

energy. (15)

The American Bar Foundation identified five areas of legal concern:

Regulation of Building Materials and Design Through Building Codes. The two established procedures for devising building codes are "prescriptive stan-

dards," which designate specific building materials and how they are to be

used, and "performance criteria," which describe the objectives the materials

or design must attain. Architects and engineers prefer the latter procedure, keyed to function rather than design, because it allows more flexibility and

reduces the financial burdens.

Financing and Marketing Arrangements. Barriers include property and sales

taxes, insurance rates, mortgage and depreciation rates, and warranties on equipment. Incentives include tax credits and deductions and loan and interest

rate guarantees.

Role of Public Utilities. The need for a backup energy source for solar

units directly involves public utilities. A rate structure that is equitable

both to the utilities and to the small user will have to be devised.

Land Use Planning. The immediate barriers local governments must face are

the restraints that constitutionally can be imposed on the use of privately

owned land. Newer procedures that favor the use of solar energy include com-

prehensive plans, transferable development rights, official mapping of solar districts, and planned unit development.

Access to Sunlight. The property owner has a right to receive light from

directly above his property but no right to receive light across neighboring

1 and. ( I 6 ) Approaches to ensuring lateral light without purchasing the neigh-

boring property include purchase of an easement that would prevent the adjacent landlord from obstructing lateral light, creation of solar zones and inclusion

of open space requirements in comprehensive plans at the state and local level,

and adoption of a policy that the encouragement of solar energy is of such com-

munity important that local governments use the right of eminent domain to

acquire air space above critical parcels. (16)

The American Bar studies claim that although Congress has passed statutes

encouraging the use of solar energy, there has been no coordinated federal

effort. Constitutional protection of unobstructed solar sky space could be

enacted, based upon commerce power, national defense and other constitutional

grounds, to protect solar sky space. Fiscal incentives such as tax credits or deductions, loan guarantees, and loan insurance could be written into the fed-

eral tax system and other programs. Changes in patent policy could require compulsory licensing that would lead to more rapid development or use of solar

energy systems. Quality standards and the federal certification of solar energy systems would deter negligent design or outright fraud in marketing sys-

tems. Regulatory action could alter the competitive positions of conventional

energy sources and impose the full costs of exploration, production and use

upon ultimate users. Jurisdictional issues over designing, constructing, installing and maintaining solar energy systems could be addressed to encourage

labor organizations to support the use of solar energy. Planning and commu-

nity development and other energy-related activities that receive federal

assistance could be made conditional on state and local adoption of laws and

regulations that encourage solar energy use. (16)

Bins sought to identify and abstract all state enactments in 1974 and 1975

that directly related to the improvement of prospects for solar energy devel-

opment and application. Included were property tax incentives, income tax

incentives, sales tax incentives, research and development, life-cycle cost

analyses for new or remodeled state buildings, solar provisions in state build-

ing codes, access to incident solar energy, informational and promotional

activities, state financing of buildings using solar energy, and an index of

enactments by state. (17)

Miller suggests that solar advocates approach legislated remedies with

caution since such legislation might be unnecessary and in fact might have an

undesirable effect on solar energy growth. Where shading problems exist, the

legislation should be drawn with the purpose of avoiding conflict in the courts. Such conflict could create the impression among the public that

significant legal problems exist, which could inhibit investment in solar sys-

tems. Solar initiatives should be taken first in those areas where sun rights

problems are minimal before tackling areas where the problem is real (e.g., high rise developments). (18)

Eisenstadt and Utton share Miller's concern about legal conflicts over the

shading of solar collectors. They believe that allowing the zoning powers of local government to control solar rights would be a practical method for

obtaining solar access, would speed public acceptance of solar power, and would

avert delays in solar development that could arise as a result of a solar collector shading lawsuit. (19)

Institutional Forces

Hirshberg and Schoen indicate that, within the U.S. housing industry,

technically feasible and economically competitive innovations often fail to

achieve rapid acceptance. Some of these failures have stemmed from a lack of

understanding of the institutional forces operating to deter innovative d i f -

fusion. (20) Several other investigators have recommended incentives for

institutional change. (21-23) As a result of four public laws enacted during

the 93rd Congress, a major National Solar Energy Program has been created. (24)

The 94th Congress has submitted eight bills which deal with institutional

changes.

Information Technology

According to Eberhard, the largest incentive to widespread use of solar

energy may lie in information technology. Easily assessable, well defined and

1 ow-cost systems of information codification, translation and dissemination could aid in defining the market more perfectly. (21) H. R. 36 would estab-

lish an Energy Conservation Research and Development Corporation to conduct

research and development in areas which offer substantial potential for solar

space conditioning. H. R. 6860 would establish the Energy Conservation and Conversion Trust Fund which provides for funds to be spent for basic and

applied research.

Development o f Standards

Spokesmen f o r t he b u i l d i n g i n d u s t r y see a need f o r a s e t o f industry-wide

performance standards and t e s t s f o r s o l a r systems. Designs f o r t he use o f

so la r energy r e q u i r e more i n t e g r a t i o n between the i n t e r n a l and ex te rna l n a t u r a l

environment, between t h e s k i l l s o f a r c h i t e c t s and t h e s k i l l s o f engineers, and

between so la r systems and s t r u c t u r a l , mechanical, and enclosure systems o f

b u i l d i n g s than i s gene ra l l y found i n t he b u i l d i n g indus t ry . (21) Promulgat ion

o f performance design techniques f o r a r c h i t e c t s and engineers i s p a r t o f a d i f -

f u s i o n o f i n fo rma t i on program. Fur ther i n c e n t i v e would be created through the

improvement and s t reaml in ing o f procedures f o r t e s t i n g , evaluat ion, and c e r t i -

f i c a t i o n o f so la r technologies. Establ ishment o f equipment q u a l i t y and per-

formance standards would increase consumer conf idence i n newly developed

equipment. (22)

Warrant ies

E f f e c t i v e consumer p r o t e c t i o n depends on the r a p i d development and imple-

mentat ion o f reasonable performance standards and t e s t i n g mechanisms. These

i n t u r n depend on ac tua l experience. U n t i l t h i s i s ava i lab le , war ran t ies o f

m a t e r i a l s and workmanship would reduce t h e l e v e l o f uncer ta in ty . The con-

s t r u c t i o n industry , w i t h the encouragement o f the Federal Government, cou ld

extend t h e normal warranty requirements f o r b u i l d i n g cons t ruc t i on from one t o

two years.

Cons t ruc t ion Codes

The Federal Government cou ld encourage the s tandard iza t ion o f codes, l o c a l

adopt ion o f model codes, and educat ion o f code o f f i c i a l s i n t h e components and

performance o f s o l a r systems.

Demonstration Programs

Pro to type system development, r e l i a b i l i t y t e s t i n g , and cos t ana lys is could

be c a r r i e d o u t us ing government b u i l d i n g s . The Energy Research and Development

Admin i s t ra t i on funded and the U.S. Department o f Housing and Urban Development

adminis tered a 3-year program o f time-phased demonstrations i n var ious c l imates

and geographic reg ions w i t h a c t i v e involvement o f t he housing indus t ry . (25 )

H. R. 8546 would r e q u i r e t h a t b u i l d i n g s f inanced w i t h f ede ra l funds incorpora te

s o l a r energy systems. H. R. 62 would d i r e c t t he a r c h i t e c t s o f the Cap i to l t o

s tudy t h e f e a s i b i l i t y o f us ing s o l a r energy i n c e r t a i n House o f f i c e b u i l d i n g s

and f o r other purposes.

E l e c t r i c U t i l i t i e s

A more p e r f e c t market f o r so la r energy cou ld be created by e l i m i n a t i n g the

c r i t i c a l s o l a r - e l e c t r i c u t i l i t y i n t e r f a c e . I f u t i l i t i e s perce ive t h a t t h e use

o f so la r systems w i l l increase t h e i r peak-load requirements and decrease t h e i r

base-load requirements, i t can be a n t i c i p a t e d t h a t they w i l l t ake p r o t e c t i v e

act ion, such as charg ing unfavorable r a t e s f o r s o l a r i n s t a l l a t i o n s . Federal

r e g u l a t o r y agencies cou ld induce an i nve rs ion o f ra tes , thus removing p e n a l t i e s

f o r the use by so la r owners o f smal l amounts o f e l e c t r i c a l a u x i l i a r y power.

Higher e l e c t r i c a l r a t e s f o r peak demand per iods cou ld encourage use o f s o l a r

s torage f a c i l i t i e s . I ncen t i ves cou ld induce u t i l i t i e s t o lease so la r equipment

t o m i t i g a t e t he impact o f r a t e s t r u c t u r e s and t r a n s f e r o f i n i t i a l costs . (23)

However, Asbury and Mue l le r conclude t h a t s o l a r energy systems and convent ional

e l e c t r i c u t i l i t y systems represent a poor techno log ica l match because bo th

technologies are ve ry c a p i t a l i n tens i ve . The e l e c t r i c u t i l i t y , because o f t h e

h igh f i x e d cos ts o f generat ion, t ransmission, and d i s t r i b u t i o n capaci ty , repre-

sents a poor backup f o r s o l a r energy systems. On t h e o ther hand, t h e s o l a r

c o l l e c t i o n system, because i t represents pure, h igh-cost c a p i t a l and i n t e r m i t -

t e n t output , should n o t be considered as a pa r t - l oad source o f a u x i l i a r y energy

f o r t he u t i l i t y . (26)

Federal Procurement

A r e p o r t by Don Sowle Associates s ta tes t h a t approximately 40 s ta tu tes ,

execut ive orders and government procurement r e g u l a t i o n s p resc r i be programs t h a t

impinge on the procurement process. Procurements o f t e n become more c o s t l y and

t ime consuming because o f t h e added requirements o f t h e programs. Yet, t h e

d i r e c t procurement o f so la r f a c i l i t i e s by the Federal Government o f f e r s an

a d d i t i o n a l i n c e n t i v e i n market penet ra t ion . (23)

Incent ives t o Competing Energy Sources

Larson s ta ted t h a t a p o l i c y dec is ion on any nonsolar energy source cou ld

a l t e r t h e market f o r s o l a r energy. Changes i n na t i ona l p o l i c i e s a f f e c t i n g

exp lora t ion , leasing, and r o y a l t i e s could e i t h e r encourage or discourage so la r

energy; a p o l i c y change t h a t discouraged some form o f r a p i d exp lo ra t i on and

e x t r a c t i o n could be expected t o increase the market f o r so la r energy. P r i ce

decontro l o f n a t u r a l gas cou ld have a major impact on t h e s o l a r market, as

cou ld Congressional ac t ion t o r a i s e the l i a b i l i t y o f t h e Price-Anderson r i s k

l i m i t . These examples i l l u s t r a t e the f a c t t h a t a l l i ncen t i ves t o a l t e r n a t i v e

present day dep le tab le f u e l s can a f f e c t the f u t u r e market f o r so la r energy. (27)

S. 311 would e s t a b l i s h a tax on excess petroleum i n d u s t r y p r o f i t s . S. 489

would amend the Clayton Act t o preserve and promote compet i t ion among corpora-

t i o n s i n t h e product ion o f o i l , na tu ra l gas, coal, o i l shale, bar sands, ura-

nium, geothermal steam, and s o l a r energy. S. 93 would increase t h e tax on

gasoline., S. 1112 would e s t a b l i s h a t r u s t fund t o develop s o l a r energy,

f inanced p a r t i a l l y by a tax o f 2d /m i l l i on Btu on a l l energy resources l e v i e d

a t t h e source o f p roduct ion o r importat ion.

There i s considerable evidence t h a t i n s t i t u t i o n a l fo rces are being devel-

oped and strengthened t o induce t h e adopt ion o f innovat ive s o l a r technology.

Thought has been conceptual ized as l e g i s l a t i o n . L e g i s l a t i o n has, i n some

cases, been passed by t h e Congress. Federal programs have been i n i t i a t e d . But

these i n s t i t u t i o n a l fo rces must be supplemented w i t h cost reducing f i s c a l

i ncen t i ves i n a c l ima te o f uncer ta in p r i c e competi t ion.

F i s c a l Pol i c y

The two p r i n c i p a l types o f f i s c a l i ncen t i ves f o r expanded r e s i d e n t i a l and

commercial uses o f s o l a r energy t h a t are discussed i n t h e l i t e r a t u r e are tax

i n c e n t i v e programs and d i r e c t subsidy programs. Several i n v e s t i g a t o r s have

l i s t e d and discussed appropr iate f i s c a l Others have

commented on s p e c i f i c incent ives. Twelve b i l l s t h a t would c rea te f i s c a l

i ncen t i ves were in t roduced i n t o the 94th Congress.

Income Tax Deduction

Senate B i l l 28 would a l l ow a $1,000 deduct ion i n f ede ra l income t a x l i a -

b i l i t y f o r any taxab le year f o r purchase o f a s o l a r system, o r a t a x c r e d i t

equal t o 25% o f the a l lowable expense. H. R. 1697 would a l l ow a tax deduct ion

f o r t h e purchase and i n s t a l l a t i o n o f s o l a r heat ing and c o o l i n g equipment no t

t o exceed 50% o f the expenses paid. However, John M. N i c luss o f the Depart-

ment o f t h e Treasury has s ta ted t h a t t h e Department's bas ic p o s i t i o n i s t o

r e s i s t the use o f the tax system t o prov ide incent ives t o s p e c i f i c sectors o f

t h e U.S. economy. Such i ncen t i ves have been enacted over t h e oppos i t i on o f the

Treasury Department. I n the view o f the department, i t i s f a r more e f f e c t i v e

t o p rov ide subsid ies through grants o r means r e f l e c t e d d i r e c t l y i n the Federal

Budget. (30) Cos te l l o f e e l s t h a t a l l ow ing a fede ra l income t a x deduct ion f o r

d i sp lac ing f o s s i l f u e l s w i t h o n s i t e s o l a r energy i s one o f t h e most promis ing

p o l i c y ac t ions open t o Congress. (31)

Income Tax C r e d i t

House B i l l 5959 would permi t a 25% income tax c r e d i t f o r expenditures f o r

s o l a r heat ing and c o o l i n g equipment t h a t do n o t exceed $8,000, o r a 12.5%

c r e d i t f o r expenditures over $8,000. H. R. 6860 would a l l ow 40% o f t h e f i r s t

$1,000 and 20% o f t h e second $1,000, f o r a maximum o f $600, o f the amount spent

on so la r energy equipment on the taxpayer 's p r i n c i p a l residence. S. 1379 would

g i ve a 25% c r e d i t , no t t o exceed $2,000, f o r s o l a r energy equipment on new and

e x i s t i n g residences. S. 168 would a l l ow a 25% t a x c r e d i t o r deduction on sums

up t o $4,000 spent f o r s o l a r energy equipment. Wilman concluded t h a t a 20%

marginal t ax bracket homeowner would need a 69% tax c r e d i t t o make s o l a r heat

compet i t i ve w i t h o i l and a 77% c r e d i t t o make i t compet i t i ve w i t h gas. (13)

This has r e s u l t e d i n t h e enactment o f a deduct ion o f 30% o f t h e f i r s t $1,500

and 20% o f the next $8,500 on a $10,000 s o l a r i n s t a l l a t i o n .

D i r e c t Subsidy

Cass s ta ted t h a t the general p u b l i c favors government subsidies t o encour-

age the use o f so la r energy. (32)

Low Interest Government Financing

Senate Bill 875 would grant 8-year loans to buyers of one to five-family

homes with solar systems at the rate at which the Treasury can borrow money

plus 0.5% of the administrative cost. S. 2163 would establish a solar energy loan administration to provide loans for the purchase of solar systems at a

rate of 2% for up to 25 years. S. 2087 would allow low-interest loans to

assist homeowners and builders in purchasing and installing solar heating. S.

622 would create low-interest loans and loan guarantee programs. Costello

found that interest-free loans were the most potent policy alternative that he investigated. (31) Peterson found that interest rate subsidies could more

than double solar energy use over the next decade in areas comparable to

Denver, Colorado. (33)

Investment Tax Credit

The current 10% investment tax credit could be extended to the cost of solar installation. The effect would be to reduce the cost of the investment

by the amount of the credit and therefore to increase the rate of return.

Costello found that a 50% investment tax credit would make onsite solar energy less costly than all fossil fuel rivals. With a 50% investment tax credit on

solar capital equipment, large onsite solar designs using storage and very lit-

tle fossil fuel backup would be the most economically attractive alternative

of those considered. (31)

Accelerated Depreciation

House Bill 6584 would permit either a 60-month amortization for federal

income tax purposes of solar heating and cooling equipment placed in non- residential structures or an investment tax credit for such equipment.

Mortgage Financing

House Rule 8524 would authorize loans by the Small Business Administration

to homeowners and builders for solar heating or combined solar heating/ cooling

equipment. The Federal Home Loan Bank Board could influence commercial banks'

lending policies on mortgates. The Federal Housing Administration and

Veterans' Administration could increase the maximum loan limits and the

loan-to-value r a t i o s . B a r r e t t , Epstein, and Harr formulated a v a r i e t y o f

lender-or iented i ncen t i ve op t ions t o increase t h e avai l a b i 1 i ty o f p r i v a t e

mortgage f i n a n c i n g f o r s o l a r homes. Incent ives aimed d i r e c t l y a t purchasers

were examined p r i m a r i l y as they might a f f e c t t h e w i l l i ngness o f lenders t o

make f i n a n c i n g a v a i l a b l e or as they might complement lender-or iented

incent ives . (34)

Insurance Requirements

The Federal Government cou ld reduce insurance costs by d i r e c t l y i n s u r i n g

b u i l d i n g s o r r e i n s u r i n g p r i v a t e insurance company p o l i c i e s , as i s done i n cer-

t a i n i n t e r c i t y areas suscept ib le t o p roper ty l oss because o f c i v i 1 d isorder .

The Federal Deposit Insurance Corporat ion o f f e r s a precedent. The P r i ce -

Anderson Act i s an example under which the Federal Government agrees t o

idemni fy t h e owner o r l i m i t losses i n t h e event o f ca tas t roph ic acc idents a t

nuclear power p lan ts .

Federal Compensation o f S ta te and Local Proper ty and Sales Taxes

Ten s ta tes c u r r e n t l y a l l ow an exclus ion o f p a r t o r a l l o f the value o f a

s o l a r energy system f o r a pe r iod rang ing from 5 years t o t h e l i f e o f t h e sys-

tem. Ruegg concluded t h a t exemption from an assumed 3% e f f e c t i v e p rope r t y t ax

and deprec ia t ion w r i t e o f f aga ins t both s t a t e and fede ra l t axab le income over 5

years had the l a r g e s t impact on owner cost o f a l l t h e exemptions analyzed.

However, none o f t h e f i s c a l i ncen t i ves analyzed would be s u f f i c i e n t t o make a

s o l a r system c o s t - e f f e c t i v e when app l ied alone. ( I 4 ) Peterson concluded t h a t

sa les t a x exemptions would have l i t t l e impact over t h e nex t decade i n areas

comparable t o Denver. (33)

Tax Free Bonds

The Federal Government has es tab l ished a precedent w i t h t h e Tennessee Val-

l e y Au tho r i t y and FNMA f o r t h e establ ishment o f t a x f r e e bonds.

Thought about the use o f f i s c a l p o l i c y t o reduce the cos t o f s o l a r energy

i s expansive. S i g n i f i c a n t l e g i s l a t i o n has been int roduced i n Congress b u t on l y

one o f the 19 b i l l s in t roduced i n the 94 th Congress was enacted. A consensus

has no t y e t been reached about p r i o r i t i e s on s p e c i f i c f i s c a l incent ives.

Conclusions

This review of current thought on solar incentives has formed the foundation for the research described in the following pages. The question of cost differentials between solar and conventional energy sources has been raised.

Concern has been expressed about property rights and statutory, regulatory, and

institutional restraints. Institutional changes have been discussed. Fiscal

policies which could result in an economically viable solar industry have been

reviewed. Future policy designed to increase the share of solar energy in the

national energy budget will likely draw upon this body of thought. However,

to do so without consideration of federal incentives that have been used to

stimulate energy production in the past would very likely result in unguided

thought, wasted resources, and lost federal expenditures. The achievement of

industrial strength and domestic comfort has been, to some extent, the result

of federal incentives to stimulate energy production. It is therefore neces-

sary to review these incentives if efficient solar energy policy is to be

established.

DEFINITION OF THE PROBLEM

It is hypothesized that the market for energy has been significantly dis-

torted by the creation of federal incentives to stimulate energy production.

If such distortions result in subsidized prices for energy, the result could v /

favor existing energy sources with established markets. Policy decisions

affecting solar energy development that are based on subsidized prices of com-

peting energy sources could prevent realization of optimum national energy

efficiency.

When price signals from the marketplace do not coincide with the goals and

objectives o f industry, consumer groups or public institutions, the perception

is one of market failure. Using perceived market failure as justification,

industry allocates resources to manipulate energy policy in order to gain

greater profits. Consumer groups seek lower prices. Scientists and adminis-

trators of public institutions influence energy policy to maintain or expand

their positions. Through economic, political, institutional and legal pres-

sures these groups attempt to rectify perceived market failures.

Using economic theory t o a i d i n problem d e f i n i t i o n , curve Se (F igure 1)

represents a supply curve f o r U.S. energy. The curve represents t h e range o f

energy q u a n t i t i e s t h a t would be marketed a t var ious p r i ces i n t h e absence o f

federa l incent ives . The shape o f t h e curve i s p r i m a r i l y determined b y t h e

ex is tence and l o c a t i o n o f known energy resources and the r a t e a t which a

stream o f technology can t rans form these resources i n t o power.

The market f o r energy e x i s t s a t the i n t e r s e c t i o n o f Se and the demand

f o r energy, De. Changes i n the demand and the r e s u l t a n t e f f e c t on p r i c e

cou ld be perceived as market f a i l u r e . Using perceived market f a i l u r e as j u s t i -

f i c a t i o n , pressures are created t o t r a n s f e r some o f the cost o f energy produc-

t i o n t o t h e p u b l i c sector. The r e s u l t i s an apparent supply curve t h a t i s

d i f f e r e n t from the r e a l supply curve.

Some o f the r e a l costs o f energy product ion are borne by the Federal Gov-

ernment through t h e c r e a t i o n and admin i s t ra t i on o f po l i cy , programs and pro-

j ec t s . The problem a t hand i s t o i d e n t i f y those fede ra l p o l i c i e s , programs and

p r o j e c t s which have r e s u l t e d i n extra-market pressures t o c rea te an apparent

supply curve f o r energy, represented by curve S: on Figure 1. To t e s t t h e

hypothesis t h a t t h e market f o r energy has been s i g n i f i c a n t l y d i s t o r t e d

by the c r e a t i o n o f f ede ra l i ncen t i ves t o s t imu la te energy product ion, i t i s

necessary t o q u a n t i f y t h e fede ra l expenditures f o r these incent ives . Th i s i s

done by s p e c i f y i n g t h a t area i n F igure 1 l y i n g between curve Se and S,:

APPROACH TO THE ANALYSIS

The ana lys is o f economic, p o l i t i c a l , i n s t i t u t i o n a l and l e g a l pressures

appl ied by i ndus t r y , consumer groups, and p u b l i c i n s t i t u t i o n s t o t r a n s f e r costs

t o the p u b l i c sector i s complex. Such ana lys is requ i res a d e t a i l e d i n t e r d i s -

c i p l i n a r y procedural map t o guide i n v e s t i g a t o r s through a maze o f i n t e r -

r e l a t i n g events. Such a map o f procedures i s presented i n Chapter I 1 as the

t h e o r e t i c a l bas i s f o r t h e analys is .

Thereafter, two approaches were taken simultaneously. S p e c i a l i s t s i n the

study o f government and p u b l i c i n s t i t u t i o n s took a broad perspect ive i n iden-

t i f y i n g and measuring i ncen t i ves created throughout the energy sector o f the

0 QUANTITY

F I G U R E 1. The Real and Apparent Market f o r Energy

economy, w h i l e engineers and micro-economists focused on i ncen t i ves c rea ted

along the t r a j e c t o r y o f t rans format ion f rom exp lo ra t i on and min ing through

t ransmiss ion and waste d isposal . The l a t t e r approach was o r i e n t e d t o t h e

energy i n d u s t r i e s : hydro, nuc lear , coal, gas, and o i l . E l e c t r i c i t y i s one of

t h e outputs o f t h e energy i n d u s t r i e s . The i n d i r e c t na ture o f t h i s energy form

precludes a complete ana lys is o f e l e c t r i c i t y i ncen t i ves t o be incorporated i n t o

t h e ana lys is o f t h e energy i n d u s t r i e s . Hence, an a d d i t i o n a l chapter analyzes

the i ncen t i ves t o generat ion and t ransmiss ion o f e l e c t r i c i t y . The f i n a l chap-

t e r sumar i zes t h e emp i r i ca l ana lys is presented i n t h e preceding seven chap-

t e r s and presents r e s u l t i n g i n s i g h t s as they r e l a t e t o t he development o f i n -

cen t ives t o encourage increased use o f s o l a r energy.

REFERENCES - CHAPTER I

E. W. Eaton, Solar Ener . Energy Research and Development Adminis t ra- t i o n , Washing&976, p. 1.

R. H. Bezdek and P. D. Maycock, Incent ives and B a r r i e r s t o t h e Develop- ment o f Solar Energy. J o i n t Conference o f the American Sect ion o f t h e I n t e r n a t i o n a l Solar Enerar Societv and So lar Enerav Societv o f Canada. - <-

Winnipeg, Canada, ~ u ~ u s t " i 9 7 6 . "

S. H. Bu t t , Incent ives f o r Solar Heating and Cool ing J u s t i f i c a t i o n , E f f e c t and Cost. Solar Energy Indus t r y Associat ion, Washington, D.C.

S. H. Bu t t , Government Ac t ion t o S t imu la te Accelerated Solar Development. Solar Energy Indus t r y Associat.ion, Washington, D.C., 1976.

A Nat ional Plan f o r Energy Research, Development, and Demonstration - Creat ing Energy Choices f o r the Future, ERDA 76-1, Energy Research and Development Adminis t rat ion, Washington, D.C., Vol 1, p. 63, 1976.

G. Bennington, M. Bohannon and P. Spewak, An Economic Analys is o f Solar and Space Heatinq. ERDA Contract E (49-1)-3764, The M i t r e Corporat ion f o r D i v i s i o n o f Solar Energy, ERDA, Washington, D.C., 1976.

G. 0. G. Lo f and R. A. Tybout, "Cost o f House Heating w i t h Solar Energy." Solar Energy, Vo. 14, 1973.

E. S. Davis, "P ro jec t SAGE Phase 0 Report." C a l i f o r n i a I n s t i t u t e o f Technology Environmental Q u a l i t y Lab Report No. 11, Pasadena, CA, 1974.

Solar Heating and Cool ing of Bu i ld ings . NSF RAN-74-021A-ZlE, Nat iona l Science Foundation, June 1974.

Solar Heating and Cool ing o f Bu i ld ings , Phase 0. NSF-RAN-74-0234, TRW Systems Group, Redondo Beach, CA, May 1974.

Solar Heating and Cool ing o f Bu i ld ings , Phase 0. Westinghouse E l e c t r i c Corporation, Balt imore, MD, May 1974.

J. E. Scott , R. W. Mel icher and D. M. Sc ig l impagl ia , Demand Anal.ysis, Solar Heating and Cool ing o f Bui ld ings, Solar Water Heating i n South F lo r i da : 1923-1974. Nat ional Science Foundation, Research Appl ied t o Nat ional Needs (RANN), Washington, D.C., p. 53, 1974.

J. Wilman, Solar Heatinq. BTM-76-11, Department o f Treasury, Washington, D.C., 1976.

14. R. T. Ruegg, Eva lua t ion o f I ncen t i ves f o r So la r Heating. NBSIR 76-1127, Nat iona l Bureau o f Standards, Department o f Commerce, Washington, D.C., 1976.

15. A. S. M i l l e r and G. P. Thompson, Research on Legal B a r r i e r s t o t h e U t i l i z a t i o n o f So la r Energy fo r Heat ing and Cool in . Environmental Law I n s t i t u t e , Washington, ERDA Contract No. E. (49-18 2528 EA-02-03 56-60-91, November 10, 1976. (The s t a t e u t i l i t y r e g u l a t i o n d iscuss ion draws h e a v i l y from a for thcoming book e n t i t l e d Energy E f f i c i e n c y i n Indus t ry : A Guide t o Legal B a r r i e r s and Oppor tun i t ies by Normal L. Dean.)

16. American Bar Foundation Legal Issues Related t o Use o f So la r Energy Systems. D r a f t r epo r t , American Bar Studies, Chicago, IL , August 1976.

17. Turn ing Toward the Sun, Vol. 1, Abst rac ts o f S ta te L e g i s l a t i v e ~ n a c t m e n t s o f 1974 and 1975 Regarding Solar Energy. Nat ional Conference o f S ta te Leg i s la tu res Renewable Energy P ro jec t , 1976.

18. A. S. M i l l e r , Another Perspect ive on t h e Sunr ights Issue. Environmental Law I n s t i t u t e , Washington, D.C., 1976.

19. M. W. E isens tad t and A. E. Utton, "Solar R igh ts and The i r E f f e c t on So la r Heat ing and Cool ing." Nat iona l Resources Journal, Vol 363, 1976.

20. A. S. H i rshberg and R. Schoen, " B a r r i e r t o Widespread U t i l i z a t i o n o f Res iden t i a l So la r Energy: The Prospects f o r Solar Energy i n U.S. Housing Indus t ry . " P o l i c y Sciences, December 1974.

21. J. P. Eberhard, Cons t ra in ts and Incen t i ves t o t h e Widespread U t i l i z a t i o n o f Solar Heat ing and Cooling. AIA Research Corporat ion, Washington, D.C., 1976.

22. Res iden t i a l So la r Heat ing and Cool ing Const ra in ts and Incent ives , A Review o f L i t e r a t u r e . Prepared by A r thu r D. L i t t l e , Inc., f o r t h e D i v i s i o n o f Energy, B u i l d i n g Technology and Standards, O f f i c e o f P o l i c y Development and Research, Department o f Housing and Urban Development, Washington, D.C., pp. 55-88, 1976.

23. A Federal Procurement Plan t o Accelerate Use o f So la r Energy. Don Sowle Associates, Inc., A r l i ng ton , VA, pp. 21-41, 1976.

24. Nat iona l Program f o r So la r Heat ing and Cool ing - Res iden t i a l and Commercial App l i ca t ions . ERDA-23A, Energy Research and Development Admin i s t ra t i on , Washington, D.C., 1976.

25. Res iden t i a l Energy from t h e Sun, U.S. Department o f Housing and Urban Development, Washington, D.C., 1975.

26. J. G. Asbury and R. 0. Muel ler , So la r Energy and E l e c t r i c U t i l i t i e s : Can They I n t e r f a c e ? Argonne Nat iona l Laboratory, Argonne, IL, 1976.

27. R. W. Larson, P o l i c i e s Which Could I n d i r e c t l y I n f l uence Solar Development. Georgia I n s t i t u t e o f Technology, A t lan ta , GA, undated.

28. J. B. Margo l in and G. C. Sponsler, Ana lys is o f F inanc ia l and Economic Incen t i ves f o r t h e Commercial Use o f So la r E n e r u . Unpublished paper, George Washington Un ive rs i t y , Washington, D.C., 1975.

29. W. Ahern e t al., Energy A l t e r n a t i v e s f o r C a l i f o r n i a : Paths t o t h e Future. R-1793-CSA/RF, The Rand Corporat ion, Santa Monica, CA, p. 155, 1975.

30. Correspondence w i t h J. M. N ic luss , Department o f the Treasury, Washington, D.C., October 18, 1976.

31. 0. Cos te l lo , Midwest ,Research I n s i t u t e Programs Deal ing w i t h I ncen t i ves and B a r r i e r s t o t he Commercial izat ion o f So la r Energy. Midwest Research I n s t i t u t e , Kansas City, MO, pp. 47-53, 1976.

32. R. C. Cass, Pub l i c Acceptance o f So la r Heat ing and Cool ing Systems f o r Bu i l d i ngs . U n i v e r s i t y o f Houston, Houston, TX, 1975.

33. C. H. Peterson, S imu la t ion o f t h e Impact o f F inanc ia l Incent ives on Solar Energy U t i l i z a t i o n f o r Space Cond i t ion ing and Water Heating: 1985. Department o f Economics, Utah Sta te Un ive rs i t y , Logan, UT, 1976.

34. D. B a r r e t t , P. Eps te in and C. M. Haar, F inancing t h e So la r Home: Under- s tand ing and Improving Mortgage Market R e c e p t i v i t y t o Energy Conservat ion and Housing Innovat ion. Regional and Urban Planning Implementation, Inc., Cambridge, MA., pp. 171-172, 1976.

11. A THEORETICAL APPROACH TO ANALYZING INCENTIVES FOR ENERGY PRODUCTION

This chapter presents a t h e o r e t i c a l approach f o r i d e n t i f y i n g and quan t i -

f y i n g fede ra l i ncen t i ves fo r energy product ion. The approach draws h e a v i l y

upon deduct ive reasoning f rom a body o f l o g i c , developed i n var ious d i s c i p l i n e s ,

f o r use i n s tudy ing governmental act ions. This approach forms the framework

used t o evaluate and s e l e c t t h e i n fo rma t i on presented i n subsequent chapters.

It prov ides a r a t i o n a l e f o r i n t e r p r e t i n g the complex maze o f ac t i ons and incen-

t i v e s t h a t have a f f e c t e d energy produc t ion i n t h e Un i ted States. Readers who

are not i n t e r e s t e d i n the cons t ruc ts developed t o guide the subsequent ana l ys i s

t o a complete t rea tment o f t h e problem a t hand may wish t o move d i r e c t l y t o t h e

emp i r i ca l chapters. Since the m a t e r i a l presented i n t h i s chapter represents

t h e development o f thought necessary t o complete t h e ana l ys i s i n t h e subsequent

chapters, i t has been pos i t i oned here.

"POLICY" VERSUS "POLICIES"

This d iscuss ion would be eas ie r i f the Federal Government had always had

an Energy Po l i cy . However, po l i cy , according t o one d i c t i o n a r y , means "any

course or p lan o f ac t ion , e s p e c i a l l y i n governmental o r business adminis t ra-

t i o n . " "Course o f ac t i onu i m p l i e s a degree o f comprehensive fo re thought

and consis tency t h a t has been miss ing from governmental ac t ions concerning

energy. Instead, t he government has taken a v a r i e t y o f ac t ions t o serve a

v a r i e t y o f purposes and these ac t i ons have had a v a r i e t y o f ef fects. Each

ac t i on may have been preceded by fo re thought and may have been cons i s ten t w i t h

t h a t forethought , b u t t h e c o l l e c t i o n o f ac t i ons has no t been. Therefore, t h e

c o l l e c t i o n o f energy-re lated ac t ions i s more a se r i es o f " p o l i c i e s " than a

"Pol icy. "

O f course, any c o l l e c t i o n o f ac t ions w i l l have some net e f f e c t , which

cou ld be labe led a de f a c t o Po l i cy . I n s i t u t a t i o n s where t h e n e t e f f e c t has

been the same over a pe r i od o f years, government observers tend t o do so.

However, t h i s i s mis leading because i t d i l u t e s the general understanding o f the

word Po l icy , which then becomes less meaningful t o descr ibe such a planned and

cons is ten t program, should one come i n t o being. ( 2 )

Boundaries o f t h e Discussion

Discussing governmental ac t ions i n a f i e l d t h a t lacks cons is ten t P o l i c y

i s d i f f i c u l t , s ince boundaries d e f i n i n g energy ac t ions are unclear. A l l gov-

ernmental ac t ions probably have a t l e a s t some i n d i r e c t relevance t o energy.

I f a cons i s ten t P o l i c y d i d ex i s t , t h e d iscussion cou ld focus on those ac t i ons

t h a t were p a r t o f the planned and cons is ten t program. For t h i s analys is , how-

ever, boundaries must be somewhat a r b i t r a r i l y defined.

F i r s t , t h i s d iscussion w i l l i nc lude o n l y those ac t ions taken by t h e Fed-

e r a l Government; re levan t ac t ions o f s t a t e and l o c a l governments are n o t con-

sidered. Second, the d iscussion covers o n l y those Federal Government ac t i ons

i n which major causes inc luded an attempt t o i n f l uence energy o r major e f f e c t s

inc luded some in f luence on energy. W i th in those l i m i t s , the d iscussion con-

s iders ac t ions r e l a t e d t o both product ion and consumption, al though product ion

receives the most emphasis. It a lso inc ludes ac t ions r e l a t i n g t o bo th increases

and decreases i n energy consumption o r product ion.

Energy product ion i s def ined as the t rans format ion o f na tu ra l resources

i n t o commonly used forms o f energy such as heat, l i g h t , and e l e c t r i c i t y . By

t h i s d e f i n i t i o n , the sh in ing o f the sun or t h e running o f a r i v e r are no t exam-

p les o f energy product ion, b u t t h e i n s t a l l a t i o n o f s o l a r panels o r t h e con-

s t r u c t i o n o f a h y d r o e l e c t r i c dam are. Energy consumption i s def ined as t h e use

o f one o f these common, "manufactured" forms o f energy. Under t h i s d e f i n i t i o n

sunbathing i s not energy consumption, bu t heat ing water by means o f a so la r

panel i s . I n bo th d e f i n i t i o n s , t h e c r u c i a l i ng red ien t i s t h e a p p l i c a t i o n o f

technology and resources t o change a na tu ra l resource i n t o a usefu l energy

form.

Determining Cause and E f f e c t

The use o f major causes or major e f f e c t s o f governmental ac t i on as bound-

a r i e s f o r t h e d iscussion requ i res s t i p u l a t i n g some methods f o r determin ing t h e

major causes and e f f e c t s o f a governmental act ion.

O f the many methods (o r "models") possib le, t h i s d iscussion w i l l use four .

We w i l l c a l l them "viewpoints" because t h i s term suggests t h a t any one obser-

va t ion o f something as complicated as a governmental ac t i on w i l l necessa r i l y

be incomplete. Each governmental ac t i on has many causes and e f fec ts , and no

one viewpoint can inc lude a l l o f them. The term viewpoint a lso suggests t h a t

any one observa t ion w i l l be somewhat d i s to r ted , s ince i t emphasizes some phe-

nomena and downplays others. Use o f more than one viewpoint i s necessary t o

ensure t h a t a l l t h e major phenomena have been adequately observed.

The f o u r v iewpoints used i n t h i s d iscussion come from f o u r types o f anal-

ys i s : economic, p o l i t i c a l , o rgan iza t iona l and l ega l . These p a r t i c u l a r f o u r

viewpoints have two major advantages. F i r s t , t hey are o f ten used t o study gov-

ernmental ac t ions (Table 1). The economic viewpoint, p a r t i c u l a r l y i n an extreme

form t h a t t r e a t e s the e n t i r e government as an "economic man," has been the over-

whelmingly dominant model i n f o r e i g n p o l i c y ana lys i s (3 ) and has been used a

great deal i n domestic p o l i c y analysis, p a r t i c u l a r l y by economists such as

~ o w n s ( ~ ) and ~ c h e l l i n ~ . ( ~ ) The p o l i t i c a l v iewpoint, i n var ious forms, has

been used by such well-known p o l i t i c a l s c i e n t i s t s as David B. ruma an(^) and

Richard E. Neustadt. ('I The organ iza t iona l viewpoint, o f t e n c a l l e d bureauc-

r a t i c o r i n s t i t u t i o n a l theory, has been a p r i n c i p a l t o o l f o r governmental

observers such as Michel and Graham ~ l l i s o n . ( ~ ) The l e g a l view-

po in t , as t h e term i s used i n t h i s discussion, i s used by lawyers o r f o r a l e g a l

audience, o r even i n other s i t ua t i ons , as i n de Tocquev i l le 's DEMOCRACY I N

AMERICA.

The second advantage o f these p a r t i c u l a r f o u r viewpoints i s t h a t they vary

along two p a r a l l e l continua, so one can be sure o f h i g h l i g h t i n g d i f f e r e n t phe-

nomena i n moving from one viewpoint t o another. The f i r s t continuum i s t h e

i n t e r c h a n g e a b i l i t y o f the e n t i t i e s viewed, the a b i l i t y t o rep lace one e n t i t y

i n a given s i t u a t i o n w i t h another w i thout changing the outcome. The f o u r view-

po in t s are ranked i n t h e f o l l o w i n g order w i t h respect t o i n te rchangeab i l i t y :

1. Economic

2. P o l i t i c a l

3. Organizat ional

4. Legal.

I n other words, e n t i t i e s i n the economic viewpoint are most interchangeable;

presumably each "economic e n t i t y " i n t h e same s i t u a t i o n would a c t t h e same.

The actors ( i nd i v idua ls , groups, and organ iza t ions) t h a t make up the p o l i t i c a l

v iewpoint are l ess interchangeable; t h e components w i t h i n t h e o rgan iza t i ona l

viewpoint are even less so; and the a u t h o r i t a t i v e bodies t h a t ac t w i t h i n the

l ega l v iewpoint are l e a s t interchangeable. The second continuum i s t h e

e q u a l i t y o f in f luence among the e n t i t i e s involved. Once again, the v iewpoints

range i n t h e same order. The economic v iewpoint assumes t h e i n f l u e n c e among

e n t i t i e s i s most equal; t h i s f a c t o r decreases from the p o l i t i c a l t o t h e

organ iza t iona l t o t h e l e g a l viewpoint, where a u t h o r i t a t i v e bodies by

d e f i n i t i o n can ove r ru le t h e i r i n f e r i o r s and can be over ru led by t h e i r

super iors.

The next f o u r sect ions w i l l descr ibe each viewpoint i n more d e t a i l ,

o u t l i n i n g t h e energy-re lated causes and e f f e c t s h i g h l i g h t e d by t h a t

viewpoint. Each d e s c r i p t i o n uses a reference example ( I0 ) ( t he Pr ice-

Anderson insurance p rov i s ions f o r nuclear f a c i l i t i e s ) t o i l l u s t r a t e t h e type

o f in fo rmat ion provided by t h a t viewpoint.

THE ECONOMIC VIEWPOINT

I n the economic viewpoint, producers make product ion decis ions based on

t h e p r i c e s o f var ious l e v e l s o f inputs, t h e technology a v a i l a b l e t o t rans fo rm

those inputs i n t o a common form o f energy, and the p r i c e o f var ious amounts o f

t h a t energy form. (I1) Consumers make decis ions based on t h e i r des i re f o r

var ious goods and serv ices t h a t use energy and t h e p r i c e o f those goods and

services. The p r i c e o f an energy-using i t em inc ludes bo th the purchase p r i c e

o f t h e i tem and t h e p r i c e o f t h e amount o f energy requ i red t o use t h a t item.

I n a mixed economy, such as t h a t of the Uni ted States, the government

contains some share o f t h e n a t i o n ' s producers and consumers. It a lso has the

power t o change cond i t i ons i n the marketplace. I n ac t i ng t o change cond i t ions

i n the marketplace, t h e Federal Government ac ts as a u n i t a r y and a n a l y t i c

decision-maker. (I2) It uses a cons is ten t se t o f ob jec t i ves t o evaluate a

r e l a t i v e l y complete s e t o f a l t e r n a t i v e ac t ions according t o t h e i r r e l a t i v e l y

well-known outcomes. I f the outcomes o f an a l t e r n a t i v e are uncer ta in, the

Federal Government weighs t h e value o f an outcome by t h e est imated p r o b a b i l i t y

o f i t s occurrence. (12)

Causes o f Governmental Act ions

For the economic viewpoint, the Federal Government takes ac t i on because

i t wants t o change a market outcome, such as t h e r e l a t i o n s h i p between

product ion and p r i c e or between consumption and p r i ce . Product ion may be

considered too h i g h r e l a t i v e t o p r ice , as when c e r t a i n energy product ion

processes do no t t a k e i n t o account t h e p o l l u t i o n they produce. Product ion may

be thought t oo low r e l a t i v e t o p r ice , as when c e r t a i n energy product ion

processes do no t t ake i n t o account t h e c o n t r i b u t i o n t o na t i ona l s e c u r i t y they

cou ld make. S i m i l a r l y , consumption cou ld be t o o h igh r e l a t i v e t o p r i ce , as

when consumers f a i l t o take i n t o account the f u t u r e or otherwise a l t e r n a t i v e

uses t h a t might be made o f t h e energy o r na tu ra l resource they are buying. I n

other cases, consumption cou ld be too low r e l a t i v e t o p r ice , as when consumers

f a i l t o take i n t o account some o f t h e bene f i t s t h a t stem from use o f a

p a r t i c u l a r energy form such as the decreased use o f another energy form.

Decisions made i n the p r i v a t e sector o f the economy may f a i l " t o take

i n t o account p u b l i c values" f o r a number o f reasons: (13)

1. E x t e r n a l i t y : The decis ion may a f f e c t p a r t i e s other than the one

making t h e dec i s ion (e.g., widespread p o l l u t i o n may r e s u l t ) .

2. Nonr i va l r y : One person's consumption o f a good or serv ice may no t

d imin ish t h e b e n e f i t s ava i l ab le f o r o ther consumers. Each person has a

tendency t o w a i t f o r the other person t o buy t h e goods. Such goods might be

underproduced. P rov i s ion f o r na t i ona l defense i s an example.

3. Nonexc ludab i l i t y : Excluding the nonpayers from a good or se rv i ce

may be i n e f f i c i e n t o r impossible. Some goods o r services, such as n a t i o n a l

defense, ill u s t r a t e bo th n o n r i v a l r y and nonexc ludab i l i t y .

4. Uncer ta inty : A p r i v a t e dec is ion concerning product ion or

consumption may i nvo l ve r i s k s and t h e p r i v a t e decision-maker may have a

d i f f e r e n t to lerance f o r r i s k than soc ie t y ( o r a m a j o r i t y o f i t s members)

does. Use o f a dangerous substance i s a t y p i c a l case. (14)

5. Delay: A dec is ion concerning product ion o r consumption may i n v o l v e

a delay between t h e dec i s ion and some o f i t s e f f e c t s and t h e decision-maker

may have a d i f f e r e n t to le rance f o r delay than s o c i e t y does. An e f f o r t t o

preserve a resource f o r f u t u r e generat ions i s a t y p i c a l case.

6. Merit: Many i n d i v i d u a l s may value a good or serv ice l ess ( o r more)

than s o c i e t y t h i n k s they should. Education i s u s u a l l y p o s i t i v e l y valued and

e f f o r t s are made t o encourage i t s consumption. Alcohol, tobacco, and

na rco t i cs are u s u a l l y nega t i ve l y valued and e f f o r t s are made t o discourage

t h e i r consumption.

7 . Inequ i ty : An i n i t i a l m a l d i s t r i b u t i o n o f resources may lead t o l ess

consumption by those i n i t i a l l y disadvantaged than s o c i e t y t h i n k s i s

equi table. E f f o r t s t o p rov ide food, c lo th ing , and s h e l t e r f o r the needy

i l l u s t r a t e t h i s phenomenon.

8. Noncompetition: The r e l a t i o n s h i p between the s i z e o f the most

e f f i c i e n t f i r m and t h e s i z e o f t h e market may keep t h e market from be ing

compet i t ive, so t h a t n a t u r a l workings o f the market do n o t produce the outcome

soc ie t y wants. P rov i s ion o f telephone se rv i ce i l l u s t r a t e s t h i s phenomenon.

9. Interdependence: Whether one i n d i v i d u a l w i l l do something depends

on h i s o r her conf idence t h a t o thers w i l l do t h e same. Enforc ing c h i l d l abo r

laws on a l l compet i tors so t h a t no compet i tor gains an advantage by v i o l a t i n g

those laws i l l u s t r a t e s t h i s f ac to r .

10. Transact ion d i f f i c u l t i e s : The d i f f i c u l t y o f achiev ing agreement

among a l l t h e necessary p a r t i e s through market barga in ing may make i n d i v i d u a l s

re fuse t o seek such agreement, al though each would welcome an agreement

imposed f rom outs ide t h e market. Uniform weights and measures, c o n t r a c t

terms, and cur renc ies a l l i l l u s t r a t e t h i s f a c t o r .

26

More than one of these reasons may be present in a single s i tua t ion . The

case for government intervention i s strongest i n s i tua t ions where several

reasons are present. These reasons r e su l t i n a perceivable dispar i ty between

the allocation of resources resul t ing from exis t ing price signals and the

goals of groups thought t o a r t i cu l a t e the preference of a broad segment of

society.

Effects of Governmental Actions

In the economic viewpoint, governmental actions have three types of

effects . A price change effected by the governmental action causes the price

of a given level of energy use or an energy-using device t o be higher or lower

than i t would be without the governmental action. A technological change

effected by governmental action, such as s c i en t i f i c research, changes the

amount of an energy form produced from a given level of inputs or the amount

of an energy form used by a given type of device. A th i rd type of change i s a

t a s t e change where a governmental action such as advertising changes consumer

desire fo r a given type of energy-using device.

Summary of the Economic Viewpoint

In summary, the economic viewpoint leads one t o look fo r such causes of a

governmental action as the f a i l u r e of production processes or consumption

decisions t o take into account public values. I t leads one t o look fo r such

e f fec t s of a governmental action as technical change, price change, or t a s t e

change. To use the Price-Anderson example, the insurance provisions were

created because without them producers would n o t be will ing t o produce enough

nuclear energy a t any price to s a t i s f y public goals l ike national security.

The producers were less to le ran t of r i sk than society could be and l e s s

interested in the e f fec t s on national secur i ty than society had t o be. The

e f fec t of the provisions was t o lower the price of insurance t o the producer

and to lower the cost of accidents i f they did occur, thus lowering the costs

of production t o the producers. Consequently, the producer was not will ing t o

produce more nuclear energy a t any given price than he would have been without

the action.

If the Uni ted States approached a l a i s s e z f a i r e system o f cap i ta l i sm, t h e

economic p o i n t o f v iew cou ld e l im ina te t h e empi r ica l ana lys is o f t h i s repo r t .

Such i s not the case. The ten reasons must be considered. I n add i t ion , they

must be considered i n unison w i t h o ther po in t s o f view.

THE POLITICAL VIEWPOINT

I n the p o l i t i c a l v iewpoint on energy processes, i nd i v idua ls , groups, and

organ iza t iona l p a r t i c i p a n t s i n s i d e and outs ide o f government bargain w i t h each

other t o ob ta in government ac t ions t h a t w i l l f avo r t h e goals they

independently seek. The fede ra l government i s n o t a u n i t a r y ac to r ou ts ide t h e

energy market. It i s a c o l l e c t i o n o f p o l i t i c a l groups tha t , together w i t h

nongovernmental groups, forms an energy barga in ing arena. For example,

producers o f a p a r t i c u l a r form o f energy may seek p o l i c i e s t h a t w i l l lead t o

g reater p r o f i t s . Consumer groups may seek lower p r i ces . Env i ronmenta l i s ts

may seek less p o l l u t i o n . Groups concerned w i t h na t i ona l s e c u r i t y may seek a

na t i ona l s t o c k p i l e o f energy resources. Because resources are scarce, n o t a l l

groups w i l l get every th ing they want. Since barga in ing power i n unequal, some

groups w i l l get more o f what they want than o thers w i l l . The Congress and t h e

execut ive o f f i c e s are c r u c i a l e n t i t i e s i n the barga in ing arenas because most

f ede ra l act ions s t a r t w i t h s ta tu tes and appropr ia t ions from Congress and

regu la t i ons and ac t ions from the execut ive o f f i c e s .

Causes o f Governmental Act ions

Governmental ac t i ons take p lace as a r e s u l t o f t h e barga in ing game

between p o l i t i c a l ac to rs pushing f o r a g iven a c t i o n and t h e ac tors r e s i s t i n g

t h a t ac t ion . The r e s u l t i n g ac t i on may c l o s e l y resemble what one actor, o r

group o f actors, wanted o r i t may be d i f f e r e n t from what any ac to r wanted.

The r e s u l t i n analogous t o a " r e s u l t a n t vec tor " i n vector add i t ion . Depending

on t h e r e l a t i v e s t rengths o f t h e i n i t i a l vectors, t h e r e s u l t a n t may

approximate one o f the i n i t i a l vectors o r may take o f f i n some e n t i r e l y new

d i r e c t i o n . ( 3 )

Predicting which actors are apt to get what they want is very difficult,

but some factors seem to be reliably associated with success. One of the most important is intensity of preference; that is, how valuable a particular

action would be to the groups seeking it, versus how damaging it would be to

the groups opposing it. Groups may oppose a policy not only when they want an

alternative action, but also when they want to use the resources involved for

some other action (as in budget fights). For instance, producer groups

seeking higher profits generally find that government actions are most

valuable to them when some or all of the following conditions exist: 1) private cartelization is unfeasible or very costly, 2) the product has a

relatively inelastic demand, 3) production requires a relatively high capital

input, 4) constrained entry exists, and 5) the industry lacks high

concentration. In addition, significant differences among the firms in a

producer group may induce a desire on the part of each to participate because

one firm cannot rely on another to represent a favorable position in the

political bargaining. (15)

Another factor that seems reliably associated with success is the political power of the groups involved. Sources of political power have been

extensively analyzed. (I6) To summarize those analyses, sources of political

power include official positions in the crucial arenas of Congress and the

executive offices; access to those in official positions; resources like

money, publicity and votes; and the skill to use the various resources

well. (17)


In the political viewpoint, actions already effected can change the

bargaining situation for the next potential action. On one hand, the groups

most successful in obtaining favorable actions gain resources and other

sources of political power that make them better able to obtain further

favorable actions (although in some circumstances a group may emerge from a

successful battle with its political power greatly reduced). (I7) On the

other hand, a successful group may be satisfied for a while, so its intensity

of preference will temporarily be lowered. Alternatively, this group may have

engaged in logrolling or other forms of trade in order to obtain the action, so will have to devote at least some of the new power to repay this debt, which may include supporting some action other than one they want. The general presumption is that the first effect predominates over the second, so the usual result is that success, after a possible delay, breeds more success unless some external event occurs. For example, oil producers may obtain

favorable action until a senior senator well-disposed toward oil producers retires; then they are apt to succeed less well.

Summary of the Political Viewpoint

In summary, the political viewpoint leads one to look for such causes of an action as bargaining by groups with a high intensity of preference for that

action and high political power. It leads analysts to look for changes in the

political power of the successful groups, tempered by some decrease in intensity due to satisfaction and trades.

To use the Price-Anderson example, the insurance provisions were created

because interests inside and outside of Congress (notably, the Joint Committee

on Atomic Energy and the nuclear industry) had an intense interest in such

provisions and the political power (positions, resources, and ski1 1) to

bargain for that result. Their effect was to increase the resources available

to the groups obtaining them. The Joint Committee gained in prestige and the

nuclear industry grew, so those groups were more likely to get what they

wanted or protect themselves from what they did not want in the next round of bargaining.

THE ORGANIZATIONAL VIEWPOINT

In the organizational viewpoint of energy processes, various activities

relevant to energy are conducted by a series of organizations. Each

organization has certain characteristics, such as size, operating procedure,

and structure, that determine how it will act in an energy production or consumption process. These organizations include firms that produce energy,

firms that consume energy, public agencies that regulate energy, and other organizations, such as consumer and environmental groups, that seek a role in

energy. The government itself is a collection of organizations.

Organizat ions i n the government and the energy market do no t make deci -

s ions i n t h e way t h e economic viewpoint assumes the government does. Although

t h e economic v iewpoint assumes t h a t the Federal Government and each consumer

and producer are un i ta ry , a n a l y t i c decision-makers, t h e organ iza t iona l view-

p o i n t assumes t h a t the Federal Government and many producers and consumers are

mu1 t i p l e , cybe rne t i c decision-makers. (I2) I n other words, t h e economic view-

p o i n t assumes t h a t decision-makers r e a c t t o complicated decis ions w i t h unce r ta in

outcomes by developing a cons is ten t se t o f ob jec t ives , examining a r e l a t i v e l y

complete s e t o f a l t e r n a t i v e s i n l i g h t o f those ob jec t ives , and e x p l i c i t l y d i s -

count ing f o r uncer ta in ty . The organ iza t iona l viewpoint assumes t h a t decis ion-

makers r e a c t t o complicated decis ions w i t h uncer ta in outcomes by apply ing s e t

procedures. Such procedures do not begin u n t i l an e x p l i c i t problem occurs,

consider o n l y a l i m i t e d se t o f ob jec t i ves one a t a time, consider o n l y a l i m -

i t e d set o f a l t e r n a t i v e s , t ake the f i r s t acceptable one, and use var ious

methods t o assume away uncer ta in ty .

Cyert and March i n THE BEHAVIOR THEORY OF THE FIRM (I8) descr ibe these

search procedures. They s t a t e t h a t one can analyze t h e o rgan iza t i ona l process

o f decision-making i n terms o f the va r iab les t h a t a f f e c t o rgan iza t iona l goals,

those t h a t a f f e c t o rgan iza t iona l expectat ions, and those t h a t a f f e c t organiza-

t i o n a l choice. (18, p. 115)

Organizat ional Goals. Var iables a f f e c t i n g the r e l a t i v e importance o f

goals i nc lude t h e composit ion o f t h e organ iza t ion , t h e d i v i s i o n o f labor i n

decision-making, and the s p e c i f i c problems f a c i n g the organ iza t ion . Var iables

t h a t a f f e c t the a s p i r a t i o n l e v e l on any goal inc lude t h e o rgan iza t i on ' s pas t

goals, the o rgan iza t i on ' s past performance, and the past performance o f other

"comparable" organizat ions.

Organizat ional Expectat ions. Var iables t h a t a f f e c t the i n t e n s i t y and suc-

cess o f search i n c l u d e t h e ex ten t t o which goals are achieved and t h e amount

o f o rgan iza t iona l slack. Var iables t h a t a f f e c t the d i r e c t i o n o f search i nc lude

t h e nature o f t h e problem s t i m u l a t i n g the search and t h e o rgan iza t i ona l compo-

nent a c t u l l y c a r r y i n g out the search.

Organizat ional Choice. The key issues are the d e f i n i t i o n o f t h e problem

t h a t requ i res a choice, t h e standard dec is ion making r u l e s appl ied, and t h e

order i n which a l t e r n a t i v e s are considered. Var iables a f f e c t i n g those issues

inc lude the past experience o f the organ iza t ion w i t h a given se t o f dec is ion

ru les , t h e pas t record o f slack, t h e organ iza t iona l component a c t u a l l y c a r r y i n g

out the search, and the past experience i n cons ider ing a l t e rna t i ves .

Organizat ional goals, expectat ions, and choice are k n i t t e d together by

f o u r phenomena: 1 ) quas i - reso lu t ion o f c o n f l i c t , 2) unce r ta in t y avoidance,

3) p rob lem is t i c search, and 4) o rgan iza t iona l learn ing. (18,~.116-126)

1. Quas i - reso lu t i on o f c o n f l i c t . Organizat ions reduce c o n f l i c t by

d i v i d i n g themselves i n t o components and l e t t i n g d i f f e r e n t components make dec i -

s ions about d i f f e r e n t goals; by s t r i v i n g f o r no more than "acceptable" perform-

ance on each goal; and, when c o n f l i c t s t i l l remains, b y f a v o r i n g one goal a t

one t ime and another the next t ime.

2. Unce r ta in t y avoidance. Organizat ions avoid unce r ta in t y by empha-

s i z i n g shor t - run r e a c t i o n t o shor t - run feedback r a t h e r than t r y i n g t o a n t i c i -

pate long-run events.

3. Prob lemis t ic research. Organizat ional search has th ree major charac-

t e r i s t i c s . F i r s t , it i s mot iva ted- -s ta r ted by t h e d iscovery o f a problem and

stopped by the d iscovery o f a so lu t i on . Second, i t i s simpleminded--using a

simple model o f c a u s a l i t y u n t i l fo rced by f a i l u r e t o f i n d a s o l u t i o n t o use a

more complex model. Organizat ions w i l l search i n the neighborhood o f t h e prob-

lem and pas t a c t i v i t y before cons ider ing new areas. Third, search i s biased--

the ac tua l conduct of the search i s very dependent on the c h a r a c t e r i s t i c s o f

t h e people i n t h e o rgan iza t i ona l component conduct ing it.

4. Organizat ional learn ing. Organizat ions modi fy t h e i r behavior i n the

l i g h t o f pas t experience. They may change goals, t h e p a r t s o f t h e environment

t o which they respond, o r the r u l e s they use i n searching f o r so lu t ions .

F igure 2 dep ic ts the r e l a t i o n s h i p s o f these concepts. (18)

One o f the most important consequences o f cybernet ic decision-making i s

t h a t d i f f e r e n t o rgan iza t ions may make d i f f e r e n t decisions, even though t h e y

face the same problems and have the same ob jec t ives .

Quasi-resolution I Uncertainty I Problemistic I OrgonizatianoI of conflict 1 ovoidonce I scorch I learning

1 I Goals as indepen- I Feedback-react Motivated search. I Ada tation o t goals. dent constraints. decisian 'simple-minded search1 idoptation in Local rattonality. I procedures. I Bias in search I attention ruler. Acceptable-level 1 Neqatioted I Adaptation in dectsoan rules. environment I / search rules

Sequential atten- I tion to goals I I I

I

FIGURE 2. A Diagram of Organizational Decision Making

I

I - I 1 I I I 1.

I I

I I I

Observe feedback from environment

Causes o f Governmental Ac t ion

I n the o rgan iza t i ona l viewpoint, governmental ac t ions take p lace when a

governmental o rgan iza t ion responds t o a dec is ion problem. The dec i s ion pro-

blem f o r the governmental o rgan iza t ion may be created by events (such as a

b i t t e r w i n t e r ) o r by ac t ions o f o rgan iza t ions ou ts ide t h e government. The

l a t t e r s i t u a t i o n occurs when a nongovernmental o rgan iza t i on ' s procedures f o r

responding t o a dec i s ion problem lead i t t o take ac t ions t h a t e l i c i t a govern-

mental response.

The k inds o f ac t ions t h a t take place the re fo re depend on the charac ter -

i s t i c s o f t h e organ iza t ions t a k i n g act ion. For instance, t h e ex is tence o f a

governmental o rgan iza t ion w i t h a concern f o r the energy market makes ac t i ons

a f f e c t i n g energy more l i k e l y than they would be i f such organ iza t ions w i t h

such concern d i d not e x i s t .

Many analysts have t r i e d t o o u t l i n e the c h a r a c t e r i s t i c s t h a t a f f e c t orga-

n i z a t i o n a l response, as shown i n t h e organ iza t iona l column o f Table 1. Graham

A l l i s o n says the c r u c i a l quest ions are: (3yp.257) How ( w i t h what procedures)

does t h e organ iza t ion generate in fo rmat ion about a problem? How does t h e

organ iza t ion generate a l t e r n a t i v e responses? How does the organ iza t ion imple-

ment t h e chosen response? Marc Roberts, i n a recent summary o f t h e organiza-

t i o n a l ana lys is l i t e r a t u r e , (I9) suggests t h a t the answers t o c r u c i a l ques-

t i o n s l i k e these depend on t h e f o l l o w i n g fac to rs :

1. Factors i n the ex te rna l environment, such as the amount o f u n c e r t a i n t y

and t h e amount o f compet i t ion from o ther organizat ions.

2. Factors i n the organ iza t ion i t s e l f , such as i t s size, i t s s t ruc tu re , and

i t s s t ra tegy (normal goals and normal a c t i v i t i e s ) .

3. Factors i n the o rgan iza t i on ' s personnel, such as t h e i r t r a i n i n g and

experience and t h e i r experiences w i t h the o rgan iza t i on ' s formal and

in fo rmal means o f se lec t ion , moni tor ing, and reward.

E f f e c t o f Governmental Act ions

I n the organ iza t iona l viewpoint, governmental ac t ions e i t h e r change which

organ iza t ions respond t o a given dec is ion problem o r they change t h e

TABLE 1. Prominent Users o f the Four Viewpoints

Viewpoints Economic

Prominent von Neuman and Morgensterm (1947)

Downs (1957) Bould ing (1959) S c h e l l i n g (1960) Baumol (1961) Snyder (1961) Rapoport (1965) Woh ls te t te r (1965) G i l p i n (1968) Axel rod 11970) Quester ( w o j Meadows e t a1

(1972) Knorr (1973) Melman (1974)

P o l i t i c a l

Lindblom (1954)

Dahl (1957) L i p s e t (1960) Matthews (1960) Almond (1961) Key (1961)

Lane (1962) Hunt ington (1968) Lowi (1969) Seidman (1970) Fenno (1973)

Organ iza t iona l

Bernard (1936)

Simon (1945) Parsons (1949) Whyte (1~956) March (1958)

Deutsch (1966) A r g y r i s (1967) Thompson (1967) Merton (1968) Barnet (1972) Ha lpe r i n (1973) Ste inbruner (1974)

Legal

de Tocquevi 1 l e (1832)

Har t and Sacks (1956) Vose (1958) Schneidhauser (1962) Shapiro (1964) Grossman (1966) M i l l e r (1966) Tanenhaus (1966) Casper (1970) '

Danelski (1970) Fa lk (1971)

W i l l r i c h (1973)

(a ) See the references f o r t h i s chapter f o r complete c i t a t i o n s .

c h a r a c t e r i s t i c s o f the organ iza t ions t h a t do respond. I n e i t h e r case, t h e

changes are ap t t o produce new procedures f o r responding t o a given t ype o f

dec is ion problem.

As an example o f the f i r s t case, a government a n t i t r u s t or t ax p o l i c y may

i n f l uence whether o f no t o i l companies become invo lved w i t h o the r forms o f

energy. I f they do become involved, they may have expe r t i se and resources t o

use t h a t other o rgan iza t ions would not. On t h e o ther hand, however, t h e y may

have reasons f o r de-emphasizing product ion t h a t o rgan iza t ions w i thout i nvo l ve -

ment i n competing energy sources would not have. For an example o f t h e second

case, government regu la t i ons concerning a p a r t i c u l a r form o f energy may r e q u i r e

energy companies t o h i r e new types o f people and c rea te new procedures f o r

making energy decisions.

Summary o f t h e Organizat ional Viewpoint

I n summary, the organ iza t iona l viewpoint leads one t o look f o r such causes

o f a governmental a c t i o n as organ iza t iona l response t o dec is ion problems caused

by events or the ac t ions o f other organizat ions; i t leads one t o look f o r such

e f f e c t s as changes i n which organ iza t ion does what. To use t h e Price-Anderson

example, the insurance p rov i s ions were created because the appropr iate organ i -

za t ions were i n ex is tence and had t h e appropr ia te c h a r a c t e r i s t i c s t o design and

c rea te them. The Atomic Energy Commission and the J o i n t Committee on Atomic

Energy were a v a i l a b l e t o design and he lp c rea te t h e incent ives , t h e l a r g e f i r m s

making up the nuclear i n d u s t r y were able t o c o n t r i b u t e subs tan t i a l help, and

each stood t o gain s u b s t a n t i a l l y i f t h e p rov i s ions came i n t o being. The

e f f e c t s o f the p rov i s ions were t o a l low and i n some cases r e q u i r e l a r g e and

otherwise powerful o rgan iza t ions such as t h e AEC and t h e nuclear f i r m s t o

become even b igger and t o work together ( a t l e a s t t o the ex ten t o f h e l p i n g t o

i nsu re each o ther ) .

THE LEGAL VIEWPOINT

I n the l e g a l viewpoint o f energy processes, p a r t i e s e s t a b l i s h and modi fy

l e g a l r e l a t i o n s h i p s among themselves and between themselves and th ings . The

government, in this viewpoint, is a collection of authoritative bodies for

establishing and modifying legal relationships. Moreover, the collection of bodies is arranged in a fairly definite hierarchy.

The relationships among parties include contracts between buyers and

sellers and laws between the Federal Government and others. In energy, the

relationships between parties and things include not only the ownership or leasing of natural resources but also patented or licensed operation of a pro-

duction process, although some evidence exists that the Federal Government is

more apt to support and protect ownership and use of resources than of manu-

f acturing processes. (20)

Together, the relationships form a "great pyramid of legal order. ,,(21)

In roughly descending order, the pyramid consists of constitutions, constitu-

tional interpretations, statutes, statutory interpretations, executive orders,

administrative orders, administrative regulations, administrative interpreta-

tions, and a large collection of privately established relationships such as

organizational charters and commercial contracts.

Causes of Governmental Actions

In the legal viewpoint actions take place because a body with the author-

ity to make law does so, usually on the insistence of parties appearing before

it. Courts hear cases and decide them. Congress hears testimony and passes

statutes. The President issues executive orders. The various agencies issue

regulations in response to requests by others. Even the buyer and seller,

acting as a body, create "law" between them by writing and signing a contract

because each wants to exchange something.

A major emphasis of the legal viewpoint is that each instance of this law-making has to follow certain procedures and fit within certain substantive

boundaries set by the existing law with greater authority. The constitution sets the most authoritative bounds; statutes or court decisions come next,

depending on the situation; and remaining legal actions must act within the

bounds set by all of these. If they do not, a court may declare them null and

void.


As reflected in the legal viewpoint, governmental actions have the effect

of changing the permissible and actual relationships among parties and between

parties and things. They determine what energy activities can take place and

have a major influence on what energy activities will take place. For example, the U.S. does not allow private individuals to own "sun rights. " ( 2 2 ) T,,,,~ private individuals have limited action in uses of the sun produce energy. For another example, statutes and regulations set out requirements for the

leasing of federally-owned minerals, including who can lease them and what procedures potential and actual lessees must follow. (23 ) For still another

example, taxes can determine what percentage of the revenue from selling a

particular form of energy at a given price will go to the government and what

percentage will thus be left to cover expenses and provide a profit to the producer. (23

Summary of the Legal Viewpoint

In summary, the legal viewpoint leads one to look for such causes of a governmental action as a declaration of law by an authoritative body that has

heard parties ask for that declaration. It leads one to look for such effects

of the action as changes in relationships among parties and things.

To use the Price-Anderson example, the insurance provisions were created

because certain parties were dissatisfied with the normal legal relationship

between energy producers and accidents in the nuclear production process.

Energy producers were liable, under many conditions, for much of the damage

caused by those accidents. Congress agreed to change that relationship. The effect of the insurance provisions was to alter, through a statute, the

relationships between energy producers and accidents. Under the new scheme,

energy producers would have their liability limited. The government helped in meeting that liability, but in turn would have to give up some of the limits

on the conditions of liability and would have to help pay for the liability

insurance.

THE INTERRELATIONSHIPS AMONG THE FOUR VIEWPOINTS

Table 2 l i s t s t he causes and effects o f governmental ac t ions h i g h l i g h t e d

by each o f t h e f o u r viewpoints. Note t h a t t h e v iewpoints may complement each

o ther . Any s i n g l e governmental ac t i on may have some o r a l l o f these causes

and some o r a l l o f these e f f e c t s . For example, w h i l e t he Price-Anderson

insurance p rov i s i ons changed the r e l a t i o n s h i p between produc t ion and pr ice ,

t hey a lso changed t h e p o l i t i c a l power o f t h e groups involved, helped determine

which o rgan i za t i ons would be invo lved i n nuclear energy, and changed the l e g a l

r e l a t i o n s h i p s between producers and t h e acc idents stemming f rom t h e i r

p roduc t ion processes.

TABLE 2. Causes and E f f e c t s o f Governmental Act ions

Viewpoint Causes E f f e c t s

Economic P r i ce s igna l s t h a t f a i l t o Technical and r e f l e c t some s o c i a l values p r i c e changes

P o l i t i c a l Bargain ing f o r ac t ions by Changes i n t he bene- groups w i t h h igh i n t e n s i t y f i t s and p o l i t i c a l o f preference and h igh power o f t he p o l i t i c a l power groups invo lved

Organ iza t iona l A c t i v i t i e s t o design, c rea te Changes i n which and use ac t i ons by organiza- o rgan iza t ions are t i o n s w i t h appropr ia te invo lved c h a r a c t e r i s t i c s

Legal A request by i n t e r e s t e d Changes i n t he l e - p a r t i e s f o r an a u t h o r i t a t i v e ga l r e l a t i o n s h i p s body t o dec la re a change among p a r t i e s and

between p a r t i e s and th ings

Government ac t i ons such as those descr ibed as i ncen t i ves t o increased

produc t ion o f energy are o f t e n analyzed f rom a s i n g l e p o i n t o f view. The

o the r viewpoints a re subordinate, i f used a t a l l . For instance, changes i n

p o l i t i c a l power, o rgan i za t i ona l a c t i v i t y , and l e g a l r e l a t i o n s h i p s migh t be

t r e a t e d as in te rmed ia te steps lead ing t o a change i n economic r e l a t i o n s h i p s .

S i m i l a r l y , changes i n economic re la t i onsh ips , o rgan iza t iona l a c t i v i t y and

l e g a l r e l a t i o n s h i p s might be t rea ted as in termediate steps lead ing t o a change

i n p o l i t i c a l power. The l a t t e r approach i s rough ly the Marxian view o f t h e

world. (24 )

TYPES OF POSSIBLE GOVERNMENTAL ACTIONS

The f o u r viewpoints p rov ide a method f o r choosing which governmental

act ions should be considered energy p o l i c i e s . The next step i s t o o u t l i n e t h e

types o f ac t ions the Federal Government could have taken. Then app ly ing t h e

f o u r viewpoints, a determinat ion can be made as t o which ac t ions should be

considered energy p o l i c i e s . The l i s t o f energy p o l i c i e s guide the ana lys i s o f

how and why t h e U.S. Government in tervenes i n t h e energy marketplace.

I n order t o a i d analys is o f e x i s t i n g s i t u a t i o n s by i d e n t i f y i n g e x i s t i n g

act ions, a ca tego r i za t i on o f governmental ac t ions must meet t h e f o l l o w i n g

c r i t e r i a :

1. General i ty . The categor ies should be re levan t t o most, i f not a l l ,

s i t u a t i o n s apt t o be sub jec t t o ana lys is o r p o l i c y development.

2. Completeness. A l l the re levan t ca tegor ies should be included.

3. Concreteness. Each category and category l a b e l should, as much as

possib le, suggest t h e ac t ions t h a t are o r cou ld be w i t h i n t h a t category.

4. Lack o f ambiguity. Act ions should, as much as possib le, c l e a r l y belong

i n one category r a t h e r than another.

The economic viewpoint suggests t h a t a ca tego r i za t i on o f governmental

ac t ions might be based on t h e p a r t o f t h e production-consumption cyc le

a f fec ted by a given act ion. Such a ca tego r i za t i on meets the c r i t e r i a o f

g e n e r a l i t y and concreteness w e l l and t h e c r i t e r i o n o f l ack o f ambiguity f a i r l y

we l l , bu t f a i l s t o meet the c r i t e r i o n o f completeness. Some ac t ions do a f f e c t

more than one p a r t o f t h e cycle, and o ther ac t ions have t h e i r most d i r e c t

eFf ects ou ts ide the production-consumption cycle. Therefore, t h i s

ca tego r i za t i on i s o n l y p a r t i a l l y complete.

The p o l i t i c a l v iewpoint leads t o a ca tego r i za t i on based on the p o l i t i c a l

purpose served by t h e act ion. I n f a c t , most prev ious attempts a t categor iza-

t i o n have been done by p o l i t i c a l s c i e n t i s t s f o l l ow ing t h i s general idea. How-

ever, t h i s type o f ca tegor iza t ion , wh i l e general and complete, i s n e i t h e r con-

c r e t e nor unambiguous. P o l i t i c a l purposes do no t immediately suggest concrete

act ions and one a c t i o n may serve many purposes.

Another ca tego r i za t i on i s based on the organ iza t iona l v iewpoint . That i s ,

one cou ld ca tegor ize governmental ac t ions by t h e organ iza t ion o r o rgan iza t iona l

component t h a t c a r r i e s them out. This ca tego r i za t i on i s probably the most con-

c r e t e o f those suggested so f a r , bu t f a i l s t o meet t h e other c r i t e r i a . It can

be ambiguous because more than one organ iza t ion may be involved i n " c a r r y i n g

ou t " a given ac t ion . I t f a i l s t o meet t h e c r i t e r i a o f g e n e r a l i t y and complete-

ness because some act ions may i n v o l v e organizat ions no t y e t i n existence.

Therefore, t h i s ca tego r i za t i on i s a lso incomplete. However, i t does he lp i n

i d e n t i f y i n g e x i s t i n g act ions, even though i t f a i l s t o generate a l l the a l t e r -

na t ives i t should.

The l e g a l v iewpoint suggests a ca tego r i za t i on based on the l e g a l form o f

t h e governmental act ion, such as a c o n s t i t u t i o n a l amendment, a s ta tu te , o r a

regu la t i on . The ca tego r i za t i on t h a t r e s u l t s i s general and complete, b u t no t

concrete o r unambiguous. The categor ies conta in too many d i f f e r e n t ac t ions and

any one ac t ion may be created through the use o f a number o f l e g a l forms.

Previous attempts t o ca tegor ize governmental ac t ions a lso f a i l e d t o meet

a l l the c r i t e r i a . A l l o f these attempts are general and complete, b u t are ne i -

t h e r concrete nor unambiguous. I n l i s t i n g governmental act ions, we considered

t h e f o u r c r i t e r i a as we l l as r e u l t s o f previous attempts. The l i s t which

r e s u l t e d i s arranged i n a h ie rarchy o f categor ies:

Creat ion o r p r o h i b i t i o n o f organizat ions. An important and basic k i n d o f

governmental a c t i o n i s the c r e a t i o n o f o rgan iza t ions t h a t i n t u r n c a r r y o u t

some o f the f o l l o w i n g kinds o f act ions. This category inc ludes both the crea-

t i o n o f such organ iza t ions and t h e p r o h i b i t i o n o f them.

Taxation. Levying o f a tax or the exemption or reduc t ion o f one t h a t i s

l e v i e d i n other s i m i l a r s i t ua t i ons .

Fees. Charges f o r the d e l i v e r y o f a government serv ice or goods no t

d i r e c t l y r e l a t e d t o the cos t o f p r o v i d i n g t h a t good o r serv ice.

Disbursements. Act ions i n which the Federal Government gives ou t money

w i thou t r e c e i v i n g anyth ing i n r e t u r n d i r e c t l y o r immediately. The category

inc ludes promises t o disburse under c e r t a i n circumstances as we l l as ac tua l

disbursements.

Requirements. Demands made by government, backed up by c r i m i n a l and

c i v i l sanct ions.

T r a d i t i o n a l government services. Assistance o r b e n e f i t prov ided by the

government t o a nongovernmental e n t i t y o r e n t i t i e s w i thou t d i r e c t charge.

This category o f assistance or b e n e f i t inc ludes a l l the symbolic o r t a n g i b l e

goods o r serv ices t h a t are t r a d i t i o n a l t o government and do n o t f a l l i n t o

other categories.

Non t rad i t i ona l serv ices. I n add i t i on t o p rov id ing symbolic o r t a n g i b l e

goods and serv ices t r a d i t i o n a l t o government, t h e government a lso prov ides

other n o n t r a d i t i o n a l services. Although the boundary between t h i s category

and t h e category o f government serv ices i s somewhat ambiguous, t h e d i s t i n c t i o n

i s use fu l f o r the purposes o f completeness and concreteness.

Market a c t i v i t y . Involvement i n a market under cond i t ions s i m i l a r t o

those faced by nongovernmental producers and consumers.

The l i s t o f e i g h t government ac t ions i s subdivided i n t o categor ies t o

a l l ow a complete screening o f t h e ac t ions o f t h e Federal Government w i t h

respect t o the c r e a t i o n o f incent ives . These ca tegor ies are l i s t e d below.

Creat ion and P r o h i b i t i o n o f Organizat ions

The government can c rea te or p r o h i b i t o rgan iza t ions o f the f o l l o w i n g

types:

Federal Government o rgan iza t ions

Other governmental o rgan iza t ions

0 Nongovernmental organizat ions.

These subcategories can be d i v ided as fo l lows:

Federal Government o rgan iza t ions (25)

1. Department o r departmental agency

2. Agency w i t h i n the Execut ive O f f i c e o f t he Pres ident

3. Independent agency

4. Foundation

5. I n s t i t u t i o n o r i n s t i t u t e

6. Claims commission

7. Regulatory commission

8. Conference

9. Government co rpo ra t i on

10. In teragency board

11. Advisory body

12. J o i n t execut ive-congressional committee

13. In tergovernmenta l o rgan i za t i on

14. Semi-public o rgan i za t i on (e.g., t h e Federal Reserve System)

15. Government-owned, contractor-operated f a c i l i t y

16. Contractor-owned, contractor-operated (bu t under government c o n t r a c t )

f a c i l i t y

17. Congressional agency

18. Federal cou r t .

Other government organizat ions. (The Federal Government can o f t e n e x e r t

a subs tan t i a l i n f l u e n c e over c r e a t i o n o r p r o h i b i t i o n even when i t cannot

d i r e c t l y c rea te o r p r o h i b i t . )

1. Regional compact

2. S ta te government

3. Organ iza t ion o f substate governments

4. County government

5. Mun ic ipa l government

6. Special purpose government (e.g., school d i s t r i c t o r sewer d i s t r i c t )

43

Nongovernmental organizations

1. Economic (e.g., prohibition of cartels)

2. Other

Taxation

The following category division stems from that developed by the

Musgraves, particularly their diagram of the production-consumption cycle

(Figure 3). (I3) The divisions are:

Levied on part of the production-consumption cycle Levied outside the production-consumption cycle.

Within the production-consumption cycle (13)

Personal income tax Consumer expenditure tax Sales (general) or excise (specific) tax

Gross receipts tax

Val ue-added tax

Business payroll tax Corporate income tax

Personal payroll tax

Retained earnings tax

Dividends tax.

Outside the production-consumption cycle (13,p.225)

1. Taxes on the holding of property

General purpose

Special purpose.

2. Taxes on the transfer of property

Gift taxes

Estate (death taxes)

Inheritance taxes

Capital gains taxes.

3. Taxes on the c ross ing o f p o l i t i c a l boundaries

Import taxes

0 Use taxes ( t o compensate for the f a i l u r e t o c o l l e c t sales or exc ise

taxes because purchased outs ide j u r i s d i c t i o n )

Export taxes ( the U.S. c o n s t i t u t i o n p r o h i b i t s t h e i r use i n the Uni ted

States) .

4. Exemptions from the taxes o f other j u r i s d i c t i o n s .

Household

FIGURE 3. Types o f Tax i n Production-Consumption cycle(13)

W i th in each o f the subcategories above, e i t h e r i n s i d e or ou ts ide the

production-consumption cycle, are two f u r t h e r subdiv is ions. The f i r s t

d i s t i ngu i shes between act ions r e l a t i n g t o the impos i t ion o f a tax and those

r e l a t i n g t o the f a i l u r e t o impose it. F a i l u r e t o impose inc ludes lower ra tes ,

delayed payments, and adjustments t o t h e taxab le base such as a d d i t i o n a l

deductions and exemptions. Tax c r e d i t s are a lso inc luded and u s u a l l y de f ined

as d i r e c t adjustments t o t h e amount o f t a x due.

Fees

The category o f fees i s not d iv ided, p r i m a r i l y because the category i s so

l i t t l e used. We noted t h a t t h i s category does no t i nc lude p r i ces charged f o r

goods and serv ices normal ly provided by nongovernmental organizat ions, even i f

t h e government i s p r o v i d i n g them.

Disbursements

We d iv ided disbursements according t o the r e c i p i e n t o f the fede ra l

money.

Grants- in-aid. Adopting the d e f i n i t i o n o f a g ran t - i n -a id as "a g ran t o f

funds by a c e n t r a l government t o a l o c a l government o r agency f o r ass is tance

i n a c i v i c undertaking,"(') the Federal Government i s the " cen t ra l

government," a l l o ther governments are t h e " l o c a l government o r agency," and

almost a l l purposes q u a l i f y as " c i v i c undertakings."

Subsidy. Subsidy i s def ined as "pecuniary a i d d i r e c t l y granted by

government t o an i n d i v i d u a l o r p r i v a t e commercial e n t e r p r i s e deemed b e n e f i c i a l

t o the pub l ic . " The r e c i p i e n t can be any nongovernment organizat ion,

group, o r i n d i v i d u a l , and t h e purpose o f t h e grant i s t o support some a c t i v i t y

the r e c i p i e n t i s undertak ing f o r h imse l f o r f o r others, bu t no t f o r the

Federal Government.

Transfer. Transfer i s "a d e l i v e r y o f t i t l e or p rope r t y from one person 7 1 t o another. We consider the term t o mean the d e l i v e r y o f money f rom the

Federal Government t o i n d i v i d u a l s as a consequence o f t h e s ta tus o f those

i n d i v i d u a l s (as opposed t o grants designed t o support an a c t i v i t y ] .

Requirements

Requirements are d i v ided according t o t h e i r announced pr imary sub jec t

mat ter . The announcement i s found i n t h e j u d i c i a l , l e g i s l a t i v e , o r

admin i s t ra t i ve preamble t o the requirement being imposed. We i d e n t i f i e d the

f o l l o w i n g subcategories. ( 2 6 )

1. Economic

2. Safe ty

3. Environmental ( i n c l u d i n g zoning)

4. C i v i l r i g h t s .

The economic subcategory i s subdivided i n t o p r i c e requirements, q u a n t i t y

requirements, q u a l i t y requirements, and e n t r y o r e x i t requirements. A l l o f

the requirements can be f u r t h e r d iv ided according t o whether they r e q u i r e

a c t i v i t i e s by nongovernmental e n t i t i e s , r e q u i r e d isc losure o f aspects o f

nongovernmental a c t i v i t i e s , o r exempt e n t i t i e s from otherwise normal

requirements. I n add i t ion , a l l t h e requirements can be once more subdivided

i n t o those enforced by c i v i l sanctions, those enforced by c r i m i n a l sanct ions,

and those enforced by both.

T r a d i t i o n a l Government Services

This category i s somewhat o f a ca tch -a l l t o insure t h a t a l l

" t r a d i t i o n a l l y governmental" ac t ions are inc luded i n t h e l i s t . Another major

reason f o r i n c l u d i n g i t i s t o i d e n t i f y those act ions whose major e f f e c t s may

not be re levan t t o t h e s i t u a t i o n under discussion, bu t whose major e f f e c t s may

be very re levant . For instance, government p rov i s ion o f roads f o r

t r a n s p o r t a t i o n purposes may have important e f f e c t s on t h e consumption o f some

energy f orms . We have somewhat incomplete ly d i v ided the category by sub jec t headings

t r a d i t i o n a l l y l i s t e d as p r i m a r i l y governmental r e s p o n s i b i l i t i e s .

The U.S. c o n s t i t u t i o n ( e s p e c i a l l y A r t i c l e I, Section 8) suggests the

f o l l owing serv ices t r a d i t i o n a l l y prov ided by government:

1. Coin ing and r e g u l a t i n g money

2. Regulat ing i n t e r s t a t e and f o r e i g n commerce (i.e., en fo rc ing p rope r t y

r i g h t s and con t rac tua l o b l i g a t i o n s )

3. Regulat ing immigrat ion

4. Regulat ing bankruptcy

5. Es tab l i sh ing weights and measures

6. Borrowing money

7. Defending the country, ra is ing armies and declaring war

8. Providing a postal service

9. Providing "post roads" (highways)

10. Providing inland waterways.

A study of s t a t e and local government adds the following services as

normal1 y governmental : (27)

11. Education

12. Social services (counseling, adoption, and the l i ke )

13. Health

14. U t i l i t i e s Water

Power ( e l e c t r i c i t y )

* Sewer

Garbage.

15. Recreation

16. Law enforcement

17. Fire protection.

The government also delivers less tangible goods and services. These

include a t l eas t t he following:

18. Legitimacy

19. Recognition

20. Acceptance

21. Agreement (nontangible support)

22. In terest

23. Involvement.

Nont rad i t i ona l Serv ices

As w i t h t r a d i t i o n a l services, t h i s category i s something o f a ca tch -a l l

Some of t h e most important act ions i n t h i s categhry o f serv ices t h a t are

u s u a l l y or o f ten prov ided by nongovernmental organizat ions are:

1. Knowledge a c q u i s i t i o n

Exp lo ra t i on

Basic research

Appl ied research

Development

Demonstration.

2. Knowledge d isseminat ion (other than educat ion)

3. Job placement

4. Transpor ta t ion (e.g., buses and subways)

5. Professional serv ices

Legal

Engineer ing

S c i e n t i f i c

Admin is t ra t i ve .

Market A c t i v i t y

I n order t o d i v i d e t h i s category, we r e f e r once again t o the Musgraves'

diagram o f t h e production-consumption c y c l e and t h e i r d iscussion o f phenomena

outs ide o f it. ( I 3 ) The government can i t s e l f a c t as a market e n t i t y a t each

step i n t h e cyc le:

1. Government borrowing

2. Saving

3. Consumption (procurement) o f consumer goods

4. Investment

5. Product ion o f consumer products

6. Product ion of c a p i t a l goods

7. Production o f labor ( t r a i n i n g or manpower development)

8. Consumption o f c a p i t a l goods

9. Consumption o f l abo r (employment)

10. Ownership o f land and o ther n a t u r a l resources

11. Transfer o f land and o the r n a t u r a l resources.

USE OF THE VIEWPOINTS AND THE TYPOLOGY TO IDENTIFY ENERGY ACTIONS

The next s tep i n the process o f i d e n t i f y i n g energy p o l i c i e s i s t o survey

each category and subcategory t o determine whether a major cause o r e f f e c t

p e r t a i n i n g t o energy i s p a r t o f any o f the ac t ions w i t h i n t h a t category. The

r e s u l t s , o f t h i s survey, i n c l u d i n g concrete examples o f these types o f

act ions, appear i n Chapter 111.

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23. K. Marx, Das Cap i ta l , The Communist Mani festo and Other Wr i t ings. Modern L ib rary , New York, 1932.

24. H. Seidman, P o l i t i c s , Pos i t ion , and Power. Oxford U n i v e r s i t y Press, New York, 1970.

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26. M. C. Cummings, Jr . and D. Wise, Democracy Under Pressure. Harcourt Brace Janovich, Inc., San Francisco, CA, p. 583, 1974.

REFERENCES - TABLE 1

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3. Argyr is , Chris. "Some Causes o f Organizat ional Ine f fec t iveness Wi th in t h e Department o f State." Occasional Paper 2, Center f o r I n t e r n a t i o n a l System Research, Dept. o f State. Washington, D.C.: R.S. Government P r i n t i n g O f f i ce , 1967.

4. Axelrod, Robert. C o n f l i c t o f I n t e r e s t : A Theory o f Divergent Goals w i t h App l ica t ions t o P o l i t i c s . Chicago: Markham Pub l ish ing Co., 1970.

5. Axelrod, Robert. Framework f o r a General Theory o f Cogni t ion and Choice. Berkeley: I n s t i t u t e o f I n t e r n a t i o n a l Studies, U n i v e r s i t y o f C a l i f o r n i a , 1972.

6. Barnard, Chester I. The Funct ions o f the Executive. Cambridge: Harvard U n i v e r s i t y Press, 1938.

7. Barnet, Richard J. The Roots o f War. New York: Atheneum, 1972.

8. Boulding, Kenneth E. Economic Factors Bearing Upon the Maintenance o f Peace: A Report t o t h e Committee on Research f o r Peace. New York: I n s t i t u t e f o r I n t e r n a t i o n a l Order, 1961.

9. Baumel, Wi l l iam. Economic Theory and Operations Research. Englewood C l i f f s , NJ: Prent ice-Ha l l , Inc., 1961.

10. Baumel, Wi l l iam. Welfare Economics and t h e Theory o f t h e State, Cambridge, Mass.: Harvard U n i v e r s i t y Press, 1965.

11. Casper, Jonathan. "Lawyers Before the Supreme Court: C i v i l L i b e r t i e s and C i v i l Rights, 1957-1966." Standard Law Review 22 (1970).

12. Dahl, Robert Alan. Congress and Foreign Po l icy . New Haven, Conn. : Yale I n s t i t u t e o f I n t e r n a t i o n a l Studies, 1949.

13. Danelski, David J., and Glendon Schubert (ed.). Comparative J u d i c i a l Behavior: Cross-Cul tura l Studies o f P o l i t i c a l Decision-Making i n t h e East and West. New York: Oxford U n i v e r s i t y Press, 1969.

14. Duetsch, K a r l W. The Nerves o f Government: Models o f P o l i t i c a l Communication and Control . New York: The Free Press, 1966.

15. Falk, Richard A. This Endangered Planet. New York. Vintage Books, 1972.

Fenno, Richard F., Jr . Congressmen i n Committees. Boston: L i t t l e , Brown and Company, 1973.

17. G i lp in , Robert. "European Disunion and the Technological Gap." P u b l i c I n t e r e s t (Winter 1968), pp. 43-54.

18. G i l p i n , Robert. "Technological S t ra teg ies and Nat iona l Purpose." Science 169, pp. 441-449.

19. Grossman, Joel B. "Socia l Backgrounds and J u d i c i a l Decis ion Making." 79 Harvard Law Review (1966), pp. 211-214.

20. Grossman, Joel B. and Richard S. Wells. C o n s t i t u t i o n a l Law and J u d i c i a l P o l i c y Making. New York: John Wi ley and Sons, 1972.

21. Halperin, Morton H. and Arnold Kantor (eds.). Readings i n American Foreign Po l i cy . Boston: L i t t l e , Brown, and Co., 1973; esp. Ha lpe r i n and Kan to r ' s "The Bureaucra t ic Perspect ive: A P re l im ina ry Framework."

22. Huntington, Samuel P. The Common Defense. New York: Columbia U n i v e r s i t y Press (1961).

23. Key, V. 0. P o l i t i c s , Par t ies , and Pressure Groups. New York: Thomas Y. Crowel 1 Company, 1942.

24. Knorr, K laus Eugen. The American Trade Proposals. New Haven, CT: Yale I n s t i t u t e o f I n t e r n a t i o n Studies, 1946.

25. Knorr, K laus Eugen. A C r i t i q u e o f t h e Randal Commission Report on U.S. Foreign Economic Po l i cy . Pr inceton, NJ: Center o f I n t e r n a t i o n a l Studies, 1954.

26. Lane, Robert Edwards. P o l i t i c a l L i f e : Why People Get Invo lved i n P o l i t i c s . Glencoe, ILL: Free Press, 1959.

27. Lindblom, Charles Edward. Bargaining: The Hidden Hand i n Government. Santa Monica, CA: Rand Corp., 1955.

28. L ipset , Seymour Mar t in . P o l i t i c a l Man: The Soc ia l Basis o f P o l i t i c s . Garden City, NY: Doubleday, 1960.

29. Lowi, Theodore. "American Business, Pub l i c Po l i cy , Case Studies, and P o l i t i c a l Theory." World P o l i t i c s 16 (1964) pp. 677-715.

30. March, James and Herber t Simon. Organizat ion. New York: Wi ley and Sons, 1958.

31. Matthews, Donald. Senators and Their World. Chapel Hill, NC: University of North Carolina Press, 1960.

32. Meadows, Donella H., et al. The Limits to Growth. New York: Universe Books, 1972.

33. Melman, Seymour. Pentagon Capitalism: The Political Economy of War, 1st ed. New York: McGraw-Hill, 1970.

34. Melman, Seymour. The Permanent War Economy: American Capitalism in Decline. New York: Simon and Schuster, 1974.

35. Merton, Robert K. Social Theory and Social Structure. New York: The Free Press, 1968.

36. Miller, Arthur S. "Constitutional Revolution Consolidated: The Rise of the Positive State. 35 George Washington Law Review (December 1966), pp. 172-184.

Miller, Arthus S. Free Press, 1968.

The Supreme Court and American Capitalism. New York:

38. Parsons, Talcott (ed.) and A. M. Henderson (trans.). Max Weber's The Theory of Social and Economic Organization. New York: Oxford University Press, 1947.

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53. Whyte, W i l l i a m H., J r . The Organizat ion Man. New York: Simon and Schuster, 1956.

54. W i l l r i c h , Mason, e t a l . Energy and World P o l i t i c s . New York: The Free Press, 1975.

55. W i l l r i c h , Mason. Global P o l i t i c s o f Nuclear Energy. New York: Praeger Publ ishers, 1971.

56. Wohlstet ter , A l b e r t J. "Analys is and Design o f C o n f l i c t Systems," i n E. S. Quade (ed.), Ana lys is f o r M i l i t a r y Decision. Rand Corporat ion, 1964, p. 131.

111. GENERIC ANALYSIS OF ENERGY INCENTIVES

Th is chap te r i d e n t i f i e s a c t i o n s ( p r i m a r i l y domest ic ) t h a t t h e f e d e r a l gov-

ernment has taken concern ing energy. As ment ioned i n t h e p r e v i o u s chapter ,

"concern ing energy" means t h a t e i t h e r a ma jo r purpose o r a ma jo r e f f e c t o f t h e

a c t i o n i n v o l v e s energy. T h i s a n a l y s i s uses t h e t y p o l o g y o f a c t i o n s desc r ibed

i n t h e p r e v i o u s chap te r t o i d e n t i f y a c t i o n s , and t h e f o u r v iewpo in ts desc r ibed

t h e r e t o determine whether an a c t i o n concerns energy. The b a s i c s t a r t i n g

p o i n t s f o r a n a l y s i s a r e t h u s t y p e s o f a c t i o n . L a t e r chap te rs ana lyze t h e

a c t i o n s a c c o r d i n g t o energy form. Once i d e n t i f i e d , t h e a c t i o n s a r e desc r ibed

and t h e n q u a n t i f i e d b y our e s t i m a t e o f t h e FY 1978 c o s t o f accompl ish ing them.

The c o s t o f c o n d u c t i n g a government a c t i v i t y can have a t l e a s t t h r e e compo-

nents : (1) t h e money t h e government spends; ( 2 ) t h e money t h e government f o r e -

goes c o l l e c t i n g ( a s i n t a x b e n e f i t s ) ; and ( 3 ) t h e money t h e government s h i f t s

f r o m one p a r t y t o another (as i n s h i f t s f rom consumers t o producers b rough t

about by p r i c e r e g u l a t i o n s ) . T h i s chap te r c o n s i d e r s o n l y t h e f i r s t component,

t h e money t h e government spends. Other chap te rs ex tend t h e a n a l y s i s t o t h e

second and t h i r d components.

IDENTIFICATION AND DESCRIPTION OF ENERGY ACTIONS (TABLE 3 )

Energy a c t i o n s a r e i d e n t i f i e d and desc r ibed i n Table 3. Some o f t h e c o l -

umns r e q u i r e f u r t h e r e x p l a n a t i o n .

O r g a n i z a t i o n a l Types (Column 3 )

Chapter 2 d e s c r i b e s t h e t ypes o f o r g a n i z a t i o n s t h a t conduct energy

a c t i o n s . The s i g n i f i c a n c e o f each o r g a n i z a t i o n a l t y p e i s desc r ibed i n t h e f o l -

l o w i n g paragraphs.

Type 1: Departmental Agency

Almost e v e r y one o f t h e 11 c a b i n e t - l e v e l departments o f t h e f e d e r a l gov-

ernment c o n t a i n s an o r g a n i z a t i o n t h a t conducts energy ac t ions . Consequently,

these depar tmenta l agencies house over h a l f o f t h e major f e d e r a l a c t i o n s i n

energy t h a t we have i d e n t i f i e d . For example, t h e Bureau o f Land Management

( w i t h i n t h e Department o f t h e I n t e r i o r ) manages n a t i o n a l resource l a n d s and

TABLE 3. I d e n t i f i c a t i o n and Desc r i p t i on o f Energy Act ions

Orga- Congressional Committee Major Major niza- Jurisdiction Energy TYP~(s)

Agency Major Energy tional Fo~rnC and of Name Related Purposesa Typeb Senate House staged Actione

1. R U P L I ~ Elec- Rural electrification 1 Agriculture, Agriculture Electricity Market Activity trification program to provide rer- Nutrition, Administra- vice to rural cooperatives and Forestry Goverrnent Production tian (Agri- and other rural ertablish- Operations culture ments. Department)

2. REA Capital Insured loans and loan 1 Agriculture, Agriculture Electricity Market Activity Investment ouarantees for construc- Nutrition. Program iian and operation o f gen- and ~arestry Gaverrnent Production (Agriculture erating plants, electric Operations Department) transmission and dirtribu-

tion lines or systems.

3. Forest Mineral leasing and mining 1 Agriculture, Agriculture Electricity; Nontraditional: Service activity, special use per- Nutrition, Fossil; (Knowledge (Agriculture mitr; Biomass Conv. R&O. and Forestry Goverment Other; Acquisition); Department) Operations Both Market Activity

4. National Coastal zone management, 1 Commerce. Merchant Marine All Forms Dirbursements; Oceanic and energy impact formula Science, and and Fisheries Organizational Atmospheric grants, coastal energy Transportation Production Creation Administra- impact fund. tion (carnme;ce Department)

5. Maritime Construction and operating 1 Commerce, Merchant Marine Oil; Disbursements Administra- subsidies f o r U.S. ships Science, and and Fisheries Production tion and waterborne transpor- Transportation (Commerce tation systems. Department)

6. National Energy conservation and 1 Commerce, Science and A11 Forms; Nontraditional: Bureau of efficiency standards, Science, and Technology Both (Knowledge Standards energy conversion mater- Transportation Acquisition, (Commerce ials reliability energy Dissemination) Department) storage systems, nuclear

standards for fission power and thermonuclear reactions.

TABLE 3 . (contd)

Agency Name

1

7. Carps of Engineers (Defense Department)

8. Atomic Energy Defense A c t i v i t i e s (DOE)

9. Na t i ona l I n s t i t u t e s o f Env i - ronmental Hea l th Serv ices (HEW)

11. Bureau of Land Man- agement ( I n t e r i o r Department)

Orga- Congressional C m i t t e e Major Major n i za - J u r i s d i c t i o n Energy TypeIs) FY78

Major Energy t i o n a l ForrnC and o f Re la ted Purposesa Typeb Senate House staged Act ione

Major dam and r e s e r v o i r 1 Environment Pub l i c Works E l e c t r i c i t y ; Market A c t i v i t y : 1,575,366 cons t ruc t i on and hydro- and Pub l i c and O i l ; T r a d i t i o n a l e l e c t r i c power generat ion, Works T ranspo r t a t i on Product ion deep wate r p o r t s const ruc t i o n . Government

O p e ~ d t i o n s

Nuclear weapons e f f e c t s 1 Armed Services Armed Services Nuclear: T r a d i t i o n a l re rearch, nuc lear weapons Product ion, t e s t i n g , and nuc lear weapons s t o c k p i l e management, nava l r eac to r development.

Support o f ~ e s e a r c h i n t o 1 Human Science and A11 Forms; Non t rad i t i ona l : 55,077 t h e p o t e n t i a l adverse Resources Technology Product ion (Knowledge h e a l t h and environmental C m i t t e e s Acqu i s i t i on , s i de e f fec ts o f t h e u a r i - D isseminat ion) aus energy techno log ies under development.

Implementat ion o f So lar 1 Heat ino and Caol ina Demon-

energy and u t i l i t y r y r - terns, energy e f f i c i e n t b u i l d i n g standards, s i t e Planning, and de r i gn f o r s o l a r energy (AIA s o l a r des ign p r o j e c t ) , new town P lann ins f a r boom town areas i i p a c t e d by new energy resource produc t i o n .

Banking, Banking, A l l bu t Non t rad i t i ona l : Housing, and Finance, and Other: (Knowledge Urban A f f a i r s Urban A f f a i r s Canrumption Acqu i s i t i on ,

D isseminat ion)

Energy and m ine ra l s man- 1 Energy and I n t e r i o r and Foss i l ; Market A c t i v i t y 81.880 agement i n c l u d i n g l eas ing N a t u ~ a I I n s u l a r A f f a i r s Nuclear; Requirements: and management o f energy Resources Other (geo- (Economic); minera ls , bo th onshore, thermal) ; and nonenergy minera ls . Product ion

TABLE 3 . ( c o n t d )

Agency Name

1

12. Bureau of Reclamation (Interior Department)

15. Office of Surface Mining

Oroa- Conorerrianal Cornittee Ma.ior . - niza- - Jurisdiction ~n;rgy

Major Energy tional FormC ald Related Purposesa ~ y p e ~ Senate House Stage

2 3 4 5 6 '

Hydroelectric power gen- 1 Energy and ' Interior and EleCtricity; eration and transmission. Natural Insular Other;.

Resources Affairs Production

Provides basic scientific data concernin4 water. land and mineral resources, and supervises the prospecting, develap- ment and production bf minerals and mineral fuels on leased federal, Indial and OCS.

Energy and Natural Resources

Government Operations

Interior and Insular Affairs


A11 but Solar; Production

Health and safety-related 1 Energy and Interior and Coal; coal mining research. Natural Insular Oil;

Resources Affairs Nuclear; . . . . . . ,

Government Production Ope~ations

Regulation of strip miner 1 Energy and Interior and Coal; and reclamation programs. Natural Insular Production

Resources Affairs

Energy leasing, genera- 1 Human Interior and Fossil; tion, and power. Resource$ Insular Other;

Affairs Electricity; Production

Major Typels)

o f Actione

7

Market Activity

Requirements: (Economic); Nontraditional: (Knowledge Acquisition, Dissemination)

Nontraditional: (Knowledge Acquisition, Dissemination)

Requirements (Environment)

Market Activity

17. Mine Safety and Health Administra- tion

Coal mine, metal and non- 1 Energy and Interior and Coal; metal mine health and Natural Insular Affairs Nuclear; safety inspections along R ~ S O U P C ~ S Production with education and train- Goverment ing programs in safety mo- Operations tivation constitute the major thrust to activities.

Requirements: (Safety)

TABLE 3 . (contd)

Orga- Congressional Committee Major Major niza- Jurisdiction Energy T y p d s )

Agency Major Energy tional FormC and of Name Related Purposesa Typeb Senate House staged Actione

1 2 3 4 5 6 ' 7

18. Alaska Power opreations in Alaska 1 Energy and Interior and Electricity; Market Activity Power including federal hydro- Natural Insular Affairs Production Administra- electric projects market- R ~ S O U F C ~ S tion ~ n g . Goverment Department of Operations Energy 9

19. Bonneville Constructs, operates and 1 Energy and Interstate and Electricity; Market Activity Power maintains facilities t o Natural Foreign Production Administra- market electric power from Resources Commerce tion 29 federal hvdroelectric Department of generating $ants. EnePgy 9


20. Southwestern Transmission, substation 1 Energy and Interstate and Electricity; Market Activity Power and switching facilities Natural Foreign Production Administra- to transmit power gener- R ~ P O U P C ~ S Commerce tion ated at Corps of Engineers Department of hydroelectric projects in Government Energy 9 the Southwest. Operat ions

21. Southeastern The administration markets 1 Energy and Interstate and Electricity; Market Activity Power power generated at Corps Natural Foreign Production Adrnlnistra- of Engineers hydroelectric Resources Commerce tion plants in a 10-state area Department of of the Southeast. Goverrnent Energy9 Operations

22. OSHA (Labor Promulgates occupational 1 Human Education and All Forms: Requirements: Department) safety and heatlh stand- Resources Labor Production (Safety)

ards, establishes regulations, enforcer campl~ance with rafety and health standavd~ and regulat~ans.

23. Employment Cmnpensation and medical 1 Human Education and Coal; Disburrementr: Standards treatment costs paid to R ~ P O U V C B S Labor Production (Subsidy) drninirtration those totally disabled due Disabled Coal to oneumoconiosis. Miners' Ben- efits (Labor Department)

TABLE 3 . (contd)

Orua- Conuressional Committee Major Major niza- J u r i s d i c t i o n Energy Type(%) FY78

Agency Major Energy t i o n a l FormC and o f Name Related Purposesa rypeb Senate House Staged Actione

24. Department Land matters--use o f fed- 1 Jud ic ia ry Jud ic ia ry Foss i l : Requirements: 1,327 o f Jus t i ce era1 and natural re- Other; (Econmic) Leoal sources. Enforcement o f Production ~ ; < i v i t i e s a n t i t r u s t .

25. Depa~tment Enforcement of a n t i t r u s t . 1 Judic iary Jud ic ia ry A l l Forms; Organizat ional 5,061 o f Just ice Both P roh ib i t i on A n t i t r u s t

26. Department P ipe l i ne R&D; R&D on i n - 1 Commerce, Publ ic Works Oi l ; Nantradi t i ona l : 54,598 o f Transpar- creased energy ef f ic ien- Science, and and Consumption (Knowledge ta t ion. CY, min imiz ing adverse Transportat ion Transportat ion Acquis i t ion) Research and impacts of energy con- Special Pro- s t r a i n t s . Science and grams, Tranr- Technology no r ta t i on systems Center,Off- shore O i l Compensation Fund

27. IRS Moni tor ing revenue p o l i c y 1 Finance Ways & Means A l l Forms; Taxation 87,420 (Treasury v is-a-y is energy Both Department) compames.

28. Department o f Energy

Di rects and conducts R&D on domestic energy SOUI.CPZ. ca r r i es out nuclear.energy funct ions r e l a t e d t o nat ional defense and fue l production and conducts basic research i n the physical, biomedical and environmental sciences.

Energy and Science and A l l Forms; Natural Technology Both Resources

I n t e r i o r and Government Insu la r A f f a i r s A f fa i r s

Goverment Jud ic ia ry Operations

Commerce. Judic iary

Nontrad i t ional : (Knowledge Acquis i t ion, Dissemination); Market A c t i v i t y ; Trad i t ional ; Reouirernentr

Science, and Transportat ion I n t e r s t a t e and

Foreign Commerce

TABLE 3 . (con td )

Orga- Congrers iona l Committee Major Major n i r a - J u r i s d i c t i o n Energy Type(s)

Agency Major Energy . t ' ional F o r d and o f Name Rela ted Purposesa Typeb Senate House staged Act ione

1 2 3 4 5 6 8 7

29. Counc i l Ana l ys i s and eva lua t i on 2 Goverment Goverrnent A l l F O ~ S ; Requirements: on Env i - of env i~onmen td l e f f e c t s A f f a i r s Operat ions Both , (Environmental) onm men till o f energy a c t i v i t i e s . Q u a l i t y

30. O f f i c e of Superv is ion of government 2 Goverrnent Government A l l Forms; T r a d i t i o n a l Management spending an energy and A f f a i c s Operat ions Both and Budget n a t u r a l resources.

31. Appalachian L i m i t e d programs of grants 2 Environment P u b l i c Works Coal; Bath Disbursements: Regional t o s imu la te energy- re la ted and Pub l i c T ranspo r t a t i on (Grant r - in -A id) Development en te rp r i se ; g ran t s f o r t h e Works Program sea l i ng and f i l l i n g of Government

vo ids i n abandoned coa l Government Operat ions miner . A f f a i ~ s

32. Environmental P r o t e c t i o n aga ins t r a d i a - 3 Environment Science and A l l Forms; Requirements: P ro tec t i on t i o n p o l l u t i o n energy- and Pub l i c Technology Bath (Environmental) ; Agency ~ e l d t e d environmental Works Non t rad i t i ona l :

programs. Gaverrnent (Knowledge Operat ions Acqu i s i t i on ,

D isseminat ion)

33. Na t i ona l A c t i v i t i e s g i v i n g improved 3 Commerce, Science and A l l Forms; Non t rad i t i ona l : Aeronaut ics data and techno logy f o r Science, and Technalogy Both (Knowledge and Space energy p roduc t i on and T ranspo r t a t i on Acqu i s i t i on , Admin is t ra - u t i l i z a t i o n are space Disseminat ion) t i o n app l i ca t i ons , space re-

search and technology, ae ronau t i ca l research and techno logy app l i ca t i ons , and suppo r t i ng a c t i v i t i e s .

34. Small Energy loans program. 3 Banking, Small Business Petroleum; Disbursements: Business Housing, and Product ion (Subsidy) Adminis- Urban A f f a i r s t r a t i o n

TABLE 3 . (contd)

Orsa- Conrrressianal Committee Maior Major oi;a- Jurisdiction ~ n i r g y ~ y ~ e ( s 1 FY78

Agency Major Energy tionill FarmC and of Name Related Purposesa T Y P ~ ~ Senate House staged Actione

35. National Pipeline surface accident 3 Commerce, Public Works Petroleum; Requirements: 1,852 Transpor- and safety investigation, Science, and and Nuclear; (Safety) tation and certificate or license Tranroortation Tranroortatian Production Safety appeal. Board

36. Smithsonian SSIE plays an increasing 5 Government Government All Forms; Nontraditional: Institute role in support of a num- Affairs Operations Both (Knowledge (Science ber of programs of na- Dissemination) Information tional interest, such as Science and - Exchanoe) enerov. cancer and oesti- Technolorrv

37. Nuclear Licensing and regulatory 7 Energy and Interstate and Nuclear Requirements: 287,699 Regulatory functions, including anti- Natu~al F o ~ e i g n Production (Economic, Conmission trust, of nuclear facili- Resources Camerce . Safety,

ties, primarily those for Judiciary Environmental); electric power generation. Judiciary Fees

Government Affairs Goverment

Operations


38. Federal Energy and product liabil- 7 Judiciary Judiciary All Forms: Requirements: 6,420 Trade ity; enforcement of corn- Both (Economic) Camnission petition in energy indur-

tvies. Prohibition

39. ICC Granting oprating author- 7 Commerce, Interstate and Coal; Requirements 2,001 ity to interstate carri- Science, and Foreign Oil; e r ~ , regulating inter- Transportation Commerce Production state shipping rater, and monitoring compliance with Interstate Commerce Act.

40. Securities Public utilities holding 7 Banking, Banking, Electricity; Requirements: 747 and Exchange company regulation. Housing, and Finance and Production (Economic) Comnission Urban Affairs Urban Affairs

TABLE 3 . (contd)

41. Tennessee Government awned caroora- 9 Enerov and Valley tion acting as whol&ale N a t u G l ~ Authority9 supplier for 160 local Resources

municinal and caooerativc electrical system;.

42. The Joint Created in 1971; rerolves 13 Energy and Federal-State land-use matters between Natural Land Use federal, state, and local Resources Planning (Tribal) jurisdictions. Cornislion Environment for Alaska and Public

43. Office of Impact assessments of new 17 Commerce, Technology technology in energy pro- Science, and Assessment duction. T ~ a n s ~ o ~ t a t i o n

44. Congressional Budget priorities for 17 Budget Budget Office energy.

45. General In 1976 through the Of- 17 Goverrnent Accounting fice of Special Programs, Affairs Office GAO conducted Enerov Pol-

icy Conservation ~ ; i - - verification examinations of enerqy-related information developed by private businerr concerns

Public Works Coal; Market Activity 3,866,581 and Natural Gar; Transportation Nuclear;

Electricity; Government Production Operations

Interior and Petroleum; Requirements: Insular Production (Economic) Affairs

Science and All forms; Nontraditional: 984 Technology 80th (Knowledge

Acquisition, Dissemination)

8udget All forms; Nontraditional: 200 80th (Knowledge

Acquisition, Dissemination)

Goverment All folms; Nontraditional: 5,739 Operations Both (Knowledge

Acquisition, Oisseminationl

under circumstances of the Act. Economic and environmental impact of natural gas curtailments, report; uranium enrichment Service pricing procedures, report.

TABLE 3 . (contd)

Organizations Deleted Due to Formation of DOE

Petroleum Reserves Defense Power Administration General Services Administration

Federal Energy Administration National Science Foundation Federal Power Comission

Energy Research and Development Administration

Notes for Table 3

a From the President's Budget for FY78 submitted to Congress, the Manual on Goverment Organization, or statutes.

l--Department of department agency

2--Agency within the Executive Office o f the President

3-Independent agency

4--Foundation

5--Institution and institute

6--Claims comnisrion

7--Regulatory comnission

8--Conference

9--Government corporation

10--Interagency Board

ll--Advisory body

12--Joint executive-congressional committee

13--1ntergovernmentd organization

14--Semi-public organizaton (e.g., the Federal Reserve System)

15--Government-owned, contractor-operated facility

16--Contractor-owned, contractor operated (but under government contract) facility

17--Congrerrianal agency

18--Federal court

C Electricity is largely hydropower; Oil includes oil shale; Other Forms includes geothermal, biarnas conversion, wind, thermal gradients, and others; Petroleum includes oil and natural gas; Fossil fuels consists of coal, oil, and natural gas.

d Production includes resource extraction, conversion and transmission; Consumption includes intermediate and end use as well as conservation. "80th" means production and conrumptian.

e Explained in Chapter I1

f Appendix 8 gives background far these estimates.

4 The outlays listed here do not represent outlays of tax dollars by the Federal government. These OrQanizations are government controlled, but, all outlays come f r o m revenues received through the sale of electricity to their customers.

t h e i r resources and " a d m i n i s t r a t e s t h e m i n e r a l resources connected w i t h

acqu i red lands and t h e submerged lands o f t h e OCS." It has s p e c i a l r e s p o n s i -

b i l i t y f o r l eases i n v o l v i n g geothermal energy.

Type 2: E x e c u t i v e O f f i c e o f t h e P r e s i d e n t

Severa l o f t h e o f f i c e s o r c o u n c i l s w i t h i n t h e Execu t i ve O f f i c e o f t h e

Pres iden t conduct energy a c t i v i t i e s . For ins tance, t h e Counc i l on Env i ron -

menta l Q u a l i t y " p r o v i d e s an ongoing assessment o f t h e n a t i o n ' s energy r e s e a r c h

and development f r o m an env i ronmenta l and c o n s e r v a t i o n s tandpo in t . " CEQ p e r -

forms t h i s a c t i v i t y a long w i t h i t s broader r o l e i n m o n i t o r i n g t h e n a t i o n ' s

environment. Other EOP o-Ff ices w i t h energy a c t i v i t i e s a r e t h e Energy Resources

Counc i l , t h e O f f i c e o f Management and Budget, and t h e Appalachian Regional

Development Program.

Type 3: Independent Agencies

Independent agenc ies are o n l y independent o f any e x e c u t i v e department and

n o t independent o f t h e P r e s i d e n t o r t h e e x e c u t i v e branch. The Env i ronmenta l

P r o t e c t i o n Agency (EPA) i s an example o f an independent agency. EPA i s respon-

s i b l e f o r r e q u i r e m e n t s programs t o improve a i r and wa te r q u a l i t y , and f o r con-

d u c t i n g o r sponsor ing needed research on p o l l u t i o n , i t s e f f e c t s , and means o f

a v o i d i n g o r c l e a n i n g up p o l l u t i o n . NASA, t h e General S e r v i c e s A d m i n i s t r a t i o n ,

and t h e Small Business A d m i n i s t r a t i o n are o t h e r examples o f independent

agencies.

Type 4: Foundat ions

Foundat ions have become a p r e f e r r e d o r g a n i z a t i o n a l arrangement f o r making

g r a n t s t o l o c a l governments, u n i v e r s i t i e s , n o n p r o f i t o r g a n i z a t i o n s , o r i n d i -

v i d u a l researchers , because dec is ion-making i s s t r u c t u r e d t o a l l o w f o r p a r t i c -

i p a t i o n b y e x p e r t s r e p r e s e n t i n g t h e f i e l d s o f s p e c i a l i z a t i o n i n which r e s e a r c h

funds are b e i n g a l l o c a t e d . No f e d e r a l f o u n d a t i o n s c u r r e n t l y have energy p r o -

grams, s i n c e t h e o n l y f o u n d a t i o n p r e v i o u s l y h a v i n g such a program, t h e N a t i o n a l

Science Foundat ion, has t r a n s f e r r e d i t s energy r e s p o n s i b i l i t i e s t o t h e DOE.

Type 5 : I n s t i t u t e s

I n s t i t u t e s p r o v i d e much t h e same dec is ion-making framework as founda t ions ,

a l l o w i n g f o r l e a d e r s i n t h e fundamental sc iences, medica l sciences, and p u b l i c

af fa i rs , and s p e c i a l i s t s i n the f i e l d covered by t h e i n s t i t u t e t o voice

approval over research contracts. The Smithsonian I n s t i t u t e ' s Soc ia l Science

In fo rmat ion Exchange p lays an increas ing r o l e i n support o f a number o f pro-

grams o f na t i ona l i n t e r e s t , such as energy, cancer, and pes t i c i des research.

The Solar Energy Research I n s t i t u t e , p a r t o f DOE, i s s p e c i f i c a l l y concerned

w i t h R&D on var ious so la r energy technologies.

Type 6: Claims Commissions

Some o f the a c t i v i t i e s undertaken by the var ious claims commissions

undoubtedly concern energy. However, t h e budgets f o r such commissions g i v e no

idea how t o i d e n t i f y and q u a n t i f y these a c t i v i t i e s . Since the amounts invo lved

are apt t o be r e l a t i v e l y small, these organ iza t ions have been omi t ted f rom

Table 3.

Type 7: Regulatory Commissions

The I C C has served as a model f o r r e g u l a t o r y commissions. Other o rgan i -

za t ions f a l l i n g w i t h i n t h e r e g u l a t o r y commission type are: t h e Nuclear Regu-

l a t o r y Commission, the Federal Trade Commission, and the Secu r i t i es and

Exchange Commission. Many o f t h e r e g u l a t o r y commissions conduct energy-re lated

a c t i v i t i e s . Wi th in the Department o f Energy, t h e Federal Energy Regulatory

Commission i s respons ib le f o r r e g u l a t i n g i n t e r s t a t e gas and e l e c t r i c i t y pro-

duct ion, transmission, and sales a c t i v i t i e s . These r e s p o n s i b i l i t i e s fo rmer l y

belonged t o t h e Federal Power Commission which merged i n t o DOE. The Economic

Regulatory Admin is t ra t ion i s responsib le f o r the range o f a c t i v i t i e s f o r m e r l y

belonging t o t h e Federal Energy Adminis t rat ion, such as c o n t r o l l i n g energy

pr ices, coping w i t h energy emergencies, and promoting conservat ion and coal

u t i l i z a t i o n .

Type 8: Conferences

No federa l conferences untook a c t i v i t i e s d i r e c t l y r e l a t e d t o energy.

Type 9: Government Corporat ions

Government corporat ions vary i n t h e i r closeness t o the Execut ive Branch,

t h e i r decision-making s t r u c t u r e (single-head o r mult i -head), and form o f

ownership (wholly owned by the government or mixed ownership). The only wholly government-owned energy related corporation is the Tennessee Valley Authority. Directorship of this corporation is vested in a board of three members appointed by the President with consent of the Senate.

Type 10: Interagency Boards, Councils, Committees

One energy-related example of an interagency board, council, or committee

is the Federal Radiation Council. Such organizations do not appear in Table 3

because their costs are shared among the member organizations already included

in the table.

Type 11: Advisory Boards

What the government basically wants from advisory committees is support.

Advisory boards may be utilized to lend respectability to new or controversial

programs such as poverty and foreign assistance. Several energy-related

advisory bodies were created and funded by the Federal Energy Administration,

including the list below:

Coal Industry Advisory Committee

Construction Advisory Committee Consumer Affairs and Special Impact Advisory Committee

Electric Utilities Advisory Committee

Energy Forecasting Advisory Committee

Environmental Advisory Committee

Food Industry Advisory Committee

LP-Gas Industry Advisory Committee

Natural Gas Transmission and Distribution Advisory Committee Northeast Advisory Committee

State Regulatory Advisory Committee

Retail Dealers Advisory Committee

Wholesale Petroleum Advisory Committee

Transportation Advisory Committee

The f a t e o f these s p e c i f i c committees du r ing t h e format ion o f DOE i s unknown;

DOE may have cont inued t h e i r existence, replaced them w i t h other adv isory

bodies, o r developed in-house c a p a b i l i t y i n these areas.

Type 12: J o i n t Executive-Congressional Committees

No j o i n t execut ive-congressional committees have been energy-related.

Type 13: Intergovernmental Organizat ions

There are two d i s t i n c t i v e fea tu res o f intergovernmental organizat ions:

(1) there i s no cons is ten t approach t o t h e i r establishment, and ( 2 ) t h e y tend

t o have tenous f u t u r e s when compared t o government a c t i v i t i e s w i t h i n federa l ,

s tate, and l o c a l j u r i s d i c t i o n s . The on l y energy-related example o f t h i s type

i s t h e j o i n t Federal-State Land Use Planning Commission f o r Alaska c rea ted i n

1971 w i t h a te rminat ion date i n 1979. Commission a c t i v i t y i s coterminous w i t h

p i p e l i n e cons t ruc t i on i n Alaska and t h e p i p e l i n e i s an important reason f o r

the commission's establishment.

Type 14: Semi-public Organizat ions

No energy-re lated organ iza t ion o f t h i s type ex i s ted i n FY 1978, a l though

several hvae been proposed, i n c l u d i n g one t o expedite development o f a coal -

based synfuels indus t ry .

Type 15: Government-Owned, Contractor-Operated F a c i l i t y

Table 3 does n o t l i s t t h e a c t i v i t i e s o f GOCO f a c i l i t i e s working under con-

t r a c t t o the Department o f Energy, because the DOE budget inc ludes those a c t i v -

i t i e s . The GOCO f a c i l i t i e s no t l i s t e d f o r t h i s reason inc lude:

Argonne Nat ional Laboratory

Brookhaven Nat ional Laboratory

H o l i f i e l d Nat ional Laboratory

Los Alamos S c i e n t i f i c Laboratory

Lawrence Berkeley Laboratory

Lawrence Livermore Laboratory

P a c i f i c Northwest Laboratory

Sandia Laborator ies

Type 16: Contractor-Owned, Cont ractor -Operated (Under Government C o n t r a c t ) F a c i l i t i e s

Tab le 3 does n o t l i s t any COCO f a c i l i t i e s , even though many conducted

e n e r g y - r e l a t e d a c t i v i t i e s . F i r s t , so many conducted energy a c t i v i t i e s t h a t

l i s t i n g them a l l would leng then t h e t a b l e unduly. Second, s i n c e a c t i v i t i e s

were conducted under c o n t r a c t , t h e budgets o f t h e agencies which l e t t h e con-

t r a c t s i n c l u d e t h e money i n v o l v e d i n these a c t i v i t i e s .

Type 17: Congress iona l Agencies

Congress iona l agencies a r e a d m i n i s t r a t i v e agencies p r i m a r i l y r e s p o n s i b l e

t o and s e r v i n g t h e l e g i s l a t i v e branch. The General Account ing O f f i c e i s an

example o f a congress iona l agency w i t h wide- rang ing a c t i v i t i e s i n oversee ing

government a c t i o n , i n c l u d i n g v e r i f i c a t i o n examinat ions o f e n e r g y - r e l a t e d i n f o r -

mat ion developed b y p r i v a t e business concerns i n r e l a t i o n t o t h e Energy P o l i c y

and Conservat ion Act ; r e p o r t i n g on t o p i c s such as economic and env i ronmenta l

impacts o f n a t u r a l gas c u r t a i l m e n t s ; and uranium enr ichment s e r v i c e p r i c i n g

procedures. T h i s o r g a n i z a t i o n a l t y p e a l s o i n c l u d e t h e Congress iona l Budget

O f f i c e and t h e O f f i c e o f Technology Assessment.

O f course, Congress i t s e l f conducts many energy a c t i v i t i e s . However,

these a c t i v i t i e s u s u a l l y do n o t a f f e c t energy d i r e c t l y , b u t o n l y t h r u g h some

supplemental a c t i v i t i e s b y o t h e r government o r g a n i z a t i o n s . I n a d d i t i o n , i den-

t i f y i n g and a s s i g n i n g c o s t s t o t h e r e l e v a n t congress iona l a c t i v i t i e s would be

v e r y d i f f i c u l t . Therefore , Tab le 3 does n o t c o n t a i n e s t i m a t e s o f t h e c o s t

i n v o l v e d i n energy a c t i v i t i e s conducted by Congress i t s e l f .

Type 18: Federa l Cour ts

Table 3 o m i t s f e d e r a l c o u r t s f o r t h e same reasons i t omi ts c l a i m s com-

m i s s i o n s and Congress. O r g a n i z a t i o n s o f these t y p e s u s u a l l y work t h r o u g h o t h e r

o r g a n i z a t i o n a l t y p e s and t h e i d e n t i f i c a t i o n and q u a n t i f i c a t i o n o f r e l e v a n t

a c t i o n s i s v e r y d i f f i c u l t .

Congress iona l Committee ? u r i s d i c t i o n (Columns 4 and 5)

A l l government a c t i o n i s s u b j e c t t o two r e v i e w processes i n Congress. One

i s subs tan t i ve ; t h e o t h e r i s a p p r o p r i a t i o n s . Since a l l f e d e r a l programs a r e

rev iewed by t h e A p p r o p r i a t i o n s Committee o r i t s subcommittees, ou r concern w i t h

committee j u r i s d i c t i o n i s l i m i t e d t o those committees w i t h a voice i n formu-

l a t i n g t h e substance o f agency p o l i c y o r programs i n the energy f i e l d . Since

committee j u r i s d i c t i o n s have changed d r a s t i c a l l y s ince 1976, we i d e n t i f i e d t h e

new committees t h a t would have had j u r i s d i c t i o n i n 1976 and consequently w i l l

probably have j u r i s d i c t i o n over s i m i l a r act ions i n the fu tu re . Congressional

committees are l i s t e d i n Table 3 i f t h e i r j u r i s d i c t i o n i n a subs tant ive area

g ives them r e s p o n s i b i l i t y f o r energy p o l i c y . Table 4 inc ludes committees w i t h

o ther than substant ive r e s p o n s i b i l i t y over energy po l i cy .

There are f i f t e e n standing committees i n t h e Senate. Only f o u r a r e

excluded from our l i s t f o r lack o f any re levan t subs tant ive energy j u r i s d i c -

t i o n : Appropr iat ions, Foreign Relat ions, Veterans A f f a i r s and Rules. The

Foreign Relat ions Committee i s no t inc luded a t t h i s t ime because a l though t h e

Foreign Relat ions Committee ( t h e subcommittee on Arms Control , Oceans, and

I n t e r n a t i o n a l Environment) does have j u r i s d i c t i o n over i n t e r n a t i o n a l aspects

o f nuclear energy and nuclear t r a n s f e r po l i cy , t h e t h r u s t o f our ana lys i s i s

i n the d i r e c t i o n o f assessing government act ions a f f e c t i n g domestic energy pro-

duct ion and consumption.

I n the House there are 22 standing committees. Table 3 inc ludes 14 com-

m i t t ees w i t h j u r i s d i c t i o n a l issues p e r t a i n i n g t o energy po l i cy . House com-

m i t t ees included i n Table 3 whose j u r i s d i c t i o n i s no t ob; iously energy-re lated

are :

1. Government Operations - which oversees government purchases and cou ld have

a s i g n i f i c a n t impact on government a c t i v i t y i n t h e marketplace i f energy

e f f i c i e n c y became a s t r i c t measure i n the procurements po l i cy .

2. Small Business - which would oversee, i f n o t t h e actual appropr iat ions,

a t l eas t the gu ide l ines implementing and con t i nu ing t h e Energy Shortage

Program.

Table 4 g ives the j u r i s d i c t i o n o f each committee inc luded i n Table 3, p lus

others.

Major Energy Form and Stage (Column 6)

This column l i s t s o n l y the major forms and stages, i n terms o f money and

emphasis, invo lved w i t h an o rgan iza t i on ' s energy act ions. Obviously, ac t i ons

TABLE 4. Federa l O r g a n i z a t i o n s by Major Type o f A c t i o n

Congress iona l Committee JURISDICTIONAL ISSUES

Senate:

A g r i c u l t u r e , F o r e s t r y and N u t r i t i o n Committee

A p p r o p r i a t i o n s Committee

Armed S e r v i c e s Committee

Banking, Housing, and Urban A f f a i r s Committee

Budget Committee

Commerce, Science and T r a n s p o r t a t i o n Committee

R u r a l development, r u r a l e l e c t r i f i c a t i o n and watersheds

A p p r o p r i a t i o n o f t h e revenue f o r t h e suppor t o f t h e government

M i l i t a r y R&D A e r o n a u t i c a l and space a c t i v i t i e s p r i m a r i l y a s s o c i a t e d w i t h development o f weapons systems o r m i l i t a r y o p e r a t i o n s N a t i o n a l s e c u r i t y aspects o f n u c l e a r energy Naval pe t ro leum reserves, excep t those i n A laska F i n a n c i a l a i d t o commerce and i n d u s t r y

0 P u b l i c and p r i v a t e hous ing 0 Urban development and urban mass t r a n s i t

Oversee T i t l e 111 and I V o f Congress iona l Budget A c t Budget o u t l a y s on c o n t i n u i n g and proposed

l e g i s l a t i o n Request and e v a l u a t e c o n t i n u i n g s t u d i e s o f t a x e x p e n d i t u r e s Review Congress iona l Budget O f f i c e conduct and i t s f u n c t i o n s and d u t i e s

I n t e r s t a t e commerce R e g u l a t i o n o f i n t e r s t a t e common c a r r i e r s , i . e . , p i p e 1 i n e s Merchant Mar ine and n a v i g a t i o n

0 Mar ine and ocean n a v i g a t i o n i n c l u d i n g deep wa te r p o r t s

0 Science, e n g i n e e r i n g and t e c h n o l o g y r e s e a r c h and deveopment and p o l i c y

a N o n m i l i t a r y a e r o n a u t i c a l and space sc iences Commerce on OCSL Coas ta l zone management A l l m a t t e r s r e l a t e d t o sc ience and t e c h n o l - ogy, ocean p o l i c y , t r a n s p o r t a t i o n , communi- c a t i o n s and consumer a f f a i r s

TABLE 4. (contd)

Congressional Committee JURISDICTIONAL ISSUES

Energy and Natural Resources Committee

Environment and Public Works Committee

Finance ~ommi ttee

Foreign Relations Committee

Governmental Affairs Commi ttee

Human Resources Commi ttee

Energy policy Energy regulation, conservation Energy R&D Solar energy systems Nonmilitary development of nuclear energy

a Naval petroleum reserves in Alaska Oil and gas production and distribution Extraction of minerals from ocean and OCSL

a Energy related aspects of deep water ports Hydro electric power, irrigation and reclamation Coal production, distribution and utilization Mineral extraction from public lands

a Mining, mineral lands, mining claims and mineral conservation

a Mining education and research Subcommittee: study energy resources and development

0 Environmental pol icy Environmental R&D Flood control and river-harbor improvements including environmental aspects of deep water ports Public works on bridges and dams

a Nonmilitary environmental regulation and control of nuclear energy Tariffs, import quotas and material related thereto

Revenue measures generally Counterpart to Ways and Means in House

Ocean and international environment and scientific affairs International aspects of nuclear energy, including nuclear transfer policy

Organization and management of U.S. nuclear expert policy

Measures relating to education, labor, health, and publicy welfare Indian land management and trust responsibil- ities

TABLE 4. (contd)


Judiciary Committee Patents, copyrights and trademarks In te rs ta te compacts generally Goverment information

House:

Agriculture Committee Rural e lec t r i f ica t ion

Armed Services Committee Naval ptroleum and o i l shale reserves Sc ien t i f ic R&D in support of Armed Services

Banking, Finance and Urban development Urban Affairs Committee Public and private housing

Financial aid t o commerce and industry (other than transportation)

Budget Committee Request and evaluate continuing studies on tax expenditures, t o divise methods of coordinating tax expenditures, policies and programs with d i rec t budget outlays Review conduct of Congressional Budget Office

function and duties

Government Operations Federal procurement Commi t t e e Intergovernmental operations

Inter ior and Insular Forfeiture of land grants and alien ownership including alien ownership of mineral r ights

Insular possessions of U.S. except those affecting revenue and appropriations

Mineral land laws and claims and en t r ies thereunder

Mineral resources of public land Mining in te res t s generally

0 Mining schools and experimental s ta t ions Petroleum conservation on public lands and conservation of the radium supply in U.S.

Public lands in general including easements Special oversight with respect t o nonmilitary nuclear energy R&D including disposal of nuclear waste

International Relations Export controls Committee International commodity agreements

TABLE 4. (contd)

Congressional Commi ttee

Interstate and Foreign Commerce Committee

Judiciary Commi ttee

Labor and Education Committee

Merchant Marine and Fisheries Committee

Public Works and Transportation Committee

Science and Technology Committee

JURISDICTIONAL ISSUES

Interstate and foreign commerce generaly Interstate oil compacts and petroleum and natural gas, except on the public lands

e Regulation of interstate transmissions of power, except the installations of connections between government water power projects Securities and exchanges

0 Consumer affairs and protection

Interstate compact generally Patents, copyrights, and trademarks Protection of trade and commerce against unlawful restraints and monopolies

Labor standards Labor statistics Welfare of miners

e Oceanography and marine affairs - costal zone management

e Fisheries and wildlife - research, restoration, refuges and conservation

e Regulation of common carriers (except matters under jurisdiction of I.C.C.), Merchange Marine inspection Registering and licensing of vessels

e Flood control and improvement of rivers and harbors Oil and other pollution of navigable waters Public works for benefit of navigation - bridges and dams, except international Water power Transportation, including civil aviation except railroads

r Roads and safety thereof Water transportation regulatory agencies except (a) I.C.C. as relates to railroads (b) Federal Railroad Administration (c) Amtrak

Astronautical R&D Bureau of Standards NASA National Aeronautics and Space Council NSF - Outer Space - exploration and control thereof

TABLE 4. (contd)


Science and Technology S c i e n t i f i c R&D Committee (cont. ) Environmental R&D

A l l energy R&D except nuclear R&D m Nat ional Weather Serv ice m Specia l ove rs igh t f u n c t i o n i n a l l n o n m i l i t a r y R&D

Small Business Committee Assistance and p r o t e c t i o n t o smal l business i n c l u d i n g f i n a n c i a l a i d

P a r t i c i p a t i o n o f small-business en te rp r i ses i n Federal procurement and Government con t rac t s Special ove rs igh t f u n c t i o n w i t h respec t t o problems o f smal l business

Solar and renewable energy source loan programs

Ways and Means Committee Reciprocal t r ade agreements m Revenue measures gene ra l l y

Revenue measures r e l a t i n g t o t he i n s u l a r possessions

Sources: Congressional Record - Senate, February 4, 1977, "Senate Resolut ion 4 c i t e d as 'Committee Svstem Reorsanizat ion Amendments o f 1977.' T i t l e I - Senate ~ommi t tees ; ~ u r i s d i c t i o n s and Sizes," pp. S2308-S2311. Congressional Quar te r l y , Weekly Report, "Senate Committees," vo l . 35, no. 5, pp. 157-188, January 29, 1977. Rules o f t h e House o f Representat ives, Revised June 16, 1975, 1 s t Session, 94 th Congress. House Reso lu t ion 5, January 4, 1977, 95 th Congress, 1 s t Session. Appendix t o The Budget o f t h e Un i ted States Government, F i s c a l Year 1980, p. 376.

i n v o l v i n g one form or stage may a lso a f f e c t other forms and stages; such

secondary e f f e c t s are no t r e f l e c t e d i n Table 3. I n add i t ion , we have n o t

attempted t o a l l o c a t e ou t lays f o r combination forms among s i n g l e forms.

Major Types o f Ac t i on (Column 7 )

As the column t i t l e impl ies, t h i s column l i s t s o n l y the major types o f

act ion, i n terms o f money and emphasis, conducted by an agency.

Type 1: Organizat ional Creat ion and P r o h i b i t i o n

Congress and t h e President are t h e major o rgan iza t ions conduct ing t h i s

type o f a c t i v i t y . We have not attempted t o i d e n t i f y and q u a n t i f y the p u r e l y

congressional o r pu re l y p r e s i d e n t i a l phase o f any a c t i o n because these phases

are u s u a l l y p a r t o f the c rea t i on o f an act ion, n o t i t s conduct. Occasional ly,

however, Congress o r t h e President delegate t h i s type o f a c t i v i t y t o some other

organizat ion. The Federal Energy Admin is t ra t ion created advisory bodies. None

o f t h e agencies i s now invo lved i n c r e a t i n g fede ra l o rgan iza t ions and none pro-

h i b i t s them. Several agencies c rea te nonfederal o r p r i v a t e organizat ions, and

several agencies p r o h i b i t some forms o f p r i v a t e economic organizat ions.

Type 2: Taxat ion ( i n c l u d i n g fees)

Taxation as such i s used o n l y by the I n t e r n a l Revenue Service. Fees are

a r e l a t i v e l y minor type o f government a c t i o n and those sub jec t t o fees are usu-

a l l y business or u t i l i t y i n t e r e s t s who encounter fees as p a r t o f p roduct ion

costs. We have found o n l y two cases o f fees as major ac t ions ( t h e Bureau o f

Land Management and the Nuclear Regulatory Commission).

T.ype 3: Disbursements

F i ve organizat ions use grants - in -a id t o support government ac t i on a t the

s t a t e o r l o c a l community l e v e l . Subsidies were used i n th ree cases, w i t h the

money going t o small sca le p r i v a t e en terpr ise . Few cases o f government ac t i on

appear t o f it the subtype t rans fers .

Type 4: Requirements

Economic, safety , and environmental requirements are imposed by several

d i f f e r e n t organizat ions.

Type 5: T r a d i t i o n a l

Act ions i n v o l v i n g the t r a d i t i o n a l government serv ices o f i n t e r s t a t e and

f o r e i g n commerce, na t i ona l defense, highways, and i n l a n d waterways have

af fected energy produc t ion and consumption.

Type 6 : N o n t r a d i t i o n a l Services

The major subtypes i n t h i s category are knowledge a c q u i s i t i o n and knowl-

edge d isseminat ion--usual ly lumped together as "research and development." The

bu l k o f the a c t i v i t y i s i n acqu i s i t i on , r a t h e r than disseminat ion. As s tud ies

o f technology t r a n s f e r have shown, t h e U.S. government has r a r e l y done a g rea t

deal t o disseminate the f i n d i n g s o f i t s research.

Type 7: Market A c t i v i t y

Market a c t i v i t y i s a major type o f ac t ion , w i t h i n which the produc t ion

o f c a p i t a l goods i s t h e most f requent subtype o f government ac t i on f o r agencies

t h a t we have c i t e d . This subtype charac ter izes most a c t i v i t i e s w i t h i n t he REA,

Corps o f Engineers, APA, BPA, Southeastern and Southwestern Power Adminis t ra-

t i o n s , and the TVA. The educat ion and t r a i n i n g programs i n mine s a f e t y motiva-

t i o n conducted by t h e Min ing Safety and Hea l th Admin i s t ra t i on f a l l w i t h i n t he

subtype o f p roduc t ion i n labor .

The petroleum reserves i n the Department o f Energy, and the Bureau of Land

Management engage i n a d i f f e r e n t k i n d o f government market a c t i v i t y , which we

have termed t r a n s f e r o f n a t u r a l resources. Transfer of n a t u r a l resources i s

one way t o descr ibe ac t i on r e l a t e d t o t h e s t o c k p i l e o f energy resources. For

instance, the ownership o f land and n a t u r a l resources invo lves the BLM i n leas-

i n g arrangements i n p a r t s o f a 450 m i l l i o n - a c r e reserve of n a t u r a l resources.

FY 1978 Outlays (Column 8 )

F i s c a l year expenditures i n our c h a r t are based on a rev iew o f t he FY 1978

ou t lays repor ted by t h e f e d e r a l government. How accu ra te l y t h e energy-re lated

ac t ions are i d e n t i f i e d and q u a n t i f i e d depends upon the r e p o r t i n g procedures

used i n t h e budget t o l i s t spending by a c t i v i t i e s . Unfor tunate ly , statements

on f i s c a l expenditures o f ten do not g i ve p rec i se f i g u r e s f o r energy-related

program a c t i v i t i e s . Although budgets are prepared by a c t i v i t i e s , t he re i s

widespread inconsis tency i n how s p e c i f i c a l l y an agency l a b e l s i t s a c t i v i t i e s

f o r t h e purpose o f r e p o r t i n g program costs. Also, programs author ized b y spe-

c i a l funding are repor ted i n a spec ia l sec t ion o f the budget and o f ten w i thou t

an e laborate d e s c r i p t i o n o f s p e c i f i c a c t i v i t i e s being funded. For instance,

research on new energy uses, technology development, and conservat ion i s o f t e n

grouped w i t h o ther environmental, t r anspor ta t i on , and in fo rmat ion exchange

a c t i v i t i e s .

Where a prec ise account o f program expenditures i s unavai lable, we have

t r i e d t o est imate us ing a v a r i e t y o f da ta sources and procedures, the percent-

age o f budget ou t lays going t o energy act ion. Appendix B discusses these

sources and procedures organ iza t ion by organizat ion.

I n t h i s update we have taken t h e fo rmat ion o f t h e Department o f Energy and

other recent o rgan iza t iona l changes i n t o account. Two organizat ions f o r m e r l y

concerned w i t h energy have been dissolved: Federal Energy Admin i s t ra t i on and

Federal Power Commission. Other organizat ions have t rans fe r red a11 o f t h e i r

major energy-re lated r e s p o n s i b i l i t i e s t o DOE: Defense Nuclear Agency, DOC

Domestic and I n t e r n a t i o n a l Business Adminis t rat ion, Nat ional Science Founda-

t i o n , and Naval Petroleum Reserves. Outer con t i nen ta l s h e l f a c t i v i t i e s are no

longer a separate organ iza t iona l component i n I n t e r i o r . I n t e r i o r ' s Bureau o f

Mines i s now r e s t r i c t e d t o s a f e t y and h e a l t h r e l a t e d coal min ing research, w i t h

o ther coal min ing R&D programs t r a n s f e r r e d t o DOE. The General Services Admin-

i s t r a t i o n no longer l i s t s energy conservat ion program expenditures i n i t s

budget.

ANALYSIS OF ENERGY ACTIONS

The fo l l ow ing ana lys is o f energy ac t ions i s o r i en ted along the l i n e s sug-

gested by t h e columns o f Table 3. The f i r s t p a r t of t h e ana lys is ranks t h e

i n d i v i d u a l agencies by s i z e o f o u t l a y and develops a t o t a l f i g u r e f o r t h e num-

ber o f separate agencies conduct ing energy-re lated a c t i v i t i e s i n 1978 and

t h e cos t o f conduct ing those a c t i v i t i e s i n 1978. La te r p a r t s o f t he ana l ys i s

break down those two t o t a l f i g u r e s by var ious i tems o f i n t e r e s t , i n c l u d i n g t h e

t ype o f o r g a n i z a t i o n (Column 3 o f Table 3), committee j u r i s d i c t i o n (Columns 4

and 5), energy f o rm (Column 6) , energy s tage (Column 6 ) , and major t ype o f

a c t i v i t y (Column 7) .

ENERGY-RELATED EXPENDITURES OF VARIOUS FEDERAL ORGANIZATIONS (TABLE 5)

I n Table 5, f e d e r a l o rgan i za t i ons conduct ing energy- re la ted a c t i v i t i e s a re

ranked accord ing t o t h e i r spending i n FY 1978 f o r these a c t i v i t i e s . Th is t a b l e

i s based on columns 1 and 8 o f Table 3.

As Table 5 shows, a t o t a l o f 45 o r g a n i z a t i o n a l components spent an e s t i -

mated $13,685,245,000 conduct ing energy a c t i v i t i e s i n FY 1978. Energy-re la ted

spending ranged f r o m $4,893,115,000 spent under t he a u t h o r i t y o f t h e Depart-

ment o f Energy t o $0 spent by t h e Small Business Admin i s t r a t i on on es tab l i shed

energy ac t ions . The average amount spent per o rgan i za t i on was $304,116,556.

T h i r t y - s i x pe rcen t o f t h e t o t a l was spent b y a u t h o r i t y o f DOE. TVA p l u s

DOE spent 64% o f t h e t o t a l . The Army Corps o f Engineers, REA, TVA, and DOE

accounted f o r 81% o f t o t a l energy r e l a t e d spending. Since t h e format ion o f DOE

and t r a n s f e r o f energy r e s p o n s i b i l i t i e s f rom o the r agencies t o DOE, energy

spending has become more concentrated i n fewer agencies. ERDA accounted f o r

j u s t 28% o f t he energy budget i n FY77, w h i l e ERDA, TVA, t h e Army Corps o f

Engineers, and REA accounted f o r j u s t 64% (Cone e t a l . , 1978, p. 79).

TABLE 5. Energy-Related Outlays o f Federal Organizat ions

FY78 Outlays Organizat ion ($000)

Department o f Energy $4,893,115

Tennessee Va l l ey A u t h o r i t y (a) 3,866,581

Corps o f Engineers 1,575,366

Rural E l e c t r i f i ca ton Admin is t ra t ion (Cap i ta l Investment) 736,306 Bureau o f Reclamation 438,199

Bonnev i l le Power Admin is t ra t ion (a) 349,232

Mar i t ime Admin is t ra t ion 336,531

Nuclear Regulatory Commission 287,699

U.S. Geological Survey 182,376

Nat ional Aeronautics and Space Admin is t ra t ion 145,377

Occupational s a f e t i and Heal th Admin is t ra t ion 120,571

Environmental P ro tec t i on Agency 112,824

Employment Standards Admin is t ra t ion (b) 112,678

I n t e r n a l Revenue Serv ice 87,420

Bureau o f Land Management 81,880

Bureau o f Mines 73,219

Nat ional I n s t i t u t e s o f Environmental Heal th 55,077

Department o f Transpor ta t ion 54,598

Min ing Safe ty and Hea l th Admin is t ra t ion 35,061

Forest Serv ice 26,256

Southwestern Power ~ d m i n i s t r a t i o n ( ~ ) 21,249

Bureau o f Ind ian A f f a i r s 20,212

Rural E l e c t r i f i c a t i o n Admin is t ra t ion 12,314

Nat ional Bureau o f Standards 8,770

Federal Trade Commission 6,420

Nat ional Oceanic and Atmospheric Admin is t ra t ion 6,283

General Accounting O f f i c e 5,739

Southeastern Power ~ d m i n i s t r a t i o n ( ~ ) 5,572

Jus t i ce A n t i t r u s t D i v i s i o n 5,061

O f f i c e o f Surface Min ing 4,961

TABLE 5. (contd)

FY78 Outlays Organizat ion ($000)

Housing and Community Research

O f f i c e o f Management and Budget

Alaska Power Admin is t ra t ion (a )

I n t e r s t a t e Commerce Commission

Nat iona l T ranspor ta t ion Safe ty Board

Appalachian Regional Development

J u s t i c e Legal A c t i v i t i e s

Counci l on Environmental Q u a l i t y

O f f i c e o f Technology Assessment

S e c u r i t i e s and Exchange Commission

J o i n t Federa l -State Land-Use Planning Commission

Smithsonian In fo rma t i on Exchange

Atomic Energy Defense A c t i v i t i e s (DOE)

Congressional Budget O f f i ce

Small Business Admin i s t ra t i on

(a ) The ou t lays l i s t e d here do no t represent ou t lays o f t a x d o l l a r s by the f e d e r a l government. These organ iza t ions are government con t ro l l ed , bu t a l l ou t l ays come from revenues received through the sa le o f e l e c t r i c i t y t o t h e i r customers.

(b ) The ou t lays l i s t e d here come from a spec ia l exc ise t a x on coa l tonnage p a i d by coal producers and f rom reimbursements i n t o t h e t r u s t fund by mine operators. The funds are used t o pay compensation, medical and s u r v i v o r b e n e f i t s t o e l i g i b l e miners and t h e i r surv ivors .

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY PROFESSIONAL TYPE (TABLE 6 )

Table 6 i s based on columns 3 and 8 o f Table 3. As Table 6 shows, depart-

mental agencies a l l oca ted the most energy do1 1 ars ($9,248,936,000). Approxi-

mate ly 67% o f t h e t o t a l o u t l a y was spent by departmental agencies i n FY78.

Independent agencies spent about 1.9% o f the t o t a l out lay, w h i l e r e g u l a t o r y

commissions spent about 2.2%. One government corpora t ion (TVA) spent 28%. The

remainder o f the FY 1978 o u t l a y was spent by var ious organizat ions o f f o u r d i f -

f e r e n t o rgan iza t iona l types. The major change from previous years i s t h e

growth i n r e l a t i v e importance o f departmental agencies. For example, i n FY77,

departmental agencies accounted f o r j u s t 46% o f t h e t o t a l o u t l a y on energy, and

independent agencies were the next most important o rgan iza t iona l type w i t h 33%

o f t h e out lays. These changes are due t o t h e format ion o f t h e Department o f

Energy, which replaced major independent agencies (FEA and ERDA), and took over

f unc t i ons fo rmer l y belonging t o several other agencies i n c l u d i n g func t i ons i n

DOD, D O I , FPC, and NSF.

TABLE 6. Energy-Related Organizat ions and Outlays by Organizat ional Types

FY78 Out lays Organizat ional Type ($000

1. Departmental Agency 2. Execut ive O f f i c e o f t h e President 3. Independent Agency 4. Foundation 5. I n s t i t u t i o n 6. Claims Commission 7. Regulatory Commission 8. Conference 9. Government Corpora t i on

10. Interagency ~ o a r d 11. Advisory Body 12. J o i n t Executive--Congressional Committee 13. Intergovernmental Organizat ion 14. Semipublic Organizat ion 15. GOCO 16. COCO 17. Congressional Agency 18. Federal Court

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY COMMITTEE JURISDICTION (TABLE 7)

Table 7 is based on columns 4, 5, and 8 of Table 3. Congressional com-

mittees listed in column 1 of Table 7 authorize energy-related programs based on their jurisdictional interests described in Table 4. Each committee's

jurisdiction column gives the number of federal energy-related organizations

each congressional committee oversees. The energy dollars in each committee's

jurisdiction column represent the total outlays for the organizations under

that committee's jurisdiction, based on energy-related spending in each orga-

nization as given in Tables 3 and 5.

In many cases more than one congressional committee has jurisdiction over

a given organization. Where there is overlapping congressional authority, we

added the "overlapped" organization to each committee's totals because we

wanted to calculate a maximum energy jurisdiction for each committee. For example, the two REA programs are included in the totals of a number of orga-

nizations and outlays for both the Agriculture and Government Operations Com-

mittees. (Note that further analyses involving operations such as adding

amounts together or computing percentages would not yield completely valid

results.)

The jurisdiction of several committees is overstated by the inclusion of

the entire Department of Energy budget. For example, the Judiciary Committees

of the House and Senate are concerned only with the Federal Energy Regulatory

Commission and the Economic Regulatory Administration, not the entire DOE. The

Armed Services Committees are similarly concerned with only part of DOE, in

this case the Atomic Energy Defense Activities.

In the Senate, 11 committees had jurisdiction over energy-related orga-

nizations. The Energy and Natural Resources Committee's jurisdiction was the

largest; it included 14 organizations with a combined total of $10,241,876,000

in outlays. The Budget Committee's jurisdiction was the smallest; it included

one organization with $200,000 in outlays. Jurisdiction averaged 4.1 organiza-

tions. The biggest jurisdiction (Energy and Natural Resources) included 31%

of the energy-related organizations.

TABLE 7. Energy-Related Organizations and Outlays by Committee Jurisdiction

Organizations Senate in Each Committee's FY78 Outlays

Committees Jurisdiction ($000)

Energy and Natural Resources 14 10,241,876

Commerce, Science, and Transportation 9 5,449,481 Government Affairs 7 5,191,816 Judiciary 4 4,909,059 Environment and Public Works 4 1,690,241 Agriculture, Nutrition, Forest 3 774,876 Human Resources 4 308,538 Finance 1 87,420 Banking, Housing, and Urban Affairs 3 3,497 Armed Services 1 442 Budget 1 200

House Committees



Interstate and Foreign Commerce

Public Works and Transportation

Science and Technology

Judiciary

Agri cu 1 ture

Merchant Marine and Fisheries Education and Labor

Ways and Means Banking, Finance, and Urban Affairs

Armed Services Budget

Small business

I n t he House, 14 committees had j u r i s d i c t i o n over energy-re la ted organiza-

t i o n s . The Government Operat ions Committee's j u r i s d i c t i o n was t h e l a r g e s t ; i t

inc luded 21 o rgan i za t i ons w i t h a combined t o t a l o f $12,628,481,000 i n ou t lays .

The Budget Committee's subs tan t i ve j u r i s d i c t i o n was t h e smal lest ; it inc luded

one o rgan i za t i on w i t h $200,000 i n ou t lays . J u r i s d i c t i o n averaged 3.2 o rgan i -

za t ions . The b i g g e s t j u r i s d i c t i o n i nc l uded 24% o f t h e energy- re la ted

o rgan iza t ions .

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY ENERGY FORM (TABLES 8, 9, 10)

Tables 8, 9, and 10 are based on columns 6 and 8 o f Table 3. Table 8

groups energy- re la ted o rgan i za t i ons and ou t l ays by t he energy form o r combi-

n a t i o n o f forms i nvo l ved . Combinations are kep t toge ther t o emphasize o rgan i -

za t i ons t h a t must spread t h e i r a c t i v i t i e s over a number o f forms. Table 9

l i s t s t he names o f t he energy-re la ted o rgan i za t i ons i n each group o f Table 8.

Table 10 i s a condensed ve rs i on o f Table 8, produced by e s t i m a t i n g how

o rgan i za t i ons w i t h o u t l a y s a f f e c t i n g more than one energy form a l l o c a t e d t h e i r

o u t l a y s among forms i n FY78.

For t he purposes o f Table 10, we have est imated an o r g a n i z a t i o n ' s a l l o c a -

t i o n s o f ene rgy - re l a ted o u t l a y s b y energy form. Once again, we used a v a r i e t y

o f da ta sources and procedures f o r making those est imates discussed i n

Appendix B and by o rgan iza t ion .

Where a d d i t i o n a l da ta were no t ava i l ab le , we f i r s t took no te o f D O E ' S

breakdown o f 1978 consumption by p r ima ry energy type. That breakdown i n

q u a d r i l l i o n B t u was as f o l l o w s :

Coal N a t u r a l Gas O i 1 H y d r o e l e c t r i c i t y Nuclear So la r and Other

Tot a1

It does no t separa te e l e c t r i c i t y , a l though many f e d e r a l programs address i t

d i r e c t l y , even though i t i s no t a "p r ima ry energy type" accord ing t o t h e DOE.

To include electricity as part of the breakdown, we calculated total electricity sales in Btu. ( 2 ) We then calculated the amount of electricity in Btu produced by each primary type. We assigned one-half of those Btu to electric-

ity and one-half to the primary energy type, on the theory that interest in

electricity from a specific form is really interest split between the specific form input and the electricity output. We did, however, assign all the hydro-

electric Btu to electricity.

Electricity Btu thus equal:

100% of hydroelectricity = 3.147 50% of coal-electrici ty = 6.076 50% of oil-electricity = 2.299 50% of natural gas electrictiy = 1.899 50% of nuclear electricity = 1.488

Total 14.909

We then subtracted the Btu we had allocated to electricity from the appropriate

primary energy type to produce the following breakdown that includes electricity:

Electricity (from above) 14.909 Coal

100% of its total consumption Minus 50% of coal-electricity Equals

Oi 1 100% of its total consumpti on Minus 50% of oil-electrictiy Equals

Natural Gas 100% of its total consumption Minus 50% of gas-electricity Equals

Nuclear 100% of its total consumption Minus 50% of nuclear-electricity Equals

Solar and Other TOTAL

Therefore we c a l c u l a t e the following percentages by energy form: E l e c t r i c i t y 19.1 Coal 10.3 Oil 45.5 Natural Gas 22.9 Nuclear 1.9 Solar -- Other 0.3

We assumed t h a t almost a l l of t h e "Solar and Other" consumption was

"o the r , " r a t h e r than " so la r " (e .g. , geothermal).

We a l loca ted energy out lays t o form by these percentages when we had no

other da ta t o suggest some other a1 1 oca t ion .

When we knew a f ede ra l ac t ion had some influence on energy production or

consumption, but energy-related spending was not disclosed in the c o s t of con-

ducting an a c t i o n , we used a percentage (12%) of t o t a l out lays as a f r a c t i o n

of spending l i k e l y t o be energy-related. This 12% f i g u r e was used, because

energy production i s roughly 12% of nat ional product. Energy production was

ca lcula ted as 12% of t o t a l market a c t i v i t y by the following method.

The 1978 energy consumption f i g u r e s on t h e previous page were mult ipled

by the average p r i c e of t h a t energy type in 1978. (3) These c a l c u l a t i o n s a re

shown below:

Estimated Quads Expenditure

Consumed $/Quad ( b i l l i o n s ) Percent

E l e c t r i c i t y 16.397 1,020.0 x 109 $167.249 68 ( inc luding nuc lea r )

Coal 8.011 97.8 x lo9 7.835 3

Oil 35.487 154.5 x 109 54.827 22

Natural Gas 17.920 90.0 x lo9 16.128 7

TOTAL $246.039

Gross nat ional product in 1978 was $2,127.6 b i l l i o n ; hence, Energy Expend-

i t u r e s divided by Gross National Product equaled 0.116 in 1978.

When considering both single and multiple energy forms, as in Tables 8 and 9, the number of organizations with actions involving a given energy form

ranged from 16 for All Forms to 1 fo r several s ingle forms. The number of

organizations per form averaged 2.6. Approximately 36% of the organizations f e l l in to one group (All Forms). The outlays involving a given energy form

ranged from $5,451,675,000 f o r a l l forms t o $2,001,000 f o r coal and oi 1. The

outlays per form averaged $805,600,880. Approximately 40% ($5,451,675,000) of

the outlays f a l l in to one group (All Forms).

When considering single forms alone, as i s done in Table 10, the outlays

involving a given energy form ranged from $5,585,096,000 fo r Nuclear t o

$119,777,000 f o r Other. The outlays per form averaged $1,955,035,000.

Approximately forty-one percent of the outlays f e l l in to one group (Nuclear).

TABLE 8. Energy Related Organizations and Outlays by Energy Form (extended version)

Number of FY78 Outlays Forms Orqanizations ($000)

Nuclear Coal O i 1.

Multiple Forms All Forms petroleum and Nuclear 1 Fossil , E lec t r ic i ty , and Other 2 Fossil , Nuclear, and Other 1 Fossil and Other 1 Coal and Nuclear 1 Elec t r ic i ty and Other 1 Coal and Oil 1 Coal, Oil, Nuclear and Other 1 Coal, Natural Gas, Nuclear

and E lec t r i c i t y 1 Elec t r ic i ty and Oil 1 All b u t Solar 1 All b u t Other 1

TABLE 9. Federal Organizations by Energy Form

Energy Form Federal Organizations

Electricity

Nuclear

Coal

Southeastern Power Administration Alaska Power Administration Southwestern Power Administration

* Bonneville Power Administration 0 Rural Electrification Administration e Rural Electrification Administration - Capital Investment Securities and Exchange Commission

Nuclear Regulatory Commission o Atomic Energy Defense Activities

Appalachian Regional Development Employment Standards Administration Office of Surface Mining

Department of Transportation Maritime Administration Small Business Administration

-Joint Federal-State Land-Use Planning Commission

MULTIPLE FORMS

Fossil, Nuclear, and Other Bureau of Land Management

Fossil and Other Legal Activities - Justice Department Coal and Nuclear Mine Safety and Health Admnistration

Electricity and other Bureau of Reclamation

Fossil, Electricity, and Forest Service Other Bureau of Indian Affairs

Oil and Coal Interstate Commerce Commi ssi on

Coal, Natural Gas, Tennessee Valley Authority Nuclear and Electricity

All Forms Congressional Budget Office e Internal Revenue Service Office of Management and Budget Antitrust--Justice Smithsonian (SSIE)

TABLE 9. (contd)

Energy Form Federal Organizat ions

A1 1 Forms (cont inued) a Nat ional Oceanic and Atmospheric Admin is t ra t ion Council on Environmental Q u a l i t y O f f i c e o f Technology Assessment

o Government Accounting O f f i c e Nat ional Aeronautics and Space Admin is t ra t ion

a Nat iona l Bureau o f Standards * Environmental P ro tec t i on Admin is t ra t ion

Department o f Energy Nat iona l I n s t i t u t e o f Environmental Hea l th Federal Trade Commission

o Occupational Safe ty and Heal th Admin is t ra t ion

A l l bu t Solar Geologic Survey

Petroleum and Nuclear Nat ional Transportat ion Safe ty Board

Coal, O i l , Nuclear Bureau o f Mines and Other

O i l and E l e c t r i c i t y Corps o f Engineers

A1 1 b u t Other Housing and Community Research

TABLE 10. Energy Outlays by Energy Form (Condensed Version)

FY 1978 ~ u t l a y s ( a ) Percent o f Energy Form ($000) To ta l Outlays

E l e c t r i c i t y $4,034,844 29.5

Nuclear 5,585,096 40.8

Coal 1,630,365 11.9

Solar 371,412 2.7

O i l 1,646,805 12.0

Gas 296,946 2.2

Other 119,777 0.9

(a ) These f i g u r e s are der ived from in fo rmat ion presented i n Appendix B.

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY ENERGY STAGE (TABLES 11, 12, 13)

Table 11 is also based on columns 6 and 9 of Table 3. This table groups

energy-related organizations and outlays by energy stage rather than form.

Tables 12 and 13 are based on a combination of Tables 11 and 9. Table 12

groups organizations by both energy form (using single and multiple forms) and

energy stage, while Table 13 does likewise for energy outlays.

Table 12 shows that the number of organizations involved with a given

form/stage combination ranged from 13 for All Forms/Both to zero for many com-

binations. The number of organizations per form/stage combination averaged

0.83. Approximately 44% of the organizations fell into two form/stage combi-

nations (All Forms/Both or Electricity/Production). About 62% of the organi-

zations are involved at the production stage, 33% at both production and con-

sumption stages, and just 4% at the consumption stage only.

Table 13 shows that outlays involved with a given form/stage combination

ranged from $5,269,744,000 for A1 1 Forms/Both to zero for many combinations.

Outlays per form/stage combination averaged $285,316,970. Approximately 38%

of the outlays fell into one fordstage combination (All Forms/Both).

TABLE 11. Energy-Related Organizations and Outlays by Energy Stage

Number of FY78 Outlays Energy Stage Organizations ($000)

Production

Consumption

Both

TABLE 12. Energy-Related Organizations by Energy Form and Energy Stage

ENERGY STAGE Energy Form Production Consumption Both

Single Forms

Electricity Nuclear Coal Oi 1

Multiple Forms

All Forms

Petroleum Petroleum and Electricity

Petroleum and Nuclear Fossil, Electricity, and Other

Fossil, Nuclear, and Other Fossil, and Other Coal and Nuclear Electricity and Other Coal and Oil Coal, Oil, Nuclear and Other

Coal, Natural Gas, Nuclear and Electricity 1 0 0

All but Solar 1 0 0

All but Other 0 1 0

TABLE 13. FY 1978 Energy Outlays by Energy Form and Energy Stage ($000)

ENERGY STAGE

Energy Form Production Consumption Both

Single Forms

Electricity

Nuclear

Coal

Oi 1

Multiple Forms

All Forms

Petroleum

Petroleum and Electricity

Petroleum and Nuclear

Fossil, Electricity and Other

Coal and Nuclear

Electricity and Other

Coal and Oil

Fossil, Nuclear, and Other

Fossil and Other

Coal, Oil, Nuclear and Other

Coal, Natural Gas, Nuclear and Electricity

All but Solar

A1 1 but Other

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY MAJOR TYPE OF ACTION 0

Table 14 i s based on columns 7 and 8 o f Table 3. I f an organ iza t ion

emphasized more than one type o f act ion, i t i s counted o n l y f o r t h e a c t i o n we

judge i t t o have emphasized most. We d i d not attempt t o group m u l t i p l e types

(as i n Table 8 ) o r t o est imate i n t rao rgan iza t i ona l a l l o c a t i o n s (as i n

Table 10). Table 15 i d e n t i f i e s the organ iza t ions we assigned t o each type o f

a c t i v i t y .

Tables 14 and 15 show t h a t the number of organizat ions g i v i n g most empha-

s i s t o a p a r t i c u l a r type o f a c t i o n ranged from 13 f o r requirements t o one f o r

Taxation. The number o f organizat ions per type averaged 6.43. The t o t a l out-

l ays o f o rgan iza t ions emphasizing a g iven type o f a c t i o n ranged from

$7,109,021,000 f o r Market A c t i v i t y t o $2,762,000 f o r T r a d i t i o n a l Services.

Approximately 52% o f t h e ou t l ays were made by organ iza t ions emphasizing Market

A c t i v i t y .

TABLE 14. Energy-Related Organizat ions and Outlays by Major Type o f Ac t ion

Number o f Organiza- Major Type o f t i o n s Emphasizing FY78 Outlays

Ac t ion This Type o f Ac t ion ($000)

Creat ion or P r o h i b i t i o n 1 o f Organizat ions

Taxat ion 1

Disbursements, 5

Requirements 13

T r a d i t i o n a l Services 2

Non t rad i t i ona l Services 12

Market A c t i v i t y 11

TABLE 15. Federal Organizations by Major Type of Action

Major Type of Action Federal Orqanizations

Organizational Creation Antitrust--Justice Department or Prohibition

Taxation Internal Revenue Service

Disbursements

Administration

Requirements

Employment Standards Administration Appalachian Regional Development Program Small Business Administration

a Maritime Administration National Oceanic and Atmospheric

Occupational Safety and Health Administration a Federal Trade Commission

U . S . Geological Survey Nuclear Regulatory Commission Legal Activities--Justice Department Council on Environmental Quality Environmental Protection Agency Securities and Exchange Commission Joint Federal-State Land-Use Planning Commission Interstate Commerce Commission National Transportation Safety Board Mine Safety and Health Administration Office of Surface Mining

Traditional Services Office of Management and Budget Atomic Energy Defense Activities

Nontraditional Services a Congressional Budget Office Office of Technology Assessment National Aeronautics and Space Administration

a General Accounting Off ice Smithsonian (SSIE) National Bureau of Standards Department of Energy

a Department of Transportation Housing and Community Research--(HUD) National Institute of Environmental Health Bureau of Mines Forest Service

TABLE 15. (contd).

Major Type o f Ac t i on Federal Organizat ions

Market A c t i v i t y 0 Southwestern Power Admin is t ra t ion Alaska Power Admin is t ra t ion Southeastern Pi5wer Admin is t ra t ion Bonnev i l le Power Admin is t ra t ion Rural E l e c t r i f i c a t i o n Admin is t ra t ion Rural E l e c t r i f i c a t i o n Admin is t ra t ion C a p i t a l Investment Bureau o f Reclamation Bureau o f Ind ian A f f a i r s

* Tennessee Val l e y A u t h o r i t y Corps o f Engineers Bureau o f Land Management

Table 16, which combines Tables 8 and 14, shows t h e r e l a t i o n s h i p between

energy form and major type o f a c t i v i t y . It shows t h a t the number o f organiza-

t i o n s invo lved w i t h a given form/type combination ranged from 8 f o r Nontradi -

t i o n a l Serv ices /A l l Forms t o one f o r many combinations. The number o f organi -

za t ions per form/type combination averaged 1.6. Non t rad i t i ona l Se rv i ces /A l l

Forms and Market A c t i v i t y / E l e c t r i c i t y together account f o r 31% o f the Form/

Organizat ion combinations.

Table 16 a lso shows t h a t the ou t lays involved w i t h a given form/type com-

b i n a t i o n ranged fom $5,109,749,000 f o r Non t rad i t i ona l Services/Al 1 Forms t o

$442,000 f o r T r a d i t i o n a l Services/Nuclear. The out lays per form/type combina-

t i o n averaged $489,114,820. Approximately 37% o f t h e ou t l ays f e l l i n t o one

fo rml type combination (Non t rad i t i ona l Serv ices /A l l Forms). Four form/type

combinations together have 85% o f t h e ou t lays (Non t rad i t i ona l Serv ices /A l l

Forms, Market A c t i v i t y / E l e c t r i c i t y , Market A c t i v i t y l O i l and E l e c t r i c i t y , and

Market A c t i v i t y / E l e c t r i c i t y , Coal, Natura l Gas and Nuclear).

TABLE 16. Energy-Related Organizations and Outlays by Action Type and Energy Form

Major Type Number of FY78 Outlays of Action Energy Form Organizations ($000)

Creation and Prohibi t ion of Organizations: All Forms

Taxation : All Forms Disbursements: Coal

Oil All Forms

Requirements: Nuclear 1 All Forms 4 Petroleum 1 E l e c t r i c i t y 1 Coal 1 Coal and Nuclear 1 Oil and Coal 1 Petroleum and Nuclear 1 Fossi l and Other 1 All b u t Solar 1

Tradi t ional Services: Nuclear 1 442

All Forms 1 2,320 Nontraditional

Services: Oi 1 1 54,598 All Forms 8 5,109,749 Coal, Oi l , Nuclear and Other 1 73,219 E l e c t r i c i t y , Foss i l , and Other 1 26,256 All b u t Other 1 2,750

Market Act iv i ty : E l e c t r i c i t y 6 1,126,783 Foss i l , E l e c t r i c i t y and Other 1 20,212 E l e c t r i c i t y and Other 1 438,199 Oil and E l e c t r i c i t v 1 1,575.366 - Coal, Natural Gas,.

Nuclear & E l e c t r i c i t y 1 Foss i l , Nuclear, and Other 1

CONCLUSIONS

The preceding ana lys is i s summarized i n Table 17, where each organ iza t ion

i s l i s t e d on l y once under one o f t h e major types o f act ions. Although an orga-

n i z a t i o n may have conducted more than one major type o f act ion, t h i s t a b l e

places a l l spending i n t h e major type o f ac t i on most f r e q u e n t l y conducted by

t h a t organizat ion. The f i r s t conclusion i s t h a t energy ac t ions occurred i n a t

l e a s t 45 d i f f e r e n t o rgan iza t ions i n FY1978. The b iggest s i n g l e energy program

i s the Department o f Energy. Energy spending as a percentage o f government

spending was on l y about 3%(4) w h i l e energy expenditures as a percentage o f

gross na t i ona l product was about 12%. Over t h e past t h ree years, t h e f e d e r a l

government has not spent a h igher percentage o f i t s budget on energy, even

though t h e na t i on has spent a h igher percentage o f i t s gross na t i ona l p roduct

on energy.

The government appeared t o be t r y i n g a number o f approaches, w i t h g reater

emphasis on some. Heavy use was made of ' departments and r e l a t i v e l y 1 i t t l e use

o f independent agencies i n the wake o f the c rea t i on o f the Department o f

Energy. Independent agencies were more h e a v i l y r e l i e d on p r i o r t o the c r e a t i o n

o f DOE (e.g., ERDA and FEA). Congressional superv is ion was spread among a num-

ber o f committees, b u t was very heavy i n a few. Some energy forms rece ived

much more a t t e n t i o n than others. For instance, over the th ree years we have

been per forming t h i s analys is , t h e percentage o f f ede ra l spending devoted t o

e l e c t r i c i t y d i r e c t l y has dropped s i g n i f i c a n t l y , wh i l e the percentage devoted

t o nuclear energy has increased s i g n i f i c a n t l y . Energy product ion rece ived much

more a t t e n t i o n than energy consumption. Research and market a c t i v i t i e s were

used much more than o rgan iza t i ona l c r e a t i o n or disbursements.

Var ia t ions i n i ncen t i ves i n t e r a c t e d i n a number o f ways. Some energy

forms were addressed much more a t one stage than another. Also, c e r t a i n energy

forms were addressed much more by one type o f a c t i o n than others. This uneven-

ness i n the a p p l i c a t i o n o f i ncen t i ves suggests t h a t some oppor tun i t i es may have

been missed. Indeed, c r i t i c s o f f ede ra l act ions toward energy have po in ted t o

a humber o f them. Perhaps most f r e q u e n t l y mentioned are: (1) the a t t e n t i o n

p a i d t o product ion and t h e l ack o f a t t e n t i o n t o consumption and (2) t h e l ack

o f a t t e n t i o n pa id t o some very promis ing new technologies.

TABLE 17. An Estimate of the Cost of Generic Incentives Used to Stimulate Energy Production FY 1978 (Thousand $ )

C r e a t i o n and Energy P r o h i b i t i o n of T r a d i t i o n a l N o n t r a d i t i o n a l Market Form O r q a n i z a t i o n s T a x a t i o n Disbursements Requirements Serv ices Serv ices A c t i v i t y TOTAL Percen t

E l e c t r i c i t y 967 16,697 1,200 47,000 443 58,111 3,910,426 4,034,844 29.5

Nuc lear 96 1,661 119 293,158 486 3,302,943 1,986,633 5,585,096 40.8

Coal 521 9,004 114,754 66,084 239 769,654 670,109 1,630,365 11.9

S o l a r 0 0 0 0 0 371,412 0 371,412 2.7

N a t u r a l Gas 1,159 20,019 1,439 116,959 531 105,080 51,759 296,946 2.2

Other 15 263 19 727 7 118,337 409 119,777 0.9

-- -- - - - T o t a l 5,061 87,420 456,921 757,488 2,762 5,266,572 7,109,021(~) 13,685,245

Percen t 0.04 0.64 3.34 5.53 0.02 38.48 51.95 100.0

( a ) T h i s va lue i n c l u d e s e x p e n d i t u r e s of $4,244,744,000 by t h e Tennessee V a l l e y A u t h o r i t y and t h e B o n n e v i l l e , Southwestern, Alaska, and Sou theas te rn power a d m i n i s t r a t i o n s whose budgets a r e f i nanced f rom o p e r a t i n g revenues and n o t Federa l Government funds .

Data summarized i n Table 17 show t h a t s o l a r energy has rece ived a very

small p a r t o f the Federal Government's energy a t ten t i on . However, the per-

centage o f energy spending devoted t o s o l a r has increased from rough ly one per-

cent t o rough ly th ree percent. The data a lso suggest t h a t the Federal Govern-

ment has undertaken a l a r g e v a r i e t y o f ac t ions w i t h respect t o other forms o f

energy. As a consequence, any expanded a t t e n t i o n t o so la r energy cou ld draw

on a l a r g e number of e x i s t i n g opt ions. The f o l l o w i n g chapters examine many o f

these fede ra l ac t ions toward o ther energy forms i n much greater d e t a i l and over

longer periods.

One a d d i t i o n a l conclus ion emerges from a comparison o f the r e s u l t s o f t h i s

update w i t h our prev ious ana lys is o f f ede ra l spending on energy (Cone, e t al.,

December 1978). F i r s t , consumer spending on e l e c t r i c i t y has increased r e l a -

t i v e t o o ther energy forms. According t o our ca l cu la t i ons , e l e c t r i c i t y has

increased f rom 16 t o 19% o f energy consumption or 21% i f nuclear i s included.

As a percentage o f purchases o f energy, e l e c t r i c i t y ( i n c l u d i n g hydropower and

nuclear) absorbs 68%. The Federal Government devoted a rough ly comparable per-

centage o f i t s spending (70.4%) t o nuclear p l u s e l e c t r i c i t y .

REFERENCES - CHAPTER I11

1. Department of Energy, Energy Information Administration, Quarter ly Report t o Congress, Fourth Q u a r t e r , 1978. April 1979.

2. Quar ter ly Report, p. 50.

3 . Cnal. o i l . and na tura l aas ~ r i c e s from Enerav Information Administra- t i o n : ~ n n l a l Report t o tongless , 1978, ~ o l u & 2 , p. 13; e l e c t r i c i t y p r i ces from Volume 3, p. 269 of the same Report ( ca l cu la t ed by l i n e a r i n t e r o o l a t i o n between h i s t o r i c a l 1978 value and projected 1985 va lue) . . .

The obtained by in t e rpo la t ion from the Report equals 34.7 milli/kwh. Since 1 kwh = 3,412 Btu's, t h i s i s equiva lent t o t h e p r i ce of 1.019t x

1012 per q u a d r i l l i o n Btu 's shown in the t a b l e above.

4. Total government spending i n FY 1978 was $502 b i l l i o n , (1980 Budget, p. 4 ) while energy expenditures t o t a l e d about $13.7 b i l l i o n ( t h i s chap te r ) .

I V . NUCLEAR ENERGY INCENTIVES

One o f t h e h a l l m a r k s o f commercial n u c l e a r power i s t h e h i g h degree o f

f e d e r a l p a r t i c i p a t i o n i n i t s development and r e g u l a t i o n . I n t h i s chapter , we

e s t i m a t e t h e magni tude o f f e d e r a l suppor t t h a t has been d i r e c t e d toward making

n u c l e a r power i n a l l i t s forms ( i n c l u d i n g f i s s i o n and f u s i o n ) i n t o commercial

energy resources. T h i s suppor t has been man i fes ted i n a number o f ways: sub-

s i d i e s , use o f f a c i l i t i e s , sponsorsh ip o f R&D d i r e c t l y a p p l i c a b l e t o commercial

n u c l e a r power, educat ion, t r a n s f e r o f techno logy f rom weapons, space and m i l i -

t a r y a p p l i c a t i o n s , and l e g i s l a t i o n . A l though n o t a l l o f t h i s suppor t i s mone-

t a r y , where p r a c t i c a l we have q u a n t i f i e d i t i n 1978 d o l l a r s .

It i s r e l a t i v e l y s imp le t o measure research and development cos ts , b u t

much more d i f f i c u l t t o e s t i m a t e f e d e r a l suppor t d e r i v e d f r o m f a c i l i t i e s con-

s t r u c t e d f o r weapons o r m i l i t a r y programs (e.g., t h e uranium enr ichment p l a n t s )

b u t now used l a r g e l y f o r commercial n u c l e a r power. Var ious approaches t o t h i s

prob lem have produced a range o f es t ima tes . Even more d i f f i c u l t t o measure are

l e g i s l a t i v e a c t i o n s which have f a c i l i t a t e d , and i n f a c t been v i t a l t o , com-

m e r c i a l n u c l e a r power. I n t h i s c a t e g o r y i s t h e l i a b i l i t y p r o t e c t i o n ( P r i c e -

Anderson A c t ) p r o v i d e d t h e i n d u s t r y . I n such cases we s i m p l y d e s c r i b e t h e

scope o f f e d e r a l suppor t w i t h o u t a t t e m p t i n g t o q u a n t i f y it. Other c o n t r i b u -

t i o n s t o commercial power have been in te rwoven w i t h p o l i t i c a l and f o r e i g n p o l -

i c y c o n s i d e r a t i o n s t h a t were beyond t h e scope o f t h i s p r o j e c t . F i n a l l y , i t i s

i m p o s s i b l e t o q u a n t i f y t h e c o n t r i b u t i o n t h a t d e r i v e s f r o m s i m p l y p r o v i n g t h a t

a concept works, e.g., n u c l e a r power, o r f r o m t r a i n i n g people which become t h e

nuc leus o f a new i n d u s t r y .

Secondary d a t a used i n t h i s a n a l y s i s were ob ta ined f r o m a u t h o r i z i n g l e g i s -

l a t i o n f o r t h e Department o f Energy ( f o r m e r l y Atomic Energy Commission and

Energy Research and Development A d m i n i s t r a t i o n ) , v a r i o u s General Account ing

O f f i c e (GAO) r e p o r t s , and o t h e r l i t e r a t u r e sources.

BACKGROUND

The development o f n u c l e a r energy r e q u i r e d un ique i n s t i t u t i o n a l arrange-

ments, i n which b o t h government and p r i v a t e i n d u s t r y opera ted i n ways v e r y

different from their conventional roles. The government's role in the develop-

ment of nuclear power has been that of a participant in the creation and evolu-

tion of a commercial alternative to the power systems traditionally devised and

manufactured by private industry.

The U.S. Government recognized at the beginning that although nuclear

power had great potential benefits to the nation as an energy source, success

was uncertain and long-range. Its development required large financial

resources and greater risks than private industry alone was willing to take.

Through government leadership, an arrangement was established with industry to

provide a framework to develop nuclear power. The policies and practices formulated and implemented by the government have been effective in developing

nuclear power within the traditional industry framework.

In 1970, there were 13 nuclear power plants in operation, representing

only 2% of the total U.S. utility generating capacity.(') At present, the

U.S. has 70 reactors with operating licenses and about 126 powerplants are either under construction or planned. ( 2 ) Nuclear plants currently account

for about 13.0% of total utility generating capacity,(2) with estimates of

about 21% by 1985.(4)

From the beginning the development of commercial nuclear power derived

from manpower, facilities, technology and contracting policies which had their

genesis in World War 11. The technology grew out of military applications of

atomic power, namely the weapons and naval reactors program. Originally, the

energy source was controlled by the Federal Government under conditions of

secrecy.

The Atomic Energy Act of 1946 created the basis for commercial development

of nuclear power. The act transferred the atomic energy program from military

to civilian control. The "Declaration of Policy'' stated: (5)

It is hereby declared to be the policy of the people of the U.S.

that, subject at all times to the paramount objective of assuring

the common defense and security, the development and utilization of

atomic energy shall, so far as practical, be directed toward

improving the p u b l i c welfare, inc reas ing the standard o f l i v i n g ,

s t rengthening f r e e compet i t ion i n p r i v a t e enterpr ise, and promoting

wor ld peace.

The Atomic Energy Commission's o r i g i n a l char ter , as s ta ted by law, was t o

develop the u t i l i z a t i o n o f f i s s i o n energy. (5yp'261) The 1946 Act es tab l ished

two governmental bodies t o c o n t r o l and develop nuclear power: t h e AEC i n t h e

Execut ive Branch and the J o i n t Committee on Atomic Energy (JCAE) i n the Con-

gress. Two bodies were es tab l ished because i t was be l ieved t h a t a s i n g l e

admin is t ra to r should not con t ro l a l l nuclear a c t i ~ i t i e s . ! ~ ' ~ ' ~ ~ ) Concurrent

w i th , and t o some degree as a r e s u l t of , AEC con t rac t i ng arrangements and

development programs, a t h i r d p a r t y emerged, the i n d u s t r i a l suppl iers. Up t o

t h e end o f 1974, t h i s three-member group remained a s tab le c o a l i t i o n working

together toward the goal o f developing nuclear power. However, the c o n t r o l o f

nuclear power remained p r i m a r i l y w i t h i n t h e government's j u r i s d i c t i o n .

Two other major pieces o f federa l l e g i s l a t i o n have been inst rumental i n

t h e t rend away f rom t h e fede ra l monopoly o f nuclear power - t h e AEC laws o f 1-

954 and 1964. Major mod i f i ca t i ons occurred w i t h the passage o f the AEC Act o f

1954. (~) This new ac t paved the way f o r i n d u s t r i a l p a r t i c i p a t i o n i n nuclear

power development.

Among other changes, t h i s law c a l l e d f o r the dec lass i f i ca t i on o f much

informat i o n t h a t had been p rev ious l y r e s t r i c t e d . I t es tab l ished procedures by

which p r i v a t e i n t e r e s t s could ob ta in c l a s s i f i e d data needed f o r nuclear power

development. Most s i g n i f i c a n t o f a l l was t h e end t o t h e government's monopoly

on reac tor ownership. For the f i r s t time, p r i v a t e i ndus t r y was permi t ted t o

own and operate nuclear reactors, i n c l u d i n g those f o r the generat ion o f e lec-

t r i c i t y . (63p'196) The AEC was s t i l l denied a u t h o r i t y t o b u i l d reac tors f o r

purposes un re la ted t o research and development, such as the business o f gen-

e r a t i n g or s e l l i n g power.

However, through the 1954 Act the government s t i l l r e ta ined ownership o f

a l l f i s s i o n a b l e ma te r ia l . P r i v a t e operators cou ld ob ta in such ma te r ia l o n l y

on lease from t h e Federal Government. Likewise, any f i s s i o n a b l e ma te r ia l gen-

erated w i t h i n a p r i v a t e l y owned reac to r was a lso government proper ty . ( 1 7 )

With bo th a p o l i c y and a l e g a l p l a t f o r m establ ished, the AEC was i n a

p o s i t i o n t o encourage t h e evo lu t i on and growth o f t h e nuclear power indus t ry .

Because o f the f i n a n c i a l r i s k involved, a framework o f government-industry

cooperat ion was developed f o r f i n a n c i n g e a r l y nuclear power p lan ts . This

f i r s t took t h e form o f the Power Demonstration Reactor Program (PDRP), i n i -

t i a t e d i n 1955. Three rounds o f demonstration p lan ts were b u i l t under t h i s

program, i n which the AEC o f f e r e d f i n a n c i a l i ncen t i ves t o cooperat ing u t i l i -

t i e s t o help b u i l d compet i t i ve nuclear p lan ts . Research and development tech-

nology, waiver o f f u e l use charges, f u e l f a b r i c a t i o n and the t r a i n i n g o f oper-

a to rs (8) were among the terms o f fe red under the PDRP.

Although the 1954 Act permi t ted the p r i v a t e ownership o f nuclear reac-

t o rs , the f u e l needed f o r t h e reac to rs was a v a i l a b l e o n l y on lease f rom t h e

Federal Government and the product p lutonium was t o be so ld back a t a f i x e d

pr ice . I n 1964, l e g i s l a t i o n p e r m i t t i n g p r i v a t e ownership o f f i s s i o n a b l e mate-

r i a l was passed. F u l l p r i v a t e ownership was reached i n steps over a pe r iod o f years. (7yp.100) Therefore, du r ing i t s infancy, the commercial nuclear power

i n d u s t r y had a s e t p r i c e f o r f u e l and a guaranteed supply and market f o r i t s

product, plutonium.

INCENTIVES

The AEC's bas ic goal was t o t r a p s f e r t h e f e d e r a l l y developed nuc lear

reac to r and f u e l cyc le technology t o a se l f - sus ta in ing p r i v a t e indus t ry .

Roadblocks t o p r i v a t e commercial izat ion were removed when necessary support

and i ncen t i ves were prov ided t o c rea te an independent nuclear supply i n d u s t r y

and encourage u t i l i t i e s t o b u i l d nuclear p lants. As s ta ted by the Commission:

A t present, atomic energy i s a government-owned indus t ry . This

departure f rom t h e normal p a t t e r n o f i n d u s t r i a l e n t e r p r i s e i n t h e

country was not taken c a p r i c i o u s l y or w i t h i n t e n t t o a l t e r our

i n s t i t u t i o n s . It was deemed necessary t o cope w i t h t h e unique and

un fami l i a r c h a r a c t e r i s t i c s o f atomic energy and because i t s products

then went almost e n t i r e l y i n t o our m i l i t a r y arsenals. Continuance

o f complete government dominance i n t o the per iod o f major p r a c t i c a l

app l ica t ions , i n v o l v i n g as i t would a basic change i n t h e

fundamental r o l e s of government and o f p r i v a t e i n d i v i d u a l s and

f i r m s , c o u l d produce a change i n ou r s o c i e t y as s i g n i f i c a n t i n i t s

way as any t h a t m i g h t accure f r o m t h e t e c h n i c a l n o v e l t y o f n u c l e a r

power.

I n o rder t h a t t h e p r i n c i p a l e f f e c t o f r e a l i z i n g n u c l e a r power may be

t o c o n f i r m and s t reng then r a t h e r t h a n t o change our economic i n s t i -

t u t i o n s and o u r way o f l i f e , we b e l i e v e t h a t n u c l e a r power should be

produced and d i s t r i b u t e d b y t h e p r i v a t e and p u b l i c power systems and

n o t by t h e Commi s s i on. (9 )

To a l a r g e e x t e n t t h i s goa l has been reached. C u r r e n t l y , a l l s teps i n t h e

f u e l cyc le , excep t enr ichment and waste management, a r e handled b y i n d u s t r y .

Tab le 18 e x p l a i n s t h e s teps i n t h e n u c l e a r f u e l cyc le . An es t ima ted $21 b i l -

l i o n has been spen t s i n c e 1950 b y t h e F e d e r a l Government t o develop commercial

n u c l e a r power. These c o s t s ( i n 1978 d o l l a r s ) can be assigned as f o l l o w s :

Research and development a c t i v i t i e s $17.2 b i l l i o n

L i a b i l i t y i nsu rance n o t q u a n t i f i a b l e

Uranium m i n i n g i n d u s t r y n o t q u a n t i f i a b l e

Enr ichment p l a n t s $2.1 b i l l i o n

R e g u l a t i o n a c t i v i t i e s $1.65 b i l l i o n

Waste management i n c l u d e d under R&D

T o t a l $20.95 b i l l i o n

W i t h i n t h e scope of t h i s p r o j e c t , some i n c e n t i v e s c o u l d n o t be q u a n t i f i e d .

These i n c e n t i v e s a r e d iscussed i n t h e f o l l o w i n g s e c t i o n s .

RESEARCH AND DEVELOPMENT ACTIVITIES

From t h e beg inn ing, t h e development o f n u c l e a r r e a c t o r s o f a l l t ypes has

r e s t e d on a b road program o f b a s i c techno logy suppor ted b y t h e AEC. Research

and development programs were c a r r i e d o u t l a r g e l y by n a t i o n a l l a b o r a t o r i e s ,

i n d u s t r i a l concerns and p r i v a t e and p u b l i c i n s t i t u t i o n s under c o n t r a c t s admin-

i s t e r e d by t h e AEC f i e l d o f f i c e s and by i n d u s t r i a l f i r m s w i t h t h e i r own

TABLE 18. Steps in the Nuclear Fuel

Step Description Institution Involved

Mining Underground and surf ace mining Independent mining com- of ore. panies. Large resource

companies.

Milling Mechanical and chemical refined Mining and chemical ore to "yellow cake." Usually companies. done near mine.

UFg production Conversion of "yellow cake" to Chemical companies and gas for enrichment resource companies.

Enrichment Concentration of natural uranium Federal Government. content of 2 3 5 ~ at 0.7% to Private ownership being between 2% and 4%. Current encouraged. technology being upgraded and new techniques being tested. Gaseous diffusion plant with capacity of 9 million separative work units (SWU) requires about 2,500 MWe electric plant to operate at full capacity.

Fuel fabrication Conversion of enriched UF6 gas Nuclear steam system to solid and assemble in fuel suppliers, large resource pins and elements. companies, others.

Utility power Converts energy in uranium to Investor-owned, pub1 ic plant electricity and federally owned

utilities.

Waste fuel "Burned" up fuel bundles which no Public utilities and longer sustain the power output federally owned of the reactor. Has concentra- utilities. tion of about 1% 2 3 5 ~ plus about 0.6% plutonium "bred" in the reactor.

Fuel reprocessing Recovery of usable uranium and Chemical and nuclear plutonium from waste. service companies.

Waste management Problem is high-level waste Federal Government whether recycling proceeds or not. Problem is safe waste management essentially forever because of the level of radiation and the long life of the radioactive isotope.

(a) Adopted from The Nuclear Power Controversy, The American Assembly, Columbia University, Prentice-Hall, Englewood Cliffs, NJ, 1976.

funding. To develop commercial reactors, AEC's program had two main th rus ts :

1 ) t o develop bas i c R&D, and 2) t o b u i l d demonstration p l a n t s i n pa r tne rsh ip

w i t h indus t ry .

The C o n t r o l l e r ' s O f f i c e o f DOE (ERDA) analyzed funds spent on the devel-

opment o f commercial nuclear power from 1950 through 1978. These f i g u r e s are

presented i n Tables 19 and 20. The t o t a l c o n t r i b u t i o n t o commercial nuclear

power was comprised o f con t r i bu t i ons o r p a r t i a l con t r i bu t i ons from one or more

o f the f o l l o w i n g programs:

Nuclear m a t e r i a l s

Laser f u s i o n

Cont ro l led thermonuclear reac t i on (magnetic fus ion)

C i v i l i a n r e a c t o r development ( f i s s i o n )

Advanced iso tope separat ions

Waste management

Reactor s a f e t y research

Resource assessment

Reactor s a f e t y f a c i l i t i e s .

These programs are comprised o f operat ing, equipment and cons t ruc t i on

funds. I n t h e DOE analys is , t h e major program c o n t r i b u t i o n t o c i v i l i a n

nuclear power was the C i v i l i a n Reactor Development Program (CRDP). Approxi-

mate ly 81% o f t h e R&D funds a l l oca ted t o commercial nuclear power by DOE from

1950 t o 1978 have been spent through CROP.(') The remaining 19% has been

spent through o the r program categor ies. The bu lk o f t h e DOE support has been

i n the form o f research and development d o l l a r s .

Developmental f i s s i o n reac tors and the e a r l y cooperat ive power reac to r

p r o j e c t s were a l s o supported through t h e CROP program. The p o r t i o n o f costs

assumed by the AEC f o r the demonstration p ro jec ts was about 20% o f the t o t a l

costs incurred, w i t h i ndus t r y c o n t r i b u t i n g the remaining 80%. (8 )

More recen t l y , the L i q u i d Metal Fast Breeder Reactor (LMFBR) program has

rece ived most o f t h e funds o f t h e CRDP. The GAO repo r t s t h a t from 1948

through f i s c a l year 1978, $4.4 b i l l i o n has been spent on R&D f o r t h e breeder

reac to r . (2)

TABLE 19. Research and Development Expenditures f o r t h e Nuclear Power Program 1950-1974 ( i n Mil 1 ions of Do1 l a r s )

Civilian ~. -

CTR Reactor Advanced Reactor Nuclear Laser Magnetic Dev. Iso. Waste Safety Resource Total Total

Year Materials Fusion Fusion Fission Plowshare Separations Manaqement Research Assessment Current $ 1978 $

Source: Nuclear Energy Branch Office of the Controller EROA (now DOE)

TABLE 20. Research and Development Expend i tu res f o r t h e Nuc lea r Power Program 1975-1978 ( i n M i l l i o n s o f Do1 l a r s )

Year 1975 1976 1976 TQ 1977 1978

Magne t i c Fus ion 95.0 139.0 50.0 211.0 277.0

Breeder Reac to r Systems 523.0 496.0 136.0 654.0 766.0

Conver te r Reactor Systems 34.0 45.0 22.0 67.0 96.0

Commercial Nuc lea r Waste 25.0 33.0 18.0 115.0 123.0

Spent Nuc lea r F u e l 5.0

Advanced Nuc lea r Systems 34.0 39.0 12.0 42.0 61.0

L i g h t Water Reac to r F a c i l i t i e s - - - 20.0 27.0 +A

+ T o t a l i n c u r r e n t $ 711.0 752.0 238.0 1,109 1,355 W T o t a l i n 1978 $ 861.7 861.8 272.7 1,194.4 1 ,355

T o t a l

772.0

Source: N u c l e a r Energy Branch O f f i c e o f t h e C o n t r o l l e r DOE.

Using the ERDA and DOE data, we c a l c u l a t e t h a t $14.7 b i l l i o n (1978 do l -

l a r s ) has been spent on commercial nuclear power through 1978. The percentage

o f the DOE budget a l l oca ted f o r the development o f commercial nuclear power

has increased over t ime. I n t h e e a r l y 1950s, o n l y 1-2% o f t h e budget was

apportioned by the Atomic Energy Commission t o commercial nuclear power R&D.

Approximately 17% o f t h e 1978 DOE funds were spent on commercial nuclear

power. (2 )

The DOE f i g u r e s inc lude R&D c o n t r i b u t i o n s on l y from programs d i r e c t l y

suppor t i ve o f nuclear power as an e l e c t r i c i t y generat ion source. Enrichment

R&D, along w i t h the R&D o f support ing technology (waste management, r e a c t o r

s a f e t y research) are included, b u t no t c o n t r i b u t i o n s from B io logy and Envi -

ronmental Science, Education In fo rmat ion and Tra in ing, o r program management

costs.

I n analyz ing other program categor ies f o r poss ib le con t r i bu t i ons t o com-

merc ia l nuclear power, we used t h e f o l l o w i n g assumptions:

1) We assumed t h a t o v e r a l l the m i l i t a r y and space nuclear programs (o the r

than submarine propuls ion) d i d no t con t r i bu te techno log ica l i n fo rma t ion

t o the commercial nuclear power program, t h e submarine propu ls ion program

i s t h e major m i l i t a r y con t r i bu to r .

2) For j o i n t l y funded f a c i l i t i e s and c a p i t a l equipment where the commercial

aspects o f programs were l ess than 50% o f t h e t o t a l funds, we assumed

t h a t they would have been provided f o r the noncommercial sector.

There i s no simple way t o v e r i f y assumption 1. I n the e a r l y years o f

atomic energy t h e weapons program developed many aspects o f t h e emerging com-

merc ia l nuclear power program. Methods o f hand l ing r a d i o a c t i v e ma te r ia l s ,

neutron d i f f u s i o n codes, c r i t i c a l experiment technology, and o ther i n fo rma t ion

were l a r g e l y app l i cab le t o the commercial program. The commercial program

developed around an a l t e r n a t i v e f u e l form (uranium oxide r a t h e r than uranium

metal ) , c ladd ing ma te r ia l , pressure member (vessel r a t h e r than tube), moder-

a t o r ( l i g h t water r a t h e r than g raph i te o r heavy water), and reac to r compo-

nents. Technology from these developments became ava i l ab le t o the weapons

program. Fuel reprocessing technology, as p resen t l y conceived f o r commercial

nuclear power, is based on weapons program-developed processes, but it is not clear at this time that these processes will become commercial. Waste management technology is being developed for both applications.

Out of the military reactor program grew the pressurized water reactor

technology. But again fuel forms differ, reactor components are substantially

larger and of different designs for the commercial market. Compactness and

long-1 ife are much more important to military applications. Further, much of

the military technology remains classified while most of the commercial tech-

nology is reported in the open literature and thus is available for military

application. On ba?ance, then, it seemed that assumption 1 was warranted. The nuclear submarine propulsion program made significant technological and

personnel contributions in the 1950s. While much of the program was classi-

fied, the transfer of people from the naval Program to industry carried both

the expertise and technology into the industry PWR programs. Important tech-

nical areas from the Naval Program include zirconium technology, reactor con-

trol (including nuclear constants and codes), piping and pressure vessel

design. The money contribution from the submarine propulsion R&D programs was

taken at 50% of the total in 1950, declining linearly to 0% in 1959. The

resultant contribution of the nuclear submarine program is $0.14 billion

($1978).

With these assumptions we did not include any contributions from the

weapons, naval reactors other than a portion of submarine R&D, or space

nuclear programs. However, several other categories of funds, such as Biology

and Medicine, Physical Research, Program Management, and Education and Train-

ing provided support to both the commercial sector as well as the weapons and

military sections. Including a proportional share of these costs increases the amount of Federal money invested from $14.7 to $17.2 billion, as shown in

Tables 19, 20, and 21.

Table 21 is based on the following reasoning. The Biomedical and' Envi-

ronmental Program focuses on health studies of humans who have been exposed accidentally, occupationally, or therapeutically to radiation. Research is

TABLE 21. Mixed Program Cont r ibu t ions t o C i v i l i a n Nuclear Power (1978 D o l l a r s i n M i l l i o n s )

B io logy and Medicine $418

Nuclear Submarine Propuls ion 140 Research

Education and T ra in ing 141

Physical Research 1,300

Program Management 553 To ta l $2,552

conducted i n t h e bas ic areas o f b i o l o g i c a l studies, h e a l t h studies, env i ron-

mental studies, waste management, phys ica l and a n a l y t i c a l studies, h e a r t

devices and some other minor areas. Most o f t h i s work done before 1965

supported the weapons program. Therefore, on l y the years s ince 1965 have been

apport ioned f o r t h e t a b u l a t i o n i n Table 21. We assumed t h e con t r i bu ton from

b io logy and medicine t o c i v i l i a n power development t o be i n the same propor-

t i o n as the c i v i l i a n power program t o t h e f i s c a l year AEC ( o r ERDA o r DOE)

budget. Applying t h a t percentage r e s u l t s i n approximately $418 m i l l i o n

(1978 $) from 1965 through 1978.

From examination o f the educat ional and t r a i n i n g budget i t appeared t h a t

about one - th i rd o f t h e programs con t r i bu ted t o o r d i r e c t l y supported t h e

development o f commercial nuclear power. This c o n t r i b u t i o n t o t a l e d $141 m i l -

l i o n (1978 $).

Cu r ren t l y the phys ica l research program i s funded i n th ree categor ies:

nuclear physics, h igh energy physics, and bas ic energy sciences. The nuclear

physics program supports research i n the areas o f medium energy physics, heavy

i o n physics, and nuclear theory. The h igh energy physics research has been

d i rec ted toward understanding energy and mat ter i n t h e i r most bas ic forms.

The j u s t i f i c a t i o n f o r t h i s e f f o r t i s b road ly based. It ranges from a c r u c i a l

f r o n t i e r r o l e i n the e f f o r t o f man t o understand t h e universe, through the

possYb l i ty o f important d iscover ies f o r meeting t h e longer range needs o f

s o c i e t y , t o t e c h n o l o g i c a l c o n t r i b u t i o n s t o p r e s e n t energy problems. The b a s i c

energy sc iences program i s comprised o f f o u r subprograms: n u c l e a r sciences;

m a t e r i a l s sciences; molecu lar , mathemat ica l , and geo-sciences; and advanced

energy p r o j e c t s . The o b j e c t i v e i s t o develop s c i e n t i f i c unders tand ing o f

p h y s i c a l phenomena b a s i c t o a l l a p p l i c a t i o n s . The program i s designed t o

develop new exper imen ta l and t h e o r e t i c a l i n s i g h t s , new concepts, improved

i n s t r u m e n t a t i o n , and o t h e r i n n o v a t i o n s i n t h e k e y areas f o r con t inued progress

i n energy research, development, and demonst ra t ion.

Programs o f t h i s n a t u r e appear t o suppor t f u t u r e t e c h n o l o g i e s more than

p r e s e n t t e c h n o l o g i e s (e.g., f u s i o n more t h a n f i s s i o n ) . S ince these f u t u r e

t e c h n o l o g i e s have n o t y e t emerged, t h e connec t ion between t h e research and t h e

techno logy i s o f t e n v e r y obscure. S t i l l , i t was t h e " p h y s i c a l research" o f

t h e e a r l y t w e n t i e t h c e n t u r y t h a t l a i d t h e f o u n d a t i o n f o r t h e commercial

n u c l e a r i n d u s t r y o f today. T h i s r a t i o n a l e l e d us t o t a k e a r a t i o o f t h e

P h y s i c a l Research budget i n t h e same p r o p o r t i o n as t h e c i v i l i a n power program

i s t o t h e f i s c a l y e a r AEC ( o r ERDA o r DOE) budget. Thus, an a d d i t i o n a l $1300

m i l l i o n (1978 $ ) c o u l d be i n c l u d e d f r o m 1950 th rough 1978.

Program management o r a d m i n i s t r a t i v e c o s t s can be a1 l o c a t e d w i t h s i m i l a r

reasoning. That i s , i n any one y e a r t h e p o r t i o n o f program management a l l o -

ca ted t o n u c l e a r power should be t h e same percentage o f t h e t o t a l amo~lnt spent

i n t h a t area. Thus, an a d d i t i o n a l $553 m i l l i o n (1978 $ ) c o u l d be i n c l u d e d

f r o m 1950 t h r o u g h 1978.

Between 1948 and 1978, t h e Federa l Government c o n t r i b u t e d t o t h e deve l -

opment o f n u c l e a r power, w i t h o u t d i r e c t charge, $17.2 b i l l i o n (1978 d o l l a r s )

i n t h e area o f knowledge a c q u i s i t i o n , d i s s e m i n a t i o n and p r o f e s s i o n a l se rv -

i ces . There fo re , t h i s i n c e n t i v e has been c l a s s i f i e d as n o n t r a d i t i o n a l s e r v i c e .

Approx imate ly $14.7 b i l l i o n o f t h i s f i g u r e comes f r o m DOE'S c a l c u l a t i o n

o f t h e c o n t r i b u t i o n t o commercial power development. An a d d i t i o n a l $2.5 b i l-

l i o n was i n c l u d e d f rom t h e B i o l o g y and Medic ine, t h e P h y s i c a l Research, Educa-

t i o n and T r a i n i n g , and Program Management c a t e g o r i e s ; an amount was a l s o

i n c l u d e d f r o m t h e submarine n u c l e a r programs noted.

LIABILITY INSURANCE

We could no t l oca te i n the l i t e r a t u r e a t o t a l q u a n t i f i c a t i o n o f the value

o f t h e l i a b i l i t y insurance prov ided t o t h e commercial nuclear power program by

the Price-Anderson Act. This ac t was q u i t e c l e a r l y an important government

ac t ion t h a t encouraged nuclear power development.

The 1954 Atomic Energy Act al lowed f o r p r i v a t e ownership and opera t ion o f

nuclear reactors. This r a i s e d t h e quest ion o f l i a b i l i t y i n t h e case o f an

accident, e s p e c i a l l y a ca tas t roph ic accident. A t t h i s t ime the compet i t i ve

p o s i t i o n o f nuclear power had n o t been es tab l ished and i n d u s t r y d i d n o t know

when i t would become p r o f i t a b l e . The supp l ie rs and the operators o f nuc lear

f a c i l i t i e s were no t w i l l i n g t o take on t h e add i t i ona l f i n a n c i a l r i s k o f a

ca tas t roph ic accident which cou ld conceivably bankrupt t h e companies

involved. (5yp.124) To meet t h i s need, the Price-Anderson Act, enacted i n

1957, was designed t o f i n a n c i a l l y p r o t e c t t h e p u b l i c and AEC l icensees and

cont rac tors against excessive r i s k s associated w i t h t h e use o f nuclear power.

Although the exact magnitude o f a "ca tas t roph ic " accident was never

spec i f i ed i n t h e 1957 hearings, i n d u s t r y spokesmen v i sua l i zed t h e p o s s i b i l i t y

o f l i a b i l i t y s u b s t a n t i a l l y i n excess o f $500 m i l l i o n . (I1) The p r i v a t e

insurance i n d u s t r y would no t p rov ide t h i s amount o f insurance, f i r s t because

they had no experience w i t h the r i s k s o f nuclear reactors, and second, because

t h e p o t e n t i a l l i a b i l i t y was many orders o f magnitude beyond t h e capac i t y o f

the insurance indus t ry . (11)

U t i l i t i e s and equipment supp l ie rs p u b l i c l y expressed t h e i r re luc tance t o

r i s k t h e i r solvency, a l l t h e assets o f t h e i r stockholders, and t h e ve ry ex i s -

tence o f t h e i r companies on the remote p o s s i b i l i t y o f a major nuclear catas-

t rophe t h a t was i nsu rab le t o o n l y a l i m i t e d extent . Fo l lowing are some com-

ments made by i n d u s t r y spokesmen i n the 1955-1957 era about t h i s subject .

A t t h i s t ime we do no t see any sound basis on which we can r i s k s o l -

vency on t h e p o s s i b i l i t y , remote as i t may be, o f a major nuclear

catastrophe. (W i l l i am Gale, Chairman, Commonwealth Edison Co.) (12)

Obv ious ly we cannot r i s k t h e f i n a n c i a l s t a b i l i t y o f ou r company f o r

a r e l a t i v e l y smal l p r o j e c t . . . We cannot exc lude t h e p o s s i b i l i t y

t h a t a g r e a t enough f o o l a ided by a g r e a t enough consp i racy o f c i r -

cumstances, would b r i n g about an a c c i d e n t exceeding a v a i l a b l e i n s u r -

ance. (Char les H. Weaver, V.P., Westinghouse E l e c t r i c Co.) (13)

We have been v e r y r e l u c t a n t , c a t e g o r i c a l l y , t o s t a t e t h a t we w i l l

n o t proceed u n l e s s an i n d e m n i t y b i l l i s passed b y Congress . . . E v e n t u a l l y , however, t h e r e comes a t i m e f o r a f r a n k s ta tement on t h e

p o s i t i o n o f t h e General E l e c t r i c Company . . . A t present , I see no

a l t e r n a t i v e b u t t o recommend t h a t work on t h e Dresden s t a t i o n be

h a l t e d as soon as p r a c t i c a b l e a f t e r t h e end o f t h i s sess ion o f Con-

gress i n case a p p r o p r i a t e l e g i s l a t i o n has n o t been passed by t h a t

t ime. ( F r a n c i s K. McCune, V.P., General E l e c t r i c Co.) (14)

AEC and t h e J o i n t Committee on Atomic Energy (JCAE) so lved t h e prob lem

u s i n g an i n d e m n i f i c a t i o n approach r a t h e r than government insurance. The

reason f o r i n d e m n i f i c a t i o n was e x p l a i n e d by t h e JCAE as f o l l o w s :

A system o f i n d e m n i f i c a t i o n i s e s t a b l i s h e d r a t h e r than an insurance

system, s i n c e t h e r e i s no way t o e s t a b l i s h any a c t u a r i a l b a s i s f o r

t h e f u l l p r o t e c t i o n r e q u i r e d . The chance t h a t a r e a c t o r w i l l r u n

away i s t o o sma l l and t h e f o r e s e e a b l e p o s s i b l e damages o f t h e r e a c -

t o r a r e t o o g r e a t t o a l l o w t h e accumulat ion o f a f u n d which would be

adequate. I f t h i s u n l i k e l y event were t o occur, t h e c o n t r i b u t i o n s

o f t h e companies p r o t e c t e d a r e l i k e l y t o be t o o sma l l b y f a r t o p r o -

t e c t t h e p u b l i c so Federa l a c t i o n i s go ing t o be r e q u i r e d anyway.

I f t h e payments a r e made l a r g e enough t o i n s u r e t h a t t h e r e i s an

adequate f u n d a v a i l a b l e , t h e o p e r a t i o n o f t h e r e a c t o r s w i l l be made

even more uneconomic. On t h e o t h e r hand, i f , as t h e J o i n t Committee

a n t i c i p a t e s , t h e r e never w i l l be any c a l l on t h e f u n d f o r payments,

t h e funds w i l l have been accumulated t o no purpose.

Committee not to treat this as an insurance problem but to treat it

as an indemnification problem. there seems to be no real need for

establishing all the technical mechanisms of an insurance fund in

this situation. (5,~.125)

Thus, while private industry was saying that it needed the protection before it could proceed with any further commercialization, the government

recognized that the cost of insurance would be an economic burden that would

raise reactor costs. By stating that it would not require full insurance, the

JCAE indicated that an indirect government subsidy to the reactor development

program was intended. If no accident ever occurred, the approach would essen-

tially cost the government nothing.

The provisions of the act covered firms involved with the chemical proc-

essing, fuel fabrication plants, firms providing transportation between plants,

R&D reactors, and commercial reactors. The purpose of the fee was to cover

administration costs, as illustrated by this comment from JCAE:

The fee for indemnification is not set by the Commission. The Com-

mission is not seeking to go into the insurance business. It is not

trying to establish an actuarily sound fund, and it is not trying to get into the rate-making business. The legislation calls for a mini-

mal fee to cover administrative costs of this program. (5,p.131)

Provisions of the original 1957 Price-Anderson Act were effective for ten

years. Since 1957 the act has limited the amount of liability protection to

$560 mil 1 ion even though the possi bi 1 ity exists that damages could exceed this amount. It provided government indemnity in the amount of $500 million for

each nuclear incident above the maximum private liability insurance available

in 1957--$60 million. The act, as amended in 1965, extended the government indemnity for ten additional years. The government also provided for a "no-

fault1'-type clause, meaning that proof of negligence of the reactor owner was

not required before the injured party could be compensated. (15)

The Price-Anderson Extension Act, amended i n 1975, w i l l phase o u t t h e

government's i ndemn i f i ca t i on o f commercial reactors, although n o n p r o f i t and

R&D reac to rs w i l l remain covered t o t h e $560 m i l l i o n l i a b i l i t y l i m i t . P r i v a t e

insurance companies are c u r r e n t l y p r o v i d i n g $125 m i l l i o n o f insurance. Essen-

t i a l l y , t h e p lan cons i s t s o f a de fer red o r r e t r o s p e c t i v e premium, which i s

payable by the u t i l i t i e s on l y i f the re i s an i nc iden t . Therefore, a l aye r o f

"pool insurance" i s created, i n a d d i t i o n t o t he amount prov ided by t h e p r i v a t e

insurance companies. This l aye r w i l l increase as the number o f reac to rs

increases u n t i l t h e pool i s ab le t o p rov ide the t o t a l d i f f e r e n c e between

$560 m i l l i o n ( t o t a l l i a b i l i t y l i m i t ) and the pr imary insurance layer , phasing

o u t t h e government. The Nuclear Regulatory Commission, now admin is te r ing t h e

Price-Anderson Act, has set the r e t r o s p e c t i v e premium a t $5 m i l l i o n per reac-

t o r per i nc iden t , w i t h a l i m i t o f $10 m i l l i o n per f a c i l i t y maximum payment f o r

any calendar year. (16)

Since i t s enactment i n 1957, t he re has been much d iscussion about

whether, and t o what ex ten t , Price-Anderson i ndemn i f i ca t i on has been a subsidy

f o r nuclear energy. I n analyz ing t h i s quest ion, two items t o consider are 1 )

t h e Price-Anderson Act removed a s tumbl ing b lock t o t he development o f nuc lear

power and 2 ) t he cos t o f p o t e n t i a l l i a b i l i t y was not borne by the nuclear

i ndus t r y , so t h e apparent economic competi t iveness o f nuc lear power w i t h o ther

energy sources may be misleading. The ac t author ized NRC ( o r i t s predeces-

sors ) t o c o l l e c t fees, beginning i n 1957, i n r e t u r n f o r t h e indemnity. The

fee i s $30 per year per thousand k i l o w a t t s o f thermal energy author ized by the

r e a c t o r ' s l i cense. ( a ) By August 1, 1977, almost $10 m i l l i o n i n indemni ty

fees had been co l l ec ted . Only minor c la ims have been made aga ins t t h e

government f o r indemni ty l i a b i l i t y .

Without Price-Anderson, the u t i l i t i e s would have t o purchase l i a b i l i t y

insurance. They would a lso have t o est imate a cos t f o r t he u n c e r t a i n t y t h a t a

p o t e n t i a l loss migh t exceed the l i a b i l i t y l i m i t s a v a i l a b l e on the p r i v a t e

market. These cos ts would be passed on t o t h e consumer i n h igher e l e c t r i c i t y

( a ) t he annual f e e f o r a 1000 MWe power p l a n t would be about $90,000.

prices. The price of nuclear power would therefore increase and the utilities would have to decide whether nuclear power would be competitive and profitable

in relation to other energy sources.

GAO estimated a portion of the subsidy inherent in the Price-Anderson Act in a report issued in 1976. They computed the annual indemnity subsidy to be no more than $145,480 for a utility with one 1,000 MWe reactor at a site and no more than $114,350 for a utility with two 1,000 MWe reactors at a site.

This subsidy was calculated as shown in Table 22. (17)

TABLE 22. The Value of Goveypypnt Indemnity to the Nuclear Power Plant Owner

Additional Annual Cost of Liability Annual Annual

Insurance if Available Indemnity Fee Subsidy

One Reactor Rated $348,000 (a) at 1,000 MWe less ,112,520(a)

$235,480

Two reactors, each $435,00O(a) rated at 1,000 MWe less 140,65O(c)

$294,350

(a) Computation based on current premium per $1 million of atomic energy insurance.

(b) The present value of the two-thirds insurance rebate ($232,000) after 10 years, discounted at the average rate of return on investment for appropriate electric utilities from 1970 through 1973 (7.5%).

(c) The present value of the two-thirds insurance rebate ($290,000) after 10 years, discounted at the average rate of return on investment for appropriate electric utilities from 1970 through 1973 (7.5%).

To multiply these annual figures for reactors by the years each has been

in operation would be one way to obtain an approximation of the subsidy for

commercial nuclear reactors. However, this figure would represent only a

small percentage of the broad coverage which has been provided for fuel fabri-

cation plants, nuclear equipment suppliers, etc. covered under the Price-

Anderson Act. This incentive has been classified as a disbursement since that

category includes promises to disburse under certain circumstances.

The Pr ice-Anderson A c t has e x i s t e d s i n c e 1957 b u t o n l y a smal l amount has

been d i s b u r s e d t o pay c la ims . We c o u l d n o t f i n d i n t h e l i t e r a t u r e any e s t i -

mate o f t h e t o t a l subs idy f o r p r o t e c t i o n from l i a b i l i t y t h a t has been p r o v i d e d

t o p a r t i c i p a n t s i n t h e commercial n u c l e a r power i n d u s t r y . However, i t i s

q u i t e c l e a r t h a t t h e Pr ice-Anderson A c t removed a c r u c i a l s t u m b l i n g b l o c k i n

t h e development o f commercial n u c l e a r power.

INCENTIVES TO THE URANIUM INDUSTRY

The uranium i n d u s t r y has been i n f l u e n c e d t o a g r e a t e r e x t e n t b y

government p o l i c y than has any o t h e r n a t u r a l resource i n d u s t r y . ( I 8 ) The

uranium p r o d u c t i o n i n d u s t r y i n t h e U.S. developed and grew i n t h e l a t e 1950s

as t h e r e s u l t o f s t i m u l a t i o n by t h e U.S. weapons program. U n t i l 1966, t h e

Federa l Government was t h e o n l y buyer f o r t h e i n d u s t r y ' s p roduc t . The govern-

ment s e t p r i c e s , bought and owned a l l uranium as soon as i t was mined. The

AEC s i g n i f i c a n t l y i n f l u e n c e d t h e s i z e and s t r u c t u r e o f t h e i n d u s t r y by i t s

procurement p o l i c i e s . Even today t h e uranium i n d u s t r y i s h i g h l y dependent on

government p o l i c y d e c i s i o n s i n such areas as enr ichment and t h e e x p o r t - i m p o r t

o f uranium.

A l though t h e i n i t i a l s t i m u l u s f o r uranium m i n i n g was t o p r o v i d e m a t e r i a l

f o r t h e m i l i t a r y , l a t e r government p o l i c i e s suppor ted t h e mines and m i l l s

u n t i l p r i v a t e demand f o r t h e o r e as f u e l f o r commercial n u c l e a r power p l a n t s

developed.

The i n c e n t i v e s used t o encourage t h e uranium i n d u s t r y were:

e AEC procurement p o l i c i e s

r e s t r i c t i o n on i m p o r t o f f o r e i g n o r e

enr ichment p o l i c i e s

t a x p o l i c i e s

Procurement P o l i c i e s

P r i o r t o t h e mid-1940s t h e o n l y commercial use f o r uranium was as a

c o l o r i n g agent i n t h e ceramic i n d u s t r y . The U.S. needs f o r t h e war e f f o r t

were s u p p l i e d f r o m a mine i n t h e B e l g i a n Congo, another smal l mine i n Canada,

and a few scat te red deposi ts i n t h e U.S. I n 1947, t h e AEC was formed and

plans f o r a much expanded nuclear weapons program unfolded. Domestic reserves

were then est imated a t 2000 tons o f U308. (19)

Recognizing these reserves and U.S. dependence on f o r e i g n ore, t h e AEC

set out t o e s t a b l i s h a program t h a t would prov ide s u f f i c i e n t uranium f o r bo th

weapons product ion and research needs. H i s t o r i e s o f t h e AEC's procurement pro-

gram are a v a i l a l e from several l i t e r a t u r e sources and a lso from C i r c u l a r s 1-8

issued by the AEC.

To s t imu la te product ion and exp lora t ion , the AEC program o f fe red domestic

producers long-term cont rac ts w i t h a t t r a c t i v e incent ives : (18,p.71-73)

1 ) a ten-year guaranteed minimum p r i c e f o r c e r t a i n high-grade uranium ore

2 ) a $10,000 bonus f o r the d iscovery and product ion o f high-grade uranim ore

3) a guaranteed three-year minimum p r i c e f o r ores from the Colorado Plateau.

The government a lso c a r r i e d out an extensive domestic exp lo ra t i on program

between 1948 and 1955 f o r t h e b e n e f i t o f t h e uranium indus t ry . These a c t i v -

i t i e s were conducted by p r i v a t e concerns under con t rac t t o AEC, by t h e U.S.

Geological Survey, by t h e U.S. Bureau o f Mines, and by AEC's geo log ica l s t a f f

I n add i t ion , the AEC constructed and operated ore-buying s t a t i o n s ( l a t e r

phased out ) and b u i l t numerous access roads t o remote mine areas. (5,~.161)

Product ion o f U,O, increased d ramat i ca l l y between 1948 and 1958. A - - t o t a l o f 261,000 mineable tons o f contained U308 were discovered i n t h i s

period.(19) The s t imu la t i on p o l i c i e s were so e f f e c t i v e the AEC was fo rced

t o modi fy them i n 1958-1962 t o avoid accumulation o f excessive stock

p i l e . (18,p.7.2-7.3)

. . . I n A p r i l 1958, the AEC issued a re lease announcing t h a t

uranium reserves developed a f t e r Novemer 1, 1957, would no t be

e l i g i b l e f o r purchase i n the pre-1962 per iod.

. . . I n November 1958, t h e AEC issued a re lease .subs tan t i a l1y modi-

f y i n g i t s 1956 announcement regard ing t h e 1962 t o 1966 procurement

program. Under the new announcement, only uranium reserves devel-

oped p r i o r t o November 1958 a r e e l i g i b l e f o r the 1962 t o 1966 pur-

chase program. The purchase p r i ce of $8.00/lb of U308 was

re ta ined .

. . . In November 1962, t h e Commission announced t h e " s t r e t chou t "

purchase program. Companies which e l ec t ed t o p a r t i c i p a t e in t h e

program could defer t o 1967 and 1968 a port ion of the uranium which

otherwise would be so ld t o t h e AEC between 1963 and 1966. The

1967-1968 p r i c e was a l s o $8.00/lb of U308. I n r e t u r n f o r t h e

d e f e r r a l , the Commission agreed t o purchase in 1969 and 1970 an

amount of uranium equivalent t o t h a t deferred t o 1967 and 1968 a t a

computed p r i c e not t o exceed $6.70. l b of U308.

The e f f e c t of the government incent ives t o expand uranium production i s

r e f l e c t e d i n uranium d r i l l i n g a c t i v i t y . H i s to r i ca l ly , d r i l l i n g a c t i v i t y has

been co r re l a t ed w i t h addi t ions t o reserves and both were co r re l a t ed with e a r l y

AEC procurement pol icy . Surface d r i l l i n g s t e a d i l y increased through 1957

while the p r inc ipa l incent ive programs were in e f f e c t (Figure 4 ) . D r i l l i n g

a c t i v i t y then s t e a d i l y decreased through 1965. From 1966 t o 1969, d r i l l i n g

a c t i v i t y increased again on the bas i s of a sharp increase in new orders f o r

nuclear power p l an t s . Dr i l l i ng decl ined between 1970 and 1972 l a r g e l y because

of delays experienced i n nuclear power p l an t s coming on-line.

However, s i n c e t h e an t i c ipa ted market demand by the u t i l i t i e s did not

ma te r i a l i ze as e a r l y a s AEC had expected, a " s t r e t chou t program" was imple-

mented. As noted by Dawson in Nuclear Power: Development & Management of a

Technology: (5 ,p.162-163)

. . . In a n t i c i p a t i o n of a t r a n s i t i o n from a government-controlled

market t o a commercial market, and t o provide a bas i s f o r long-range

planning by t h e mining and mi l l i ng companies, t h e AEC announced a

new procurement program f o r t h e p e r i o d A p r i l 1, 1962, through Decem-

ber 13, 1966; t h i s program provided a guaranteed market, sub jec t t o

c e r t a i n condi t ions; such as q u a l i t y , f o r domestic uranium

concentrates . . .

CALENDAR YEAR (BEGINNING)

FIGURE 4. Annual Surface D r i l l i n g and Reserve Addi t ions (AEC Data)

It was ev ident t o the AEC i n 1962 t h a t by 1966, which was the te rm i -

na t ion date o f t h e AEC's purchase program, t h e commercial market f o r

uranium would not be s u f f i c i e n t t o absorb the product ion from t h e uranium

indus t ry . With t h e o b j e c t i v e o f ma in ta in ing a v i a b l e indus t ry , t h e AEC

announced a s t re t chou t program on November 17, 1962. The program was t o

r u n from December 31, 1966, t o December 31, 1970.

The new program consis ted o f d e f e r r a l o f a p o r t i o n o f the m a t e r i a l then

contracted f o r d e l i v e r y t o t h e AEC before 1967. The deferred m a t e r i a l

would be purchased by the AEC dur ing the pe r iod from January 1, 1967,

through December 31, 1968, a t p r i c e s p rev ious l y establ ished. An

add i t i ona l q u a n t i t y equal t o the deferred q u a n t i t y would be purchased

from January 1, 1969, t o December 31, 1970. The f i x e d p r i c e would be 85%

of product ion cost p lus $1.60/lb o f U308, w i t h a maximum o f $6.70/lb.

From 1948 t o 1970 the AEC's t o t a l purchase o f uranium ( tons o f U308) had

been 315,900 tons, from the f o l l o w i n g sources: (5 ,~ .163)

Domestic 174,500 tons (55%)

Canada 73,800 tons (24%)

Overseas 67,600 tons (21%)

Tota l 315,900 tons

I n 1971, t h e AEC terminated t h e uranium purchase program a f t e r purchasing $2.9

b i l l i o n o f uranium from domestic s e l l e r s a t an average p r i c e per pound o f

U308 o f $8.52. The domestic uranium-producing i n d u s t r y was then dependent

on t h e c o m e r c i a l market.

The long- term procurement cont rac ts had a t t r a c t e d s e l l e r s by assuring

t h a t t h e i r p roduc t i ve capac i ty would be u t i l i z e d a t p red i c tab le l e v e l s and

pr ices . AEC's major problem was ad jus t i ng incent ives t o y i e l d the des i red

product ion. When it became apparent t h a t t h e o r i g i n a l i ncen t i ves were r e s u l t -

i n g i n the accumulation o f too much uranium, AEC was fo rced i n t o the p o s i t i o n

o f a l l o c a t i n g i t s f u t u r e uranium purchases among t h e many s e l l e r s t h a t had

responded t o i t s i ncen t i ve program. This s i t u a t i o n was analyzed by a B a t t e l l e

Memori a1 I n s t i t u t e study f o r the Nat ional Science Foundation. (18,p.7.5, 7.6)

The a l l o c a t i o n program proved t o be d i f f i c u l t t o administer and gen-

erated many complex l e g a l problems. For example, t h e AEC a l l oca ted

i t s maximum uranium purchase ob l i ga t i ons on the basis o f resources

contained i n a l l p rope r t i es i n which a producer owned minera l r i g h t s .

An operator c o n t r o l l i n g more than one p rope r t y genera l l y had h i s

p rope r t i es grouped together i n t o a p rope r t y u n i t and was f r e e t o

produce h i s a l l o c a t i o n from the reserves w i t h i n the p rope r t y u n i t

which o f f e r e d t h e 1 owest p roduct ion cost. Problems subsequently

arose when ownership changed and operators added or t rans fe r red

p rope r t y con ta in ing uranium reserves. An operator then c o n t r o l l i n g

two p rope r t y un i ts , f o r example, would have t o produce h i s quota

from each separate u n i t even though e f f i c i e n c y might d i c t a t e pro-

duct ion from on ly one u n i t . I n some instances the AEC a l l e v i a t e d

t h i s problem by p e r m i t t i n g conso l i da t i on o f p rope r t y u n i t s . Another

problem was the d i f f i c u l t y i n determining whether claimed reserves

cou ld a c t u a l l y be mined a t a p r o f i t . Some holders o f a l l oca t i ons

d i d not produce because i t was uneconomic t o do so.

The s t re t chou t program created add i t i ona l problems. Dur ing the

1962-1968 per iod, t h e AEC purchased uranium a t a f l a t p r i c e o f

$8.00/lb o f U308. This f l a t p r i c e f a c i l i t a t e d payment b u t had

t h e e f f e c t o f b e n e f i t i n g producers w i t h low product ion cos ts and

hu r t i ng ' t hose w i t h h igh costs. The p r i c e pa id dur ing 1969 and 1970

was based on 85% o f average a l lowable product ion costs between 1963

and 1968 b u t cou ld not exceed $6.70/lb o f U308. The average

p r i c e p a i d was less than $6.70/lb o f U308. The determinat ion o f

average a l lowable product ion costs generated many d i f f i c u l t problems

and requ i red d e t a i l e d prov is ions i n the s t re t chou t contracts.

R e s t r i c t i o n on Import o f Fore ign Ore

Af ter t e rm ina t i ng the uranium purchase program one benevolent po l i c y t o

t h e uranium i n d u s t r y remained--the r e s t r i c t i o n on t h e import o f f o r e i g n uran-

ium ore. Passage o f the "P r i va te Ownership o f Special Nuclear M a t e r i a l s Act"

i n 1964 placed a p r o h i b i t i o n against impor t ing f o r e i g n uranium f o r use i n

domestic nuclear power p lants. Sect ion 161 o f the 1964 Act s tates:

And provided f u r t h e r , t h a t the Commission, t o the ex ten t necessary

t o assure t h e maintenance o f a . v iab le domestic uranium indus t ry ,

s h a l l not o f f e r such serv ices f o r source or spec ia l nuclear mate-

r i a l s o f f o r e i g n o r i g i n intended f o r use i n a u t i l i z a t i o n f a c i l i t y

w i t h i n o r under the j u r i s d i c t i o n o f the Uni ted states. The Com-

miss ion s h a l l e s t a b l i s h c r i t e r i a i n w r i t i n g s e t t i n g f o r t h t h e terms

and cond i t ions under which serv ices provided under t h i s subsect ion

s h a l l be made a v a i l a b l e i n c l u d i n g t h e extend t o which such serv ices

w i l l be made a v a i l a b l e f o r source or spec ia l nuclear ma te r i a l o f

f o r e i g n o r i g i n intended f o r use i n a u t i l i z a t i o n f a c i l i t y w i t h i n o r

under the j u r i s d i c t i o n o f the Un i ted States: Provided, t h a t before

t h e Commission es tab l i shed such C r i t e r i a , t he proposed C r i t e r i a

s h a l l be submit ted t o the J o i n t Committee, and a pe r i od o f f o r t y -

f i v e days s h a l l elapse w h i l e Congress i s i n session ( i n computing

the f o r t y - f i v e days there s h a l l be excluded the days i n which e i t h e r

House i s no t i n session o f adjournment f o r more than th ree days

unless the J o i n t Committee by r e s o l u t i o n i n w r i t i n g waives the

cond i t i ons o f , o r a l l o f any p o r t i o n of , such f o r t y - f i v e day

per iod) . (19)

By t h i s p rov is ion , the domestic uranium i n d u s t r y was pro tec ted from com-

p e t i t i o n f rom t h e cheaper f o r e i g n uranium. I n 1975, t h e p o l i c y was changed t o

phase ou t the r e s t r i c t i o n on the use o f f o r e i g n uranium i n domestic p lan ts ,

according t o the f o l l o w i n g schedule shown i n Table 23. (20,p.308)

TABLE 23. Percent o f Fore ign-Or ig in Uranium Ore Permi t ted f o r Use i n U.S. P lan ts

Up t o 10% o f Uranium Furnished f o r Enrichment may be o f Fore ign O r i g i n when used i n a Domestic P lan t

15%

20%

30%

40%

60%

80%

No R e s t r i c t i o n s

We d i d no t at tempt t o q u a n t i f y t he subsidy t o t h e uranium i n d u s t r y c re -

ated by the ban on the use o f f o r e i g n ores i n domestic reac tors . While t h e

c o s t o f uranium t o t h e u l t i m a t e user ( t h e u t i l i t i e s ) might have been h igher ,

s t i l l the u t i l i t i e s bene f i t ed from the development o f an assured domestic

source o f supply. The p r o t e c t i o n from f o r e i g n compet i t ion i n con junc t ion w i t h

AEC procurement p o l i c i e s has prov ided an environment which fos te red the growth

o f t h e U.S. uranium indus t r y .

Enrichment P o l i c i e s

Af ter t a k i n g i n t o account government needs f o r uranium, i n 1971 t h e AEC

est imated i t had 50,000 tons (100 m i l l i o n pounds) o f surp lus U308 on hand. (21yp'190) Although the uranium product ion i n d u s t r y and some buyers

argued t h a t t h e na t i ona l s t o c k p i l e should be r e t a i n e d as insurance aga ins t any

f u t u r e surge i n demand, the AEC announced i t s i n t e n t i o n t o dispose o f the

s tockp i le . To dispose o f t h i s s t o c k p i l e w i t h minimum d i s r u p t i o n t o t h e

market, i n 1972 the government adopted i t s " s p l i t t a i l s p lan" o f d isposal .

This p lan i s t e c h n i c a l l y complicated i n t h a t i t invo lves the method o f

opera t ing the gaseous d i f f u s i o n enrichment complex. Enrichment p o l i c y i s a

complicated f a c t o r i n v o l v i n g many economic t rade-o f fs . The demand f o r uranium

i s somewhat i n e l a s t i c because t h e t o t a l cost o f producing e l e c t r i c power from

a nuclear power p l a n t i s r e l a t i v e l y i n s e n s i t i v e t o the p r i c e o f uranium. I n

simple terms under t h e " s p l i t t a i l s " plan, t h e AEC (DOE) requ i res i t s cus-

tomers f o r enrichment serv ices t o supply on ly approximately 80% o f the n a t u r a l

uranium requ i red t o produce t h e enr iched uranium t h a t i s de l i ve red and t o pay

about 25% more f o r enrichment serv ices than i s a c t u a l l y del ivered. The remain-

i n g 20% o f t h e raw m a t e r i a l requirement i s taken from t h e s tockp i l e . As a

consequence, t h e s t o c k p i l e w i l l be reduced over a pe r iod o f 7 o r 8 years by

sa le t o a v a r i e t y o f enrichment customers. (213p'191) According t o a spec ia l

t o p i c a l r e p o r t by t h e Nuclear Exchange Corporation, wh i l e t h i s approach m i n i -

mized market d i s rup t i on , s p l i t t a i l s d i d reduce uranium demand by 20%. (22)

As a r e s u l t o f a rev iew o f the l i t e r a t u r e and discussions w i t h persons

knowledgeable w i t h enrichment p l a n t costs, we found t h a t t h e sa le o f t h e stock-

p i l e cou ld r e s u l t i n a gain or l oss t o the government, depending on one's view-

po in t . Much o f t h e p e r i o d i c a l l i t e r a t u r e mainta ins t h a t t h e s a l e i s a subsidy.

However, an ana lys is o f the s p l i t t a i l s p lan found government record-keeping

t o be such t h a t t h e c u r r e n t s e l l i n g p r i c e o f the uranium i s equal t o o r g rea ter

than the average government purchase p r i c e (a l though a handl ing charge i s no t

allowed f o r ) . I n add i t ion , t h e depleted uranium t a i l s are s to red and main-

ta ined by DOE and can be reprocessed. The " t a i l s " are valued a t zero by DOE.

Government ownership o f one step o f the nuclear f u e l c y c l e a l lows f o r a

fede ra l i n f l uence on t h e uranium mining indus t ry . I n t h i s p a r t i c u l a r s i t u a -

t i o n , the bene f i t s t o the uranium indus t r y have been b a s i c a l l y two: (23,p.12,13)

the market was not depressed, even though a t over-capacity, and

a r t i f i c i a l p r i c i n g was avoided.

The uranium i n d u s t r y has a lso been affected by D O E ' S long-term f i x e d com-

mitment enrichment contracts, which prov ided f o r d e l i v e r y o f and payment f o r

f i xed q u a n t i t i e s o f SWU f o r d e l i v e r y up t o 18 years i n t o the fu tu re . (22 ,~ .4)

It i s Nuexco's view t h a t t h e move t o f i x e d commitment SWU cont rac ts i n i t i a t e d

the p r i c e ( a ) move o f uranium from $5.95/1b i n August 1971 t o $41/ lb i n Sep-

tember 1976. (22'p'1y10) Current p r i ces f o r U308 are about $45/lb. Hence,

t h e Federal Government s t i l l exe r t s a s t rong i n f l uence on t h e uranium i n d u s t r y

through i t s c o n t r o l o f the enrichment process.

Tax P o l i c i e s

The best known t a x p rov i s ion a f f e c t i n g the energy i n d u s t r y i s percentage

deplet ion. The percentage dep le t ion r a t e f o r uranium i s 22%. (25 ) Brannon,

i n Tax Incent ives, s ta tes t h a t t h e uranium market has been so in f luenced by

other government p o l i c i e s t h a t the tax e f f e c t i s minor; therefore, no attempt

was made t o q u a n t i f y it.

I n summary, t h e many i ncen t i ves given t o the uranium indus t r y do not lend

themselves t o q u a n t i f i c a t i o n . The Federal Government has p a r t i c i p a t e d i n t h e

marketplace as a purchaser o f uranium, has placed r e s t r i c t i o n s on f o r e i g n ore

t o p r o t e c t t h e young U.S. indus t ry , has allowed t a x incent ives , and has exer ted

an in f luence on the uranium indus t r y through i t s con t ro l o f the enrichment

process.

FEDERAL INVESTMENT I N ENRICHMENT PLANTS

Uranium enrichment involves separat ing the two p r i n c i p a l isotopes o f

uranium found i n nature--uranium-235 and uranium-238--to increase t h e per-

centage o f the f i s s i o n a b l e uranium-235. The work done t o separate these

isotopes i s c a l l e d separat ive work, and the product achieved i s c a l l e d

enriched uranium.

(a ) P r i ce r e f e r s t o the Nuexco exchange value fo r immediate de l i ve ry .

Between 1943 and 1956 the U.S. bu i l t f o r national defense purposes three

uranium enrichment f a c i l i t i e s - - a t Oak Ridge, Tennessee; Paducah, Kentucky; and

Portsmouth, Ohio--at a cost of approximatly $2.4 b i l l ion . (Cost i n 1978 dol- l a r s would be $6.2 bi l l ion.) The Oak Ridge plant was bu i l t during World War I 1 and the l a t t e r two, during the Korean War. These plants are owned by the government and are operated by private firms under cost-plus-fixed-fee management con-

t r ac t s . An additional $250 million i n R&D and capi ta l improvements has been invested in the three plants during t h e i r l i f e , but not capital ized. The govern-

ment has continued to own the technology, which i s c lass i f ied because i t i s

v i ta l t o the production of nuclear weapons.

With the passage of time, the dominant market fo r enriched uranium has

shif ted from t h a t of a highly enriched product f o r defense purposes t o a lower

enrichment material f o r commercial nuclear power fuel . Most domestic and

foreign commercial nuclear power reactors use s l i gh t ly enriched uranium as

fuel . Uranium products of higher enrichment are used fo r weapons, in mi l i t a ry reactors, 'and f o r fuel in HTGR and specialized reactors.

DOE'S three enrichment plants are the major source of enriched uranium in

the f r e e world. These f a c i l i t i e s , a t today's maximum production capacity, can

annually service the equivalent of about 200 power plants with a generating

capacity of 1,000 MWe each. The U.S. not only provides enrichment services t o

the domestic reactors b u t has more than 95% of the present noncommunist enrichment capacity.(24) DOE supplies enrichment services t o both domestic and foreign customers under three major types of contracts: 1 ) requirements con-

t r ac t s , under which DOE agrees t o supply a l l of the enriched uranium required

t o fuel a specif ic nuclear reactor; 2) long-term, fixed-committment contracts ,

under which DOE agrees t o provide fixed amounts of enriched uranium fo r a cer-

t a in time period; and 3) conditional contracts, under which DOE agrees t o pro-

vide enriched uranium i f cer ta in enriching capacity currently under contract

i s freed. Table 24 shows the dis t r ibut ion of contracts as of September 15, 1978.

About one-third of the capacity of the plants was used in 1969. (26 ,~ .43)

Government requirements i n the future f o r defense purposes are projected t o be

only 10% of the capacity of these plants. (26yp.26) To quote Dr. Glenn Seabor in 1969 hearings before the JCAE:

TABLE 24. DOE Uranium nr~chment Contracts as of September 15, 1978 ( i n Gigawatts ! .

Type of Contract Domestic Foreign Total

Requirements 75 25 100

Long-term, Fixed Commitment

Conditional

Total

. . . Thus, the future market projected fo r the exist ing U.S. uran-

i u m enriching capacity i s primarily fo r c iv i l i an nuclear power, b o t h

within the United States and abroad, . . . and the requirements fo r

uranium enriching services t o produce the fuel fo r nuclear power

plants are growing rapidly. (26 ,~ .26)

W i t h the aforementioned s h i f t in the market fo r enrichment services toward

industry, the Atomic Industrial Forum, the Atomic Energy Commission, the JCAE

of the Congress, and others have over the past 10 years studied the future

ownership and management of the uranium enrichment f ac i l i t i e ~ . ( ~ ~ ) Since

1971, the executive branch has followed pol ic ies and programs t o encourage

private industry--rather than the Federal Government--to build the next incre-

ments of uranium enrichment capacity. Regardless of the technology involved

(centrifuge, l a se r , or gasous dif fusion) , an enrichment f a c i l i t y requires a

large amount of capi ta l t o construct and operate. The estimated cost ( in 1975

dol lars) t o construct one economically sized gaseous diffusion plant i s $3.3

bi l l ion. (28) To help private industry enter t h i s market, a c lass i f ied

information access program was i n i t i a t ed . Industry has made several proposals

t o build enrichment plants, b u t as of mid-1977, none has announced i t s inten-

t ion t o build one. I t i s beyond the scope of t h i s report t o describe the

po l i t i ca l ramifications of the enrichment issue.

W i t h continued growth i n e l e c t r i c i t y generated by nuclear plants, the

eventual need f o r new enrichment capacity i s c lea r , b u t the timing and magni-

tude of tha t need are not. As an interim solution t o meet t h i s demand, a pro-

gram fo r improving and uprating enrichment capacity was i n i t i a t ed in the ear ly

1970s. To ta l capac i t y w i l l be increased by 59%. (27) Through mi d-1978, $1.5 b i l l i o n has been spent. (29) The e n t i r e add i t i ona l enrichment capac i ty i s

f o r domestic and f o r e i g n nuclear power p lan ts .

Foreign Imp l i ca t i ons

For many years the AEC, and now DOE has f e l t t h a t i t i s i n the i n t e r e s t

o f t h e U.S. t o ac t as a supp l i e r o f enriched uranium abroad. This p o l i c y was

reviewed i n a (6/24/69) l e t t e r t o Chet H o l i f i e l d , then Chairman o f the JCAE,

from Glenn Seaborg, Chairmain o f t h e AEC:

Nat iona l Secu r i t y aspects . . . i n p a r t i c u l a r the na t iona l p o l i c y o f

seeking t o avo id t h e p r o l i f e r a t i o n o f nuclear weapons . . . The

a v a i l a b i l i t y o f enriched uranium from the U.S. on a t t r a c t i v e terms

reduces t h e i n c e n t i v e f o r other coun t r i es t o develop t h e i r own

en r i ch ing c a p a b i l i t y . . . t h e a v a i l a b i l i t y o f enriched uranium f rom

t h e Uni ted States . . . has helped i n t h e development o f t h e Non-

Pro1 i f e r a t i o n Treaty.

Secondly, . . . by supply ing enriched uranium we encourage the devel -

lopment o f s t rong and mu tua l l y bene f i c i a l economic t i e s between our -

selves and the user . . . F i n a l l y , there are important economic bene f i t s attendant upon the

sa le o f enr iched uranium aboard. U.S. enr iched uranium pr ices ,

w h i l e they do no t inc lude a p r o f i t from a p r i v a t e f i nanc ing view-

p o i n t . . . they thus prov ide a ne t cash b e n e f i t t o t h e U.S. Trea-

sury and help i n the amor t iza t ion o f f a c i l i t i e s i n i t i a l l y b u i l t f o r

defense purposes. (21,p.48,49)

Thus, the U.S. involvement i n supply ing other count r ies w i t h enr iched

uranium has played an important r o l e i n t h e f o r e i g n p o l i c y o f t h e U.S. b y

improving our balance o f payments p o s i t i o n and by he lp ing t o l i m i t the spread

o f nuclear weapons. Sales o f enrichment serv ices have a lso been used as

leverage t o ob ta in safeguards and n o n p r o l i f e r a t i o n guarantees. (27,~.28)

No attempt has been made t o q u a n t i f y t h e e f f e c t s o f guaranteed government

subsid ies and f u e l supp l ies on f o r e i g n LWR sales. However, had t h e d i f f u s i o n

p lan ts no t existed, the development o f commercial nuclear power i n the Un i ted

States would probably have been along t h e l i n e s o f na tu ra l uranium f u e l e d

reactors, such as the Canadian heavy water reactors or the Brit ish graphite reactors. The existence of diffusion plants permitted a more competitive type

of reactor to be bu i l t , the l igh t water reactor.

Enrichment Services

The DOE pricing policy for uranium enriching services has been based on

recovering the government's cost f o r providing the services. As such i t does

not provide for insurance costs, federal , s t a t e or local taxes, or a provision f o r return on equity. With the advent of possible private ownership of new

enrichment f a c i l i t i e s , concern has been expressed over the expected difference

in federal and private service costs. Too large a difference, i t was thought,

would discourage private involvement.

In 1975, the GAO analyzed federal enrichment services and the following

material i s derived from t h i s report. (30)

The Private Ownership of Special Nuclear Materials Act of 1964 (Public Law 88-489) authorized AEC to offer , beginning in January 1969, services f o r

enriching pr ivately owned uranium. The act also provided tha t AEC s e t fo r th

the terms and conditions under which enriching services would be made available, including the requirement that prices be established on the basis of providing reasonable compensation t o the Government.

The act was amended by P.L. 91-560 on December 19, 1970, t o s t a t e tha t

prices would be established on a basis of recovery of the Government's cost

over a reasonable period. On May 9, 1973, AEC established a new type of

enrichment contract--fixed commitment. Under fixed-commitment contracts, cus-

tomers must specify delivery leadtime of a t l eas t 8 years f o r i n i t i a l delivery

and 10 years f o r subsequent deliveries and make a substantial down payment. Before t h i s type of contract was established, AEC offered requirements con-

t r ac t s in which AEC agreed to provide the enrichment services for a s ta ted

nuclear reactor on an "as needed" basis, up t o a l imit , w i t h only 120 days'

advance notice.

The establishment of fixed-commitment contracts created a dual pricing

structure--one price f o r requirements contracts and a lower price f o r

fixed-commitment contracts. AEC jus t i f ied t h i s difference by pointing to i t s

experience w i t h requirements contract holders that have shown that actual sa les

have f a l l e n shor t o f p ro jec ted sales. I n June 1975 t h e Admin is t ra to r o f ERDA

forwarded t o t h e Congress d r a f t l e g i s l a t i o n which would r e v i s e t h e p r i c i n g

c r i t e r i a f o r en r i ch ing uranium used t o f u e l nuclear power p lants. The pro-

posed l e g i s l a t i o n would amend t h e Atomic Energy Act o f 1954, as amended, t o 1)

o b t a i n f a i r value f o r en r i ch ing service, and 2) e l i m i n a t e o r reduce t h e d i f -

f e r e n t i a l between t h e Government's charges f o r en r i ch ing serv ices and those o f

p o t e n t i a l domestic p r i v a t e enrichment p ro jec ts . The p r i c e f o r a separate work

u n i t under t h e new bas is would i nc lude charges i n l i e u o f insurance and fed-

e ra l , s tate, and l o c a l taxes p lus a fac to r t o cover economic r i s k s .

The proposed l e g i s l a t i o n w i l l increase enrichment p r i c e s from $53.35 per

separa t ive work u n i t t o about $76.00. The $22.65 d i f f e rence i s rough ly equiva-

l e n t t o the Federal subsidy(a) f o r enrichment services.

Th is subsidy represents a b e n e f i t t o the nuclear power i n d u s t r y because

t h e p r i c e charged by t h e Government t o en r i ch uranium has not inc luded p r o f i t ,

taxes, and insurance. I f a taxpaying, p ro f i t -max imiz ing company were s e l l i n g

these enrichment serv ices t o t h e nuclear power indus t ry , these items would be

inc luded i n the p r i ce .

Table 25 shows t h e q u a n t i t y o f enriched uranium so ld by t h e government i n

terms o f separat ive work u n i t s and revenues received through f i s c a l year 1978.

TABLE 25. Separat ive Work Un i t s and Revenue from Enriched Uranium Sold Through 1978 ( i n M i l l i o n s )

Separat ive Work U n i t s Revenues

Domestic 21,468 635,874

Fore ign 21,858 695,397

Tot a1 43,326 $1,331,271

The in fo rmat ion i n Table 25 i l l u s t r a t e s t h e complexi ty o f determin ing fed-

e r a l i ncen t i ves t o commercial nuclear power f o r enrichment serv ices. Several

approaches have been suggested. One approach i s t o assume t h e GAO's es t imate

(a ) Def ined t o i nc lude d i r e c t o r i n d i r e c t payments, economic concessions, and p r i v i l e g e s o r b e n e f i t s prov ided t o any en te rp r i se by t h e Government t o promote i t s p o l i c y .

o f f ede ra l subsidy f o r enrichment serv ices ($22.65 per SWU), assume t h a t t h e

r a t i o o f subsidy t o cost remained constant, and w i t h the t o t a l domestic reve-

nues g iven i n Table 25, ca l cu la te a subsidy. Such a c a l c u l a t i o n y i e l d s a sub-

s i d y o f $556.3 m i l l i o n ( i n 1978 d o l l a r s ) f o r the domestic enrichment services.

The a v a i l a b i l i t y o f enrichment serv ices a t a lower-than-world p r i c e f o r f o r e i g n

nat ions could be an important considerat ion i n t h e i r buying U.S. r eac to r p lan ts ,

and might be looked upon as a subsidy t o commercial nuclear power. The objec-

t i v e s o f such sales, as p rev ious l y discussed, seem t o embrace aspects other

than s imply developing commercial nuclear power. A more d e t a i l e d analys is o f

t h i s aspect i s beyond t h e scope o f t h i s p ro jec t .

An a l t e r n a t i v e p o i n t o f view might be t h a t it i s inappropr ia te f o r t h e

government t o charge f o r serv ices on t h e same basis as p r i v a t e indus t ry . The

enrichment p lan ts were b u i l t f o r m i l i t a r y purposes, have served t h e i r purpose

and, there fore , on l y out-of-pocket expenses should be considered a subsidy t o

t h e unre la ted commercial nuclear power indus t ry .

Perhaps another way t o est imate t h e subsidy i s t o speculate on how t h e

i n d u s t r y might have developed had t h e r e been no f e d e r a l l y owned enrichment

p lan ts . Two cases might e s t a b l i s h ' t h e upper bound o f a p o t e n t i a l subsidy.

F i r s t , t h e e l e c t r i c a l output o f a l l commercial nuclear power p lan ts might have

been generated by f o s s i l f u e l (coal, o i l , o r gas) p lan ts i f the nuclear indus-

t ry had not evolved. During 1977, t h e cost o f producing e l e c t r i c a l power by

nuclear p lan ts was 16% less than f o r coal p lan ts (31) and considerably l ess

than f o r o i l and gas f i r e d p lan ts . Secondly, t h e U.S. nuclear i n d u s t r y might

have evolved arond natura l uranium fue led reactors. T y p i c a l l y c a p i t a l costs

f o r these reac to rs are about 10% higher than f o r LWRs. A t t h e present t ime

the U.S. investment i n operat ing LWRs i s about $15-25 b i l l i o n . Ten percent o f

t h a t amount i s $1.5-2.5 b i l l i o n . One might consider some f r a c t i o n o f t h i s

f i g u r e t o be a subsidy t o commercial nuclear power. As noted before, t h e

t o t a l cost o f t h e enrichment f a c i l i t i e s i s $6.2 b i l l i o n i n 1978 do l l a rs .

Therefore, the maximum subsidy could be t h e t o t a l cost o f these p lan ts . How-

ever, t h e m a j o r i t y o f t h e i r p roduct ion has been f o r m i l i t a r y app l ica t ions , and

o n l y a small percentage has been devoted so f a r t o commercial nuclear power

product ion.

One might wish t o look a t the value o f the net investment no t y e t repaid.

The cash f l o w rece ived from sales o f enrichment serv ices (both f o r e i g n and

domestic) has inc luded a p rov i s ion f o r depreciat ion, which averages about 33

years l i f e bu t i s a c t u a l l y f i g u r e d on t h e capac i ty used. The n e t book value

o f the enrichment p lan ts as o f June 30, 1971, was $1.13 b i l l i o n . Hence, the

unrecovered costs were $1.8 b i l l i o n i n 1978 d o l l a r s . This f i g u r e does n o t

i n d i c a t e the percentage o f t o t a l capac i t y used f o r commercial nuclear power

compared t o m i l i t a r y needs, bu t r a t h e r t h e recovered costs through sales o f

enrichment services. Actual product ion f o r m i l i t a r y needs i s c l a s s i f i e d , b u t

t h e commercial nuclear program has on l y used i t s serv ices s ince 1965 and most

predominant ly s ince 1968.

The ex is tence o f the enrichment p lan ts in f luenced the type o f reac to r t h a t

was commercialized i n t h e U.S. Because o f t h e p l a n t s ' m i l i t a r y o r i g i n s , how-

ever, i t i s d i f f i c u l t t o defend one p a r t i c u l a r d o l l a r amount as an incent ive .

Depending on t h e approach used t o analyze the s i t u a t i o n , t h e i ncen t i ve cou ld

be considered as much as the t o t a l cost o f the enrichment f a c i l i t i e s . We have

selected $2.1 b i l l i o n (1978$) as t h e i ncen t i ve on t h e basis o f t h e $0.6 b i l l i o n

GAO estimated subsidy o f the d i f f e rence between commercial and government p r i ces

p lus t h e $1.5 b i l l i o n o u t l a y (no t y e t recovered) f o r inc reas ing t h e enrichment

capac i t y f o r commercial purposes. Since 1965, the Federal Government has been

supply ing u t i l i t i e s w i t h enriched uranium and the re fo re t h i s subsidy i s c las -

s i f i e d as a market a c t i v i t y .

FEDERAL REGULATION OF THE NUCLEAR INDUSTRY

Since AEC1s establ ishment by Congress through the Atomic Energy Ac t o f

1946, the r e s p o n s i b i l i t y bo th f o r p r o t e c t i n g t h e hea l th a ~ d s a f e t y o f t h e

p u b l i c w i t h regard t o use o f nuclear energy and f o r r e g u l a t i n g the c o n t r o l o f

nuclear m a t e r i a l s has res ted w i t h t h a t body and i t s successor, DOE. Atomic

energy i s unique i n r e q u i r i n g maximum r e g u l a t i o n o f every aspect, from the

min ing o f t h e ore t o t h e waste product. This i s p a r t l y so because o f t h e dual

uses t o which these mater ia ls , processes, and products may be put--both peace-

f u l and w a r l i k e app l i ca t i ons . During the pe r iod when a l l nuclear m a t e r i a l s

were owned by the government, control was re la t ive ly simple. Since the pas-

sage of the 1964 Private Ownership Act, the task has become increasingly

d i f f i c u l t .

As the construction and operation of nuclear power s ta t ions increased,

the AEC devoted an increasing share of i t s resources t o regulating the indus-

t r i a l uses of atomic energy. In 1965, regulatory ac t i v i t i e s were only 0.2% of

the AEC budget, whereas i n 1974 they were 2.1%. In 1975, the Energy Reorga-

nization Act separated the developmental and promotional functions of nuclear

power from the regulatory functions. The act created the Nuclear Regulatory

Commission ( N R C ) , whose purpose was t o regulate the design, construction and

operation of central s ta t ion nuclear power plants and associated f a c i l i t i e s .

NRC plays a major ro l e in the regulation of a l l phases of the commercial fuel

cycle except mining, which i s control led by individual s t a t e s , and enrichment,

which i s regulated by DOE. ( 6 ,~ .449 )

As stated in the AEC budget requests, the basic purpose of the regulatory

program i s :

. . . t o carry out the Commission's s ta tutory respons ib i l i t i es fo r

assuring t ha t the possession, use and disposal of radioactive

f a c i l i t i e s be conducted in a manner consistent with public health

and safety and the common defense and security, and with proper

regard for environmental quali ty. (33)

The regulatory system encompasses three functions:

rulemaking, or the issuance of requirements of generalized appl icabi l i ty

0 licensing, including review of necessary prerequisi te conditions f o r

l icense

coordination of policy, enforcement of determinations, and administration

of the agency i t s e l f . ( 5 ,~ .175 )

These standards are codified and published as T i t l e 10 of the U.S. Code of

Federal Regulations. ( 5 , ~ . 1 7 6 )

Regulatory respons ib i l i t i es are defined in three pieces of legis la t ion: (33)

1) Atomic energy Act of 1954, as amended

2) Nat iona l Environmental P o l i c y Act o f 1969 (NEPA)

3) Federal Water P o l l u t i o n Cont ro l Act, as amended by the Water Q u a l i t y

Improvement Act o f 1970.

An amendment t o the Atomic Energy Act passed i n December o f 1970 added the

r e g u l a t o r y f u n c t i o n of rev iewing t h e a n t i t r u s t aspects o f l i c e n s e a p p l i c a t i o n s

f o r a l l commercial o r i n d u s t r i a l nuclear f a c i l i t i e s . (33)

E a r l y s i t i n g problems and c o n f l i c t s centered almost e n t i r e l y on the

s a f e t y o f proposed reac tors . I n t h e e a r l y 19705, however, t h e environmental

issue became a major concern i n s i t i n g considerat ions. The Ca lve r t C l i f f s

dec is ion by t h e Federal Court o f Appeals on J u l y 23, 1971, a f f e c t e d a l l new

l i c e n s e app l i ca t i ons and over 110 reac to rs which were a l ready under l i c e n s i n g

review, under cons t ruc t ion , o r i n operat ion. The e f f e c t o f t h e c o u r t ' s dec i -

s ion was t o make the AEC d i r e c t l y respons ib le f o r eva lua t i ng and assessing the

t o t a l environmental impact (chemical, thermal, and r a d i o l o g i c a l ) o f nuc lear

reac tors . (33,p.746)

Atomic energy i s unique i n r e q u i r i n g maximum r e g u l a t i o n o f every aspect,

f rom t h e min ing o f t h e o re t o t reatment o f t he waste product. When t h e AEC

was reorganized i n t o EROA and NRC, NRC was g iven r e g u l a t o r y r e s p o n s i b i l i t y f o r

t h e storage and d isposal of h igh - l eve l wastes a t ERDA f a c i l i t i e s i n a d d i t i o n

t o t he r e g u l a t i o n o f waste m a t e r i a l s i n the commercial sector . (4,~.541)

Before 1960 most r e g u l a t o r y a c t i v i t i e s were f o r defense reasons. From 1960 t o

1978, the Federal Government d i r e c t l y spent $1.65 b i l l i o n (see Table 26) f o r

r e g u l a t i o n o f t h e commercial nuc lear power indus t ry . More than h a l f o f t h e

t o t a l spent f o r r e g u l a t o r y a c t i v i t i e s was spent a f t e r 1975, r e f l e c t i n g t h e

increase i n t h e number o f p l a n t s and t h e pressure f rom spec ia l i n t e r e s t

groups. I n keeping w i t h the o v e r a l l approach o f t h i s repo r t , f ede ra l funds

spent on r e g u l a t o r y a c t i v i t i e s , i n t h i s case $1.65 b i l l i o n , have been inc luded

as an incent ive . Regulat ion cos ts have been categor ized as a requirement,

s ince fees no t p a i d are backed by pena l t i es .

WASTE MANAGEMENT

As nuclear f u e l i s consumed i n the process o f producing e l e c t r i c i t y ,

f i s s i o n products are produced. These waste products e f f e c t i v e l y slow t h e

n u c l e a r r e a c t i o n i n t h e power p l a n t and t h e r e f o r e must be removed. Each year about o n e - t h i r d o f t h e f u e l l o a d i s removed and f r e s h f u e l i s loaded i n t o t h e

r e a c t o r . The "spen t " f u e l e lements s t i l l c o n t a i n usab le uranium i so topes .

F i g u r e 5 i l l u s t r a t e s t h e o p t i o n s a v a i l a b l e f o r r e u s i n g spent f u e l . The f u e l

c y c l e has t o be ended e i t h e r by rep rocess ing and permanent waste management o r

by no r e p r o c e s s i n g and permanent waste management.

TABLE 26. AEC and NRC R e g u l a t o r y Costs (Mi 11 i o n s o f $ )

Year

T o t a l i n 1978 d o l l a r s

Amount Amount 1978 $

Source: "Nuc lear Power Costs and Subsidies," General Account ing O f f i c e , EMD-79-52 June 13, 1979 p. 28

The economics of rep rocess ing , as we1 1 as r e l a t e d s a f e t y c o n s i d e r a t i o n s ,

a r e i n d i s p u t e . C u r r e n t l y no spent f u e l r e p r o c e s s i n g p l a n t i s i n o p e r a t i o n i n

t h e U.S. and those under c o n s t r u c t i o n a r e u n l i k e l y t o s t a r t up i n t h e f o r e -

seeable f u t u r e . (34) Whi le t h e d i s p o s a l o f r a d i o a c t i v e waste has l o n g been

recognized as a key issue affect ing public acceptance of nuclear power, basic

decisions regarding the form in which waste should be stored and locations of storage f a c i l i t i e s have not yet been made.

URANIUM MINING

URANIUM MILLING

RECOVERED

PRODUCTION

ENRICHMENT

FUEL FABRlCATlON

UTILITY STORAGE POWER PLANT

FIGURE 5. Nuclear Fuel Cycle - Options fo r Waste Fuel

The f ron t end of the fuel cycle--uranium mining and enrichment--was

developed on a large scale in the 1940s and 1950s t o meet the demands of t he nuclear weapons program. (34*p'100) As weapon production declined, there was

ample capacity t o service the growing needs of the commercial power program.

As for the back-end of the fuel cycle--spent fuel reprocessing, plutonium

fabrication and waste storage--all had been t reated rather casually as par t of

government programs, accord ing t o F r i t z F. Hermann, C h i e f Counc i l f o r G.E. ' s

Power Generat ion group. The genera l assumption was t h a t t h e p r i v a t e s e c t o r

would proceed t o b u i l d whatever f u e l c y c l e c a p a c i t y was necessary when

r e q u i r e d f o r t h e growth o f n u c l e a r power. It f i t t e d t h e "conven t iona l eco-

nomic wisdom o f b o t h government and i n d u s t r y l e a d e r s and i t d i d n o t r e q u i r e

t h e a p p r o p r i a t i o n o f government funds. .(34,~.100)

P r i o r t o 1971, t h e r e s p o n s i b i l i t y f o r d i r e c t i o n o f long- term r a d i o a c t i v e

waste management was vested i n t h e AEC under s e v e r a l programs. I n 1971 these

were c o n s o l i d a t e d i n t o a new AEC d i v i s i o n i n o rder t o p l a c e g r e a t e r emphasis

on waste management and t o improve t h e i n t e g r a t i o n o f r e l e v a n t a c t i v i -

I n 1975, b o t h ERDA and NRC were g iven r e s p o n s i b i l i t i e s f o r

waste management.

The O f f i c e o f Nuc lear R e g u l a t o r y Research i n NRC i s now respons ib le , i n

a d d i t i o n , f o r r e s e a r c h t o suppor t NRC's r e g u l a t o r y f u n c t i o n s . NRC was s p e c i f -

i c a l l y c r e a t e d t o have an independent c a p a b i l i t y f o r deve lop ing and a n a l y z i n g

t e c h n i c a l i n f o r m a t i o n r e l a t e d t o r e a c t o r s a f e t y , safeguards, and env i ronmenta l

p r o t e c t i o n i n suppor t o f l i c e n s i n g and r e g u l a t o r y processes.

NRC's r e s e a r c h was t o be s o l e l y c o n f i r m a t o r y , by e s t a b l i s h i n g t h e

v a l i d i t y o f s a f e t y p r i n c i p l e s t h a t suppor t t h e r e g u l a t e d t e c h n o l -

ogies; ERDA was t o be r e s p o n s i b l e f o r developmental o r p romot iona l

research. NRC was t o use t h e f a c i l i t i e s and e x p e r t i s e a v a i l a b l e

th rough ERDA, o t h e r Federa l agencies, and p r i v a t e c o n t r a c t o r s t o

c a r r y o u t i t s a n a l y t i c a l and exper imenta l research program. ( 3 6 )

U n t i l t h e l a s t few years o n l y smal l sums were spent on waste management

problems. The prob lem o f waste has always been t h e r e , b u t t h e need t o r e s o l v e

i t was n o t t h e f o c u s o f p u b l i c p ressure u n t i l r e c e n t l y .

An a n a l y s i s o f p a s t AEC budgets shows p e r i o d s when budgets f o r waste man-

agement R&D were n e g l i g i b l e . Most o f t h e n u c l e a r waste now i n s to rage da tes

f r o m t h e weapons program. Therefore , o n l y t h e funds assoc ia ted w i t h t h e

management o f , o r R&D r e l a t i n g to , waste management should be i n c l u d e d as an

i n c e n t i v e t o c i v i l i a n n u c l e a r power, as t h e o t h e r funds i n t h e AEC (ERDA)

budget have been f o r conta inment and s u r v e i l l a n c e o f n u c l e a r waste f r o m t h e

weapons program.

I n the 1977 I n t e r n a t i o n a l Atomic Energy Agency Study on Regional Nuclear

Fuel Cycle Centers, over 70% o f the t o t a l c a p i t a l cost o f waste management i s

a t t r i b u t e d t o the s o l i d i f i c a t i o n p l a n t fo r h igh- leve l waste and the cost o f

disposal i n a geological format ion. (37) Furthermore, the economic dec is ion

regarding f u e l recyc le versus long-term storage o f spent f u e l would depend

s t r o n g l y on the s i ze o f the reg iona l f u e l cyc le center, the p r i c e o f uranium,

and the economic cond i t ions under which t h e recyc le storage f a c i l i t i e s would

be f inanced. (37yp'51) To analyze f u t u r e costs o f waste management i s beyond

the scope o f t h i s p ro jec t , bu t p r e l i m i n a r y est imates o f storage and d isposa l

costs i n d i a t e t h a t they should add l ess than 1 m i l l per k i l o w a t t hour t o

nuclear power costs, which are now about 40 m i l l s per k i l o w a t t hour t o t h e

consumer. (39)

Since the development o f commercial nuclear power began, funds have been

spent f o r research and development on nuclear wastes, both m i l i t a r y and com-

merc ia l . These expenditures were accounted f o r under the incent ive , Research

and Development A c t i v i t i e s . Recent pub1 i c pressures have r e s u l t e d i n an

increase i n the R&D waste managemet budget from $81 m i l l i o n i n 1976 t o $180

m i l l i o n i n 1978. O f t h e $180 m i l l i o n , $123 m i l l i o n i s f o r R&D. Over 70% i s

f o r research on commercial waste management. These R&D funds have been

accounted f o r i n Table 19.

CONCLUSIONS

The Federal Government bel ieved t h a t a t t a i n i n g economical ly compet i t i ve

nuclear power was a goal o f na t i ona l importance. It was thought t h a t t h e

uncer ta in f u t u r e o f our f o s s i l f u e l reserves and the pressure toward h igher

cos t power due t o increased f u e l costs made the development o f a new source o f

energy an essen t i a l goal. The unce r ta in t y o f r e t u r n on investment and t h e

r i s k invo lved necessi tated gover~ment involvement i f nuclear power was t o

become commercially v iab le . (38) However, i t was a lso f i r m l y be l ieved t h a t

as nuclear power became compet i t i ve i t should be i n teg ra ted i n t o es tab l i shed

i n s t i t u t i o n s i n the U.S. and t h a t i t should be produced by the e x i s t i n g u t i l -

i t y systems.

Although development of an economical ly compet i t i ve energy source was the

bas ic goal, t h e h i s t o r y o f nuc lear energy p o l i c y cannot e a s i l y be d ivorced

from mat ters of n a t i o n a l s e c u r i t y and f o r e i g n po l i cy . The entanglement o f

these p o l i c i e s began w i t h o r i g i n a l use o f f i s s i o n by t h e U.S. Government.

From the beginning the development o f commercial nuclear power d r i ved f rom

manpower, f a c i l i t i e s , technology and con t rac t i ng p o l i c i e s s t a r t e d dur ing World

War 11. O r i g i n a l l y the use o f the atom as an energy source as w e l l as f o r

na t i ona l defense purposes was c o n t r o l l e d by the government under cond i t i ons o f

secrecy. P o l i c i e s concerning i n t e r n a t i o n a l t r ade and the n o n p r o l i f e r a t i o n o f

weapons have p layed important r o l e s i n t he development o f commercial nuc lear

power.

Through J u l y 1978, nuclear power had cumula t i ve ly produced 1121 x 10 9

15 kwh or 3.83 x 10 Btu,. Nuclear power accounted f o r 13.0% o f the t o t a l

u t i l i t y genera t ing capac i ty i n 1978. Over t he past 30 years, we est imate t h a t

$21 b i l l i o n have been spent by t he Federal Government t o a s s i s t the develop-

ment o f commercial nuc lear power. Table 27 presents these f i g u r e s . The t o t a l

TABLE 27. An Est imate o f the Cost o f Incent ives t o S t imu la te C i v i l i a n Nuclear Power Product ion ( i n B i l l ions o f 1978 D o l l a r s )

Tradi - Nontradi- Taxa- Disburse- Require- t i o n a l t i o n a l Market t i o n ments ments Services Services A c t i v i t y

Research and Development

L i a b i l i t y (a) Insurance

Uranium Indus t r y

Enrichment P lan t

Regulat ion 1.65 Waste Management - - - - -

Tota l o (a) 1.65 o 17.2 2.1

To ta l $20.95 B i l l i o n

(a) Not able t o quant i f y ( b ) Inc luded i n R&D costs

does not take into account several nonquantifiable incentives. Neither legis- lative actions (such as the Price-Anderson Act), which removed the liability

roadblock, nor several policies (such as long-term uranium procurement) which

were initiated for military programs but created or subsidized the industry

for the commercial nuclear power industry are included. Commercial nuclear

power provides an example of a partnership between government and industry

aimed at developing an alternative energy source.

REFERENCES - CHAPTER I V

1. R. M. Murray, Jr., "The ~conomics o f E l e c t r i c Power Generation 1975-2000." The Nuclear Power Controversy, The American Assembly, Columbia Un ivers i ty , Pren t ice-Ha l l , Englewood C l i f f s , NJ, p. 62, 1976.

2. "Nuclear Power Costs and Subsidies", General Accounting O f f i c e , EMD-79-52, June 13, 1979.

3. Atomic I n d u s t r i a l Forum, Inc. INFO 117, Washington, DC, A p r i l 1978.

4. ERDA Au tho r i z i ng L e g i s l a t i o n F i s c a l Year 1977 Hearings, P a r t 1: Volume I, p. 24, January 21, 1976.

5. F. G. Dawson, Nuclear Power: Development and Management o f a Technology. U n i v e r s i t y o f Washington Press, Seat t le , WA, p. 19, 1976.

6. W. H. Zinn and F. K. Pittman, Nuclear Power, U.S.A. McGraw-Hill Book Co., NY, p. 9, 1964.

7. Resources f o r the Future, Inc., U.S. Energy P o l i c i e s : An Agenda f o r Research. Johns Hopkins, Balt imore, MD, p. 100, 1968.

8. Atomic Energy Commission, 1974 F inanc ia l Report, pp. 9-11.

9. Congress o f t h e Un i ted States, Hearings before the J o i n t Committee on Atomic Energy. 83rd Congress, 2nd Session, S 3323 and H.R. 8862, p. 574, 1954.

10. Considerat ions f o r Commercial izing t h e L i q u i d Metal Fast Breeder Reactor. U.S. General Accounting O f f i ce , EMD-77-5, p. 1, November 29, 1976.

11. H. Green, "Nuclear Power: Risk, L i a b i l i t y , and Idemnity." Michigan Law Review, Vol 71, p. 483.

12. Testimony o f W i l l i a m Gale, Hearings Before the J o i n t Committee on Atomic Energy on Government Indemnity f o r P r i v a t e Licenses and AEC Contractors Against Reactor Hazards. 84 th Congress, 2nd Session, Washington, D.C.: U.S. Government P r i n t i n g O f f i ce , p. 240, 1956.

13. Testimony o f Charles H. Weaver, 1956 Indemnity Hearings.

15. Pub l i c Law 89-210, S ta t . 855, 1965.

16. "NRC Sets Insurance Premium at $5 Mil 1 ion." Nuclear Industry, 3(2) :23, February 1977.

"Selected Aspects of Nuclear Power Plant Reliability and Economics." U.S. GAO Report B-164105, RED-76-7, Appendix I, pp. 18-19, August 15, 1975.

J. 6. Burnham, Assessment of Uranium and Thorium Resources in the United States and the Effect of Policy Alternatives. Report to National Science Foundation, Battelle, Pacific Northwest Laboratories, Richland, WA, p. 71, December 1974.

American Mining Congress Statement on Uranium Imports Submitted to the Chairman of the Atomic Energy Commission, Appendix 11, June 15, 1973.

U.S. Atomic Energy Commission, Annual Report to Congress, p. 104, 1970.

Hearings before JCAE, "Development, Growth and State of Nuclear Industry." p. 308, February 5 and 6, 1974.

"Significant Events in the Uranium Market, 1969-1976." Nuclear Exchange Corporation, p. 2, October 15, 1976.

"New Master Policy for Fuel Supply." Nuclear Industry - 19 (3):ll-18, March, 1972.

Uranium Enrichment: Alternatives for Meeting the Nation's Needs and Their Implications for the Federal Budget. Background Paper No. 7, Congressional Budget Office, p. 2, May 18, 1976.

G. M. Brannon, Energy Taxes and Subsidies. Ballinger Publishing Co., 1974.

"Future Ownership of the AEC's Gaseous Diffusion Plants," Hearings before JCAE, p. 43, 1969.

See the following sources:

Private Ownership and Operation of Uranium-Enrichment Facilities, Atomic Industrial Forum, Inc., June 1968.

Selected Background Information on Uranium Enriching, AEC. DRO-688, March 1969.

AEC Gaseous Diffusion Plant Operations, 0R0-685, February 1968.

Summary Report by AEC Staff of Future Ownership and Management of Uranium Facilities in the U.S., March 1969.

R e ~ o r t t o the JCAE Conqress of the United S t a t e s , poss ib le Transfer of the A E C ' s Gaseous iffu us ion- P lan t s t o P r iva te Ownership, by t h e Comptroller General of t h e U.S., May 20, 1969.

28. "Evaluation of the Adminis t ra t ion ' s Proposal f o r Government Assis tance t o P r iva te Uranium Enrichment Groups.'' U.S. General Accounting Off ice (RED-76-36), p. 32, October 31, 1975.

29. ERDA Authorizing Legis la t ion FY-1977, Hearings before JCAE, Par t I : Volume I , pp. 127, 129, January 21, 1976.

30. "Comnents on Proposed Legis la t ion t o Change Basis f o r Government Charge f o r Uranium Enrichment Services." U.S. General Accounting Off ice , RED-76-30, September 22, 1975.

31. "Federal Government Incent ives t o Coal and Nuclear Energy", Congressional Research Serv ice , Committee P r i n t 96-IFC20, G . P . O . , May 1979.

32. AEC Gaseous Diffusion P lan t Operations, AEC, 0R0-684, p. 9 , January 1972.

33. AEC Authorizing Legislat ion FY-1973, Hearings before t h e JCAE, Pa r t I , p. 743, 1973.

34. "How Can We Get the Nuclear Job Done?" Nuclear Power Controversy.

35. U.S. Atomic Energy Commission, Annual Report t o Conqress, p. 75, 1971.

36. "Development of Interagency Relat ionships in the Regulation of Nuclear Mater ia l s and F a c i l i t i e s . " U.S. GAO, RED-76-72, p. 3 , March 10, 1976.

37. Regional Nuclear Fuel Cycle Centers , Vol I : Summary 1977 Report of the IAEA Study P ro jec t , IAEA, Vienna, p. 23, 1977.

38. J . L. Morrison, "Federal Support of Domestic Atomic Power Development - The Policy Issues ." 12 Vanderbuilt Law Review, p. 195, 1958.

39. "DOE Announces New Spent Nuclear Fuel Pol icy ," RLO-77-33, October 18, 1977.

V HYDRO-ENERGY INCENTIVES

The Federal Government constructs, operates and regulates hydroelectric

facilities and markets the electricity. Federal projects now account for 28% of the major hydroelectric plants, 44% of the installed hydroelectric capacity

and 47% of the net hydroelectric generation. Many of the first major pro-

jects funded by the government were justified to improve navigational facili-

ties, control floods and develop water resources for agriculture, industry and

municipalities. Hydroelectric power generation was a secondary consideration.

In recent years hydroelectric power generation has become the main justifica-

tion for new dams. For example, many of the projects now contemplated involve

the development of pumped storage facilities to meet peak power requirements.

This chapter presents a discussion of those factors that are involved in the

construction of dams, the marketing of power and the regulation of facilities.

Alternative methods of quantifying the costs of incentives are described in

detail.

CONSTRUCTION

The construction of all federal dams is supervised by the Army Corps of

engineers, the Bureau of Reclamation or the Tennessee Valley Authority. These

organizations are involved with site selection and dam design. However, the

construction may be performed by subcontractors. The federal incentive provided by the direct participation of these organizations is included in the

cost of the projects. This information is presented in the section on

"Marketing of Hydroelectric Power."

Army Corps of Engineers

The Corps of Engineers began its substantial involvement in civilian pro-

jects in 1824 when the Congress assigned the Corps the task of clearing snags

and sandbars from the Ohio and Mississippi Rivers. This initial assignment

gradually expanded to a general responsibility for navigation improvements. In

1917 Congress added the responsibility for flood control. Multipurpose dams

were constructed to meet these needs and hence the Corps also became involved

in the operation of hydroelectric facilities. Today the Corps operates over 70

hydroelectric facilities throughout the country.

Bureau of Reclamation

The Reclamation Act of 1902 authorized the Secretary of the In te r io r t o locate , construct , operate, and maintain works fo r the storage, diversion, and development of waters fo r the reclamation of ar id and semiarid lands in 17 western s t a t e s and Hawaii. The reclamation Service was established and in 1923

the name was changed to the Bureau of Reclamation.

Bureau of Reclamation projects , through a mu1 tiple-purpose concept, pro-

vide some or a l l of the following: municipal and industrial water supply,

hydroelectric power generation and transmission, i r r iga t ion water service ,

water qual i ty improvement, f i s h and wi ld l i fe enhancement, outdoor recreat ion,

flood control, navigation, r iver regulation and control , and related uses. All funds are appropriated by Congress. Through contractual agreements w i t h pro-

j e c t beneficiaries, the Bureau arranges for repayment t o the government of

reimbursable project construction, operation, and maintenance costs.

Tennessee Valley Authority

The Tennessee Valley Authority (TVA) i s a government corporation created by an ac t of Congress in 1933. All functions of the Authority are vested in

i t s Board of Directors, who are appointed by the President with the consent of

the Senate.

A system of dams b u i l t by TVA on the Tennessee River and i t s larger t r i - butaries provides flood regulation on the Tennessee and contributes t o regula-

tion of the lower Ohio and Mississippi Rivers. The system maintains a contin-

uous 9-f t d ra f t navigation channel fo r the length of the 650-mile Tennessee

River main stream from Paducah, Kentucky, t o Knoxville, Tennessee. The dams

harness the power of the r ivers t o produce e l ec t r i c i t y . They also provide

other benefits , including recreational f a c i l i t i e s . The e l e c t r i c power program

i s required t o be f inanc ia l ly self-supporting but other programs are financed

primarily by Congressional appropriations.

TVA operates the r iver control system, and investigates the need f o r and

f e a s i b i l i t y of additional r iver control projects. I t gives assistance t o s t a t e

and local governments in reducing local flood problems. I t also works with

cooperating agencies t o encourage f u l l and effect ive use of navigable waterways

by industry and commerce.

Projects now under construction by TVA include nuclear power plants, a

pumped-storage hydroelectric project , and multi-use reservoirs.

MARKETING

The Federal Government markets e l ec t r i c power through the Bureau of Recla-

mation, the Tennessee Valley Authority, and f ive power administrations. The

Bureau of Reclamation and TVA have the authority to construct and operate the i r

own power f a c i l i t i e s . The f ive power administrations are the Bonneville, West-

ern, Southwestern, Southeastern, and Alaska. These administrations se l l elec-

t r i c i t y produced a t dams tha t are constructed and operated by the Army Corps

of Engineers and/or the Bureau of Reclamation. These power administrations,

combined w i t h the hydroelectric f a c i l i t i e s i n the i r regions, are called Federal

Power Programs or Federal Power Systems.

The Flood Control Act of 1944 requires the Department of Inter ior t o s e l l

power generated a t reservoir projects operated by the Army Corps of Engineers.

The ra tes must pay for the cost of producing and transmitting the energy plus

amortization of cap i ta l investment over a reasonable period. The Federal

Energy Regulatory Commission must approve the ra te . Public bodies and cooper-

at ives are preferred customers.

The Bureau of Reclamation constructs and operates many large projects.

However, some of these projects have been transferred t o the power administra-

tions. When a project i s transferred, the Bureau of Reclamation continues to

operate i t b u t the power administration assumes reponsibi l i ty for marketing

the power and repaying the cost of the project.

When a hydroelectric project i s completed, the costs are allocated t o the

various functions of the project: flood control , navigation, recreation, power

generation, e tc . Some of the costs, such as for navigation, flood control ,

f i sh and wi ld l i fe , and recreation, do not have t o be repaid. The costs asso-

ciated with commercial power production and i r r igat ion water supply must be

repaid with in te res t . Some of the costs allocated t o i r r igat ion are paid by

commercial power revenues. In the Federal Columbia River Power System 82.4%

o f the t o t a l costs must a lso repay more than 2/3 o f the costs a l l oca ted t o the

Bonnev i l le Power Admin is t ra t ion (BPA) i r r i g a t i o n system.

The costs a l l oca ted t o power can be d i f f e r e n t i a t e d from the costs a l l o -

cated t o navigat ion, i r r i g a t i o n and o ther purposes. But, i t i s d i f f i c u l t t o

j u s t i f y the a l l o c a t i o n o f a l l the transmission costs as an i ncen t i ve o n l y t o

hydropower. The t ransmiss ion systems b u i l t by t h e Alaska Power Admin i s t ra t i on

(APA), Southwestern Power Admin is t ra t ion (SWPA) and the Bureau o f Reclamation

are s o l e l y i ncen t i ves t o hydropower. However, t h e t ransmiss ion systems b u i l t

by the BPA and TVA are used by thermal e l e c t r i c p lan ts also. This problem was

d e a l t w i t h by separat ing t h e t ransmiss ion costs from t h e generat ion cos ts where

poss ib le and t r e a t i n g the transmission costs as a subsidy t o e l e c t r i c power i n

general.

Bonnev i l le Power Admin is t ra t ion

The Bonnev i l le Power Admin is t ra t ion (BPA) was created i n 1937. Through a

reg iona l in te rconnect ing t ransmiss ion system, i t markets e l e c t r i c power and

energy from federa l h y d r o e l e c t r i c p ro jec ts i n the P a c i f i c Northwest constructed

and operated by t h e Corps o f Engineers o r t h e Bureau o f Reclamation. Through

i n t e r r e g i o n a l connections, i t s e l l s and exchanges surp lus power t o o the r

regions.

By Act o f Congress approved October 18, 1974, t h e Bonnev i l le Power Admin-

i s t r a t i o n now has t h e au tho r i t y , i n l i e u o f appropr iat ions, t o use i t s revenues

or t o s e l l revenue bonds t o the U.S. Treasury i n order t o construct , operate,

and main ta in i t s t ransmiss ion system.

Data on the fede ra l investment i n hydropower generat ion and t ransmiss ion

f a c i l i t i e s are presented i n Appendix E, Table E-11. ( 2 ) These f i g u r e s i nc lude

t h e i n t e r e s t accrued on t h e federa l investment. The f l u c t u a t i o n s i n values are

brought about by changes i n y e a r l y r a i n f a l l , p o l i t i c a l condi t ions, and t h e cos t

a l l o c a t i o n t o power. A heavy y e a r l y r a i n f a l l can mean more power s o l d and

l a r g e r revenues. A change i n the p o l i t i c a l c l i m - t e can mean s h i f t s i n t h e Fed-

e r a l Government's spending on hydropower. Also, t h e cos t o f a p r o j e c t t h a t i s

a l l oca ted t o power can change once the p r o j e c t i s completed. Cost a l l o c a t i o n s

are t e n t a t i v e when t h e p r o j e c t i s on t h e drawing board and can be changed as

the p r o j e c t nears completion.

By the end of FY-1978 the net federal investment i n the Federal Columbia

River Power System was $6.66 bi l l ion. As a r e su l t of t h i s investment there are

28 projects w i t h a capacity of 16,441,780 kW in operation. Improvements and

one additional project with a capacity of 3,439,400 kW are under construction.

The to t a l generation of the Federal Columbia River Power system from inception

t o September 30, 1978 was 1,359.10 b i l l ion kwh.

Southwestern Power Administration

The Southwestern Power Administration (SWPA) was created by the Secretary

of the Inter ior in 1943. I t administers the scale of e l ec t r i c power generated

a t cer ta in projects constructed and operated by the Army Corps of engineers in

the s t a t e s of Kansas, Missouri, Oklahoma, Arkansas, Texas and Louisiana.

Chronological data on the federal investment i n hydropower generation and

transmission i s reported in Appendix E , Table E-12. (3 ) These data include

investments in the completed f a c i l i t i e s b u t not the in te res t or repayment on

projects under construction. The to t a l federal investment i s s l i gh t ly higher

than the number reported here.

By the end of FY-1978 the net federal investment in the Southwestern Fed-

era l Power system was $1.31 bi l l ion. The Southwestern Federal Power System

has 21 projects w i t h a capacity of 1,916,700 kW in operation and 2 projects

with a capacity of 218,000 kW under construction. The to t a l generation of the

Southwestern Federal Power System hydroelectric projects from inception t o

September 30, 1978 was 82.27 b i l l ion kwh.

Southeastern Power Administration

The Southeastern Power Administration (SEPA) was created by the Secretary

of the Inter ior i n 1950 to carry out functions assigned t o the Secretary by the

Flood Control Act of 1944. I t administers the sale of e l ec t r i c power from dams

operated by the U.S. Army Corps of Engineers in the s t a t e s of West Virginia,

Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi,

Tennessee, and Kentucky. The SEPA does not own, construct or maintain any

transmission f a c i l i t i e s . Therefore, Table E-13 in Appendix E presents data on

hydroelectric generation only. ( 4 )

By the end o f FY-1978 the net federa l investment i n the Southeastern Fed-

e r a l Power Program (SEFPP) was $1.77 b i l l i o n . The SEFPP has 21 p r o j e c t s w i t h

a capac i ty o f 2,712,375 kW i n operat ion and one p r o j e c t w i t h a capac i ty o f

300,000 kW under cons t ruc t ion . The t o t a l generat ion o f t h e SEFPP Hydroe lec t r i c

p ro jec ts from incept ion t o September 30, 1978, was 131.6 b i l l i o n kwh.

Alaska Power Admin i s t ra t i on

The Alaska Power Admin is t ra t ion (APA) was created by the Secreatry o f the

I n t e r i o r i n 1967 t o c a r r y ou t f unc t i ons assigned t o t h e Secretary r e l a t e d t o

water and power p lann ing and power operat ions i n Alaska, i n c l u d i n g among others

t h e Eklutna P r o j e c t Act; t h e Snettisham P r o j e c t au tho r i za t i on i n t h e Flood Con-

t r o l Act o f 1962; and the power market ing p rov i s ion o f the Flood Contro l Act o f

1944.

The Admin is t ra t ion 1) p lans water, power, and re1 ated resources develop-

ment and u t i l i z a t i o n i n cooperat ion w i t h other s tate, l oca l , and fede ra l e n t i -

t i e s ; and 2) prov ides operat ion, maintenance, and power market ing f o r f ede ra l

hyd roe lec t r i c p ro jec ts .

The power operat ions and market ing funct ions i nvo l ve the Eklutna and

Snettisham h y d r o e l e c t r i c p ro jec ts , i n c l u d i n g r e l a t e d t ransmiss ion systems serv-

i n g the Anchorage and Juneau areas, respec t i ve l y . The cos t data on the hydro-

e l e c t r i c generat ion and t ransmiss ion f a c i l i t i e s are repor ted i n Appendix E,

Table E-14. (5)

By the end o f FY-1978 the net f ede ra l investment i n the Alaska Federal

Power Program (AFPP) h y d r o e l e c t r i c p r o j e c t s was $172.89 m i l l i o n . The AFPP has

two p ro jec ts w i t h a capac i t y o f 77,200 kW i n operat ion and a p r o j e c t w i t h a

capaci ty o f 27,000 kW under cons t ruc t ion . The t o t a l generat ion o f t h e AFPP

from incept ion t o September 30, 1978, was est imated t o be 3.97 b i l l i o n kwh.

Tennessee Val l e y A u t h o r i t y

The Tennessee Va l l ey A u t h o r i t y (TVA) i s the wholesale power s u p p l i e r f o r

160 l o c a l munic ipal and cooperat ive e l e c t r i c systems serv ing 2.6 m i l l i o n cus-

tomers i n p a r t s o f seven states. It suppl ies power t o several f ede ra l i n s t a l -

l a t i o n s and i n d u s t r i e s whose power requirements are l a r g e o r unusual. Power

t o meet these demands i s suppl ied from 29 dams, 12 c o a l - f i r e d power p lan ts , 1

nuclear power p lan t , and 4 gas t u r b i n e i n s t a l l a t i o n s operated by TVA; 8 U.S.

Corps o f Engineers dams i n the Cumberland Val ley; and 12 Aluminum Company of

America dams whose opera t ion i s coord inated w i t h t h e TVA system.

Chronological data on the fede ra l (TVA) investment i n hydropower genera-

t i o n and t ransmiss ion f a c i l i t i e s are repor ted i n Appendix E, Table E-15. (6 )

These da ta are repor ted because they were r e a d i l y ava i lab le , deal o n l y w i t h

hydropower, and the t o t a l Federal Government investment i n the TVA's hydropower

f a c i l i t i e s could n o t be accura te ly obta ined from t h e f i n a n c i a l statements. The

assets do no t inc lude the i n t e r e s t or repayment of the federa l investment. I n

a l l cases encountered t h e investment o f t h e Federal Government i s l a r g e r than

the assets. Therefore, the use o f the assets leads t o a low est imate o f the

f e d e r a l i n c e n t i v e t o t h e TVA's hydropower f a c i l i t i e s . The f l u c t u a t i o n s i n t h e

da ta are due t o changes i n t he annual r a i n f a l l , t he p o l i c i e s o f t he government,

t h e economic s i t u a t i o n , and the account ing procedure used t o a u d i t t h e TVA.

By the end o f FY-1978 the ne t f ede ra l investment i n the Tennessee Va l l ey

A u t h o r i t y h y d r o e l e c t r i c p r o j e c t s was $2.00 b i l l i o n . The TVA has 30 p r o j e c t s

w i t h a capac i t y o f 3,269,910 kW i n operat ion and a pumped storage u n i t w i t h a

capac i ty o f 1,530,000 kW under cons t ruc t ion . The t o t a l generat ion o f t h e TVA

h y d r o e l e c t r i c p r o j e c t s from incep t i on t o September 30, 1978 was 487.0 b i l l i o n kwh.

Western Area Power Admin i s t ra t i on

The Western Area Power Admin i s t ra t i on (WAPA) was es tab l i shed on December 21,

1977, w i t h headquarters i n Denver, t o serve the e l e c t r i c power needs of an

est imated 5 m i l l i o n r e t a i l customers i n 15 western s tates.

The new power admin i s t ra t i on i s respons ib le f o r t he fede ra l power market-

i n g f u n c t i o n s t r a n s f e r r e d f rom t h e Department o f t he I n t e r i o r ' s Bureau o f

Reclamation t o DOE On October 1, 1977, under t he prov is ions o f the Department

o f Energy Organizat ion Act (91 Stat . 578; 42 U.S.C. 7152). These market ing

func t i ons i nvo l ve the sa le and d i s t r i b u t i o n o f power produced a t e x i s t i n g fed-

e r a l h y d r o e l e c t r i c generat ion f a c i l i t i e s i n t h e 15 s ta tes . I n add i t ion , t h e

r e s p o n s i b i l i t y f o r cons t ruc t ion , operat ion, and maintenance o f t ransmiss ion

l i n e s and at tendent f a c i l i t i e s was t r a n s f e r r e d t o DOE. The 14 s ta tes t o be

served by WAPA are C a l i f o r n i a , Arizona, Nevada, Montana, Nor th Dakota, South

Dakota, Iowa, Colorado, Wyoming, Minnesota, Texas, New Mexico, Utah, and

Nebraska.

It i s an t i c i pa ted t h a t t h e WAPA w i l l not be completely opera t iona l u n t i l

1981. Cur ren t l y the WAPA i s coord ina t ing i t s assigned a c t i v i t i e s w i t h the

Bureau o f Reclamation. U n t i l t h e WAPA i s f u l l y operat ional , the data on the

hydropower f a c i l i t i e s i n the WAPA reg ion w i l l be repor ted i n the Bureau o f

Reclamation sec t ion below.

Bureau o f Reclamation

The Bureau o f Reclamation produces power from the p r o j e c t s i n i t s s i x

regions. The regions are: t h e Lower Missour i , t h e Upper Missour i , t h e Lower

Colorado, the Upper Colorado, the Centra l Va l l ey and the R io Grande. The

general c r i t e r i a f o r repayment o f t h e p r o j e c t s w i t h power revenues are:

1. Projected annual revenues must be s u f f i c i e n t t o meet a l l costs i n the

year they occur except investment and replacement costs, and c u r r e n t

yea r ' s i n t e r e s t t h a t cannot be met from cu r ren t revenues.

2. Each increment o f investment subal located t o commercial power must be

paid, w i t h i n t e r e s t , w i t h i n 50 years a f t e r the r e l a t e d f a c i l i t y i s

placed i n service. Replacements must be repa id w i t h i n the est imated

serv ice l i f e o f the equipment.

3. I r r i g a t i o n and waterfowl conservat ion a i d must a lso be repa id w i t h i n

50 years a f t e r t h e major p r o j e c t add i t ion .

Chronological data on the federa l investment i n hydropower generat ion and

transmission f a c i l i t i e s i s repor ted i n Appendix E, Table E-16. (7-11) These

data inc lude repayment o f t h e i n t e r e s t , opera t ion and maintenance and rep lace-

ment expenses. Because the generat ion and transmission costs were not separ-

able, they are repor ted as a t o t a l f i g u r e .

By the end o f FY-1977 the net f ede ra l investment i n hyd roe lec t r i c p r o j e c t s

from which t h e Bureau o f Reclamation markets t h e power was $2.59 b i l l i o n . The

t o t a l i n s t a l l e d capac i ty o f these p ro jec ts i s 6,882,500 kW. The t o t a l gross

generat ion o f these p r o j e c t s from incep t i on t o September 30, 1977 was 437.00

b i l l i o n kwh. This gross generat ion f i g u r e includes on l y p lan ts t h a t are s t i l l

operat ing. Due t o t r a n s f e r o f r e s p o n s i b i l i t y t o WAPA, 1978 data was no t a v a i l -

ab le a t the t ime o f t h i s p r i n t i n g . Consequently, 1977 data was reapp l i ed t o

1978 f o r es t imat ion purposes.

The Federal Power Market ing Agencies prov ide a market a c t i v i t y i ncen t i ve

t o hydro-energy by market ing the power produced a t f ede ra l dams. The BPA and

TVA a lso t ransmi t and wheel power produced by p r i v a t e u t i l i t i e s . The transmis-

s ion and wheeling of power by t h e BPA and TVA c o n s t i t u t e s a market a c t i v i t y

i ncen t i ve t o bo th hydro-energy and e l e c t r i c energy. The costs associated w i t h

t h e admin i s t ra t i ve func t i ons o f power market ing and wheeling are very smal l

compared t o the dam and power1 i n e cons t ruc t ion costs.

REGULATION OF HYDROELECTRIC FACILITIES

The Federal Energy Regulatory Commission (FERC) regu la tes the i n t e r s t a t e

aspects o f the e l e c t r i c power and na tu ra l gas i ndus t r i es . I t i s an independent

agency opera t ing under the Federal Power Act o r i g i n a l l y enacted as the Federal

Water Power Act of 1920 and subsequently amended by T i t l e I 1 o f the Pub l i c

U t i l i t y Act o f 1935 and the Natura l Gas Act o f 1938. Add i t iona l r e s p o n s i b i l i -

t i e s have been assigned by subsequent l e g i s l a t i o n and execut ive order.

Concerning h y d r o e l e c t r i c i t y , the Federal Energy Regulatory Commission

issues permi ts and l i censes f o r nonfederal hyd roe lec t r i c power pro jec ts ; regu-

l a t e s the ra tes and other aspets o f i n t e r s t a t e wholesale t ransac t ions i n elec-

t r i c power; issues c e r t i f i c a t e s ; conducts cont inu ing i nves t i ga t i ons o f the

e l e c t r i c power i n d u s t r i e s and t h e i r r e l a t i o n s h i p s t o na t i ona l programs and

ob jec t ives , i n c l u d i n g conservat ion and e f f i c i e n t u t i l i z a t i o n o f resources;

requ i res maximum p r o t e c t i o n o f the environment i n the cons t ruc t ion o f new

hyd roe lec t r i c p r o j e c t s and transmission l i n e s cons is ten t w i t h the n a t i o n ' s

needs f o r adequate and r e l i a b l e e l e c t r i c power; and a l l oca tes resources consis-

t e n t w i t h the p u b l i c i n t e r e s t under the' Federal Power Act. I n add i t ion , the

FERC prescr ibes and enforces a uni form system o f accounts f o r regu la ted

e l e c t r i c u t i l i t i e s .

The FERC publ ishes r i v e r basin appra isa ls f o r use i n l i c e n s i n g pro jec ts .

It also reviews p lans f o r dams proposed by other f ede ra l agencies and makes

recommendations concerning f a c i l i t i e s f o r the development o f h y d r o e l e c t r i c

power. The Commission reviews r a t e s f o r t h e sale o f e l e c t r i c power from cer-

t a i n federa l h y d r o e l e c t r i c p ro jec ts . I n addi t ion, i t p a r t i c i p a t e s w i t h other

agencies i n coo rd ina t i ng development and u t i l i z a t i o n o f t h e n a t i o n ' s water and

r e l a t e d land resources. Expenditures s ince 1971 f o r r e g u l a t i o n o f hydroelec-

t r i c power are l i s t e d i n Table 28. (12)

ANALYTICAL METHOD

I n t h i s chapter b e n e f i t i s def ined as e l e c t r i c a l energy produced i n k i l o -

wat t hours (kwh). F i ve d e f i n i t i o n s o f costs o f i ncen t i ve were considered and

represented i n Appendix D. Two d e f i n i t i o n s were selected:

1. The p o r t i o n o f the ne t investment i n cons t ruc t i on and opera t ion o f the

dam a l l oca ted t o power development and the exemption o f power revenues

from fede ra l income taxes. This d e f i n i t i o n inc ludes r e t u r n on t h e

investment f rom power revenues and covers costs o f cons t ruc t ion ,

operat ion, maintenance, management and regu la t i on .

2. The low i n t e r e s t r a t e s o f f ede ra l appropr ia t ions and t h e exemption o f

power revenues from fede ra l income taxes. This d e f i n i t i o n i s based

on the d i f f e rence between fede ra l and p r i v a t e i ndus t r y costs f o r t h e

dams.

For d e f i n i t i o n #1, p l a n t investment, generat ion and capac i t y data were

used t o est imate t h e chrono log ica l l i s t i n g o f f ede ra l incent ives shown i n

Table 28. A l l amounts are i n 1978 do l l a rs . This t a b l e was obtained us ing the

c a l c u l a t i o n a l procedures i n Appendix D and by summing Tables E-11 through E-15

i n Appendix E.

The t o t a l cumulat ive ne t f ede ra l investment i n h y d r o e l e c t r i c generat ion

f a c i l i t i e s by t h e end o f FY-1978 was $14.52 b i l l i o n ; the t o t a l i n s t a l l e d capa-

c i t y o f these f a c i l i t i e s i s 31,300,456 kW. The t o t a l cumulat ive generat ion

was 2,500.94 b i l l i o n kwh.

The t o t a l cumulat ive ne t f ede ra l investment i n e l e c t r i c i t y t ransmiss ion

f a c i l i t i e s has been $6.22 b i l l i o n . These t ransmiss ion f a c i l i t i e s are used by

other e l e c t r i c i t y generat ing sources as we l l as hydro. I t i s keyond t h e scope

o f t h i s research t o p ropo r t i on t h i s expenditure over the appropr ia te energy

sources so t h i s investment i s i d e n t i f i e d here as a subsidy t o e l e c t r i c energy

and t h e d o l l a r amount i s incorporated i n t o t h e e l e c t r i c i t y chapter.

The method used t o est imate the income tax exemption i n c e n t i v e i s as

fo l l ows :

160

R E F E R E N C E S - CHAPTER V

1. Federal Power Commission, Hydroelectric P l a n t Construction Cost and Annual Production Expenses, 16 th Annual Supplement, 1972.

2. U . S . Department of the Inter ior , Bonneville Power Administration, Annual Reports, 1945-1947, 1951-1952, 1955-1959, and 1961-1976.

3. U.S . Department o f the Inter ior , Southwestern Power Administration, Annual Reports, 1973-1975.

4. U.S. Department o f the Inter ior , Southeastern Power Administration, Annual Reports, 1970-1972, 1974.

5 . U.S. Department of the Inter ior , Alaska Power Administration, Annual Reports, 1969-1970, 1973, 1974-1976.

6. Comptroller General o f the United States General Accounting O f f i c e , Report t o t h e Congress, Examination o f Financial Statements o f the Tennessee Val ley Authority for the Fiscal Years 1947, 1948 ... 1976.

7. U.S. Department of the Inter ior , Bureau o f Reclamation, Mid-Pacific Region, Central Valley Project, Cal i fornia , Tentative Power Rate Adjustment Study, August 1975.

8. U.S. Department o f the Inter ior , Bureau o f Reclamation, Southwest Region, Rio Grande Project, New Mexico, Tentative Power Rate Adjustment, September 1975.

9. U . S . Department of the Inter ior , Bureau o f Reclamation, Lower Colorado Region, Parker-Davis Project Power Repayment Study Brochure for Fiscal Year 1974, J u l y 1975.

10. U.S. Department of the Inter ior , Bureau o f Reclamation, Upper Colorado Region, Colorado River Project and Participating Projects Tentative Power Rate Adjustment, September 1975.

11. U . S . Department of the Inter ior , Bureau o f Reclamation, Eastern and Western Division, Customer Brochure, Proposed Power Rate Adjustment, September 1975.

12. Executive O f f i c e o f the President o f the United S ta tes , O f f i c e o f Management and Budget, The Budget o f the United States Government, 1967 through 1972.

13. Historical S t a t i s t i c s o f the Electric U t i l i t y Industry Through 1970. Edison Electr ic In s t i t u t e , New York, NY 10016, Tables 54 and 57.

14. Statistical Year Book of the Electric Utility Industry for 1975. Edison Electric Institute, New York, NY 10016, Tables 545 and 575, October 1976.

15. Statistical Year Book of the Electric Utility Industry for 1976. Edison Electric Institute, New York, NY 10016.

VI. COAL ENERGY INCENTIVES

The U.S. Department of Energy publication, Monthly Energy Review" (1)

indicates that 74% of U.S. coal production is used by utility companies for power generation, 24% is used by industry, and the balance of current coal production is consumed by household or commercial users. In 1978 these users consumed 10,372; 3,433 and 265 trillion Btu, respectively. The major federal incentives to coal production and utilization are for capital expenditures and depletion allowances. This chapter presents a brief review of the federal

incentives applicable to leasing, mining and R&D, and regulations and laws which have served as incentives for the development of U.S. coal resources.

RESEARCH AND DEVELOPMENT

As shown in Table 32, about $3.4 billion (1978 dollars) of direct federal

funds were spent for coal R&D programs from 1950 to 1978. This includes expenditures by the Environmental Protection Agency for research to mitigate

the environmental impact of using high-sulfur coal as a fuel, especially for

electricity generation.

Mining Methods and Techniques

Because for many years the coal industry operated at a deficit (or at

relatively low earnings as compared to other major industries in the United

States), and because of the industry's lack of highly specialized laboratories

and skills in the multiple disciplines needed for effective research little

research was done by the coal industry except as directed to local problems.

Recently, however, through Bituminous Coal Research, Inc., now affiliated with

the National Coal Association, the coal industry has initiated and partici-

pated in considerable research on various coal processes. In addition, several

of the large coal and coal owning oil companies have been active in mining and

conversion research.

The Bureau of Mines has carried on numerous studies pertaining to coal

mining, preparation, and utilization, including coking coal characteristics.

These studies included mining methods and systems, mechanization of operations,

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coal c lean ing processes, and f a c t o r s t o increase t h e p r o d u c t i v i t y o f mines,

p lus experiments i n longwal l mining, the use o f diamond d r i l l s , and t h e devel-

opment o f r o o f b o l t i n g . For many years t h e Bureau has made f i e l d and labora-

t o r y examinat ions and analyses o f t he chemical cons t i t uen ts o f coal on a

mine-by-mine bas is and has r e g u l a r l y publ ished r e p o r t s on them.

I n add i t i on , by 1985, t he Bureau o f Mines w i l l have completed major demon-

s t r a t i o n s i n t h e eastern, c e n t r a l and southwestern sect ions o f t he count ry t o

e s t a b l i s h the economic e f f i c a c y o f i n teg ra ted ex t rac t ion- rec lamat ion systems.

Also, t h e Bureau c u r r e n t l y i s developing improved coa l t reatment technologies

t o upgrade the q u a l i t y o f coal by reducing the amount o f ash, s u l f u r , and o ther

coa l cons t i t uen ts . ( 2 )

U t i l i z a t i o n

The o n l y major growth market f o r coa l i s t he e l e c t r i c u t i l i t y indus t ry .

I n 1978, 69% o f t o t a l coal p roduc t ion was used f o r power generat ion. Exclud-

i n g coal exports, consumption by u t i l i t i e s represents over 74% o f U.S. coal

consumption. On the basis o f coal equiva lents, coa l suppl ies approx i -

mate ly 60% o f t h e f o s s i l f u e l s consumed f o r power generat ion as compared t o

about 22% f o r o i l . I n other areas o f cu r ren t coal u t i l i z a t i o n , approx i -

mate ly 25% o f p roduc t i on i s used f o r making coke a t home and abroad; t he re i s

now considerable compet i t ion among e l e c t r i c u t i l i t i e s f o r low s u l f u r , high-Btu

coals.

Among the f a c t o r s l i m i t i n g the use o f coal are environmental regu la t ions ,

p a r t i c u l a r l y a i r p o l l u t i o n standards, which p resc r i be l i m i t s on t h e s u l f u r

content o f usable coa l . This i s a ser ious problem f o r the e l e c t r i c u t i l i t y

i ndus t r y . Th is problem i s increased by the h igh cost, and i n some cases ques-

t i o n a b l e e f f ec t i veness , o f stack gas scrubbers and o ther d e s u l f u r i z a t i o n pro-

cesses f o r reducing coa l combustion p o l l u t a n t s .

Extensive research i s under way t o p rov ide v i a b l e a n t i p o l l u t a n t processes,

i n c l u d i n g d i f f e r e n t types o f scrubbers, f l u i d i z e d bed combustion, so lven t

r e f i n i n g , and o the r processes. To encourage the i n s t a l l a t i o n o f f l u e gas

d e s u l f u r i z a t i o n equipment, i t has been suggested t h a t u n t i l these processes

become high performance, proven techniques, cons idera t ion be given t o

classifying them under the Internal Revenue Code to permit the rapid write-off

of their capital costs. ( 4 )

A prime incentive for the development of western coal mining is the need

for low-sulfur coals to meet air quality standards in the East. The practical problems in the development of western coal mining are the leasing of public lands, the appreciably lower Btu values of western coals compared to eastern

coals, high transportation costs, and the impact of successful development of

economically and technically viable flue gas desulfurization processes.

Just as the sulfur content of coal has become an increasingly important

factor in the production and utilization of coal, so are relative heating val-

ues (Btu) of coals, both in their direct relation to SO2 regulations and their costs. Generally coals of high Btu value command the highest prices.

Another factor that influences coal use is the price of competing fuels.

Partial or complete deregulation of natural gas prices would be a strong deter-

rent to the continued use of natural gas for power generation and thus would

be an added incentive for increased use of coal.

Considerable research has been done by both the Federal Government and industry on the preparation of coal to reduce impurities, including sulfur, as

an alternative to post-combustion abatement.

Research on new uses of coal, including low-rank coals such as lignite, has been carried on for many years by the Bureau of Mines. During the Kennedy

Administration the Office of Coal Research was established to develop new proc-

esses for the utilization of coal, including research, development, and demonstration. With the establishment of ERDA, the Office of Coal Research and coal

utilization activities of the Bureau of Mines were transferred out of the

Department of the Interior. These activities are now part of DOE.

Through the efforts of the U.S. Bureau of Mines, synthetic fuel develop-

ments achieved in Germany during World War I1 were evaluated in a program at

Louisiana, Missouri. German Lurgi hydrogeneration units were evaluated using

U.S. coals. Only minor economic use was made of the information developed at

that time but it has provided useful background for the present synfuels

program.

Because of the total lack of information relative to the feasibility of

underground coal gasification, the U.S. Bureau of Mines developed a field scale test and methodological evaluation at Gorgas, Alabama, in 1948. More recent

tests have been performed in Wyoming by DOE. To date, however, no commercial

installations have resulted from this research.

One of the major forces underlying many coal research programs (as well

as those involving other energy sources) is the large utility market, which is continually expanding to meet increasing requirements for electric power. This

research is motivated by our inadequate domestic supplies of oil and natural

gas and our increasing dependence on high-cost foreign oil, plus all the atten-

dant adverse implications. In addition to research and development on coal

combustion techniques, DOE is engaged in extensive and vitally needed research on coal gasification, coal liquefaction, and solvent refining. These programs

are positive secondary incentives for coal production.

Research and development for coal production and utilization is a non-

traditional service of government. The total presented for the period was

developed from published expenditures of the appropriate government agencies

and includes R&D on resource assessment, mining techniques, mining health and

safety, coal utilization, and sulfur dioxide pollution abatement. Expenditures

were about $3.4 billion (in 1978 dollars) for the period 1950-1978.

EXPLORATION

Among the basic incentives to coal production has been the comprehensive

data assembled by the U.S. Geological Survey through exploration and geologic

inference and supplemented by information from the Bureau of Mines and feder-

ally supported state agencies on coal resources and reserves.

Although the U.S. coal resources are huge,(a) they have neither been as

fully explored nor as finely categorized as now appears necessary in consider-

ation of the drastic reassessments of energy resource availabilities made in

recent years, and the "quality of fuels" factors recently made more important

(3) Approximately 1.7 trillion tons each of "identified" and "unidentified" (or postulated) resources, according to estimates of the U.S. Geological Survey, presented in Reference 12.

173

by environmental considerations. Until processes are developed that will per-

mit the use of coal tha t otherwise may be considered environmentally unaccept-

able, these factors will effect ively "reduce" the coal resource base. Coal in i t s sol id s t a t e must continue t o play a v i ta l ro le in national energy supply, notwithstanding the develoment of large-scale a l ternate sources of energy, including the development of synthetic o i l and gas from coal and o i l shale, of

nuclear power, solar power, and a variety of other energy sources which hereto- fore have not been considered of consequence.

Whereas coal "resources" refer to the t o t a l i t y of exist ing coal, pract i - c a l i t i e s of commercial ava i lab i l i ty require us t o consider as readily-available

"reserves" only those coals that are mineable under current economic and tech-

nological conditions. This narrows the coal reserve base t o approximately

438 b i l l ion tons. ( I 2 ) These coals are categorized by rank (bituminous, sub- bituminous, l ign i te , anthracite) and by the i r amenability t o "underground' min-

ing or "surface" mining (68% and 32% of to ta l reserves for the country as a

whole, respectively, although the percentages d i f f e r in various sections of the

nation). Also, primarily because of safety requirements and geologic condi-

t ions , generally only about 50% of underground reserves can be recovered in

mining, whereas surface mining recovery ranges up t o 90%. I t i s expected tha t

new technology will increase the percent recovery in underground mining.

Among other important delineations for coal are geographic and qua l i ty

differences. Most coal reserves are west of the Mississippi River; many are on federal and Indian lands where leases are required for operation, and gen-

e ra l ly they are f a r from concentrations of industry and commerce.

Although about 65% of to ta l coal resources are estimated to contain 1.0%

or less sulfur by weight and almost half contain 0.7% or less sulfur , most

coals of these qua l i t i es are located in the West. (4 ) Western coals have

average heating ( B t u ) values well below those of "Eastern" coals. Generally,

they are less cost ly to produce, as most Western production i s surface mined;

b u t , f o r eastern markets, they have high transportation cost. Water avai la-

b i l i t y can be a constraining factor i n both the production and use of coal ,

par t icular ly in the West.

Eastern coal land is mostly privately owned and is relatively near the

large industrial and commercial markets of the United States (electric util-

ities, coke plants, exports) for which transportation facilities have been we1 1 developed. Approximately 49% of coal production in the east is from underground mines (51% from surface mines). (I3) These coals generally have appre-

ciably higher Btu values than Western coals. (The heating values of coal

shipped to market range from approximately 7,000 Btu/lb for Texas lignite to

14,000 Btu/lb for coking coal from southern Appalachia.)

Most Eastern coal is of medium-to-high sulfur content except that from

southern Appalachia, which produces the highest quality (low sulfur) coals for

metallurgical purposes (the production of coke for steel mills) and for other

purposes that require low-sulfur coal. Because of the higher sulfur content

of much of the coal near industrial centers, considerable effort is being con-

centrated on the development of stack gas scrubbers and other antipollutant

processes to make these coals more environmentally acceptable.

Federally supported exploration and examination of coal inventories have

provided, and will continue to provide, valuable incentives for the develop-

ment, production, and utilization of the nation's coal energy resources. At

the same time, they will form a basis for comparing coal resources with the

volume and quality of other domestic energy resource availabilities in the

nation's overall energy structure and with foreign sources of supply.

The principal government agency involved in collecting, analyzing, and

disseminating information on coal resources is the Geological Survey of the

Department of Interior. For example, recently the U.S. Geological Survey pub-

lished a detailed study, "Resources and Land Information Demonstration Pro-

gram," pertaining to coal-bearing areas in the Intermountain West (including

the Power River Basin), related water resources, and other valuable informa-

tion. Map folios were also prepared. These offer valuable guidance in the

development of these area.

The expenditures by the Geological Survey for all geological and mineral

surveys (descried in Chapter VII) amounted to $1,262 million in 1978 dollars

for the period 1950-1978. If the 10.3% of the energy consumed during 1978

which is attributed to coal (using the figures from Chapter 111) can be applied

t o a l l funds expended s ince 1950, coa l - re la ted work amounted t o $130 m i l l i o n

(1978 do1 1 ars) . Tax Rules App l icab le t o Exp lo ra t i on

I n 1976 t h e ho ld ing per iod o f 6 months was extended t o 9 months as a

r e s u l t o f Sect ion 1402 b ( l ) ( I ) of t h e Tax Reform Act o f 1976, which amended

Sect ion 631 o f the Code. I n 1968, the U.S. Treasury est imated t h a t f o r t h a t

f i s c a l year the revenue cos t o f t h i s i ncen t i ve was $5 m i l l i o n . (5 )

Federal expenditures f o r exp lo ra t i on are def ined i n 25 USC 617 (a) as

those" ...p a i d o r incur red dur ing t h e taxab le year f o r t h e purpose o f ascer-

t a i n i n g the existence, l oca t i on , extent, o r q u a l i t y o f any deposi t o f o re or

o ther minera l ..., and pa id o r i ncu r red before t h e beginning o f t h e development

stage o f the mine...' This s t a t u t e does no t apply t o o i l and gas exp lo ra t i on

costs.

P r i o r t o 1951, exp lo ra t i on expenditures were no t covered i n the Revenue

Act even though i t was genera l l y accepted t h a t such expenditures were c a p i t a l

i n nature. (63p.1570) I n t h a t year, changes were made i n the a c t a l l ow ing a

s p e c i f i c deduct ion o f such cos ts up t o $75,000, o r an a l t e r n a t i v e method by

which the taxpayer cou ld e l e c t t o defer amounts up t o t h a t sum not deducted i n

t h e cu r ren t year and deduct t h e amount r a t a b l y as t h e minera ls were discovered

or sold. This was intended t o encourage small mine operators. (6,~.1571) The

law was f u r t h e r amended i n 1954, when t h e d o l l a r l i m i t a t i o n was increased t o

$100,000 per year or $400,000 i n 4 years, and i n 1960, when the 4-year l i m i t a -

t i o n was removed. I n 1966, t h e Congress, i n an attempt t o s t imu la te increased

domestic min ing a c t i v i t y due t o the need f o r a domestic, r a t h e r than a f o r e i g n

source o f essen t i a l minerals, removed t h e monetary l i m i t on amounts t h a t cou ld

be deducted c u r r e n t l y . However, t h e law int roduced the p r i n c i p l e o f recapture

t o be appl ied when t h e mine was so ld o r reached t h e producing stage. If, how-

ever, the taxpayer opted t o be sub jec t t o a $400,000 l i m i t a t i o n , he cou ld avo id

the e f f e c t s o f recapture. (6,p.1572)

I n 1969, t h e exp lo ra t i on expenditure s t a t u t e was amended t o i t s present

form. For expenditures i ncu r red a f t e r December 31, 1969, t h e law has prov ided

no p rov i s ion f o r deduct ion o f costs w i thout one o f two forms o f recapture. The

r u l e s f o r recapture were analyzed i n a rev iew o f i ncen t i ves f o r n a t u r a l

resources by Frank M. Burke, Jr., when he stated"

A taxpayer under the f i r s t r u l e o f recapture (which app l ies i f the

second method discussed below i s no t e lec ted) , i s no t al lowed any

deduction f o r dep le t ion w i t h respect t o a p rope r t y u n t i l t he o ther -

wise a l lowab le dep le t i on f o r such p rope r t y equals "adjusted exp lo ra-

t i o n expenditures" w i t h respect t o such proper ty . The term "adjusted

exp lo ra t i on expenditures" means the excess o f 1) t h e t o t a l explora-

t i o n costs deducted by the taxpayer i n a l l taxab le years which would

have otherwise been c a p i t a l i z e d as bas is o f t h e proper ty , over 2 )

t he amount by which a l lowab le dep le t i on f o r t h a t p rope r t y has been

reduced, f o r a l l taxab le years, because e x p l o r a t i o n cos ts were

deducted, r a t h e r than cap i t a l i zed . A taxpayer may e l e c t t he second

method o f recapture which requ i res i n c l u s i o n i n gross income o f an

amount equal t o the "adjusted exp lo ra t i on expenditures" w i t h respect

t o a l l p r o p e r t i e s o r mines reaching t h e producing stage dur ing t h e

taxab le year. If the taxpayer e l e c t s t h i s a l t e r n a t i v e , he w i l l be

al lowed h i s f u l l dep le t i on deduct ion f o r t h e year. The amount

inc luded i n gross income i s added t o the taxpayer 's dep le tab le basis .

The f i r s t method, o f course, may a l l ow the taxpayer t o spread t h e

recapture over several years, whereas the second method requ i res

i n c l u s i o n o f t he e n t i r e amount i n one taxab le year.

Generally, i f a min ing p rope r t y i s disposed of , t he l esse r o f t he

adjusted e x p l o r a t i o n expenditures w i t h respec t t o t h e p rope r t y o r

the excess o f t he amount r e a l i z e d over the adjusted bas is o f t he

proper ty , i s t r ea ted as o rd ina ry income. I n t h e case o f a d i spos i -

t i o n other than a sale, exchange, o r i n v o l u n t a r y conversion, t he f a i r

market value o f t he p rope r t y i s used i n p lace o f t h e amount

rea l i zed . (6,p.1572)

The ne t e f f e c t o f the 1969 changes p r o h i b i t s t he taxpayer from b e n e f i t i n g

f rom both the c u r r e n t deduct ion o f exp lo ra t i on cos ts and from dep le t i on o f t h e

p r o p e r t y when i t reaches the produc t ion s tate, o r f rom c a p i t a l ga ins when the

p r o p e r t y i s sold. ( 7 )

Thus far, it has been difficult to quantify the number of tax dollars lost as a result of this incentive. However, the deduction for such costs in non-

metallic mining were termed "trivial for tax returns filed in 1960. (7)

Leasing and Development of Federal Coal Lands in the West

As the Federal Government owns over 60% of western coal reserves, ( 4 )

most of which are of low-sulfur content, it can directly influence the ability

of the United States to meet its energy production goals, both qualitatively

and quantitatively. Because of the lead times necessary for capital forma-

tion, market acquisition, mine development, and the blocking up of reserves to support large, long-term coal consumers, any undue deferment of leasing under

conditions sufficient to attract development automatically could be a con-

straint to the achievement of production goals for the 1980s.

Although 51.5% of the demonstrated coal reserve base is west of the Mis-

sissippi River and is predominantly low-sulfur coal, 1978 production in the West was only 28% of total U.S. production. (13)

Although leasing schedules for federal coal lands have not yet been established, proposed amendments to the Federal Coal Leasing Act of 1975 generally

are designed as incentives to the leasing and development of these lands. The amendments establish criteria for leasing that are favorable to investors,

including the recapture of costs; deferred bonus payments; the treatment of royalties and other tax incentives; the protection of proprietary data; and

other administrative and operational measures. Such incentives are effective

because private industry is reluctant to spend large sums for geological and

hydrological data collection unless proprietary data can be protected. The

cost of paying royalties on coal mining leases can be a significant factor in

lease investment speculations. The IRS at present has a tax regulation which grants significant tax deductions to investors paying advance royalties on coal

leases. Taxation of royalties at regular tax rates led owners to ask for

larger royalties. Such royalties could be treated as capital gains if cost

depletion were used, which could lower the effect of coal leases on increased

production. Deduction of costs for mine development instead of capitalization

also would encourage mine operators.

Pub l i c Law 94-377 (S-391) of August 4, 1976, amended the Federal Coal

Leasing Amendments Act o f 1975. Among t h e changes which encouraged l eas ing and

development are t h e f o l l o w i n g prov is ions : Sect ion 2, "No l ess than 50 per cen-

tum o f t h e t o t a l acreage o f f e r e d f o r lease by t h e Secretary i n any one year

s h a l l be lease under a system o f de fer red bonus payments;" Sect ion 5(d) ( I ) ,

"The Secretary, upon determin ing t h e maximum economic recovery o f t h e coal

deposi t or deposi ts served thereby may approve the conso l i da t i on o f coal leases

i n t o a l o g i c a l m in ing u n i t . A l o g i c a l m in ing u n i t i s an area o f land i n which

the coa l resources can be developed i n an e f f i c i e n t , economical, and o r d e r l y

manner as a u n i t w i t h due regard t o conservat ion o f coal reserves and t h e i r

resources;" Sect ion 8A (a) , "The Secretary i s author ized and d i r e c t e d t o con-

duct a comprehensive exp lo ra to ry program designed t o ob ta in s u f f i c i e n t data and

in fo rmat ion t o evaluate the extent , l oca t i on , and p o t e n t i a l f o r developing the

known recoverable coa l resources w i t h i n t h e coal lands sub jec t t o t h i s Act.

This program s h a l l be designed t o o b t a i n t he resources in fo rmat ion necessary

f o r determin ing whether commercial q u a n t i t i e s o f coa l are present and the geo-

g raph ica l ex ten t of the coa l f ie lds-- ; " Sect ion 8A (b) , "The Secretary s h a l l

ma in ta in a c o n f i d e n t i a l i t y o f a l l p r o p r i e t a r y da ta o r i n fo rma t i on purchased

from commercial sources w h i l e no t under con t rac t w i t h the U.S. Government u n t i l

a f t e r t h e areas i nvo l ved have been leased."

These amendment statements o f f e r d i r e c t i ncen t i ves t o l a r g e p r i v a t e coal

developers t o extend t h e i r operat ions on new o r cont iguous coa l reserves.

Sect ion 26 USC 161 (a) de f ines "development expenditure" deductions as

those"... p a i d o r i n c u r r e d du r i ng the taxab le year f o r t he development o f a

mine or o ther n a t u r a l depos i t (o ther than an o i l o r gas w e l l ) i f p a i d o r

i ncu r red a f t e r t h e ex is tence o f ores o r minera ls i n commercial ly marketable

q u a n t i t i e s has been disclosed."

P r i o r t o 1951, t h i s type o f expenditure i n excess o f ne t r e c e i p t s from

ores o r minera ls had t o be c a p i t a l i z e d w h i l e t he mine was i n t h e development

stage and t o be recovered through dep le t i on when t h e mine became product ive.

Since t h i s t a x t reatment i n h i b i t e d m in ing i n d u s t r y expansion, and s ince t h e

Senate Finance Committee was concerned about t he shortage o f many essen t i a l

meta ls and minera ls necessary t o t h e defense e f f o r t , t h e Congress prov ided f o r

development costs t o be t rea ted e i t h e r as a cu r ren t deduction o r as a deferred

expense t o be deducted r a t a b l y as t h e u n i t s o f ores o r minera ls were

sold. (6,p.1573)

I n 1954, the cu r ren t Sect ion 616 o f the Code was enacted. It cont inued

t h e op t i on t o deduct c u r r e n t l y o r defer such expenditures. Although t h e

expenditures are no t def ined i n the s ta tu te , the I n t e r n a l Revenue Serv ice has

r u l e d t h a t i t inc ludes a l l costs r e s u l t i n g d i r e c t l y from t h e process o f making

the minera l accessib le by the d r i v i n g of shafts, tunnels, and s i m i l a r proc-

esses or a c t i v i t i e s . (6,p.1579)

Since development expenditures are no t sub jec t t o recapture as are explo-

r a t i o n expenditures under Sect ion 617, taxpayers are anxious t o have t h e i r

i n t e r e s t c l a s s i f i e d as being i n the development stage. ( 6 ) The general r u l e

governing whether a mine i s i n the development o r exp lo ra t i on stage i s t h a t t h e

taxpayer 's ac t i on must i n d i c a t e a d e f i n i t e i n t e n t i o n and commitment t o develop

t h e p rope r t y before the advancement from exp lo ra t i on t o development can be

establ ished. This i n t e n t i o n should be manifested a f te r the ex is tence o f com-

m e r c i a l l y marketable q u a n t i t i e s o f ores or other minera ls has been establ ished. (9)

I n 1960, development expenses t o t a l i n g about $13 m i 11 i o n were deducted

aga ins t $2 b i l l i o n o f gross income f rom mineral p roper t ies . I n the most impor-

t a n t o f the i n d u s t r i e s covered by the deduction, bi tuminous coal, the r a t i o o f

development expense t o gross income was 0.3%. ( 3 )

Sect ion 26 USC 631 ( c ) provides a gain/ loss i ncen t i ve t o i r o n and coal

r o y a l t y r e c i p i e n t s . Before 1951, t h e r e c i p i e n t s o f bonuses, advances, and

r o y a l t i e s i n coal l eas ing t ransac t ions were requ i red t o t r e a t the amounts

rece ived as o rd ina ry income, sub jec t t o percentage deplet ion. The Senate

Finance Committee i n t h a t year decided t h a t the r e c i p i e n t s o f coal r o y a l t i e s

were e n t i t l e d t o tax r e l i e f and Sect ion 117 ( c ) (2 ) o f t h e I n t e r n a l Revenue

Code o f 1939 was enacted, the predecessor t o Sect ion 631 (c ) . (6,~.1570) The .(6,~.1570) e f f e c t o f t h i s i ncen t i ve p rov i s ion has been explained as fo l l ows .

This p rov i s ion s ta tes t h a t w h e r e the owner o f coal assigns r i g h t s t o

e x p l o i t such coal, r e t a i n i n g an economic i n t e r e s t , such owner may

t r e a t the present and f u t u r e proceeds from assignment o f the

i n t e r e s t , t o t h e extend such proceeds exceed h i s adjusted dep le t i on

basis (plus any deductions disallowed fo r the taxable year by virtue of Section 272 of the Internal Revenue Code of 1954) as gain from

disposition of an asset used in a trade or business. Therefore,

provided the owner has held his in te res t in the coal fo r more than 6

months when the coal i s mined, the resul t ing gain i s treated as Sec-

t ion 1231 gain. Bonuses received i n connection w i t h the grant of

the lease qual i fy under Section 631 (c ) t o the extent a t t r ibu tab le

t o coal held more than 6 months. An owner qualifying under Section

631 ( c ) i s not en t i t l ed t o depletion on the receipts under the con-

t r a c t . Section 631 ( c ) does not apply t o income realized by the

owner as a co-adventurer, partner or principal in the actual mining

of such coal.

In the Internal Revenue Code of 1954, Section 631 ( c ) was expanded

t o include iron ore except t o the extent iron ore i s disposed of t o

cer ta in re la ted partners. Thus, under present law, the recipients

of iron ore and coal royal t ies are afforded more favorable tax

treatment than most other mineral royalty recipients.

The holding period of 6 months was extended to 9 months in 1977 and one

year thereaf ter as a r e su l t of Section 1402 b ( 1 ) ( I ) of the.Tax Reform Act of

1976. That section amended Section 631 of the Code.

In 1968, the U.S. Treasury estimated tha t fo r t ha t f i s ca l year the revenue

cost of t h i s incentive was $5 million. ( 5 )

Leasing of coal on federal lands, which are almost en t i r e ly west of the

Mississippi, i s handled by the Bureau of Land Management of the Department of

the Inter ior . In Chapter VII, i t i s estimated tha t BLM has spent $672.4 mil-

lion (1978 do1 l a r s ) on foss i 1 fuel resource management and leasing ac t i v i t i e s .

From 1950 t o 1978 approximately 3% of the value of foss i l fuel produced from

federal leases was from coal. ( I ) Using t h i s as a measure of the incentive,

$20.2 million (1978 dol lars) can be a t t r ibuted t o the coal leasing costs

incurred by BLM.

Development o f Coal i n t h e East

Coal min ing east o f the M i s s i s s i p p i River, which accounts f o r about 76%

o f t o t a l coal product ion, i s almost who l ly on pr ivately-owned lands. Most

mines have been developed t o supply the open market, al though some are owned

and operated by l a r g e consumers such as s t e e l companies and e l e c t r i c u t i l i t i e s .

O f the approximately 6,000 mines i n the East i n 1975, 37% (2,245) were under-

ground mines, producing 52% o f product ion. The 3,750 sur face mines (63% o f t h e

t o t a l ) produced 48% o f Eastern output. ( 3 )

Southern Appalachia (Alabama, V i r g i n i a , and po r t i ons o f West V i r g i n i a and

Kentucky) has t h e l a r g e s t low-su l fu r coal reserves i n t h e East, al though Penn-

sy l van ia and I l l i n o i s a lso have s izeable reserves i n the lower ranges o f su l -

f u r content. The remaining coals . i n both nor thern and southern Appalachia

conta in medium-to-high s u l f u r contents, which i s the pr imary reason f o r in ten-

s i v e research a c t i v i t i e s f o r t h e development o f v i a b l e stack gas scrubbers,

f l u i d i z e d bed combustion, and other a n t i p o l l u t i o n processes.

As i n the West, most product ion i n the East i s from l a r g e mines. I n 1975,

f o r t h e country as a whole, over 55% of product ion came from o n l y 4.6% (284)

o f the mines; 71% o f product ion came from less than 10% o f the mines. (3 )

As d is t ingu ished from the past, when many coal mines were developed w i t h

minimal thought t o compet i t i ve markets f o r coal, o i l , and n a t u r a l gas, l a r g e

mines today are no t developed w i thout f i r m consumer commitments f o r a t l e a s t a

major p o r t i o n o f t h e i r intended product ion.

Exp lora t ion i ncen t i ves cons i s t o f t axa t i on and t r a d i t i o n a l serv ices. Spe-

c i a l t ax r u l e s are designed t o encourage small coal mine operators by g i v i n g

spec ia l deductions, which amount t o o n l y a few m i l l i o n d o l l a r s per year. The

p r i n c i p a l type o f i ncen t i ve i s t h e n o n t r a d i t i o n a l se rv i ce prov ided by t h e U.S.

Geological Survey i n supply ing in fo rmat ion which, f o r the pe r iod 1950-1978

amounted t o $130 m i l l i o n . A market a c t i v i t y se rv i ce was prov ided by t h e Bureau

o f Land Management i n awarding and Superv is ing coal min ing leases ( f o r

1950-1978 $20.2 m i l l i o n ) . The f i g u r e s were ca l cu la ted from budget f i g u r e s f o r

agencies and the share o f t h e i r a c t i v i t y t h a t i s coal - re lated. The t o t a l f o r

t h e exp lo ra t i on area i s thus $150.2 m i l l i o n f o r t h e pe r iod 1950-1978.

M I N I N G

There are many complexi t ies invo lved i n broadening the r o l e o f coal

resources i n t h e n a t i o n ' s energy s t ruc tu re . These inc lude var ious min ing and

associated admin i s t ra t i ve and opera t iona l considerat ions, i n c l u d i n g past, pres-

ent, and poss ib le f u t u r e incent ives, both d i r e c t and i n d i r e c t , some o f which

are discussed below.

Deplet ion A1 lowance

Coal i s a "wast ing asset," t h a t i s , the value o f c a p i t a l invested i n mines

i s decreased as coa l reserves are ext racted. O r i g i n a l l y ca l cu la ted on t h e

basis of the value o f reserves and the value o f annual product ion, the coal

dep le t ion allowance i s ca l cu la ted today as a percentage o f the value o f pro-

duct ion a t the minemouth.

The percentage dep le t ion allowance i s lo%, which i s s u b s t a n t i a l l y l ess

than the 22% f o r o i l and gas. The maximum allowance i s 50% o f t h e income from

the proper ty . Because o f the low p r i c e of coal i n 1960, the e f f e c t i v e per-

centage was repo r ted as 4%. With h igher p r i ces f o r coal i n recent years, 5-62 now seems reasonable. ( 7 ) For t h i s analys is , 4% was used from 1950 t o 1974

and 6% the rea f te r . A 48% t a x r a t e was app l icab le from 1954 t o 1977. P r i o r t o

t h a t the r a t e was 52%. I n 1978, the r a t e was reduced t o 46%.

The t o t a l revenue equ iva len t o f the percentage dep le t ion allowance i s

shown i n Table 33. The t o t a l f rom 1950-1978 i s about $4.7 b i l l i o n 1978 do l -

l a r s . Dur ing t h i s per iod about 26 b i l l i o n tons o f coal were produced, equiva-

l e n t t o rough ly 624 q u a d r i l l i o n Btu. The i ncen t i ve amounted t o $0.011 per

m i l l i o n Btu.

Minimum Pr i ce Con t ro l s - -S tab i l i za t i on

H i s t o r i c a l l y , among the most important f ede ra l incent ives f o r coal pro-

duct ion were t h e p rov i s ions o f t h e Nat ional Recovery Act and Bituminous Coal

Acts o f 1935 and 1937. Although the f i r s t two were he ld uncons t i t u t i ona l

because o f t h e i n c l u s i o n o f labor prov is ions, under the Nat ional Bituminous

Coal Act o f 1937 minimum p r i c e schedules f o r coal were success fu l l y estab-

l i s h e d and upheld by t h e cour ts . These measures were a d i r e c t outgrowth of the

Great Depression. The i r fundamental purpose was t o prevent unrestra ined p r i c e

TABLE 33. Revenue Equivalent of Percent Deplet ion Allowance f o r Coal

Value o f Production Mill<,." 1070 t

M i l l i o n Current $ L i g n i t e and

,r,, , , ,",, A>,"

Revenue Equivalent o f Percent

Year - 1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1957

1956

1955

1954

1953

1952

1951

1950

TOTAL

~ i t u m i n o u s Anthrac i te Total - Total Deplet ion

16,214 272 16,486 430

( a ) Assumed $22/ton for l i g n i t e and bituminous and $37.5/ton fo r an t rac i t e coal.

(b) Assumed $24.80/ton f o r l i g n i t e and b i t m i n o u s and $42.25/ton f o r an t rac i t e coal.

Sources: Minerals Yearbook, U.S. Dept. o f I n t e r i o r , Bureau o f Mines, various Dept. o f Energy, Energy Informat ion

dget of the U.S. Government, years 1976-1980, Special Analyses section, "Tax Expenditures" chapter.

cutting and consequent overproduction and bankruptcies in the coal industry

through the estabishment of "minimum prices." In effect, the purpose was to

prevent large segments of the coal industry from selling coal below their costs

of production in vain attempts to recoup their losses by gaining new customers

at the lower prices, which inevitably continued their downward spiral.

Stated briefly, the minimum prices were based on weighted average costs

for designated districts and minimum price areas into which the country was divided on the basis of meaningful characteristics related to production,

transportation, and prices. Among the many factors considered were coal qual-

ities, sizes, uses for which sold, transportation rates to common market areas,

and other matters related to coal values.

The establishment and administration of federally regulated minimum prices

involved lengthy and complex procedures, including requirements for the sub-

mittal of cost data from individual producers and support data from sales

agents, distributors, transportation media, and others. The validity of such

control measures was challenged all the way to the Supreme Court, where they

were upheld. Although the law and the minimum prices resulted in significant

stabilization of the coal industry and in the development of a great body of

administrative law, their full effectiveness was never realized because of the

United States' entry into World War 11. As a result of the war, the need

changed from minimum prices to maximum permissible prices, set by the Office

of Price Administration.

Data Collection

An important factor in the development of price stabilization policy was the collection and analysis of coal production and price data. This task was

assigned to the Bureau of Mines. For the period 1964-1978 the cost of data

collection and analysis by BOM for all minerals is presented in Table 34 based

on the Appendix to the Budget. For 1964-71, data were published on the amounts

attributed to bituminous and anthracite coal and "petroleum." The petroleum

fraction has been assigned 2/3 to oil and 1/3 to natural gas. Since no break-

down after 1971 is available, estimates must be used. It was assumed that the

percentage breakdown for 1971 applies to later years. This yields a cost esti-

mate of $56.2 million (1978 dollars) for coal data collection and analysis for

TABLE 34. Cost o f Data C o l l e c t i o n and Analysis, A l l Minerals--Bureau o f Mines

Current F rac t i on F rac t i on 1978 $ (Thousands) Year $ (Thousands) - Coal O i l and Gas Coal as(^)

TOTAL 56,253 18,392 9,129

(a) Assumes 2/3 o f "petroleum" cos t f o r o i l , 1/3 f o r gas. (b ) Estimated.

t h e e n t i r e pe r i od 1964-1978. (The data c o l l e c t i o n a c t i v i t y was t r a n s f e r r e d t o

DOE a t t h e s t a r t o f FY 1978).

Hea l th and Safe ty

The Bureau o f Mines and coal producing s ta tes have had a c t i v e programs i n

h e a l t h and s a f e t y f o r many years. They culminated i n t h e Federal Mine Hea l th

and Safe ty Act o f 1969, which most ly extended governmental a u t h o r i t y i n t h i s

area and imposed new r e s t r i c t i o n s and r e s p o n s i b i l i t i e s on t h e coa l i ndus t r y ,

some o f which are burdensome. Admin is t ra t ion of the a c t i s now the responsi -

b i l i t y o f t h e Min ing Enforcement and Safety Admin is t ra t ion (MESA), p a r t o f t h e

Department o f the I n t e r i o r u n t i l March 8, 1978. As a r e s u l t o f t he Mine Safe ty

and Hea l th Amendments Act o f 1977, t h i s a c t i v i t y i s now t h e Mine Safe ty and

Hea l th Admin i s t ra t i on i n the Department of Labor. The cos t o f admin is te r ing

mine hea l th and s a f e t y programs, 1950-1978, i s g iven i n Table 35. For t h e

pe r i od 1972-1978, da ta e x i s t f o r the cos t of inspec t ions o f coa l mines and f o r

meta l and non-meta l l i c m inera l mines. The r a t i o was used t o appor t ion t r a i n -

i n g programs and a d m i n i s t r a t i v e costs. For t he e a r l i e r pe r i od i t was assumed

t h a t 0.85 o f t he t o t a l cos t was coa l indus t ry - re la ted . Thus, coa l mine h e a l t h

and safety , exc lud ing R&D, i s est imated as $798.9 m i l l i o n (1978 d o l l a r s ) .

(Whether t h i s i s a p o s i t i v e incent ive , negat ive incent ive , o r merely an

increased cost o f do ing business i s a mat te r of opinion; s ince i t was no t

in tended as an i n c e n t i v e f o r coa l product ion, i t s impacts on mine p r o d u c t i v i t y

and min ing costs are secondary e f f e c t s . )

As an i n c e n t i v e t o t he i n d u s t r y t o i n v e s t i n c e r t a i n coal mine s a f e t y

equipment, i n 1964 Congress enacted f o u r p rov i s i ons t o make 5-year amor t i za t ion

ava i l ab le . Among them was 26 USC 187, which extended r a p i d amor t i za t ion t o

coa l mine operators. This p r o v i s i o n was repealed, however, by Sect ion 1901 o f . the Tax Reform Act o f 1976.

The s t a t u t e prov ided t h a t a taxpayer cou ld e l e c t a 5-year amort izat ion,

i n l i e u o f t h e dep rec ia t i on deduct ion al lowed by 26 USC 167, f o r c e r t i f i e d coal

mine s a f e t y equipment ( i .e., e l e c t r i c m i ne-face equipment) requ i red by the Fed-

e r a l Coal Mine Hea l th and Safe ty Act, as c e r t i f i e d by t h e Secretary o f t h e

I n t e r i o r and p laced i n serv ice p r i o r t o January 1, 1976. (10)

TABLE 35. Expenditures on Yine Health and Safety. Excluding R&D

Year

1978

1977

TQ 1976

1976

1975

1974

1973

1972

1971

1970

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

TOTAL

F r a c t i o n o f Thousands A l l I nspec t i on Funds o f $ T o t a l f o r Coal Mines

108,361 0.71

98,271 0.76

22,765 0.75

83,066 0.77

77,882 0.79

56,735 0.82

54,009 0.84

47,209 0.84

20,384 0 . 8 5 ( ~ )

13,903 0 . 8 5 ( ~ )

8,856 0 . 8 5 ~ ~ )

8,114 0 . 8 5 ( ~ )

7,443 0 . 8 5 ( ~ )

7,092 0 . 8 5 ( ~ )

6,861 0 . 8 5 ( ~ )

6,604 0 . 8 5 ( ~ )

8 , 2 0 1 ( ~ ) 0 . 8 5 ( ~ )

7 ,154(~) 0 . 8 5 ' ~ )

6 , 7 8 ~ ( ~ ) 0 . 8 5 ( ~ )

5,985 0 . 8 5 ( ~ )

6 ,063 '~ ) 0 . 8 5 ( ~ )

5,659 0 . 8 5 ' ~ )

4,893 0 . 8 5 ' ~ )

4,861 0 . 8 5 ' ~ )

5 , 0 3 1 ( ~ ) 0 . 8 5 ( ~ )

4 , 8 ~ 1 ( ~ ) 0 . 8 5 ( ~ )

4 , 2 7 0 ( ~ ) 0 . 8 5 ( ~ )

4 , 0 5 8 ( ~ ) 0 . 8 5 ( ~ )

3 , 8 0 5 ( ~ ' ~ ) 0 . 8 5 ( ~ )

3 , 7 8 d b ) 0 . 8 5 ( ~ )

Cur ren t $ T o t a l f o r Coal - (Thousands)

76,936

74,686

17,074

64,275

61,523

46,361

45,532

39,773

24,976

11,818

7,528

6,897

6,327

6,028

5,832

5,613

6,971(b)

6 , 0 8 1 ( ~ )

5,765

5,087

5 , 1 5 4 ( ~ )

4,810

4,159

4,132

4,276

4,098

3,630

3,449

3,234(a)

3.215

T o t a l 1978 $ f o r Coal

(Thousands)

( a ) Est imated. ( b ) I nc ludes some R&D and f a c i l i t y development costs.

This equipment i s designed t o prevent sparking of coal mine equipment.

When sparking occurs in a coal mine with a suff ic ient concentration of methane

gas, ignition and explosion can resu l t . The provision was passed to ease the

cost burden on operators of so-called nongassy mines who were required t o

i n s t a l l safe e lec t r ica l mine equipment under the act . (10,~.7484) When the investment c r ed i t was reenacted i n 1971, the Congress provided tha t rapid amor-

t izat ion and the investment tax c r ed i t could not both be used fo r the same

investment. The taxpayer was required t o make an election. (10,p.7482)

In 1974, when Congress extended the effect of the 1969 law for an addi-

t ional year, i t estimated t h a t the four amortization s ta tu tes would r e su l t in

a tax revenue loss of $5 mil lion i n 1975. However, no breakout was given fo r

t h i s par t icular incentive. That same projection showed declines of $4 mil-

l ion, $3 million, $2 million, and $1 million in succeeding years. (10,p.7484)

Training Programs

As modern coal mining requires ski l led manpower to operate the sophist i-

cated equipment now used i n coal extraction, handling, and treatment, there i s

a serious need for programs t o t r a in miners. Such programs need to be pro-

moted and supported through the cooperation of government, industry, and educa-

t ional ins t i tu t ions in or near those communities which will benefit most from

the employment of such sk i l l ed workers.

Similarly, there i s an inadequate supply of mining engineers, f o r when

t ra ining programs should be established, including the cross-training of engi-

neers from other discipl ines .

Production and Productivity

Incentives for the development of small mines are discussed in a preceed-

ing section, "Development of Coal in the East."

In 1977, coal production reachedan all- t ime high of 695 million tons. (1)

Production of 660 million tons'') was lower during 1978 because of the coal

s t r ike . The value of production has a lso increased s ignif icant ly , from $3.9

b i l l ion i n 1971 (522 million tons) t o $16.5 b i l l ion i n 1978 assuming $24.80 per

t o n f o r bituminous and l i gn i t e coal and $42.25 per ton fo r anthracite coal.

In recent years, major production has shifted from underground to surface min-

ing (39% and 61%) respectively, in 1978. (12)

However, productivity has declined significantly for both underground and

surface mining in recent years. This is a reversal of the earlier long-term

trends toward increased industry productivity which resulted largely from con-

tinuing mechanization of mining operations. The primary reasons for this

decrease have been the addition of nonproductive workers required under the

Health and Safety Act, unprecedented absenteeism and strikes in the industry,

and other factors. Declining productivity has an adverse influence on mining

costs and prices.

With emphasis being placed on the need for increased coal production, the industry is concerned about the impact of environmental restrictions. These

restrictions will cause shifts in patterns of production, both geographically

and technologically, in land leasing regulations, and in other related areas, including oil import levels and prices and future policies on natural gas. The

coal industry is watching closely requirements under the National Energy Act

of 1978 (specifically the Power Plant and Industrial Fuel Use Act), that apply to the conversion of electric power plants from oil and gas to coal, as well

as the results of research and development programs associated with these con-

version efforts.

Powerplant and Industrial Fuel Use Act

The Powerplant and Industrial Fuel Use Act (PIFUA) is one of the five

major components of the National Energy Act of 1978. PIFUA contains three

major provisions: (1) new electric powerplants cannot be constructed with the

capacity if using natural gas or petroleum as their primary fuels, (2) existing

electric plants are prohibited from using natural gas after January 1, 1990, and are in the interim prohibited from increasing their proportional use of

natural gas above historic levels, and (3) boilers for new major fuel burning installations (generally a single unit using 100 MM Btu/hr heat input or an aggregation using 250 MM Btu/hr) are prohibited from using natural gas or petroleum as their primary energy source. Other significant provisions include

a prohibition on the use of natural gas for decorative outdoor lighting and the

a v a i l a b i l i t y of f i n a n c i a l assistance t o s ta tes s u b s t a n t i a l l y impacted by t h e

development r e s u l t i n g from increased coal and uranium mining. The Department

o f Energy i s g iven the a u t h o r i t y t o g rant exemptions from major p rov is ions o f

the Act.

The purposes of PIFUA are t o reduce o i l imports and t o s t imu la te the use

of coal and o ther p l e n t i f u l s u b s t i t u t e f u e l s t o save dwind l ing domestic sup-

p l i e s o f o i l and gas. The fuel t h a t i s l i k e l y t o rece ive the greates t b e n e f i t

i s coal. The Department o f Energy has est imated t h a t coal use w i l l be

increased fom 9.6 percent t o 11.6 percent as a r e s u l t o f the Act. ( I 4 ) t o t a l

energy consumption i s no t expected t o change s i g n i f i c a n t l y . PIFUA has been

inc luded as an i n c e n t i v e f o r coal product ion because t h a t i s one o f the

purposes s ta ted by Congress and i t i s one o f t h e expected r e s u l t s . Since t h e

Act was signed o n l y i n November 1978, the costs are probably small and are not

included.

Small Operators

It i s not economical o r o p e r a t i o n a l l y f eas ib le f o r l a rge min ing organiza-

t i o n s t o e x t r a c t many o f t h e smal ler, noncontiguous coal deposits. And, u n t i l

r e c e n t l y there was on l y a moderate i ncen t i ve f o r small min ing operators, who

have f l e x i b i l i t y o f s t ruc ture , c a p a b i l i t i e s , and m o b i l i t y , t o work these

somewhat i s o l a t e d resource areas. Except f o r Pennsylvania, most small mines

are i n t h e southern coal f i e l d s (Kentucky, Tennessee, V i r g i n i a , and West

V i r g i n i a ) , many of them i n areas o f low-sulfur, high-Btu coal reserves.

C o l l e c t i v e l y , small and medium-sized mines con t r i bu te s i g n i f i c a n t l y i n

p rov id ing energy f o r t h e n a t i o n ' s economy. They are e s p e c i a l l y important i n

emergencies when, due t o t h e i r greater f l e x i b i l i t y f o r i n t e r r u p t i b l e

operat ion, they can r e a d i l y increase o r decrease t h e i r product ion i n response

t o sudden changes i n demand. This was amply demonstrated f o l l o w i n g t h e o i l

embargo and subsequent energy c r i s i s when increased product ion was l a r g e l y

from small- t o medium-sized mines, s ince coal from la rge r mines was committed

t o long-term cont rac ts . With t h e assistance o f federa l loan guarantees t o t h e

smal ler underground mines under the Energy P o l i c y and Conservation Act o f

1975, t h e p o t e n t i a l s f o r s i g n i f i c a n t l y increased product ion t o meet expanding

energy requirements would be exce l l en t .

The increased demand for coal to bolster the decreasing supply and

increased cost of other direct fired fuel resources such as oil and gas has

led to the opening of new underground coal mines, particularly deposits that

will yield low-sulfur coal. The Energy Policy and Conservation Act of 1975,

provides, in part, for financial assistance in the form of loan guarantees to small coal producers. Small producers are defined as those with gross

revenues of $50 million or less, or production of 1 million tons of coal or less, in the calendar year preceding the year in which they apply for a loan guarantee. The guaranteed loan cannot exceed 80% of the loan required, or $30

million. The aggregate permitted under this section is not to exceed $750

million.

The principal incentive for coal mining has been the tax incentive

provided by allowing a percentage deduction, as opposed to the cost depletion allowance. From 1950-1978 this amounted to $4.7 billion, calculated by using

an estimated realized fraction of the maximum value (10%) times the value of production. Enforcement of mine health and safety regulations by the

Department of Labor, which cost $798.9 million for the period 1950-1978 is a

"requirements" type of action. Budget expenditures were multiplied by the

estimated fraction of activities involving coal to give the total. Data

collection and dissemination by the Bureau of Mines is nontraditional service,

with a cost of $56.2 million for the period 1967-1978. Loan guarantees for small mine operators, a small cost, constitute a market activity.

RECLAMATION

Aside from its effects on air quality, the major environmental impact of

coal production is surface disturbance during strip mining. As strip mining

increases in both the East and West, the establishment of reclamation

standards that are economically feasible as well as environmentally acceptable

is a matter of great concern to the coal industry as well as to

environmentalists and the public. Of principal interest is the return of the

land to its original contour or as nearly so as possible, or to equal or more

productive use, without unduly restricting coal production.

The degree o f land disturbance depends upon the land and water

rec lamat ion measures taken by coal operators p r i o r to, during, and a f t e r

s t r i pp ing . Considerable advances have been made by the coal i n d u s t r y i n such

rec lamat ion e f f o r t s as rehabi 1 i t a t i o n of farmlands, r e f o r e s t a t i o n , development

o f rec rea t i ona l a c t i v i t i e s i n c l u d i n g lakes and w i l d l i f e refuges, and

r e s t o r a t i o n o f aes the t i c values. Even i n r e l a t i v e l y a r i d regions o f t h e West,

land rec lamat ion i s poss ib le w i t h good management pract ices. (1 )

Although many s ta tes have enacted l e g i s l a t i o n t o c o n t r o l land rec lamat ion

and r e h a b i l i t a t i o n , t he re i s considerable l ack of u n i f o r m i t y i n t h e con t ro l s

and i n t h e i r e f fec t iveness and i n proposed fede ra l rec lamat ion measures.

Federal regu la t i ons can have a s i g n i f i c a n t impact on t h e a b i l i t y o f t h e coal

i n d u s t r y t o meet t h e expectat ions t h a t have been se t f o r it. The Surface

Min ing Cont ro l and Reclamation Act o f 1977 r e s u l t e d i n e s t a b l i s h i n g t h e O f f i c e

o f Surface Min ing Reclamation and Enforcement i n the Department o f the

I n t e r i o r . To ta l expenses through 1978 were $3.2 m i l l i o n (1978 d o l l a r s ) .

TRANSPORTATION

Dur ing t h e opening of the U.S. f r o n t i e r , the need f o r major r a i l r o a d

development was apparent. The vas t distances invo lved made r a i l r o a d s

essen t i a l . The i r development requ i red such l a r g e investments o f c a p i t a l t h a t

i t would n o t have been poss ib le t o achieve t h e needed growth w i thout a

subsidy. This was prov ided by the Federal Government i n the form o f land

grants t o r a i l r o a d companies, which were used f o r r i g h t s o f way and t o f inance

cons t ruc t ion . Approximately 94.5 m i l l i o n acres o f r a i l r o a d land grants have

been made s ince t h e land grant program was i n i t i a t e d i n 1950. Reducing t h e

requ i red investments by the r a i l r o a d s permi t ted lower r a i l t a r i f f s .

I n a d d i t i o n t o f u r t h e r d i r e c t b e n e f i t s t o t h e r a i l r o a d s from t h e min ing

and u t i l i z a t i o n o f coa l f o r t h e i r locomotives, t h e development o f r a i l r o a d s

throughout the coun t r y was a major i ncen t i ve i n support o f the development o f

coal mines t o meet t h e growing n a t i o n ' s i n d u s t r i a l needs f o r energy. This i n

turn, generated m i l l i o n s o f tons o f t r a f f i c , and corresponding revenues t o the

r a i l r o a d s .

Today an un in ter rup ted f l o w of coal i s t o t a l l y dependent upon adequate,

e f f i c i e n t t ranspor ta t i on systems. Except f o r t h e assembly o f coal i n s i l o s o r

o ther f a c i l i t i e s f o r u n i t t r a i n s , coal t o be shipped by r a i l u s u a l l y i s no t

s tockp i l ed a t t h e mines because o f t h e added expense invo lved i n r e l i f t i n g .

Accordingly, i f mines do not rece ive the requ i red number o f empty r a i l r o a d

cars f o r t h e i r d a i l y load ing o f coa l output, they do n o t work o r p roduct ion i s

c u r t a i l e d u n t i l cars become ava i lab le . On a lesser scale, the same p r i n c i p l e

genera l l y holds t r u e f o r shipments by t r u c k and barge.

I n 1975, approximately 65% o f coal shipments were by r a i l , 12% by t ruck ,

and 11% by waterways. Approximately 11% o f coal product ion was used by p l a n t s

a t o r near the mines and 1% was used f o r other l o c a l purposes, i n c l u d i n g power

and heat a t the mines and coal f o r employees. ( 3 )

General ly i t i s considered t h a t w i t h shor te r lead t imes needed f o r the

product ion o f new t r a n s p o r t a t i o n equipment than f o r t h e development and

cons t ruc t i on o f new mines and l a r g e coal consuming p lants, the problem o f

t r a n s p o r t a t i o n a v a i l a b i l i t y w i l l be minimal. Many problems w i l l be involved,

however, which r e q u i r e p lann ing and coordinat ion. A t t e n t i o n must be g iven t o

t r a c k and roadbed r e h a b i l i t a t i o n and cons t ruc t ion . Long-term markets must be

a n t i c i p a t e d or assured t o warrant the long-term investments t h a t w i l l be

requ i red by t h e r a i l r o a d s unless fede ra l o r o ther f i n a n c i a l i ncen t i ves

evolve. Changing pa t te rns o f u t i 1 i z a t i o n and coal product ion can have

s i g n i f i c a n t e f f e c t s on t h e ex ten t t o which t h e t r a n s p o r t a t i o n i n d u s t r y f e e l s

secure i n ma in ta in ing or expanding coal movement c a p a b i l i t i e s . P o t e n t i a l s f o r

s u b s t a n t i a l l y increased movements o f low-su l fu r coal from t h e West t o eastern

markets pose d i f f i c u l t quest ions w i t h regard t o f u t u r e adequacy o f

t r a n s p o r t a t i o n f a c i l i t i e s , i n c l u d i n g both r a i l r o a d s and coal s l u r r y

p ipe l i nes . I n t h i s respect, successful research and development o f v i a b l e

a n t i p o l l t a n t processes, such as stack gas scrubbers and f l u i d i z e d bed

combustion, would permi t the cont inu ing use i n the East o f i t s medium and

h igh -su l fu r coals and thus prec lude shipments o f s i g n i f i c a n t q u a n t i t i e s o f

low-su l fu r coals from the West t o eastern marke ts - -pa r t i cu la r l y s ince western

coa ls genera l l y have appreciably lower heat ing values than eastern coals.

Similarly, transportation factors are important in the consideration of

the conversion of e l ec t r i c u t i l i t y plants t o coal from o i l and natural gas.

In many instances where "reconversion1' t o coal is considered, coal receiving

and storage f a c i l i t i e s are no longer available. Many coal-carrying vessels

(coast-wise co l l i e r s and barges) used previously for waterborne movement

e i ther have been diverted t o other uses or otherwise taken o u t of service.

Many of the former coal piers and docks have been abandoned, dismantled, or

allowed t o decay. Until recent years, 16-20% of U.S. waterborne commerce

consisted of coal. However, recently t h i s has decreased to approximately 12%

as shown in Table 36.

The incentives to coal production from federal expenditures for ports and

waterways have been estimated i n Table 36. The costs f o r a l l improvements

have been multiplied by coa l ' s share in tons of to ta l waterborne commerce,

giving a to ta l subsidy of $2.6 b i l l ion (1978 dol lars) . Obviously, some ports

carry l i t t l e coal but others (Hampton Roads, Baltimore, Mobile) have large

coal exports, primarily metallurgical coal.

Coal s lu r ry pipelines and extra high-voltage (EHU) transmission of coal

produced power over longer distances are other considerations tha t must be

addressed when considering overall national transportation needs and policies

in re la t ion t o substantial increases i n coal production and u t i l i za t ion .

Transportation ra tes are an important component of the cost of enrgy

delivered t o consumers. Overall r a i l f re igh t charges for coal shipments

increased from $3.70 t o $5.23 per ton between 1971 and 1975. (3) Types of

shipments are fac tors involed in the se t t ing of railroad ra tes , such as the

development and approval of u n i t t r a ins for the d i rec t shipment of coal from

mines t o consumers' plants and other "volume" ra tes as approved by the

In te rs ta te Commerce Commission. Other important controls, par t icular ly i n

times of emergencies, include changes in railroad car demurrage ra tes or the

amount of f ree time permitted for unloading so that coal cars may be returned

t o active service more quickly.

Federal support of ports and waterways has been a t radi t ional government

ac t iv i ty , with expenditures chief ly by the Army Corps of Engineers. The

TABLE 36. Domestic and Foreign Waterborne Shipments (a )

Total Percent Shipments Total Expenditure Subsidy (Milli8ps Subsidy (Millions

Year JMillion Tons) 7 - Million Tons) Shipments, ~l (Million $)?c) of Current I ) of 1978 8 )

1977

TQ 1976

1976

1975

1974 1973

1972 1971

1970 1969

1968

1967

1966

1965

1964 1963

1962

1961

1960

1959

1958 1957

1956

1955

1954 1953

1952

1951

1950

TOTAL

!a! From Waterborne Commerce of the U.5.--Corps of Engineers

coal. (el Estimates from previous or later years. (f) For calendar year 1976.

portion ascribed t o coal on the basis of the f ract ion of tonnage represented

by coal amounted t o $2.6 b i l l ion from 1950 t o 1978. Federal support of

ra i l roads in the l a t e 1800s has been omitted because i t occurred so long ago.

Highway support, a minor fac tor f o r coal , i s largely balanced by user charges

through taxes and has been omitted.

WASTE DISPOSAL

Whereas wastes a t mines and preparation plants generally are sol id (rock,

s l a t e , e tc . ) , acid water and sludge "wastes" a t consumer plants include f l y

ash, par t icula tes , sulfur dioxide, and where stack gas scrubbers and some

other antipollution processes are used, considerable amounts of sludge.

Sludge formed i n the process of scrubbing i s d i f f i c u l t t o dispose of and

nearly doubles the bulk of waste from a power s ta t ion.

Although the a i r qual i ty emission standards for eff luents from coal

combustion established under Sta te Implementation Plans (SIP5) and the EPA are

designed to reduce pollution, i n the absence of adequate supplies of

low-sulfur coal and desulfurization processes i t i s v i r tua l ly impossible f o r

users of high-sulfur eastern coals t o meet the standards.

The sociopol i t ical a t t i tudes prevalent in parts of the Intermountain West

have been strongly opposed t o western low-sulfur coal u t i l i za t ion in the area,

par t i cu la r ly when the power generated i s transferred out of the region.

However, there i s l e s s apparent opposition t o shipping western coal t o eastern

and midwestern markets. As a consequence, the emission standards have led t o

increasing production of western coals fo r sa le in the East, t o the

encouragement of intense mining of low-sulfur eastern coal, and t o research

and development of antipollution processes t ha t will permit the use of large

reserves of high-sulfur eastern coals tha t cannot otherwise meet the

standards. Western consumption of western coals i s expected t o double within

the next 10 years. Under the Clean Air Act Amendments (CAAA) of 1977, EPA

revised the ru les fo r e l e c t r i c power plants s ta r ted a f t e r September 19, 1978,

t o require removal of specified f ract ions of the SO2 in the f l ue gas

depending on the su l fur content of the coal. This requires the use of

scrubbers i n a l l new e l e c t r i c plants and destroys much of the advantage t ha t

western coal ' former ly had. The i n t e n t i o n o f t h e requirements i n a d d i t i o n t o

reducing p o l l u t i o n , i s t o prevent f u r t h e r j ob losses i n h igh s u l f u r coa l areas

such as Ohio. A secondary e f f e c t i s t o f avo r nuclear over coal i n areas where

it i s the cheapest fue l when a l l new coal p lan ts must have a scrubber. Since

these regu la t i ons d i d no t apply i n 1977, and are be ing implemented i n 1978, no

cos t has been included.

CONCLUSIONS

Although coal was t h e Un i ted Sta tes ' most important f u e l u n t i l t h e end o f

World War 11, i t has n o t rece ived much i n t h e way o f f ede ra l incent ive ,

compared w i t h other energy forms. The loss o f two l a r g e markets, steam

locomotives and space heat ing, produced a dec l i ne i n t h e indus t ry , slowed o n l y

by the r a p i d growth o f the e l e c t r i c i t y generat ion market. Only r e c e n t l y d i d

coal product ion reach i t s h igh o f a generat ion ago. The i ncen t i ves f o r

nuclear energy can a l l be considered as d i s incen t i ves f o r coal bu t have no t

been inc luded i n t h e f o l l o w i n g tabu la t ion . Coal development has no t been a

v i t a l f a c t o r i n U.S. economic weal th r e c e n t l y and i t s developers have no t had

t h e p o l i t i c a l c l o u t o f t h e o i l and gas indus t ry . A l l o f these f a c t o r s exp la in

why coal incent ives have been smal ler than those f o r o ther energy forms.

The p r i n c i p a l coa l i ncen t i ves and t h e i r magnitude i n 1978 d o l l a r s are as

shown i n Table 37. The t o t a l o f about $12 b i l l i o n i s due p r i n c i p a l l y t o t h e

dep le t i on allowance ( taxa t i on ) , 40%, research (non - t rad i t i ona l serv ice) , 31%,

and p o r t s and waterways costs ( t r a d i t i o n a l serv ices) 22%.

The federa l regu la t i ons a f f e c t i n g the c o n t r o l and d isposal o f waste

products o f coal use were no t intended t o encourage o r discourage t h e

product ion o f coal as such. It was a secondary e f f e c t and the costs have not

been tabulated. The Amendments t o t h e Clean A i r Act passed i n 1977 (CAAA)

r e q u i r e new s p e c i f i c a t i o n s f o r New Source Performance Standards f o r e l e c t r i c

power p lan ts so t h e use o f western coa l i n t h e Midwest w i l l be discouraged,

b u t few fede ra l cos ts o f the Amendments have been i ncu r red ye t .

TABLE 37. Summary of Incentives to Coal by Type ( i n Millions of 1978 Dollars)

Disburse- Require- Traditional Nontrad. Market Incentive Area Taxation ment ments Services Services Activity Total

Research and development 3,364

Exploration Geological Survey Bureau of Land Management

Mining Depl e t i on a1 1 owance Mine health and safety Bureau of Mines data Mine Reclamation

+ Transportation, CO w

ports and waterways

TOTAL

REFERENCES - CHAPTER V I

U. S. Department o f Energy, Monthly Energy Review, DOE/EIA-03517, (79), J u l y 1979.

A Nat iona l Plan f o r Energy Research, Development and Demonstration; Creat ing Energy Choices f o r t h e Future. Volume 1, U.S. Energy Research and Development Adminis t rat ion, 1976.

Coal-Bituminous and L i g n i t e i n 1975. U.S. Department o f t h e I n t e r i o r , Bureau o f Mines, D i v i s i o n o f Fuels Data and D i v i s i o n o f Coal, February 10, 1975.

"Coal Task Force Report, P ro jec t Independence B l u e p r i n t . l o Federal Energy Admin i s t ra t i on - U.S. Department o f t h e I n t e r i o r , November 1974.

S. M. Surrey, "Tax Incent ives as a Device f o r Implementing Government Po l i cy : A Comparison w i t h D i r e c t Government Expenditures." Harvard Law Review, Harvard Un ivers i ty , 83-:708-9, 1970.

F. M. Burke, Jr., " Incent ives t o Develop Natura l Resources: Fac tors A f f e c t i n g I n d u s t r i e s Involved i n Natura l Resource Exp lo i t a t i ons ; O i l and Gas; Hard Mater ia ls ; Timber.' 33rd Annual N.Y.U. I n s t i t u t e on Federal Taxation, 1975.

G. M. Brannon, " E x i s t i n g Tax D i f f e r e n t i a l and Subsidies Re la t i ng t o the Energy Indus t r ies . " Studies i n Energy Tax Po l icy , ( a Report t o t h e Enerav P o l i c v P r o j e c t o f the Ford Foundation). B a l l inqer Pub l i sh inq p om^%^, c a d r i d g e , MA, 1975, p. 12.

- -

"Bituminous Coal and L i g n i t e D i s t r i b u t i o n , Calendar Year 1975." U.S. Department o f t h e I n t e r i o r , Bureau o f Mines, D i v i s i o n o f Fuels Data, A p r i l 12, 1976.

J. J. Mikelonis , "Coming t o Gr ips w i t h the P e r p l e x i t i e s o f Coal Mine Taxation." Coal Age 3 81:93, 1976.

"Taxat ion and T a r i f f ." U.S. Code Congressional and Admin i s t ra t i ve News, Senate Report No. 1357, West Pub l ish ing Company, St. Paul, MN, Vol 7483, 1974.

Nat ional Academy o f Sciences, "Rehab i l i t a t i on P o t e n t i a l o f Western Coal Lands." A r e p o r t t o t h e Energy P o l i c y P r o j e c t o f t h e Ford Foundation, B a l l inger Pub l i sh ing Company, Cambridge, MA, 1974.

1978 Keystone Coal I ndus t r y Manual, p. 658 pp. 693-696.

Energy Data Reports, Weekly Coal Report No. 69, January 26, 1979, Table 5.

14. Analysis of Proposed U.S. Department of Energy Regulations: Implementin the Power Plant and Industrial Fuel Use Act, U.S. DOE, Energy Informatio! Administration, November 1978, Table S-2.

V I I . OIL ENERGY INCENTIVES

There are two major areas o f o i l energy i ncen t i ves :

1) exp lo ra t i on and product ion, i n c l u d i n g the search and recovery o f crude

o i l and n a t u r a l gas, as w e l l as t h e t r a n s p o r t a t i o n o f crude o i l , and

2) r e f i n i n g and product t r anspo r ta t i on , i n c l u d i n g t h e conversion o f

petroleum t o products, and d i s t r i b u t i o n t o bo th wholesale and r e t a i l

customers.

I ncen t i ves t o na tu ra l gas produc t ion and recovery are inc luded i n t he

f i r s t ( e x p l o r a t i o n and produc t ion) c l a s s i f i c a t i o n , because most n a t u r a l gas i s

produced by o i l companies. However, n a t u r a l gas t ransmiss ion and

d i s t r i b u t i o n , discussed i n Chapter V I I I , are c o n t r o l l e d by a d i f f e r e n t t ype o f

company, encompassing d i f f e r e n t needs f o r incent ives .

RESEARCH

Table 38 shows the fede ra l funds spent f o r R&D i n t he petroleum i n d u s t r y

dur ing t h e p e r i o d 1950 through 1978. The t o t a l f o r t h a t pe r i od i s $1287.2

m i l l i o n (1978 d o l l a r s ) . The var ious changes i n o rgn iza t ions w i t h i n the

Federal Government and the con t i nua l over lap o f agency i n t e r e s t s make i t

d i f f i c u l t t o i d e n t i f y the b e n e f i c i a r i e s o f R&D budget components. Even w i t h i n

t h e same p u b l i c a t i o n ser ies, such as t h e NSF se r i es on "Research and

Development i n I n d u s t r y " and an "Analys is o f Federal R&D Funding by Function,"

t h e r e are incons is tenc ies from year t o year. When such incons is tenc ies were

found, t he data used i n the t a b l e were taken from the most recent sources.

These expendi tures c o n s t i t u t e a n o n t r a d i t i o n a l government serv ice.

OIL AND GAS EXPLORATION AND PRODUCTION

Exp lo ra t i on and produc t ion are the f i r s t steps i n making petroleum

resources a v a i l a b l e f o r use by consumers. Since exp lo ra t i on and produc t ion do

no t necessa r i l y i n v o l v e c ross ing s t a t e boundaries, many aspects o f t h i s phase

o f o i l company opera t ions are mat te rs o f s ta te , r a t h e r than fede ra l , concern.

Any such a c t i v i t i e s on fede ra l lands, however, i n c l u d i n g the ou te r con t i nen ta l

she l f , are under f e d e r a l con t ro l . Perhaps t h e most impor tan t f ede ra l

TABLE 38. Federal R&D Expenditures Related to the Petroleum Industry (in Millions o f Dollars)

Cont ro l o f Petroleum P n l l l i t i n n from

and N a t ~ l r r l

- . . - . ,, . - - -. - . ~ Related Funded R&D

. . . S p i l l a g e Seabed Environmental f o r t h e F i s c a l Gas Research Waste Assess en t Cont ro l P ogram Petroleum To ta l s To ta l s Year (DOE ) (coas t Guard) (EPA) ( f r I n d u s t r y . (Curren t 8 ) (1978 $ ) ( 9 )

TOTAL

l a ) Data f o r FY-1957 through FY-1962 are from API 'cPetroleum Facts and Figures. 1971 E d i t i o n " which used data f rom NSF "Research and Development i n Indus t ry , 1967."

( b ) Data f rom FY-1963 through FY-1972 are f rom NSF "Research and Development i n Indus t ry , 1972.'' ( c ) Data f rom FY-1973 through FY-1979 are f rom NSF "Ana lys is of Federal R&D Funding by Funct ion, 1979. ( d ) Data f o r 1978 i s an es t imate contained i n NSF "Ana lys is o f Federal R&O Funding by Funct ion, 1979." ( e ) The emphasis of under-sea minera l s tud ies i s on petroleum. Seventy f i v e percent o f the program cos ts

were a l l oca ted t o the pe t ro leum indus t ry . ( f ) Petro leum rece ives minor emphasis i n t h i s program. Based on an examination o f the 1976 program,

6.7 percent o f t h e t o t a l program was a l l o c a t e d t o t h e petro leum indus t ry . ( 9 ) The Bureau of Labor S t a t i s t i c s ' Consumer P r i c e index was used t o convert t o 1978 d o l l a r s . ( h ) Data from API "Petroleum Facts and Figures, 1959." (i) Est imates us ing 1953 ac tua l f igures .

i ncen t i ves are those t h a t a l low s t a t e conservat ion c o n t r o l s t o apply t o o i l

so ld i n i n t e r s t a t e commerce. Although t h e cos ts t o t he Federal Government o f

these i ncen t i ves have been small, t he i ncen t i ves have been very s i g n i f i c a n t t o

t h e o i l companies.

Geologica l Survey Data

The p r i n c i p a l government source o f geo log ica l i n fo rma t i on f o r use i n

e x p l o r a t i o n ( p r i n c i p a l l y onshore) i s t h e U.S. Geologica l Survey o f t h e

Department o f I n t e r i o r . Table 39 g ives the expenditures f o r a l l geologic and

minera l resource surveys. I n 1978, 45.5% of t h e energy consumed was i n t h e

form o f o i l (Chapter 111). Apply ing the same percentage f o r t he pe r i od

1950-1978 g ives a t o t a l o f $574.2 m i l l i o n (1978 d o l l a r s ) . S i m i l a r l y , n a t u r a l

gas i s 22.9% o f t he t o t a l , o r $289 m i l l i o n .

O i l Leasing P o l i c y

When l e a s i n g f e d e r a l lands f o r o i l and gas exp lo ra t i on and produc t ion has

been contemplated, t he normal progress ion has been f o r t he Bureau o f Land

Management t o nominate b locks f o r lease. Other government agencies have then

requested wi thdrawals f o r var ious reasons such as n a t i o n a l defense, h igh

environmental r i s k , e tc . Although the re have been some experiments w i t h

l eas ing methods, most b idd ing i s on the bas is o f an advance r o y a l t y bonus

payment i n a d d i t i o n t o the usual p roduc t ion r o y a l t y . Because 1 arge companies

can r a i s e e x t r a money f o r t h e bonus payments more e a s i l y than can smal l

companies, t he re a re c o n s t r a i n t s on j o i n t b i d d i n g by l a r g e companies. The

b ids are reviewed and those considered inadequate are re jec ted . Appropr ia te

environmental impact statements, i n c l u d i n g archeo log ica l surveys and base l ine

b i o t a surveys, are r e q u i r e d as p a r t o f t h e l eas ing process. To date the

o f f sho re l e a s i n g process has gone r a t h e r slowly, a d i s i n c e n t i v e i n general.

The o v e r a l l e f f e c t o f advance r o y a l t y bonuses has been t o g i v e t h e

government e x t r a revenue e a r l y i n t h e t r a j e c t o r y lead ing f rom e x p l o r a t i o n t o

product ion. Net cos t t o t he government i s t he re fo re nonexis tent , s ince the

e x t r a i n t e r e s t earned i s g rea te r than t h e cos ts o f admin is t ra t ion . The

procedure probably f avo rs l a r g e companies t h a t can accept t h e r i s k o f f a i l u r e

and i s a d i s i n c e n t i v e t o smal l companies. No q u a n t i t a t i v e assessment o f t h e

e f f e c t on o v e r a l l p roduc t ion can be made.

TABLE 39. Geological and Mineral Resource Surveys--Direct Expenditures by the Geological Survey (Thousands of Dollars)

1952 1951 1950

TOTAL

Current $

(a) Estimated

Bureau o f Land Management

The Bureau o f Land Management p lans the use and l eas ing o f f ede ra l lands,

i n c l u d i n g t h e ou te r con t i nen ta l she l f . I n add i t ion , i t has r e s p o n s i b i l i t y f o r

o ther a c t i v i t i e s r e l a t e d t o p lann ing and resource management. The costs f o r

these a c t i v i t i e s f o r a l l f o s s i l f u e l s are shown i n Table 40. Since about 74%

o f the value o f f o s s i l f u e l s produced on leased fede ra l land i n 1974 was f rom

o i l , ( I ) and 23% f rom na tu ra l gas, these percentages have been used t o

c a l c u l a t e t he cos t o f t h e incent ive . Thus, $497.6 m i l l i o n can be a t t r i b u t e d

t o o i l l eas ing and $154.7 m i l l i o n t o n a t u r a l gas (1978 d o l l a r s ) .

I n t e r s t a t e O i l Compact Act--1935

The produc t ion o f o i l i n the 1920s and e a r l y 1930s invo lved phys ica l and

economic waste, as descr ibed i n t h e d iscussion o f t he Connal ly Hot O i l Act.

(which f o l l o w s ) . Th is waste was a mat ter o f concern f o r both the producing

s ta tes and t h e Federal Government. However, proposals t o so lve t h e problem

created a controversy over s tates, r i g h t s versus the power o f t he Federal

Government t o r e g u l a t e i n t e r s t a t e commerce and t o improve economic cond i t i ons

i n general. (2,3)

The o i l p roduc t ion code (Sect ion 9c) o f the Nat iona l I n d u s t r i a l Recovery

Act (NIRA) o f 1933 gave the Federal Government a u t h o r i t y t o e s t a b l i s h and

enforce conservat ion. When the cou r t s r u l e d Sect ion 9c i n v a l i d , Congress

debated i n s t i t u t i n g new laws t o e s t a b l i s h fede ra l c o n t r o l again, b u t t h e

proposed l e g i s l a t i o n was success fu l l y opposed by the o i l companies and

producer s tates. As an a l t e r n a t i v e t o f e d e r a l r egu la t i on , t h e American

Petroleum I n s t i t u t e and the Governor o f Oklahoma promoted the fo rmat ion o f an

assoc ia t i on o f producer s ta tes t o coord ina te conservat ion laws, regu la t i ons ,

and enforcement. By mid-1935, s i x s ta tes had r a t i f i e d t h i s compact.

Pres ident Roosevelt then recommended t o Congress t h a t a law be passed t o g i v e

f e d e r a l b less ing t o t he compact. The Act o f Congress s ta ted t h a t e l i m i n a t i n g

phys i ca l waste was the goal; i n t h i s way Congress avoided the c r i t i c i s m t h a t

passage o f the law was tantamount t o p r i c e f i x i n g . Oklahoma, Texas, and

severa l o ther p r i n c i p a l producing s ta tes evolved a se r i es o f r e g u l a t i o n s t h a t ,

w i t h the Hot O i l Act, brought most o f the U.S. o i l i n d u s t r y under con t ro l .

TABLE 40. Expenditures by the Bureau of Land Management for Fossil Fuel Activities (thousands of Dollars)

Energy and T o t a l M i n e r a l F o s s i l Fue l T o t a l

Leas ing and Resource Resource and Share i n Year D i sposa l - M a n a m Manaqement o f Leas in -- 1978 $ 1978 28,548 -. 81,880

1977 40,45? s2,82lo 82,821

109,568 112,515 '~) 121,179

TO 9,766 12,236 1 6 , 5 0 2 ( ~ ) 18,928

1976 31,341 37,413 51 ,566 '~ ' 59,147

1975 28,233 33,018 4 5 , 9 3 ~ ( ~ ) 55,747

1974 7 0 , 1 9 2 ( ~ ) 28,077 (h ) 37,164

1073 6 0 , 8 4 2 ( ~ ) 21,295 ( h ) 31,289

1972 ~ 7 , 1 1 9 ' ~ ) 17 ,136 '~) 26,751

1071 5 2 , 7 1 5 ( ~ ) 1 3 , 1 7 9 ' ~ ) 21,254

1970 7,483 41,456 9,798 ( f ) 16,476

1969 6,427 37,028 8 ,691 '~ ' 15,481

1'368 6,125 35,968 8,419 (f) 15,797

1967 5,268 37,344 4,199(e) 7 ,250 '~ ) 14,178

1066 5,100 34,283 4,753(e) 7 , 0 1 5 ' ~ ) 14,113

1965 5,497 30,766 4 , 4 2 ~ ( ~ ) 7 , 4 4 ~ ( ~ ) 15,399

1964 4 , 9 ~ 2 ' ~ ) 27,547 ( d ) 3 ,963(d) (e ) 6,664 ( b ) 14,026

1963 40,218 9,729") 20,737

1962 32,969 7,967") 17,206

1961 8 , ~ 3 9 ( ~ ) 6,179 ( b ) 13,483

1960 7,140 5,355") 11,800

1959 6 , 7 1 3 ' ~ ) 5,035 ( b ) 11,274

1958 5,720 4,290 ( b ) 9,684

1957 5,014 3,760 ( h ) 8,718

1956 3,469 2,602 ( b ) 6,249

1955 2,435 1 ,876 '~ ) 4,450

1954 1,933 i , a 5 0 ( ~ ) 3,522

1953 605 454(b) 1,108

1952 537 4 0 3 ' ~ ) 991

1951 8 0 4 ' ~ ) 6 ~ 3 ( ~ ) 1,666

1950 876 657(b) -- 1,772

TOTAL 672,410

l a ) Es t ima ted . ( b ) 0.75 of columns 1 p l u s 3. ( c ) 0.24 o f column 2 (same r a t i o as i n 1964) . ( d ) Es t ima ted f r o m p r o p o r t i o n s i n 1965 and t o t a l of $32,469,000. ( e ) Land c l a s s i f i c a t i o n and m i n e r a l exam ina t i on . ( f ) 0.2 o f columns 1 p l u s 2. ( 4 ) I n c l u d e s l e a s i n g . (h) Column 2 t imes 0.25 i n 1971, 0.3 i n 1972, 0.35 i n 1973, 0.40 i n 1974.

As a r e s u l t o f t h i s l e g i s l a t i o n , the short- term e f f e c t o f increased

consumer p r i c e s has been balanced by t h e long-term p r i c e reduct ion due t o

b e t t e r o v e r a l l recovery. The cost o f t h i s i ncen t i ve t o the Federal Treasury,

t h e consumer, and t h e i n d u s t r y has been too smal l t o tabu la te .

In fo rmat ion Gathering

As p a r t o f the p lan t o s t a b i l i z e the o i l i ndus t r y under the NIRA, t h e

Bureau o f Mines was i n s t r u c t e d t o gather in format ion on p r i c e s and volumes o f

o i l produced. D e t a i l s on the o v e r a l l costs of c o l l e c t i n g data on a l l f o s s i l

f u e l product ion are presented i n Chapter V I . The costs f o r o i l data gather ing

f o r the per iod 1964-78 amounted t o $18.4 m i l l i o n (1978). For na tu ra l gas i t

amounted t o $9.1 m i l l i o n . (This breakdown i s based on t h e assumption t h a t 213

can be a t t r i b u t e d t o o i l and 113 t o na tu ra l gas; see Chapter 111.)

Connal ly Hot O i l Act--1935

O i l - f i e l d p r a c t i c e a t the t ime o f the d iscovery of the East Texas F i e l d

i n 1930 was charac ter ized by close-spaced d r i l l i n g and maximum product ion from

each lease. This r e s u l t e d from operat ion under the doc t r i ne o f capture, which

sa id t h e owner o f a we l l was e n t i t l e d t o whatever i t produced, even i f i t

drained o i l from p a r t o f the st ratum under a neighboring lease. ( 2 )

This r a p i d product ion resu l ted i n both phys ica l and economic waste. The

r e s e r v o i r pressures dropped r a p i d l y , decreasing t h e amount o f o i l t h a t could

be u l t i m a t e l y produced. I n add i t ion , resources were wasted d r i l l i n g and

s e r v i c i n g unneeded we l l s .

By the end o f 1931, there were about 4,000 w e l l s i n the East Texas F i e l d

w i t h an o v e r a l l p roduct ion o f almost 1 m i l l i o n bbl/day, o r about 40% o f t o t a l

U.S. requirements a t t h a t time. As a r e s u l t o f t h i s overproduction, t h e p r i c e

o f crude o i l dropped from $l. lO/bbl t o as l i t t l e as $O.lO/bbl. By January

1932 about 600 o i l f i e l d s were closed down as the p r i c e was below recovery

costs. M a r t i a l law was es tab l ished i n t h e East Texas F i e l d t o enforce a

p r o r a t i o n p lan ( l i m i t i n g each w e l l ' s product ion t o l ess than i t s maximum

output ) bu t the p lan was declared i n v a l i d by a fede ra l cour t . (3)

As a r e s u l t o f t h i s chaot ic s i t u a t i o n , a v a r i e t y o f o i l conservat ion laws

were passed i n t h e producing states. The Federal Government a lso developed

conservation regulations for leases on federal lands. (Since production on federal lands has been only about 3% of the U.S. total, costs associated with these regulations are not included in our figures.) The heart of the conservation system was prorationing; the amount of production allowed could be related to the number of wells, the acreage leased, or the "maximum

efficient rate" (MER) for each well. In recent times, the last approach has

been used, granting an "allowable" of a certain percentage of the MER, set on

the basis of expected sales.

In spite of the state laws, great difficulties were experienced in preventing production of oil in excess of the allowable ("hot oil"). In 1934,

20% of all oil from the East Texas Field was produced illegally and by the end

of the year, there were 17,650 wells to police. State laws and regulations

were revised follwing court tests until a fairly enforceable scheme evolved

for control inside the states. A defect in the conservation system was that the sales orders could be written up out of state. Thus, the movement could

be considered interstate commerce and therefore beyond state control.

To avoid this defect in the state conservation programs, President

Roosevent in 1933 issued a decree banning sales of hot oil in interstate and

foreign commerce. As part of the National Industrial Recovery Act (1933) a code for petroleum production was developed which specificially banned

interstate and foreign shipment of "hot oil". In 1935, a series of court

decisions invalidated the whole production code. To avoid a return to chaos,

Congress passed the Connally Act on February 22, 1935, authorizing the

Interior Department to develop regulations to stop interstate and foreign

shipment of "hot oil."

The cost of this program has been quite small, consisting of

administrative and legal costs. More importantly, the Interstate Oil Compact

and the Connally Hot Oil Act permitted the development of an orderly and

stable oil industry, rather than the boom-and-bust conditions that had

characterized the industry.

Stripper Well Incentives--1944, 1973

Stripper oil wells are wells on producing properties with an average

output per well of no more than 10 barrels per day. Thus, some individual

wells may produce more than 10 barrels daily, while other low producers on the

same property bring the average down to 10 or less. These wells are generally in fields which were once highly productive but have declined over time.

Stripper production plays an important role in maintaining reserves and the

productive capacity of the nation's oil supply. In 1978, stripper wells

accounted for 14.03 percent of total U.S. oil production. Because stripper

wells have high operating costs, they are only marginally economical. They

have been partially or wholly exempt from prorationing by the states.

During World War I1 when there were price controls on oil production,

special subsidies were paid to stripper well operators. From August 1, 1944,

to November 30, 1945, about $65 million was paid to operators; 177 million bbl

of oil were produced under this program, amounting to about $0.36/bbl subsidy ($1.36 in 1978 dollars).

Following the 1973 OPEC price increase, the Emergency Petroleum

Allocation Act of 1973 was enacted. This fixed the price of oil from existing

wells at a level that averaged about $5 a barrel (see Table 41). As an

incentive to stripper well operators, prices for stripper oil were not

controlled. Stripper oil thus commanded a price $5 to $8 more than "old"

oil. The Energy Policy and Conservation Act, effective February 1976, rolled

back the price of stripper oil to $11.53 under rules designed to make the

average price of domestic oil $7.66. under the Energy Conservation and

Production Act, effective September 1976, all price controls on stripper oil

were lifted. The incentive for stripper oil has been calculated as shown in

Table 42; it amounts to $16.84 billion for the years 1974-1978.

Note that this analysis takes as a baseline the controlled price for old oil and considers the higher price for stripper oil as an incentive. If one

took the world price set by OPEC as the baseline, the low price for old oil

would represent a disincentive. History indicates that, at the time, the

officials involved considered that they were providing an incentive for

stripper oil.

Incentives for New Oil Production--1973

The Emergency Petroleum Allocation Act was enacted in late 1973 during a

time of severe shortages of crude oil and refined products. The principal

TABLE 41. I ncen t i ves Under O i l P r i c e Contro ls

Average Percent o f P roduc t i on Average P r i c e ( $ / B b l ) Domestic Naval New & Alaskan Naval

P roduc t i on O ld New S t r i p p e r Released A laska Pet ro leum Old Released S t r i p p e r N o r t h Pet ro leum Year (Bb l /dav) O i l Oi 1 Oi 1 O i l No r t h Slope Reserve O i l O i l O i l Slope Reserve

1974 8,774,000 63 15 13 9 5.03 10.13 10.13

1974 8,375,000 62 16 13 8 5.03 12.03 12.03

1976

Jan. 8,211,000 54 21 15 10 5.02 12.99 12.99

Lower Upper T i e r O i l T i e r O i l --

Lower Upper T i e r O i l a

1977

Jan.-June 8,W1,000 49.3(a) 37. l ( ' ) 13.5(') 5 .16 '~ ) 1 1 . 1 2 ( ~ ) 1 3 . ~ 9 ' ~ ) N c July-Dec. 8,357,M)O 4 ~ . 8 ' ~ ) 3 5 . ~ ( ~ ) 1 3 . l ( ~ ) 7.9 ib) 0 . 9 7 ' ~ ) 5 . 2 1 ' ~ ) 11 .32 '~ ) 13 .87 '~ ) 6 . 4 ~ ' ~ ) 12 .33 '~ ) N

1978 8,701,000 37.5 34.4 14.0 13.0 1.10 5.46 12.15 13.95 5.22 12.85

Source: Mon th l y Energy Review, Federa l Energy A d m i n i s t r a t i o n , May 1975, June 1977, August 1978, J u l y 1979. ( a ) Excludes s t r i p p e r o i l . ( b ) A r i t h m e t i c average of mon th l y f i g u r e s .

TABLE 42. Value of Incentives (Billion $)

1974

1975

1976

Jan.

Feb. -Aug . Sept. -Dec

N + W

1977

Jan. - June July-Dec.

1978

Current Dollars 1978 Dollars New Oil. New. Released.

upper A1 askan Naval Alaska North slope, Stripper Tier Oil, North Petroleum Stripper and Naval Petroleum

Oi 1 Released Oil Slope Oil Reserves O i 1 Reserves

aims o f the ac t were t o meet the n a t i o n ' s p r i o r i t y needs; t o d i s t r i b u t e the

ava i l ab le product ion e q u i t a b l y and a t equ i tab le pr ices ; and t o accomplish

these ob jec t i ves i n ways t h a t would preserve the compet i t i ve v i a b i l i t y o f the

"independent"(a) segments o f the indus t ry .

Regulat ions under t h i s ac t es tab l ished a "two t i e r " p r i c i n g system which

imposed a p r i c e c e i l i n g on the c l a s s i f i c a t i o n o f crude o i l designated as " o l d

o i l " ( o i l from p rope r t i es producing at , o r less than, t h e i r 1972 product ion

l eve l s ) , wh i l e a l low ing new and s t r i p p e r o i l t o s e l l a t t h e market p r ices . As

an e x t r a i ncen t i ve f o r increased product ion from o l d f i e l d s , an a d d i t i o n a l

amount o f o l d o i l , designated "released o i l , " was allowed t p be so ld a t t h e

new o i l pr ices.

The Energy P o l i c y and Conservation Act, e f f e c t i v e February 1976, sought

t o r o l l back t h e average p r i c e o f domestic crude o i l t o $7.66/bbl. To t h i s

end, o l d o i l , designated lower t i e r o i l , was t o be p r i ced a t the May 15, 1973

p r i c e p lus $1.35/bbl. New and s t r i p p e r o i l ("upper t i e r o i l " ) were s e t a t t h e

September 30, 1975 new o i l p r i c e l ess $1.32/bbl. The "released o i l ' program

was dropped. Prov is ions f o r ad jus t i ng f o r i n f l a t i o n were inc luded bu t due t o

m isca l cu la t i on caused by lack o f data, the p r i c e s se t have no t achieved the

desi red average p r i c e s and the re have been "freezes" on t h e i n f l a t i o n a r y

adjustments and even a r o l l b a c k o f the "upper t i e r " p r i ce .

The Energy Conservation and Product ion Act, e f f e c t i v e September 1976,

exempted s t r i p p e r o i l f rom p r i c e c o n t r o l s bu t imputed t h e upper t i e r p r i c e t o

it i n c a l c u l a t i n g the average domestic p r i ce . For en t i t l emen t purposes, i t i s

considered imported o i l . The same r u l e s have been app l ied t o o i l f rom

Alaska's North Slope.

The two t i e r ' p r i c e - c o n t r o l system was intended by the o f f i c i a l s i n charge

t o be an i n c e n t i v e f o r o i l exp lo ra t i on and product ion. However, t h e r o l l back

o f new o i l p r i c e s and i n c l u s i o n o f new o i l i n the en t i t lement program s ince

February 1976 has served as a m i l d i ncen t i ve t o t h e purchase o f imported o i l

( a ) "Independent" o r i g i n a l l y r e f e r r e d t o i n d i v i d u a l s and companies o ther than those o f t h e "Standard O i l Trust." I n present terminology, independent u s u a l l y excludes "major" o i l companies, the top 25 o r so companies i n terms o f revenues, v i r t u a l l y a l l o f which have exp lora t ion . product ion, r e f i n i n g , and market ing operat ions.

since the importer takes none of the risks of exploration and field development directly and in addition gets an entitlement credit that equalizes

the prices. Thus, a buyer of upper tier oil in December 1976 paid an average

of $11.64/bbl. Imports averaged $13.71/bbl with an entitlement credit of

$2.10 to give a net cost of $11.61. (This assumes the average grades of domestic and imported crude oil are equivalent and that the buyer does not

exceed the national average domestic oil supply ratio.) However, starting in

mid-1977 the value of the entitlement decreased while the average cost of

imports rose eliminating the small incentive to imports. The value of the incentives for new oil from 1974-78 amounted to $33.34 billion as shown in

Table 42.

1 Entitlement Program

1 Under price controls, profit per gallon of product was controlled and each refiner had to base his selling price on the amount paid for crude. The refiner with contracts for or ownership of large amounts of price-controlled

domestic crude would have been forced to undersell his competitor, who used exclusively imported oil, by up to 20 cents per gallon. Differences this

large would have disturbed local markets, created problems with refinery and transportation schedules, created large regional price differences and caused

great discrepancies in company cash flows and profits. To avoid these I problems, FEA instituted a system that allocated the price-controlled oil

1 among all refiners. (This program is currently administered by the Economic I Regulatory Administration, DOE). Refiners with access to a larger amount of

price-controlled oil than the national average are required to pay for the

excess by purchasing "entitlements" from refiners with less price-controlled

I oil. The crude oil entitlement benefit for imported crude has varied from

$1.27 in December, 1978 to a high of about $3.10 in late 1975.(~) Due to

I the large amount of imported residual fuel oil priced at the OPEC level and

I used in the Atlantic Coast states, the entitlement program also was extended

to imports of residual oil from Caribbean refiners. In addition, small

refiners obtain special privileges under the entitlement rules. Starting in

May, 1979, a temporary program providing a $5 per barrel credit for the

I importation of middle distil 1 ates was established.

The entitlement program has not acted as an incentive for production but it has stabilized the market. By stabilizing the volumes sold by each company

and controlling the profit per barrel refined, DOE (previously FEA) has spread

overall profitability over the entire industry. The cost of this is the

administrative cost for FEA, and DOE, covered elsewhere.

Economic Regulatory Admini stration

The Economic Regulatory Administration (DOE) and its predecessors, the

Federal Energy Administration and the Federal Energy Office, have primarly been concerned with developng and administering policy in the area of petroleum

supply and demand. This includes price controls on crude oil and products, allocation of crude, allocation of products, and switching of gas and oil

burning utilities and industrial plants to coal. The National Strategic Oil

Reserve, established with the idea of maintaining at least a 90-day supply of

oil in domestic storage facilities is an incentive to the consumer of oil, but

not the domestic producer of oil. Nevertheless, these costs are included in

the expenditure considered here for years prior to FY 1978. Those in FY 1978 are in the next section. The costs of administering the petroleum related

functions of FEA (and its successor, ERA) are included in this chapter. The

costs were $51.8 million in 1974, $87.3 million in 1975, $121.2 million in 1976, $42.7 million in the 1976 transition quarter, $153.1 million in 1977,

and $447.6 million in 1978. The total in 1978 dollars is $974.8 million.

Strategic Petroleum Reserve

The cost of the Strategic Oil Reserve in 1978 was $733.5 million. This

figure includes only actual outlays, as opposed to the total appropriation, since actual crude oil purchases fell far below the planned level. (a) This

was the first year that a significant amount of money was spent on this pro-

gram. In former years, it was included in the budget for FEA/ERA. Although the Strategic Oil Reserve is really an incentive for consumptlon, it does

indirectly provide a production incentive and thus has been included here.

(a) This is different from all other sections, where the authorization figure is used. However, in this case, the difference between authorization and outlays is substantial, with no guarantee that expenditures will ever reach the planned level.

Intantigle Drilling Expenses--1918-1978

Section 26 USC 263(c) established this incentive for the oil and gas

industry. Since 1918, the industry has been given the option of deducting as

a current expense any "intangible drilling and development costs." (4) The main result of this incentive is that the oil and gas industry uses the deduction to reduce income taxes on unrelated income and thereby to pay a

lower proportion of taxes on their overall income. (5yp.52) Intangible

drilling expenses include the amounts paid for labor, fuel, repairs, hauling,

and supplies which are used in drilling oil or gas wells, clearing of ground in preparation for drilling, and the intangible costs of constructing

derricks, tanks, pipelines, and other structures and equipment necessary for

the drilling and preparation of the wells for production. Without the

statutory authority to deduct these expenses, they would in the case of

successful wells be added to the taxpayer's basis and recovered through

depletion and depreciation as in the case of tangible property, e.g.,

derricks. In the case of dry holes, the costs are deducted at the time the

hole is completed. (5) The purpose of the incentive was to encourage oil and gas producers to bring in more wells and thus increase production. In 1971,

the treasury estimated the tax benefit due to quick expensing of such costs to

be $340 million.(6) The estimate derived in this study is presented at the

end of the following section.

Percentage Depl etion--1926-1978

The need for depletion as a special tax incentive for the oil and gas

industry was recognized in the Revenue Act of 1913, which established cost depletion (now 26 USC 611, 612) as the method of computing the depletion

deduction. In the Revenue acts of 1916, 1918, 1921, and 1924 refinements were made in the law and finally, in 1926, the Revenue act introduced the new

concept of percentage depletion and established a 27.5% depletion rate for oil

and gas. Under this concept, the stated percentage was applied to the gross

income from a property for a taxable year to determine the amount of the

percentage depletion deduction for such year. Such deduction was limited to

50% of the net income from the property computed without allowance for

depletion. The law also provided that the annual depletion deduction could

n o t be less than cost dep le t ion as computed f o r such proper ty . ( 7 ) An

essen t i a l d i f f e r e n c e between cos t dep le t i on and percentage dep le t i on i s t h a t

t h e former i s s i m i l a r t o deprec ia t ion and t i e d more t o the i n i t i a l cos t o f the

asset, whereas t h e l a t t e r takes i n t o cons idera t ion an amount equal t o t h e

gross value o f product ion from t h a t asset. The c h i e f advantage o f percentage

dep le t i on i s t h a t i t avoids making t h e uncer ta in est imate o f t h e t o t a l

product ion l i k e l y from the f i e l d . A t the t ime i t was i n s t i t u t e d , the f e d e r a l

corporate tax r a t e was 15% and cos t and percentage dep le t ion gave about t h e

same recovery o f c a p i t a l i n the wast ing asset. As the federa l t ax r a t e rose,

t h e advantage o f percentage dep le t i on rose. S i m i l a r l y when OPEC r a i s e d t h e

p r i c e o f o i l i n 1973, the percentage dep le t i on i ncen t i ve became very large,

prompting Congress t o change t h e law.

There are vary ing est imates as t o the ac tua l cost o f percentage, as

compared w i t h cos t dep le t ion , t o t h e U.S. Treasury. For f i s c a l year 1968, a

Treasury analys is showed an i ncen t i ve expenditure o f 1,300 m i l l i o n

d o l l a r s . I n 1971, another estimate, a f t e r changes i n the Tax Code i n

1969, i d e n t i f i e d a t o t a l t a x cos t o f t h e excess o f percentage over cos t

dep le t i on f o r a l l minera ls o f $985 m i l l i o n . That same est imate r e f e r r e d

t o an annual revenue loss i n 1937 from percentage dep le t i on t o cos t dep le t i on

o f $75 m i l l i o n ; i n 1950, $400 t o $500 m i l l i o n ; i n 1953, more than $700

m i l l i o n ; and, i n 1960, a revenue loss o f $2.5 b i l l i o n . It a lso noted t h a t t h e

House est imated t h a t changes i n the 1969 Tax Reform Act would increase

revenues t o t h e government from changing percentage dep le t i on by $425 m i l l i o n

i n 1970 and $410 m i l l i o n i n 1971. Those changes reduced the percentage

dep le t i on a1 lowance from 27.5% t o 22% and reduced e l i g i b i 1 i ty.

The percentage dep le t ion r a t e was 27.5% o f the we l l head value f rom 1926

t o 1969 and subsequently 22%, w i t h severe r e s t r i c t i o n s on f i r m s i z e s t a r t i n g i n 1975. (10-17)(a) The dep le t ion percentage deduction i s 1 i m i t e d t o n o t

more than 50% o f t o t a l income from t h e proper ty . Since 1969, t he re has a l so

(a ) I n 1981 t h e dep le t ion allowance w i l l be 20 percent, i n 1982, 18 percent, i n 1983, 16 percent and 1984 and t h e r e a f t e r 15 percent. The a l lowab le depe l tab le q u a n t i t y i s being lowered i n steps from 2000 b a r r e l s per day i n 1975 t o 1000 b a r r e l s per day i n 1980, ( i n c l u d i n g the o i l equ iva len t o f gas s p e c i f i e d i n the Act) .

been a minimum t a x ra te . The allowance i s a v a i l a b l e no t o n l y t o t he operator

o f t h e f i e l d bu t a l so t h e r o y a l t y holder . Thus, t he dep le t i on deduct ion can

apply t o incomes taxed a t r a t e s o f up t o 46% s t a r t i n g i n 1978 (48% from

1954-77 and 52% p r i o r t o 1954) f o r corpora t ions and 70% f o r i n d i v i d u a l s .

Comparing percentage values developed by Brannon ( l o ) w i t h d o l l a r est imates

repor ted by the L i b r a r y o f Congress (11) and assuming an incremental t a x r a t e

o f 48%, f o r t h e p e r i o d 1970-74 t h e 22% allowance i s e f f e c t i v e l y o n l y 15% a f t e r

a d j u s t i n g f o r t he 50% r u l e , t he minimum tax, and the cos t dep le t i on

a l t e r n a t i v e . For t h e pe r i od 1975-78, t h e a1 lowance app l ies o n l y t o smal l

operators (12) o r an est imated 30% of the t o t a l o i l product ion. The gas

produc t ion allowance app l i es o n l y t o gas regu la ted i n p r i c e o r so ld under

f i x e d p r i c e con t rac t . It was assumed t h a t a l l gas met these c r i t e r i a . For

1950 t o 1969, t h e 27.5% allowance was taken t o be e f f e c t i v e l y 19% when

cor rec ted f o r t he 50% r u l e and the cos t dep le t i on a l t e r n a t i v e .

S t a r t i n g w i t h the 1976 Budget o f t he U.S. Government, t h e Treasury

Department has made est imates o f t h e l oss i n t a x revenue due t o spec ia l

t reatment o f c e r t a i n types o f income. The est imates ( I 3 ) f o r t he percentage

dep le t i on allowance ( i ns tead o f c o s t dep le t i on ) and expensing o f i n t a n g i b l e

d r i l l i n g costs ( i ns tead o f c a p i t a l i z a t i o n ) have been used i n t h i s s tudy f o r

t h e pe r i od beginning i n 1974, t h e f i r s t year t hey are ava i lab le . The f i g u r e s

i nc lude both corpora te t a x losses and i n d i v i d u a l income t a x losses, w i t h a

marginal t a x r a t e o f up t o 70 percent app ly ing t o t h e l a t t e r . The t o t a l

amount o f these i n c e n t i v e s was apport ioned among coal, o i l , and gas according

t o t o t a l value o f product ion. These c a l c u l a t i o n s were conf irmed by

conversat ion w i t h t he Treasury Department. For years p r i o r t o 1974, t h e

corporate t a x r a t e was used t o c a l c u l a t e t h e income equ iva len t o f t h e

dep le t ion allowance and expensing o f i n tang ib les . This assumes t h a t t he

average marginal personal income t a x o f i nves to rs i n o i l p r o p e r t i e s and

r o y a l t y holders was the same as the corporate ra te .

The b e n e f i t o f the dep le t i on allowance does no t accrue e n t i r e l y t o t he

o i l company ope ra t i ng t h e f i e l d . The r o y a l t y holder and operator apply t h e

allowance t o t h e i r share o f the wellhead value. I n add i t ion , t h e increased

value o f d r i l l i n g r i g h t s t o t h e operator make him more w i l l i n g t o pay a h igher

r o y a l t y . Under the compet i t i ve s i t u a t i o n e x i s t i n g today, the p r i c e o f the

crude can be reduced and t h e operator can s t i l l get h i s des i red r e t u r n because

o f the allowance. Some o f the b e n e f i t i s passed on t o the consumer and some

i s passed back t o t h e r o y a l t y owner, which cou ld be t h e Federal Government.

Brannon est imates t h a t 40% o f the value o f the dep le t ion allowance ends up as

increased r o y a l t i e s , 10% as a f t e r - t a x p r o f i t f o r the operator, and 50% as

p r i c e reduct ion. ( I 4 ) Thus, 50% i s a d i r e c t i ncen t i ve t o the producer and

lessor and 50% i s an i n d i r e t i n c e n t i v e t o production, due t o increased demand

r e s u l t i n g from lower pr ices. The costs repor ted here do no t c o r r e c t f o r t a x

losses recaptured by t h e government i n t h e form o f h igher r o y a l t i e s on

government lands.

The value t o the operator o f cons ider ing i n t a n g i b l e d r i l l i n g expenses as

an expense r a t h e r than a c a p i t a l investment sub jec t t o deprec ia t ion i s

equ iva len t t o r e c e i v i n g a tax- f ree loan from the government. I t s va lue i s

r e l a t e d t o t h e amount o f d r i l l i n g i n any g iven year. For t h i s study, i t has

been approximated as 6% o f the we1 1 head value o f product ion. (10)

Since 1950, allowances have amounted t o $50.3 b i l l i o n f o r dep le t i on and

$20.1 b i l l i o n f o r t h e treatment o f i n tang ib les (Table 43). Dur ing t h i s t ime,

76.8 b i l l i o n bb l o f o i l and 444 t r i l l i o n cubic f e e t o f gas were produced, a

t o t a l o f 919 q u a d r i l l i o n Btu. On t h e bas is o f wellhead value t h a t i s sub jec t

t o the i ncen t i ve , $40.0 b i l l i o n i s a l l oca ted t o o i l dep le t i on allowance, and

$15.4 b i l l i o n t o o i l i n t a n g i b l e expenses allowance. The t o t a l i n c e n t i v e i s

12.4 c e n t s / m i l l i o n B tu o f o i l .

Recapture o f I n t a n g i b l e Expenses on D i s p o s i t i o n of O i l and

Gas-Producing Proper ty

I n Studies i n Energy Tax Po l icy , ed i ted by Brannon, ( l o ) i t was noted

t h a t w i t h equipment investments, t h e t a x law takes t h e p o s i t i o n t h a t on sa le

any gain t o the ex ten t o f p r i o r deprec ia t ion deductions i s t o be t r e a t e d as

o rd ina ry income on s a l e and taxed a t o rd ina ry income t a x r a t e s r a t h e r than a t

c a p i t a l gains ra tes . However, Brannon po in ted o u t t h a t f o r n a t u r a l resources

invo lved i n energy product ion, t h e r e i s no corresponding pena l t y on t h e sa le

o f na tu ra l resource property. As a r e s u l t , i f the taxpayer i nves ts a c e r t a i n

amount i n i n t a n g i b l e d r i l l i n g expenses, takes t h e deduction, and then s e l l s

TABLE 43. Revenue Equivalent of Percentage Depletion Allowance and In tangib le D r i l l i n g Expensing (Oil and Gas)

I \svsllus LC,

Million Wellhead Value of

- In tangib le

Domestic Production Depletion D r i l l i n g Mil l ion Current $ 1978 $ A1 lowance Expensing

Oi . a 1 Total O i 1 - - Gas - Oi 1 - Gas - 1 - Gas Tot -

TOTAL 1950-1978 40,033 10,269 15,449 4,648

the p rope r t y a f t e r the prescr ibed ho ld ing pe r iod f o r the same amount o f p r o f i t

i n excess o f t h e o r i g i n a l cos t o f t h e land, t h e gain i s t r e a t e d e n t i r e l y as

c a p i t a l gains and not as o rd ina ry income. (10,~.23)

This f a i l u r e t o prov ide f o r recapture i n the na tu ra l resource area

prov ides an i n c e n t i v e t o t h e o i l and gas indus t ry . Recapture, on t h e o the r

hand, was introduced i n t o the s t a t u t e governing the treatment o f hard minera l

exp lo ra t i on cost. (15)

The Tax Reform Act o f 1976 added Sect ion 1254 t o the Tax Code, p r o v i d i n g

t h a t amounts deducted f o r i n t a n g i b l e d r i 11 i n g expenses on product ive we1 1s are

t o be recaptured upon t h e d i s p o s i t i o n o f the o i l o r gas proper ty .

Sect ion 1254 declares t h a t those amounts are t o be t r e a t e d as o rd ina ry income

t o the ex ten t they exceed the amounts t h a t would be allowed i f the i n t a n g i b l e

d r i l l i n g expenses were c a p i t a l i z e d and amortized over t h e use fu l l i f e o f t h e

we l l . The law a f f e c t s costs p a i d or incur red a f t e r December 31,

1975. ( 5 , ~ 1228)

I t was est imated by the House t h a t t a x revenues from t h i s source would

increase by $5 m i l l i o n i n 1976, $10 m i l l i o n i n 1977, and $75 mi 11 i o n

by 1981. ( 5 y p This i s a negat ive i ncen t i ve i f the previous arrangement

i s t rea ted as t h e basel ine, o r i s neu t ra l i f recapture as ex i s ted i n hard

minera l exp lo ra t i on i s t rea ted as the basel ine. These costs have no t been

inc luded i n t h e f i n a l t abu la t i on .

Western Hemisphere Trade Corporat ions

Sect ion 26 USC 921 def ines Western Hemisphere Trade Corporat ions and 26

USC 922, t h e method by which a spec ia l t a x c r e d i t f o r such corpora t ions i s

computed. Although r e f e r r e d t o i n Sect ion 922 as a spec ia l deduction, t h e ne t

e f f e c t of t h i s i n c e n t i v e i s t o reduce t h e app l icab le corporate income t a x r a t e

t o as much as 14 percentage po in t s below the app l icab le r a t e f o r other

domestic corporat ions.

To q u a l i f y under Sect ion 921, the domestic corpora t ion must do a l l i t s

business w i t h i n t h e Western Hemisphere and must be predominant ly engaged i n

the a c t i v e conduct o f a t rade or business ou ts ide the Uni ted States.

These c r e d i t p rov i s ions were enacted i n 1942 dur ing a per iod o f h igh

wartime taxes i n t h e Uni ted States and genera l l y low taxes i n o ther Western

Hemisphere count r ies . They were aimed a t ensuring t h a t U. S. corporat ions

would not operate a t a disadvantage i n competing w i t h f o r e i g n corporat ions.

The i r purpose was t o increase U.S. corporate a c t i v i t y i n the hemisphere and

r e t a i n U.S. ownership o f f o r e i g n investments which, i f placed i n t h e c o n t r o l

o f f o r e i g n corporat ions, might eventua l ly pass over t o f o r e i g n

i n t e r e s t s . ( 5 , ~ 818)

The Tax Reform Act o f 1976, Sect ion 1052, repeals the Western Hemisphere

Trade Corporat ion deduct ion a f t e r 1979 and prov ides a c r e d i t beginning a t 11%

i n 1976 and s c a l i n g down t o zero a f t e r 1979. Among the reasons given f o r

phasing ou t t h i s i n c e n t i v e are t h a t f o r e i g n income should be taxed a t the same

r a t e as domestic income; t h a t D I S C p rov is ions 25 USC 992 (a) are a more

appropr ia te incent ive ; and t h a t o ther Western Hemisphere coun t r i es have r a i s e d

t h e i r t ax r a t e s s ince the enactment o f t h i s p rov is ion , thus g i v i n g l i t t l e t a x

b e n e f i t t o companies t h a t q u a l i f y f o r the c r e d i t . ( 5 y p 'I8) DISC p rov is ions

c i t e d have l i t t l e a p p l i c a t i o n t o t h e energy i n d u s t r y as a whole because o f

amendments contained i n the Tax Reduction Act o f 1975.

I n f i s c a l year 1968, the U.S. Treasury est imated the revenue cost o f t h i s

i ncen t i ve t o be $50 m i l l i o n . (8 ) The Senate and House disagreed on the

amount o f t h e increase i n corporate taxes t h i s amendment would produce du r ing

the phaseout per iod bu t bo th agree t h a t the t o t a l t ax savings, by 1980-81,

w i l l be $50 m i l l i o n . ( 5 y p p 260y819) This i ncen t i ve was used by the petroleum

i n d u s t r y bu t has n o t been an i ncen t i ve f o r domestic product ion; i n f a c t , i t

may have been a d i s incen t i ve .

Foreign Tax Cred i t s

Sect ion 26 USC 901 conta ins the s t a t u t o r y source f o r f o r e i g n tax c red i t s ,

sub jec t t o t h e l i m i t a t i o n s contained i n Sect ion 904, and t h e spec ia l r u l e s f o r

o i l and gas, enacted i n 1975 and contained i n Sect ion 907 (a) and (b) o f the

Code. The spec ia l r u l e s l i m i t e d t h e amount o f the c r e d i t a v a i l a b l e t o t h e o i l

and gas i n d u s t r y on income from f o r e i g n sources. Furthermore, changes

p e r t a i n i n g t o t h e t a x c r e d i t were made i n t h e Tax Reform Act o f 1976.

The purpose o f the f o r e i g n tax c r e d i t was t o prevent double t a x a t i o n o f

U.S. corporate income der ived from f o r e i g n sources. It has been suggested

t h a t the r u l e s were i n t e r p r e t e d i n a l i b e r a l manner so as t o subsid ize the

Saudi Arabian Government and thus avoid t h e c a n c e l l a t i o n o f ARAMCO's

concession i n t h a t country. The theory o f subs id iza t ion and the f o r e i g n

p o l i c y imp l i ca t i ons o f the t a x c r e d i t are discussed i n a Forbes a r t i c l e , (16)

which noted t h a t i n a s i n g l e year, ARAMCO's U.S. income taxes dropped

$44 m i l l i o n , t o $6 m i l l i o n , w h i l e the Saudi Government increased i t s t ake from

$44 m i l l i o n t o $110 m i l l i o n through a 50% t a x on ARAMCO's o i l p r o f i t s .

The e f f e c t o f the f o r e i g n t a x c r e d i t law p r i o r t o the 1975 changes has

been described as fo l l ows :

Under present law, a domestic taxpayer having f o r e i g n income pays t a x

on t h a t income t o t h e count ry o f t h e business a c t i v i t y and, t o avo id

double taxat ion, the taxpayer i s given a d o l l a r - f o r - d o l l a r t ax c r e d i t

against t h e Un i ted States tax. The Un i ted States has a l i m i t a t i o n on

the f o r e i g n taxes t h a t can be c red i ted i n any 1 year against Un i ted

States income tax. I n general, l i m i t a t i o n on t h e f o r e i g n t a x c r e d i t

i s ca lcu la ted on a "per country' ' o r an " o v e r a l l " l i m i t a t i o n . Under

t h e o v e r a l l l i m i t a t i o n , t h e c r e d i t f o r f o r e i g n taxes may n o t exceed

t h e p ropo r t i on o f U.S. t a x on t h e co rpo ra t i on ' s worldwide income i n

t h e r a t i o o f i t s f o r e i g n source income t o i t s worldwide income. The

r e s u l t s o f t h i s l i m i t a t i o n i s t o a l l o c a t e the t e n t a t i v e U.S. t ax on

t h e taxpayer 's worldwide income on a p ro r a t a bas is between U.S.

source income and f o r e i g n source income. The same formula i s a l s o

used by t h e "per country" l i m i t a t i o n , b u t t h e formula i s app l ied

separa te ly t o the income from each f o r e i g n country. Under t h i s

l i m i t a t i o n , the c r e d i t f o r taxes pa id t o each i n d i v i d u a l country may

no t exceed the p ropo r t i on o f the U.S. taxes on worldwide income

which t h e income from any p a r t i c u l a r count ry i s o f worldwide

income. The r e s u l t under the "per country" l i m i t a t i o n i s t h a t t h e

t o t a l t a x c r e d i t l i m i t i s t h e sum o f t h e l i m i t s o f each country.

The e f f e c t o f the " o v e r a l l l i m i t a t i o n " i s t o permi t averaging o f t h e

taxes on income from d i f f e r e n t coun t r i es w i t h the r e s u l t t h a t taxes

i n h igh r a t e tax coun t r i es can be used t o reduce Uni ted States t a x

on income earned in low rate countries. Because of this, most corporations, except those having heavy losses in a particular

country, use the "overall limitation.'' Since most companies in the

oil business incur large losses from drilling and development

operations, they have elected to use the "per country"

limitation. (7,pp 1589-90)

The 1975 changes accomplished the following:

o reduced the amount of foreign taxes attributable to oil and gas income

which are available for the credit by reference to stipulated percentages applied to "foreign oil and gas extraction income"

0 limited the availability of future foreign tax credits to foreign

oil-related income and provided that such credits may not be used to offset foreign income from other sources

0 required that the overall limitation be used to compute the foreign tax

credits attributable to foreign oil-related income

0 restricted foreign oil-related tax credit carry-forwards arising in years

prior to 1975 to foreign oil-related income

limited available credits where losses attributable to foreign oil

operations are incurred. (17)

The Tax Reform Act of 1976 contains amendments further affecting the

treatment of foreign source income. Included is an overall limitation for all

foreign source income other than oil and gas covered in the amendments of the

1975 Act. However, Section 1031 of the 1976 Act amending 26 USC 904 delays

the effective date for mining companies, because certain mining ventures were

begun with substantial investments of capital under the assumption that

foreign tax credit could be computed under the per country limitation.

Therefore, the law contains transitional rules. (5yp 226) Section 1035 of

the Tax Reform Act of 1976 further revises Section 907. Under this act, the

foreign tax credit on extraction income allowable as a credit is limited, for taxable years after 1976, to 48% of that income on an overall basis. Special

rules for production-sharing contracts and carryover and carryback of disallowed tax credits in any taxable year are also included. ( 5 , ~ 1272)

The f o r e i g n t a x c r e d i t i s the major in f luence on f o r e i g n source income.

It has been said, p r i o r t o t h e 1975 and 1976 amendments, t h a t i n t h e f o r e i g n

petroleum industry , so many f o r e i g n t a x c r e d i t s were a v a i l a b l e from producing

coun t r i es t h a t U.S. I n teg ra ted petroleum operat ions would pay e s s e n t i a l l y no

t a x on f o r e i g n income, even i f no other t a x preferences were

a1 1 owed. 214) A study publ ished i n 1975 (lOypp 220-228) concluded t h a t

t h e tax c r e d i t s were o f much greater value t o t h e petroleum i n d u s t r y i n reduc-

i n g t a x payments than any other types o f f o r e i g n investment. The s tudy a lso

showed t h a t t h e t o t a l value o f f o r e i g n t a x c r e d i t s used t o reduce U.S. taxab le

income was $815.39 m i l l i o n i n 1962, $1,001.85 m i l l i o n i n 1964, $1,029.05

m i l l i o n i n 1965, $1,131 m i l l i o n i n 1966, and $1,609.36 m i l l i o n i n 1968.

The amendments i n the 1975 and 1976 Tax Reform Acts have s u b s t a n t i a l l y

reduced t h e a p p l i c a t i o n o f t h e t a x c r e d i t p rov i s ions t o reduce domestic income

taxes. For instance, i t i s p ro jec ted t h a t the adoption o f Sect ion 1035 w i l l

produce add i t i ona l revenues t o t h e Treasury o f $23 m i l l i o n i n 1978 and

$50 m i l l i o n i n 1979, 1980, and 1981. ( 5 , ~ 1375)

Foreign t a x c r e d i t s , even though intended t o avoid double taxa t ion , are

nevertheless a d i s i n c e n t i v e t o domestic product ion. However, s ince t h e U. S.

market was pro tec ted by quotas from 1959-73, the impact o f the c r e d i t f o r

f o r e i g n t a x c r e d i t s on domestic product ion was small. ( a ) It may have

in f luenced t h e l e v e l s o f investment a t home and abroad, which i n t u r n

in f luenced the d iscovery o f reserves and u l t i m a t e l y product ion. The impact on

t h e U.S. consumer was a lso smal l since, p r i o r t o 1973, most o f the f o r e i g n o i l

was marketed i n Europe and Japan. (Since 1973, w i t h the except ion o f t h e

impact o f Alaskan o i l on C a l i f o r n i a ' s heavy o i l product ion, t he re has been a

ready market f o r a l l domestic o i l product ion.)

O i 1 Import Quotas--1959-1973

I n the l a t e 1940s i t appeared t h a t t h e Uni ted States was " running ou t o f

o i l ." The government was concerned and i n i t i a t e d R&D on' coal conversion and

o i l shale development. The o i l i n d u s t r y increased i t s d r i l l i n g e f f o r t s and

(a) I t cou ld be argued, on the other hand, t h a t generous f o r e i g n t a x c r e d i t s al lowed i n t e r n a t i o n a l o i l companies t o subsid ize domestic operat ions. However, there i s no evidence f o r t h i s p o i n t o f view.

production rose from 5.4 million bbllday i n 1950 t o 7.2 mill i ion bbllday

in 1956, an increase of 33%. Reserves increased 20% in sp i t e of the increased

production. During the same period imports of crude o i l and petroleum

products increased from 850 thousand bbl/day t o 1.4 million/day, an increase

of 65%.

The industry became concerned tha t a flood of low cost imports would take

over a large share of the U.S market. Imports from Venezuela had always been

a factor in the U.S. market, in sp i t e of a t a r i f f applied i n 1932, b u t the

production cost was not out of l i ne with U.S. costs. What concerned U.S. o i l

producers was the t r i p l i n g of reserves in the Middle East, the very low cost

of production there , and the abundance of tankers.

After closing of the Suez Canal i n 1956, the U.S. Government became

concerned about dependence on foreign o i l . The following year a voluntary

reduction i n crude imports was requested in the name of national security.

Crude imports s tabi l ized b u t imports of refined products and residual o i l

t r ip led . In 1959 the Mandatory Oil Import Control Program was proclaimed by

President Eisenhower. Quotas were established fo r each section of the

country. On the West Coast, imports were limited t o the de f i c i t between

domestic supply and demand. East of the Rockies, imports of crude and

d i s t i l l a t e products were i n i t i a l l y s e t a t 12.2% of t o t a l demand. With

domestic o i l a t a higher price than imports, the re f iner ies were designed o r redesigned to make as much gasoline and other d i s t i l l a t e products as possible

from each barre l , decreasing the ava i l ab i l i t y of residual fuel o i l . To

prevent shortages and high prices on the East Coast, residual o i l was' declared

exempt from the quota program.

The quotas fo r crude oi l imports were allocated among re f iners , using

his tor ical operating data and a s l id ing scale t h a t favored small ref iners .

The inland ref iners were allowed t o s e l l t h e i r quota privilege t o coastal

re f iners , " t ickets" being worth roughly $l/bbl. Thus, the immediate impact

was t o support the U.S. o i l price and to aid small and inland re f iners while

avoiding increases in e l e c t r i c i t y costs on the East Coast. Later provisions

allowed asphalt imports outside the quota, aided industr ia l development by

allowing some products from Puerto Rico and the V i r g i n Islands i n a special

quota, gave preference i n quotas t o o i l coming overland from Canada and Mexico

and al lowed low s u l f u r crude burned i n p lace o f h igh s u l f u r r e s i d u a l o i l t o be

c l a s s i f i e d as r e s i d u a l o i l . I n A p r i l o f 1973, t h i s program was cancel led due

t o h igh U.S. demand and increased costs o f f o r e i g n crude.

The cost o f t h e program t o the government was small s ince m i l i t a r y

procurement overseas was no t affeced. The cos t t o t h e i n d u s t r y was mixed.

Crude o i l costs t o r e f i n e r s were equal ized through the quota system. Domestic

crude o i l producers received h igher p r i c e s than would have been obta inab le

w i t h uncont ro l led imports, t ax bases o f major crude o i l producing s ta tes were

maintained, and consumer p r i ces were h igher p r i o r t o t h e embargo, bu t t h e

e x t r a reserves developed as a r e s u l t of the i ncen t i ve helped t o reduce the

impact o f t h e Arab o i l embargos o f 1967 and 1973.

O i l exp lo ra t i on and product ion incent ives amounted t o $108.5 b i l l i o n f o r

t h e pe r iod 1950-1978. O f t h i s , $55.5 b i l l i o n was f o r t a x items; namely, t h e

expensing o f i n t a n g i b l e d r i l l i n g costs and the use o f the percentage dep le t i on

allowance. Ex t ra income o f $50.2 b i l l i o n from higher al lowed p r i c e s

i n 1974-1978 was assigned t o requirements, even though the funds were received

from t h e marketplace. Regulatory a c t i v i t i e s o f t h e Economic Regulatory

Admin is t ra t ion and i t s predecessors, the FEA and FEO, and t h e S t r a t e g i c O i l

Reserve cos t $1.71 b i l l i o n f o r t h e pe r iod 1974-1978 and were categor ized as

requirements. Non t rad i t i ona l services, t h e o i l a c t i v i t i e s o f the Geological

Survey and t h e Bureau o f Mines, amounted t o $592 m i l l i o n from 1950 t o 1978.

The o i l l eas ing a c t i v i t i e s o f the Bureau o f Land Management, $498 m i l l i o n

f o r 1950-1978, are considered market a c t i v i t i e s . Costs were determined by

est imates o f taxes foregone, increased value o f sales, o r expenditures f o r

government agencies, as appropriate.

PETROLEUM REFINING AND TRANSPORTATION

Since the focus o f t h i s study i s product ion, t h e "downstream" a c t i v i t i e s

o f r e f i n i n g and t ranspor ta t i on are important f o r t h e i r r o l e i n developing t h e

markets f o r petroleum products and thus i n d i r e c t l y encouraging product ion.

The r e a l p r o f i t a b i l i t y i n the petroleum i n d u s t r y u n t i l r e c e n t l y was i n

product ion, not r e f i n i n g and market ing petroleum. The major o i l companies

used a strategy of expanding their markets as rapidly as possible as a way of

increasing their sales of crude oil. Anything that increased sales allowed

them to produce more, either domestically or abroad.

Oil Pipeline Rates--1921-1951

During the 1920s, the pipeline companies were reluctant to expand. The volume of oil in a given field was not always predictable and there was danger

that a field might become exhausted before the pipeline constructed to serve the field had been amortized. To continue expansion of the pipeline system,

the Interstate Commerce Commission (ICC) permitted the pipeline companies to

set tariffs to produce a higher rate of return than was allowed for most

public utilities. (23p 356-360) This provided an incentive for pipeline

expansion that was equivalent to the difference between the actual rate of

return and what would have normally been allowed. This incentive, which is tabulated for the years 1921-1951 in Table 44, affected the distribution stage

of the energy system.

Cost of Oil Pipeline Regulation--1950-1978

Until October, 1977, the Interstate Commerce Commission (ICC) regulated

pipeline companies; since then, regulation has been by the Federal Energy

Regulatory Commission (FERC), part of DOE. Since the cost of this regulation

is borne by the taxpayer, it can be considered a subsidy. The total outlay

for all ICC operations was $58.7 million in 1977. This total is about four

times the cost 20 years earlier,(18) or twice as much when measured in

constant dollars.

Only a small portion of the ICC activitities were related to pipelines.

In 1975, less than 1% of the tariffs received and cases handled involved

pipelines.(19) Activities of FERC regulating oil pipe1 ines cost

$3.1 million in 1978. This amount is small compared to other subsidies and

these costs were therefore not included.

Maintenance of Inland Waterways--1950-1978

The policy of the U.S. is to provide inland waterways as free public

highways. The U.S. Army Corp of Engineers constructs and maintains inland

waterways, which are available to the petroleum industry at no cost.

TABLE 44. Pipeline Company Return on Investment (Millions of Dollars)

Net ~ncome(a)

Income at 10% ~eturn(b)

Incent 'v Returnlce

0.7

Incentive Return in 1978 $ Year -

1921 1922

Capitalization

337.1 471.7

1950 660.3 81.3 66.0 15.3 41.6 1951 759.3 82.0 75.9 6.1 15.4

TOTAL 5,600.9

(a) From API Petroleum Facts and Figures, 1971. (b) Calculated - 10% of capitalization. (c) Calculated - Net income minus income at 10% return.

In suppor t ing the waterways the re was no d i r e c t i n t e n t t o subs id ize the

petroleum indus t r y , bu t a major p a r t o f t h e movement on i n l a n d waterways i s 9 petroleum and petroleum products (approx imate ly 45 x10 ton-mi les i n 1973).

The cos t o f cons t ruc t ion , maintenance, and opera t ion o f t h e waterways was

about 0.1 cen t l t on -m i l e du r i ng 1973. (20) The second-order subsidy f o r 1973

was, t he re fo re , about $45 m i l l i o n . Th is prov ides an i n c e n t i v e f o r t he

d i s t r i b u t i o n stage o f t he energy system.

A longer-range approach t o es t ima t i ng the s i ze o f t h i s subsidy i s

descr ibed under maintenance o f Coastal Por ts below.

Maintenance o f Coastal Ports--1950-1978

The p o l i c y o f p r o v i d i n g waterways as f r e e p u b l i c highways app l ies a l so t o

coas ta l Great Lakes por ts . I n t h e same way the re i s a second order subsidy t o

the petroleum i n d u s t r y ' s use o f the p o r t s and channels. I n p o r t s t h a t handle

r e l a t i v e l y l a r g e tankers, t h e tankers present t he reason f o r deepening

channels s ince tankers are u s u a l l y t he deepest d r a f t vessels t h a t use the

p o r t . Therefore, a la rger - than-propor t iona l amount o f t o t a l dredging cos ts

are i n e f f e c t a second-order subsidy t o t he d i s t r i b u t i o n stage o f t he o i l

energy system.

Federal funds f o r support o f nav iga t ion i n both coas ta l p o r t s and i n land

waterways are prov ided through t h e U.S. Army Corps o f Engineers. However, o n l y

a p a r t o f the commerce us ing these waters invo lves petroleum products. Table 45

l i s t s t h e expendi tures f o r nav iga t i on programs w i t h i n t he Corps o f Engineers

and a l l oca tes those costs as a petroleum subsidy according t o t he r a t i o o f the

tonnage o f pet ro leum and petroleum products c a r r i e d t o a l l water-borne t rade.

The subsidy t o t a l s $6.9 b i l l i o n f o r t he pe r i od 1950 through 1978. A t 390

m i l l i o n B tu l t on , t h i s i s an i n c e n t i v e o f 0.13 cents m i l l i o n Btu.

The Jones Act o f 1915--1915-1978

Fore ign sh ips are able t o prov ide serv ices a t lower cos t than ships

s a i l i n g under t h e U.S. f l a g . The wages p a i d t o U.S. s a i l o r s and sh ipbu i l de rs

account f o r the d i f f e rence . However, i t i s i n t he i n t e r e s t o f the U.S. t o

ma in ta in a f u n c t i o n i n g merchant f l e e t t h a t would be a v a i l a b l e i n wartime o r

other emergencies. Therefore, t he Jones Act was passed i n 1915 t o i nsu re t h e

TABLE 45. U.S. Army Corps of Engineers Expenditures f o r Navigation ~ r o j e c t s ( a ) ( i n Millions of Dollars)

Petroleum Product Petroleum as(d) Current Dollars 1978 Doll r

Movements, a Portion of Petroleu Fiscal Millions Total Water- 1ndustryTe)

d Industry

Year Short ~ons(f) Borne Trade ~xpenditure(c) Subsidy Subsidy

.... Total 1950-1978

( a ) Navigation projects include (1) navigation studies, (2) construction of channels and harbors, (3) construction of locks and dams, (4) operation and maintenance of channels and harbors, and (5) operation and maintenance of locks and dams.

(b) Estimated. (c) From the ''Budget of the United States Government," Fiscal Year 1952 through Fiscal Year 1979'. (d) From API Petroleum Facts and Figures, 1971, Page 295; Waterborne Commerce of the United States Corps of Engineers, National

Sumnaries 1968-75. (e) The subsidy is calculated as the product of total expenciture and the proportion of total waterborne trade that is petroleum and

petroleum products. ( f ) Calendar year.

continued existence of a U.S. Merchant fleet. The act specifies that only

U.S. flag ships could be used for transport movements between U.S. ports.

This act increases the cost of shipments of petroleum between U.S.

ports. It is a disincentive for the transportation sector of the oil

industry.

Deepwater Ports Act of 1974

The cost of shipping petroleum is directly related to the size of the

tanker. No existing U.S. ports are able to handle the supertankers that can

provide the lowest-cost transport. To promote the development of suitable

ports and at the same time protect the environment, a Deepwater Ports Act

(PL 93-627) was passed in 1974 to provide for licensing of deepwater ports.

The act provided funds for developing design guidelines to assist with

required environmental impact statements. The act also designated the ports

as common carriers and, in addition, established a liability trust fund.

The incentives provided by this act can be evaluated in terms of the appropriation to implement the act. The incentive contributes to the

distribution stage of the energy system.

There is another aspect of the act that might be considered an

incentive. The liability trust fund is to be built by a charge per barrel of

oil moved through the port. This fund will grow to a maximum amount, after

which charges will not be collected until the fund is reduced by claims.

Maximum liabilities are established at $150/dwt or $20,000,000, whichever is

less. This fund could be considered an incentive if the cost is less than

would be expected for the same insurance provided by a private insurer, if the

damages resulting from an occurrence would be greater than the maximum

liability, and if there are different economic advantages to supertankers of

different sizes. Until experience is obtained, the net cost of these factors

cannot be determined.

The Deepwater Ports Act authorized an appropriation of $2.5 million per

year for administration of the act. If this entire amount were considered a

subsidy to the petroleum industry, this would total $11.8 million for

FY-1975-FY-1978 expressed in 1978 dollars.

Deepwater p o r t s o f f the Gu l f o r A t l a n t i c coasts w i l l tend t o discourage

domestic product ion s ince they w i l l make t h e impor ta t i on o f f o r e i g n crude

cheaper. They w i l l favor domestic r e f i n i n g , however, s ince very l a r g e crude

c a r r i e r s are too l a r g e f o r economical shipments o f r e f i n e d products from

abroad.

Trans-Alaska P i p e l i n e Au tho r i za t i on Act

The d iscovery o f o i l on the Alaskan North Slope prov ided an oppor tun i t y

t o reduce U.S. dependence on f o r e i g n o i l . The t r a n s p o r t a t i o n o f t h e crude o i l

t o r e f i n e r i e s cou ld be accomplished most e f f i c i e n t l y us ing a p i p e l i n e across

Alaska. I n i t i a l attempts a t ob ta in ing permission t o cons t ruc t a p i p e l i n e

became bogged down i n cou r t cases concerning the environmental impact

statements. The Trans-Alaska P i p e l i n e Au tho r i za t i on Act (PL 93-153) s p e c i f i e d

steps t o be taken f o r environmental p r o t e c t i o n and the requirements f o r

environmental impact statements. I n add i t ion , t h e a c t es tab l ished a l i a b i l i t y

t r u s t fund.

The fede ra l funds appropr iated t o adminis ter the ac t cou ld be considered

a d i r e c t subsidy t o t h e d i s t r i b u t i o n stage o f t h e energy system. The

l i a b i l i t y t r u s t fund w i l l be b u i l t from charges on p i p e l i n e throughput.

Considerat ion o f t h i s government-operated insurance system as an i n c e n t i v e i s

s i m i l a r t o t h a t f o r the Deepwater Por ts Act, except t h a t the Trans-Alaska

P i p e l i n e Author iza t ion Act does l i m i t l i a b i l i t y .

Merchant Marine Ac t o f 1970

The costs o f cons t ruc t i on and operat ion o f U.S. f l a g ships are h igher

than f o r f o r e i g n ships. This makes U.S. ships l ess compet i t i ve and tends t o

i n t e r f e r e w i t h the cont inued s t rength and growth o f the U.S. Merchant f l e e t .

A s t rong f l e e t i s needed f o r na t i ona l s e c u r i t y reasons. I n a d d i t i o n the re i s

pressure from the mar i t ime unions and the shipping i n d u s t r y t o prov ide

i ncen t i ves t o U.S. shipping.

The Merchant Marine Act o f 1970 prov ided sh ip cons t ruc t i on and opera t ing

subsid ies f o r U.S. f l a g operators. Contracts t o b u i l d 28 tankers under t h i s

program had been es tab l ished as o f October 1973. I n add i t ion , loans can be

guaranteed under t h e Federl Shippers Mortgage Insurance Program

( t i t l e X I ) . (21) This i s a second-order subsidy t o t he t r a n s p o r t a t i o n sector

o f t h e o i l i ndus t r y .

The sh ip cons t ruc t i on and opera t ing subsid ies made a v a i l a b l e by the

Merchant Marine Act o f 1970 have been used f o r passenger ships, general cargo

ships, and other spec ia l i zed t ranspor ts , as w e l l as tankers. Therefore, i t

was necessary t o est imate t h e p o r t i o n o f t h e t o t a l o u t l a y used by t h e

petroleum indus t ry . The source o f t h i s data was the Appendix t o t he Budget o f

t h e U.S. Government f o r FY-1972 through 1978. The budgets f o r t h e Mar i t ime

Admin is t ra t ion i n the Department o f commerce prov ided ac tua l ou t l ays f o r

FY-1970 through 1975 and an est imated o u t l a y f o r 1976. I n add i t ion , t he

amounts programmed f o r cons t ruc t i on f o r d i f f e r e n t types o f sh ips were prov ided

i n t h e budgets f o r FY-1973 through 1975. This breakdown was used t o est imate

the propor t ion o f t o t a l cons t ruc t i on subsidy t o a l l o c a t e t o the petroleum

indus t ry . The budgets f o r FY-1975 through FY-1978 d i f f e r e n t i a t e d between

ope ra t i ng subsid ies f o r bu l k cargo ships and general cargo ships. This helped

a l l o c a t e ope ra t i ng subsid ies t o petroleum. It was assumed t h a t 50% o f t h e

bu l k cargo ope ra t i ng subsidy went t o tankers, (25% i n 1976 when g r a i n t rade

w i t h U.S.S.R. was inc luded i n t h e data). The c a l c u l a t i o n s o f t h e est imated

subsidy are shown i n Table 46. The t o t a l subsidy f o r t he pe r i od 1970

through 1978 was $1,300.8 m i l l i o n i n 1978 d o l l a r s .

I t should be noted t h a t t h i s i s an i n c e n t i v e i n t h a t t he cos t o f U.S.

sh ips would be h igher i f t h e subsidy d i d no t e x i s t . The cos t o f f o r e i g n f l a g

vessels i s s t i l l lower and i n t he absence o f the Jones Act preference f o r e i g n

vessels would rep lace U.S. vessels, even w i t h t h e subsidy. Th is subsidy i s an

i n c e n t i v e t o domestic r e f i n i n g and u t i l i z a t i o n bu t no t t o domestic product ion,

s ince t h e subsid ized sh ips are no t normal ly al lowed t o p l y between domestic

p o r t s and thus cannot move crude o i l f rom Alaska t o t he West Coast, al though a

six-month permiss ion f o r use o f subsid ized tankers t o c a r r y o i l f rom Alaska

was granted.

World War I1 P i p e l i n e Construct ion

E a r l y du r i ng World War 11, German U-boats sank many tankers c a r r y i n g o i l

f rom t h e Gu l f p o r t s t o t h e East Coast por ts , c r e a t i n g a need f o r crude o i l t o

TABLE 46. Subsidies from the Merchant Marine Act of 1970 (Mi 11 ions of Do1 l a r s )

Current Dollars Ship Ship Operating Total

Construction Construc1;pn Operating Subsidy Subsidy FY - Outlay Tankers - Subsidy Tankers Tankers

1976 202.7 TQ 42.0

N 1977 219.4 W o',

1978 156.7 TOTAL

1978 001 1 a r s Total Subsidy

(a ) Based on 56% of the programmed cons t ruc t ion f o r tankers (b ) 50% of t h e indica ted port ion of t h e operat ing subsidy f o r bulk c a r r i e r s . ( c ) Based on 8% of the t o t a l operat ing subsidy f o r bulk c a r r i e r s and 50% of t h a t

tankers . (d ) 33% of the indicated port ion of the operat ing subsidy f o r bulk c a r r i e r s .

amount f o r

be shipped over land t o t he r e f i n e r i e s i n t he East i n order t o supply t he

m i l i t a r y needs. The Federal Government cons t ruc ted a 24-in. p i p e l i n e from t h e

Texas o i l f i e l d s t o r e f i n e r i e s i n I l l i n o i s du r i ng 1942. Dur ing 1943 the

Federal Government constructed a 20-in. pipe1 i n e f rom Texas t o I l l i n o i s and

then extended i t t o New Jersey. These were c a l l e d the B i g Inch and L i t t l e

B i g Inch p ipe l i nes . An a d d i t i o n a l 3 1 p i p e l i n e p r o j e c t s were completed du r i ng

World War 11. The U.S. Investment i n these p i p e l i n e s was approximately

$161.5 m i l l i o n . (2 )

The p i p e l i n e s were intended t o p rov ide f o r wartime needs, bu t a f t e r t h e

war t h e B i g Inch and L i t t l e B i g Inch p i p e l i n e s were converted t o n a t u r a l gas

transmission, w i t h the L i t t l e B i g Inch l a t e r being converted t o an o i l product

p i p e l i n e . Since t h e p i p e l i n e s were s o l d t o p r i v a t e i n t e r e s t a t l ess than

replacement cost, t h i s prov ided a subsidy t o the t r a n s p o r t a t i o n stage o f t he

o i l and i ndus t r i es .

1973 Program t o Encourage Energy Resource Development

I n 1973, i t was no t advantageous f o r o i l companies t o expand t h e i r

r e f i n e r y capac i ty w i t h i n t h e Un i ted States as the re were import quotas which

r e s t r i c t e d access t o expanded sources o f crude o i l . I n A p r i l 1973 the

r e s t r i c t i o n s on imports were suspended, an impor t l i cense- fee schedule was

es tab l i shed which imposed r e l a t i v e l y h igher fees f o r gasol ine and r e s i d u a l

f u e l o i l s than f o r crude ($0.63/bbl versus $0.21). I n add i t ion , U.S. r e f i n e r s

cou ld ob ta in du ty - f ree quotas f o r imported crude equal t o 75% o f new r e f i n e r y

c a p a c i t y f o r a pe r i od o f 5 years. (22)

This was a f i r s t - o r d e r i n c e n t i v e f o r t he r e f i n i n g stage o f t he energy

system.

Federal Support o f Highway Construction--1916-1978

S t a r t i n g w i t h the Federal-Aid Road Act o f 1916 and extending through t h e

90% f i n a n c i n g o f t h e I n t e r s t a t e Highway System, t h e Federal Government has

supported highway construction.("^ 183-184) This has made automobile and

t r u c k t r a v e l eas ie r , more economical, and sa fe r and has thus s t imu la ted o i l

consumption, e s p e c i a l l y gasol ine. Asphal t f o r pav ing a l so was i n g rea ter

demand. The need f o r gaso l ine and d iese l f u e l , i n turn, has s t imu la ted demand

f o r domestic and f o r e i g n crude o i l and has r e s u l t e d i n increased domestic

product ion. This e f f e c t has been so i n d i r e c t t h a t i t i s no t q u a n t i f i e d here.

Subsequent t o the 1973-1974 o i l embargo Congress enacted a na t i ona l

55 m i l e per hour speed l i m i t . This, p lus s t a t e energy conservat ion programs

which discourage d r i v i ng , can be considered d i s incen t i ves t o the use o f

petroleum.

Waste Disposal and Environmental Problems

The petroleum-producing i n d u s t r y faces several types o f waste d isposal

and environmental problems: f i r s t i n g e t t i n g approval f o r s i t i n g o f

exp lora t ion and product ion a c t i v i t i e s ( f o r example, meeting the requirements

o f t h e Nat ional Environmental P o l i c y Act); second, regu la t i ons a f f e c t d r i l l i n g ,

operat ion, and u l t i m a t e abandonment; f i n a l l y , there are regu la t i ons t h a t a f f e c t

t ranspor ta t i on , r e f i n i n g , marketing, and u l t i m a t e u t i l i z a t i o n . The impact can

be delays, out-of-pocket costs, and increased energy consumption. A recent

study analyz ing 80 e x i s t i n g and p o t e n t i a l f ede ra l and s t a t e regu la t i ons (many

o f the l a t t e r requ i red by fede ra l ac t s ) est imated t h a t t h e i r cost was about

$600 m i l l i o n i n 1965 and rose t o about $6 b i l l i o n i n 1976. (23) Any reduc t i on

o f demand caused by t h i s impact would reduce imports, no t domestic product ion.

However, some product ion has been l o s t , p a r t i c u l a r l y i n the Bakers f ie ld ,

C a l i f o r n i a area. There some b o i l e r s t h a t used t o generate steam f o r i n j e c t i o n

t o enhance o i l recovery have been shut down because of su l f u r d iox ide emission

regu la t ions . I n t h e f i e l d s c l a s s i f i e d as o l d o i l , t h e cos t o f scrubbers i s t oo

h igh r e l a t i v e t o the value o f the o i l and the f i e l d s were shut down. The

recent decontro l o f heavy o i l p r i c e s may solve t h i s problem. E x t r a energy

requ i red f o r p o l l u t i o n abatement i n the o i l i n d u s t r y du r ing 1976 was est imated

a t 500 t r i l l i o n Btu, c lose t o 83 m i l l i o n bb l o f o i l . (23)

These f i g u r e s do not inc lude the e x t r a cos t and gasol ine consumption

brought about by emission c o n t r o l s on cars.

Environmental regu la t i ons are enforced by the Geologic Survey f o r d r i l l i n g

r i g s and p la t fo rms on t h e Outer Cont inenta l Shelf , by t h e Coast Guard f o r a l l

water- re lated t ranspor ta t i on s i t ua t i ons , and by EPA f o r a l l non- t ranspor ta t ion

water cases and a l l f ede ra l a i r cases on land and i n s t a t e waters. I n addi-

t i o n , the s ta tes a lso enforce r u l e s and regu la t ions , some o f which have been

developed a t federal insistence. Since the regulations were not designed as

d i rec t incentives fo r production, the enforcement cost i s not included here.

In the petroleum refining and transportation category, there are three

separate major incentives, a l l connected with transportation. High yie lds

allowed to encourage o i l pipelines are considered a requirement. The value of

the incentive, $5.6 b i l l ion , was calculated from the difference between the

actual yield and a baseline 10% for the period 1921-1951. Funds spent t o

maintain ports and waterways, $6.9 b i l l ion from 1950 t o 1978 are assigned t o

t radi t ional services. Direct construction and operating subsidies fo r tankers,

a disbursement, amounted t o $1.3 b i l l ion during the period 1970-1978. Total

incentives for the petroleum refining and transportation category are $13.8

bi l l ion.

CONCLUSIONS

Petroleum used fo r nontransportation-related res ident ia l and commercial

purposes in 1978 amounted t o 6.4 quadril l ion B t u , about 22% of the energy used

for th i s purpose. For industrial uses i t constituted 26% and 97% fo r transpor-

ta t ion. In addit ion, o i l provided about 17% of the energy used fo r e l e c t r i c i t y

generation. .

The chief incentives and the i r costs are shown i n Table 47. The costs of

environmental controls are n o t included here since t h e i r in tent was neither t o

encourage or discourage production.

TABLE 47.

Incentive Area

Research and Development

Oil Exploration and Production

Geological Survey-data Bureau of Land Manage-

ment-leasing Bureau of Mines-data Stripper well price

incentives Incentives f o r new o i l Economic Regulat r i' 7 Administration a Intangible d r i l l i ng

expensing Percentage depletion

a1 1 owance

Petroleum Refining and Transportation

High yield on pipelines Maintenance of ports

and waterways Subsidies f o r tankers

Tot a1

Summary of Oil Incentives by Type ( in Mill ions of 1978 Dollars)

Disburse- Require- Traditional Nontrad. Market Taxation ment ments Services Services Activity Total

( a ) Includes Strategic Oil Reserve.

REFERENCES - CHAPTER VII

W. Dupre, H. Enzer, S. Miller, and D. Hillieo, Energy Perspectives 2, U.S. Department of the Interior, 1975.

H. F. Williamson, et al., The American Petroleum Industry, The Age of Energy 1899-1959. Northwestern University Press, 1963, pp. 535-566.

J. A. Clark, Three Stars for the Colonel, The Biography of Ernest 0. Thompson, Father of Petroleum Conservation. Random House, New York, 1954, pp. 101-117.

Monthly Energy Review, Federal Energy Administration and Energy Information Administration, DOE, various issues through July, 1979.

"Tax Reform Act of 1976," U.S. Code Congressional and Administrative News. Vol. 9A, West Publishing Company, St. Paul, MN, 1976. - R. B. Mancke, "Tax Incentives." The Failure of U.S. Energy Policy, Columbia University Press, New York, 1974, p. 79.

F. M. Burke, Jr., "Incentives to Develop Natural Resources: Factors Affecting Industries Involved in Natural Resource Exploitation; Oil and Gas; Hard Minerals; Timber." 33rd Annual N.Y.U. Institute on Federal Taxation, 1975.

S. M. Surrey, "Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures." Harvard Law Review, Harvard University - 83:708-709, 1970.

J. H. Shows, "The Oil and Gas Industry and Its Present Tax Treatment." Mississippi Law Journal, University of Mississippi - 45:1140-41, 1974.

G. M. Brannon, "Existing Tax Differentials and Subsidies Relating to the Energy Industries." Studies in Energy Tax Policy, Ed Ballinger, 1974.

"An Analvsis of the Federal Tax Treatment of Oil and Gas and Some Policv ~lternatyves." Senate Committee on Interior and Insular Affairs, ~eriaj NO, 93-29 (92-64), 1974.

L. McDonald, "U.S. Depletion Policy: Some Changes and Likely Effects." Energy Policy - 4(1) :56-62, 1976.

Budget of the United States Government, Special Analysis, 1976-1980.

G. M. Brannon, Energy Taxes and Subsidies. Ballinger, 1974, p. 41.

26 USC 617.

16. J. Cook, "Taking the 'AM' out o f ARAMCO." Forbes - 118:38, 1976.

17. R. C. Bennett, "Tax L e g i s l a t i o n A f f e c t i n g t h e Petroleum Industry . " Proceedings o f the 21st Annual Rocky Mountain Minera l Law I n s t i t u t e , Southwestern Legal Foundation g :346 , 1976.

18. Budget o f the U.S. Government, 1957 and 1977.

19. I n t e r s t a t e Commerce Commission 89 th Annual Report t o Congress.

20. L. A. Shabman, "User Charges f o r I n land Waterways: A Review o f Issues i n P o l i c y and Economic Impact." B u l l e t i n 91, V i r g i n i a Water Resources Research Center, Blacksburg, VA, 1976.

21. O i l and Gas Journal, October 15, 1973, p. 58.

22. O i l and Gas Journal, A p r i l 23, 1973, p. 20.

23. W. J. Sheppard, e t al., "The Economic Impact o f Environmental Regulat ions on the Petroleum Industry--Phase I1 Study." American Petroleum I n s t i t u t e P u b l i c a t i o n 4281, 1976.

VIII. NATURAL GAS ENERGY INCENTIVES

This chapter deals principally with the federal incentives applicable to the transmission and distribution of natural gas from the gathering point to

the consumer. Incentives for production that are closely related to oil

production, such as percentage depletion, were described in Chapter VII. This

chapter focuses on the incentives affecting the pipeline companies and the

residential consumer. As discussed below, the largest incentive, wellhead

price control of natural gas, is now a negative incentive for the producer.

Most of the federal incentives in this area of service can be ascribed to the

organization and workings of a single federal agency, the Federal Energy

Regulatory Commission (FERC)and its predecessor, the Federal Power

Commission (FPC); hence, we have analyzed its expenditures in regulating

natural gas.

Federal incentives are described in the following sections in terms of the relevant historical and economic conditions prevailing at the time the

incentive was implemented. Following the initial section on R&D, the sections

are roughly arranged in a sequence from exploration and production to the

final sale to the consumer.

RESEARCH AND DEVELOPMENT

While federal expenditures for research and development of processes for

the production, transmission, and utilization of synthetic natural gas are considered to be a direct incentive for the increased utilization of coal,

they can also be considered to be indirect federal aid to the natural gas

transmission companies. These companies can expect to profit from the

government's research programs on synthetic fuels that they can transport and

sell to their distributing companies. Research costs for coal gasification

were included in Chapter VI, Coal Energy Incentives. The research dollars

spent by the federl government to increase oil production can reasonab!y be

expected to increase gas production, since gas is often found with oil. The

cost of this research was analyzed in Chapter VII, Oil Energy Incentives.

To compensate f o r the f a c t t h a t gas reserves are being used f a s t e r than

new d iscover ies are being made, t h e gas i n d u s t r y f e e l s t h a t i t s technology

base must be s i g n i f i c a n t l y expanded. To accomplish t h i s , the n a t i o n ' s

na tu ra l gas d i s t r i b u t i o n and t ransmiss ion companies have j o i n e d together t o

form the Gas Research I n s t i t u t e (GRI). G R I i s modeled a f t e r the E l e c t r i c

Power Research I n s t i t u t e (EPRI) and i s funded by a charge passed on t o

consumers. EPRI i s e l i g i b l e t o rece i ve R&D funds from i t s members, who pass

t h e cos t on t o t h e consumer. The FERC annual ly reviews t h e G R I research

program and budget and author izes advance payments by t h e p i p e l i n e companies

i n support o f t h e approved program. Federal au tho r i za t i on o f such R&D

i n s t i t u t e s c o n s t i t u t e an i ncen t i ve f o r increased product ion and consumption o f

na tu ra l gas a t t h e expense o f t h e consumer, n o t the taxpayer. Although t h e

fede ra l government's e f f o r t s t o increase gas product ion by nuclear explos ions

could be considered as a d i r e c t i ncen t i ve t o the increased product ion o f

na tu ra l gas, i n t h i s study programs such as Plowshare are considered a d i r e c t

i n c e n t i v e t o s t imu la te t h e use o f nuclear energy and are counted i n

Chapter I V , Nuclear Energy Incent ives.

EXPLORATION

I n recent years, the na tu ra l gas p i p e l i n e companies have acknowledged

t h e i r cont inu ing dependence on o i l and gas exp lo ra t i on companies. Since

exp lo ra t i on and d r i l l i n g i s a c a p i t a l i n tens i ve business character ized by h igh

cos ts and r i s k s , t h e na tu ra l gas p i p e l i n e companies adopted a p o l i c y o f

advancing gas payments t o d r i l l i n g and exp lo ra t i on companies. This was

intended t o s t imu la te exp lo ra t i on and a s s i s t them i n developing s i t e s where

l a r g e q u a n t i t i e s o f gas are expected t o be found. This can be i n t e r p r e t e d as

an i n d i r e c t i n c e n t i v e f o r an eventual increase i n supply and consumption o f

na tu ra l gas. The FERC has now discont inued t h i s p o l i c y except f o r payments up

t o 30 days i n advance o f de l i ve ry . The cos t o f t h i s i ncen t i ve i s r e l a t e d t o

the i n t e r e s t on advance payments, which was an i n d i r e c t p r i c e increase. This

i n c e n t i v e was smal l and i s n o t q u a n t i f i e d i n t h i s study.

PRODUCTION

Wellhead P r i c e Cont ro ls

I n 1954, i n the case o f P h i l l i p s Petroleum versus the Sta te o f

Wisconsin, e t al., t h e U.S. Supreme Court r u l e d t h a t producers o f na tu ra l gas

were sub jec t t o the same p r i c e regu la t i ons as companies t r a n s m i t t i n g and

d i s t r i b u t i n g na tu ra l gas. The Court r u l e d t h a t

"Regulat ion o f the sales i n i n t e r s t a t e commerce f o r resa le made by a

so-ca l led independent na tu ra l gas producer i s no t e s s e n t i a l l y

d i f f e r e n t from regu la t i on o f such sales when made by an a f f i l i a t e o f

an i n t e r s t a t e p i p e l i n e company. I n both cases, the r a t e s charged may

have a d i r e c t and subs tan t i a l e f f e c t on the p r i c e pa id by t h e

u l t i m a t e consumers. P ro tec t i on o f consumers against e x p l o i t a t i o n a t

the hands o f n a t u r a l gas companies was the pr imary aim o f the Natura l

Gas Act. ,,(2)

The i n t e n t o f the Court appears t o be c lear ; consumers were t o be

pro tec ted from t h e p o s s i b i l i t y o f r a p i d l y r i s i n g f u e l b i l l s once they were

committed t o a n a t u r a l gas system. I t i s f e l t t h a t t h i s assurance t o the

consumer has r e s u l t e d i n increased consumer confidence and u l t i m a t e l y i n

increased consumption o f na tu ra l gas. However, t h i s i ncen t i ve f o r the

consumer became a d i s i n c e n t i v e f o r exp lo ra t i on and product ion once t h e gas

surp lus turned t o a shortage.

P r i o r t o about 1967, there was a surp lus o f na tu ra l gas, and average

p r i c e s o f gas so ld i n t r a s t a t e and t o i n t e r s t a t e p i p e l i n e s were e s s e n t i a l l y t h e

same, w i t h s l i g h t l y h igher p r i c e s f o r i n t e r s t a t e gas. ( 2 ) ~ n t r a s t a t e p r i c e s

f o r new gas began t o increase s l i g h t l y over i n t e r s t a t e p r i c e s s t a r t i n g

i n 1969, w i t h dramatic increases from 1972 t o the present. Gas product ion

peaked i n 1973, decreased an average o f 6% per year through 1975, and has

decreased an average o f 0.7% i n recent years. This decrease, co inc ident w i t h

t h e e f f e c t s o f t h e o i l embargo, con t r i bu ted t o t h e g r e a t l y increased p r i c e s o f

i n t r a s t a t e gas and d e c l i n i n g purchases by i n t e r s t a t e p ipe l i nes . I n 1975, the

FPC took ac t i on t o increase i n t e r s t a t e pr ices ; however, i n t e r s t a t e p i p e l i n e

sales were s t i l l d e c l i n i n g i n t h a t year because o f lower amounts o f gas

discovered.

Regulat ion o f i n t e r s t a t e p r i c e s i s considered as a subsidy or i ncen t i ve

f o r t h e use o f n a t u r a l gas. However, i t has been a d i s i n c e n t i v e t o new

n a t u r a l gas product ion s ince 1969. Because of outstanding contracts, i t d i d

no t show up as a d i s i n c e n t i v e i n t h e average f i gu res u n t i l 1974. The

f o l l o w i n g ana lys is est imates the amount o f t h i s i ncen t i ve through 1978.

Table 48 was constructed from ava i l ab le s t a t i s t i c s s t a r t i n g w i t h 1955,

t h e f i r s t year t h e Supreme Court dec is ion had much e f f e c t . This ana lys is

assumes t h a t a l l i n t e r s t a t e gas cou ld be so ld a t i n t r a s t a t e pr ices, and t h a t

t h e d i f f e r e n c e between i n t e r s t a t e and i n t r a s t a t e p r i ces can be considered t h e

i ncen t i ve f o r promoting product ion o f na tu ra l gas. This p r i c e d i f f e r e n c e

m u l t i p l i e d by t o t a l i n t e r s t a t e p i p e l i n e sales per year g ives an est imate o f

the t o t a l amount o f "subsidy," which was corrected f o r i n f l a t i o n . From 1955

t o 1973 there was a ne t i n c e n t i v e t o t h e producer, bu t dur ing t h e pe r iod

1974-78 i t was a net d i s incen t i ve . Hold ing the wellhead p r i c e below t h e

i n t r a s t a t e l e v e l has been a ne t saving f o r the consumer who i s g e t t i n g

serv ice. It has meant a net cost t o those denied serv ice because o f a l ack o f

gas.

The cost o f wellhead p r i c e c o n t r o l s was assigned t o the requirements

category. I n t h e e a r l y days o f na tu ra l gas i t was ca l cu la ted from t h e h igher

p r i c e received by s e l l i n g t o the i n t e r s t a t e market t imes the volume. I n

recent years t h e average i n t e r s t a t e p r i c e has lagged behind t h a t o f i n t r a s t a t e

gas, producing a negat ive incent ive . The t o t a l n e t i ncen t i ve has amounted t o

a negat ive $1,048 m i l l i o n f o r t h e pe r iod 1955-1978.

Natura l Gas P o l i c y Act

A subs tan t i a l d i r e c t i ncen t i ve t o producers i s the r e l a x a t i o n and

eventual removal o f wel lhead p r i c e c o n t r o l s on na tu ra l gas as prov ided i n t h e

Natura l Gas P o l i c y Act. The Act c l a s s i f i e s na tu ra l 'gas i n t o several

categor ies, based p r i m a r i l y upon t h e cos t o f product ion. Each category i s

allowed a c e r t a i n maximum p r i c e escalated each month by a prescr ibed fo rmula

which inc ludes t h e r a t e o f i n f l a t i o n . As a r e s u l t o f t h i s new p r i c i n g

mechanism, wellhead p r i ces have been al lowed t o r i s e much h igher than under

the prev ious system. This amounts t o a reduc t i on i n a product ion

d is incent ive , o r a ne t i ncen t i ve f o r product ion. Because the Act d i d not

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become e f f e c t i v e u n t i l December, 1978, however, and because o f widespread

confus ion about the var ious prov is ions, i t had minimal impact i n 1978.

Furthermore, any p o s i t i v e impact upon i n t e r s t a t e gas suppl ies was t o some

ex ten t counterbalanced by the extension o f p r i c e c o n t r o l s t o gas product ion

dedicated t o i n t r a s t a t e markets. The o v e r a l l impact o f NPGA on n a t u r a l gas

product ion i n 1978 i s considered t o be too small t o be measured.

R o l l - I n P r i c i n g o f Supplementary Gas Suppl ies

The FPC has t r a d i t i o n a l l y had a p o l i c y o f r e q u i r i n g " r o l l e d - i n " r a t e s on

p i p e l i n e sales. Under t h i s p o l i c y t h e costs o f newly acquired gas supp l ies

are averaged i n w i t h the e x i s t i n g gas supply costs and recovered through a

s i n g l e r a t e s t r u c t u r e app l icab le t o a l l customers of a given class, bo th o l d

and new. (3) The averaging o f p r i ces takes p lace a t a l l l e v e l s (i.e.,

producer t o p i p e l i n e company, pipe1 i n e company t o d i s t r i b u t i o n company,

d i s t r i b u t i o n company t o consumer), w i t h the r e s u l t t h a t the p r i c e p a i d by the

new consumer does no t completely r e f l e c t t h e incremental p r i c e o f t h e new

product ion. Ro l l ed - in p r i c i n g encourages p i p e l i n e s and d i s t r i b u t o r s t o s e l l

gas a t l ess than the incremental value o f producing and t r a n s p o r t i n g it,

r e s u l t i n g i n a h igher demand f o r na tu ra l gas than would be the case i f new

purchasers had t o pay p r i c e s based o n l y on t h e ac tua l cos t o f producing and

d i s t r i b u t i n g new gas. This i s a d i r e c t i ncen t i ve f o r na tu ra l gas product ion,

use and product ion o f syn the t i c na tu ra l gas, and impor ta t ion o f l i q u i f i e d

n a t u r a l gas (LNG). (Even w i t h wellhead p r i c e cont ro ls , the impact on domestic

producers a lso has been favorab le s ince wel lhead p r i c e s have been a l lowed t o

r i s e ) . ( a ) This i ncen t i ve cou ld no t be q u a n t i f i e d s ince e l a s t i c i t i e s o f

demand f o r e x i s t i n g and new customers were n o t ava i lab le .

The NGPA requ i res incremental p r i c i n g o f c e r t a i n categor ies o f h igh cost

n a t u r a l gas f o r use i n i n d u s t r i a l b o i l e r s , and u l t i m a t e l y f o r o ther i n d u s t r i a l

uses as wel l . Once the incremental p r i c e o f na tu ra l gas r i s e s t o the l e v e l o f

a s u b s t i t u t e f u e l ( e i t h e r No.' 2 f u e l o i l o r No. 6 f u e l o i l ) , then a d d i t i o n a l

cos t increases are r o l l e d i n t o the r a t e s o f other customers. Most o f these

(a) I n some recent cases, incremental p r i c i n g o f imported LNG has been adopted by t h e Commission, however, i t has no t y e t been app l ied t o domest ica l l y produced gas.

provisions, which are yet to be finalized, will take effect in November 1979,

with others to follow at a later date. Thus incremental pricing had no impact through 1978, the period of this study.

Industry Purchases of Intrastate Gas Transmitted in Interstate Pipelines

Due to the shortage of natural gas in recent years, in 1975 the FPC

relaxed its policy of prohibiting transportation of intrastate gas in

interstate pipelines in order to make more gas available to industrial users during periods of low supply. FERC Order 533 authorizes interstate pipelines to transport gas purchased intrastate by high-priority industrial users. ( 4 )

Title I11 of the NGPA allows FERC to authorize interstate pipelines to

transport gas on the behalf of intrastate pipelines or local distribution

companies, or to authorize intrastate pipelines to transport gas on behalf of

the others. The authorization may be for a two year period with a two year

extension.

This policy acts as a direct incentive for the utilization of natural gas in that industrial users in nonproducing states are able to receive gas

through the interstate pipeline system. It is also an incentive for producers

of gas not committed to the interstate system.

Interstate Pipeline Purchase of Intrastate Gas

FERC procedure 2.68 allows interstate pipeline companies and distribution

companies to buy gas from intrastate gas companies (not producers) at

unregulated prices for 60 day periods, subject to FERC approval. This acts as

an incentive to production (or avoids the disincentive of wellhead price control), but the volumes sold have been small and hence the incentive is not quantified here. The NGPA allows the President to authorize such purchases

for up to four months under a declared emergency. This provision has not yet been utilized.

TRANSMISSION

Natural Gas Act of 1938

The gas industry began marketing manufactured gas in this country in 1816. The first corporation organized to distribute natural gas was in

Fredonia, New York, i n 1858. However, the technology t o t ranspor t n a t u r a l gas

economical ly and e f f i c i e n t l y from t h e producing southwest s ta tes t o l a r g e

p a r t s o f the count ry was not developed u n t i l the l a t e 1920s.

The gas i n d u s t r y was the second i n d u s t r y t o be designated a p u b l i c

u t i l i t y , a f t e r the water supply industry . A p u b l i c u t i l i t y i s an i n d u s t r y

t h a t fu rn ishes what are genera l l y considered t o be essen t i a l serv ices t o l a r g e

p a r t s o f t h e populat ion. The d e f i n i t i o n and concept o f a p u b l i c u t i l i t y was

der ived from e a r l y common law o f England. E a r l y Eng l ish cour ts regu la ted

c e r t a i n occupations "a f fec ted w i t h a p u b l i c i n te res t , " r e q u i r i n g t h a t t hey

serve a l l who apply w i t h i n the f ranch ise area

serve t h e maximum requirements o f a customer

prov ide safe and adequate serv ice

prevent u n j u s t d i s c r i m i n a t i o n

charge a reasonable p r i c e f o r serv ice rendered.

As the n a t u r a l gas i n d u s t r y requ i red the investment o f l a r g e sums o f

c a p i t a l over an extended period, i t was n a t u r a l f o r t h e gas companies t o

evolve as l a r g e monopolies, each able t o serve wide geographic areas w i thou t

t h e i n f l uence o f compet i t ion from o the r gas t ransmiss ion companies. Two o r

more such u t i l i t i e s serv ing the same area would r e s u l t i n c o s t l y and

unnecessary d u p l i c a t i o n o f f a c i l i t i e s .

By d e f i n i n g an i n d u s t r y as a " p u b l i c u t i l i t y , " bene f i t s are r e a l i z e d by

bo th the u t i l i t y and t h e popu la t ion served. The p r i n c i p a l o b l i g a t i o n s o f a

company as a p u b l i c u t i l i t y are: t o serve a l l who request serv ice i f i t can

be reasonably suppl ied, t o serve i t s customers w i thout unreasonable

d i sc r im ina t i on , t o se t ra tes which have been judged reasonable by r e g u l a t o r y

a u t h o r i t i e s and have customer acceptance, and t o main ta in adequate and sa fe

f a c i l i t i e s . I n re tu rn , the companies designated as p u b l i c u t i l i t i e s a re

compensated w i t h t h e f o l l o w i n g bene f i t s : t h e oppor tun i t y t o earn a f a i r

r e t u r n upon the value o f i t s p rope r t y used and usefu l i n p u b l i c serv ice,

f ranch ise r i g h t s i n i t s area o f operat ion, exerc ise o f eminent domain, and use

o f p u b l i c ways. ( 2 )

The n a t u r a l gas companies were i n i t i a l l y regu la ted by s t a t e and l o c a l

agencies. However, w i t h techno log ica l advances i n p i p e l i n e m a t e r i a l s and

j o i n i n g , p i p e l i n e companies experienced tremendous growth between 1926

and 1932, expanding r a p i d l y i n t o t h e i n t e r s t a t e market. By t h e e a r l y 1930s,

concerns were r a i s e d t h a t no r e g u l a t o r y body had i n f l uence over gas produced

i n one s t a t e and t ranspor ted by a company f o r r e s a l e i n another s ta te . (a )

I n 1938, t h e Natura l Gas Act was passed, g i v i n g t h e FPC r e g u l a t o r y powers over

t ransmiss ion companies opera t ing i n i n t e r s t a t e markets.

E s s e n t i a l l y , t h e Federal Government a l lows the i n t e r s t a t e n a t u r a l gas

t ransmiss ion companies t o operate i n a monopo l is t i c manner. Because o f t h e

tremendous amounts o f money which must be spent on equipment and p lan ts when

e s t a b l i s h i n g gas t ransmiss ion l i n e s , i t i s b e n e f i c i a l t o t he company t o be

assured o f a market. The FPC requ i res the company t o ob ta in a " c e r t i f i c a t e o f

convenience and necessi ty" be fore i t gran ts a u t h o r i t y t o t h a t company t o b u i l d

and operate a new n a t u r a l gas p i p e l i n e f a c i l i t y , t o extend an e x i s t i n g n a t u r a l

gas f a c i l i t y , o r t o s e l l gas i n i n t e r s t a t e commerce. ( 5 ) The n a t u r a l gas

t ransmiss ion company i s respons ib le f o r i n v e s t i g a t i n g t h e demand f o r i t s

product over a s p e c i f i e d pe r i od o f time, u s u a l l y 20 years, and t o demonstrate

t h a t i t can p rov ide t h i s l e v e l o f se rv i ce over t he same t ime frame. The

customers are t h e r e f o r e assured t h a t once they are hooked i n t o t h a t company's

p ipe l i ne , t hey w i l l r ece i ve t h e amount o f gas t h a t has been p red i c ted t o be

needed w i t h i n a c e r t a i n per iod. Thus, by government r e g u l a t i o n o f p r i c e and

supply, t h e consumer's conf idence i n gas supply i s kep t h igh w h i l e p r i c e s are

h e l d low, r e s u l t i n g i n increased use o f n a t u r a l gas.

I n r e t u r n f o r the serv ices rendered t o t he p u b l i c by p u b l i c u t i l i t i e s ,

t h e u t i l t i e s are gene ra l l y granted t h e r i g h t o f eminent domain o r use o f

p u b l i c r i g h t o f way. The Natura l Gas Act o f 1938 extended t h i s r i g h t t o

n a t u r a l gas t ransmiss ion companies by p r o v i d i n g t h a t any holder o f a

c e r t i f i c a t i o n o f p u b l i c convenience and necess i t y may acqui re r igh t -o f -way

and/or o the r p r o p e r t y requ i red by exe rc i s i ng t h e r i g h t o f eminent domain.

(a ) These concerns arose over the waste o f gas, t he des i re o f consumers fo r cheap gas, t h e monopo l is t i c c o n t r o l o f p i p e l i n e s by producers and gas u t i l i t y h o l d i n g companies, and d i s c r i m i n a t o r y r a t e s charged d i s t r i b u t i o n comoanies.

This r i g h t may be exerc ised i n f ede ra l d i s t r i c t cour ts o r i n s t a t e cour ts .

This r i g h t has obv ious ly increased t h e consumption and u t i l i z a t i o n o f na tu ra l

gas by g r e a t l y reducing the t ime and expense t h a t would have t o be spent i n

nego t i a t i ng f o r land r i g h t s w i t h p r i v a t e o r i n d i v i d u a l land owners.

The u t i l i t y s ta tus granted t o i n t e r s t a t e transmission companies as a

r e s u l t o f t h e Natura l Gas Act was a boon t o producers s ince t h e p i p e l i n e s

cou ld be c a p i t a l i z e d a t a h igh debt- to-equi ty r a t i o by issuance o f new stocks

and bonds and d i d no t produce a d r a i n on the cash f l o w o f t h e o i l companies,

l a r g e and smal l , t ' l a t were the producers. A t the t ime the re was surp lus

product ion capac i ty and by f a c i l i t a t i n g access t o markets, product ion from

both o i l f i e l d s and nonassociated gas f i e l d s was encouraged. This i s one o f

t h e p r i n c i p a l reasons t h a t the cos t o f t h e FERC's gas r e g u l a t i o n a c t i v i t i e s

can be counted as an incent ive .

Overa l l Est imate of_-t_h_e_ Cost o f Gas Regulatory Agencies

The p r i n c i p a l f ede ra l incent ives t o the na tu ra l gas t ransmiss ion and

d i s t r i b u t i o n companies have occurred through t h e establ ishment and ac t ions o f

the FPC and FERC. The passage of the Natura l Gas Act i n 1938 charged the FPC

w i t h r e g u l a t i n g t h e i n t e r s t a t e aspects o f t h e na tu ra l gas i ndus t r i es .

Add i t i ona l r e s p o n s i b i l i t i e s o f the commission are the r e g u l a t i o n o f t h e

i n t e r s t a t e t ransmiss ion o f e l e c t r i c a l power and o i l p ipe l ines .

The amount o f money spent by the Federal Government f o r t h i s i n c e n t i v e t o

t h e na tu ra l gas t ransmiss ion and d i s t r i b u t i o n companies, was est imated from

the Appendix t o the Federal Budget. Costs est imated i n t h i s manner inc luded

t h e costs o f admini s t r a t i o n , personnel, and equipment t h a t were i nvo l ved i n

r e g u l a t i o n o f the n a t u r a l gas transmission and d i s t r i b u t i o n i n d u s t r i e s by t h e

commission. The money a l l oca ted t o t h e FPC f o r t h i s purpose was recorded f o r

each year from 1949 t o 1977, and t o FERC f o r 1978. From 1938 t o 1948, the

a l l o c a t i o n o f FPC funds f o r gas r e g u l a t i o n (as opposed t o e l e c t r i c a l

regu la t i on ) was no t recorded i n the Appendix t o the Federal Budget.

Discussion w i t h FERC ind i ca ted t h a t a f u r t h e r breakdown f o r those years was

no t ava i lab le . An est imated 20% o f these costs, however, were assumed i n

l i g h t o f t h e t rends i n fund ing f o r t h e two func t i ons i n l a t e r years.

Table 49 lists the amount appropriated to the FPC (and FERC) for regulation of the natural gas transmission and distribution companies in constant 1978 dollars. (Note that regulation of producers is considered a negative

incentive starting in 1969.)

Pipeline Safety Programs

The Department of Transportation has the responsibility for carrying out the natural gas pipeline safety program authorized under the Natural Gas

Pipeline Safety Act of 1968. The minimum safety standards for natural gas

pipelines were also established by this act. Through charging a federal

agency with this reponsibility the Federal Government has, in effect, provided a direct incentive for the natural gas transmission and distribution companies

by helping to provide the personnel, equipment, and activities required to carry out a natural gas pipeline safety program. The cost of this incentive

has not been large and therefore is not included. (In 1976, the Materials

Transportation Bureau of DOT spent $1.86 million altogether and the National

Transportation Safety Board, an independent agency, spent $2.39 million

investigating surface accidents and license appeals for fuels and nonfuels.)

The incentives in the transmission of natural gas are dominated by the costs of administering the industry by the Federal Energy Regulatory

Commission. The costs of pipeline tariff administration were considered as

positive in all years. However, the costs for regulation of interstate

producers were considered negative starting in the year new contract prices

were lower than those for intrastate gas. The total net incentive for the

period 1938-1978 amounts to $248 mil 1 ion.

UTILIZATION

Regulation of Imported Liquefied Natural Gas

The policy of the government on the regulation of LNG seems presently to

be in a state of flux and definition. The first major proceeding before the

FPC involving proposals for long-term LNG imports and construction of

substantial terminal, regasification, and transportation facilities was Distrigas Corporation, Opinion No. 613, issued in March, 1972. (4) This

F i s c a l Year

1978 1977 TO

TABLE 49. Est imated Net I ncen t i ve Due t o FERC Regulat ions o f the Natura l Gas P ipe l i nes and I n t e r s t a t e Producers

1949 1938 t o 1948

To ta l

Regulat ion o f I n t e r s t a t e Producers

Regulat ion o f Pipe1 ines

Net ~ n c e n t i v e s ( ~ ) 1978 $

Source: Appendix t o t h e Budget o f the Uni ted States Government. (a ) 1969-78 t h e cos t o f r e g u l a t i o n o f i n t e r s t a t e producers was taken as a '

negat ive incent ive. The f i n a l i ncen t i ve a lso inc ludes cost o f r e g u l a t i o n o f p ipe l ines , other gas programs, and a p ro r a t a share o f general expenses, from Appendices t o t h e Federal Budget.

opinion involved the regulation of imported LNG to be used solely in intrastate markets where the primary use was anticipated to be peak-sharing in

electric generation. The FPC ruled not to regulate such gas, stating,

We are, in effect, inviting venture capital into the development

of LNG import projects and, to the extent that these projects are

intrastate in nature, we are expressing our intention not to regulate

them. We are firmly of the opinion that the exemption of these projects from the federal regulatory umbrella will make them more

attractive to private investors and lead to more gas at a lower price to the consumer, and effect this result sooner than if we controlled

every detail and decision related thereto.

However, the FPC decided to regulate LNG which would be imported for

interstate transmission and sale and intended for base load purposes in a

proceeding brought by El Paso-Columbia Corporation. In this proceeding,

the FPC not only decided to regulate LNG crossing state borders, but stated

that the LNG would have to be incrementally priced by pipeline purchasers.

This ruling has recently been reversed, allowing roll-in pricing.

With the establishment of the Department of Energy in 1977, the regulation of imported natural gas was divided between FERC and the Economic

Regulatory Administration (ERA). Authority for siting of facilities and

pricing to customers remains with FERC. All other issues, including

certification to import and the price paid for the gas, are within the

province of ERA. At this point, it appears that cost of the gas is the major

determinant of whether or not an import certificate will be granted. In

approving tariffs, FERC has recently tended to favor some degree of incremental pricing to those customers who stand to receive the greatest benefit from the gas. These policies will become better defined as additional

decisions are handed down.

The status of imports of LNG is neither an incentive or disincentive for

production since LNG is more expensive than domestic production at unregulated

prices.

P r i o r i t i e s Es tab l ished on Gas Purchased and Transmitted i n I n t e r s t a t e Systems

A recent r u l i n g by the FPC i n response t o the cu r ren t shortages o f

na tu ra l gas overrode a l l t h e cont rac ts p rev ious l y es tab l ished between

producers, t ransmiss ion companies, and d i s t r i b u t i n g companies. FPC r u l e d i n

Order 467 i n January, 1973, t h a t n a t u r a l gas should be d i rec ted on a p r i o r i t y

basis f o r purposes of home heat ing and consumption. Commercial establ ishments

were g iven a h igher p r i o r i t y than i n d u s t r i a l companies. The NGPA provides t h e

President w i t h a d d i t i o n a l a l l o c a t i o n a u t h o r i t y t o be used i n an emergency

s i t u a t i o n .

Whi le p r i o r i t i z i n g consumer groups f o r a l l o c a t i n g the supply o f n a t u r a l

gas does no t increase the amount produced o r u t i l i z e d , i t does increase and

s t a b i l i z e the amount o f na tu ra l gas ava i l ab le f o r home heat ing and o ther

uses. It can t h e r e f o r e be considered t o be a d i r e c t f ede ra l i n c e n t i v e toward

t h a t end.

The Clean A i r Act o f 1970

The Clean A i r Ac t Amendments passed i n 1970 e f f e c t i v e l y l i m i t e d t h e

amounts o f p o l l u t a n t s t h a t cou ld be re leased i n t o t h e environment from var ious

processes. Many power p lan ts and i n d u s t r i a l users had been burn ing coa l o r

o ther low-cost, h igh p o l l u t a n t - p o t e n t i a l f ue l s ; however, due t o enactment o f

these amendments, many p lan ts converted t o use o f gas as a clean, e f f i c i e n t

f u e l . Passage o f these amendments can the re fo re be considered as i n d i r e c t

f ede ra l i ncen t i ve t o i n d u s t r i e s t o use n a t u r a l gas, thereby increas ing t h e

product ion and u t i l i z a t i o n o f t h i s f u e l . The e f f e c t has been small due t o t h e

cu r ta i lmen ts o f i n d u s t r i a l use and the passage o f t h e Act c i t e d immediately

below.

The Energy Supply and Environmental Coordinat ion Act o f 1974

DOE i s mandated t o p r o h i b i t coa l burn ing e l e c t r i c generat ing p l a n t s from

swi tch ing t o gas o r o i l , which i t does through i s s u i n g " p r o h i b i t i o n orders."

DOE can issue p r o h i b i t i o n orders o r f o r b i d the use o f o i l o r gas i n power

p l a n t s now us ing i t i f a swi tch t o coa l i s f e a s i b l e i n terms o f p l a n t design.

This law, o f course, i s intended t o be a d i s i n c e n t i v e f o r na tu ra l gas

u t i l i z a t i o n bu t has no impact on product ion s ince gas i s i n shor t supply.

(Recently, DOE has encouraged the opposite, namely, rep lac ing imported f u e l

o i l used i n power p lan ts w i t h na tu ra l gas.)

WASTE DISPOSAL

Althogh the n a t u r a l gas i ndus t r y does no t have t h e severe waste disposal

requirements o f t h e nuclear and coal i ndus t r i es , i t does have a few due t o t h e

presence o f poisonous and cor ros ive hydrogen s u l f i d e i n c e r t a i n na tu ra l gas

suppl ies. This so-ca l led sour gas i s found p r i m a r i l y i n Texas, F lo r i da ,

Alabama, M i s s i s s i p p i , New Mexico, and Wyoming. To reduce cor ros ion problems,

the hydrogen s u l f i d e i s scrubbed from the gas by an amine o r caus t i c

so lu t i on . Amine scrubbing i s the pr imary process used today. The amine i s

regenerated by heat ing i t t o d r i v e o f f hydrogen s u l f i d e as a concentrated gas

stream. Because o f i t s poisonous nature, t h e re leased hydrogen s u l f i d e i s

e i t h e r f l a r e d o r converted t o elemental s u l f u r i n a Claus o r s i m i l a r s u l f u r

recovery p lan t . Since f l a r i n g releases s u l f u r d iox ide t o the atmosphere,

p o l l u t i o n regu la t i ons p lace s t r i c t l i m i t s on f l a r i n g . The regu la t i ons are

p a r t o f S ta te Implementation Plants (SIP) f i l e d under the requirements o f the

Clean A i r Act as amended i n 1970. The SIP requirements are designed t o b r i n g

each s t a t e ' s ambient a i r q u a l i t y i n t o l i n e w i t h the s t a t e ' s standards, which

must meet o r exceed t h e federa l ambient standards. Each s t a t e has a s l i g h t l y

d i f f e r e n t approach b u t i n p r a c t i c e f l a r i n g i s forb idden when the s u l f u r i npu t

i s 2 t o 5 tons per day, depending on t h e s ta te . ( F l a r i n g i s forb idden i n

F lo r ida . ) Since a Claus p l a n t o f 20 long tons per day i s economical because

o f the value o f t h e recovered s u l f u r , the pena l t y o f these regu la t i ons on

producers i s smal l .

F lo r i da , Oklahoma, and New Mexico have regu la t i ons r e q u i r i n g t h a t new

Claus p lan ts be desinged t o abate about 99% o f the p o t e n t i a l SO2. This i s

t o be compared w i t h t h e 94 t o 96% reduct ion obtained i n the standard 2 o r

3 stage Claus p lan ts . I n p r a c t i c e t h i s doubles the p l a n t cos t but increases

t h e s u l f u r recovered by on l y a few percent. The incremental cos t f o r t h e t a i l

gas cleanup i s a d i s i n c e n t i v e f o r gas product ion, but, s ince o n l y one p l a n t

has been b u i l t us ing t h i s technology, t h e costs have no t been ca lcu la ted .

The Federal Government has the a u t h o r i t y t o c o n t r o l emissions from new

sources i n a l l s ta tes . To date, New Source Performance Standards have n o t

been issued.

I Federal environmental regu la t i ons o f gas product ion such as appropr ia te

d isposal o f d r i l l i n g mud, l i m i t s on discharge o f o i l y water coproduced, and

abandonment procedures, are discussed i n Chapter V I I , O i l Energy Incent ives.

CONCLUSIONS

Natura l gas i s a major source o f U.S. energy suppl ies. I n 1978, t h e

r e s i d e n t i a l and commerci a1 sectors consumed 7.68 q u a d r i l l i o n Btu, o r 38.8% o f

the t o t a l 19.80 q u a d r i l l i o n B t u ' s o f na tu ra l gas consumption. The consumption

by other sectors was; i n d u s t r i a l , 8.28 quads (41.8%); t ranspor ta t ion , 0.54

quads (2.7%); and e l e c t r i c u t i l i t i e s , 3.30 quads (16.7%).

The p r i n c i p a l incent ives r e l a t e d t o na tu ra l gas transmission and

product ion are 1) a f r a c t i o n o f t h e cos t o f running t h e Federal Power

Commission, approximately $248 m i l 1 i o n s ince 1938, and 2) the i ncen t i ve t o t h e

producer s e l l i n g i n t e r s t a t e na tu ra l gas due t o wellhead p r i c e cont ro ls , which

amounted t o a negat ive $1,048 m i l l i o n from 1955-1978. (Since 1969 t h e

wellhead con t ro l s have been a d i s i n c e n t i v e t o the producer. Because o f t h e

e f f e c t o f outstanding i n t r a s t a t e cont rac ts a t lower p r i ces than i n t e r s t a t e

cont rac ts , on average, t h e wellhead p r i c e c o n t r o l s d i d no t become a n e t

d i s i n c e n t i v e u n t i l 1974.) The expenditures shown i n Table 50 can be

considered as i ncen t i ves prov ided by t h e Federal Government t o t h e development

o f the na tu ra l gas indus t ry .

TABLE 50. Summary o f Natura l Gas Incent ives by Type ( i n M i l l ions o f 1978 D o l l a r s )

Disburse- Require- T r a d i t i o n a l Nontrad. Market I ncen t i ve Area Taxat ion ment ments Services Services A c t i v i t y To ta l

From O i l Chapter

Geological Survey-data 289

Bureau o f Land Management l eas ing

Bureau o f Mines-data 9

I n t a n g i b l e d r i l l i n g expensing 4,648

Percentage dep le t i on a1 1 owance 10,269

Wellhead P r i ce Cont ro ls -1,048

Federal Power Commission Regu 1 a t i on

- - -- Total 14,917 0 -800 0 298 155 14,570

REFERENCES - CHAPTER V I I I

1. 0. J. Bowen, "Gas Research I n s t i t u t e Formed by Natura l Gas Industry. ' ' American Gas Assoc ia t ion Research and Engineer ing Q u a r t e r l y Review, Volume 2, No. 3, November 1976.

2. Nat iona l Gas Survey. Volume 11, Federal Power Commission, Washington, D.C., 1973.

3. Gas Rate Fundamentals. American Gas Associat ion, Rate Committee, 420 Lexington Avenue, New York, 17, NY, 1960.

4. S. G. Breyer and P. 0. Macovoy, Energy Regulat ion by t h e Federal Power Commission. The Brookings I n s t i t u t i o n , Washington, D.C., 1974.

5. S t a f f ana lys is prepared a t t he request o f Henry M. Jackson, Chairman, Committee on I n t e r i o r and I n s u l a r A f f a i r s , Un i ted States Senate, "Natura l Gas P o l i c y Issues and Options," S e r i a l No. 93-20 (12-55), 1973.

6. A P re l im ina ry Eva lua t ion o f t h e Cost o f Natura l Gas Deregulat ion. FPC Intra-Agency Task Force, p. 21, January 1975.

7. U.S. Department o f Energy, "Monthly Energy Review," J u l y 1979.

IX. ELECTRICITY

INTRODUCTION

In this chapter, electricity is analyzed as one of six energy forms. It

is distinguished from other energy forms (oil, natural gas, nuclear, coal,

hydropower, other (geothermal), and solar), because electricity refers to the

electric current supplied as a public utility for lighting, heating, etc.

Public utilities and electricity go hand in hand, or as Gerald Brannon says:

"By public utilities in the energy field we mean principally com-

panies concerned with the generation and distribution of electricity

or with the distribution of natural gas. Practically speaking, these

firms are not concerned with the availability of resources but with

marketing energy. It will be helpful to think of the generation of

electricity as simply a technique for marketing the energy content of

coal, oil, and uranium. (The hydro-generation of electricity is a

very small element of the total energy picture.)" (1)

This chapter will analyze federal incentives to encourage public utility gen-

eration and transmission of electricity. Federal actions taken to support

electricity are primarily those actions which encourage the transmission of

electric power. In cases where another energy form is used to supply electri-

city for transmission, federal actions to encourage public utility construction

of facilities to convert various energy forms into electricity are included as

actions whose primary purposes are to assist in the distribution of electric

power.

ORGANIZATIONS

Thirteen major federal energy-related organizations have some involvement

with public utility distribution of electricity as an energy form. Major

energy-related actions toward electricity are conducted by the following twelve

organizations.

Department o f A g r i c u l t u r e (DOA)

The Rural E l e c t r i f i c a t i o n Admin is t ra t ion (REA)

Department o f Energy (DOE)

The Alaska Power Admin is t ra t ion (APA)

The Bonnevi 11 e Power Admin is t ra t ion (BPA)

The Southeastern Power Admin is t ra t ion (SEPA)

The Southwestern Power Admin is t ra t ion (SWPA)

The Western Area Power Admin is t ra t ion (WAPA)

The Economic Regulatory Admin is t ra t ion (ERA)

The Federal Energy Regul a t o r v Commi s s i on (FERC)

The Energy In fo rmat ion Admin is t ra t ion (EIA)

Department o f the Treasurey (DotT)

The I n t e r n a l Revenue Serv ice (IRS)

Independent Organizat ions

The Secu r i t i es and Exchange Commission (SEC)

* The Tennessee Va l l ey A u t h o r i t y (TVA)

The organizat ions t h a t have had the l a r g e s t d i r e c t impact on the d o l l a r incen

t i v e f igures presented i n t h i s chapter are t h e REA, TVA, BPA, SWPA, and FERC.

The act ions o f the SEC and IRS i n admin is te r ing tax and investment i ncen t i ves

c o n s t i t u t e t h e l a r g e s t i n d i r e c t impacts.

TYPES OF ACTIONS

Energy-related act ions toward e l e c t r i c i t y and est imates o f t h e i r costs t o

t h e Federal Government w i l l be described according t o t h e types o f ac t i ons used

by these organizat ions. There are n ine d i s t i n c t types of ac t ions i d e n t i f i e d i n

t h e t h e o r e t i c a l chapter, bu t n o t a l l o f them are used as major ac t ions t o

encourage the d i s t r i b u t i o n o f e l e c t r i c i t y . The types of f ede ra l ac t ions

a f f e c t i n g the e l e c t r i c energy market are:

exhortation organizational creation and prohibition

taxation traditional government services

requirements market activity.

There is no example for exhortation as a major energy-related action, although this is an important minor action sometimes used in conjunction with other

examples of major actions. For example, during the 1930's both REA and TVA

conducted extensive public relations campaigns with the goal of demonstrating

the advantages of residential and agricultural uses of electricity for those

residing in rural areas and small towns. This spending for publicity or the use of exhortation was part of operations and maintenance expenditures and

small in comparison to the cost of supporting power generating facilities and transmission equipment for the distribution of electric power. Hence, exhorta-

tion was a minor action conducted along with the major action of market acti-

vity. The remainder of this chapter will describe only those types of actions

which have been used to encourage the distribution of electricity. Estimates

of costs to the federal government for actions conducted to encourage use of

electricity will be described by each type of action.

Expenditures for Electricity as an Energy Form

An analysis of the federal expenditures for electric power requires a

careful separation of the costs to the Federal Government to develop hydropower

resources and other costs to support the distribution of electricity. The

method used will distinguish between two major types of utility companies. One type is the investor owned private utility. Another type is the government

sponsored utility which exists in several different organizational forms.

Types of utilities:

A. Private investor owned utility

B. Government sponsored utility

1. Federal power authorities

2. State power authorities

3. Municipally owned electric utilities 4. Electric co-operatives.

Investor owned utilities distribute about 77% of all electricity used in the U.S., while government sponsored utilities distribute the remaining 23%. The distinction between type of utility is important because government sponsored utilities receive special treatment by the Federal Government not extended to

investor owned utilities. This is particularly true in the area of taxation.

The method of analysis emphasizes federal actions directed at public utilities which encourage growth in the availability of electricity to consumers. Emphasis is placed as public utilities, because the distribution of electricity has traditionally been the principal concern of public utilities.

TAXATION

For the utility industry, there are special features of the federal taxation type of action which affects investor owned and government sponsored

utilities differently. These special features are:

1. Investment tax credits

2. Liberalized depreciation which allows for:

a. accelerated depreciation on plant and equipment

b. tax deferrals on capital expenses

3. Absence of tax on the income of publicly owned utilities.

When first enacted by the Internal Revenue Act of 1962, the investment tax

credit allowed electric utility companies a credit against federal income tax

of 3% of investment in qualified property. This investment tax credit provi-

sion of the 1962 Act was suspended October, 1966, but reinstated effective

March, 1967. It was repealed in April, 1969 for property constructed or

acquired after that date, but it was restored in the Revenue Act of 1971 as the

Job Development Investment Credit. The Act of 1971 increased the 3% credit

to 4%. The credit applies to the construction, reconstruction, or erection of

qualifying property completed after August, 1971. This credit was revised

again in the "Tax Reduction Act of 1975" by increasing the investment tax

credit allowable for electric utilities from 4% to 10%.

The use of investment tax credi ts by investor-owned u t i l i t i e s i s summa-

rized in Table 51 according t o the method of accounting employed, 1) flow

through or 2 ) deferred. The amounts l i s ted by the flow through method of

accounting indicts savings passed on t o the customer. The amounts by deffered

accounting do not r e su l t i n a r a t e reduction from savings realized through use

of investment tax credi t . No sui table method was formed t o convert the data t o 1978 dollars, so the current dollar f igures l i s ted in Table 51 are low by a

factor of roughly 1.2 t o 1.5.

TABLE 51. Summary of Investment Tax Credits Generated and Utilized During the Years 1962 through 197 by Method of Accounting. (Current ~ o l l a r s ) ( 2 '3

Method of Credits Credits Utilized Number of Accounting Generated Amount Percent Companies

Fl ow-through 860,124,000 718,393,000 23 68

Deferred 3,451,585,000 3,060,622,000 77 177

Not stated 9,070,000 61,000 4

Tot a1 4,370,816,000 3,779,676,000 100 249

For purposes of estimating amount of savings t o investor-owned u t i l i t i e s

from federal tax credi ts "generated" savings from tax credi t will be used since

t h i s column re fe rs t o the amount l ike ly t o be u t i l i zed , considering tha t the

provision for applying credi ts not currently used can be transferred t o expenses e i ther back three years or forward seven years. Hence, the tax c red i t

incentive amounts to $4,370.82 mil 1 ion current dollars.

Liberalized Depreciations

Since 1954 the u t i l i t y industry has had the option of using l iberal ized

depreciation in computing the i r tax l i a b i l i t y . They can choose t o adopt

accelerated depreciation for writing off expenses which i s approximately twice

the ra te of depreciation tha t i s possible when using the s t ra igh t l ine method

of depreciating expenses. For accounting purposes, however, u t i l i t i e s main-

ta in records on the actual depreciation which i s 50 percent of the accelerated

depreciation. Thus , additional deductions from the use of accelerated depre-

ciation are reported as deferred taxes. If the assumption tha t future plant

main ta in records on the ac tua l deprec ia t ion which i s 50 percent o f the acceler-

ated depreciat ion. Thus, a d d i t i o n a l deductions from t h e use o f accelerated

deprec ia t ion are repor ted as deferred taxes. I f the assumption t h a t f u t l r r e

p l a n t investment w i l l cont inue t o grow, these deferred taxes are p e r p e t u a l l y

re ta ined by u t i l i t i e s . Under cond i t ions o f growth, i t i s u n l i k e l y t h a t

deferred taxes w i l l be p a i d out as taxes. I n a few cases, u t i l i t y investment

du r ing the depression o f the 1930's has been analyzed t o determine what would

happen t o deferred taxes dur ing a severe economic slump. The r e s u l t s o f t h i s

ana lys is showed t h a t the gross p l a n t o f New England Telephone and Telegraph

cont inued t o grow throughout t h e depression, w i t h t h e except ion o f two years.

O f course, more s tud ies would have t o be done t o conc lus i ve l y show t h a t

de fer red taxes would no t be a f f e c t e d dur ing a severe economic slump. Assuming

a hea l thy economy, the f o l l o w i n g desc r ip t i on o f deferred t a x i s accurate.

It i s t r u e t h a t f o r a s i n g l e u n i t o f p l a n t sub jec t t o l i b e r a l i z e d

deprec ia t ion f o r t ax purposes, any lower income taxes r e s u l t i n g f rom

higher deprec ia t ion deductions i n the e a r l y years o f l i f e would be

o f f s e t by h igher income taxes i n the l a t e r years o f l i f e . However,

i n the case o f a t o t a l u t i l i t y proper ty , annual deprec ia t ion charges

f o r t ax purposes under t h e l i b e r a l i z e d methods w i l l never be lower

than the s t r a i g h t - l i n e charges i n l a t e r years as long as d o l l a r s o f

add i t ions are a t l e a s t equal t o d o l l a r s o f ret i rements. Therefore,

f o r a growing u t i l i t y , o r even a s t a t i c u t i l i t y , the t a x reduct ions

from l i b e r a l i z e d deprec ia t ion r e s u l t n o t i n t a x de fer ra ls , b u t i n

permanent t ax savings. ( 3 )

Thus, f o r purposes o f t h i s r e p o r t t ax d e f e r r a l s w i l l be considered a t a x

savings and an i n c e n t i v e encouraging growth i n t h e d i s t r i b u t i o n o f e l e c t r i c i t y .

The i n c e n t i v e prov ided by l i b e r a l i z e d deprec ia t ion i s tabu la ted i n

Table 52 and amounts t o $14,094.7 m i l l i o n 1978 d o l l a r s .

Absence o f Federal Tax on t h e Income o f P u b l i c l y Owned U t i l i t i e s

So fa r , t h i s desc r ip t i on o f t a x a t i o n has concerned o n l y the investor-owned

u t i l i t i e s . Government-sponsored u t i l i t i e s are exempt from paying f e d e r a l

TABLE 52. Incentive Provided to Class A and B Privately Owned Ut'lities by Deferred Income Tax Due to Liberalized Depreciation121

Deferred Income ~axes(a) Year (Million of 1978 Dollars) -

NA 2636.620 ( P ) 1869.874 1475.670

1959 490.582 1958 513.742 1957 479.740 1956 443.384 TOTAL 14,094.72

Ta) The use of liberalized depreciation started in 1953 but data on the tax deferred was not split out until 1956. (P) Preliminary

income tax. This exempt status is a significant inducement for the growth of

government-sponsored utilities. In the last thirty years federal taxes paid by

private investor-owned utilities has averaged 11% of operating revenue. (4,5)

Savings in operating revenue of this magnitude should clearly place the

government-sponsored utility at a competitive advantage over the investor-owned

utility and encourage growth in the direction of government-sponsored

utilities.

The accounting of the tax savings to government sponsored utilities is in

three parts. The parts correspond to the following government sponsored

utility types:

Federal Power Authorities (APA, BPA, SEPA, SWPA, WAPA, and TVA)

State Power Authorities and Municipally Owned Electric Utilities

Electric Cooperatives (REA)

Each of these utility types has a different organizational structure and each is treated somewhat differently by the Federal Government. However, none of these utilities pay federal taxes. The net effect of this absence of federal

' tax is a lower energy price to the consumer. It does not matter what portions

of the electric energy generation, transmission, conditioning, distribution and

marketing cycle the government sponsored utility is involved in. If the same functions were performed by a private investor-owned utility they would be

taxed and the cost of electric energy to the consumer would be higher.

The income tax exemption incentive provided to the Federal Power Admini-

strations and the TVA amounts to $1,970.0 + $1,626.5 million 1978 dollars. The

first figure ($1,970.0 mi 11 ion) is directly associated with hydro-energy and in included in the total of the hydro-energy chapter. The second figure ($1,626.5

\

million) is the tax exemption incentive for the TVA's non-hydropower energy

sources. The basic data for these figures are included in Appendix C. The

calculational method used is described in detail in the hydro-energy chapter.

The TVA is the only Federal Power Authority that has extensive fossil fuel and

nuclear electric generation plants. The tax incentive to this portion of the

Federal Power Authorities is tabulated in Table 53.

The income tax exemption incentive provided to State Power Authorities and

Municipal Utilities amounts to $8,215.91 million 1978 dollars. This figure is based upon a calculation of tax per million killowatt hours paid by investor-

owned utilities from 1937 to 1978. This tax per million killowatt hours for

each year was multiplied by annual amounts of electricity made available for

distribution by State Power Authorities and Municipal Utilities reported in

million killowatt hours. The resulting figure in the last column of Table 54

TABLE 53. Incentive Provided to the Tenne s e Valley Authority by the Exemption of Federal Tax ? a?

Estimated Incentive Provided by Tax Exemption

Year (Millions of 1978 Dollars)

TOTAL 1,626.46

This table includes only the non- hydropower portion of the TVA revenues as the hydropower portion is presented in the Hydro-Energy Chapter.

TABLE 54. I n c e n t i v e Provided t o S t a t e Power A u t h o r i t i e s and Munic ipal U t i l i t i e s by t h e Exemption o f Federal Taxes

Tax Rate Annual Electrical Federal Taxer Paid by Annual Electrical Supply by (1978 Dollars Supply by Government Tax Savings o f Govern-

Fiscal Investor Owned Utilities Investor Owned Utilities per Million Sponsored Utilities ment Sponsored Utilities Year (Millions of 1978 Dollars1 (Millions of Kilowatt Hours) Kilowatt Hours (Million Kilowatt Hours) (Million 1978 Dollars)

1978 N/A 1977 809.426 1976 596.417 1975 997.296 1974 701.924 1973 1,065.312 1972 1,386.915 1971 1,535.016 1970 1,878.758 1969 2,819.850 1968 3,103.959 1967 2,951.687 1966 3,119.342 1965 3,078.785 1964 3,125.835 1963 3,008.470 1962 3,011.873 1961 2,784.855 1960 2,607.944 1959 2,472.346 1958 2,175.454 1957 2,217.004 1956 2,300.038 1955 2,593.265 1954 2,221.453 1953 2,110.399 1952 1,949.984 1951 1,678.228 1950 1,332.630 1949 1,017.442 1948 884.435 1947 2,108.065 1946 2,320.567 1945 2,588.289 1944 2,716.687 1943 2,818.774 1942 2,758.953 1941 2,515.846 1940 2,084.086 1939 1,829.014 1938 1,692.805 1937 1,589.640 TOTAL

( e ) Estimated.

r e p r e s e n t s t h e amount government-sponsored u t i l i t i e s would have p a i d o u t i n

taxes each y e a r i f t h e y had been t a x e d a t t h e same r a t e as investor -owned

u t i l i t i e s . I n f o r m a t i o n on t o t a l f e d e r a l t a x e s p a i d was n o t a v a i l a b l e f o r

1978 a t t h e t i m e o f p r i n t i n g so, t h e 1977 t a x i s used as an e s t i m a t e f o r 1978.

The income t a x exemption i n c e n t i v e p r o v i d e d t o t h e coopera t i ves t h a t

bor row f r o m t h e REA amounts t o $6,110.40 m i l l i o n 1978 d o l l a r s . T h i s f i g u r e i s

p resen ted i n Table 55 and was c a l c u l a t e d u s i n g t h e method desc r ibed i n t h e

hydro chapter .

I n t e r e s t Subsidy f r o m Tax-Exempt Bonds

Government sponsored u t i l i t i e s can i s s u e t a x exempt m u n i c i p a l bonds. Wi th

a t a x exempt s t a t u s , these bonds can be o f f e r e d f o r s a l e a t a lower i n t e r e s t

r a t e than a t a x a b l e u t i l i t y bond. Through c o n t a c t s w i t h i n d u s t r y spokesmen we

have e s t i m a t e d t h a t t h e i n t e r e s t r a t e d i f f e r e n c e between t a x a b l e and t a x f r e e

bonds has averaged about 2.25%. T h i s 2.25% sav ings assoc ia ted w i t h t h e a b i l i t y

t o suppor t l ong- te rm debt b y bond i ssues s e l l i n g f o r a lower i n t e r e s t r a t e

aga in r e s u l t s i n t h e u n d e r p r i c i n g o f e l e c t r i c energy. Complete d a t a was n o t

a v a i l a b l e a t t h e t i m e o f p r i n t i n g , however f i g u r e s f o r 1964 t h r o u g h 1974 a r e

p resen ted i n Tab le 56. The es t ima ted subs idy amounts t o $2,441.28 m i l l i o n 1978

d o l l a r s .

MARKET ACTIVITY

The Federa l Government cons t ruc ts , operates and m a i n t a i n s e l e c t r i c i t y

t r a n s m i s s i o n systems and p r o v i d e s loans and loan guarantees f o r e l e c t r i c i t y

genera t ion , t r a n s m i s s i o n and d i s t r i b u t i o n systems. The f e d e r a l invo lvement i n

t h e development o f e l e c t r i c i t y began d u r i n g t h e Rooseve l t a d m i n i s t r a t i o n . The

c r e a t i o n o f t h e Tennessee Val l e y A u t h o r i t y (TVA), R u r a l E l e c t r i f i c a t i o n Admin-

i s t r a t i o n (REA), and t h e B o n n e v i l l e Power A d m i n i s t r t i o n (BPA) were t h e f i r s t

major a c t i o n s o f t h e Federa l Government i n t h e e l e c t r i c a l energy market. The

p r i m a r y m o t i v a t i o n f o r t h e e l e c t r i c i t y invo lvement o f t h e BPA and TVA ( i g n o r i n g ,'

t h e dam's m u l t i p u r p o s e uses) was t o s t i m u l a t e i n d u s t r y and p r o v i d e jobs. The

p r i m a r y m o t i v a t i o n beh ind t h e c r e a t i o n o f t h e REA was t o s low t h e m i g r a t i o n o f

p e o p l e f r o m t h e farms t o t h e c i t i e s . A t t h i s t i m e i n h i s t o r y , t h e l a t e 1930 's

TABLE 55. Incentive Provided to REA Cooperatives by the Exemption of Federal Taxes

Gross Operating Revenue of

REA Borrowers (Millions 1978$1

Federal Tax Tax Savinas of Rate for Investor Owned Utilities

., REA Borrowers (Mil lions 1978$) Year

- - -

1941 TOTAL

(e) Estimated values.

Year

1974

1973

1972

197 1

1970

1969

1968 1967

1966

1965

1964

TABLE 56. Tax-Free Bond Subsidy Provided to Publ'cly Owned Class A and Class B Electric Utilities76)

Long-Term Debt (Mi 11 ions of Current Do1 1 ars)

9,436.525

7,828.203

7,481.868

6,363.388

5,997.883

5,455.858 5,132.667

4,578.430 4,112.683

3,919.311

3,739.715

Estimate of the Subsidy Pro- vided by the 2.25% Average Dif-

ference in Bond Rates (Millions of 1978 Dollars)

280.928

258.647

262.609

230.595 226.793

218.547

216.582

201.291

185.994

182.374

177.008

TOTAL 2,441.279

the cities had many modern conveniences like electricity and flush toilets.

The electrical needs of the cities were served by private utilities. The rural

areas were ignored by the utilities because there weren't enough customers to

justify an electric distribution system. The REA was created to provide the

financing necessary to develop an electrical distribution system for rural

areas.

The REA was established by Executive Order of the President as an emergency relief program on May 11, 1935. Statutory authority was provided by the

Rural Electrification Act of 1936. The Act established REA as a lending agency

with responsibility for developing a program for rural electrification. On

October 28, 1949, an amendment to the Rural Electrification Act authorized REA

to make loans to improve and extend telephone service in rural areas. In 1971,

the Act was amended to authorize the establishment of a Rural Telephone Bank to

provide supplemental financing for telephone systems. And in 1973, authority

t o guarantee loans made by non-REA lenders was authorized by an amendment t o

t h e Act. This amendment a l so increased t h e standard i n t e r e s t r a t e f o r REA

loans t o 5 percent, b u t cont inued the 2 percent i n t e r e s t r a t e f o r borrowers

meeting spec ia l s t a t u t o r y c r i t e r i a .

REA has made long-term, i n te res t -bea r ing loans, and guaranteed loans made

by others, t o 1,000 e l e c t r i c and 900 telephone systems loca ted i n t h e r u r a l

areas o f the Uni ted States. These borrowers serve about 8.0 m i l l i o n e l e c t r i c

consumers and 3.5 m i l l i o n telephone subscribers, loca ted i n 47 states, t h e

V i r g i n Is lands and Puerto Rico. REA loans t o f inance e l e c t r i c and telephone

f a c i l i t i e s bear i n t e r e s t a t e i t h e r a standard r a t e o f 5 percent o r a spec ia l

r a t e o f 2 percent i n t e r e s t i n accordance w i t h c r i t e r i a se t f o r t h i n t h e Act.

REA a lso makes loans i n con junc t ion w i t h o ther lenders; and may guarantee t h e

repayment o f loans from non-REA f i n a n c i n g sources.

E l e c t r i c Loans

REA e l e c t r i c loans are made t o non -p ro f i t and cooperat ive associat ions,

p u b l i c bodies, and o ther e l e c t r i c u t i l i t i e s . These loans f inance t h e construc-

t i o n and operat ion o f d i s t r i b u t i o n l i n e s or systems, generat ing p l a n t s and

transmission l i n e s t o p rov ide i n i t i a l and cont inued adequate e l e c t r i c se rv i ce

t o persons i n r u r a l areas. About 99 percent of the REA-financed e l e c t r i c

systems are cooperat ives, owned and c o n t r o l l e d by t h e i r consumer members.

REA-financed d i s t r i b u t i o n systems t y p i c a l l y buy t h e i r power wholesale from

e x i s t i n g supp l ie rs and d e l i v e r i t a t r e t a i l t o t h e i r consumers. REA generat ion

and transmission loans are made o n l y where no adequate or dependable source o f

power i s ava i l ab le o r where t h e r a t e s o f f e r e d by e x i s t i n g power sources would

r e s u l t i n a s i g n i f i c a n t l y h igher cos t o f power t o the consumers than t h e cost

from f a c i l i t i e s t o be f inanced by REA.

Loan Guarantees

REA also guarantees loans t o f a c i l i t a t e t h e ob ta in ing o f f i n a n c i n g f o r

large-scale e l e c t r i c and telephone f a c i l i t i e s from non-REA sources. Guarantees

are considered i f such loans cou ld have been made by REA under the ACT, and may

be made concu r ren t l y w i t h an REA loan. Guaranteed loans bear i n t e r e s t a t a

r a t e agreed upon by the borrower and the lender, and may be obtained f rom any

l e g a l l y organized lend ing agency q u a l i f i e d t o make, hold, and se rv i ce t h e loan.

In 1974, REA entered into an agreement with the Federal Financing Bank,

whereby FFB agreed t o purchase obligations guaranteed by the REA Administrator.

Interes t ra tes on FFB loans are determined a t the time each advance of funds i s

made and are based upon the cost of money t o the FFB. R E A acts as agent fo r

the FFB, and performs a l l loan servicing functions as authorized by the Act

creating FFB. Borrower's dealings are with R E A and a l l policies and procedures

of R E A are applicable t o a guaranteed loan.

Interes t Rates

Most R E A loans bear in te res t a t the standard r a t e of f i ve percent. A

special two percent r a t e i s available fo r e l e c t r i c and telephone borrowers

which have experienced extenuating circumstances or extreme hardship, or which

meet c r i t e r i a s e t f o r th in the law. These include e l ec t r i c systems with an

average consumer density of two or fewer per mile or an adjusted plant revenue

r a t i o of 9.0 or more. Plant revenue r a t i o i s the t o t a l cost of dis t r ibut ion

and general plant divided by the annual gross revenue a f te r excluding the cost

of power.

A Revolving Fund f o r Loan Capital

A Rural E lec t r i f i ca t ion and Telephone Revolving Fund in the U.S. Treasury

i s the source of REA loan funds. This fund i s replenished through col lect ions

on outstanding and future REA loans and from the sa le of borrower's notes t o

the Secretary of t he Treasury or the money market. Repayment of notes sold i s

insured by REA. Limitations on the amounts authorized for loans in any one

year may be imposed by the Congress.

Loans are repaid by the systems REA finances over a 35-year period.

Success of t h i s program may be demonstrated in the f a c t tha t these borrowers

repay t h e i r government loans promptly, often ahead of schedule. Of the 12.9

bi l l ion loaned through September 30, 1978, l ess than 1/1,00Oth of one percent

has been los t through foreclosures or fa i lu re .

Technical Assistance

REA helps develop the resouces and a b i l i t y o f borrowers t o meet t h e i r own

a f f a i r s e f f e c t i v e l y , and achieve as soon as poss ib le t h e i n t e r n a l s t reng th and

soundness t o assure t h e i r success. As borrowers develop adequate i n t e r n a l

s t rength and f i n a n c i a l soundness, t h e need f o r REA assistance diminishes.

REA i s headquartered i n Washington, DC and has no f i e l d o f f i c e s . A s t a f f

o f engineering, accounting and management s p e c i a l i s t s , opera t ing from t h e i r

p r i v a t e residences, i s located through the Uni ted States t o prov ide d i r e c t

ass is tance t o borrowers.

Throughout i t s h i s t o r y the REA has made loans f o r the consumption as we l l

as d i s t r i b u t i o n o f e l e c t r i c i t y . An accounting o f t h e loans granted by t h e REA

f o r d i s t r i b u t i o n l i n e s and f a c i l i t i e s , t ransmiss ion and generat ion f a c i l i t i e s ,

and consumer f a c i l i t i e s i s presented i n Table 57. The amount o f the p r i n c i p a l

and the i n t e r e s t t h a t has been repa id i s presented i n Table 58. The n e t annual

outstanding REA loans i s ca l cu la ted i n Table 59 t o f a c i l i t a t e c a l c u l a t i o n o f

the cumulat ive outstanding balance. The i ncen t i ve provided t o e l e c t r i c i t y pro-

duc t ion by the REA can be def ined as t h e t o t a l amount o f money outstanding i n

10ans.or the d i f f e rence i n the cost o f c a p i t a l pa id by REA borrowers and p r i -

vate u t i l i t i e s . These d e f i n i t i o n s o f i ncen t i ves are s i m i l a r t o those i n t h e

hydro-energy chapter. The t o t a l amount o f REA loans outstanding a t t h e end o f

t h e 1978 f i s c a l year was $18.95 b i l l i o n (1978). To est imate t h e i n c e n t i v e

prov ided by low i n t e r e s t loans the net cumulat ive d o l l a r amount o f ou ts tand ing

REA loans i n 1978 d o l l a r s was m u l t i p l i e d by the d i f f e r e n c e between the weighted

average y i e l d s on newly issued e l e c t r i c and gas u t i l i t y bonds and t h e composite

i n t e r e s t ra tes on t h e t o t a l long term f i n a n c i n g f o r a l l REA e l e c t r i c borrowers

f o r each year between 1936 and 1978. These data and r e s u l t s are presented i n

Table 60. The est imated i ncen t i ve us ing t h i s d e f i n i t i o n i s $9.6 b i l l i o n

(1978). Admin is t ra t i ve costs o f opera t ing the REA have amounted t o $524.3

m i l l i o n (1978). Admin i s t ra t i ve cos t data i s presented i n Table 61.

Federal Power Admin is t ra t ions and t h e TVA

The TVA and most o f the Federal Power Admin is t ra t ions cons t ruc t and

operate t ransmiss ion f a c i l i t i e s t o accompany t h e i r generat ion s ta t i ons . A

TABLE 57. REA Loans Granted in the Electrification Progr m by Purpose (Millions of 1978 Dollars Per Year) 87 )

Loans for Distribution Loans for Transmission Loans for Lines and Facilities Operation Facilities Consumer Facilities Year

1937 1936 TOTAL

(a) 1976 Fiscal Year Transition Quarter NOTE: Table may not add exactly due to rounding.

277

TABLE 58. Repayment o f REA Loans ( M i l l i o n s o f 1978 Do l l a rs Per

P r i n c i p a l I n t e r e s t Year Due and Paid Due and Paid Advance Payments

1978 315.988 278.694 -14.957 1977 234.836 206.817 -15.286 1976(a) 52.469 47.899 -8.691

-. . -- -- -

1942 1.757 31.078 8.824 1941 14.720 13.810 12.342 1940 9.976 10.911 1.942 TOTAL 6,265.84 3,937.28 437.02

(a) 1976 F i s c a l Year T r a n s i t i o n quar te r NOTE: Table may no t add e x a c t l y due t o rounding.

TABLE 59. Net Annua REA Loans Outstanding (Mil l ions of 1978 Dollars Per Year) 77)

Total REA Loans Total Payments Total Pr inc ipa l Granted f o r t h e t o Pr inc ipa l on Outstanding on E l e c t r i c Program REA Loans REA Loans

984.701 301.031 683.670

Year

TABLE 60. To ta l Net Cumulative Outstanding REA Loans f o t he E l e c t r i c Program ( M i l l ions o f 1978 ~ o l l a r s ) ( 7'i

Weighted Average Composite I n t e r e s t T o t a l Net Cumu- of Y ie l ds on Newly Rates on T o t a l Long Est imated Cost of

l a t i v e Outstanding Issued Domestic Term F inanc ing f o r I ncen t i ves Prov ided REA Loans f o r t he E l e c t r i c and Gas A l l REA E l e c t r i c by Low I n t e r e s t

Year E l e c t r i c Program U t i l i t y Bonds (%) Borrowers (%) REA Loans

1937 270.32 1936 65.55 TOTAL

TABLE 61. REA Administrative Funds Obligated t the Program (Millions of 1978 Dollars) (77

Administrative Administrative Year Funds Obligated Year Funds Obligated

1959 10.639 1958 10.251 1957 9.900 1956 10.440 TOTAL 524.344

(a) 1976 Fiscal Year Transition Quarter * Estimated Data NOTE: Table may not add exactly due to rounding.

description of these organizations and an analysis of their expenditures for

transmission systems is presented in the hydro-energy chapter. The cumulative amount of loans outstanding at the end of 1978 was $6.2 billion (1978). These data are presented in the hydro-energy chapter in Table 28.

CONCLUSIONS

The directly quantifiable federal incentives to electricity distribution transmission and generation (excluding incentives already identified for hydro

and nuclear energy) were found to be $64.5 or $51.4 billion 1978 dollars. The two costs represent two different viewpoints on how an incentive is defined. In either case these figures represent a conservative minimum estimate of the

incentives to electricity. Most of the quantifiable incentives identified con-

stitute market activity and taxation actions by the Federal Government. The

total amount of federal money outstanding is designated as incentive definition number 1 and the interest rate incentive is designated as definition number 2.

The results are summarized in Table 62.

TABLE 62.- Federal Incent ives Used t o St imu la te the Development o f E l e c t r i c Energy ( M i l l i o n s o f 1978 Do l l a rs )

T r a d i t i o n a l Market I ncen t i ve Area Taxat ion Services A c t i v i t y

Investment Tax Cred i ts

L i b e r a l i z e d Depreciat ion

Tax Exemption :

- Federal Power

a u t h o r i t i e s

- Sta te Power A u t h o r i t i e s

and Municipal U t i l i t i e s

- Cooperatives

Tax Free Bonds

REA Loans

REA Admin is t ra t ion 524.3 ( 1 ) ( ~ 3 d )

E l e c t r i c i t y Transmission 6,224.7 2,447.1'~)

Subtota l 38,829.1 524.3 25,171.0 (1)

12,019.0 (2)

TOTAL 64,524.4 ( 1 )

51,372.4 (2 )

(a) Current d o l l a r s . (b ) Included i n hydro-energy chapter t o t a l and shown here o n l y f o r completeness ( c ) D e f i n i t i o n s 1 and 2 represent d i f f e ren t viewpoints and do no t add o r

i n d i c a t e a range. (d ) Transferred f rom the hydro-energy chapter.

REFERENCES - CHAPTER IX

1. Brannon, Gerald M., Energy Taxes and Subsidies, Energy Policy Project of the Ford Foundation, Ball inger, 1975.

2. Statistics of Privately Owned Electric Utilities in the U.S., Federal Power Commission, Government Printing Office, 1971, 1975, 1976, 1977, 1978.

3. Glassman, Gerald J. "Objections to Taking Liberalized Depreciation" Public Utilities Fortnightly, March 31, 1966, pp 34.

4. Historical Statistics of the Electric Utility Industry, Edison Electric Institute, New York, NY, 1971.

5. Statistical Year Book of the Electric Utility Industry, Edison Electric Institute, New York, NY, October 1977.

6. Moody's, A Nationwide Survey of Public Utility Progress, 1975, pp 22.

7. U.S. Department of Agriculture, Rural Electrification Administration, Report of the Administrator, years 1936 through 1977.

8. U.S. Department of Agriculture, Rural Electrification Administration, - REA Loans and Loan Guarantees for Rural Electric and Telephone Service, October 1976.

9. In calculating this figure it has been assumed that the level of electricity supplied by the government sponsored utilities would not have changes even if they did have to pay Federal taxes. It is possible that the level of output may have been lower if the utilities had to pay the tax. The assumption was felt to be justified, however, due to the price inelasticity of demand for electricity.

X. CONCLUSIONS WITH RESPECT TO SOLAR ENERGY POLICY

Debate over solar energy's future role and its share in the national

energy budget has caused policy makers to speculate on the reasons for the

large difference between present and potential use of solar energy. With an understanding of the forces that have shaped the existing energy budget,

policy makers may better guide the efficient exploitation of America's energy resources. The problem at hand is to identify the magnitude of the forces

created by the Federal Government that have resulted in the increased energy

production of coal, gas, oil, nuclear, and hydro power. With knowledge about

what has been done to create incentives to increase production of traditional

energy sources, policy makers can determine how to increase the share of solar

energy used to generate electricity and heat and cool buildings.

THEORETICAL APPROACH

To identify incentives that resulted in the apparent secular supply curve

for energy, we categorized government actions based on economic, political,

institutional, and legal pressures. A typology was developed by considering

economic, political, organizational and legal viewpoints. This typology

resulted in the following eight categories:

1) Creation or prohibition of orqanizations that carry out actions.

2) Exemption from taxation, or reduction of existing taxes.

3 ) Collection of fees for the delivery of a governmental service or good not

directly related to the cost of providing that good or service.

4) Disbursements in which the Federal Government distributes money without

requiring anything in return.

5) Governmental requirements backed by criminal or civil sanction.

6) Traditional government services provided through a nongovernmental entity

without direct change (i.e., regulating interstate and foreign commerce

and providing inland waterways).

7) Nontraditional government services such as exploration, research, devel-

opment and demonstration of new technology.

8) Market a c t i v i t y under cond i t ions s i m i l a r t o those faced by nongovernmental

producers o r consumers.

Fo l lowing the establ ishment o f t h i s typology, the problem became one o f

ass igning values f o r expenditures o r r e c e i p t s foregone t o each o f these e i g h t

categor ies according t o the f i v e energy types. Two approaches were taken

simultaneously. S p e c i a l i s t s i n t h e study o f government and p u b l i c i n s t i t u t i o n s

took a broad perspect ive i n i d e n t i f y i n g and measuring i ncen t i ves created

throughout t h e energy sec tor o f the economy. Engineers and micro-economists

focused on i ncen t i ves created along the t r a j e c t o r y o f t ransformat ion f rom

exp lo ra t i on and min ing through t ransmiss ion and waste d isposal .

GENERIC INCENTIVES

The typology o f f ede ra l ac t ions developed i n the t h e o r e t i c a l framework was

f i r s t app l ied broad ly t o i d e n t i f y i ncen t i ves funded by fede ra l i n s t i t u t i o n s

dur ing f i s c a l year 1978. F o r t y - f i v e organ iza t iona l components spent an e s t i -

mated $13.7 b i l l i o n conduct ing energy r e l a t e d a c t i v i t i e s . Organizat ions t h a t

emphasized market a c t i v i t y spent 52% o f a l l major f ede ra l energy-re lated expen-

d i t u res . Explorat ion, research, development, and demonstration accounted f o r

38.5% expended by 12 organizat ions. Organizat ions whose pr imary a c t i o n

invo lves requirements backed by c r i m i n a l and c i v i 1 sanct ions spent 5.5% o f a1 1

energy-related expenditures. Only one organ iza t ion was invo lved i n a l t e r i n g

t h e tax s t ruc ture . The l a r g e s t s i n g l e energy program was t h e Department o f

Energy. Twenty-nine percent o f the expenditures were d i r e c t l y r e l a t e d t o

i ncen t i ves i n v o l v i n g e l e c t r i c i t y , and most o f t h i s was f o r market a c t i v i t i e s .

The remaining 71% was d i v ided among s i x energy sources: nuclear, coal , so la r ,

o i l , o the r ( p r i m a r i l y goethermal), and na tu ra l gas. The s o l a r energy i n d u s t r y

received 2.7% o f the i ncen t i ves d i rec ted s p e c i f i c a l l y t o energy producing

i n d u s t r i e s i n 1978.

NUCLEAR INCENTIVES

The na t i ona l o b j e c t i v e t o c rea te an economical ly v i a b l e nuclear energy

source has been i n t e r r e l a t e d w i t h mat te rs o f n a t i o n a l s e c u r i t y and f o r e i g n

r e l a t i o n s . Perhaps because o f these i n t e r r e l a t i o n s h i p s , over 80% o f the cost

o f incent ives was i n t h e form o f n o n t r a d i t i o n a l serv ices. These n o n t r a d i t i o n a l

services were p r i m a r i l y appl ied t o knowledge a c q u i s i t i o n i n the area o f the

perceived p o t e n t i a l f o r nuclear power. Creat ing i ncen t i ves us ing non t rad i -

t i o n a l services gave the government f i r m c o n t r o l over s p e c i f i c f a c t o r s o f

nuclear energy product ion t h a t cou ld have been con t ra ry t o t h e na t i ona l

i n t e r e s t , such as weapons development and environmental contamination.

Incent ives f o r nuclear power are estimated t o have cost the Federal Gov-

ernment $21.0 b i l l i o n over t h e past 30 years. This i s approximately 8.3% o f

the t o t a l est imated cost o f a l l incent ives useds t o s t imu la te energy

product ion.

The t o t a l costs o f incent ives t o the nuclear i ndus t r y do not take i n t o

account several nonquant i f iab le incent ives . Nei ther the cos t o f t h e Pr ice-

Anderson Act ( a l e g i s l a t i v e ac t ion which removed the l i a b i l i t y insurance road-

block), nor t h e fede ra l uranium p o l i c i e s are inc luded because no way was found

t o q u a n t i f y them.

HYDRO INCENTIVES

The Federal Government constructs, operates, and regu la tes h y d r o e l e c t r i c

f a c i l i t i e s and markets e l e c t r i c i t y . Many major p r o j e c t s were o r i g i n a l l y funded

by the government t o improve nav iga t iona l f a c i l i t i e s , c o n t r o l f loods, and

develop water resources f o r ag r i cu l t u re , indus t ry , and m u n i c i p a l i t i e s . His-

t o r i c a l l y , h y d r o e l e c t r i c power generat ion was a secondary considerat ion. As

t h e former ob jec t i ves have been l a r g e l y accomplished, t h e pr imary j u s t i f i-

cat ion f o r new dams has become power generation.

I n the development o f hydropower, the government has acted p r i m a r i l y as a

market e n t i t y a t each step o f t h e production-consumption cyc le, from ownership

o f the pr imary f a c i l i t i e s o f product ion through d e l i v e r y t o the consumer. Two

a l t e r n a t i v e procedures were used i n q u a n t i f y i n g these incent ives . F i r s t ,

r e t u r n on investment from power revenues and costs o f construct ion, operat ion,

maintenance, management, and r e g u l a t i o n o f dams t h a t cou ld be a l l oca ted t o

power development were calculated. Second, the subsid ies prov ided by the low

i n t e r e s t r a t e s o f f ede ra l appropr ia t ions and t h e exemption o f power revenues

from income taxes were ca l cu la ted on the bas is of the d i f f e rences between fed-

e r a l and p r i v a t e i n d u s t r y costs. Using t h e f i r s t d e f i n i t i o n , i t was est imated

t h a t the costs o f i ncen t i ves were $16.9 b i l l i o n f o r hyd roe lec t r i c generation.

With t h e second d e f i n i t i o n , i t was est imated t h a t the costs o f t h e i ncen t i ves

were $8.9 b i l l i o n f o r product ion. Hydro power has received 6.7% o f the t o t a l

est imated cos t o f i ncen t i ves used t o s t imu la te energy product ion.

COAL INCENTIVES

More energy has been produced from coal than any other energy source;

Loss o f t h e steam locomotive and space heat ing market produced a d e c l i n e i n t h e

i n d u s t r y t h a t was slowed and then reversed by the r a p i d growth o f t h e e l e c t r i -

c i t y generat ion market. Only r e c e n t l y has product ion reached t h e l e v e l o f a

generat ion ago. Present ly , 74% o f U.S. coal product ion t h a t i s not exported

i s used by u t i l i t y companies f o r power generat ion. I n d u s t r i a l p roduct ion

accounts f o r the use o f 24% and the remaining 2% i s consumed by household or

commercial en terpr ises .

The dep le t ion allowance, which amounted t o $4.7 b i l l i o n between 1950 and

1978, has been t h e s i n g l e l a r g e s t i ncen t i ve t o increased coal product ion. Tra-

d i t i o n a l services, i n c l u d i n g f a c i l i t i e s t o a i d the water-borne movement o f

coal, amounted t o $2.6 b i l l i o n between 1950 and 1978. The n o n t r a d i t i o n a l serv-

i c e s o f research, exp lora t ion , development, and sa fe ty accounted f o r $3.6 b i l -

l i o n of incent ives .

Though much o f the energy produced i n the U.S. over the l a s t 25 years came

from coal, the est imated costs o f i ncen t i ves used t o s t imu la te coal p roduct ion

were lower than those fo r the f o u r other energy sources. An est imated $11.7

b i l l i o n has been expended f o r i ncen t i ves t o t h e coal indus t ry , o r 4.6% o f t h e

t o t a l cos t o f incent ives.

OIL INCENTIVES

Technical cons idera t ion necessi tated d i v i d i n g i ncen t i ves t o increase o i l

p roduct ion i n t o two categor ies: 1) exp lo ra t i on and product ion and 2) r e f i n i n g

and d i s t r i b u t i o n . E x p l o r a t i o n and p r o d u c t i o n i n c l u d e d t h e search f o r and

r e c o v e r y o f b o t h c rude o i l and n a t u r a l gas. Thus, i n c e n t i v e s t o t h e e x p l o r a -

t i o n and p r o d u c t i o n o f one o f these energy sources ac ted as an i n c e n t i v e t o t h e

o the r . However, r e f i n i n g and d i s t r i b u t i o n were l i m i t e d t o pe t ro leum

convers ion.

Some o f t h e l a r g e s t i n c e n t i v e s t o t h e pe t ro leum i n d u s t r y were t h e reduc-

t i o n o f e x i s t i n g t a x e s t h r o u g h i n t a n g i b l e d r i l l i n g expensing and t h e percentage

d e p l e t i o n al lowance. These two i n c e n t i v e s amounted t o $55.5 b i l l i o n . Another

l a r g e c a t e g o r y was requ i rements , i n which t h e Federa l Government makes demands

which are backed up by c r i m i n a l and c i v i l sanc t ions . These requ i rements

i n c l u d e d s t r i p p e r w e l l p r i c e i n c e n t i v e s , i n c e n t i v e s f o r new o i l , and r e q u i r e -

ments o f t h e Economic R e g u l a t o r y A d m i n i s t r a t i o n . The es t ima ted va lue o f

requ i rements t h r o u g h 1978 was $57.5 b i l l i o n . T r a d i t i o n a l s e r v i c e s such as t h e

maintenance o f p o r t s and waterways t o handle o i l t a n k e r s counted f o r $6.9 b i l -

l i o n . Research and development and d a t a f r o m t h e Geo log ica l Survey and t h e

Bureau o f Mines accounted f o r $1.9 b i l l i o n o f i n c e n t i v e s . Market a c t i v i t y and

disbursements accounted f o r an i n s i g n i f i c a n t percentage o f t h e t o t a l c o s t o f

i n c e n t i v e s t o o i l .

Among t h e s i x sources o f energy analyzed, o i l accounted f o r t h e h i g h e s t

c o s t o f i n c e n t i v e s . F o r t y - n i n e p e r c e n t o f t h e c o s t o f i n c e n t i v e s , o r

$123.6 b i l l i o n , c o u l d be a t t r i b u t e d t o t h e p r o d u c t i o n o f o i l .

NATURAL GAS INCENTIVES

Most o f t h e i n c e n t i v e s t o t h e n a t u r a l gas i n d u s t r y were i n t h e f o r m o f

exemptions o r r e d u c t i o n s o f e x i s t i n g taxes. I n t a n g i b l e d r i l l i n g expens ing and

t h e percentage d e p l e t i o n a l lowance accounted f o r $14.9 b i l l i o n o f t h e f e d e r a l

e x p e n d i t u r e f o r i n c e n t i v e s t o n a t u r a l gas. Requirements i n t h e f o r m o f w e l l -

head p r i c e c o n t r o l s was a d i s i n c e n t i v e t o t h e n a t u r a l gas i n d u s t r y o f $0.8 b i l -

l i o n . N o n t r a d i t i o n a l s e r v i c e s which i n c l u d e d d a t a f r o m t h e Bureau o f Mines and

t h e Geo log ica l Survey, and market a c t i v i t y accounted f o r $0.45 b i l l i o n .

Between 1950 and 1977, i n c e n t i v e s t o t h e n a t u r a l gas i n d u s t r y due t o Fed-

e r a l Government a c t i o n s were $14.6 b i l l i o n . T h i s was 5.8% o f t h e c o s t o f

i n c e n t i v e s t o t h e s i x major energy sources.

ELECTRICITY INCENTIVES

The Rural Electrification Administration provides incentives to encourage

public utility generation and transmission of electricity. During FY-1978 this

organization spent $0.75 bill ion for 5.5% of the total energy-related outlays

for FY-1978.

To estimate the value of incentives, the analysis distinguished between

the investor owned private utilities and the government sponsored utilities.

Emphasis was placed on public utilities since the distribution of electricity

has traditionally been the principle concern of public utilities.

The same two alternative procedures used to estimate hydro incentives were applied to the calculation of electricity incentives. Using the first definition (federal investment money outstanding), it was estimated that the cost of

incentives were $64.5 billion. With the second definition (interest rate

incentive), the costs of incentives were estimated at $51.4 billion. Most of

these incentives to electricity generation and transmission constitute market

activity and taxation actions by the Federal Government.

The total cost of incentives for electricity was the second largest cate-

gory, accounting for 25.6% of the total energy incentives provided by the Fed- eral Government to the six major energy sources.

POSSIBLE SOLAR INCENTIVES

Following the indentification, quantification and analysis of federal

incentives which have been used to stimulate energy production, each author

identified one or more incentives that could effectively increase solar energy

production.

Accelerated Depreciation

Currently, the Internal Revenue Service regulates the number of years over

which certain items of equipment can be depreciated. Congress could direct the

IRS to publish shorter-than-normal depreciation schedules for all forms of

solar equipment. Shorter schedules would mean that more depreciation expense

can be deducted in each year, and businesses would pay less tax if they were

using solar equipment. This incentive would be somewhat analogous to the oil

incentive that allows oil companies to deduct all the intangible expenses conducted with an oil well as they occur, rather than spreading expenses over the

projected life of the well. The cost of this incentive would be the reduction

in the amount of taxes otherwise collected and is estimated to be $5 billion

over the next 10 years.

Direct Subsidies

The Federal Government could pay specific institutions, such as schools,

to install solar equipment. Because of the political activity of such

institutions, this incentive could become fairly powerful. The estimated

10-year cost of the incentive is $1 to $5 billion.

Low Interest Loans

A major barrier to investment in solar heating and cooling systems is their high initial cost. The cost and availability of financing for installa-

tion of solar systems is important to the acceptance of solar energy for

heating and cooling homes. Low interest loans could be made available to individuals or neighborhoods for individual or central solar collecting units

and associated heating distribution systems. Low interest loan programs would reduce down payment requirements and lower monthly repayments to owners, pro-

viding the greatest benefit to low and middle income groups. The REA low interest loans provide a precedent for this policy. The estimated cost of this

incentive would be $1 to $5 billion over the next 10 years.

Value-Added Tax

Currently, businesses deduct the cost of all fuels purchased in calcu-

lating their income tax. If each incremental dollar earned is taxed at 48% by

the Federal Government, then effectively the government pays about half the

cost of all fuel utilized. Conversely, the business that installs solar units

realizes only 5 2 t of each dollar as after-tax-profit. A value-added tax is

assessed on the value added by production. It covers labor costs, interest,

rents, indirect taxes and profits. It is calculated by substracting the cost

of raw material, semi-finished inputs, utilities, depletion and appreciation

from the return from sales. The tax rate is typically 10% to 15% of the value

added. This means a d o l l a r i n f u e l purchases saved would be 85& t o 906 i n

re ta ined value added. If deprec ia t ion were def ined as p a r t o f the value added,

a more d e t a i l e d ana lys is would be requ i red because o f t h e c a p i t a l - i n t e n s i v e

nature o f so la r energy. Since the value-added tax has been termed a f e d e r a l

sales tax, t he re cou ld be some controversy w i t h respect t o in f r ingement

on s t a t e ' s r i g h t s . Since the t a x genera l l y penal izes imports and rewards

expor ts by not t a x i n g exports, i t cou ld cause some d i s r u p t i o n i n t h e petroleum

market.

Tax-Free I n d u s t r i a l Bonds

I n an i ncen t i ve analogous t o the tax f r e e bonds a v a i l a b l e f o r t h e pur-

chase o f p o l l u t i o n equipment, p u b l i c and p r i v a t e organ iza t ions would be ab le

t o purchase so la r equipment w i t h the proceeds from the sa le o f t ax - f ree indus-

t r i a l bonds issued by m u n i c i p a l i t i e s . This income i s t a x f r e e and t h e p r i n -

c i p a l must be used f o r s p e c i f i e d purposes. It i s est imated t h a t the c o s t o f

t h i s i n c e n t i v e would be $5 b i l l i o n over t h e next 3 years.

Government L i a b i l i t y Insurance f o r Solar Technology

The Price-Anderson Act, under which the Federal Government agreed t o

indemnify and l i m i t losses i n t h e event o f a ca tas t roph ic accident a t a nuclear

power p lan t , o f f e r s a precedent f o r a s i m i l a r i ncen t i ve f o r so la r energy. One

o f t h e b a r r i e r s t o t h e adopt ion o f s o l a r technology i s the economic r i s k and

unce r ta in t y associated w i t h a new technology. The r i s k s invo lved are no t known

due t o t h e l ack o f a c t u a r i a l data on s o l a r equipment breakage, d u r a b i l i t y and

maintenance. An insurance or indemnity incent ive , whereby t h e Federal Govern-

ment assumes t h e r i s k , cou ld prov ide t h e assurance needed by s p e c i f i c s o l a r

energy technologies t o enable them t o penetrate the market. It i s est imated

t h a t t h e cos t o f t h i s i ncen t i ve would be l ess than $1 b i l l i o n over t h e next

10 years.

Special Gas P r i o r i t i e s

One o f so la r energy's perceived l i m i t a t i o n s i s i t s i n t e r r u p t a b i l i t y due

t o c loud cover. An i n c e n t i v e cou ld be created by a l l ow ing e x i s t i n g gas users

who adopt so la r energy t o have h igher p r i o r i t i e s t o rece i ve l i m i t e d supp l ies

o f gas dur ing t imes o f s c a r c i t y . The g rea tes t problem w i t h t h i s i n c e n t i v e i s

p o l i c i n g , accounting, and v e r i f i c a t i o n .

Red i rec t i on o f t h e Rural E l e c t r i f i c a t i o n Admin i s t ra t i on

The Rural E l e c t r i f i c a t i o n Admin i s t ra t i on could p rov ide grants and low-

i n t e r e s t loans f o r t he cons t ruc t i on of medium-scale s o l a r thermal, e l e c t r i c ,

pho tovo l t a i c and wind energy conversion f a c i l i t i e s . The operat ion and func-

t i o n o f t h e REA cou ld remain unchanged, bu t i t would be d i r e c t e d t o fund pro-

j e c t s us ing so la r resources. It i s est imated t h a t such an i n c e n t i v e would cos t

over $5 b i l l i o n i n 10 years.

Formation o f a So la r TVA

A l a rge government corpora t ion could be created t o produce energy and

s t imu la te t h e economy o f t h e southern "sunbe l t " s ta tes . The Federal Government

owns vast areas o f a r i d land i n New Mexico, Texas and Arizona which cou ld be

used f o r l a r g e s o l a r thermal e l e c t r i c and/or pho tovo l t a i c f a c i l i t i e s . It i s

est imated t h a t t h i s p r o j e c t would cos t more than $10 b i l l i o n over 10 years.

Federal Cons t ruc t ion o f Larqe Solar F a c i l i t i e s

Using t h i s incent ive , the Nat iona l Aeronaut ics and Space Admin is t ra t ion ,

U.S. Army Corps o f Engineers, and Bureau o f Reclamation cou ld be commissioned

t o design, b u i l d and operate l a r g e so la r p r o j e c t s such as land and ocean b io -

mass, so la r thermal e l e c t r i c , ocean thermal energy conversion and pho tovo l t a i c

f a c i l i t i e s . These p r o j e c t s could be funded by low i n t e r e s t loans. The power

and products produced would be marketed by t h e e x i s t i n g Bonnevi l le , Alaska,

Southwest, and Southeast Power Admin is t ra t ions . This program would have a

major e f f e c t on t h e c u r r e n t e l e c t r i c energy market ing i n f r a s t r u c t u r e . It i s

est imated t h a t t h i s program would cos t over $10 b i l l i o n du r i ng a pe r i od o f t ime

t o exceed t h e nex t 10 years.

Bonus f o r I nnova t i ve Uses o f So la r Enerqy

This i n c e n t i v e program i s pa t te rned a f t e r the uranium prospec t ing bonus

program o f t h e 1940-1950s, i n which prospectors who loca ted s i g n i f i c a n t

uranium deposi ts rece ived bonuses o f $10,000. The bonus approach would be

app l ied t o a wide range o f so la r energy uses, i n c l u d i n g passive designs f o r

homes, o f f i c e s , commercial bu i l d ings , and f a c t o r i e s and the use o f s o l a r water

heat ing i n b u i l d i n g app l ica t ions , housing developments and shopping centers.

I n add i t ion , s o l a r e l e c t r i c app l i ca t i ons t o reduce e l e c t r i c demand du r ing peak

power per iods cou ld a lso be included. The p o s s i b i l i t i e s o f t h e bonus approach

f o r i ngenu i t y and s p e c i f i c app l i ca t i ons i s almost endless. The amount o f the

bonus could vary w i t h t h e app l ica t ion , and admin i s t ra t i on o f t h e bonus system

cou ld be delegated t o i n d i v i d u a l states. Each s t a t e cou ld se t up i t s own

i n c e n t i v e program t o meet i t s own energy s i t u a t i o n and i n d u s t r i a l base. Con-

s ide rab le p u b l i c involvement cou ld be s t ruc tu red i n t o the program. The p u b l i c

educat ion and p u b l i c r e l a t i o n s aspects o f t h e program would be considerable.

The moving f o r c e o f t h i s program cou ld be expected t o a r i s e a t the grass r o o t s

l eve l , i n p a r t i n response t o t h e p o s s i b i l i t y o f recogn i t i on and a bonus. The

program could be administered throughout s t a t e and l o c a l p o l i t i c a l subd iv id ions

based on t h e i r own perceived energy needs. I t i s est imated t h a t bonuses would

range from $10,000 t o $100,000. I f each s t a t e awarded between 10 and

100 bonuses, t h e annual cos t o f t h e program would range between $1 m i 11 i o n and

$100 m i l l i o n per year.

Manhattan P ro jec t f o r Solar Energy

This i ncen t i ve would be baseds on a perceived na t i ona l need f o r t h e u t i l i -

z a t i o n o f so la r energy on a crash/ large-scale basis. Regional e n t i t i e s fash-

ioned a f t e r the TVA or e x i s t i n g reg iona l u t i l i t i e s would be the r e c i p i e n t o f

federal funds f o r i n s t a l l i n g s o l a r base energy systems on a l a r g e scale. The

e l e c t r i c i t y would be marketed through e x i s t i n g d i s t r i b u t i o n channels. This

approach would severe ly impinge on t h e present s t ruc tu res f o r producing,

f i n a n c i n g and r e g u l a t i n g e l e c t r i c a l energy. The precedent f o r t h i s approach

i s t h e Tennessee Va l l ey A u t h o r i t y and t h e Bonnev i l le Power Admin is t ra t ion . The

est imated cost i s more than $10 b i l l i o n over a pe r iod i n excess o f 10 years.

Power P lan t Demonstration Program

This i ncen t i ve would be pat terned a f t e r the Atomic Energy Commission's

Power Reactor Demonstration Program (PRDP). U t i l i t i e s would b u i l d small, o f t e n

f i r s t - o f - a - k i n d c o l l e c t o r s and the Federal Government would agree t o assume

c e r t a i n costs and r e s p o n s i b i l i t i e s over and above what an equ iva len t generat ing

capac i ty would requ i re . This i ncen t i ve accomplishes several ob jec t ives . I t

would f a c i l i t a t e deployment o f so la r power p lan ts , o f i n t e r e s t t o u t i l i t i e s .

It would t r a n s f e r technology t o the user. It would g ive hands-on experience

o f so la r p l a n t development t o the u t i l i t i e s . U t i l i t i e s cou ld be asked t o sub-

m i t proposals f o r i n s t a l l i n g so la r systems i n t h e i r gr ids. Cost d i f f e r e n t i a l s

could be assumed by the Federal Government. Assuming 20 l a rge capac i ty demon-

s t r a t i o n p lan ts , t h e cost i s estimated t o be less than $1 b i l l i o n w i t h i n

10 years.

CONCLUSION

Since as e a r l y as 1918, the Federal Government has expended $252 b i l l i o n

f o r i ncen t i ves t o s t imu la te energy product ion. These expenditures are pre-

sented i n Table 63 by energy source and i ncen t i ve type. A precedent t he re fo re

e x i s t s f o r t h e Federal Government t o spend o r forego l a r g e sums t o increase

energy product ion. I n s i g h t s usefu l i n the development o f so la r p o l i c y can be

drawn by cons ider ing t h e in fo rmat ion i n Table 63 against a background o f tech-

n i c a l , economic, l ega l , i n s t i t u t i o n a l and p o l i t i c a l i n t e r r e l a t i o n s h i p s .

Considering t h e sums o f the columns o f Table 63 i t can be seen t h a t o i l

received the l a r g e s t share o f i ncen t i ve funds. Possib le reasons are 1) a l a r g e

percentage o f the popu la t ion enters the o i l market, a t the gasol ine pumps, each

week; 2 ) o i l has been commonly assumed t o be d i f f i c u l t t o f i n d and i n r e l a -

t i v e l y l i m i t e d supply; and 3) o i l i s perceived by t h e average c i t i z e n as neces-

sary f o r a d e s i r a b l e l i f e s t y l e . The great value placed on o i l by t h e p u b l i c

makes l e g i s l a t o r s s e n s i t i v e t o an assured supply.

The second l a r g e s t share o f federa l incent ives went t o the promotion of

e l e c t r i c i t y generat ion and transmission. Reasons f o r t h i s expenditure may have

been the d e s i r a b i l i t y o f an inexpensive and r e a d i l y ava i l ab le source o f power

f o r the pub l i c . The Rural E l e c t r i f i c a t i o n Admin is t ra t ion was created t o pro-

v ide the f i n a n c i n g necessary t o develop an e l e c t r i c a l d i s t r i b u t i o n system f o r

a l l areas o f t h e country .

Coal received the smal lest percentage o f incent ives . The reasons may be:

1) coal has supp l ied energy over t h e longest pe r iod o f t ime; 2 ) i t i s thought

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to be available in abundant quantities; and 3) coal is perceived as an inconve- nient and dirty fuel. It therefore commands less political popularity.

Incentives for gas, nuclear, and hydro power have received intermediate

amounts of funding. Production of gas is strongly related to the production

of oil and the creation of incentives to increase oil production is correlated

to that for gas. Incentives to the nuclear industry could result from 1) a strong puritan ethic which valued the making of something useful out of an

investment conceived for destruction, and 2) a recognized need for new power

sources. This was manifested as a dream of the future and articulated by the

Joint Committee on Atomic Energy. The driving forces behind federal expenditures for hydropower were largely social, as part of the taming of a raw land with flood control, irrigation and recreational facilities.

Considering the sum of the rows of Table 63, it can be seen that 46% of

the total cost of incentives could be categorized as the action of levying a

tax or the exemption or reduction of an existing one. Taxation is relatively

easy to administer, has an immediate financial impact on those affected, is

flexible, and is expedient. Approximately 0.5% of the cost of incentives was

in the form of disbursements for which the Federal Government received no

direct or indirect good or service in return. Requirements, such as price con-

trols accounted for 23.5% of the incentives. The Federal Government allocated

9.1% of the money expended to create incentives for energy production through

nontraditional services such as exploration, research, development, and demon-

stration. Though popular in promise, nontraditional services are not as flex-

ible as taxation and requirements. One reason for this is the limit to the

size of the research community, which cannot be readily expanded. Seventeen

percent of the total expenditure for incentives to increse energy production

involved government market activities such as TVA. Traditional government

services accounted for only 4% of the total. These, too, are inflexible.

Creation or prohibition or organizations, and collection of fees have not

been emphasized as incentives to increase energy production. 'Such incentives

are often unpopular. When they are potentially feasible, as in the case of

creating the TVA, they must be acted upon quickly.

The ana lys is i nd i ca tes two apparent r a t i o n a l e s f o r incent ives : 1 ) promo-

t i o n o f a new technology dur ing i t s e a r l y stages, and 2 ) payment o f t h e d i f f e r -

ence between the value o f an a c t i v i t y t o the p r i v a t e sector and i t s value t o

t h e p u b l i c sector. The support o f nuclear energy represents an example o f t h e

f i r s t j u s t i f i c a t i o n . Examples o f the second are r u r a l e l e c t r i f i c a t i o n (REA),

economic development (TVA) , f l o o d c o n t r o l (dams), and p r i c e c o n t r o l s ( o i 1, gas,

and coal ) . I f so lar p o l i c y were developoed according t o these ra t i ona les , two-

t h i r d s o f t h e a c t i o n would focus on t a x a t i o n and requirements. It would appear

t h a t these i ncen t i ves should a f f e c t the techn ica l elements o f s o l a r energy pro-

duct ion f o r which consumers most o f t e n en ter t h e marketplace.

During the course o f the analysis, i ncen t i ves were i d e n t i f i e d which d i d

not have a q u a n t i f i a b l e cos t t o t h e American taxpayer. Examples o f these are

the Price-Anderson l i a b i l i t y indemni f i ca t ion f o r nuclear power, the Connal ly

Hot O i l Act, t h e I n t e r s t a t e O i l Compact Commission, and t h e Natura l Gas Act o f

1938. An ana lys is o f the r e s u l t s o f such i ncen t i ves i n which the Federal Gov-

ernment assumes r e s p o n s i b i l i t y and r i s k cou ld lend considerable i n s i g h t t o t h e

fo rmula t ion o f a s t ra tegy f o r so la r development.

I n conclusion, a precedent e x i s t s f o r u t i l i z i n g fede ra l i ncen t i ves t o

increase energy product ion. Design o f n a t i o n a l energy p o l i c y which considers

the r e s u l t s o f f ede ra l investment i n incent ives t o increase energy product ion

cou ld be an e f f i c i e n t bas is upon which t o i n t e g r a t e cu r ren t and impending tech-

nology, e x i s t i n g energy stocks, and consumer requirements and preferences. The

conclusions o f micro-economic s o l a r energy f e a s i b i l i t y s tud ies cou ld be incon-

sequent ia l w i thout a comprehensive understanding o f the costs and r e s u l t s o f

i ncen t i ves t o increse energy product ion. This i s so because o f t h e d i s p a r i t y

i n r a t i o n a l e between the Federal Government and the p r i v a t e sector. The Fed-

e r a l Government need no t p red i ca te na t i ona l p o l i c y on shor t term, micro-

economic analys is . As confirmed by t h i s study, f ede ra l j u s t i f i c a t i o n i s pre-

d icated on long-term goals met w i t h t h e a i d o f new technology and supported by

s o c i a l values o f the nat ion. If it i s s o c i a l l y des i rab le and t e c h n o l o g i c a l l y

f e a s i b l e t o increase s o l a r energy's share i n t h e n a t i o n a l energy budget, t h e

paramount p o l i c y quest ion i s one o f s e l e c t i n g an i n c e n t i v e s t ra tegy and deter -

min ing t h e government's l e v e l o f investment i n it.

APPENDIX A

TABLE OF CURRENT AN0 CONSTANT

DOLLAR FACTORS

APPENDIX A

TABLE OF CURRENT AND CONSTANT

DOLLAR FACTORS

From the time of the creation of the Tennessee Valley Authority and the

National Recovery Administration minimum coal price schedules in 1933 t o the

present, the purchasing power of the dollar has decreased by more than 75%. A

comparison of federal expenditures over time must be made in constant

dol lars . Table A-1 presents the consumer price index for urban wage earners

and c le r ica l workers and the factor used t o adjust current dollar values t o

1978 dol lars .

TABLE A-1. Annual Average Consumer P r i c e Index and Conversion Factor t o 1978 D o l l a r s

Year - CPI 1978 Fac tor

TABLE A-1. ( con td )

Year - CP I 1978 Factor

APPENDIX B

DETAILS OF CHAPTER THREE SPENDING ESTIMATES

APPENDIX B

The following pages give de t a i l s about the estimates of FY-1978 energy-

re la ted spending used i n Chapter 111. The discussions correspond to each row

of Table 3 i n Chapter 111. Sources fo r material in t h i s appendix a re noted.

The notation "Appendix, p. - " referes t o the Budqet of the United States ,

1980: Appendix. In cases where this source provided insuff ic ient d e t a i l ,

the agency's research department was contacted by telephone. The name of the

agency analyst providing data i s given f o r these cases.

APPENDIX TO CHAPTER THREE

APPENDIX TO CHAPTER THREE (.contdj

0 r g a n i . a t l a n g u d Liner l t w r FY 1918 Outlays ROW (source) (Energy Farm) (000's)

ROW 13 U.S. Geological Survey (Appendix, p. 582)

Alaska Pipeline investigation Mineral resource surveys Canlervation af lands and minerals

TOTAL

he assumption for distribution between oil and gas is taken from our previous report (PNL-24101, and is bared on 1978 oil and gar conrumption data.

Distribution sharer: 213 Oil = $121,584; 113 Gar = $60,792

ROW 14 ~ u r e a u of Miner . (Appendix, p. 590) Mining research Mining environmental research Mined land demonstrations Data collection and aoalyrir Mineral land arrerrnents

TOTAL (All Coal)

Row 15 Office of Surface Mining state regulatory program grantr Federal regulatory program grantr Mineral instituter Abandoned miner reclamation fund

TOTAL (A11 Coal)

ROW 16 Bureau of Indian Affairs (Appendix, pp. 600-1)

Minerals, mining, irrigation, and power Alaska Native Fund--power systems

TOTAL (Electricity)

ROW 17 Mining Health and Safety Administration (formerly Mine Enforcement and Safety Administration)

(Appendix, p. 657)

coal health and safety inspections (Caall Metal and non-metal I % uranium from PNL-2410):

8,740 x 0.02 (Nuclear) Education and training: $ 4,091 Technical SUPDOT~: 6,067 Program administration: 1.976

blZ.13q

% of above for coal = 0.77 % of above f o r nuclear = 0.05

All of the arrumptiani for distribution of expenditures by energy farm are the same as those ured in our previous report (PNL-2410). The PNL-2410 airurnptions are bared on MESA'S (MSHA'r predecessor agency) FY-1978 Budget Justification.

TOTAL: Coal Nuclear

ROW 18 Alaska Power Adminirtration Entire agency (Electricity] 2,110 (Appendix, p. 3871

ROW 19 Bonneville vower Administration ~ n t i r e age"$ (Electricity) 349,232 (Appendix, p. 388)

ROW 20 Southwestern Power Adminiitration Entire agency (Electricity) 21,249 (Appendix, p. 3891

ROW 21 southeastern Power Administration Entire agency (Electricity1 5,572 (Appendix. p. 390)

ROW 2 2 Occupational Health and Safety Entire program: $150,711 Administration Proportion energy-related from PNL-2410 = 0.8

, (Appendix, p. 655)

Mining and transportation and public utilities are two industrial rectarr reports in OSHA employment injury incidence r ~ t e ~ . In 1974 and 1975, there two categories were tne third highest in injuries per 100 full-time workerr. A higher percentage than energy production'r share of GNI (80% instead of 12%) war ured to calculate energy-related spending. The average injury incidence rate war 9.1; the actual rate in mining war 11.0, and in transportation and public utilities, 9.4.

Distribution to energy t n e by conrumptionr rharer: Electricity 23,029 Coal 12,419 Oi 1 54,860 Natu~al gas 27,611 Nuclear 2,291 Other 361

APPENDIX TO CHAPTER THREE (.contdJ

Organizat ion 8udget L I ~ ~ S Items FY 1978 Out lays ROW (Source) ( E n e r w Form) (OOO'r)

Row 23 Emploment Standards Admin i s t ra t i on Black Lung D i s a b i l i t y T r u s t Fund, p a p e n t r f o r (Appendix, p. 655) d isabled miners (Coal ) 112,678

ROW 24 J u r t i c e - ~ e g a l A c t i v i t i e s Legal op in ions: S1,349,WD (Appendix, p. 618) % energy-re la ted from PNL-2410 x 0.2 270

Land, n a t u r a l resources, and I n d i a n ma t te rs : $8,811 X energy-re la ted equals 0.12 1,057

TOTAL 1,327

The general l i t i g a t i o n d i v i r i o n rpendr about 20% of personnel t i m e on energy-re la ted mat ters . Inc luded i n these expendi tures are a t t o r n e y ' s t ime, s e c r e t a r i a l ass is tance, t r a v e l expenses, and expenses f o r h i r i n g expe r t witnesses. Energy- r e l a t e d rpending amounted t o $1,372,000 i n 1977 and p a i d f a r carer, f o r example, r e l a t e d t o coa l S t r i p min ing, offshore development o f o i l resources, and a i l sha le on federa l lands. I n add i t i on , t h e a l l o c a t i o n f o r l e g a l a c t i v i t i e s r e l a t e d t o " land, na tu ra l reso~rces , and I n d i a n m a t t e r s ' were i nc luded a t 12% o f t o t a l , bared upon t h e l e v e l o f energy-re la ted a c t i v i t i e s i n the economy as a whole. Land, n a t u r a l rerourcer, and Ind ian a f f a i r s were then d i v i d e d by energy conrumptian l eve l s .

D i S t r i b u t i o n b y energy farms u r i n g consumption sharer : E l e c t r i c i t y 253 Coal 137 O i l 604 Na tu ra l gas 304 Nuclear 25 Other 4

Row 25 J u s t i c e - A n t r i t r u r t D i v i s i o n To ta l Budget: $42,175,000 (Appendix, p. 620) % o f energy-re la ted equals 0.12 5,061

The t o t a l a n t i t r u s t budget equals 142,175. Energy accountr f o r 12% o f t he economy, so we used 12% o f t h e a n t i t r u s t budget. we a l l o c a t e d t h i s es t ima te by our s tandard energy consumption f i g u r e r .

D i S t r i b u t i o n b y energy fannr u r i n g FEA consumption rha re r : E l e c t r i c i t y 967 Coal 521 O i l 2,303 Na tu ra l Gas 1,159 Nuc1e.l 96 Other 15

ROW 26 Department o f T ranspo r ta t i on

Nan-Highway Systems. Fuels and Lubr icants , Operat ional Improvements, Highway A c t i v i t i e s - - t h e r e budget ca tego r i es a r e no longer l i r t e d . The f u n c t i o n s or l i n e i twr l i r t e d i n PNL-2410 are now l i s t e d under t h e f o l l ow ing DOT budget ca tego r i e r .

Research and Spec ia l Programs Research and development ( p i p e l i n e safety, i n t e i - and mult i-modal r v s t m i l 1 5 3

conso l i da ted work ing ~ u n d , Re ipon r i b l e fo;~&o oh increased e f f i c i e n c y , improved T ran rpa r ta t i on Syrternr Center safety, lessened env i ronmenta l impacts, m in im iz ing

l ~ o o e n d i x . oo. 688. 7411 adverse irnoact o f enerov c o n s t r a i n t s 54.445 . . ,. ~~. . ~ ~ . .. Offshore O i l Comoenration Fund 0

(Appendix, pp.'698, 741, 742) -

TOTAL ( A l l O i l ) 54,598

ROW 27 I n t e r n a l Revenue Se rv i ce Compliance: $728,061 (Appendix, p. 771) % energy-re la ted = 0.12 87,420.

For t o t a l f i go re r , we took 12% of t he 1RS budget on compliance, because energy accounts f a r about 12% of t h e U.S. economy. Only,IRS spending f o r compliance war used, because these expendi tures are m o s t l y d i r e c t e d a t proper use o f t a x l i a b i l i t y p r o v l n o n r . we a l l o c a t e d IRS expendi tures by energy consumption.

D i s t r i b u t i o n b y energy f o r m i u r i n g consumption f i g u r e s : E l e c t r i c i t y Coal ~~~

O i l N ~ ~ Y I - a 1 gas Nuclear Other

ROW 28 Department of Energy (Appendix, pp. 369-386)

General r c i e n c e and research ope ra t i ons (Nuclear)

High energy phys ics: $186, 360 x 0.62 Nuclear phys ics: $66,240 x 0.62

General sc ience and research c a p i t a l (Nuc lea r1 L i f e sciences: f 1,985 High energy phys ics: 68,807 Nuclear phys ics:

$83,066 x 0.62

Because weapons research war 38% a f t h e a l l o c a t e d ERDA budget, we took 62% o f t h e f o l l o w i n g ca tego r i es : l i f e sciences research and h i m e d i c a l ; h i g h energy phy r i cs , and nuc lear physics.

APPENDIX TO CHAPTER THREE (contd)

Budget Liner Items FY 1978 Outlays (Energy Faml (Ooo'r) ROY

Department of Energy, continued Enerqv supply RLD CaOital Solw applications Solar technolow 8iom.s~ and Other Nuclear fission Magnetic fusion Geothermal Hydropower Environmental Suppoiting research Multi-lector

Uranium enrichment

Fas~il energy R&O C0.1 Petroleum Gas

Energy production, demonrtratian, and distribution "">I

6Ti'shale Oil and gar C",..

Conservation -- Petroleum r e r e m EIA - ERA - FERC, regulation of: Hydro Multi-resource Gas Oil

Geothermal resources development fund

DOE OISTRIBUTION TOTALS

Electricity Coal Oil Natural gar Nuclear Solar Other

Total, ~pecific

Multirector

TOTAL

Percent 0.342 13.712 7.626 0.978 67.415 7.534 2.389

Specific 8udqet Ltenr

13.873 556,241 309,343 39,700

2,734,658 305,644 96,944 --

MultiSector Budget Allocated LI Percent of Specific Energy

Forms

16,735 670,971 373.164 47,857

3,298.827 368.662 116,899

ROW 29 Council on ~nviranmental Quality ~nvironmental policy development and program evaluation: $2,854 (Appendix, p. 68) I energy-related = 0.12 1,027

acting specific data, we assumed that CEq expenditurer on enetgy would be in proportion to EPA spending on energy relative to total EPA research and development spending, or $112.824 divided by $317,246 = 0.36.

Row 30 Office of Management and Budget Natuial resources, energy, and science: $3,222 (Appendix, p. 72) % for energy = 0.72 2,320

The percentage for energy war calculated as the federal energy function outlays divided by federal natural resources and sciences function outlays: 1980 Budset, Part 1, pp. 115, 127.

Electricity 443 Coal 239 Oil 1,056 Natural 8.33 531 Nuclear 44 Other 7

A P P E N D I X TO CHAPTER T H R E E (~contd]

rn i( 1978 Out lays ROW (Source) (Enera" Form) (000 '3)

Row 31 Appalachian Regional Development A l l (Coal ) 1,429 pr' lgrm

ROY 32 Environmental P r o t e c t i o n Agency Energy 112,824 (re K. P e t t i t , Budget Operat ions Of f ice) D i s t r i b u t i o n t o energy forms by canrumption percentages:

E l e c t r i c i t y 21,549 Coal 11,621 O i l 51,334 Na tu ra l gas 25,837 Nuclear 2,144 Other 339

ROW 33 Na t i ona l Aeronaut ics and Space Energy technology a p p l i c a t i a n r 145,377 Admin i s t ra t i on

(Appendix, p. 819) D i s t r i b u t i o n t o energy iaurcer by canrumptian percentages: E l e c t r i c i t y 27,767 Coal 14,974 O i l 66,147 Natu1.1 gas 33,291 Nut lea? 2,762 Other 436

Row 34 Small B u r i n e r r Admin i s t ra t i on Energy loan program--no expendi tures du r i ng FY-1978 0 (Appendix, p. 378)

ROW 35 Na t i ona l T l d n s p o l t a t i o n Sa fe t y Board P o l i c y and suppor t : 1,756 (Appendix, p. 948) Acc ident i n v e s t i g a t i o n s : 7,554

Admin i s t ra t i ve law judger : 620 P ropo r t i on ene rgy - re la ted f rom P N L - ~ ~ I O :

P o l i c y and suppor t = 0.26 492 Acc ident i n v e s t i g a t i o n = 116 1,257 A d m i n i s t r a t i v e law judger = 116 103

TOTALS 1,852

This i s one -s i x th of t h e t o t a l expense f o r t h r e e sa fe t y board a c t i v i t i e s s i n c e "eva lua t i on safeguards i nvo l ved i n t h e t r a n s p o r t a t i o n of haiaTdouS m a t e ~ i a l " i s one of s i x broad mandates. O i l , n a t u r a l gar, and nuc lear a re t h e t h r e e energy f o r m i cons idered hazardour m a t e r i a l s i n t r anspo r t .

Approx imate ly 72% of t h e Board 's a c t i v e program i n v o l v e r a v i a t i o n . Therefore, we assume 72% of p o l i c y and ruppo r t i nvo l ves a v i a t i o n . We took t h e remainder of p o l i c y and $Upport PIUS 116 o f a the? two i tems t o get t o t a l energy-re la ted spending.

D i s t r i b u t i o n t o enerw form5 f rom PNL-2410: O i l = 0.61.. Na tu ra l gar = 0.35 Nuclear = 0.04

Row 36 Smithsonian SSIE A l l : $2,435 (Appendix, p. 987-8) P ropo r t i on energy-re la ted = 0.2 487

T o t a l energy-re la ted spending i s 20% of t o t a l budget, a l l o c a t e d even l y because of t h e ex ten t of c rass -e f f ec t s i n bas i c vesedrch. Th is 20% f i g u r e i s de r i ved from seve ra l broad t o p i c s of spec ia l i n t e r e s t t o SSIE, one o f which i s energy.

D i s t r i b u t i o n t o energy sources by canrumption percentages: E l e c t r i c i t y 93 - Coal 50 O i l 222 Natu1.1 gas 112 Nuclear 9 Other 1

ROW 37 Nuclear Regulatory C m i r r i a n A11 (Nuclear) 287,699 (Appendix, pp. 950-951)

ROW 38 Federal Trade Commission M a i n t a i n i n g cmpet i t ion--consumer p r o t e c t i o n : 53,507 x 0.12 6,420

Lack ing more s p e c i f i c i n fo rma t i on . we arrumed t h a t FTC'r energy r e l a t e d spending would be i n p r o p o r t i o n t o e n e r g y t r c o n t r i b u t i o n t o GNP; i.e., 12% of FTC'r t o t a l budget f o r ma in ta in ing compe t i t i on and consumer p r o t e c t i o n .

D i s t r i b u t i o n t o energy t ypes b y consumption percentages: E l e c t r i c i t y 1,226 Coal 661 O i l 2,921 N a t u ~ d l gas 1,470 Nuclear 122 Other 20

ROW 45 General Accounting Office (appendix, p. 421

APPENDIX TO CHAPTER THREE (con td)

~ n e r g y and Minerals ~ i v i r i o n 5,739

~ i s t ~ i b u t i o n by energy type " r ing consumption percentages: E l e c t r i c i t y 1,096 Coal 591 O i l 2,612 Natural gas 1,314 Nuclear 109 Othei I 7

Orqanirat ionr Mewed i n t o DOE

Petroleum Reserves: The Naval Petroleum Reserves were t ransferred t o the Department of Energy by P.L. 95-91 and Executive Order 12009 e f f e c t i v e October 1, 1977. I n addit ion, explorat ion and development of an Alaskan petroleum reserve i s underway and a s t ra teg ic petroleum reserve program has been established. Total out lays f a r a l l of the re programs are reported below i n DOE section.

Oefense Power Administ rat ion: Emergency preparednerr--part of DOE Budget Line Item "Energy Information, po l i cy , and Regulation."

General Services Administ rat ion: NO energy a c t i v i t i e s l i s t e d .

~ a t i o n a l Science Foundation: Energy a c t i v i t i e s dismantled and r e r p o n r i b i l i t y s h i f t e d t o EROA, now DOE

Federal Energy I \dn in i r t ra t ion

Federal Power Comniir ion

Energy Research and Development Administ rat ian

APPENDIX C

DATA USED TO QUANTIFY FEDERAL LOW INTEREST RATE

AND INCOME TAX INCENTIVES

APPENDIX C

This appendix contains a listing of the interest rates charged by the

Federal Government on the appropriations allocated to hydro-energy

development. The yearly gross operating revenues received by the federal

power marketing agencies are also tabulated.

BONNEVILLE POWER ADMINISTRATION

Rates of interest applied to the unamortized federal investment for each

generating project and for each year's investment in the transmission system, as shown below, have been set either by law, by administrative order pursuant

to law, or by administrative policies. The rates have not necessarily been designed to recover the interest costs to the U.S. Treasury to finance the

investment.

GENERATING PROJECTS

Albeni Falls Boise Bonnevi 1 le Bonneville Second Power House

and Peaking Modifications Chief Joseph Chief Joseph Additional Units Columbia Basin Columbia Basin Third Power Plant Cougar Detroit-Big Cliff Dworshak Green Peter-Foster Hills Creek Hungry Horse Ice Harbor

TRANSMISSION FACILITIES

Through Fiscal Year 1963 Fiscal Year 1964 Fiscal Year 1965 Fiscal Years 1966 through 1968 Fiscal Years 1969 and 1970 Fiscal Year 1971 Fiscal Year 1972 Fiscal Year 1973

John Day Libby Little Goose Lookout Point-Dexter Lost Creek Lower Granite Lower Monumental McNary Minidoka Palisades Teton The Dalles The Dalles Additional Units Yakima - Rosa Division Yakima - Kennewick Division

SOUTHWESTERN POWER ADMINISTRATION

An i n t e r e s t r a t e o f 2-1/2% i s app l ied t o the unpaid federa l investment

f o r t h e m a j o r i t y o f t h e Corps h y d r o e l e c t r i c p ro jec ts . The p r o j e c t s which use

a h igher r a t e than 2-1/2% are as fo l l ows : Broken Bow, DeGray and Stockton - 2-5/8%, Har ry S. Truman - 3%, and Clarence Cannon - 3-1/8%. I n t e r e s t r a t e s

app l ied t o the unpaid f ede ra l investment by SPA i n t ransmiss ion f a c i l i t i e s are

as fo l l ows :

F i s c a l Year

Through 1963 1964 1965

SOUTHEASTERN POWER ADMINISTRATION

An i n t e r e s t r a t e o f 2.5% was used f o r a l l i n t e r e s t computations made f o r

p r o j e c t s i n opera t ion as o f June 30, 1969. A r a t e o f 2.625% was used f o r bo th

J. Percy P r i e s t and M i l l e r s F e r r y p r o j e c t s which became opera t iona l du r i ng

f i s c a l year 1970, and f o r Co rde l l H u l l i n f i s c a l year 1974. The i n t e r e s t

r a t e s app l i cab le t o the p r o j e c t s under cons t ruc t i on as o f June 30, 1974, are

as f o l l o w s :

Car te rs 2-5/8% Laure l R iver 3% Jones B l u f f 2-5/8% West Po in t 3%

The i n t e r e s t r a t e s have been se t by law o r by a d m i n i s t r a t i v e p o l i c i e s pursuant

t o law. They have no t necessa r i l y been designed t o recover t he i n t e r e s t cos ts

t o t h e U.S. Treasury t o f i nance t h e investment.

ALASKA POWER ADMINISTRATION

Authorizing legis la t ion for Snettisham and Eklutna Projects requires that

3% and 2-1/2% in te res t ra tes , respectively, be applied t o the net investment

of the U.S. Government. This legislation does not permit modification of the

in te res t ra te to r e f l ec t the actual cost t o the U.S. Treasury a t the time of

construction.

TENNESSEE VALLEY AUTHORITY

Section 15d and the TVA Act authorizes TVA t o issue bonds, notes, and

other evidences o f indebtedness u p to a to ta l of $15 b i l l ion outstanding a t

any one time to a s s i s t to financing i t s power program. Debt service on these

obligations, which i s payable solely from TVA's net power proceeds, has

precedence over the payment to the U.S. Treasury. Issues outstanding on

June 30, 1978, consist of the following:

Long-Term Debt %

(Thousands)

Ser ies A, Ser ies A, Series A, Series A, Series B, Ser ies B, Series A, Ser ies B.

November 15, 1985 J u l y 1, 1986 February 1, 1987 May 15, 1992 November 1, 1992 October 15, 1994 March 15, 1995 June 15, 1995 October 1, 1996 January 1, 1996 May 1, 1997 J u l y 1, 1997 October 1, 1997 Januarv 1. 1998

due due due due due due due due due due due due due due due due due due due due due due due due due due due due due due due due

7.30 1971 Series B; 7 1972 Ser ies A, 7.35 1972 Ser ies B, 7.35 1972 Series C,

1972 Series D; 1973 Ser ies A, 1973 Series B, 1973 Ser ies C, 1973 Series D, 1974 Ser ies A, 1974 Series B, 1974 Series C, 1975 Series A, 1975 Series B, 1975 Series C, 1975 Ser ies D, 1975 Series E, 1976 Series A, 1976 Series B, 1976 Series C, 1977 Series A, 1977 Ser ies B, 1977 Series C, 1978 Series A,

TOTAL LONG-TERM DEBT

A o r i l i. i 998 J;~Y 1,-1998 October 1, 1998 January 1, 1999 A o r i l 1. 1979

January 31; 1990 (FEB) March 31, 2000 (FFB) May 31, 1988 (FFB) J u l y 31, 2000 (FFB)

Februarv 28. 2001 '(FFB)

~ a n u a r ~ 31, '2002 ( ~ F B ) '

February 28, 2002 (FFB) May 31, 2002 (FFB)

January 31; 2003 (FFB)

Short-Term Debt

U.S. Treasury Federal Financing Bank (FFB) Long-Term Debt ~ i e ~ p r i l 1 , 1 9

TOTAL SHORT-TERM DEBT

TOTAL DEBT

These i n t e r e s t ra tes d i d not apply when the dams were bu i l t . The

in te res t ra tes on the hydro projects were on the order of 1.875% and 3%.

BUREAU OF RECLAMATION

The current in te res t r a t e t o be applied t o unpaid balances fo r a l l new

project replacements and additions, except as otherwise provided by law, i s

the r a t e determined as of the f i r s t f i s ca l year in which funds are f i r s t

appropriated t o i n i t i a t e construction with such investments. Such in t e r e s t

r a t e i s determined each f i s c a l year in accordance with Departmental Manual,

Part 730.3, and r e f l ec t s the current cost of money t o the U.S. Treasury. This

reflection of current cost of money more nearly approaches actual cost.

Fiscal Year %

Through 1969 3 1970 4-7/8 1971 5-3/8

Some completed projects have in te res t ra tes t ha t do not correspond to these

and fur ther information i s available in references 7 through 11.

TABLE C-1. Yearly Gross Operating Revenues Received by the Central Valley P oject of the Bureau of Reclamation( 7 r

Yearly Gross Operating Revenues

Year (In Current Do1 lars)

(a) Estimate

TABLE C-2. Yearly Gross Operating Revenues Received by t he Rio Grand? Project o f the Bureau


Year ( In Current Do1 l a r s )

1978 1,390,921(a) 1977 1,390,921(a)

TO 1976 337.251(3)

( a ) Estimate

TABLE C-3. Yearly Gross Operating Revenues Received by the Parker-Da i s Project of the Bureau of ~eclamat ion(9 Y

Year


( In Current Do1 l a r s )

( a ) Estimate

TABLE C-4. Yearly Gross Operating Revenues Received by the Colorado River Stora Project of the Bureau of ~ec lamat ion(1 87


Year ( In Current Do1 l a r s )

( a ) Estimate

TABLE C-5. Yearly Gross Operating Revenues Received by the Pick-Sloan Missouri B sin Program of the Bureau of Reclamation?11)

Year


(In Current Dollars)

( a ) Estimate

TABLE C-6. Yearly Gross Operating Revenues Received by the Alaska Power Administration

Year


(In Current Do1 1 ars)

TABLE C-7.

Year

1978 1977

Yearly Gross Operating Revenues Received by the Southwestern Power Administration


(In Current Dollars)

TABLE C-8. Estimation of the Yearly Hydroelectric Energy Sales Revenue Received by the Tennessee Valley Authority

Total Sales Total Hydroelectric Total E l e c t r i c i t y Estimated Sales EnergyGeneration E l e c t r i c t y (Millions of of Hydroelectr ic i ty

Year (Megawatt-hours) (Meqawatt-hours) Current Dollars) (Mil l ions of Current Dollars)

1938 2,365,849 2,379,572 6.645

TOTAL 605,075,691 2,156,723,185 15,795.984

TABLE C-9.

Year

1978 1977

Yearly Gross Operating Revenues Received by the Bonnevil le Power Administration


( In Current Do1 1 ars)

267,473,836 . 223,592,000 75.508.000

TABLE C-10. Yearly Gross Operating Revenues Received by the Southeastern Power


Year ( In Current Do1 1 ars)

APPENDIX D

DEFINITION OF HYDRO-ENERGY INCENTIVES AND

DESCRIPTION OF PROCEDURES USED TO

CALCULATE THE MONETARY VALUE

OF THE INCENTIVES

APPENDIX D

DEFINITIONS

The f o l l o w i n g d e f i n i t i o n s o f i n c e n t i v e were used f o r t h i s p r o j e c t :

1. The p o r t i o n o f t h e n e t investment i n cons t ruc t i on and opera t ion o f t h e dam

a l l oca ted t o power development and exemption from fede ra l income taxes.

2. Low i n t e r e s t r a t e s on f e d e r a l appropr ia t ions and t h e exemption from fed-

e r a l income taxes.

The bas ic arguments f o r and against us ing d e f i n i t i o n #1 are as fo l lows:

Arguments f o r d e f i n i t i o n 1:

It - i s the t o t a l ne t amount o f money t h a t the Federal Government has spent

developing hydropower.

0 If fede ra l f und ing had no t been ava i lab le , the cons t ruc t ion o f most o f

these p r o j e c t s would have been se t back 10 t o 30 years w a i t i n g f o r p r i v a t e

indus t ry .

Arguments against d e f i n i t i o n 1:

The fede ra l funds are being repa id w i t h i n t e r e s t and the re fo re are no t an

incent ive .

I n order t o answer t h i s dilemma, d e f i n i t i o n # 2 was created. D e f i n i t i o n #2

attempts t o determine what t h e d i f f e r e n c e i n c o s t o f developing hydro-energy

would have been i f it had been done by the p r i v a t e sec tor ins tead o f t he

Federal Government.

Three other d e f i n i t i o n s were considered and re jec ted .

3. Federal expendi tures t o encourage p r i v a t e development o f h y d r o e l e c t r i c

f a c i l i t i e s

This d e f i n i t i o n was r e j e c t e d becuse the o n l y f ede ra l i n t e r a c t i o n w i t h

pr ivate ly-owned dams i s r e g u l a t i o n by t h e Federal Power Commission. Also, t h e

cos t o f t h i s r e g u l a t i o n must be repa id by the owners o f the dams.

4. The gross on n e t investment i n t h e cons t ruc t i on and operat ion o f dams

This d e f i n i t i o n i s d e f i c i e n t because i t would inc lude money spent f o r other

purposes ( f l o o d con t ro l , navigat ion, f i s h ladders, etc.) and would account f o r

the r e t u r n on investment.

5. The p o r t i o n o f t h e gross investment i n cons t ruc t i on and opera t ion o f the

dam a l l oca ted t o power development

This d e f i n i t i o n was re jec ted because i t does not account f o r the r e t u r n on

t h e investment.

CALCULATION PROCEDURES FOR DETERMINING NET

INVESTMENTS I N HYDRO-ENERGY FACILITIES

T h i s s e c t i o n desc r ibes t h e method used t o e s t i m a t e t h e m i s s i n g data.

The d a t a i n Tab le D-1 were ob ta ined by m a n i p u l a t i n g t h e i n f o r m a t i o n i n

t h e f i n a n c i a l s ta tements o f t h e BPA's Annual Reports. The n e t f e d e r a l

investment i n g e n e r a t i o n and t r a n s m i s s i o n combined i s found i n t h e "Statement

of Assets and L i a b i l i t i e s " under t h e " P r o p r i e t a r y C a p i t a l " heading. The s p l i t

between t r a n s m i s s i o n and genera t ion money was made u s i n g da ta f r o m t h e "Amount

and A l l o c a t i o n o f P l a n t Investment" schedule. The d o l l a r amount a l l o c a t e d t o

t r a n s m i s s i o n f a c i l i t i e s i n t h e " T o t a l Commercial Power' column was d i v i d e d by

t h e t o t a l o f t h a t column and m u l t i p l i e d b y t h e n e t f e d e r a l i nves tment t o

o b t a i n t h e n e t f e d e r a l investment i n t ransmiss ion . The f e d e r a l i nves tment i n

g e n e r a t i o n was o b t a i n e d b y s u b t r a c t i n g t h e t r a n s m i s s i o n d o l l a r s f r o m t h e

t o t a l .

The d a t a i n Tab le D-11 were c a l c u l a t e d u s i n g t h e d a t a i n Tab le D-1. The

c a l c u l a t i o n was made i n t h e f o l l o w i n g manner: t h e Net Federa l Investment i n

H y d r o e l e c t r i c Generat ion o r Transmiss ion per Year o f Year N = The Net

Cumula t i ve Investment o f Year N - t h e Net Cumulat ive Investment o f Year N-1.

The n e t f e d e r a l investment h y d r o e l e c t r i c genera t ion and t r a n s m i s s i o n per year

i s t h e n m u l t i p l i e d b y t h e p roper index t o r e p r e s e n t t h e money i n

1978 d o l l a r s . The breakdown o f d o l l a r s pe r y e a r between 1937 and 1945 was n o t

known, so t h e f o l l o w i n g approx imat ion was used. The n e t c u m u l a t i v e investment

i n 1945 was d i v i d e d by t h e number o f years between 1937 and 1945 and then

m u l t i p l i e d b y t h e 1978 d o l l a r i ndex f o r each year .

S i m i l a r methods were used t o e s t i m a t e t h e d o l l a r s p e r year f i g u r e s f o r

t h e o t h e r a d m i n i s t r a t i o n s b u t t h e r e were some d i f f e r e n c e s . The BPA was t h e

o n l y one t h a t r e q u i r e d an approximate s p l i t between genera t ion and

t ransmiss ion . The TVA d a t a i s i n t h e f o r m o f n e t assets and n o t n e t

investment .

ALTERNATIVE CALCULATION PROCEDURES CONSIDERED TO CALCULATE THE FEDERAL

INCENTIVES TO HYDROPOWER DEVELOPMENT

This sec t ion presents several a l t e r n a t e c a l c u l a t i o n procedures f o r

determining t h e fede ra l i ncen t i ves t o hydropower development prov ided by low

i n t e r e s t federa l appropr ia t ions and exemption from fede ra l income taxes.

The cumulat ive net federa l investment (Ct) can be obtained by summing

up the net f ede ra l investment i n hydropower each year (At) f rom Table 28.

Both At and Ct are i n m i l l i o n s o f 1978 d o l l a r s . These values (At and Ct) are

a summation o f t h e f o u r f o l l o w i n g cash f lows:

0 Investment i n f l o w i n the form o f federa l appropr iat ions.

Revenue from power sales.

Repayment o f p r i n c i p a l and i n t e r e s t .

Operation and Maintenance expenses.

This assumes t h a t the cumulat ive net f ede ra l investment (Ct) i s

e s s e n t i a l l y t h e outstanding unpaid balance. The i n t e r e s t subsidy i s then

ca l cu la ted by m u l t i p l y i n g the d i f f e rence i n the fede ra l and p r i v a t e i n t e r e s t

r a t e s by Ct and summing over t. The r e s u l t i n g subsidy f i g u r e i s o n l y

cu r ren t t o 1978, t h a t i s , i t doesn' t consider t h e d i f f e r e n c e i n f u t u r e

i n t e r e s t pa-ments on money obtained p r i o r t o 1978. It i s i n other words an

est imate o f t h e subsidy t o date.

This can be w r i t t e n :

where

U1 = The t o t a l subsidy prov ided t o hydropower development by t h e low

i n t e r e s t f ede ra l appropr iat ions.

Ct = The cumulat ive ne t f ede ra l investment i n hydropower from

incep t i on t o year t. i n $ lo6 1978.

i I t = The weighted average c o s t o f c a p i t a l i n t h e p r i v a t e u t i l i t y

s e c t o r i n y e a r t.

it = The f e d e r a l i n t e r e s t r a t e i n year t. i n %

t = S u b s c r i p t t i m e i n d i c a t o r .

A second method t r e a t s t h e n e t f e d e r a l investment each year (At) as a

new loan taken o u t t h a t year . It i s assumed t h a t t h e loans w i l l be r e p a i d

w i t h equal p e r i o d payments f o r n pe r iods . The a p p r o p r i a t i o n s must be r e p a i d

w i t h i n 50 years. However, t h e f e d e r a l agencies u s u a l l y repay t h e h i g h e r

i n t e r e s t loans w i t h i n 25 years. I t i s assumed t h a t n i s 40 years. The

subs idy i s then c a l c u l a t e d b y t h e f o r m u l a g i v e n p r e v i o u s l y . The r e s u l t i n g

subs idy f i g u r e i n c l u d e s t h e f u t u r e i n t e r e s t subs idy on a l l funds

th rough 1978.

T h i s can be w r i t t e n :

T o t a l payment on year t ' s l oan i n n Pt

where

Pt o r P I t = The end o f p e r i o d payment i n a u n i f o r m s e r i e s c o n t i n u i n g

f o r t h e coming n per iods , t h e e n t i r e s e r i e s equal t o At a t

i n t e r e s t r a t e it o r je t .

At = The ne t f ede ra l investment i n hydropower i n year t. i n

$lo6 1978/year.

n = The number o f i n t e r e s t periods.

The t h i r d method uses the t o t a l y e a r l y revenues o f a l l f ede ra l hydropower

market ing agencies (Rt) and the average percentage o f p r i v a t e u t i l i t y

revenues t h a t went t o federa l income t a x (Et). The formula i s no t a

s t r a i g h t percentage because t h e t a x would have t o be supported by l a r g e r

revenues. Therefore the t o t a l y e a r l y revenues (Rt) are t rea ted as t h a t

which i s l e f t over a f t e r taxes. This subsidy f i g u r e i s cu r ren t t o

September 30, 1978. The subsidy and Rt are i n cur ren t d o l l a r s and t h e

1978 d o l l a r f a c t o r (Ft) cor rec ts them t o 1978 d o l l a r s .


where

Ft = The 1978 d o l l a r f a c t o r ( f rom Appendix A)

Rt = The t o t a l y e a r l y gross opera t ing revenues c o l l e c t e d from incep t i on 6 t o September 30, 1978 by fede ra l agencies ( i n 10 cu r ren t

d o l l a r s ) .

Et = The average percentage o f revenues t h a t u t i l i t i e s have pa id i n

Federal taxes each year from 1937 t o 1978 ( i n 8).

The f o u r t h method uses the t o t a l cumulat ive fede ra l h y d r o e l e c t r i c

generat ion (M), t h e 1933 t o 1978 average cos t per kwh t h a t p r i v a t e u t i l i t i e s

charged (0) and the t o t a l cumulat ive fede ra l revenues (R). The reasoning f o r

t h i s c a l c u l a t i o n i s as fo l l ows : The o n l y basic d i f f e rences between p r i v a t e

u t i l i t i e s and the fede ra l power market ing agencies are t h a t the p r i v a t e

u t i l i t i e s pay fede ra l taxes, have a h igher cos t o f c a p i t a l and use more

the rma l -e lec t r i c generat ing p lan ts . I f you assume t h a t the fede ra l taxes and

h igher cos t o f c a p i t a l have a much greater e f f e c t than t h e f a c t t h a t t h e

p r i v a t e p lan ts are most ly t he rma l -e lec t r i c ins tead o f h y d r o e l e c t r i c then the

d i f f e r e n c e between t h e revenue charged by the government and the revenue t h a t

would have been charged by the p r i v a t e u t i l i t i e s i n a f a i r est imate o f the

subsidy t o hydropower.


where

M = the t o t a l cumulat ive fede ra l h y d r o e l e c t r i c energy produc t ion from

i n c e p t i o n t o September 30, 1978, i n kwh - D = the average revenue per k i l o w a t t hour t h a t p r i v a t e u t i l i t i e s have

charged from 1933 t o 1978.

APPENDIX E

NET FEDERAL INVESTMENTS I N HYDRO-

ENERGY F A C I L I T I E S : DATA AND RESULTS

APPENDIX E

I n t h i s appendix. Tab les E - 1 t h rough E-10 c o n t a i n t h e d a t a used t o

e s t i m a t e t h e n e t f e d e r a l i nves tment i n hydro-energy; Tab les E-11 t h r o u g h E-16

p r e s e n t t h e r e s u l t s o b t a i n e d when t h e m i s s i n g number c a l c u l a t i o n ( f r o m

Appendix D) and d o l l a r convers ion f a c t o r s were a p p l i e d t o t h i s data.

TABLE E-1. Cumulative Net Federal Investment in the Federal Columbia River Power System Hydro- electric Generatio nd Electricity Trans- mission Facilities Ta7

Fiscal Hydroelectric Electricity Year 1978 Generation $105 Transmission $105

(a) Current Dollars - no adjustment has been made for inflation.

TABLE E-2. Cumulative Net Federal Investment in the Completed Hydroelectric Generation and Electricity Transmissi Facilities of the Southwestern Federal Power System ?a)

Hvdroelectric ~lectricitv(b) - ~~~~ .~ - d

Fiscal Generation Transmission Year 1978 Facilities in $105 Facilities in $105


(b) The electricity transmission facilities of the Southwestern Federal Power System are used solely to transmit the power generated by the power system's hydroelectric facilities.

TABLE E-3. Cumulative Net Federal Investment in the Southeastern Federal Power Propgy~ Hydro- e l e c t r i c Generation F a c i l i t i e s

Net Federal Fiscal Investment i n Genera-

Year 1978 t ion Fac i l i t i e s $lo5

( a ) Current Dollars - no adjustment has been made for inf la t ion.

(b) Estimate.

TABLE E-4. Data From Which t h e Estimates of t h e Net Federal Investment per Ye in the Alaska Federal Power Program Were Made 8)

Cumulative Net Cumulative Net .. . .

Investment in the Investment in the F isca l Year Snettisham Pro jec t $lo5 Eklutna Pro jec t $105

( S t a r t up)

(Construction begun)

- - ~

298.9 301.8

S t a r t up 302.6

(Construction begun)

( a ) These da ta have not been correc ted f o r i n f l a t i o n .

TABLE E-5. Cumulative Net Assets of the Tennessee Valley Authority Hydroelectric Generati89 and Elec- tricity Transmission Facilities

Assets in ' Assets in Hydropower Transmission

Fiscal Year Plants ($105) Facilities ($lo5)


TABLE E-6. Cumula t ive Net Federa l I nves tmen t i n t h e Bureau o f Rec lamat ion ' s Upper Colorado Region t h a t Mu be Repaid w i t h Commerical Power Revenues 7%)

Net Federa l I nves tmen t

I n Genera t ion F i s c a l and T ransmiss ion

Year 1978 F a c i l i t i e s ($105)

( a ) C u r r e n t D o l l a r s - no ad jus tment has been made f o r i n f l a t i o n .

TABLE E-7. Cumulative Net Federal Investment i n the Bureau o f Reclamation's Lower Colorado Region t h a t Mu@]be Repaid w i t h Commercial Power Revenues

Net Federal Investment

I n Generat ion F i s c a l and Transmission

Year 1978 F a c i l i t i e s ($105)

(a ) Current D o l l a r s - no adjustment has been made f o r i n f l a t i o n

( b ) Est imate.

TAS LE E-8. Cumulative Net Federal Investment in the - Bureau of Reclamation's Upper and Lower

Missouri Region that Must Repaid with Commerical Power Revenues ( $7


In Generation Fiscal and Transmission

Year 1978 Facilities ($105)


( b ) Estimate.

TABLE E-9. Cumulative Net Federal Investment in the Bureau of Reclamation's Central Valley Project that Must b epaid with Commer- cial Power Revenues ?a?



Year 1978 Facilities ($1051

1978 N/A 1977 762.2

Tq 1976 762.2 1976 762.2 1975 644.9 1974 421.8 1973 340.7 1972 143.9 1971 176.6 1970 213.3 1969 583.3 1968 699.8 1967 1,217.5 1966 1,401.4 1965 1,577.5 1964 1,766.6 1963 1,308.2 1962 413.3 1961 548.1 1960 499.2

(a) Current Dollars - no adjustment has been made for inflation

TABLE E-10. Cumulative Net Federal Investment in t h e Bureau of Reclamation's Rio Grande Pro- j e c t t h a t Must(9g Repaid with Commercial Power Revenues



Year 1978 Facilities ($1051

(a) Current Dollars - no adjustment has been made for inflation

.E E-11. Net Federal Investment in the Federal Columbia River Power System Hydro- electric Generation and Electricity Transmission Facilities per Year (in Mill ion 1978 Dollars)

Hydroelectric Electricity Year Generation Transmission

1978 271.07 124.50

TOTAL 6,660.29 3,114.20

(a) Estimated data; see Appendix 0.

TABLE E-12. Net Federal Investment in the Southwestern Federal Power System Hydroelectric Generation and Electricity Transmission Facilities per Year (in Million 1978 Dollars)


TOTAL

(a) Estimated data; see Appendix D.

TABLE E-13. Net Federal Investment in the South- eastern Federal Power Program Hydro- electric Generation Facilities per Year (in Million 1978 Dollars)

Year Hydroelectric Generation

TOTAL 1,771.47

(a) Estimated data; see Appendix D.

TABLE E-14. Net Federa l Investment i n t he A laska Power A d m i n i s t r a t i o n Federa l Power Program Hydro- e l e c t r i c Generat ion and Transmission F a c i l - i t i e s Per Year ( I n M i l l i o n 1978 D o l l a r s )

Year - H y d r o e l e c t r i c Generat ion

and Transmission Investment

TOTAL 172.89

( a ) Est imated data; see Appendix D.

TABLE E-15. Net Federal Investment in the Tennessee Valley Authority Hydroelectric Generation and Electricity Transmission Facilities per Year (in Million 1978 Dollars)


TOTAL 2,006.53 2,844.94

( a ) Estimated data; see Appendix D.

TABLE E-16. Net Federal InvestmentIYear in the Hydro- electric Power Projects from Which the Bureau of Reclamation Markets the Power (in Million 1978 Dollars)

Hydroelectric Generation Year and Transmission Investment

~~~ ~

1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941

TOTAL

(a) Estimated

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Federal Incentives for Energy Production - 1980

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