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1 PNL-2410 REV. I
Revised

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 a an account of sponsored s 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 O FEDERAL INCENTIVES F USED TO STIMULATE ENERGY PRODUCTION

B. M. M. A. H. C.

W. Cone, D. L. Brenchley, V. L. B r i x ,

L. Brown, K. E. Cochran, P. D. Cohn, R. J. Cole, G. Curry, R. Davidson, J. E a s t e r l i n g , J. C. Emery, G. Fassbender, J. S. F a t t o r i n i , J r . , 6. Gordon, Harty, D. Lenerz, A. R. Maurizi, R. Mazzucchi, 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 Solar Applications 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 product. 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., lawyer. 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 planner; Mr. Easterling; Mr. Fattorini; Charles McClain, lawyer and business analyst; 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, environmental 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 contribution 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 t h e h e l p 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 prep a r i n g e a r l i e r versions o f t h e t h e o r e t i c a l and generic chapters. D r . Cole and Dr. Sommers acknowledge t h e h e l p o f t h e 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 generic i n c e n t i v e s . Richard Bulman, Power Supply O f f i c e r . t i o n Management. ment Program. get Branch. Division. Programs O f f i c e . NOAA: REA:
C. A. Jewel, D i r e c t o r , O f f i c e

o f the Budget; Thomas A. Scanlon, A s s i s t a n t D i r e c t o r , O f f i c e o f t h e Budget; Forest Service: D r . Harry Brown, Watershed and Aquatic H a b i t a t Research; S. W. Van Doran, Recreation S t a f f , RecreaDick Langloi s, Deputy D i r e c t o r , Coastal Zone ManageDIBA: P a t r i c i a Spencer, I n d u s t r y Programs D i v i s i o n , Energy

Corps o f Engineers;

M r . Jerontonis, Budget and Finance, BudL t . Colonel Walter Scott. Housing and

Defense Nuclear Agency: Bureau o f Land Management:

Community Research:

Joseph Sherman, Energy B u i l d i n g Technology and Standards Donald P. Touesdell f o r Frank Edwards, Bureau o f Reclamation: Clark L. Rose,
U.S.

A s s i s t a n t D i r e c t o r o f M i n e r a l s leasing. and W i l d l i f e :

Systems Engineering Branch f o r Raymond E. Harmon, Power D i v i s i o n . Rod H a l l , O f f i c e o f B i o l o g i c a l Services. Bureau o f Mines: L i n n Hoover, Ecologic D i v i s i o n . Oyler, Budget D i v i s i o n . MESA:

Fish

Geological Survey:

Leonard Westerstrom, Coal

Economics Branch; Walter Dupree, I n t e r f u e l s Studies o f Fuels D i v i s i o n ; W i l l i a m Herschel P o t t e r and Charles Luxmore, S a f e t y OCS Porgram: Alan Powers, Outer C o n t i n e n t a l B i l l Bettenberg, Former Justice-Legal A c t i v i t i e s : Justice, A n t i t r u s t A c t i v i I n t e r n a l Revenue Service: D i v i s i o n , Coal Mine Health and Safety; and Levy E. Brake, S a f e t y D i v i s i o n Metal and Nonmetal H e a l t h and Safety. S h e l f Program Coordination. Power Administrations:

A c t i n g A s s i s t a n t Secretary f o r M i n e r a l s and Energy. Floyd L. France, Head, General L i t i g a t i o n Section. ties: Cheryl Peck, P u b l i c I n f o r m a t i o n O f f i c e r . W i l l i a m J. Devereaux, O f f i c e o f Systems Engineering. Operations Analysis D i v i s i o n . Clark 111, Senior Economist.

Transportation Department:

Randel Blankenship, A s s i s t a n t D i r e c t o r , L e g i s l a t i v e Analysis OMB:

Research and Edwin H. EPA: David A l b e r t P.

Council on Environmental Q u a l i t y : J e f f S t r u t h e r s , Energy Policy. NASA:

Graham, Energy Processes i n Energy Minerals and Industry.

L i t t l e , A s s i s t a n t t o t h e Comptroller f o r NASA. General Services Administrat i o n : Dorothy S. Gregor, Preparation and Review Divsion, GSA Budget O f f i c e .

SBA:

Tony Robinson, Energy Environment Economist, Competitive Structure. James A. Wilson, Budget and Finance D i v i s i o n .

Fed-

e r a l Trade Commission:

Inter-

s t a t e Commerce Commission: Commission:

Dave Heggerstad, Chief o f t h e Budget Branch; and S e c u r i t i e s and Exchange

Richard Chais, Chief, Energy and Environment Section. Lawrence Haynes, Comptroller.

O f f i c e o f Technology Assessment:

L i o n e l (Skip) Johns, Energy P r o j e c t Manager; and Linda Parker, Energy P r o j e c t A c t i v i t i e s . General Accounting O f f i c e : John Bachkosky, Supervisor Auditor, Planning and A d m i n i s t r a t i o n S t a f f , Energy and Minerals. M r . Harty, M r . Cohn, and Mrs. B r i x wish t o acknowledge t h e f o l l o w i n g conF. W. Albaugh, c o n s u l t a n 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 Cont r o l l e r , ERDA; and W. J. B a i r and R. D. Widrig o f Battelle-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 d e s c r i b i n g i n c e n t i v e s 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, Portland, Oregon; Leon Joroulman and John H. Schimmelbusch, B o n n e v i l l e Power Admini s t r a t i o n , Portland, Oregon; Jesse C. M i l l s , Tennessee V a l l e y A u t h o r i t y , Knoxv i l l e , Tennessee; Gordon Hallum, Kathleen Berry, and Lenore Melin, Alaska Power Administration, Juneau, Alaska; Mary George Bond, Ed E. Riggin, and H. Wright, Southeastern Power Administration, Elberton, Georgia; J. Lopez and 0. P. P i t t s , Tennessee V a l l e y A u t h o r i t y , 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.;

t r i b u t o r s t o t h e chapter d e f i n i n g i n c e n t i v e s t o nuclear power:

J e r r y Dinan, B o n n e v i l l e

Power A d m i n i s t r a t i o n , Portland, Oregon; Lee C. Sheppard, Tennessee V a l l e y A u t h o r i t y , K n o x v i l l e , Tennessee; and Lyman Harris, ALCOA, Vancouver, Washington; R. Olsen, USBR Lower Colorado Region, Boulder City, Nevada; Ed Spear, USBR Upper M i s s o u r 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 Missouri Region (Western D i v i s i o n ) , Denver, Colorado; Robert Ortego and Jim Wedeward, USBR R i o Grande, E l Paso, Texas; Pat Shippley, USBR C e n t r a l V a l l e y P r o j e c 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 discussions 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, published during December, 1978. A chapter was added which analyzes federal incentives to encourage public utility generation and transmission of electricity. 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 document. 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

. . . . . .

iii vii xvi i xix

TABLES

. FIGURES .
I. INTRODUCTION

PURPOSE OF THE RESEARCH Economic F e a s i b i l i t y Legal Factors Fiscal Policy Conclusions I n s t i t u t i o n a l Forces

CURRENT THOUGHT ON SOLAR INCENTIVES

DEFINITION OF THE PROBLEM APPROACH T THE ANALYSIS O REFERENCES CHAPTER I 11. A THEORETICAL APPROACH T ANALYZING INCENTIVES F R O O ENERGY PRODUCTION

"POLICY" VERSUS "POLICIES" Boundaries o f t h e Discussion Determining Cause and E f f e c t THE ECONOMIC VIEWPOINT

. .

Causes o f Governmental Actions E f f e c t s o f Governmental Actions Summary o f t h e Economic Viewpoint POLITICAL VIEWPOINT

. .

Causes o f Governmental Actions E f f e c t s o f Governmental Actions Summary o f t h e P o l i t i c a l Viewpoint THE ORGANIZATIONAL VIEWPOINT Causes o f Governmental A c t i o n E f f e c t o f Governmental Actions Summary o f t h e Organizational Viewpoint

. .
36

THE LEGAL VIEWPOINT

. . .

36 37

Causes o f Governmental Actions E f f e c t s o f Governmental Actions Summary o f t h e Legal Viewpoint THE INTERRELATIONSHIPS A O G THE FOUR VIEWPOINTS MN TYPES OF POSSIBLE GOVERNMENTAL ACTIONS Taxation Fees Creation and P r o h i b i t i o n o f Organizations

.
.

. .

Disbursements Requirements

.
.

T r a d i t i o n a l Government Services N o n t r a d i t i o n a l Services Market A c t i v i t y

USE O THE VIEWPOINTS AND THE TYPOLOGY T IDENTIFY F O ENERGY ACTIONS

REFERENCES CHAPTER I 1 REFERENCES TABLE 1

111. GENERIC ANALYSIS OF ENERGY INCENTIVES IDENTIFICATION AND DESCRIPTION O ENERGY ACTIONS F Organizational Types Congressional Committee J u r i s d i c t i o n Major Energy Form and Stage Major Types o f A c t i o n FY 1978 Out1 ays ANALYSIS O ENERGY ACTIONS F

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 O ACTION F

CONCLUSIONS

REFERENCES CHAPTER I 1 1

IV.

NUCLEAR ENERGY INCENTIVES BACKGROUND INCENTIVES RESEARCH AND DEVELOPMENT ACTIVITIES LIABILITY INSURANCE

. .

INCENTIVES T THE URANIUM INDUSTRY O Procurement P o l i c i e s

.
.

R e s t r i c t i o n on Import o f Foreign 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 I m p l i c a t i o n s Enrichment Services WASTE MANAGEMENT CONCLUSIONS

. . .

FEDERAL REGULATION O THE NUCLEAR INDUSTRY F

. .

REFERENCES CHAPTER I V HYDRO-ENERGY INCENTIVES CONSTRUCTION

Army Corps o f Engineers Bureau o f Reclamation MARKETING

.
. . .

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

B o n n e v i l l e Power A d m i n i s t r a t i o n Southwestern Power A d m i n i s t r a t i o n Southeastern Power A d m i n i s t r a t i o n Alaska Power A d m i n i s t r a t i o n

.
.

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

156

Western Area Power A d m i n i s t r a t i o n REGULATION OF HYDROELECTRIC FACILITIES ANALYTICAL METHOD CONCLUSIONS VI.

. .

157 159 160 164 167

REFERENCES CHAPTER V COAL ENERGY INCENTIVES

RESEARCH AND DEVELOPMENT M i n i n g Methods and Techniques Utilization

. .

169 169 169 171 173 176 178 182 183 183

EXPLORATION Tax Rules A p p l i c a b l e t o E x p l o r a t i o n Leasing and Development o f Federal Coal Lands i n the West

. .

Development o f Coal i n t h e East

MINING

. .

D e p l e t i o n Allowance Data C o l l e c t i o n H e a l t h and S a f e t y T r a i n i n g Programs

. . .

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

183 185 187 189

Production and P r o d u c t i v i t y Small Operators

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

189 190 191 192 193 197 198 200 203 203 203 205 205

. TRANSPORTATION .
WASTE DISPOSAL CONCLUSIONS

. .

REFERENCES CHAPTER V I

VII.

OIL ENERGY INCENTIVES RESEARCH

OIL AND GAS EXPLORATION AND PRODUCTION Geological Survey Data

O i l Leasing P o l i c y

Bureau of Land Management Interstate Oil Compact Act--1935 . InformationGathering . Connally Hot Oil Act-1935 Stripper We1 1 Incentives--1944, 1973 . Incentives for New Oil Production--1973 Entitlement Program . Economic Regulatory Administration . Strategic Petroleum Reserve . Intangible Drill ing Expenses--1918-1978 Percentage Depletion--1926-1978 . Recapture of Intangible Expenses on Disposition of Oil and Gas-Producing Property . Western Hemisphere Trade Corporations . Foreign Tax Credits . Oil Import Quotas--1959-1973 PETROLEUM REFINING AND TRANSPORTATION . Oil Pipeline Rates--1921-1951 Cost of Oil Pipeline Regulation--1950-1978 . Maintenance of Inland Waterways--1950-1978 . Maintenance of Coastal Ports--1950-1978 . The Jones Act of 1915--1915-1978 Deepwater Ports Act of 1974 . Trans-Alaska Pipeline Authorization Act . Merchant Marine Act of 1970 . World War I1 Pipeline Construction . 1973 Program to Encourage Energy Resource Development Federal Support of Highway Construction--1916-1978 . Waste Disposal and Environmental Problems CONCLUSIONS . REFERENCES CHAPTER VII .

207 207 209 209 210 211 215 216 216 217 217 220 222 223 226 228 229 229 229 231 231 233 234 234 235 237 237 238 239 241

. .

VIII.

NATURAL GAS ENERGY INCENTIVES RESEARCH AND DEVELOPMENT EXPLORATION PRODUCTION Wellhead P r i c e C o n t r o l s N a t u r a 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 Transmitted i n Interstate Pipelines 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

. . .

N a t u r a l Gas Act o f 1938

O v e r a l l Estimate o f t h e Cost o f Gas Regulatory Agencies P i p e l i n e S a f e t y Programs UTILIZATION

R e g u l a t i o n o f Imported L i q u e f i e d N a t u r a l Gas P r i o r i t i e s E s t a b l i s h e d on Gas Purchased and Transmitted 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 Coordination A c t o f 1974 WASTE DISPOSAL CONCLUSIONS

. . . .

REFERENCES CHAPTER V I I I

IX.

ELECTRICITY INTRODUCTION ORGANIZATIONS

TYPES OF ACTIONS TAXATION

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

L i b e r a l i z e d Depreciations

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

. Loan Guarantees I n t e r e s t Rates .

E l e c t r i c Loans

A Revolving Fund f o r Loan C a p i t a l Technical Assistance

Federal Power A d m i n i s t r a t i o n s and the TVA CONCLUSIONS X.

. .

.
.

REFERENCES CHAPTER I X THEORETICAL APPROACH GENERIC INCENTIVES NUCLEAR INCENTIVES

CONCLUSIONS WITH RESPECT T SOLAR ENERGY POLICY O

HYDRO INCENTIVES
COAL INCENTIVES OIL INCENTIVES

. .
. .

NATURAL GAS INCENTIVES ELECTRICITY INCENTIVES POSSIBLE SOLAR INCENTIVES

Accelerated Depreciation 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

. .

R e d i r e c t i o n o f the Rural E l e c t r i f i c a t i o n Administration

Formation o f a Solar TVA

Federal C o n s t r u c t i o n o f Large S o l a r F a c i l i t i e s Bonus f o r I n n o v a t i v e Uses o f S o l a r Energy Manhattan P r o j e c t f o r S o l a r Energy Power P l a n t Demonstration Program CONCLUSION APPENDIX A

.
.

293 293 294 294 295

. APPENDIX C . APPENDIX D . APPENDIX E . BIBLIOGRAPHY .

APPENDIX B DISTRIBUTION

A-1 B-1 C-1 D- 1

E-1
B i b-1 Distr-1

Prominent Users of the Four Viewpoints Causes and Effects of Governmental Actions Identification and Description of Energy Actions Federal Organizations by Major Type of Action Energy-Related Out1 ays of Federal Organizations Energy-Related Organizations and Outlays by Organizational Types Energy-Related Organizations and Outlays by Committee Jurisdiction Energy-Related Organizations and Outlays by Energy Form Federal Organizations by Energy Form Energy Outlays by Energy Form Energy-Related Organizations and Outlays by Energy Stage Energy-Related Organizations by Energy Form and Energy Stage FY 1978 Energy Outlays by Energy Form and Energy Stage Energy-Related Organizations and Outlays by Major Type of Action Federal Organizations by Major Type of Action Energy-Related Organizations and Outlays by Action Type and Energy Form An Estimate of the Cost of Generic Incentives Used t o Stimulate Energy Production FY 1978 Steps i n the Nuclear Fuel Cycle Research and Development Expenditures for the Nuclear Power Program 1950-1974 Research and Development Expenditures f o r the Nuclear Power Program 1975-1978 Mixed Program Contributions t o Civilian Nuclear Power The Value of Government Indemnity t o the Nuclear Power Plant Owner Percent of Foreign-Origin Uranium Ore Permitted f o r Use i n U.S. Plants DOE Uranium Enrichment Contracts as of September 15, 1978

35 39 59 73 82 84 84 90 91 92 93
94

95 96 97 99

. .

. . . . . . .

101 110
112

113 116 122 129 133

Separative Work U n i t s and Revenue from Enriched Uranium Sold Through 1978

AEC and NRC Regulatory Costs

An Estimate o f the Cost o f I n c e n t i v e s t o Stimulate C i v i l i a n Nuclear Power Production Estimate o f t h e T o t a l Net Federal Investment i n H y d r o e l e c t r i c Power Development

Estimation o f t h e Federal I n c e n t i v e Provided t o Hydro-Energy Development by Exemption from Federal Income Taxes E s t i m a t i o n o f t h e Subsidy Provided t o t h e Development o f Hydroe 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 Appropriations

Federal I n c e n t i v e s Used t o S t i m u l a t e t h e Development o f HydroEnergy and E l e c t r i c i t y Transmission Federal R&D Expenditures f o r Coal I n d u s t r y

Revenue Equivalent o f Percent Depletion Allowance f o r Coal Cost o f Data C o l l e c t i o n and Analysis, A l l Minerals-Bureau o f Mines Expenditures on Mine Health and S a f e t y Excluding R&D Domestic and Foreign Waterborne Shipments Summary o f I n c e n t i v e s t o Coal b y Type

. .

Federal R&D Expenditures Related t o the Petroleum I n d u s t r y Geological and M i n e r a 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 I n c e n t i v e s Under O i l P r i c e Controls

. Revenue Equivalent o f Percentage D r i l l i n g Expensing .

Value o f I n c e n t i v e s

Depletion Allowance and I n t a n g i b l e

P i p e l i n e Company Return on Investment

. .

U.S. Army Corps o f Engineers Expenditures f o r Navigation P r o j e c t s Subsidies from t h e Merchant Marine Act o f 1970 Summary o f O i l I n c e n t i v e s by Type

Data f o r E s t i m a t i n g Amount o f Subsidy f o r Promotion o f N a t u r a 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 c e Regulation Estimated Net I n c e n t i v e Due t o FERC Regulations o f t h e N a t u r a l Gas P i p e l i n e s and I n t e r s t a t e Producers

Summary o f N a t u r a l Gas I n c e n t i v e s b y Type

.
by

Summary o f Investment Tax C r e d i t s Generated and U t i l i z e d During t h e Years 1962 through 1976 by Method o f Accounting

. I n c e n t i v e 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 . Deferred Income Tax Due t o L i b e r a l i z e d Depreciation

Provided t o t h e Tennessee V a l l e y A u t h o r i t y b y t h e o f Federal Tax Provided t o S t a t e Power A u t h o r i t i e s and Municipal by t h e Exemption o f Federal Taxes

Incentive Exemption Incentive Utilities

I n c e n t i v e Provided t o REA Cooperatives by t h e Exemption o f Federal Taxes . 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 . 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 Repayment o f REA Loans

Net Annual REA Loans Outstanding

. .

T o t a l Net Cumulative Outstanding REA Loans f o r t h e E l e c t r i c Program

REA A d m i n i s t r a t i v e Funds Obligated t o t h e Program

. . . . . . . . . . . .

259 265 267 269 270 272 273 277 278 279 280 281 283

Federal I n c e n t i v e s Used t o S t i m u l a t e t h e Development o f E l e c t r i c Energy An Estimate o f t h e Cost I n c e n t i v e s Used t o S t i m u l a t e Energy Production

296

FIGURES

1.
2.
3.

The Real and Apparent Market f o r Energy

17

A Diagram o f Organizational Decision Making Types o f Tax i n Production-Consumption Cycle Nuclear Fuel Cycle - Options f o r Waste Fuel

. . . .

33 45 126 142

4.
5.

Annual Surface D r i l l i n g and Reserve Additions.

A ANALYSIS O FEDERAL INCENTIVES USED N F T STIMULATE ENERGY PRODUCTION O

I.

INTRODUCTION

The amount o f s o l a r energy t h a t reaches t h e e a r t h ' s surface every two weeks i s e q u i v a l e n 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 buildings i s negligible. Debate over s o l a r energy's share i n the n a t i o n a l The reasons appear t o be b u r i e d 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 r e n c e between present and p o t e n t i a l use. tionships. policy. PURPOSE OF THE RESEARCH The purpose o f t h e research presented i n t h i s r e p o r t i s t o a s s i s t t h e D i v i s i o n o f Conservation and S o l a r Applications, Department o f Energy (DOE), i n the study and recommendation o f f e d e r a l i n c e n t i v e s f o r t h e development o f s o l a r energy. A f e d e r a 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 govThe developernment t o expand r e s i d e n t i a l and commercial use o f s o l a r energy. i n complex t e c h n i c a l , economic, l e g a 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 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 t h e design o f s o l a r energy

ment o f s o l a r energy p o l i c y c o u l d be enhanced b y 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 a n a l y s i s o f f e d e r a l i n c e n t i v e s t h a t have been used t o simulate t h e development o f other forms o f energy. energy. A b u i l d i n g c o n t r a c t o r o r p r o s p e c t i v e homeowner contemplating t h e purchase o f s o l a r energy equipment f o r h e a t i n g 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 r a t e s , and t h e 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

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 i n c e n t i v e s and r e l a t e s them t o c u r r e n t thought about s o l a r

set i n a p e r f e c t l y c o m p e t i t i v e 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 h e n a t i o n ' s energy resources. Such i s n o t t h e case. Hist o r i c a l l y the United S t a t e has created i n c e n t i v e s t o increase p r o d u c t i o n 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 c o m p e t i t i v e energy economy. A r a t i o n a l s o l a r energy p o l i c y i s t h e r e f o r e p r e d i c a t e d on a knowledge o f e x i s t i n g i n c e n t i v e s t h a t have been created t o increase p r o d u c t i o n o f other forms o f energy. CURRENT THOUGHT ON SOLAR INCENTIVES The o i l embargo o f 1973 s t i m u l a t e d concern over energy supplies. i c y makers sought U.S. and advantages o f u t i l i z i n g s o l a r energy were considered. i n c e n t i v e s t o increase t h e n a t i o n a l use o f s o l a 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 i g h i n i t i a l c o s t o f s o l a r systems have r e c e i v e d t h e most a t t e n t i o n . 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 Preliminary c r e d i t s , and accelerated d e p r e c i a t i o n have a l l been proposed. ~ignifican~ impact on s o l a r market p e n e t r a t i o n . solar/electrical u t i l i t y interface. (2) B u t t i s one o f t h e strongest advocates f o r f e d e r a 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 h e r e i s a need t o r e d r e s s The i n d i v i d u a l , e x i s t i n g d i s t o r t i o n s i n t h e c o m p e t i t i v e energy marketplace. EcoAs p o l s e l f - s u f f i c i e n c y i n energy production, t h e o p p o r t u n i t i e s 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

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 The most important noneconomic i n c e n t i v e program was found t o be t h e development o f t h e c r i t i c a l

as a producer o f s o l a r energy, does n o t r e c e i v e t h e c o m p e t i t i v e b e n e f i t s o f investment t a x c r e d i t s and d e p r e c i a t i o n allowances provided by present t a x law t o c o r p o r a t e producers o f a l t e r n a t i v e energy sources. A l l producers o f s o l a 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 conventional energy p r i c e s t o below marginal c o s t s o r marketclearing prices. (3,a)

Economic Feasibi 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 available solar equipment, the climate and average available sun flux, the initial and operational cost of conventional heating and cooling systems, the availability of capital funds, and the cost of conventional energy. (5) Bennington, Bohannon and Spewak state that solar water heating and solar space heating installed at an equivalent cost of $20/ft 2 of collector system could compete today with electric resistance systems throughout most of the United States. If the cost is reduced to $15/ft 2 solar systems become competitive 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, generally range from about $20/ft 2 down to $13/ft 2 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 competitive to any significant extent during this century. However, modest reductions 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, t h e s o l a 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 d e c l i n e i n t h e s o l a r i n d u s t r y r e s u l t e d from t h e r a p i d decrease i n e l e c t r i c i t y r a t e s , 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 c o s t s o f s o l a r systems, maintenance costs f o r s o l a r systems, and t h e i n c r e a s i n g s i z e o f f i r m s i n t h e b u i l d i n g i n d u s t r y . (12) Wilman showed t h a t t h e present value o f a 20-year stream o f h e a t i n g expenditures f o r an average home w i t h a s o l a r system was $12,907, w i t h $3,659 f o r o i l and $2,582 f o r gas. 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 i m a t e s i m i l a r t o Madison, Wisconsin, Ruegg found t h a t i n c e n t i v e s are r e q u i r e d t o make s o l a r energy c o s 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 l s o showed t h a t s o l a r i n c e n t i v e s would be needed as a l t e r n a t i v e energy sources increased i n p r i c e . (14) These sources i n d i c a t e t h e 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 r e n c e o f o p i n i o n about T h i s l a c k o f consensus c o u l d be due t o marStrengthening o f i n s t i t u t i o n s , i n p a r t , Furwhether s o l a r h e a t i n g and c o o l i n g i s o r w i l l be p r i c e c o m p e t i t i v e w i t h o t h e r forms o f energy i n t h i s century. r e l a t i v e l y new energy technology. k e t imperfections r e s u l t i n g from weak i n s t i t u t i o n a l f o r c e s associated w i t h a deals w i t h l e g a l p r o t e c t i o n o f p r o p e r t y r i g h t s and r u l e s o f t r a n s a c t i o n . t h e r i n s i g h t s can be gained from a r e v i e w o f t h e l e g a l l i t e r a t u r e . Legal Factors Thought about t h e l e g a l i m p l i c a t i o n s o f s o l a 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) I n c e n t i v e s associated w i t h t h e l a t t e r would c o n s i s t T h i s 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 s t a t u t o r y , r e g u l a t o r y , 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 i n a n c i n g , cons t r u c t i o n and marketing. o f changes i n e x i s t i n g laws and r e g u l a t i o n s t h a t take s o l a r energy and associated technology i n t o consideration. i n s t i t u t i o n a l forces. as compared Thus, t h e s o l a r system i s 3.5 times

The Environmental Law I n s t i t u t e (ELI) reviewed the e x i s t i n g Sunrights Laws and i d e n t i f i e d new approaches t h a t might be used t o encourage development of solar energy systems. They concluded t h a t establishing sunshine r i g h t s , solar zoning schemes and land use planning compatible with s o l a r access, developing municipal regulations, and passing a basic policy s t a t u t e could encourage solar energy development. Mandatory i n s t a l l a t i o n laws, b o t h f o r construction and e x i s t i n g buildings, would probably survive a court challenge b u t could be unwise because of economic f a c t o r s .

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 s o l a r energy systems, determine whether solar systems are e l i g i b l e f o r exemption, t r e a t solar easements as they r e l a t e t o assessments, and determine whether s o l a r systems under construction are e l i g i b l e f o r an exemption. I f property taxes are assessed on r e a l e s t a t e according t o i t s income production, s o l a r systems should e i t h e r be exempted or given other, more appropriate incentives. Mortgage b a r r i e r s a f f e c t i n g new s o l a r energy systems include: 1) federal laws t h a t regulate the s i z e of new home loans granted by savings and loan i n s t i t u t i o n s , 2 ) borrowers' underwriting c r i t e r i a t h a t do not consider t h e cost of heating and cooling homes when they assess a loan a p p l i c a n t ' 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 i n s t i t u t i o n s attempting t o s e l l t h e i r mortgages. Financing of r e t r o f i t s of old homes i s affected by the Home Owners Loan Act of 1933 S (48 STAT. 128, 1 2 U C 1461 e t seq., as amended), which allows f e d e r a l l y chartered savings and loan companies t o make f i r s t l i e n s on r e s i d e n t i a l properties. As a r e s u l t , t h e 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 t h e c o s t of t h e solar system. ELI found no e x i s t i n g major legal b a r r i e r s associated with the insuring of s o l a r s t r u c t u r e s since s o l a r systems are not e x p l i c i t l y excluded i n the standard homeowner's insurance contract. Regulatory j u r i s d i c t i o n over s o l a r heating and cooling i s a t t h e s t a t e level; the Federal Power Commission and other federal agencies apparently do n o t have j u r i s d i c t i o n . U t i l i t y involvement i n the s a l e , financing, ownership or servicing of s o l a r c o l l e c t o r s f o r

heating and cooling is a key policy question. Although there is strong opposition 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 standards," 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 comprehensive 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 neighboring 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 community 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 federal 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 systems. 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 community 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 development 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 building 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 systems. 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 establish 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 h e 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 h e use o f s o l a 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 e x t e r n a 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 s o l a 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 g e n e r a l l y found i n t h e b u i l d i n g i n d u s t r y . f u s i o n o f i n f o r m a t i o n program. f i c a t i o n o f s o l a r technologies. equipment. (22) Warranties 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 implementation o f reasonable performance standards and t e s t i n g mechanisms. i n t u r n depend on a c t u a l experience. m a t e r i a l s and workmanship would reduce t h e l e v e l o f u n c e r t a i n t y . These U n t i l t h i s i s available, warranties o f The con-

(21) Promulgation

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 r t h e r i n c e n t i v e would be created through t h e Establishment o f equipment q u a l i t y and perimprovement and s t r e a m l i n i n g o f procedures f o r t e s t i n g , evaluation, and c e r t i formance standards would increase consumer confidence i n newly developed

s t r u c t i o n industry, w i t h the encouragement o f the Federal Government, c o u l d extend t h e normal warranty requirements f o r b u i l d i n g c o n s t r u c t i o n from one t o two years. C o n s t r u c t i o n Codes The Federal Government c o u l d encourage the s t a n d a r d i z a t i o n o f codes, l o c a l adoption o f model codes, and education 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 P r o t o t y p e system development, r e l i a b i l i t y t e s t i n g , and c o s t a n a l y s i s could be c a r r i e d o u t u s i n g government b u i l d i n g s . A d m i n i s t r a t i o n funded and t h e U.S. The Energy Research and Development Department o f Housing and Urban Development

administered a 3-year program o f time-phased demonstrations i n v a r i o u s c l i m a t e s and geographic r e g i o n s w i t h a c t i v e involvement o f t h e housing i n d u s t r y . ( 2 5 )

H. R. 8546 would r e q u i r e t h a t b u i l d i n g s financed w i t h f e d e r a l funds i n c o r p o r a t e

s o l a r energy systems. and f o r other purposes. Electric U t i l i t i e s A more p e r f e c t market f o r s o l a r energy c o u l d be created by e l i m i n a t i n g t h e c r i t i c a l solar-electric u t i l i t y interface. H. R. 62 would d i r e c t t h e a r c h i t e c t s o f the C a p i t o l t o study t h e f e a s i b i l i t y o f u s i n g 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

I f u t i l i t i e s p e r c e i v e t h a t t h e use

o f s o l a 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 t h e y w i l l t a k e p r o t e c t i v e action, such as c h a r g i n g 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 c o u l d induce an i n v e r s i o n o f r a t e s , t h u s removing p e n a l t i e s f o r the use by s o l a r owners o f small 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 p e r i o d s c o u l d encourage use o f s o l a r I n c e n t i v e s c o u l d induce u t i l i t i e s t o lease s o l a r equipment t o m i t i g a t e t h e 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 M u e l l e r conclude t h a t s o l a r energy systems and conventional e l e c t r i c u t i l i t y systems represent a poor t e c h n o l o g i c a l match because b o t h technologies are v e r y c a p i t a l i n t e n s i v e . The e l e c t r i c u t i l i t y , because o f t h e On t h e o t h e r hand, t h e s o l a r h i g h f i x e d c o s t s o f generation, transmission, and d i s t r i b u t i o n capacity, r e p r e sents a poor backup f o r s o l a r energy systems. c o l l e c t i o n system, because i t represents pure, high-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 p a r t - l o a d source o f a u x i l i a r y energy f o r t h e u t i l i t y . (26) Federal Procurement A r e p o r t by Don Sowle Associates s t a t e s t h a t approximately 40 s t a t u t e s , e x e c u t i v e orders and government procurement r e g u l a t i o n s p r e s c r i b e 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 Yet, t h e t i m e consuming because o f t h e added requirements o f t h e programs. storage f a c i l i t i e s .

d i r e c t procurement o f s o l a 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 p e n e t r a t i o n . (23)

I n c e n t i v e s t o Competing Energy Sources Larson s t a t e d t h a t a p o l i c y d e c i s i o n on any nonsolar energy source c o u l d a l t e r t h e market f o r s o l a r energy. Changes i n n a t i o n a l p o l i c i e s a f f e c t i n g e x p l o r a t i o n , leasing, and r o y a l t i e s could e i t h e r encourage o r discourage s o l a r energy; a p o l i c y change t h a t discouraged some form o f r a p i d e x p l o r a t i o n and e x t r a c t i o n could be expected t o increase t h e market f o r s o l a r energy. Price decontrol o f n a t u r a l gas c o u l d have a major impact on t h e s o l a r market, as c o u l d Congressional a c t i o n t o r a i s e t h e l i a b i l i t y o f t h e Price-Anderson r i s k limit. These examples i l l u s t r a t e t h e f a c t t h a t a l l i n c e n t i v e s t o a l t e r n a t i v e S. 489 present day d e p l e t a b l e f u e l s can a f f e c t the f u t u r e market f o r s o l a r energy. (27)
S. 311 would e s t a b l i s h a t a x on excess petroleum i n d u s t r y p r o f i t s .

would amend the Clayton Act t o preserve and promote competition among corporat i o n s i n t h e p r o d u c t i o n o f o i l , n a t u r a l gas, coal, o i l shale, bar sands, uranium, geothermal steam, and s o l a r energy. gasoline.,
S. 93 would increase t h e t a x on 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,

financed p a r t i a l l y by a t a x o f 2 d / m i l l i o n Btu on a l l energy resources l e v i e d a t t h e source o f p r o d u c t i o n o r importation. There i s considerable evidence t h a t i n s t i t u t i o n a l f o r c e s are being developed and strengthened t o induce t h e adoption o f i n n o v a t i v e s o l a r technology. Thought has been conceptualized as l e g i s l a t i o n . cases, been passed b y t h e Congress. L e g i s l a t i o n has, i n some But Federal programs have been i n i t i a t e d .

these i n s t i t u t i o n a l f o r c e s must be supplemented w i t h cost reducing f i s c a l i n c e n t i v e s i n a c l i m a t e o f u n c e r t a i n p r i c e competition. 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 n c e n t i v e s 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 t a x i n c e n t i v e programs and d i r e c t subsidy programs. l i s t e d and discussed appropriate f i s c a l commented on s p e c i f i c incentives. i n c e n t i v e s were introduced i n t o t h e 94th Congress. Several i n v e s t i g a t o r s have Others have

Twelve b i l l s t h a t would c r e a t e f i s c a l

Income Tax Deduction Senate B i l l 28 would a l l o w a $1,000 deduction i n f e d e r a l income t a x l i a b i l i t y f o r any t a x a b l e 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 t h e allowable expense. t o exceed 50% o f the expenses paid.

H. R. 1697 would a l l o w a t a x deduction

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 h e a t i n g and c o o l i n g equipment n o t However, John M. N i c l u s s o f the Department o f t h e Treasury has s t a t e d t h a t t h e Department's b a s i c p o s i t i o n i s t o r e s i s t the use o f t h e t a x system t o provide i n c e n t i v e s t o s p e c i f i c sectors o f t h e U.S. economy. Such i n c e n t i v e s have been enacted over t h e o p p o s i t i o n o f t h e I n the view o f t h e department, i t i s f a r more e f f e c t i v e Treasury Department. Budget. (30)

t o p r o v i d e subsidies through grants o r means r e f l e c t e d d i r e c t l y i n t h e Federal C o s t e l l o f e e l s t h a t a l l o w i n g a f e d e r a l income t a x deduction f o r d i s p l a c i n g 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 promising p o l i c y a c t i o n s open t o Congress. (31) Income Tax C r e d i t House B i l l 5959 would p e r m i t a 25% income t a x c r e d i t f o r expenditures f o r s o l a r h e a t i n g 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% H. R. 6860 would a l l o w 40% o f t h e f i r s t c r e d i t f o r expenditures over $8,000. $1,000 and 20% o f t h e second $1,000, f o r a maximum o f $600, o f t h e amount spent on s o l a r energy equipment on t h e t a x p a y e r ' s p r i n c i p a l residence. g i v e a 25% c r e d i t , n o t t o exceed $2,000, e x i s t i n g residences.

S. 1379 would

f o r s o l a r energy equipment on new and Wilman concluded t h a t a 20%

S. 168 would a l l o w 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.

marginal t a x bracket homeowner would need a 69% t a x c r e d i t t o make s o l a r heat c o m p e t i t i v e w i t h o i l and a 77% c r e d i t t o make i t c o m p e t i t i v e 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 deduction o f 30% o f t h e f i r s t $1,500 and 20% o f t h e 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 t a t e d t h a t t h e general p u b l i c f a v o r s government subsidies t o encourage the use o f s o l a 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 little 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 nonresidential 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 I n c e n t i v e s aimed d i r e c t l y a t purchasers

lender-oriented i n c e n t i v e o p t i o n s t o increase t h e avai l a b i 1ity 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. were examined p r i m a r i l y as t h e y might a f f e c t t h e w i l l i n g n e s s o f lenders t o make f i n a n c i n g a v a i l a b l e o r as t h e y m i g h t complement lender-oriented i n c e n t i v e s . (34) Insurance Requirements The Federal Government c o u l d 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 cert a i n i n t e r c i t y areas s u s c e p t i b l e t o p r o p e r t y l o s s because o f c i v i 1 d i s o r d e r . The Federal Deposit Insurance Corporation o f f e r s a precedent. The P r i c e Anderson Act i s an example under which t h e Federal Government agrees t o i d e m n i f y t h e owner o r l i m i t losses i n t h e event o f c a t a s t r o p h i c accidents a t nuclear power p l a n t s . Federal Compensation o f S t a t e and Local P r o p e r t y and Sales Taxes Ten s t a t e s c u r r e n t l y a l l o w an exclusion o f p a r t o r a l l o f t h e value o f a s o l a r energy system f o r a p e r i o d r a n g i n g from 5 years t o t h e l i f e o f t h e system. Ruegg concluded t h a t exemption from an assumed 3% e f f e c t i v e p r o p e r t y t a x and d e p r e c i a t i o n w r i t e o f f a g a i n s t both s t a t e and f e d e r a l t a x a b l e 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 n c e n t i v e s 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 a p p l i e d alone. ( I 4 ) comparable t o Denver. (33) Tax Free Bonds The Federal Government has e s t a b l i s h e d a precedent w i t h t h e Tennessee Vall e y A u t h o r i t y and FNMA f o r t h e establishment 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 t h e c o s 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 introduced i n Congress b u t o n l y A consensus one o f t h e 19 b i l l s introduced i n t h e 9 4 t h Congress was enacted. Peterson concluded t h a t sales t a x exemptions would have l i t t l e impact over t h e n e x t decade i n areas

has n o 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 incentives.

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 necessary 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 distorted by the creation of federal incentives to stimulate energy production. If such distortions result in subsidized prices for energy, the result could favor existing energy sources with established markets. Policy decisions affecting solar energy development that are based on subsidized prices of competing 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 administrators of public institutions influence energy policy to maintain or expand their positions. Through economic, political, institutional and legal pressures these groups attempt to rectify perceived market failures.

Using economic t h e o r y t o a i d i n problem d e f i n i t i o n , curve Se ( F i g u r e 1) represents a supply curve f o r U.S. federal incentives. 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 various p r i c e s i n t h e absence o f 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 existence 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 r a n s f o r m 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 t h e demand f o r energy, De. Changes i n t h e demand and t h e r e s u l t a n t e f f e c t on p r i c e Using perceived market f a i l u r e as j u s t i c o u l d be perceived as market f a i l u r e . t i o n t o t h e p u b l i c sector.

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 producThe 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 t h e r e a l costs o f energy production are borne by t h e Federal Government through t h e c r e a t i o n and a d m i n i s t r a t i o n o f p o l i c y , programs and projects. The problem a t hand i s t o i d e n t i f y those f e d e r a l p o l i c i e s , programs and on Figure 1. To t e s t t h e 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 r e a t e an apparent supply curve f o r energy, represented by curve S : 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 e d e r a l i n c e n t i v e s t o s t i m u l a t e energy production, i t i s necessary t o q u a n t i f y t h e f e d e r a l expenditures f o r these i n c e n t i v e s . done by s p e c i f y i n g t h a t area i n F i g u r e 1 l y i n g between curve Se and : ,S APPROACH T THE ANALYSIS O The a n a l y s i s 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 applied by i n d u s 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. r e l a t i n g events. Such a n a l y s i s r e q u i r e s 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 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 b a s i s f o r t h e analysis. Thereafter, two approaches were taken simultaneously. S p e c i a l i s t s i n the This i s

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 p e r s p e c t i v e i n ident i f y i n g and measuring i n c e n t i v e s created throughout t h e energy sector o f the

QUANTITY

FIGURE 1.

The Real and Apparent Market f o r Energy

economy, w h i l e engineers and micro-economists focused on i n c e n t i v e s c r e a t e d along the t r a j e c t o r y o f t r a n s f o r m a t i o n from e x p l o r a t i o n and m i n i n g through transmission and waste disposal. energy i n d u s t r i e s : The l a t t e r approach was o r i e n t e d t o t h e E l e c t r i c i t y i s one of The i n d i r e c t n a t u r e o f t h i s energy form Hence, an a d d i t i o n a l chapter analyzes The f i n a l chaphydro, nuclear, coal, gas, and o i l .

t h e outputs o f t h e energy i n d u s t r i e s . t h e a n a l y s i s o f t h e energy i n d u s t r i e s .

precludes a complete a n a l y s i s o f e l e c t r i c i t y i n c e n t i v e s t o be incorporated i n t o t h e i n c e n t i v e s t o generation and transmission o f e l e c t r i c i t y .

t e r s u m a r i z e s t h e e m p i r i c a l a n a l y s i s presented i n t h e preceding seven chapt e r s and presents r e s u l t i n g i n s i g h t s as t h e y r e l a t e t o t h e development o f i n c e n t i v e s t o encourage increased use o f s o l a r energy.

REFERENCES E. W. Eaton, Solar Ener t i o n , Washing&976,

CHAPTER I

Energy Research and Development Administrap. 1.

R. H. Bezdek and P. D. Maycock, I n c e n t i v e s and B a r r i e r s t o t h e Development o f Solar Energy. J o i n t Conference o f t h e American Section o f t h e I n t e r n a t i o n a l Solar Enerar Societv and S o l a r Enerav Societv o f Canada. " Winnipeg, Canada, ~ u ~ u s t " i 9 7 6 .
<-

S. H. B u t t , I n c e n t i v e s f o r Solar Heating and Cooling J u s t i f i c a t i o n , E f f e c t and Cost. Solar Energy I n d u s t r y Association, Washington, D.C.

S. H. B u t t , Government A c t i o n t o S t i m u l a t e Accelerated Solar Development. 1976. Solar Energy I n d u s t r y Associat.ion, Washington, D.C.,
A National Plan f o r Energy Research, Development, and Demonstration Creating Energy Choices f o r t h e Future, ERDA 76-1, Energy Research and Vol 1 p. 63, 1976. , Development Administration, Washington, D.C.,
G. Bennington, M. Bohannon and P. Spewak, An Economic Analysis o f Solar and Space Heatinq. ERDA Contract E (49-1)-3764, The M i t r e Corporation f o r D i v i s i o n o f Solar Energy, ERDA, Washington, D.C., 1976. G. 0. G. L o 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 r o j e c 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 1 Technology Environmental Q u a l i t y Lab Report No. 1 , Pasadena, CA, 1974.

Solar Heating and Cooling of B u i l d i n g s . Science Foundation, June 1974.

NSF RAN-74-021A-ZlE,

National TW R

Solar Heating and Cooling o f B u i l d i n g s , Phase 0. Systems Group, Redondo Beach, CA, May 1974. Solar Heating and Cooling o f B u i l d i n g s , Phase 0. Corporation, Baltimore, MD, May 1974.

NSF-RAN-74-0234,

Westinghouse E l e c t r i c

J. E. Scott, R. W. Melicher and D. M. Sciglimpaglia, Demand Anal.ysis, Solar Heating and Cooling o f Buildings, Solar Water Heating i n South F l o r i d a : 1923-1974. National Science Foundation, Research Applied t o p. 53, 1974. National Needs (RANN), Washington, D.C.,

J. Wilman, Solar Heatinq. Washington, D.C., 1976.

BTM-76-11,

Department o f Treasury,

14.

R. T. Ruegg, E v a l u a t i o n o f I n c e n t i v e s f o r S o l a r Heating. NBSIR 76-1127, N a t i o n a l Bureau o f Standards, Department o f Commerce, Washington, D.C., 1976. 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 S o l a r Energy f o r Heating and Coolin . 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 i s c u s s i o n draws h e a v i l y from a forthcoming book e n t i t l e d Energy E f f i c i e n c y i n I n d u s t r y : A Guide t o Legal B a r r i e r s and O p p o r t u n i t i e s by Normal L. Dean.) American Bar Foundation Legal Issues Related t o Use o f S o l a r Energy Systems. D r a f t r e p o r t , American Bar Studies, Chicago, IL, August 1976. Turning Toward t h e Sun, Vol. 1, A b s t r a c t s o f S t a t e 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. National Conference o f S t a t e L e g i s l a t u r e s Renewable Energy P r o j e c t , 1976. A. S. M i l l e r , Another Perspective on t h e Sunrights Issue. Law I n s t i t u t e , Washington, D.C., 1976. Environmental

15.

16. 17.

18. 19. 20.

M. W. E i s e n s t a d t and A. E. Utton, "Solar R i g h t s and T h e i r E f f e c t on S o l a r Heating and Cooling." N a t i o n a l Resources Journal, Vol 363, 1976.

A. S. Hirshberg 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 R e s i d e n t i a l S o l a r Energy: The Prospects f o r Solar Energy i n U.S. Housing I n d u s t r y . " P o l i c y Sciences, December 1974.

21.

J. P. Eberhard, C o n s t r a i n t s and I n c e n t i v e s t o t h e Widespread U t i l i z a t i o n o f Solar Heating and Cooling. AIA Research Corporation, Washington, D.C., 1976.
R e s i d e n t i a l S o l a r Heating and Cooling C o n s t r a i n t s and I n c e n t i v e s , A Review o f L i t e r a t u r e . Prepared b y A r t h u 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, pp. 55-88, 1976. Washington, D.C., A Federal Procurement Plan t o Accelerate Use o f S o l a r Energy. Associates, Inc., A r l i n g t o n , VA, pp. 21-41, 1976. Don Sowle

22.

23. 24.

N a t i o n a l Program f o r S o l a r Heating and Cooling - R e s i d e n t i a l and Commercial A p p l i c a t i o n s . ERDA-23A, Energy Research and Development A d m i n i s t r a t i o n , Washington, D.C., 1976. R e s i d e n t i a l Energy from t h e Sun, U.S. 1975. Development, Washington, D.C., Department o f Housing and Urban

25.

26. 27. 28.

J. G. Asbury and R. 0. Mueller, S o l a r Energy and E l e c t r i c U t i l i t i e s : They I n t e r f a c e ? Argonne N a t i o n a l Laboratory, Argonne, IL, 1976.

Can

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 u e n c e Solar Development. Georgia I n s t i t u t e o f Technology, A t l a n t a , GA, undated.

J. B. M a r g o l i n and G. C. Sponsler, A n a l y s i s o f F i n a n c i a l and Economic I n c e n t i v e s f o r t h e Commercial Use o f S o l a r E n e r u . Unpublished paper, 1975. George Washington U n i v e r s i t y , Washington, D.C.,
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 Corporation, Santa Monica, CA, p. 155, 1975. Correspondence w i t h J. M. N i c l u s s , Department o f the Treasury, October 18, 1976. Washington, D.C., 0. C o s t e l l o , Midwest ,Research I n s i t u t e Programs Dealing w i t h I n c e n t i v e s and B a r r i e r s t o t h e Commercialization o f S o l a r Energy. Midwest Research I n s t i t u t e , Kansas City, MO, pp. 47-53, 1976. R. C. Cass, P u b l i c Acceptance o f S o l a r Heating and Cooling Systems f o r B u i l d i n g s . U n i v e r s i t y o f Houston, Houston, TX, 1975.
C. H. Peterson, S i m u l a t i o n o f t h e Impact o f F i n a n c i a l I n c e n t i v e s on Solar Energy U t i l i z a t i o n f o r Space C o n d i t i o n i n g and Water Heating: 1985. Department o f Economics, Utah S t a t e U n i v e r s i t y , Logan, UT, 1976.

29.

30.

31.

32. 33.

34.

D. B a r r e t t , P. E p s t e i n and C. M. Haar, Financing t h e S o l a r Home: Unders t a n d i n g and Improving Mortgage Market R e c e p t i v i t y t o Energy Conservation and Housing Innovation. Regional and Urban Planning Implementation, Inc., Cambridge, MA., pp. 171-172, 1976.

11.

A THEORETICAL APPROACH T ANALYZING O 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 q u a n t i f y i n g f e d e r a l i n c e n t i v e s f o r energy production. f o r use i n s t u d y i n g governmental actions. The approach draws h e a v i l y upon deductive reasoning from a body o f l o g i c , developed i n v a r i o u s d i s c i p l i n e s , This approach forms t h e framework used t o evaluate and s e l e c t t h e i n f o r m a t i o n presented i n subsequent chapters.
I t provides 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 t h e complex maze o f a c t i o n s and incen-

t i v e s t h a t have a f f e c t e d energy p r o d u c t i o n i n t h e U n i t e d States.

Readers who

are not i n t e r e s t e d i n the c o n s t r u c t s developed t o guide t h e subsequent a n a l y s i s t o a complete t r e a t m e n t 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 e m p i r i c a 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 a n a l y s i s i n t h e subsequent chapters, i t has been p o s i t i o n e d here. "POLICY" VERSUS "POLICIES" This d i s c u s s i o n would be e a s i e r i f t h e Federal Government had always had an Energy P o l i c y . tion." energy. However, p o l i c y , according t o one d i c t i o n a r y , means "any course or p l a n o f a c t i o n , e s p e c i a l l y i n governmental o r business administra"Course o f a c t i o n u i m p l i e s a degree o f comprehensive f o r e t h o u g h t Instead, t h e government has taken a v a r i e t y o f a c t i o n s t o serve a Each and consistency t h a t has been m i s s i n g from governmental a c t i o n s concerning v a r i e t y o f purposes and these a c t i o n s have had a v a r i e t y o f effects. t h a t forethought, b u t t h e c o l l e c t i o n o f a c t i o n s has n o t been. "Policy."

a c t i o n may have been preceded by f o r e t h o u g h t and may have been c o n s i s t e n t w i t h Therefore, t h e c o l l e c t i o n o f energy-related a c t i o n s i s more a s e r i e s o f " p o l i c i e s " than a

O f course, any c o l l e c t i o n o f a c t i o n s w i l l have some n e t e f f e c t , which

c o u l d be l a b e l e d a de f a c t o P o l i c y . 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 p e r i o d o f years, government observers tend t o do so.

However, t h i s i s misleading because i t d i l u t e s t h e general understanding o f the word P o l i c y , which then becomes l e s s meaningful t o describe such a planned and c o n s i s t e n t program, should one come i n t o being. ( 2 ) Boundaries o f t h e Discussion Discussing governmental a c t i o n s i n a f i e l d t h a t l a c k s c o n s i s t e n t P o l i c y i s d i f f i c u l t , since boundaries d e f i n i n g energy a c t i o n s a r e unclear. A l l governmental a c t i o n s 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 c o n s i s t e n t P o l i c y d i d e x i s t , t h e discussion c o u l d focus on those a c t i o n s

t h a t were p a r t o f the planned and c o n s i s t e n t program. ever, boundaries must be somewhat a r b i t r a r i l y defined.

For t h i s analysis, how-

F i r s t , t h i s discussion w i l l i n c l u d e o n l y those a c t i o n s taken by t h e Fede r a l Government; r e l e v a n t a c t i o n s o f s t a t e and l o c a l governments are n o t considered. Second, t h e discussion covers o n l y those Federal Government a c t i o n s W i t h i n those l i m i t s , t h e discussion coni n which major causes included an attempt t o i n f l u e n c e energy o r major e f f e c t s included some i n f l u e n c e on energy. receives t h e most emphasis. s i d e r s a c t i o n s r e l a t e d t o both p r o d u c t i o n and consumption, although p r o d u c t i o n
It a l s o includes a c t i o n s r e l a t i n g t o b o t h increases

and decreases i n energy consumption o r production. Energy production i s defined as t h e t r a n s f o r m a t i o n o f n a t u r a 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 , t h e s h i n i n g o f the sun or t h e running o f a r i v e r are n o t examp l e s o f energy production, 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 cons 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 defined as t h e use Under t h i s d e f i n i t i o n o f one o f these common, "manufactured" forms o f energy. panel i s . form. Determining Cause and E f f e c t The use o f major causes o r major e f f e c t s o f governmental a c t i o n as bounda r i e s f o r t h e discussion r e q u i r e s s t i p u l a t i n g some methods f o r determining t h e major causes and e f f e c t s o f a governmental action.

sunbathing i s not energy consumption, b u t h e a t i n g water b y means o f a s o l a r I n both d e f i n i t i o n s , the c r u c i a l ingredient i s the a p p l i c a t i o n o f technology and resources t o change a n a t u r a l resource i n t o a u s e f u l energy

O f t h e many methods ( o r "models") possible, t h i s discussion w i l l use f o u r . W w i l l c a l l them "viewpoints" because t h i s term suggests t h a t any one obsere v a t i o n o f something as complicated as a governmental a c t i o n w i l l n e c e s s a r i l y be incomplete. Each governmental a c t i o n has many causes and e f f e c t s , and no The term viewpoint a l s o suggests t h a t one viewpoint can i n c l u d e a l l o f them. nomena and downplays others.

any one o b s e r v a t i o n w i l l be somewhat d i s t o r t e d , since i t emphasizes some pheUse 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 viewpoints used i n t h i s discussion come from f o u r types o f analysis: economic, p o l i t i c a l , o r g a n i z a t i o n a l and l e g a 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 h e y are o f t e n used t o study govhas been t h e over-

ernmental a c t i o n s (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," whelmingly dominant model i n f o r e i g n p o l i c y a n a l y s i s ( 3 ) and has been used a g r e a t 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 ( ~ ) ~ c h e l l i n ~ . ( ~ ) p o l i t i c a l viewpoint, i n various forms, has and The 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. Richard E. Neustadt.

ruma an(^)

and

('I

The o r g a n i z a t i o n a l viewpoint, o f t e n c a l l e d bureaucand Graham ~ l l i s o n . ( ~ )The l e g a l view-

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 p o i n 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 u a t i o n s , as i n de T o c q u e v i l l e ' 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 v a r y 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 phenomena i n moving from one viewpoint t o another. The f i r s t continuum i s t h e The f o u r viewi n t e r c h a n g e a b i l i t y o f t h e e n t i t i e s viewed, t h e a b i l i t y t o r e p l a c e 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 t h o u t changing t h e outcome. p o i n t s are ranked i n t h e f o l l o w i n g order w i t h r e s p e c t t o i n t e r c h a n g e a b i l i t y :

1.
2.
3.

Economic Political Organizational Legal.

4.

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 n d i v i d u a l s , groups, and o r g a n i z a t i o n s ) t h a t make up t h e p o l i t i c a l viewpoint are l e s s interchangeable; t h e components w i t h i n t h e o r g a n i z a t i o n a l viewpoint are even l e s s so; and t h e a u t h o r i t a t i v e bodies t h a t a c t w i t h i n t h e l e g a l viewpoint are l e a s t interchangeable. range i n t h e same order. The second continuum i s t h e Once again, t h e viewpoints e q u a l i t y o f i n f l u e n c e among the e n t i t i e s involved.

The economic viewpoint 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 o r g a n i z a t i o n a 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 o v e r r u l e t h e i r i n f e r i o r s and can be o v e r r u l e d b y t h e i r superiors. The next f o u r sections w i l l describe each viewpoint i n more d e t a i l , o u t l i n i n g t h e energy-related 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 ( I 0 ) ( t h e PriceAnderson insurance p r o v i s i o n s 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 t y p e o f i n f o r m a t i o n provided by t h a t viewpoint.
THE ECONOMIC VIEWPOINT

I n the economic viewpoint, producers make production decisions based on t h e p r i c e s o f various 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 r a n s f o r m those i n p u t s i n t o a common form o f energy, and t h e p r i c e o f various amounts o f t h a t energy form. (I1) services. Consumers make decisions based on t h e i r d e s i r e f o r various goods and s e r v i c e s t h a t use energy and t h e p r i c e o f those goods and The p r i c e o f an energy-using i t e m includes b o t h t h e purchase p r i c e o f t h e i t e m and t h e p r i c e o f t h e amount o f energy r e q u i r e d t o use t h a t item.

I n a mixed economy, such as t h a t of t h e United States, t h e government contains some share o f t h e n a t i o n ' s producers and consumers. power t o change c o n d i t i o n s i n t h e marketplace. decision-maker.
It a l s o has t h e

I n a c t i n g t o change c o n d i t i o n s

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

(I2)

It uses a c o n s i s t e n t s e t o f o b j e c t i v e s 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 a c t i o n s 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 uncertain, t h e

Federal Government weighs t h e value o f an outcome by t h e estimated p r o b a b i l i t y o f i t s occurrence. (12) Causes o f Governmental Actions For t h e economic viewpoint, t h e Federal Government takes a c t i o n 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

production and p r i c e or between consumption and p r i c e .

Production may be Production may

considered t o o h i g h r e l a t i v e t o p r i c e , as when c e r t a i n energy p r o d u c t i o n processes do n o t t a k e i n t o account t h e p o l l u t i o n t h e y produce. be thought t o o low r e l a t i v e t o p r i c e , as when c e r t a i n energy p r o d u c t i o n processes do n o t t a k e i n t o account t h e c o n t r i b u t i o n t o n a t i o n a l s e c u r i t y they c o u l d make. S i m i l a r l y , consumption c o u l d be t o o h i g h r e l a t i v e t o p r i c e , as In when consumers f a i l t o take i n t o account t h e f u t u r e o r otherwise a l t e r n a t i v e uses t h a t m i g h t be made o f t h e energy o r n a t u r a l resource they are buying. f a i l t o t a k e i n t o account some o f t h e b e n e 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 t h e decreased use o f another energy form. Decisions made i n t h e p r i v a t e sector o f t h e 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: ( 1 3 ) other cases, consumption c o u l d be t o o low r e l a t i v e t o p r i c e , as when consumers

1.

Externality:

The decision may a f f e c t p a r t i e s other than t h e one widespread p o l l u t i o n may r e s u l t ) .

making t h e d e c i s i o n (e.g.,

2.

Nonrivalry:

One person's consumption o f a good o r s e r v i c e may n o t Each person has a Such goods might be

diminish t h e b e n e f i t s a v a i l a b l e f o r o t h e r consumers. underproduced.

tendency t o w a i t f o r t h e other person t o buy t h e goods.

P r o v i s i o n f o r n a t i o n a l defense i s an example.

3.

Nonexcludability:

Excluding t h e nonpayers from a good o r s e r v i c e Some goods o r services, such as n a t i o n a l

may be i n e f f i c i e n t o r impossible.

defense, illu s t r a t e b o t h n o n r i v a l r y and n o n e x c l u d a b i l i t y . 4. Uncertainty: A p r i v a t e d e c i s i o n concerning production o r

consumption may i n v o l v e 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 tolerance f o r r i s k than s o c i e 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 d e c i s i o n concerning production o r consumption may i n v o l v e An e f f o r t t o

a delay between t h e d e c i s i o n 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 t o l e r a n c e f o r delay than s o c i e t y does. preserve a resource f o r f u t u r e generations 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 o r s e r v i c e l e s s ( o r more) Education i s u s u a l l y p o s i t i v e l y valued and Alcohol, tobacco, and

than s o c i e t y t h i n k s t h e y should.

e f f o r t s are made t o encourage i t s consumption. t h e i r consumption.

n a r c o t i c s are u s u a l l y n e g a t i v e l y valued and e f f o r t s are made t o discourage

7.
equitable.

Inequity:

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 e s s

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 E f f o r t s t o p r o v i d e food, c l o t h i n g , and s h e l t e r f o r t h e 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 t h e s i z e o f t h e 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 b e i n g competitive, so t h a t n a t u r a l workings o f t h e market do n o t produce t h e outcome s o c i e t y wants. P r o v i s i o n o f telephone s e r v i c e i l l u s t r a t e s t h i s phenomenon. Whether one i n d i v i d u a l w i l l do something depends Enforcing c h i l d labor

9.

Interdependence:

on h i s o r her confidence t h a t o t h e r s w i l l do t h e same. those laws i l l u s t r a t e s t h i s f a c t o r . 10. Transaction d i f f i c u l t i e s :

laws on a l l competitors so t h a t no competitor gains an advantage by v i o l a t i n g

The d i f f i c u l t y o f achieving agreement

among a l l t h e necessary p a r t i e s through market b a r g a i n i n g may make i n d i v i d u a l s r e f u s e t o seek such agreement, although each would welcome an agreement imposed from o u t s i d e t h e market. Uniform weights and measures, c o n t r a c t
26

terms, and c u r r e n c i e s a l l i l l u s t r a t e t h i s f a c t o r .

More than one of these reasons may be present in a single s i t u a t i o n . The case f o r government intervention i s strongest i n s i t u a t i o n s where several reasons are present. These reasons r e s u l t i n a perceivable d i s p a r i t y between the allocation of resources r e s u l t i n g from e x i s t i n g price signals and the goals of groups thought t o a r t i c u l a t e t h e preference of a broad segment of society. Effects of Governmental Actions In the economic viewpoint, governmental actions have three types of e f f e c t s . A price change effected by t h e 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 t h e governmental action. A technological change effected by governmental action, such as s c i e n t i f i c research, changes the amount of an energy form produced from a given level of inputs o r t h e amount of an energy form used by a given type of device. A t h i r d type of change i s a t a s t e change where a governmental action such as advertising changes consumer desire f o r a given type of energy-using device. Summary of t h e Economic Viewpoint In summary, t h e economic viewpoint leads one t o look f o 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 i n t o account public values. I t leads one t o look f o r such e f f e c 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 willing t o produce enough nuclear energy a t any price to s a t i s f y public goals l i k e national security. The producers were l e s s t o l e r a n t of r i s k than society could be and l e s s interested in the e f f e c t s on national s e c u r i t y than society had t o be. The e f f e c t of t h e provisions was t o lower the price of insurance t o t h e producer and t o lower the cost of accidents i f they did occur, thus lowering t h e costs of production t o the producers. Consequently, the producer was not willing t o produce more nuclear energy a t any given price than he would have been without t h e action.

I f t h e United States approached a l a i s s e z f a i r e system o f c a p i t a l i s m , t h e

economic p o i n t o f view c o u l d e l i m i n a t e t h e e m p i r i c a l a n a l y s i s o f t h i s r e p o r t . Such i s not the case. The t e n reasons must be considered. I n addition, they must be considered i n unison w i t h o t h e r p o i n t s o f view. THE POLITICAL VIEWPOINT I n t h e p o l i t i c a l viewpoint on energy processes, i n d i v i d u a l s , groups, and o r g a n i z a t i o n a l p a r t i c i p a n t s i n s i d e and o u t s i d e o f government bargain w i t h each other t o o b t a i n government a c t i o n s t h a t w i l l f a v o r t h e goals they independently seek. energy market. The f e d e r a l government i s n o t a u n i t a r y a c t o r o u t s i d e t h e For example, Environmentalists
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 t h a t , together w i t h

nongovernmental groups, forms an energy b a r g a i n i n g arena. greater p r o f i t s . Consumer groups may seek lower p r i c e s .

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 may seek l e s s p o l l u t i o n . Groups concerned w i t h n a t i o n a l s e c u r i t y may seek a Because resources a r e scarce, n o t a l l Since b a r g a i n i n g power i n unequal, some The Congress and t h e

n a t i o n a l s t o c k p i l e o f energy resources. groups w i l l get e v e r y t h i n g they want.

groups w i l l get more o f what t h e y want than o t h e r s w i l l .

executive 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 t h e b a r g a i n i n g arenas because most f e d e r a l actions s t a r t w i t h s t a t u t e s and a p p r o p r i a t i o n s from Congress and r e g u l a t i o n s and a c t i o n s from t h e executive o f f i c e s . Causes o f Governmental Actions Governmental a c t i o n s take place as a r e s u l t o f t h e b a r g a i n i n g game between p o l i t i c a l a c t o r s pushing f o r a given a c t i o n and t h e a c t o r s r e s i s t i n g t h a t action. The r e s u l t i n g a c t i o n may c l o s e l y resemble what one actor, o r Depending group o f actors, wanted o r i t may be d i f f e r e n t from what any a c t o r wanted. The r e s u l t i n analogous t o a " r e s u l t a n t v e c t o r " i n vector a d d i t i o n . on t h e r e l a t i v e s t r e n g t h s 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 t h e 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 direction. (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) Effects of Governmental Actions 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.

Organizations i n the government and t h e energy market do n o t make decisions i n t h e way t h e economic viewpoint assumes t h e government does. Although t h e economic viewpoint assumes t h a t t h e Federal Government and each consumer and producer are u n i t a r y , a n a l y t i c decision-makers, t h e o r g a n i z a t i o n a l viewp o i n t assumes t h a t the Federal Government and many producers and consumers are mu1t i p l e , c y b e r n e t i c decision-makers. (I2) I n other words, t h e economic viewp o i n t assumes t h a t decision-makers r e a c t t o complicated decisions w i t h u n c e r t a i n outcomes by developing a c o n s i s t e n t s e t o f o b j e c t i v e s , 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 o b j e c t i v e s , and e x p l i c i t l y d i s counting f o r u n c e r t a i n t y . procedures. The o r g a n i z a t i o n a l viewpoint assumes t h a t decisionmakers r e a c t t o complicated decisions w i t h u n c e r t a i n outcomes b y applying s e t 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 s e t o f o b j e c t i v e s 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 a k e the f i r s t acceptable one, and use various methods t o assume away u n c e r t a i n t y . Cyert and March i n THE BEHAVIOR THEORY O THE FIRM(I8) describe these F search procedures. They s t a t e t h a t one can analyze t h e o r g a n i z a t i o n a l process o f decision-making i n terms o f t h e v a r i a b l e s t h a t a f f e c t o r g a n i z a t i o n a l goals, those t h a t a f f e c t o r g a n i z a t i o n a l expectations, and those t h a t a f f e c t organiza(18, p. 115) t i o n a l choice. Organizational Goals. Variables a f f e c t i n g t h e r e l a t i v e importance o f

goals i n c l u d e t h e composition o f t h e o r g a n i z a t i o n , t h e d i v i s i o n o f l a b o r i n decision-making, and the s p e c i f i c problems f a c i n g t h e o r g a n i z a t i o n . Variables t h a t a f f e c t t h e a s p i r a t i o n l e v e l on any goal i n c l u d e t h e o r g a n i z a t i o n ' s p a s t goals, t h e o r g a n i z a t i o n ' s past performance, and the past performance o f other "comparable" organizations. Organizational Expectations. o f o r g a n i z a t i o n a l slack. Variables t h a t a f f e c t t h e 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 e x t e n t t o which goals are achieved and t h e amount Variables t h a t a f f e c t t h e d i r e c t i o n o f search i n c l u d e t h e nature o f t h e problem s t i m u l a t i n g t h e search and t h e o r g a n i z a t i o n a l component a c t u l l y c a r r y i n g out t h e search. Organizational 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 r e q u i r e s a choice, t h e standard d e c i s i o n making r u l e s applied, and t h e

order i n which a l t e r n a t i v e s are considered.

Variables a f f e c t i n g those issues i n c l u d e t h e past experience o f t h e o r g a n i z a t i o n w i t h a given s e t o f d e c i s i o n

r u l e s , t h e p a s t r e c o r d o f slack, t h e o r g a n i z a t i o n a 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 c o n s i d e r i n g a l t e r n a t i v e s . Organizational goals, expectations, and choice are k n i t t e d together by 1 ) q u a s i - r e s o l u t i o n o f c o n f l i c t , 2) u n c e r t a i n t y avoidance, (18,~.116-126) 3) p r o b l e m i s t i c search, and 4) o r g a n i z a t i o n a l learning. f o u r phenomena:

1. Q u a s i - r e s o l u t i o n o f c o n f l i c t . Organizations 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 d e c i sions 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" performance 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 i m e and another the next time.
2. U n c e r t a i n t y avoidance. Organizations avoid u n c e r t a i n t y by empha-

s i z i n g s h o r t - r u n r e a c t i o n t o short-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.
teristics.

P r o b l e m i s t i c research.

Organizational search has t h r e e major characSecond, i t i s simpleminded--using a

F i r s t , i t i s m o t i v a t e d - - s t a r t e d b y t h e discovery o f a problem and

stopped by t h e d i s c o v e r y o f a s o l u t i o n . more complex model.

simple model o f c a u s a l i t y u n t i l f o r c e d b y 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 Organizations w i l l search i n t h e neighborhood o f t h e probThird, search i s biased-lem and p a s t a c t i v i t y before c o n s i d e r i n g new areas.

t h e a c t u a l conduct of the search i s very dependent on t h e 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 r g a n i z a t i o n a l component conducting it.

4. Organizational learning. Organizations modify t h e i r behavior i n the l i g h t o f p a s t experience. They may change goals, t h e p a r t s o f t h e environment t o which t h e y respond, o r t h e r u l e s t h e y use i n searching f o r s o l u t i o n s .
F i g u r e 2 d e p i c t s t h e r e l a t i o n s h i p s o f these concepts. (18) One o f t h e most important consequences o f c y b e r n e t i c decision-making i s t h a t d i f f e r e n t o r g a n i z a t i o n s 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 o b j e c t i v e s .

Quasi-resolution of conflict
Goals as independent constraints. Local rattonality. Acceptable-level dectsoan rules. Sequential attention to goals

1 1 I I 1

Uncertainty ovoidonce
Feedback-react decisian procedures. Neqatioted environment

I
I

Problemistic scorch

OrgonizatianoI learning

II
I

Motivated search. I Ada tation o t goals. 'simple-minded search1 idoptation in Bias in search attention ruler. Adaptation in I search rules

II

/ I
I

I I

Observe feedback from environment

I I

1.

FIGURE 2. A Diagram o f Organizational Decision Making

Causes o f Governmental A c t i o n I n t h e o r g a n i z a t i o n a l viewpoint, governmental a c t i o n s take p l a c e when a governmental o r g a n i z a t i o n responds t o a d e c i s i o n problem. The d e c i s i o n p r o The blem f o r the governmental o r g a n i z a t i o n may be created by events (such as a b i t t e r w i n t e r ) o r b y a c t i o n s o f o r g a n i z a t i o n s o u t s i d e t h e government. l a t t e r s i t u a t i o n occurs when a nongovernmental o r g a n i z a t i o n ' s procedures f o r responding t o a d e c i s i o n problem lead i t t o t a k e a c t i o n s t h a t e l i c i t a governmental response. The k i n d s o f a c t i o n s t h a t t a k e place t h e r e f o r e depend on t h e c h a r a c t e r i s t i c s o f t h e o r g a n i z a t i o n s t a k i n g action. For instance, t h e existence o f a governmental o r g a n i z a t i o n w i t h a concern f o r t h e energy market makes a c t i o n s a f f e c t i n g energy more l i k e l y than t h e y would be i f such o r g a n i z a t i o n s 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 t h e 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 organ i z a t i o n a l response, as shown i n t h e o r g a n i z a t i o n a l column o f Table 1. Graham A l l i s o n says the c r u c i a l questions are: (3yp.257) How ( w i t h what procedures) does t h e o r g a n i z a t i o n generate i n f o r m a t i o n about a problem? How does t h e o r g a n i z a t i o n generate a l t e r n a t i v e responses? t i o n a l analysis l i t e r a t u r e , How does t h e o r g a n i z a t i o n implement t h e chosen response? Marc Roberts, i n a r e c e n t summary o f t h e organiza-

(I9)

suggests t h a t t h e 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 f a c t o r s :

1.

Factors i n the e x t e r n a l environment, such as t h e amount o f u n c e r t a i n t y and t h e amount o f competition from o t h e r organizations.

2.

Factors i n the o r g a n i z a t i o n i t s e l f , such as i t s size, i t s s t r u c t u r e , and i t s s t r a t e g y (normal goals and normal a c t i v i t i e s ) .

3.

Factors i n the o r g a n i z a t i o n ' 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 t h e o r g a n i z a t i o n ' s formal and i n f o r m a l means o f s e l e c t i o n , monitoring, and reward.

E f f e c t o f Governmental Actions I n the o r g a n i z a t i o n a l viewpoint, governmental a c t i o n s e i t h e r change which o r g a n i z a t i o n s respond t o a given d e c i s i o n problem o r they change t h e

TABLE 1 . Viewpoints Prominent Economic von Neuman and Morgensterm (1947) Downs (1957) Boulding (1959) S c h e l l i n g (1960) Baumol (1961) Snyder (1961) Rapoport (1965) W o h l s t e t t e r (1965) G i l p i n (1968) Axelrod 11970) Quester ( w o j Meadows e t a1 (1972) Knorr (1973) Melman (1974)

Prominent Users o f the Four Viewpoints Political Lindblom (1954) Dahl (1957) L i p s e t (1960) Matthews (1960) Almond (1961) Key (1961) Lane (1962) Huntington (1968) Lowi (1969) Seidman (1970) Fenno (1973) Organizational 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) H a l p e r i n (1973) Steinbruner (1974) Legal de Tocquevi 1l e (1832) H a r 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) F a l k (1971) W i l l r i c h (1973)

( a ) See t h e references f o r t h i s chapter f o r complete c i t a t i o n s .

I n e i t h e r case, t h e changes are a p t t o produce new procedures f o r responding t o a given t y p e o f d e c i s i o n 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 a x p o l i c y may i n f l u e n c e whether o f n o t o i l companies become i n v o l v e d w i t h o t h e r forms o f energy.
I f t h e y do become involved, they may have e x p e r t i s e and resources t o

c h a r a c t e r i s t i c s o f t h e o r g a n i z a t i o n s t h a t do respond.

use t h a t other o r g a n i z a t i o n s would not.

On t h e o t h e r hand, however, t h e y may For an example o f t h e second

have reasons f o r de-emphasizing production t h a t o r g a n i z a t i o n s w i t h o u t i n v o l v e ment i n competing energy sources would not have. case, government r e g u l a t i o n s 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 r e a t e new procedures f o r making energy decisions. Summary o f t h e Organizational Viewpoint I n summary, the o r g a n i z a t i o n a l viewpoint leads one t o look f o r such causes o f a governmental a c t i o n as o r g a n i z a t i o n a l response t o d e c i s i o n problems caused by events o r t h e a c t i o n s o f other organizations; i t leads one t o look f o r such e f f e c t s as changes i n which o r g a n i z a t i o n does what. To use t h e Price-Anderson example, t h e insurance p r o v i s i o n s were created because the appropriate o r g a n i z a t i o n s were i n existence and had t h e a p p r o p r i a t e c h a r a c t e r i s t i c s t o design and c r e a t e them. The Atomic Energy Commission and t h e J o i n t Committee on Atomic Energy were a v a i l a b l e t o design and h e l p c r e a t e t h e i n c e n t i v e s , t h e l a r g e f i r m s making up t h e nuclear i n d u s t r y were able t o c o n t r i b u t e s u b s t a n 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 r o v i s i o n s came i n t o being. The e f f e c t s o f t h e p r o v i s i o n s were t o a l l o w and i n some cases r e q u i r e l a r g e and otherwise powerful o r g a n i z a t i o n s such as t h e AEC and t h e nuclear f i r m s t o become even bigger and t o work together ( a t l e a s t t o t h e e x t e n t o f h e l p i n g t o i n s u r e each o t h e r ) . 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 m o d i f y l e g a l r e l a t i o n s h i p s among themselves and between themselves and t h i n g s . 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 production process, although some evidence exists that the Federal Government is more apt to support and protect ownership and use of resources than of manuf acturing processes. (20) Together, the relationships form a "great pyramid of legal order. ,,(21) In roughly descending order, the pyramid consists of constitutions, constitutional interpretations, statutes, statutory interpretations, executive orders, administrative orders, administrative regulations, administrative interpretations, 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 authority 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 b the existing law with greater authority. The constitution y 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.

Effects of Governmental Actions 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. ( 2 3 ) 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 h e causes and effects o f governmental a c t i o n s h i g h l i g h t e d by each o f t h e f o u r viewpoints. other. and some o r a l l o f these e f f e c t s . Note t h a t t h e viewpoints may complement each For example, w h i l e t h e Price-Anderson Any s i n g l e governmental a c t i o n may have some o r a l l o f these causes

insurance p r o v i s i o n s changed t h e r e l a t i o n s h i p between p r o d u c t i o n and p r i c e , t h e y a l s o 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 r g a n i z a t i o n s would be i n v o l v e d i n nuclear energy, and changed t h e l e g a l r e l a t i o n s h i p s between producers and t h e accidents stemming from t h e i r p r o d u c t i o n processes. TABLE 2. Viewpoint Economic Political Causes and E f f e c t s o f Governmental Actions Causes Price signals that f a i l t o r e f l e c t some s o c i a l values Bargaining f o r a c t i o n s by groups w i t h h i g h i n t e n s i t y o f preference and h i g h p o l i t i c a l power A c t i v i t i e s t o design, c r e a t e and use a c t i o n s by organizat i o n s w i t h appropriate characteristics A request by i n t e r e s t e d p a r t i e s f o r an a u t h o r i t a t i v e body t o d e c l a r e a change Effects Technical and p r i c e changes Changes i n t h e benef i t s and p o l i t i c a l power o f t h e groups i n v o l v e d Changes i n which o r g a n i z a t i o n s are involved Changes i n t h e l e gal relationships among p a r t i e s and between p a r t i e s and t h i n g s

Organizational

Legal

Government a c t i o n s such as those described as i n c e n t i v e s t o increased p r o d u c t i o n o f energy are o f t e n analyzed from a s i n g l e p o i n t o f view. o t h e r viewpoints a r e subordinate, i f used a t a l l . The For instance, changes i n

p o l i t i c a l power, o r g a n i z a t i o n a 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 m i g h t be t r e a t e d as i n t e r m e d i a t e steps l e a d i n g 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 r e l a t i o n s h i p s , o r g a n i z a t i o n a 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 r e a t e d as intermediate steps l e a d i n g t o a change i n p o l i t i c a l power. world. ( 2 4 ) TYPES O POSSIBLE GOVERNMENTAL ACTIONS F The f o u r viewpoints p r o v i d e a method f o r choosing which governmental actions 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 Then a p p l y i n g t h e types o f a c t i o n s the Federal Government could have taken. considered energy p o l i c i e s . how and why t h e U.S. The l a t t e r approach i s r o u g h l y t h e Marxian view o f t h e

f o u r viewpoints, a determination can be made as t o which a c t i o n s should be The l i s t o f energy p o l i c i e s guide t h e a n a l y s i s o f Government intervenes i n t h e energy marketplace.

I n order t o a i d analysis 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 actions, a c a t e g o r i z a t i o n o f governmental a c t i o n s must meet t h e f o l l o w i n g criteria: 1. Generality. The categories should be r e l e v a n t t o most, i f not a l l ,

s i t u a t i o n s apt t o be s u b j e c t t o a n a l y s i s o r p o l i c y development. 2.
3.

Completeness. Concreteness.

A l l t h e r e l e v a n t c a t e g o r i e s should be included. Each category and category l a b e l should, as much as

possible, suggest t h e a c t i o n s t h a t are o r c o u l d be w i t h i n t h a t category. 4. Lack o f ambiguity. Actions should, as much as possible, 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 c a t e g o r i z a t i o n o f governmental a c t i o n s might be based on t h e p a r t o f t h e production-consumption c y c l e a f f e c t e d by a given action. Such a c a t e g o r i z a t i o n meets t h e c r i t e r i a o f Some a c t i o n s do a f f e c t 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 a c k o f ambiguity f a i r l y w e l l , b u t f a i l s t o meet the c r i t e r i o n o f completeness. eFf ects o u t s i d e the production-consumption cycle. c a t e g o r i z a t i o n i s o n l y p a r t i a l l y complete. more than one p a r t o f t h e cycle, and o t h e r a c t i o n s have t h e i r most d i r e c t Therefore, t h i s

The p o l i t i c a l viewpoint leads t o a c a t e g o r i z a t i o n based on t h e p o l i t i c a l purpose served b y t h e action. I n f a c t , most previous attempts a t categorizaHowt 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 o w i n g t h i s general idea. c r e t e nor unambiguous.

ever, t h i s t y p e o f c a t e g o r i z a t i o n , w h i l e general and complete, i s n e i t h e r conP o l i t i c a l purposes do n o t immediately suggest concrete actions and one a c t i o n may serve many purposes. Another c a t e g o r i z a t i o n i s based on t h e o r g a n i z a t i o n a l viewpoint. component t h a t c a r r i e s them out. That i s ,

one c o u l d c a t e g o r i z e governmental a c t i o n s by t h e o r g a n i z a t i o n o r o r g a n i z a t i o n a l This c a t e g o r i z a t i o n i s probably t h e most conIt can

c r e t e o f those suggested so f a r , b u t f a i l s t o meet t h e other c r i t e r i a . o u t " a given a c t i o n .

be ambiguous because more than one o r g a n i z a t i o n may be involved i n " c a r r y i n g 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 completeness because some actions may i n v o l v e organizations n o t y e t i n existence. Therefore, t h i s c a t e g o r i z a t i o n i s a l s o incomplete. n a t i v e s i t should. The l e g a l viewpoint suggests a c a t e g o r i z a t i o n based on the l e g a l form o f t h e governmental action, such as a c o n s t i t u t i o n a l amendment, a s t a t u t e , o r a regulation. The c a t e g o r i z a t i o n t h a t r e s u l t s i s general and complete, b u t n o t The categories c o n t a i n t o o many d i f f e r e n t a c t i o n s and concrete o r unambiguous. However, i t does h e l p i n i d e n t i f y i n g e x i s t i n g actions, even though i t f a i l s t o generate a l l t h e a l t e r -

any one a c t i o n may be created through t h e use o f a number o f l e g a l forms. Previous attempts t o c a t e g o r i z e governmental a c t i o n s also 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 n e i I n l i s t i n g governmental actions, we considered The l i s t which t h e r concrete nor unambiguous.

t h e f o u r c r i t e r i a as w e l l as r e u l t s o f previous attempts. r e s u l t e d i s arranged i n a h i e r a r c h y o f categories: Creation o r p r o h i b i t i o n o f organizations. some o f the f o l l o w i n g kinds o f actions.

An important and basic k i n d o f

governmental a c t i o n i s t h e c r e a t i o n o f o r g a n i z a t i o n s t h a t i n t u r n c a r r y o u t This category includes b o t h t h e creat i o n o f such o r g a n i z a t i o n s and t h e p r o h i b i t i o n o f them. Taxation. Levying o f a t a x o r t h e exemption o r r e d u c t i o n 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 u a t i o n s .

Fees.

Charges f o r t h e d e l i v e r y o f a government s e r v i c e o r goods n o t

d i r e c t l y r e l a t e d t o t h e c o s t o f p r o v i d i n g t h a t good o r service. Disbursements. Actions i n which t h e Federal Government gives o u t money The category

w i t h o u t r e c e i v i n g anything i n r e t u r n d i r e c t l y o r immediately. disbursements. Requirements. c i v i l sanctions. T r a d i t i o n a l government services.

i n c l u d e s promises t o disburse under c e r t a i n circumstances as w e l l as a c t u a l

Demands made by government, backed up by c r i m i n a l and

Assistance o r b e n e f i t provided b y t h e

government t o a nongovernmental e n t i t y o r e n t i t i e s w i t h o u t d i r e c t charge. This category o f assistance o r b e n e f i t includes a l l t h e symbolic o r t a n g i b l e goods o r services 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. N o n t r a d i t i o n a l services. other n o n t r a d i t i o n a l services. I n a d d i t i o n t o p r o v i d i n g symbolic o r t a n g i b l e Although t h e boundary between t h i s category

goods and services t r a d i t i o n a l t o government, t h e government also p r o v i d e s and t h e category o f government s e r v i c e s i s somewhat ambiguous, t h e d i s t i n c t i o n i s u s e f u l f o r t h e purposes o f completeness and concreteness. Market a c t i v i t y . Involvement i n a market under c o n d i t i o n s s i m i l a r t o

those faced b y nongovernmental producers and consumers. The l i s t o f e i g h t government a c t i o n s i s subdivided i n t o categories t o a l l o w a complete screening o f t h e a c t i o n s o f t h e Federal Government w i t h respect t o the creation o f incentives. These c a t e g o r i e s are l i s t e d below.

Creation and P r o h i b i t i o n o f Organizations The government can c r e a t e o r p r o h i b i t o r g a n i z a t i o n s o f t h e f o l l o w i n g types: Federal Government o r g a n i z a t i o n s Other governmental o r g a n i z a t i o n s
0

Nongovernmental organizations.

These subcategories can be d i v i d e d as f o l l o w s :

Federal Government o r g a n i z a t i o n s (25)

1.
2.
3. 4.

Department o r departmental agency Agency w i t h i n the Executive O f f i c e o f t h e President Independent agency Foundation I n s t i t u t i o n or i n s t i t u t e Claims commission Regulatory commission Conference Government c o r p o r a t i o n Interagency board Advisory body J o i n t executive-congressional committee Intergovernmental o r g a n i z a t i o n Semi-public o r g a n i z a t i o n (e.g., t h e Federal Reserve System)

5.
6.

7.
8. 9. 10.

11.
12. 13. 14. 15.

Government-owned, contractor-operated f a c i l i t y Contractor-owned, facility contractor-operated ( b u t under government c o n t r a c t )

16.

17.
18.

Congressional agency Federal c o u r t . Other government organizations. (The Federal Government can o f t e n e x e r t

a s u b s t a n 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 create o r prohibit.)

1 .
2. 3.

Regional compact S t a t e government O r g a n i z a t i o n o f substate governments County government M u n i c i p a l government 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

4. 5.
6.

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 r o s s i n g 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 o r excise taxes because purchased o u t s i d e j u r i s d i c t i o n ) Export taxes ( t h e U.S. States). 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 t h e United

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 t h i n each o f the subcategories above, e i t h e r i n s i d e or o u t s i d e the production-consumption cycle, are two f u r t h e r subdivisions. The f i r s t d i s t i n g u i s h e s between actions r e l a t i n g t o t h e i m p o s i t i o n o f a t a x 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 includes lower r a t e s ,

delayed payments, and adjustments t o t h e t a x a b l e 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 l s o included and u s u a l l y d e f i n e d 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 divided, p r i m a r i l y because the category i s so l i t t l e used. W noted t h a t t h i s category does n o t i n c l u d e p r i c e s charged f o r e goods and services normally provided by nongovernmental organizations, even i f t h e government i s p r o v i d i n g them. Disbursements W d i v i d e d disbursements according t o t h e r e c i p i e n t o f the f e d e r a l e money. Grants-in-aid. Adopting the d e f i n i t i o n o f a g r a n t - i n - a i d as " a g r a n t o f the Federal Government i s t h e " c e n t r a l and

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 assistance i n a c i v i c undertaking,"(') government," a l l other governments a r e t h e " l o c a l government o r agency,"

almost a l l purposes q u a l i f y as " c i v i c undertakings." Subsidy. t o the p u b l i c . " Subsidy i s defined as "pecuniary a i d d i r e c t l y granted by The r e c i p i e n t can be any nongovernment organization,

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 group, o r i n d i v i d u a l , and t h e purpose o f t h e g r a n t 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 undertaking f o r h i m s e l f o r f o r others, b u t n o t f o r t h e Federal Government. Transfer. Transfer i s "a d e l i v e r y o f t i t l e or p r o p e r t y from one person W consider the term t o mean t h e d e l i v e r y o f money f r o m t h e e

7 t o another.

Federal Government t o i n d i v i d u a l s as a consequence o f t h e s t a t u s o f t h o s e 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 i d e d according t o t h e i r announced primary s u b j e c t matter. 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 W i d e n t i f i e d the e a d m i n i s t r a t i v e preamble t o the requirement being imposed. f o l l o w i n g subcategories. ( 2 6 )

1 .
2.

Economic Safety Environmental ( i n c l u d i n g zoning) C i v i l rights. The economic subcategory i s subdivided i n t o p r i c e requirements, q u a n t i t y

3.
4.

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 of

t h e requirements can be f u r t h e r d i v i d e d 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 i s c l o s u r e 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 a d d i t i o n , 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 sanctions, 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 c a t c h - a l l t o i n s u r e t h a t a l l " t r a d i t i o n a l l y governmental" a c t i o n s are included 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 actions whose major e f f e c t s may not be r e l e v a n t t o t h e s i t u a t i o n under discussion, b u t whose major e f f e c t s may be v e r y r e l e v a n t . energy f orms For instance, government p r o v i s i o n 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

.
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 t h e

W have somewhat incompletely d i v i d e d the category by s u b j e c t headings e 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.

f o l l owing services t r a d i t i o n a l l y provided by government:

1.
2.

Coining and r e g u l a t i n g money Regulating i n t e r s t a t e and f o r e i g n commerce (i.e., r i g h t s and c o n t r a c t u a l o b l i g a t i o n s ) enforcing property

3.
4.

Regulating immigration Regulating bankruptcy E s t a b l i s h i n g weights and measures

5.

6.
7.

Borrowing money Defending the country, raising armies and declaring war Providing a postal service Providing "post roads" (highways) Providing inland waterways.

8.
9.

10.

A study of s t a t e and local government adds the following services as normal1y governmental :(27) 11. Education

12. 13. 14.

Social services (counseling, adoption, and the l i k e ) Health Utilities Water Power ( e l e c t r i c i t y ) * Sewer Garbage. Recreation Law enforcement Fire protection. These

15.
16.

17.

The government also delivers less tangible goods and services. include a t l e a s t t h e following: 18. 19. 20. 21. 22. 23. Legitimacy Recognition Acceptance Agreement (nontangible support) Interest Involvement.

N o n t r a d i t i o n a l Services 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 c a t c h - a l l Some of t h e most important actions i n t h i s categhry o f services t h a t are u s u a l l y or o f t e n provided by nongovernmental organizations are:

1 .

Knowledge a c q u i s i t i o n Exploration Basic research Applied research Development Demonstration.

2.
3.

Knowledge dissemination (other than education) Job placement T r a n s p o r t a t i o n (e.g., Professional services Legal Engineering Scientific Administrative. buses and subways)

4. 5.

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 t h e Musgraves' diagram o f t h e production-consumption c y c l e and t h e i r discussion o f phenomena o u t s i d e 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 cycle:

1 .
2.
3.

Government borrowing Saving Consumption (procurement) o f consumer goods Investment Production o f consumer products Production of c a p i t a l goods Production o f labor ( t r a i n i n g o r manpower development)

4. 5.
6.
7.

8.

Consumption o f c a p i t a l goods Consumption o f l a b o r (employment) Ownership o f land and o t h e r n a t u r a l resources Transfer o f l a n d and o t h e r n a t u r a l resources.

9.
10. 11.

USE OF THE VIEWPOINTS AND THE TYPOLOGY T IDENTIFY ENERGY ACTIONS O The next s t e p 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 a c t i o n s w i t h i n t h a t category. 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 actions, appear i n Chapter 111. The

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Grossman, Joel B. "Social Backgrounds and J u d i c i a l Decision Making." Harvard Law Review (1966), pp. 211-214.

79

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 Wiley and Sons, 1972. Readings i n American Halperin, Morton H. and Arnold Kantor (eds.). Foreign P o l i c y . Boston: L i t t l e , Brown, and Co., 1973; esp. H a l p e r i n and K a n t o r ' s "The B u r e a u c r a t i c Perspective: A P r e l i m i n a r y Framework." Huntington, Samuel P. The Common Defense. U n i v e r s i t y Press (1961). New York: Columbia New York: Thomas Y. Yale

22. 23. 24. 25.

Key, V. 0. P o l i t i c s , P a r t i e s , and Pressure Groups. Crowel 1 Company, 1942. Knorr, Klaus Eugen. The American Trade Proposals. I n s t i t u t e o f I n t e r n a t i o n Studies, 1946.

New Haven, CT:

Knorr, Klaus Eugen. A C r i t i q u e o f t h e Randal Commission Report on U.S. Foreign Economic P o l i c y . Princeton, NJ: Center o f I n t e r n a t i o n a l Studies, 1954. Lane, Robert Edwards. P o l i t i c a l L i f e : Why People Get I n v o l v e d i n P o l i t i c s . Glencoe, ILL: Free Press, 1959. Lindblom, Charles Edward. Bargaining: Santa Monica, CA: Rand Corp., 1955. Lipset, Seymour M a r t i n . P o l i t i c a l Man: Garden City, NY: Doubleday, 1960. The Hidden Hand i n Government. The S o c i a l Basis o f P o l i t i c s .

26. 27. 28. 29. 30.

Lowi, Theodore. "American Business, P u b l i c P o l i c y , Case Studies, and World P o l i t i c s 16 (1964) pp. 677-715. P o l i t i c a l Theory." March, James and Herbert Simon. Sons, 1958. Organization. New York: Wiley and

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. The Supreme Court and American Capitalism. New York: Free Press, 1968. 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.

39. Quester, George H. Deterence Before Hiroshima: The Air Power Background of Modern Strategy. New York: Wiley and Sons, 1966.

40. Rapoport, Anatol. Fights, Games and Debates. Ann Arbor: University of Michigan Press, 1960.

41. Rapoport, Anatol. N-Person Game Theory: Concepts and Applications. Ann Arbor, MI: University of Michigan Press, Ann Arbor Science Library Series, 1966. 42. Schelling, Thomas C. 1958. International Economics. Boston: Allyn and Bacon,

43. Schmidhauser, John R. "State Decisis, Dissent, and the Background of the Justices of the Supreme Court of the United States." 14 University of Toronto Law Journal (1962), pp. 164-212.
44. Shapiro, Martin. Law and Politics in the Supreme Court. Glenco, IL: Free Press, 1964.

45.

Shapiro, Martin. The Supreme Court and Administrative Agencies. New York: The Free Press, 1968.

46.

Simon, Herbert A. A d m i n i s t r a t i v e Behavior: A Study o f Decision-Making Processes i n A d m i n i s t r a t i v e Organization. New York: The Macmillan Co., 1945. Snyder, Glenn H. Deterrence and Defense: Toward a Theory o f N a t i o n a l Security. Princeton, NJ: P r i n c e t o n U n i v e r s i t y Press, 1961. Surrey, S t a n l e y S. Company, 1971. Tax Incentives. Lexington, MA: D. E. Heath and 79

47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

Tanenhaus, Joseph. "The Cumulative S e a l i n g o f J u d i c i a l Decision.' Harvard Law Review (1966), 1583-1589. Thompson, James D. Company, 1967. Organizations i n Action. New York:

McGraw-Hill Book

Von Neumann, J., and 0. Morgerstern. Theory o f Games and Economic Behavior. Princeton, NJ: P r i n c e t o n U n i v e r s i t y Press, 1947. Vose, Clement. " L i t i g a t i o n as a Form o f Pressure Group A c t i v i t y . " Annals o f t h e American Academy o f P o l i t i c a l and S o c i a l Science, 1958. Whyte, W i l l i a m H., Schuster, 1956. Jr. The Organization Man. New York: Simon and The Free Praeger

W i l l r i c h , Mason, e t a l . Press, 1975.

Energy and World P o l i t i c s .

New York: New York:

W i l l r i c h , Mason. Global P o l i t i c s o f Nuclear Energy. Publishers, 1971.

Wohlstetter, A l b e r t J. "Analysis and Design o f C o n f l i c t Systems," i n E. S. Quade (ed.), A n a l y s i s f o r M i l i t a r y Decision. Rand Corporation, 1964, p. 131.

111.

GENERIC ANALYSIS OF ENERGY INCENTIVES

T h i s c h a p t e 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 domestic) t h a t t h e f e d e r a l government has t a k e n c o n c e r n i n g energy. a c t i o n i n v o l v e s energy. As mentioned i n t h e p r e v i o u s chapter, "concerning energy" means t h a t e i t h e r a m a j o r purpose o r a m a j o r e f f e c t o f t h e 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 d e s c r i b e d The b a s i c s t a r t i n g i n t h e p r e v i o u s c h a p t e 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 i e w p o i n t s d e s c r i b e d t h e r e t o determine whether an a c t i o n concerns energy. points f o r analysis are thus types o f action. 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 , L a t e r c h a p t e r s analyze t h e the actions are described

and t h e n q u a n t i f i e d b y o u r e s t i m a t e o f t h e FY 1978 c o s t o f accomplishing 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 components:

(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 r o m consumers t o producers b r o u g h t about by p r i c e r e g u l a t i o n s ) . 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 d e s c r i b e d i n Table 3. 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 y p e s o f o r g a n i z a t i o n s t h a t conduct energy actions. 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 d e s c r i b e d i n t h e f o l l o w i n g paragraphs. Type 1: Departmental Agency Some o f t h e c o l T h i s c h a p t e r c o n s i d e r s o n l y t h e f i r s t component, Other c h a p t e r s extend t h e a n a l y s i s t o t h e t h e money t h e government spends.

Almost e v e r y one o f t h e 1 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 gov1 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 a c t i o n s . energy t h a t we have i d e n t i f i e d . Consequently, t h e s e departmental 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 F o r 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 r e s o u r c e l a n d s and

TABLE 3.

I d e n t i f i c a t i o n and D e s c r i p t i o n o f Energy Actions

Organizational Typeb Congressional Committee Jurisdiction Senate House Major Energy Fo~rnC and staged Major TYP~(s) of Actione

Agency
Name

Major Energy Related Purposesa

1. R U P L I Elec~
trification Administratian (Agriculture Department)

Rural electrification program to provide rervice to rural cooperatives and other rural ertablishments.

Agriculture, Nutrition, and Forestry

Agriculture Goverrnent Operations

Electricity Production

Market Activity

2.

REA Capital Investment Program (Agriculture Department)

Insured loans and loan ouarantees for construciian and operation o f generating plants, electric transmission and dirtribution lines or systems.

Agriculture, Nutrition. and ~ a r e s t r y

Agriculture Gaverrnent Operations

Electricity Production

Market Activity

3.

Forest Service (Agriculture Department)

Mineral leasing and mining activity, special use permitr; Biomass Conv. R&O.

Agriculture, Nutrition, and Forestry

Agriculture Goverment Operations

Electricity; Fossil; Other; Both

Nontraditional: (Knowledge Acquisition); Market Activity

4.

National Oceanic and Atmospheric Administration (carnme;ce Department)

Coastal zone management, energy impact formula grants, coastal energy impact fund.

Commerce. Merchant Marine All Forms Science, and and Fisheries Transportation Production

Dirbursements; Organizational Creation

5. Maritime Administration (Commerce Department)

Construction and operating subsidies f o r U.S. ships and waterborne transportation systems.

Commerce, Merchant Marine Oil; Science, and and Fisheries Production Transportation

Disbursements

6.

National Bureau of Standards (Commerce Department)

Energy conservation and efficiency standards, energy conversion materials reliability energy storage systems, nuclear standards for fission power and thermonuclear reactions.

Commerce, Science, and Transportation

Science and Technology

A11 Forms; Both

Nontraditional: (Knowledge Acquisition, Dissemination)

TABLE 3 .
Organizational Typeb

(contd)
Major Energy ForrnC and staged

Congressional C m i t t e e Jurisdiction Senate House

Major
TypeIs) of Actione FY78

Agency Name 1 7. Carps of Engineers (Defense Department)

Major Energy R e l a t e d Purposesa

Major dam and r e s e r v o i r c o n s t r u c t i o n and hydroe l e c t r i c power generation, deep water p o r t s c o n s t r u c tion.

Environment and P u b l i c Works

P u b l i c Works and Transportation Government Ope~dtions

Electricity; Oil; Production

Market A c t i v i t y : Traditional

1,575,366

8.

Atomic Energy Defense Activities (DOE)

Nuclear weapons e f f e c t s r e r e a r c h , n u c l e a r weapons t e s t i n g , and n u c l e a r weapons s t o c k p i l e management, n a v a l r e a c t o r development.

Armed Services

Armed Services

Nuclear: Production,

Traditional

9.

National Institutes o f Environmental Health Services (HEW)

Support o f ~ e s e a r c hi n t o t h e p o t e n t i a l adverse h e a l t h and environmental side effects o f t h e u a r i aus energy t e c h n o l o g i e s under development.

Human

Resources
Cmittees

Science and Technology

A11 Forms; Production

Nontraditional: (Knowledge Acquisition, Dissemination)

55,077

Implementation o f S o l a r H e a t i n o and C a o l i n a Demon-

Banking, Housing, and Urban A f f a i r s

Banking, Finance, and Urban A f f a i r s

A l l but Other: Canrumption

Nontraditional: (Knowledge Acquisition, Dissemination)

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 d e r i g n f o r s o l a r energy (AIA s o l a r d e s i g n p r o j e c t ) , new town P l a n n i n s f a r boom town areas i i p a c t e d by new energy resource produc tion.

11. Bureau of Land Management (Interior Department)

Energy and m i n e r a l s management i n c l u d i n g l e a s i n g and management o f energy m i n e r a l s , b o t h onshore, and nonenergy m i n e r a l s .

Energy and Natu~aI

Resources

I n t e r i o r and Fossil; I n s u l a r A f f a i r s Nuclear; Other (geothermal); Production

Market A c t i v i t y Requirements: (Economic);

81.880

TABLE 3 .
. OroanizaAgency Name
1

(contd)
Ma.ior ~n;rgy FormC ald Stage
6

Major Energy Related Purposesa

2

tional ~ y p e ~
3

Conorerrianal Cornittee - Jurisdiction Senate

4

Major Typels)
of

House
5

Actione

'

12. Bureau of Reclamation (Interior Department)

Hydroelectric power generation and transmission.

Energy and Natural Resources

'

Interior and Insular Affairs Government Operations

EleCtricity; Other;. Production

Market Activity

Provides basic scientific data concernin4 water. land and mineral resources, and supervises the prospecting, develapment and production bf minerals and mineral fuels on leased federal, Indial and OCS.

Energy and Natural Resources

Interior and Insular Affairs Government Operations

A11 but Solar; Production

Requirements: (Economic); Nontraditional: (Knowledge Acquisition, Dissemination)

Health and safety-related coal mining research.

Energy and Natural Resources

Interior and Insular Affairs Government Ope~ations

Coal; Oil; Nuclear;

. ..., . .

Nontraditional: (Knowledge Acquisition, Dissemination)

Production

15. Office of Surface Mining

Regulation of strip miner and reclamation programs.

Energy and Natural

Resources

Interior and Insular Affairs

Coal; Production

Requirements (Environment)

Energy leasing, generation, and power.

Human Resource$

Interior and Insular Affairs

Fossil; Other; Electricity; Production

Market Activity

17. Mine Safety

and Health Administration

Coal mine, metal and nonmetal mine health and safety inspections along with education and training programs in safety motivation constitute the major thrust to activities.

Energy and Natural R~SOUPC~S

Interior and Coal; Insular Affairs Nuclear; Production Goverment Operations

Requirements: (Safety)

TABLE 3 .
Organizational Typeb
3

(contd)
Major Energy FormC and staged
6

Congressional Committee Jurisdiction Senate

House

Agency
Name

Major Energy Related Purposesa 2

Major Typds) of Actione

'

18. Alaska
Power Administration Department of Energy 9

Power opreations in Alaska including federal hydroelectric projects market~ng.

Energy and Natural R~SOUFC~S

Interior and Electricity; Insular Affairs Production Goverment Operations

Market Activity

19. Bonneville Power Administration Department of EnePgy 9

Constructs, operates and maintains facilities t o market electric power from 29 federal hvdroelectric generating $ants.

Energy and Natural Resources

Interstate and Electricity; Foreign Production Commerce Government Operations

Market Activity

20. Southwestern Transmission, substation Power and switching facilities Administrato transmit power genertion ated at Corps of Engineers Department of hydroelectric projects in Energy 9 the Southwest.

Energy and Natural

R~POUPC~S

Interstate and Electricity; Foreign Production Commerce Government Operat ions

Market Activity

21. Southeastern The administration markets Power power generated at Corps Adrnlnistraof Engineers hydroelectric tion plants in a 10-state area Department of of the Southeast. Energy9

Energy and Natural Resources

Interstate and Electricity; Foreign Production Commerce Goverrnent Operations

Market Activity

22. OSHA (Labor Department)

Promulgates occupational 1 safety and heatlh standards, establishes regulations, enforcer c a m p l ~ a n c e with rafety and health s t a n d a v d ~ and regulat~ans.

Human Resources

Education and Labor

All Forms: Production

Requirements: (Safety)

23. Employment Standards drninirtration Disabled Coal Miners' Benefits (Labor Department)

Cmnpensation and medical treatment costs paid to those totally disabled due to oneumoconiosis.

Human

R~POUVCBS

Education and Labor

Coal; Production

Disburrementr: (Subsidy)

TABLE 3 .
Oruanizational rypeb

(contd)
Major Energy FormC and Staged Major Type(%) of Actione FY78

Conuressional Committee Jurisdiction Senate

Agency Name

Major Energy Related Purposesa

House

24. Department o f Justice Leoal ~;<ivities

Land matters--use o f federa1 and natural resources. Enforcement o f antitrust.

Judiciary

Judiciary

Fossil: Other; Production

Requirements: (Econmic)

1,327

25. Depa~tment o f Justice Antitrust

Enforcement of a n t i t r u s t .

Judiciary

Judiciary

A l l Forms; Both

Organizational Prohibition

5,061

26. Department o f Transpartation. Research and Special Programs, Tranrnortation systems Center,Offshore O i l Compensation Fund

P i p e l i n e R&D; R&D on i n creased energy e f f i c i e n CY, m i n i m i z i n g adverse impacts of energy constraints.

Commerce, Science, and Transportation

P u b l i c Works and Transportation Science and Technology

Oil; Consumption

Nantradi t i o n a l : (Knowledge Acquisition)

54,598

27. IRS (Treasury Department)

M o n i t o r i n g revenue p o l i c y v i s - a - y i s energy compames.

Finance

Ways & Means

A l l Forms; Both

Taxation

87,420

28. Department o f Energy

D i r e c t s and conducts R&D on domestic energy SOUI.CPZ. c a r r i e s out nuclear.energy functions r e l a t e d t o n a t i o n a l defense and f u e l production and conducts basic research i n t h e physical, biomedical and environmental sciences.

Energy and Natural Resources Government Affairs Judiciary Commerce. Science, and Transportation

Science and Technology I n t e r i o r and Insular Affairs Goverment Operations Judiciary

A l l Forms; Both

Nontraditional: (Knowledge Acquisition, Dissemination); Market A c t i v i t y ; Traditional; Reouirernentr

I n t e r s t a t e and Foreign Commerce

TABLE 3 .
Organirat'ional Typeb 3
2

(contd)
Major Energy F o r d and staged Major Type(s) of Actione
8

C o n g r e r s i o n a l Committee Jurisdiction Senate House

Agency Name

Major Energy . R e l a t e d Purposesa

1
29. C o u n c i l on E n v i -

2 A n a l y s i s and e v a l u a t i o n of e n v i ~ o n m e n t d l e f f e c t s o f energy a c t i v i t i e s .

4
Goverment Affairs

5
Goverrnent Operations

6
All F O ~ S ; Both ,

7
Requirements: (Environmental)

onm men till

Quality

30. O f f i c e of Management and Budget

S u p e r v i s i o n of government spending an energy and n a t u r a l resources.

Goverrnent Affaics

Government Operations

A l l Forms; Both

Traditional

31. Appalachian Regional Development Program

L i m i t e d programs of g r a n t s t o simulate energy-related enterprise; grants for the s e a l i n g and f i l l i n g of v o i d s i n abandoned c o a l miner.

Environment and P u b l i c Works Government Affai~s

P u b l i c Works Transportation Government Operations

Coal; B a t h

Disbursements: (Grantr-in-Aid)

32. Environmental Protection Agency

P r o t e c t i o n against r a d i a t i o n p o l l u t i o n energy~ e l d t e denvironmental programs.

Environment and P u b l i c Works

Science and Technology Gaverrnent Operations

A l l Forms; Bath

Requirements: (Environmental); Nontraditional: (Knowledge Acquisition, Dissemination)

33. N a t i o n a l Aeronautics and Space Administration

A c t i v i t i e s g i v i n g improved d a t a and t e c h n o l o g y f o r energy p r o d u c t i o n and u t i l i z a t i o n are space a p p l i c a t i o n s , space research and technology, a e r o n a u t i c a l r e s e a r c h and technology applications, and s u p p o r t i n g a c t i v i t i e s .

Commerce, Science, and Transportation

Science and Technalogy

A l l Forms; Both

Nontraditional: (Knowledge Acquisition, Dissemination)

34. Small Business Administration

Energy loans program.

Banking, Housing, and Urban A f f a i r s

Small Business

Petroleum; Production

Disbursements: (Subsidy)

TABLE 3 .
Orsaoi;ationill

(contd)
Maior ~nirgy FarmC and staged Major ~y~e(s1 of Actione FY78

Conrrressianal Committee Jurisdiction Senate

House

Agency Name

Major Energy Related Purposesa

T Y P ~ ~

35. National Transportation Safety Board

Pipeline surface accident and safety investigation, and certificate or license appeal.

Commerce, Public Works Petroleum; Science, and and Nuclear; Tranroortation Tranroortatian Production

Requirements: (Safety)

1,852

36. Smithsonian Institute (Science Information Exchanoe)

SSIE plays an increasing role in support o f a number of programs of national interest, such as enerov. cancer and oesti-

Government Affairs

Government Operations Science and Technolorrv

All Forms; Both

Nontraditional: (Knowledge Dissemination)

37. Nuclear Regulatory Conmission

Licensing and regulatory functions, including antitrust, of nuclear facilities, primarily those for electric power generation.

Energy and Natu~al Resources Judiciary Government Affairs

Interstate and Nuclear Fo~eign Production Camerce

Judiciary Goverment Operations Interior and Insular Affairs

Requirements: (Economic, Safety, Environmental); Fees

287,699

38. Federal Trade Camnission

Energy and product liability; enforcement of cornpetition in energy indurtvies.

Judiciary

Judiciary

All Forms: Both

Requirements: (Economic) Prohibition

6,420

39. ICC

Granting oprating authority to interstate carrier~, regulating interstate shipping rater, and monitoring compliance with Interstate Commerce Act.

Commerce, Interstate and Coal; Science, and Foreign Oil; Transportation Commerce Production

Requirements

2,001

40. Securities and Exchange Comnission

Public utilities holding company regulation.

Banking, Housing, and Urban Affairs

Banking, Finance and Urban Affairs

Electricity; Production

Requirements: (Economic)

747

TABLE 3 .

(contd)

41. Tennessee Valley Authority9

Government awned carooration acting as whol&ale supplier for 160 local municinal and caooerativc electrical system;.

Enerov and NatuGl~ Resources

Public Works Coal; and Natural Gar; Transportation Nuclear; Electricity; Government Production Operations

Market Activity

3,866,581

42. The Joint Federal-State Land Use Planning Cornislion for Alaska

Created in 1971; rerolves land-use matters between federal, state, and local (Tribal) jurisdictions.

13

Energy and Natural Resources Environment and Public

Interior and Insular Affairs

Petroleum; Production

Requirements: (Economic)

43. Office of Technology Assessment

Impact assessments of new technology in energy production.

17

Commerce, Science and Science, and Technology T~ans~o~tation

All forms; 80th

Nontraditional: (Knowledge Acquisition, Dissemination)

984

44. Congressional Budget Office

Budget priorities for energy.

17

Budget

8udget

All forms; 80th

Nontraditional: (Knowledge Acquisition, Dissemination)

200

45. General Accounting Office

In 1976 through the Office of Special Programs, GAO conducted Enerov Policy Conservation ~ ; i - verification examinations of enerqy-related information developed by private businerr concerns under circumstances of the Act. Economic and environmental impact of natural gas curtailments, report; uranium enrichment Service pricing procedures, report.

17

Goverrnent Affairs

Goverment Operations

All folms; Both

Nontraditional: (Knowledge Acquisition, Oisseminationl

5,739

TABLE 3 .

(contd)
Federal Energy Administration National Science Foundation Federal Power Comission

Organizations Deleted Due to Formation of DOE Petroleum Reserves Defense Power Administration General Services Administration 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 t h e 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. Production includes resource extraction, conversion and transmission; Consumption includes intermediate and end use as well as conservation. "80th" means production and conrumptian. Explained in Chapter I1 Appendix 8 gives background far these estimates. 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.

d
e
f

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 r e s o u r c e s connected w i t h a c q u i r e d lands and t h e submerged lands o f t h e OCS." b i l i t y f o r l e a s e s i n v o l v i n g geothermal energy. Type 2: Executive O f f i c e o f the President
It has s p e c i a l r e s p o n s i -

Several 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 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 conduct energy a c t i v i t i e s . For instance, t h e C o u n c i l on E n v i r o n CEQ p e r mental 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 environmental and c o n s e r v a t i o n s t a n d p o i n t . " environment. forms t h i s a c t i v i t y a l o n g 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 Other EOP o-Ffices w i t h energy a c t i v i t i e s a r e t h e Energy Resources Council, 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 agencies 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 Environmental EPA i s responP r o t e c t i o n Agency (EPA) i s an example o f an independent agency.

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 w a t e r q u a l i t y , and f o r cond u c t i n g o r s p o n s o r i n g needed r e s e a r c h 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 . agencies. Type 4: Foundations 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

Foundations 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 r e s e a r c h e r s , because decision-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 Foundation, 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: Institutes

I n s t i t u t e s p r o v i d e much t h e same decision-making framework as f o u n d a t i o n s , a l l o w i n g f o r l e a d e r s i n t h e fundamental sciences, medical sciences, and p u b l i c

and s p e c i a l i s t s i n t h e 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 S o c i a l Science affairs, I n f o r m a t i o n Exchange plays an i n c r e a s i n g r o l e i n support o f a number o f programs o f n a t i o n a l i n t e r e s t , such as energy, cancer, and p e s t i c i d e s 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 v a r i o u s s o l a r energy technologies. Type 6: Claims Commissions

Some o f t h e a c t i v i t i e s undertaken by t h e various claims commissions undoubtedly concern energy. However, t h e budgets f o r such commissions g i v e no Since t h e amounts i n v o l v e d 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 . Table 3. Type 7: Regulatory Commissions Other o r g a n i -

are apt t o be r e l a t i v e l y small, these o r g a n i z a t i o n s have been o m i t t e d from

The I C C has served as a model f o r r e g u l a t o r y commissions. z a t i o n s 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: Exchange Commission. activities.

t h e Nuclear Regu-

l a t o r y Commission, t h e Federal Trade Commission, and t h e S e c u r i t i e s and Many o f t h e r e g u l a t o r y commissions conduct energy-related W i t h i n the Department o f Energy, t h e Federal Energy Regulatory These r e s p o n s i b i l i t i e s f o r m e r l y The Economic

Commission i s r e s p o n s i b l e 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 production, transmission, and sales a c t i v i t i e s . belonged t o t h e Federal Power Commission which merged i n t o DOE.

Regulatory A d m i n i s t r a t i o n i s responsible f o r t h e 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 Administration, such as c o n t r o l l i n g energy prices, coping w i t h energy emergencies, and promoting conservation and coal utilization. Type 8: Conferences

No f e d e r a 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 Corporations

Government corporations v a r y i n t h e i r closeness t o t h e Executive Branch, t h e i r decision-making s t r u c t u r e (single-head o r multi-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 d u r i n g t h e formation o f D E i s unknown; O D E may have continued t h e i r existence, replaced them w i t h other a d v i s o r y O 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 executive-congressional committees have been energy-related. Type 13: Intergovernmental Organizations

There are two d i s t i n c t i v e f e a t u r e s o f intergovernmental organizations: (1) t h e r e i s no c o n s i s t e n 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 f e d e r a l , state, and l o c a l j u r i s d i c t i o n s . The o n l y energy-related example o f t h i s type Commission a c t i v i t y i s coterminous w i t h i s t h e j o i n t Federal-State Land Use Planning Commission f o r Alaska c r e a t e d i n 1971 w i t h a t e r m i n a t i o n date i n 1979. the commission's establishment. Type 14: Semi-public Organizations p i p e l i n e c o n s t r u c t i o n i n Alaska and t h e p i p e l i n e i s an important reason f o r

No energy-related o r g a n i z a t i o n o f t h i s type e x i s t e d i n FY 1978, although several hvae been proposed, i n c l u d i n g one t o expedite development o f a coalbased synfuels i n d u s t r y . 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 cont r a c t t o the Department o f Energy, because t h e DOE budget includes those a c t i v ities. The GOCO f a c i l i t i e s n o t l i s t e d f o r t h i s reason include:

Argonne National Laboratory Brookhaven National Laboratory H o l i f i e l d National 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 Laboratories

Type 16: Contractor-Owned, Contract) F a c i l i t i e s

Contractor-Operated (Under Government

T a b l e 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 energy-related 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 Second, s i n c e a c t i v i t i e s l i s t i n g them a l l would l e n g t h e n t h e t a b l e unduly.

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 cont 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 t h e s e a c t i v i t i e s . Type 17: Congressional Agencies

Congressional 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 Accounting O f f i c e i s an example o f a c o n g r e s s i o n a l agency w i t h wide-ranging a c t i v i t i e s i n o v e r s e e i n g 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 examinations o f e n e r g y - r e l a t e d i n f o r m a t i o n 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 Conservation Act; r e p o r t i n g on t o p i c s such as economic and environmental 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 enrichment 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 Congressional 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,

t h e s e 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 . very d i f f i c u l t . I n addition, ident 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 c o n g r e s s i o n a l a c t i v i t i e s would be Therefore, Table 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: Federal Courts

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 o m i t s c l a i m s comm i s s i o n s and Congress. O r g a n i z a t i o n s o f t h e s e 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 actions i s very d i f f i c u l t . Congressional 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. i s substantive; t h e other i s appropriations. One

Since a l l f e d e r a l programs a r e

reviewed 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, o u 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 formuSince 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 since 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 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 s u b s t a n t i v e area Table 4 includes committees w i t h o t h e r than substantive r e s p o n s i b i l i t y over energy p o l i c y . Only f o u r a r e excluded from our l i s t f o r l a c k o f any r e l e v a n t s u b s t a n t i v e energy j u r i s d i c tion: Appropriations, Foreign Relations, Veterans A f f a i r s and Rules. The Foreign Relations Committee i s n o t included a t t h i s t i m e because although t h e Foreign Relations 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 p o l i c y , t h e t h r u s t o f our a n a l y s i s i s i n t h e d i r e c t i o n o f assessing government actions a f f e c t i n g domestic energy production and consumption. I n the House t h e r e are 22 standing committees. Table 3 includes 14 comHouse comThere are f i f t e e n standing committees i n t h e Senate. gives 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 . probably have j u r i s d i c t i o n over s i m i l a r actions i n t h e f u t u r e . l a t i n g t h e substance o f agency p o l i c y o r programs i n t h e energy f i e l d .

m i t t e e s 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 p o l i c y . are :

m i t t e e s included i n Table 3 whose j u r i s d i c t i o n i s n o t ob;iously energy-related

1.

Government Operations

- which

oversees government purchases and c o u l d have

i f energy

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 e f f i c i e n c y became a s t r i c t measure i n the procurements p o l i c y . 2. Small Business Program.

which would oversee, i f n o t t h e actual appropriations,

a t l e a s t t h e g u i d e l i n e s implementing and c o n t i n u i n g t h e Energy Shortage

Table 4 gives t h e j u r i s d i c t i o n o f each committee included i n Table 3, p l u s others. Major Energy Form and Stage (Column 6) This column l i s t s o n l y t h e major forms and stages, i n terms o f money and emphasis, i n v o l v e d w i t h an o r g a n i z a t i o n ' s energy actions. Obviously, a c t i o n s

TABLE 4.

F e d e r a l O r g a n i z a t i o n s b y Major Type o f A c t i o n JURISDICTIONAL ISSUES

Congressional Committee 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

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 s u p p o r 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 p e t r o l e u m reserves, e x c e p t t h o s e i n A l a s k a F i n a n c i a l a i d t o commerce and i n d u s t r y P u b l i c and p r i v a t e h o u s i n g Urban development and urban mass t r a n s i t Oversee T i t l e 111 and I V o f Congressional Budget Act Budget o u t l a y s on c o n t i n u i n g and proposed legislation 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 expenditures Review Congressional 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 . , pipe1ines Merchant Marine and n a v i g a t i o n M a r i n e and ocean n a v i g a t i o n i n c l u d i n g deep w a t e r ports 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 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 s c i e n c e s Commerce on OCSL C o a s t a l zone management A l l m a t t e r s r e l a t e d t o s c i e n c e 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 , communic a t i o n s and consumer a f f a i r s

Banking, Housing, and Urban A f f a i r s Committee Budget Committee

0
0

Commerce, Science and T r a n s p o r t a t i o n Committee

TABLE 4. (contd)

Congressional Committee Energy and Natural Resources Committee

JURISDICTIONAL ISSUES Energy policy Energy regulation, conservation Energy R&D Solar energy systems Nonmilitary development of nuclear energy Naval petroleum reserves in Alaska Oil and gas production and distribution Extraction of minerals from ocean and OCSL Energy related aspects of deep water ports Hydro electric power, irrigation and reclamation Coal production, distribution and utilization Mineral extraction from public lands Mining, mineral lands, mining claims and mineral conservation Mining education and research Subcommittee: study energy resources and development 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 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 responsibilities

a
a

Environment and Public Works Committee

ttee Finance ~ommi Foreign Relations Committee

Governmental Affairs Commi ttee Human Resources Commi ttee

TABLE 4. (contd)

Congressional Committee Judiciary Committee

JURISDICTIONAL ISSUES Patents, copyrights and trademarks I n t e r s t a t e compacts generally Goverment information

House: Agriculture Committee Armed Services Committee Banking, Finance and Urban Affairs Committee Rural e l e c t r i f i c a t i o n Naval ptroleum and o i l shale reserves S c i e n t i f i c R&D in support of Armed Services Urban development Public and private housing Financial aid t o commerce and industry (other than transportation) Request and evaluate continuing studies on tax expenditures, t o divise methods of coordinating tax expenditures, policies and programs with d i r e c t budget outlays Review conduct of Congressional Budget Office function and duties Federal procurement Intergovernmental operations Forfeiture of land grants and alien ownership including alien ownership of mineral r i g h t s Insular possessions of U.S. except those affecting revenue and appropriations Mineral land laws and claims and e n t r i e s thereunder Mineral resources of public land Mining i n t e r e s t s generally Mining schools and experimental s t a t i o n s 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 Export controls International commodity agreements

Budget Committee

Government Operations Commi t t e e I n t e r i o r and Insular

International Relations Committee

TABLE 4. (contd)

Congressional Committee Interstate and Foreign Commerce Committee

e

JURISDICTIONAL ISSUES Interstate and foreign commerce generaly Interstate oil compacts and petroleum and natural gas, except on the public lands Regulation of interstate transmissions of power, except the installations of connections between government water power projects Securities and exchanges 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 e

Judiciary Commi ttee

Labor and Education Committee Merchant Marine and Fisheries Committee

Oceanography and marine affairs - costal zone management Fisheries and wildlife - research, restoration, refuges and conservation Regulation of common carriers (except matters under jurisdiction of I.C.C.), Merchange Marine inspection Registering and licensing of vessels 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 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

Public Works and Transportation Committee

Science and Technology Committee

TABLE 4.

(contd)

Congressional Committee Science and Technology Committee (cont. )

m m

JURISDICTIONAL ISSUES S c i e n t i f i c R&D Environmental R&D A l l energy R&D except nuclear R&D National Weather Service Special o v e r s i g h 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 Assistance and p r o t e c t i o n t o small business including financial aid P a r t i c i p a t i o n o f small-business e n t e r p r i s e s i n Federal procurement and Government c o n t r a c t s Special o v e r s i g h t f u n c t i o n w i t h r e s p e c t t o problems o f small business Solar and renewable energy source loan programs
m

R&D

Small Business Committee

Ways and Means Committee

Reciprocal t r a d e agreements Revenue measures g e n e r a l l y Revenue measures r e l a t i n g t o t h e i n s u l a r possessions

Sources:

Congressional Record - Senate, February 4, 1977, "Senate Resolution 4 c i t e d as 'Committee Svstem Reorsanization Amendments o f 1977.' T i t l e I - Senate ~ o m m i t t e e s ; ~ u r i s d i c t i o n sand Sizes," pp. S2308-S2311. Congressional Q u a r t e r l y , Weekly Report, "Senate Committees," v o l . 35, no. 5, pp. 157-188, January 29, 1977. Rules o f t h e House o f Representatives, Revised June 16, 1975, 1 s t Session, 9 4 t h Congress. House R e s o l u t i o n 5, January 4, 1977, 9 5 t h Congress, 1 s t Session. Appendix t o The Budget o f t h e U n i t e d States Government, F i s c a l Year 1980, p. 376.

i n v o l v i n g one form o r stage may also a f f e c t other forms and stages; such secondary e f f e c t s are n o t r e f l e c t e d i n Table 3. I n a d d i t i o n , we have n o t attempted t o a l l o c a t e o u t l a y s f o r combination forms among s i n g l e forms. Major Types o f A c t i o n (Column 7 ) As the column t i t l e implies, t h i s column l i s t s o n l y t h e major types o f action, i n terms o f money and emphasis, conducted by an agency. Type 1: Organizational Creation and P r o h i b i t i o n

Congress and t h e President are t h e major o r g a n i z a t i o n s conducting t h i s type o f a c t i v i t y . W have not attempted t o i d e n t i f y and q u a n t i f y t h e p u r e l y e Occasionally, None congressional o r p u r e 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 r e a t i o n o f an action, n o t i t s conduct. organization. h i b i t s them. however, Congress o r t h e President delegate t h i s t y p e o f a c t i v i t y t o some other The Federal Energy A d m i n i s t r a t i o n created advisory bodies. o f t h e agencies i s now i n v o l v e d i n c r e a t i n g f e d e r a l o r g a n i z a t i o n s and none proSeveral agencies c r e a t e nonfederal o r p r i v a t e organizations, and several agencies p r o h i b i t some forms o f p r i v a t e economic organizations. Type 2: Taxation ( i n c l u d i n g fees) Fees are

Taxation as such i s used o n l y by t h e I n t e r n a l Revenue Service.

a r e l a t i v e l y minor type o f government a c t i o n and those s u b j e c t t o f e e s are usua l l y business o r 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 r o d u c t i o n costs. W have found o n l y two cases o f fees as major a c t i o n s ( t h e Bureau o f e Land Management and t h e Nuclear Regulatory Commission). T.ype 3: Disbursements

F i v e organizations use g r a n t s - i n - a i d t o support government a c t i o n a t t h e s t a t e o r l o c a l community l e v e l . Subsidies were used i n t h r e e cases, w i t h t h e Few cases o f government a c t i o n money going t o small s c a l e p r i v a t e e n t e r p r i s e . appear t o f i t t h e subtype t r a n s f e r s .

Type 4:

Requirements

Economic, safety, and environmental requirements are imposed by several d i f f e r e n t organizations. Type 5: Traditional

Actions i n v o l v i n g t h e t r a d i t i o n a l government services o f i n t e r s t a t e and f o r e i g n commerce, n a t i o n a l defense, highways, and i n l a n d waterways have affected energy p r o d u c t i o n 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 knowledge dissemination--usually lumped t o g e t h e r as "research and development." The b u l k o f the a c t i v i t y i s i n a c q u i s i t i o n , r a t h e r than dissemination. o f technology t r a n s f e r have shown, t h e U.S. 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 As s t u d i e s

government has r a r e l y done a g r e a t

Market a c t i v i t y i s a major t y p e o f a c t i o n , w i t h i n which t h e p r o d u c t i o n o f c a p i t a l goods i s t h e most f r e q u e n t subtype o f government a c t i o n f o r agencies t h a t we have c i t e d . t i o n s , and t h e TVA. This subtype c h a r a c t e r i z e s most a c t i v i t i e s w i t h i n t h e REA, The education and t r a i n i n g programs i n mine s a f e t y motivaCorps o f Engineers, APA, BPA, Southeastern and Southwestern Power Administrat i o n conducted b y t h e M i n i n g Safety and H e a l t h A d m i n i s t r a t i o n f a l l w i t h i n t h e subtype o f p r o d u c t i o n i n labor. The petroleum reserves i n the Department o f Energy, and t h e 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 For one way t o d e s c r i b e a c t i o n 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.

instance, the ownership o f land and n a t u r a l resources i n v o l v e s t h e BLM i n leasi 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 review o f t h e FY 1978 o u t l a y s r e p o r t e d by t h e f e d e r a l government. How a c c u r a t e l y t h e energy-related a c t i o n s are i d e n t i f i e d and q u a n t i f i e d depends upon t h e r e p o r t i n g procedures used i n t h e budget t o l i s t spending b y a c t i v i t i e s . U n f o r t u n a t e l y , statements

on f i s c a l expenditures o f t e n do not g i v e p r e c i s e 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 h e r e i s Also, programs authorized b y speFor instance, widespread inconsistency 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. c i a l funding are r e p o r t e d i n a s p e c i a l s e c t i o n o f the budget and o f t e n w i t h o u t an elaborate 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. research on new energy uses, technology development, and conservation i s o f t e n grouped w i t h o t h e r environmental, t r a n s p o r t a t i o n , and i n f o r m a t i o n exchange activities. Where a p r e c i s e account o f program expenditures i s unavailable, we have t r i e d t o estimate u s i n g a v a r i e t y o f d a t a sources and procedures, t h e percentage o f budget o u t l a y s going t o energy action. Appendix B discusses these sources and procedures o r g a n i z a t i o n by organization. I n t h i s update we have taken t h e f o r m a t i o n o f t h e Department o f Energy and other recent o r g a n i z a t i o n a l changes i n t o account. Two organizations f o r m e r l y concerned w i t h energy have been dissolved: Federal Power Commission. Federal Energy A d m i n i s t r a t i o n and Defense Nuclear Agency, D C O Other organizations have t r a n s f e r r e d a11 o f t h e i r

major energy-related r e s p o n s i b i l i t i e s t o DOE: t i o n , and Naval Petroleum Reserves.

Domestic and I n t e r n a t i o n a l Business Administration, National Science FoundaOuter c o n t i n e n t a l s h e l f a c t i v i t i e s a r e no I n t e r i o r ' s Bureau o f longer a separate o r g a n i z a t i o n a l component i n I n t e r i o r . o t h e r coal mining R&D programs t r a n s f e r r e d t o DOE. budget. ANALYSIS O ENERGY ACTIONS F The f o l l o w i n g a n a l y s i s o f energy a c t i o n s i s o r i e n t e d along t h e l i n e s suggested by t h e columns o f Table 3. The f i r s t p a r t of t h e a n a l y s i s 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 number o f separate agencies conducting energy-related a c t i v i t i e s i n 1978 and

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 m i n i n g research, w i t h The General Services Admini s t r a t i o n no longer l i s t s energy conservation program expenditures i n i t s

t h e c o s t o f conducting those a c t i v i t i e s i n 1978.

Later parts o f the analysis

break down those two t o t a l f i g u r e s b y v a r i o u s items o f i n t e r e s t , i n c l u d i n g t h e t y p e 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 r m (Column 6 ) , energy stage (Column 6 ) , and major t y p e 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 r g a n i z a t i o n s conducting e n e r g y - r e l a t e d a c t i v i t i e s a r e ranked according 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 . 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 conducting energy a c t i v i t i e s i n FY 1978. Energy-related spending ranged f r o m $4,893,115,000 energy a c t i o n s . spent under t h e a u t h o r i t y o f t h e DepartThis t a b l e

ment o f Energy t o $0 spent by t h e Small Business A d m i n i s t r a t i o n on e s t a b l i s h e d The average amount spent p e r o r g a n i z a t i o n was $304,116,556. TVA p l u s and DOE

T h i r t y - s i x p e r c e n 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.

DOE spent 64% o f t h e t o t a l .

The Army Corps o f Engineers, REA, TVA,

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 formation o f DOE ERDA accounted f o r 1978, p. 79).

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 from o t h e r agencies t o DOE, energy spending has become more concentrated i n fewer agencies. Engineers, and REA accounted f o r j u s t 64% (Cone e t al., j u s t 28% o f t h e energy budget i n FY77, w h i l e ERDA, TVA, t h e Army Corps o f

TABLE 5.

Energy-Related Outlays o f Federal Organizations FY78 Outlays ($000) $4,893,115 3,866,581 1,575,366 736,306 438,199 349,232 336,531 287,699 182,376 145,377 120,571 112,824 112,678 87,420 81,880 73,219 55,077 54,598 35,061 26,256 21,249 20,212 12,314 8,770 6,420 6,283 5,739 5,572 5,061 4,961

Organization Department o f Energy Tennessee V a l l e y A u t h o r i t y (a) Corps o f Engineers Rural E l e c t r i f i c a t o n A d m i n i s t r a t i o n ( C a p i t a l Investment) Bureau o f Reclamation B o n n e v i l l e Power A d m i n i s t r a t i o n (a) Maritime A d m i n i s t r a t i o n Nuclear Regulatory Commission U.S. Geological Survey National Aeronautics and Space A d m i n i s t r a t i o n Occupational s a f e t i and Health A d m i n i s t r a t i o n Environmental P r o t e c t i o n Agency Employment Standards A d m i n i s t r a t i o n (b) I n t e r n a l Revenue Service Bureau o f Land Management Bureau o f Mines National I n s t i t u t e s o f Environmental Health Department o f T r a n s p o r t a t i o n Mining S a f e t y and H e a l t h A d m i n i s t r a t i o n Forest Service Southwestern Power ~ d m i n i s t r a t i o n ( ~ ) Bureau o f I n d i a n A f f a i r s Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n National Bureau o f Standards Federal Trade Commission National Oceanic and Atmospheric A d m i n i s t r a t i o n General Accounting O f f i c e Southeastern Power ~ d m i n i s t r a t i o n ( ~ ) Justice Antitrust Division O f f i c e o f Surface M i n i n g

TABLE 5.

(contd) FY78 Outlays ($000)

Organization Housing and Community Research O f f i c e o f Management and Budget Alaska Power A d m i n i s t r a t i o n ( a ) I n t e r s t a t e Commerce Commission N a t i o n a l T r a n s p o r t a t i o n S a f e t y Board Appalachian Regional Development J u s t i c e Legal A c t i v i t i e s Council 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 Federal-State Land-Use Planning Commission Smithsonian I n f o r m a t i o n Exchange Atomic Energy Defense A c t i v i t i e s (DOE) Congressional Budget O f f i c e Small Business A d m i n i s t r a t i o n

( a ) The o u t l a y s l i s t e d here do n o t represent o u t l a y s o f t a x d o l l a r s by t h e f e d e r a l government. These o r g a n i z a t i o n s are government c o n t r o l l e d , b u t a l l o u t l a y s come from revenues received through t h e s a l e o f e l e c t r i c i t y t o t h e i r customers. ( b ) The o u t l a y s l i s t e d here come from a s p e c i a l e x c i s e t a x on c o a l tonnage p a i d by coal producers and from reimbursements i n t o t h e t r u s t f u n d 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 s u r v i v o r s .

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, departApproxi-

mental agencies a l l o c a t e d t h e most energy do1 1ars ($9,248,936,000).

mately 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 outlay, w h i l e r e g u l a t o r y commissions spent about 2.2%. f e r e n t o r g a n i z a t i o n a l types. One government c o r p o r a t i o n (TVA) spent 28%. The major change from previous years i s t h e For example, i n FY77, The remainder o f the FY 1978 o u t l a y was spent by various organizations o f f o u r d i f growth i n r e l a t i v e importance o f departmental agencies.

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 r g a n i z a t i o n a l type w i t h 33% o f t h e outlays. These changes are due t o t h e formation o f t h e Department o f Energy, which replaced major independent agencies (FEA and ERDA), and took over f u n c t i o n s f o r m e r l y belonging t o several other agencies i n c l u d i n g f u n c t i o n s i n
DOD, DOI, FPC, and NSF.

TABLE 6.

Energy-Related Organizations and Outlays by Organizational Types FY78 Outlays ($000

Organizational Type

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 1 12. 13. 14. 15. 16. 17. 18.

Departmental Agency Executive O f f i c e o f t h e President Independent Agency Foundation Institution Claims Commission Regulatory Commission Conference Government C o r p o r a t i on Interagency ~ o a r d Advisory Body J o i n t Executive--Congressional Committee Intergovernmental Organization Semipublic Organization GOCO COCO Congressional Agency 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 organization 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 organizations and outlays for both the Agriculture and Government Operations Committees. (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 organizations. 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 organizations. 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 in Each Committee's Jurisdiction 14 9 7 4 4 3 4 1 3 1 1

Senate Committees

FY78 Outlays ($000) 10,241,876 5,449,481 5,191,816 4,909,059 1,690,241 774,876 308,538 87,420 3,497 442 200

Energy and Natural Resources Commerce, Science, and Transportation Government Affairs Judiciary Environment and Public Works Agriculture, Nutrition, Forest Human Resources Finance Banking, Housing, and Urban Affairs Armed Services Budget House Committees Government Operations Interior and Insular Affairs Interstate and Foreign Commerce Public Works and Transportation Science and Technology Judiciary Agri cu 1ture Merchant Marine and Fisheries Education and Labor Ways and Means Banking, Finance, and Urban Affairs Armed Services Budget Small business

I n t h e House, 14 committees had j u r i s d i c t i o n over energy-related organizations. The Government Operations 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 i n outlays. i n c l u d e d 21 o r g a n i z a t i o n s w i t h a combined t o t a l o f $12,628,481,000 one o r g a n i z a t i o n w i t h $200,000 zations. organizations. 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. n a t i o n o f forms i n v o l v e d . Table 8 i n outlays.

The Budget Committee's s u b s t a n t i v e j u r i s d i c t i o n was t h e smallest; i t i n c l u d e d J u r i s d i c t i o n averaged 3.2 o r g a n i The b i g g e s t j u r i s d i c t i o n i n c l u d e d 24% o f t h e e n e r g y - r e l a t e d

groups e n e r g y - r e l a t e d o r g a n i z a t i o n s and o u t l a y s by t h e energy form o r combiCombinations are k e p t t o g e t h e r t o emphasize o r g a n i Table 9 z a t i o n s 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.

l i s t s t h e names o f t h e energy-related o r g a n i z a t i o n s i n each group o f Table 8. Table 10 i s a condensed v e r s i o n o f Table 8, produced b y e s t i m a t i n g how o r g a n i z a t i o n s 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 h e purposes o f Table 10, we have estimated 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 e n e r g y - r e l a t e d o u t l a y s b y energy form. Appendix B and b y o r g a n i z a t i o n . Where a d d i t i o n a l d a t a were n o t a v a i l a b l e , we f i r s t took n o t e o f D O E ' S breakdown o f 1978 consumption by p r i m a r y energy type. 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 i1 Hydroelectricity Nuclear S o l a r and Other Tot a1
It does n o t s e p a r a t e e l e c t r i c i t y , although many f e d e r a l programs address i t

Once again, we used a v a r i e t y

o f d a t a sources and procedures f o r making those estimates discussed i n

That breakdown i n

d i r e c t l y , even though i t i s n o t a " p r i m a r y energy t y p e " according 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 electricity 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 hydroelectric Btu to electricity. Electricity Btu thus equal: 100% 50% 50% 50% 50% of of of of of hydroelectricity coal-electricity oil-electricity natural gas electrictiy nuclear electricity Total 3.147 6.076 2.299 1.899 = 1.488 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) Coal 100% of its total consumption Minus 50% of coal-electricity Equals Oi 1 100% of its total consumption 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 14.909

Therefore w c a l c u l a t e the following percentages by energy form: e Electricity 19.1 Coal 10.3 Oil 45.5 Natural Gas 22.9 Nuclear 1.9 Solar -Other 0.3 W assumed t h a t almost a l l of t h e "Solar and Other" consumption was e " o t h e r , " r a t h e r than " s o l a r " (e.g., geothermal). W a l l o c a t e d energy o u t l a y s t o form by t h e s e percentages when we had no e other d a t a t o suggest some other a1 1o c a t i o n . When we knew a f e d e r a l a c t i o n had some influence on energy production or consumption, but energy-related spending was not disclosed in the c o s t of conducting an a c t i o n , we used a percentage (12%) of t o t a l o u t l a y s a s 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 national product. Energy production was c a l c u l a t e d a s 12% of t o t a l market a c t i v i t y by t h e following method. The 1978 energy consumption f i g u r e s on t h e previous page were multipled by t h e 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 r e shown below: Quads Consumed Electricity (including nuclear) Coal Oil Natural Gas 16.397 8.011 35.487 17.920 Estimated Expenditure (billions) $167.249 7.835 54.827 16.128 $246.039

$/Quad 1,020.0 x 109 97.8 x lo9 154.5 x 109 90.0 x lo9 TOTAL

Percent 68 3 22 7

Gross national product in 1978 was $2,127.6 b i l l i o n ; hence, Energy Expendi 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 f o r All Forms t o 1 f o r several single forms. The number of organizations per form averaged 2.6. Approximately 36% of the organizations f e l l into 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 into 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 f o 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 into one group (Nuclear). TABLE 8. Energy Related Organizations and Outlays by Energy Form (extended version) Number of Orqanizations FY78 Outlays ($000)

Forms

Nuclear Coal O i 1. Multiple Forms All Forms petroleum and Nuclear Fossil, E l e c t r i c i t y , and Other Fossil, Nuclear, and Other Fossil and Other Coal and Nuclear E l e c t r i c i t y and Other Coal and Oil Coal, Oil, Nuclear and Other Coal, Natural Gas, Nuclear and E l e c t r i c i t y E l e c t r i c i t y and Oil All b u t Solar All b u t Other

1 2 1 1 1 1 1 1
1 1 1 1

TABLE 9. Federal Organizations b Energy Form y Energy Form Electricity Federal Organizations 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
o

Nuclear Coal

Nuclear Regulatory Commission 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 Fossil and Other Coal and Nuclear Electricity and other Fossil, Electricity, and Other Oil and Coal Coal, Natural Gas, Nuclear and Electricity All Forms
e

Bureau of Land Management Legal Activities

Justice Department

Mine Safety and Health Admnistration Bureau of Reclamation Forest Service Bureau of Indian Affairs Interstate Commerce Commi ssi on Tennessee Valley Authority Congressional Budget Office Internal Revenue Service Office of Management and Budget Antitrust--Justice Smithsonian (SSIE)

TABLE 9. Energy Form A1 1 Forms (continued)

a

(contd) Federal Organizations

National Oceanic and Atmospheric Administration Council on Environmental Q u a l i t y O f f i c e o f Technology Assessment Government Accounting O f f i c e National Aeronautics and Space Administration N a t i o n a l Bureau o f Standards Environmental P r o t e c t i o n A d m i n i s t r a t i o n Department o f Energy N a t i o n a l I n s t i t u t e o f Environmental H e a l t h Federal Trade Commission Occupational S a f e t y and Health Administration

A l l b u t Solar Petroleum and Nuclear Coal, O i l , Nuclear and Other

O i l and E l e c t r i c i t y

Geologic Survey National Transportation S a f e t y Board Bureau o f Mines Corps o f Engineers Housing and Community Research

A1 1 b u t Other

TABLE 10.

Energy Outlays by Energy Form (Condensed Version) FY 1978 ~ u t l a y s ( a ) ($000) $4,034,844 5,585,096 1,630,365 371,412 1,646,805 296,946 119,777 Percent o f T o t a l Outlays 29.5 40.8 11.9 2.7 12.0 2.2 0.9

Energy Form Electricity Nuclear Coal Solar Oil Gas Other

( a ) These f i g u r e s are derived from i n f o r m a t i o n 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 combinations. The number of organizations per form/stage combination averaged 0.83. Approximately 44% of the organizations fell into two form/stage combinations (All Forms/Both or Electricity/Production). About 62% of the organizations are involved at the production stage, 33% at both production and consumption 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 Organizations FY78 Outlays ($000)

Energy Stage Production Consumption Both

TABLE 12. Energy-Related Organizations by Energy Form and Energy Stage ENERGY STAGE Production Consumption

Energy Form 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 All but Solar All but Other

Both

1 1
0

0 0 1

0 0 0

TABLE 13. FY 1978 Energy Outlays by Energy Form and Energy Stage ($000) ENERGY STAGE Production Consumption

Energy Form 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

Both

0
Table 14 i s based on columns 7 and 8 o f Table 3.
I f an o r g a n i z a t i o n

ENERGY-RELATED ORGANIZATIONS AND OUTLAYS BY MAJOR TYPE O ACTION F

emphasized more than one t y p e o f action, i t i s counted o n l y f o r t h e a c t i o n we e judge i t t o have emphasized most. W 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 estimate i n t r a o r g a n i z a t i o n a l a l l o c a t i o n s (as i n Table 10). activity. Tables 14 and 15 show t h a t the number of organizations g i v i n g most emphas 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 organizations per t y p e averaged 6.43. f o r Market A c t i v i t y t o $2,762,000 The t o t a l outl a y s o f o r g a n i z a t i o n s emphasizing a given t y p e o f a c t i o n ranged from $7,109,021,000 Activity. TABLE 14. Energy-Related Organizations and Outlays by Major Type o f A c t i o n Number o f Organizat i o n s Emphasizing This Type o f A c t i o n f o r T r a d i t i o n a l Services. Approximately 52% o f t h e o u t l a y s were made b y o r g a n i z a t i o n s emphasizing Market Table 15 i d e n t i f i e s the o r g a n i z a t i o n s we assigned t o each type o f

Major Type o f Action Creation or P r o h i b i t i o n o f Organizations Taxation Disbursements, Requirements T r a d i t i o n a l Services N o n t r a d i t i o n a l Services Market A c t i v i t y

FY78 Outlays ($000)

1
1 5 13
2

12

1 1

TABLE 15. Federal Organizations by Major Type of Action Major Type of Action Organizational Creation or Prohibition Taxation Disbursements
a

Federal Orqanizations Antitrust--Justice Department Internal Revenue Service Employment Standards Administration Appalachian Regional Development Program Small Business Administration Maritime Administration National Oceanic and Atmospheric Occupational Safety and Health Administration 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 Office of Management and Budget Atomic Energy Defense Activities
a

Administration Requirements
a

Traditional Services Nontraditional Services

Congressional Budget Office Office of Technology Assessment National Aeronautics and Space Administration General Accounting Off ice Smithsonian (SSIE) National Bureau of Standards Department of Energy 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 A c t i o n Market A c t i v i t y

0

Federal Organizations Southwestern Power A d m i n i s t r a t i o n Alaska Power A d m i n i s t r a t i o n Southeastern Pi5wer A d m i n i s t r a t i o n B o n n e v i l l e Power A d m i n i s t r a t i o n Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n C a p i t a l Investment Bureau o f Reclamation Bureau o f I n d i a n 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 It shows t h a t t h e number o f organizaenergy form and major type o f a c t i v i t y . t i o n s i n v o l v e d w i t h a given form/type combination ranged from 8 f o r Nontradit i o n a l S e r v i c e s / A l l Forms t o one f o r many combinations. The number o f organiNontraditional Services/All z a t i o n s p e r form/type combination averaged 1.6. 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 t h e Form/ Organization combinations. Table 16 a l s o shows t h a t the o u t l a y s involved w i t h a given form/type comb i n a t i o n ranged fom $5,109,749,000 f o r N o n t r a d i t i o n a l Services/Al 1 Forms t o The o u t l a y s per form/type combina$442,000 f o r T r a d i t i o n a l Services/Nuclear. Approximately 37% o f t h e o u t l a y s f e l l i n t o one t i o n averaged $489,114,820. f o r m l t y p e combination ( N o n t r a d i t i o n a l S e r v i c e s / A l l Forms). Four form/type combinations together have 85% o f t h e o u t l a y s ( N o n t r a d i t i o n a l S e r v i c e s / 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, Natural Gas and Nuclear).

TABLE 16.

Energy-Related Organizations and Outlays by Action Type and Energy Form Number of Organizations FY78 Outlays ($000)

Major Type of Action Creation and Prohibition of Organizations: Taxation : Disbursements: Requirements:

Energy Form

All Forms All Forms Coal Oil All Forms Nuclear All Forms Petroleum Electricity Coal Coal and Nuclear Oil and Coal Petroleum and Nuclear Fossil and Other All b u t Solar Nuclear All Forms

1 4 1 1 1 1 1 1 1 1 1 1
442 2,320 54,598 5,109,749 73,219 26,256 2,750 1,126,783 20,212 438,199 1,575.366

Traditional Services: Nontraditional Services:

Market A c t i v i t y :

1 Oi 1 8 All Forms Coal, O i l , Nuclear and Other 1 E l e c t r i c i t y , F o s s i l , and Other 1 1 All b u t Other Electricity 6 1 F o s s i l , E l e c t r i c i t y and Other 1 E l e c t r i c i t y and Other Oil and E l e c t r i c i t v 1 Coal, Natural Gas,. Nuclear & E l e c t r i c i t y 1 F o s s i l , Nuclear, and Other 1

CONCLUSIONS The preceding a n a l y s i s i s summarized i n Table 17, where each o r g a n i z a t i o n i s l i s t e d o n l y once under one o f t h e major types o f actions. Although an organ i z a t i o n may have conducted more than one major t y p e o f action, t h i s t a b l e places a l l spending i n t h e major type o f a c t i o n most f r e q u e n t l y conducted b y t h a t organization. The f i r s t conclusion i s t h a t energy a c t i o n s occurred i n a t The biggest s i n g l e energy program Energy spending as a percentage o f government Over t h e past t h r e e years, t h e f e d e r a l l e a s t 45 d i f f e r e n t o r g a n i z a t i o n s i n FY1978. i s the Department o f Energy.

spending was o n l y about 3%(4) w h i l e energy expenditures as a percentage o f gross n a t i o n a l product was about 12%. government has not spent a higher percentage o f i t s budget on energy, even though t h e n a t i o n has spent a higher percentage o f i t s gross n a t i o n a l p r o d u c t on energy. The government appeared t o be t r y i n g a number o f approaches, w i t h g r e a t e r emphasis on some. Energy. Heavy use was made of' departments and r e l a t i v e l y 1i t t l e use o f independent agencies i n the wake o f t h e c r e a t i o n o f t h e Department o f 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 t h e c r e a t i o n ERDA and FEA). Congressional supervision was spread among a numSome energy forms r e c e i v e d For instance, over the t h r e e years we have o f D E (e.g., O

ber o f committees, b u t was v e r y heavy i n a few. much more a t t e n t i o n than others.

been performing t h i s analysis, t h e percentage o f f e d e r a 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 , w h i l e t h e percentage devoted t o nuclear energy has increased s i g n i f i c a n t l y . more a t t e n t i o n than energy consumption. Energy production r e c e i v e d much Research and market a c t i v i t i e s were

used much more than o r g a n i z a t i o n a l c r e a t i o n o r disbursements. V a r i a t i o n s i n i n c e n t i v e s 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 t y p e o f a c t i o n than others. been missed. This unevenness i n the a p p l i c a t i o n o f i n c e n t i v e s suggests t h a t some o p p o r t u n i t i e s may have Indeed, c r i t i c s o f f e d e r a l actions toward energy have p o i n t e d t o Perhaps most f r e q u e n t l y mentioned are: a humber o f them.

(1) t h e a t t e n t i o n

p a i d t o production and t h e l a c k o f a t t e n t i o n t o consumption and ( 2 ) t h e l a c k o f a t t e n t i o n p a i d t o some v e r y promising new technologies.

TABLE 17. An Estimate of the Cost of Generic Incentives Used to Stimulate Energy Production FY 1978 (Thousand $ )
Energy Form Electricity Nuclear Coal Solar C r e a t i o n and P r o h i b i t i o n of OrqanizationsTaxation 967 96 521 0 16,697 1,661 9,004 0 Traditional Services 443 486 239 0 Nontraditional Services 58,111 3,302,943 769,654 371,412 Market Activity 3,910,426 1,986,633 670,109 0

Disbursements 1,200 119 114,754 0

Requirements 47,000 293,158 66,084 0

TOTAL 4,034,844 5,585,096 1,630,365 371,412

Percent 29.5 40.8 11.9 2.7

N a t u r a l Gas Other

1,159 15

20,019 263

1,439 19

116,959 727

531 7

105,080 118,337

51,759 409

296,946 119,777

2.2 0.9

Total Percent 5,061 0.04

-87,420 0.64

456,921 3.34

757,488 5.53

2,762 0.02

5,266,572 38.48

7,109,021(~) 13,685,245 51.95 100.0

( a ) T h i s v a l u e 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 S o u t h e a s t e r n power a d m i n i s t r a t i o n s whose budgets a r e f i n a n c e d f r o m o p e r a t i n g revenues and n o t F e d e r a l Government f u n d s .

Data summarized i n Table 17 show t h a t s o l a r energy has r e c e i v e d a v e r y small p a r t o f the Federal Government's energy a t t e n t i o n . cent t o r o u g h l y t h r e e percent. energy. However, t h e percentage o f energy spending devoted t o s o l a r has increased from r o u g h l y one perThe data a l s o suggest t h a t the Federal Government has undertaken a l a r g e v a r i e t y o f a c t i o n s w i t h r e s p e c t t o other forms o f As a consequence, any expanded a t t e n t i o n t o s o l a r energy c o u l d draw The f o l l o w i n g chapters examine many o f on a l a r g e number of e x i s t i n g options. longer periods. One a d d i t i o n a l conclusion emerges from a comparison o f t h e r e s u l t s o f t h i s update w i t h our previous a n a l y s i s o f f e d e r a 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 According t o our c a l c u l a t i o n s , e l e c t r i c i t y has t i v e t o o t h e r energy forms.

these f e d e r a l a c t i o n s toward o t h e r energy forms i n much g r e a t e r d e t a i l and over

increased from 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 r o u g h l y comparable percentage 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.
2.
3.

Department of Energy, Energy Information Administration, Quarterly Report t o Congress, Fourth Q u a r t e r , 1978. April 1979. Q u a r t e r l y Report, p. 50. Cnal. o i l . and n a t u r a l aas ~ r i c e sfrom Enerav Information Administration: ~ n n l a lReport t o t o n g l e s s , 1978, ~ o l u &2 , p. 13; e l e c t r i c i t y p r i c e s from Volume 3, p. 269 of the same Report ( c a l c u l a t e d 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 v a l u e ) . . . obtained by i n t e r p o l a t i o n from t h e Report equals 34.7 milli/kwh. The Since 1 kwh = 3,412 Btu's, t h i s i s e q u i v a l e n t t o t h e p r i c e of 1.019t x 1012 per q u a d r i l l i o n Btu's shown in t h e t a b l e above. Total government spending i n F 1978 was $502 b i l l i o n , (1980 Budget, Y 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 chapter).

4.

IV.

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 magnitude o f f e d e r a l s u p p o r t t h a t has been d i r e c t e d t o w a r d 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 s u p p o r t has been m a n i f e s t e d i n a number o f ways: subs i d i e s , use o f f a c i l i t i e s , sponsorship 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, education, t r a n s f e r o f t e c h n o l o g y f r o m 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 . Although n o t a l l o f t h i s s u p p o r t i s monet 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 i m p l e t o measure r e s e a r c h and development c o s t s , 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 s u p p o r t d e r i v e d f r o m f a c i l i t i e s cons t r u c t e d f o r weapons o r m i l i t a r y programs (e.g., problem have produced a range o f e s t i m a t e s . m e r c i a l n u c l e a r power. t h e uranium enrichment p l a n t s ) V a r i o u s approaches t o t h i 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.

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 , comI n t h i s category i s the l i a b i l i t y protection (PriceI n such cases we s i m p l y d e s c r i b e t h e Other c o n t r i b u Finally, it i s Anderson A c t ) p r o v i d e d t h e i n d u s t r y .

scope o f f e d e r a l s u p p o r 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.

t i o n s t o commercial power have been i n t e r w o v e n 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 . a concept works, e.g., impossible t o q u a n t i f y the c o n t r i b u t i o n t h a t derives from simply proving t h a t 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 n u c l e u s 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 o b t a i n e d 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 Accounting 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 unique i n s t i t u t i o n a l arrangements, i n which b o t h government and p r i v a t e i n d u s t r y o p e r a t e d i n ways v e r y

different from their conventional roles. The government's role in the development of nuclear power has been that of a participant in the creation and evolution 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 At present, the only 2% of the total U.S. utility generating capacity.(') 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 t h e p u b l i c welfare, i n c r e a s i n g t h e standard o f l i v i n g , strengthening f r e e competition i n p r i v a t e enterprise, and promoting w o r l d peace. The Atomic Energy Commission's o r i g i n a l charter, as s t a t e d 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 e s t a b l i s h e d t h e AEC i n t h e two governmental bodies t o c o n t r o l and develop nuclear power: gress.

Executive Branch and the J o i n t Committee on Atomic Energy (JCAE) i n t h e ConTwo bodies were e s t a b l i s h e d because i t was b e l i e v e d t h a t a s i n g l e a d m i n i s t r a t o r should not c o n t r o l a l l nuclear a c t i ~ i t i e s . ! ~ ' ~ ' Concurrent ~~) w i t h , and t o some degree as a r e s u l t of, AEC c o n t r a c t i n g arrangements and development programs, a t h i r d p a r t y emerged, t h e i n d u s t r i a l suppliers. together toward t h e goal o f developing nuclear power. Up t o t h e end o f 1974, t h i s three-member group remained a s t a b l e c o a l i t i o n working However, t h e 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 f e d e r a l l e g i s l a t i o n have been instrumental i n t h e t r e n d away f r o m t h e f e d e r a l monopoly o f nuclear power 954 and 1964.

t h e AEC laws o f 1-

Major m o d i f i c a t i o n s occurred w i t h the passage o f the AEC Act o f

1 9 5 4 . ( ~ ) This new a c t paved t h e 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 d e c l a s s i f i c a t i o n o f much informat i o n t h a t had been p r e v i o u s l y r e s t r i c t e d . I t e s t a b l i s h e d procedures b y which p r i v a t e i n t e r e s t s could o b t a i n 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 For the f i r s t time, p r i v a t e i n d u s t r y was p e r m i t t e d t o on r e a c t o r ownership. t r i c i t y . (63p'196)

own and operate nuclear reactors, i n c l u d i n g those f o r t h e generation o f elecThe AEC was s t i l l denied a u t h o r i t y t o b u i l d r e a c t o r s f o r purposes u n r e l a t e d t o research and development, such as t h e business o f gene r a t i n g o r s e l l i n g power. However, through t h e 1954 Act t h e government s t i l l r e t a i n e d ownership o f a l l fissionable material. P r i v a t e operators c o u l d o b t a i n such m a t e r i a l o n l y Likewise, any f i s s i o n a b l e m a t e r i a l genon lease from t h e Federal Government.

erated w i t h i n a p r i v a t e l y owned r e a c t o r was also government property.

(17)

With b o t h a p o l i c y and a l e g a l p l a t f o r m established, t h e AEC was i n a p o s i t i o n t o encourage t h e e v o l u t i o n and growth o f t h e nuclear power i n d u s t r y . Because o f t h e f i n a n c i a l r i s k involved, a framework o f government-industry cooperation was developed f o r f i n a n c i n g e a r l y nuclear power p l a n t s . t i a t e d i n 1955. This f i r s t took t h e form o f t h e Power Demonstration Reactor Program (PDRP), i n i Three rounds o f demonstration p l a n t s were b u i l t under t h i s Research and development techprogram, i n which t h e AEC o f f e r e d f i n a n c i a l i n c e n t i v e s t o cooperating u t i l i t i e s t o help b u i l d c o m p e t i t i v e nuclear p l a n t s . 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 t h e t r a i n i n g o f opera t o r s ( 8 ) were among the terms o f f e r e d under t h e PDRP. Although t h e 1954 Act p e r m i t t e d t h e p r i v a t e ownership o f nuclear react o r s , t h e f u e l needed f o r t h e r e a c t o r s was a v a i l a b l e o n l y on lease from t h e Federal Government and t h e product plutonium was t o be s o l d back a t a f i x e d price. 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 mater i a l was passed. F u l l p r i v a t e ownership was reached i n steps over a p e r i o d o f years. (7yp.100) Therefore, d u r i n g i t s infancy, t h e 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 b a s i c 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 n u c l e a r r e a c t o r and f u e l c y c l e technology t o a s e l f - s u s t a i n i n g p r i v a t e i n d u s t r y . Roadblocks t o p r i v a t e commercialization were removed when necessary support and i n c e n t i v e s were provided t o c r e a t e 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 plants. As s t a t e d by t h e Commission: A t present, atomic energy i s a government-owned i n d u s t r y . This

departure from 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 institutions.

It was deemed necessary t o cope w i t h t h e unique and

u n f a m i 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 t h e p e r i o d o f major p r a c t i c a l a p p l i c a t i o n s , 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 o u 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 r d e r 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 r e n g t h e n r a t h e r t h a n t o change o u r 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 goal has been reached. C u r r e n t l y , a l l steps i n t h e An e s t i m a t e d $21 b i l -

f u e l c y c l e , e x c e p t enrichment and waste management, a r e handled b y i n d u s t r y . Table 18 e x p l a i n s t h e steps i n t h e n u c l e a r f u e l c y c l e . n u c l e a r power. l i o n has been s p e n t s i n c e 1950 b y t h e F e d e r a l Government t o develop commercial 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 : $17.2 b i l l i o n not quantifiable not quantifiable

Research and development a c t i v i t i e s L i a b i l i t y insurance Uranium m i n i n g i n d u s t r y Enrichment p l a n t s Regulation a c t i v i t i e s Waste management Total

$2.1 b i l l i o n $1.65 b i l l i o n
i n c l u d e d under R&D $20.95 billion

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 discussed 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 beginning, 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 y p e s has r e s t e d on a b r o a d program o f b a s i c t e c h n o l o g y supported 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 admini 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 Mining Description Underground and surface mining of ore. Mechanical and chemical refined ore to "yellow cake." Usually done near mine. Conversion of "yellow cake" to gas for enrichment Institution Involved Independent mining companies. Large resource companies. Mining and chemical companies. Chemical companies and resource companies.

Milling

UFg production Enrichment

Concentration of natural uranium Federal Government. at Private ownership being content of 2 3 5 ~ 0.7% to encouraged. between 2% and 4%. Current 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. Conversion of enriched UF6 gas to solid and assemble in fuel pins and elements. Converts energy in uranium to electricity Nuclear steam system suppliers, large resource companies, others. Investor-owned, pub1 ic and federally owned utilities.

Fuel fabrication

Utility power plant Waste fuel

"Burned" up fuel bundles which no Public utilities and longer sustain the power output federally owned of the reactor. Has concentrautilities. tion of about 1% 2 3 5 ~ plus about 0.6% plutonium "bred" in the reactor. Chemical and nuclear service companies.

Fuel reprocessing Recovery of usable uranium and plutonium from waste. 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 t h r u s t s :

1 ) t o develop b a s i c R&D, and 2) t o b u i l d demonstration p l a n t s i n p a r t n e r s h i p w i t h industry. The C o n t r o l l e r ' s O f f i c e o f D E (ERDA) analyzed funds spent on t h e develO opment o f commercial nuclear power from 1950 through 1978. presented i n Tables 19 and 20. 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 C o n t r o l l e d thermonuclear r e a c t i o n (magnetic fusion) C i v i l i a n r e a c t o r development ( f i s s i o n ) Advanced i s o t o p e separations 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 operating, equipment and c o n s t r u c t i o n funds. I n t h e D E analysis, 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 O Approxinuclear power was the C i v i l i a n Reactor Development Program (CRDP). 1950 t o 1978 have been spent through CROP.(') spent through o t h e r program categories. These f i g u r e s are 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 c o n t r i b u t i o n s o r p a r t i a l c o n t r i b u t i o n s from one o r more

m a t e l y 81% o f t h e R&D funds a l l o c a t e d t o commercial nuclear power by DOE from The remaining 19% has been The b u l k o f t h e D E support has been O

i n the form o f research and development d o l l a r s . Developmental f i s s i o n r e a c t o r s and the e a r l y cooperative power r e a c t o 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 r o j e c t s was about 20% o f t h e t o t a l costs incurred, w i t h i n d u s t r y c o n t r i b u t i n g t h e remaining 80%. ( 8 ) More r e c e n t l y , t h e L i q u i d Metal Fast Breeder Reactor (LMFBR) program has r e c e i v e d most o f t h e funds o f t h e CRDP. r e a c t o r . (2) The GAO r e p o 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

TABLE 19.

Research and Development Expenditures f o r t h e Nuclear Power Program 1950-1974 ( i n Mil 1ions of Do1 l a r s )
CTR Magnetic Fusion Civilian ~. Reactor
Dev.

Advanced

Reactor Waste
Manaqement

Year

Nuclear Materials

Laser
Fusion

Iso.
Plowshare Separations

Fission

Research

Safety

Resource Assessment

Total Current $

Total 1978 $

Source:

Nuclear Energy Branch Office of the Controller EROA (now DOE)

TABLE 20.

Research and Development E x p e n d i t u r e s f o r t h e N u c l e a r Power Program 1975-1978 ( i n M i l l i o n s o f Do1 l a r s ) Year

1975
Magnetic Fusion Breeder R e a c t o r Systems C o n v e r t e r Reactor Systems Commercial N u c l e a r Waste Spent N u c l e a r F u e l Advanced N u c l e a r Systems L i g h t Water R e a c t o r F a c i l i t i e s
+A

1976 139.0 496.0 45.0 33.0

1976 TQ 50.0 136.0 22.0 18.0

1977 211.0 654.0 67.0 115.0

1978 277.0 766.0 96.0 123.0 5.0

Total

95.0 523.0 34.0 25.0

772.0

34.0

39.0

12.0

42.0 20.0 1,109 1,194.4

61.0 27.0 1,355 1,355

711.0 861.7

752.0 861.8

238.0 272.7

+
W

Total i n current $ T o t a l i n 1978 $ 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 t h e ERDA and D E 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 d o l O The percentage o f the D E budget a l l o c a t e d f o r t h e development o f commercial nuclear power O has increased over time. 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 D E funds were spent on commercial nuclear O power. ( 2 ) The D E f i g u r e s i n c l u d e R&D c o n t r i b u t i o n s o n l y from programs d i r e c t l y O Enrichment R&D, along w i t h t h e R&D o f supporting technology (waste management, r e a c t o r s a f e t y research) are included, b u t n o t c o n t r i b u t i o n s from B i o l o g y and Environmental Science, Education I n f o r m a t i o n and Training, o r program management costs. I n analyzing other program categories f o r p o s s i b l e c o n t r i b u t i o n s t o comm e r c i a l nuclear power, we used t h e f o l l o w i n g assumptions: s u p p o r t i v e o f nuclear power as an e l e c t r i c i t y generation source. l a r s ) has been spent on commercial nuclear power through 1978.

1)

W 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 t h e r e than submarine propulsion) d i d n o t c o n t r i b u t e t e c h n o l o g i c a l i n f o r m a t i o n t o the commercial nuclear power program, t h e submarine p r o p u l s i o n program i s t h e major m i l i t a r y c o n t r i b u t o 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 t h e commercial aspects o f programs were l e s s than 50% o f t h e t o t a l funds, we assumed t h a t t h e y would have been provided f o r t h e 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 comm e r c i a l nuclear power program. Methods o f h a n d l i n g r a d i o a c t i v e m a t e r i a l s , The commercial program neutron d i f f u s i o n codes, c r i t i c a l experiment technology, and o t h e r i n f o r m a t i o n were l a r g e l y a p p l i c a b l e t o 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 l a d d i n g m a t e r i a l , pressure member (vessel r a t h e r than tube), modera t o r ( l i g h t water r a t h e r than g r a p h i t e o r heavy water), and r e a c t o r components. program. Technology from these developments became a v a i l a b l e t o the weapons Fuel reprocessing technology, as p r e s e n 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 technology 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 classified, the transfer of people from the naval Program to industry carried both the expertise and technology into the industry PWR programs. Important technical areas from the Naval Program include zirconium technology, reactor control (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 Training 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'Environmental Program focuses on health studies of humans who have been exposed accidentally, occupationally, or therapeutically to radiation. Research is

TABLE 21.

Mixed Program C o n t r i b u t i o n s 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 ) $418 140 141 1,300 553 $2,552

B i o l o g y and Medicine Nuclear Submarine Propulsion Research Education and T r a i n i n g Physical Research Program Management Total

conducted i n t h e b a s i c areas o f b i o l o g i c a l studies, h e a l t h studies, e n v i r o n mental studies, waste management, p h y s i c a l and a n a l y t i c a l studies, h e a r t devices and some other minor areas. supported the weapons program. Most o f t h i s work done before 1965 W assumed t h e c o n t r i b u t o n from e Therefore, o n l y t h e years since 1965 have been

apportioned f o r t h e t a b u l a t i o n i n Table 21.

b i o l o g y and medicine t o c i v i l i a n power development t o be i n t h e same proport i o n as t h e 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 educational and t r a i n i n g budget i t appeared t h a t about o n e - t h i r d o f t h e programs c o n t r i b u t e d t o o r d i r e c t l y supported t h e development o f commercial nuclear power. l i o n (1978 $). C u r r e n t l y the p h y s i c a l research program i s funded i n t h r e e categories: nuclear physics, h i g h energy physics, and b a s i c 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 i g h energy physics research has been d i r e c t e d toward understanding energy and matter i n t h e i r most b a s i c 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 r o a d l y based.
I t ranges from a c r u c i a l

This c o n t r i b u t i o n t o t a l e d $141 m i 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 t h e p o s s Y b l i t y o f important d i s c o v e r i e s 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. energy sciences program i s comprised o f f o u r subprograms: energy p r o j e c t s . m a t e r i a l s sciences; molecular, mathematical, and geo-sciences; 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 b a s i c

n u c l e a r sciences; and advanced

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 u n d e r s t a n d i n g o f The program i s designed t o

develop new e x p e r i m e n t a 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 c o n t i n u e d progress i n energy research, development, and demonstration. Programs o f t h i s n a t u r e appear t o s u p p o r 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 ) . Since t h e s e 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 c o n n e c t i o n between t h e r e s e a r c h and t h e t e c h n o l o g y i s o f t e n v e r y obscure. n u c l e a r i n d u s t r y o f today. S t i l l , i t was t h e " p h y s i c a l r e s e a r c h " 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 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 Thus, an a d d i t i o n a l $1300 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. 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. 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 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 c a t e d 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. f r o m 1950 t h r o u g h 1978. Between 1948 and 1978, t h e Federal Government c o n t r i b u t e d t o t h e d e v e 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 s e r v ices. T h e r e f o r e , 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 . A p p r o x i m a t e l y $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 ll i o n was i n c l u d e d from t h e B i o l o g y and Medicine, t h e P h y s i c a l Research, Educat 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 W could n o t l o c a t e 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 t h e value e o f t h e l i a b i l i t y insurance provided t o t h e commercial nuclear power program b y the Price-Anderson Act. This a c t was q u i t e c l e a r l y an important government a c t i o n t h a t encouraged nuclear power development. The 1954 Atomic Energy Act allowed f o r p r i v a t e ownership and o p e r a t i o n o f nuclear reactors. This r a i s e d t h e question o f l i a b i l i t y i n t h e case o f an A t t h i s time the competitive accident, e s p e c i a l l y a c a t a s t r o p h i c accident. when i t would become p r o f i t a b l e .

p o s i t i o n o f nuclear power had n o t been e s t a b l i s h e d and i n d u s t r y d i d n o t know The s u p p l i e r s and t h e operators o f n u c l e a r f a c i l i t i e s were n o t w i l l i n g t o t a k e on t h e a d d i t i o n a l f i n a n c i a l r i s k o f a c a t a s t r o p h i c accident which c o u l d conceivably bankrupt t h e companies involved. (5yp.124) To meet t h i s need, t h e 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 licensees and c o n t r a c t o r s against excessive r i s k s associated w i t h t h e use o f nuclear power. Although t h e exact magnitude o f a " c a t a s t r o p h i c " accident was never s p e c i f i e d i n t h e 1957 hearings, i n d u s t r y spokesmen v i s u a l i z e d 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 n o t p r o v i d e 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 c a p a c i t y o f the insurance i n d u s t r y . (11) U t i l i t i e s and equipment s u p p l i e r s p u b l i c l y expressed t h e i r r e l u c t a n c e 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 v e r y e x i s tence o f t h e i r companies on t h e remote p o s s i b i l i t y o f a major nuclear catastrophe t h a t was i n s u r a b l e t o o n l y a l i m i t e d extent. F o l l o w i n g are some comments made by i n d u s t r y spokesmen i n t h e 1955-1957 e r a about t h i s subject. A t t h i s time we do n o 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 a m Gale, Chairman, Commonwealth Edison Co.) (12)

O b v i o u s l y 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 o u r company f o r a r e l a t i v e l y small p r o j e c t

. . . We

cannot exclude 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 i d e d by a g r e a t enough c o n s p i r a c y 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. ( C h a r l e s H. Weaver, V.P., Westinghouse E l e c t r i c Co.) (13)

W 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 e 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 statement 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

. . At

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 s e s s i o n o f Congress 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 time. ( 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) s o l v e d t h e problem 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 t h a n government insurance. 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 t h a n an i n s u r a n c e 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 required. 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 s m a 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 accumulation 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 s m a 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 F e d e r a l a c t i o n i s g o i n g 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. The

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 essentially cost the government nothing. The provisions of the act covered firms involved with the chemical processing, 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 Commission 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 minimal 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 "nofault1'-typeclause, 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 n d e m n i f i c a t i o n o f commercial reactors, although n o n p r o f i t and R&D r e a c t o r s 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 . 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. payable by the u t i l i t i e s o n l y i f t h e r e i s an i n c i d e n t . insurance companies. Private Essen-

t i a l l y , t h e p l a n c o n s i s t s o f a d e f e r r e d o r r e t r o s p e c t i v e premium, which i s Therefore, a l a y e r o f "pool insurance" i s created, i n a d d i t i o n t o t h e amount provided by t h e p r i v a t e This l a y e r w i l l increase as the number o f r e a c t o r s increases u n t i l t h e pool i s a b l e t o p r o v i d e t h e 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 primary insurance l a y e r , phasing o u t t h e government. The Nuclear Regulatory Commission, now a d m i n i s t e r i n g 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 react o r p e r i n c i d e n 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 h e r e has been much discussion about whether, and t o what e x t e n t , Price-Anderson i n d e m n i f i c a t i o n has been a subsidy f o r nuclear energy. I n analyzing t h i s question, two items t o consider are 1 ) t h e Price-Anderson Act removed a stumbling block t o t h e development o f nuclear power and 2 ) t h e c o s 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 t h e nuclear i n d u s t r y , so t h e apparent economic competitiveness o f nuclear power w i t h o t h e r energy sources may be misleading. The a c t authorized NRC ( o r i t s predecesThe s o r s ) 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. r e a c t o r ' s license. (a)

f e e i s $30 per year per thousand k i l o w a t t s o f thermal energy authorized by the By August 1, 1977, almost $10 m i l l i o n i n indemnity Only minor claims have been made a g a i n s t t h e fees had been c o l l e c t e d .

government f o r indemnity 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. market. They would a l s o have t o estimate a c o s t f o r t h e 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 m i g h t exceed t h e 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 t h e p r i v a t e These c o s t s would be passed on t o t h e consumer i n higher e l e c t r i c i t y

( a ) t h e annual f e e f o r a 1000 M e power p l a n t would be about $90,000. W

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 Insurance if Available One Reactor Rated less at 1,000 MWe $348,000 (a) ,112,520(a) $235,480

Annual Indemnity Fee

Annual Subsidy

$435,00O(a) Two reactors, each 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 fabrication plants, nuclear equipment suppliers, etc. covered under the PriceAnderson Act. This incentive has been classified as a disbursement since that category includes promises to disburse under certain circumstances.

The Price-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 small amount has been d i s b u r s e d t o pay c l a i m s . W 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 e However, i t i s mate o f t h e t o t a l subsidy 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 . 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 t h a n has any o t h e r n a t u r a l r e s o u r c e i n d u s t r y . ( I 8 ) 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. 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. The developed and grew i n t h e l a t e 1950s U n t i l 1966, t h e The governThe q u i t e c l e a r t h a t t h e Price-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

F e d e r a 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 r o d u c t .

ment s e t p r i c e s , bought and owned a l l uranium as soon as i t was mined. procurement p o l i c i e s . o f uranium.

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 Even t o d a y 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 enrichment and t h e e x p o r t - i m p o r t

A l t h o u g h 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 supported 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 enrichment p o l i c i e s tax policies

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 small mine i n Canada,

and a few s c a t t e r e d deposits i n t h e U.S.

I n 1947, t h e AEC was formed and Domestic reserves

plans f o r a much expanded nuclear weapons program unfolded. were then estimated a t 2000 tons o f U308. (19) Recognizing these reserves and U.S. weapons production and research needs. issued by t h e AEC.

dependence on f o r e i g n ore, t h e AEC H i s t o r i e s o f t h e AEC's procurement pro-

s e t out t o e s t a b l i s h a program t h a t would p r o v i d e s u f f i c i e n t uranium f o r b o t h 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 l s o from C i r c u l a r s 1-8

To s t i m u l a t e production and e x p l o r a t i o n , t h e AEC program o f f e r e d domestic producers long-term c o n t r a c t s w i t h a t t r a c t i v e i n c e n t i v e s : (18,p.71-73) 1) 2) 3) a ten-year guaranteed minimum p r i c e f o r c e r t a i n high-grade uranium o r e a $10,000 bonus f o r t h e discovery and production o f high-grade uranim ore a guaranteed three-year minimum p r i c e f o r ores from t h e Colorado Plateau.

The government also c a r r i e d out an extensive domestic e x p l o r a t i o n program between 1948 and 1955 f o r t h e b e n e f i t o f t h e uranium i n d u s t r y . Geological Survey, by t h e U.S. These a c t i v i t i e s were conducted by p r i v a t e concerns under c o n t r a c t t o AEC, by t h e U.S. Bureau o f Mines, and b y AEC's g e o l o g i c a l s t a f f I n a d d i t i o n , t h e AEC constructed and operated ore-buying s t a t i o n s ( l a t e r phased o u t ) and b u i l t numerous access roads t o remote mine areas. (5,~.161) Production o f U, O , t o t a l o f 261,000 period.(19) d r a m a t i c l y between 1948 and - - increasedf containeda lU308 were discovered1958.t h i sA mineable tons o in

The s t i m u l a t i o n p o l i c i e s were so e f f e c t i v e t h e AEC was f o r c e d

t o modify 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 April .. .In

1958, t h e AEC issued a r e l e a s e announcing t h a t

uranium reserves developed a f t e r Novemer 1, 1957, would n o t be e l i g i b l e f o r purchase i n the pre-1962 period. November 1958, t h e AEC issued a r e l e a s e . s u b s t a n t i a l 1 y modi-

f y i n g i t s 1956 announcement r e g a r d i n g t h e 1962 t o 1966 procurement

program.

Under t h e new announcement, only uranium r e s e r v e s 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 purchase program. The purchase p r i c e of $8.00/lb of U308 was retained. November 1962, t h e Commission announced t h e " s t r e t c h o u t " purchase program. Companies which e l e c t e d 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 portion of t h e uranium which otherwise would be s o l d 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 t h e government i n c e n t i v e s 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 t o r i c a l l y , d r i l l i n g a c t i v i t y has been c o r r e l a t e d w i t h a d d i t i o n s t o r e s e r v e s and both were c o r r e l a t e d with e a r l y AEC procurement p o l i c y . Surface d r i l l i n g s t e a d i l y increased through 1957 while the p r i n c i p a l i n c e n t i v e 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 t h e b a s i s of a sharp i n c r e a s e in new orders f o r nuclear power p l a n t s . D r i l l i n g declined between 1970 and 1972 l a r g e l y because of delays experienced i n nuclear power p l a n t s coming on-line. However, s i n c e t h e a n t i c i p a t e d market demand by the u t i l i t i e s did not m a t e r i a l i z e a s e a r l y a s AEC had expected, a " s t r e t c h o u t program" was imples mented. A noted by Dawson in Nuclear Power: Development & Management of a (5 ,p.162-163) Technology: 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 b a s i s f o r long-range planning by t h e mining and m i l l i n g companies, t h e AEC announced a

. . . In

. . In

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, s u b j e c t t o c e r t a i n conditions; 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 Additions (AEC Data)

It was evident t o the AEC i n 1962 t h a t by 1966, which was the t e r m i n a t i o n 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 t h e production from t h e uranium industry. With t h e o b j e c t i v e o f m a i n t a i n i n g a v i a b l e i n d u s t r y , t h e AEC The program was t o announced a s t r e t c h o u t program on November 17, 1962. r u n from December 31, 1966, t o December 31, 1970. The new program consisted o f d e f e r r a l o f a p o r t i o n o f t h e 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 b e f o r e 1967. The deferred m a t e r i a l An

, would be purchased by the AEC d u r i n g t h e p e r i o d from January 1 1967,

through December 31, 1968, a t p r i c e s p r e v i o u s l y established.

a d d i t i o n a l q u a n t i t y equal t o t h e deferred q u a n t i t y would be purchased

, from January 1 1969, t o December 31, 1970.

of production cost p l u s $1.60/lb

The f i x e d p r i c e would be 85%

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 , ~ . 1 6 3 ) Domestic Canada Overseas Total 174,500 tons (55%) 73,800 tons (24%) 67,600 tons (21%) 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 c o n t r a c t s 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 r o d u c t i v e c a p a c i t y would be u t i l i z e d a t p r e d i c t a b l e l e v e l s and prices. AEC's major problem was a d j u s t i n g i n c e n t i v e s t o y i e l d the d e s i r e d When i t became apparent t h a t t h e o r i g i n a l i n c e n t i v e s were r e s u l t production.

i n g i n the accumulation o f too much uranium, AEC was f o r c e d 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 This s i t u a t i o n was analyzed by a B a t t e l l e (18,p.7.5, 7.6) Memori a1 I n s t i t u t e study f o r the National Science Foundation. 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 generated many complex l e g a l problems. For example, t h e AEC a l l o c a t e d i t s maximum uranium purchase o b l i g a t i o n s on t h e basis o f resources contained i n a l l p r o p e r t i e s i n which a producer owned m i n e r a l r i g h t s . An operator c o n t r o l l i n g more than one p r o p e r t y g e n e r a l l y had h i s p r o p e r t i e s grouped together i n t o a p r o p e 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 r o p e r t y u n i t which o f f e r e d t h e 1 owest p r o d u c t i o n cost. p r o p e r t y c o n t a i n i n g uranium reserves. Problems subsequently arose when ownership changed and operators added o r t r a n s f e r r e d responded t o i t s i n c e n t i v e program.

An operator then c o n t r o l l i n g

two p r o p e r t y u n i t s , 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 production from o n l y one u n i t . I n some instances t h e AEC a l l e v i a t e d Another t h i s problem b y p e r m i t t i n g c o n s o l i d a t i o n o f p r o p e r t y u n i t s . c o u l d a c t u a l l y be mined a t a p r o f i t .

problem was the d i f f i c u l t y i n determining whether claimed reserves Some holders o f a l l o c a t i o n s d i d not produce because i t was uneconomic t o do so. The s t r e t c h o u t program created a d d i t i o n a l problems. $8.00/lb o f U308. During t h e

1962-1968 period, t h e AEC purchased uranium a t a f l a t p r i c e o f 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 The p r i c e p a i d d u r i n g 1969 and 1970 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 p r o d u c t i o n c o s t s and h u r t i n g ' t h o s e w i t h high costs. was based on 85% o f average allowable production costs between 1963 and 1968 b u t c o u l d not exceed $6.70/lb o f U308. The average p r i c e p a i d was l e s s than $6.70/lb o f U308. The determination o f average allowable p r o d u c t i o n costs generated many d i f f i c u l t problems and r e q u i r e d d e t a i l e d p r o v i s i o n s i n the s t r e t c h o u t contracts. R e s t r i c t i o n on Import o f Foreign Ore After t e r m i n a t i n g the uranium purchase program one benevolent p o 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 uranium ore. Passage o f the " P r i v a t e Ownership o f Special Nuclear M a t e r i a l s Act" Section 161 o f the 1964 Act states: i n 1964 placed a p r o h i b i t i o n against i m p o r t i n g f o r e i g n uranium f o r use i n domestic nuclear power plants.

And provided f u r t h e r , t h a t the Commission, t o the e x t e n t necessary t o assure t h e maintenance o f a . v i a b l e domestic uranium i n d u s t r y , s h a l l not o f f e r such services f o r source o r s p e c i a l nuclear mater 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 United states. The Commission 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 c o n d i t i o n s under which services provided under t h i s subsection 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 s e r v i c e s w i l l be made a v a i l a b l e f o r source o r s p e c i a l nuclear m a t e 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 U n i t e d States:

Provided, t h a t before

t h e Commission e s t a b l i s h e d such C r i t e r i a , t h e proposed C r i t e r i a s h a l l be submitted t o the J o i n t Committee, and a p e r i o d 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 t h e f o r t y - f i v e days t h e r e s h a l l be excluded the days i n which e i t h e r House i s n o t i n session o f adjournment f o r more than t h r e e 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 t h e c o n d i t i o n s 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 p e r i o d ) . (19)

B t h i s p r o v i s i o n , the domestic uranium i n d u s t r y was p r o t e c t e d from comy

p e t i t i o n from 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 o u 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 l a n t s , 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 Foreign-Origin Uranium Ore Permitted f o r Use i n U.S. P l a n t s Up t o 10% o f Uranium Furnished f o r Enrichment may be o f Foreign O r i g i n when used i n a Domestic P l a n t 15% 20% 30% 40% 60% 80% No R e s t r i c t i o n s W d i d n o t attempt t o q u a n t i f y t h e subsidy t o t h e uranium i n d u s t r y c r e e ated by the ban on t h e use o f f o r e i g n ores i n domestic r e a c t o r s . 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 higher, s t i l l the u t i l i t i e s b e n e f i t e d from the development o f an assured domestic source o f supply. o f t h e U.S. The p r o t e c t i o n from f o r e i g n c o m p e t i t i o n i n c o n j u n c t i o n w i t h

AEC procurement p o l i c i e s has provided an environment which f o s t e r e d t h e growth

uranium i n d u s t r y .

Enrichment P o l i c i e s After t a k i n g i n t o account government needs f o r uranium, i n 1971 t h e AEC estimated i t had 50,000 tons (100 m i l l i o n pounds) o f surplus U308 on hand. (21yp'190) Although t h e uranium production i n d u s t r y and some buyers argued t h a t t h e n a t i o n a l s t o c k p i l e should be r e t a i n e d as insurance a g a i n s t any f u t u r e surge i n demand, t h e AEC announced i t s i n t e n t i o n t o dispose o f t h e stockpile. 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 t h e government adopted i t s " s p l i t t a i l s plan" o f disposal. This p l a n i s t e c h n i c a l l y complicated i n t h a t i t i n v o l v e s t h e method o f 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 r a d e - o f f s . 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 t h e p r i c e o f uranium. simple terms under t h e " s p l i t t a i l s " plan, t h e AEC (DOE) r e q u i r e s i t s customers f o r enrichment services t o supply o n l y approximately 80% o f t h e n a t u r a l uranium r e q u i r e d t o produce t h e enriched uranium t h a t i s d e l i v e r e d and t o pay about 25% more f o r enrichment services than i s a c t u a l l y delivered. 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 t o c k p i l e . s a l e t o a v a r i e t y o f enrichment customers. (213p'191) The remainAs a In o p e r a t i n g t h e gaseous d i f f u s i o n enrichment complex.

consequence, t h e s t o c k p i l e w i l l be reduced over a p e r i o d o f 7 o r 8 years by According t o a s p e c i a l t o p i c a l r e p o r t b y t h e Nuclear Exchange Corporation, w h i l e t h i s approach m i n i mized market d i s r u p t i o n , 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 review 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 s a l e o f t h e stockp i l e c o u l d r e s u l t i n a gain o r l o s s t o t h e government, depending on one's viewpoint. 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 maintains t h a t t h e s a l e i s a subsidy. However, an a n a l y s i s o f the s p l i t t a i l s p l a n 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 t h e uranium i s equal t o o r g r e a t e r than the average government purchase p r i c e (although a handling charge i s n o t allowed f o r ) . I n a d d i t i o n , t h e depleted uranium t a i l s are s t o r e d and mainThe " t a i l s " are valued a t zero by DOE. t a i n e d by D E and can be reprocessed. O

Government ownership o f one step o f the nuclear f u e l c y c l e allows f o r a f e d e r a l i n f l u e n c e on t h e uranium mining i n d u s t r y . I n t h i s particular situa(23,p.12,13) t i o n , t h e b e n e f i t s t o the uranium i n d u s t r y have been b a s i c a l l y two:

t h e 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 also been affected by D O E ' S long-term f i x e d commitment enrichment contracts, which provided f o r d e l i v e r y o f and payment f o r f i x e d 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 f u t u r e . ( 2 2 , ~ . 4 )
I t i s Nuexco's view t h a t t h e move t o f i x e d commitment SWU c o n t r a c t s i n i t i a t e d

t h e p r i c e ( a ) move o f uranium from $5.95/1b tember 1976. (22'p'1y10)

i n August 1971 t o $41/lb i n SepHence,

Current p r i c e s f o r U308 are about $45/lb.

t h e Federal Government s t i l l e x e r t s a s t r o n g i n f l u e n c e 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 r o v i s i o n a f f e c t i n g t h e energy i n d u s t r y i s percentage depletion. The percentage d e p l e t i o n r a t e f o r uranium i s 22%. ( 2 5 ) Brannon, i n Tax Incentives, s t a t e s t h a t t h e uranium market has been so i n f l u e n c e d b y other government p o l i c i e s t h a t the t a x e f f e c t i s minor; therefore, no attempt was made t o q u a n t i f y i t . I n summary, t h e many i n c e n t i v e s given t o the uranium i n d u s t r y do not lend themselves t o q u a n t i f i c a t i o n . t o p r o t e c t t h e young U.S. process. FEDERAL INVESTMENT I N ENRICHMENT PLANTS Uranium enrichment involves separating 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 percentage o f the f i s s i o n a b l e uranium-235. enriched uranium. ( a ) P r i c e r e f e r s t o the Nuexco exchange value f o r immediate d e l i v e r y . The work done t o separate these 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 i n d u s t r y , has allowed t a x i n c e n t i v e s , and has exerted an i n f l u e n c e 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

isotopes i s c a l l e d separative work, and t h e product achieved i s c a l l e d

Between 1943 and 1956 the U.S. b u 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 i o n . (Cost i n 1978 doll a r s would be $6.2 billion.) The Oak Ridge plant was b u 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 cont r a c t s . An additional $250 million i n R&D and capital improvements has been invested in the three plants during t h e i r l i f e , but not capitalized. The government has continued t o own the technology, which i s c l a s s i f i e d because i t i s vital t o the production of nuclear weapons. With the passage of time, the dominant market f o r enriched uranium has shifted 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 g h t l y enriched uranium as fuel. Uranium products of higher enrichment are used f o r weapons, in m i l i t a r y reactors, 'and f o r fuel i n H G and specialized reactors. TR
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 M e each. The U.S. not only provides enrichment services t o W 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 cont r a c t s , under which DOE agrees t o supply a l l of the enriched uranium required t o fuel a specific nuclear reactor; 2) long-term, fixed-committment contracts, under which DOE agrees t o provide fixed amounts of enriched uranium f o r a cert a i n time period; and 3 ) conditional contracts, under which DOE agrees t o provide enriched uranium i f certain enriching capacity currently under contract i s freed. Table 24 shows the distribution of contracts as of September 15, 1978.

About one-third of the capacity of the plants was used in 1969. ( 2 6 , ~ . 4 3 ) 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 t h e JCAE:

TABLE 24. Type of Contract Requirements Long-term, Fixed Commitment Conditional Total

DOE Uranium nr~chmentContracts as of September 15, 1978 ( i n Gigawatts Domestic 75 Foreign 25

!.

Total
100

t h e f u t u r e market projected f o r the existing U.S. urani u m enriching capacity i s primarily f o r c i v i l i a n nuclear power, b o t h within the United S t a t e s and abroad, and the requirements f o r uranium enriching services t o produce the fuel f o r nuclear power plants are growing rapidly. ( 2 6 , ~ . 2 6 )
W i t h the aforementioned s h i f t in the market f o r enrichment services toward

. . . Thus,

...

industry, t h e Atomic Industrial Forum, t h e Atomic Energy Commission, t h e JCAE of the Congress, and others have over the past 10 years studied the f u t u r e ownership and management of the uranium enrichment f a c i l i t i e ~ . ( ~ Since ~ ) 1971, the executive branch has followed p o l i c i e s and programs t o encourage private industry--rather than the Federal Government--to build the next increments of uranium enrichment capacity. Regardless of the technology involved (centrifuge, l a s e r , or gasous d i f f u s i o n ) , an enrichment f a c i l i t y requires a large amount of c a p i t a l t o construct and operate. The estimated c o s t ( i n 1975 d o l l a r s ) t o construct one economically sized gaseous diffusion plant i s $3.3 b i l l i o n . (28) To help private industry enter t h i s market, a c l a s s i f i e d information access program was i n i t i a t e d . Industry has made several proposals

t o build enrichment plants, b u t as of mid-1977, none has announced i t s intent i o n t o build one. I t i s beyond t h e scope of t h i s report t o describe t h e
p o l i t i c a 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 l e a r , b u t the timing and magnitude of t h a t need are not. A an interim solution t o meet t h i s demand, a pros gram f o r improving and uprating enrichment capacity was i n i t i a t e d in t h e e a r l y

1970s. T o t a l c a p a c 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 a d d i t i o n a l enrichment c a p a c i t y i s f o r domestic and f o r e i g n nuclear power p l a n t s . Foreign I m p l i c a t i o n s For many years the AEC, and now D E has f e l t t h a t i t i s i n t h e i n t e r e s t O o f t h e U.S. t o a c t as a s u p p l i e r o f enriched uranium abroad. reviewed i n a (6/24/69) from Glenn Seaborg, Chairmain o f t h e AEC: N a t i o n a l S e c u r i t y aspects This p o l i c y was l e t t e r t o Chet H o l i f i e l d , then Chairman o f the JCAE,

. . . i n particular

the national p o l i c y o f

seeking t o a v o i d t h e p r o l i f e r a t i o n o f nuclear weapons a v a i l a b i l i t y o f enriched uranium from t h e U.S. enriching capability t h e United States

. . . The

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 c o u n t r i e s t o develop t h e i r own

. . . t h e a v a i l a b i l i t y o f enriched uranium from . . . has helped i n t h e development o f t h e Nonuranium we encourage t h e devel-

Pro1 i f e r a t i o n Treaty. Secondly,

. . . by supplying enriched

lopment o f s t r o n g and m u t u a l l y b e n e f i c i a l economic t i e s between o u r selves and the user

...

F i n a l l y , t h e r e are important economic b e n e f i t s attendant upon the s a l e o f enriched uranium aboard. point U.S. enriched uranium p r i c e s , Treaw h i l e they do n o t i n c l u d e a p r o f i t from a p r i v a t e f i n a n c i n g view-

. . . t h e y thus

p r o v i d e a n e t cash b e n e f i t t o t h e U.S.

s u r y and help i n t h e a m o r t i z a t i o n 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 (21,p.48,49) defense purposes. Thus, t h e U.S. involvement i n supplying other c o u n t r i e s w i t h enriched

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 h e l p i n g t o l i m i t t h e spread o f nuclear weapons. Sales o f enrichment services have also been used as leverage t o o b t a i n 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 subsidies and f u e l s u p p l i e s 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 l a n t s n o t existed, t h e development o f commercial nuclear power i n t h e U n i t e d States would probably have been along t h e l i n e s o f n a t u r a l uranium f u e l e d

reactors, such as the Canadian heavy water reactors or the British graphite reactors. The existence of diffusion plants permitted a more competitive type of reactor t o be b u i l t , the l i g h t water reactor. Enrichment Services The DOE pricing policy f o r 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 f o r 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 t o offer, beginning in January 1969, services f o r enriching privately owned uranium. The act also provided t h a t AEC s e t f o r t h 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 t h a 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, customers must specify delivery leadtime of a t l e a s 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 cont r a c t s in which AEC agreed t o provide the enrichment services f o r a stated nuclear reactor on an "as needed" basis, up t o a limit, 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 j u s t i f i e d t h i s difference by pointing t o i t s experience w i t h requirements contract holders that have shown that actual sales

have f a l l e n s h o r t o f p r o j e c t e d sales.

I n June 1975 t h e A d m i n i s t r a t o r o f ERDA The pro-

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 e n r i c h i n g uranium used t o f u e l nuclear power plants. 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 e n r i c h i n g 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 e n r i c h i n g services and those o f p o t e n t i a l domestic p r i v a t e enrichment p r o j e c t s . The p r i c e f o r a separate work u n i t under t h e new b a s i s would i n c l u d e charges i n l i e u o f insurance and f e d e r a l , state, and l o c a l taxes p l u s a f a c t o 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 p e r s e p a r a t i v e work u n i t t o about $76.00. The $22.65 d i f f e r e n c e i s r o u g h l y equival e n t t o t h e Federal subsidy(a) f o r enrichment services. T h i s subsidy represents a b e n e f i t t o t h e nuclear power i n d u s t r y because t h e p r i c e charged b y t h e Government t o e n r i c h uranium has not included p r o f i t , taxes, and insurance. included i n t h e p r i c e . Table 25 shows t h e q u a n t i t y o f enriched uranium s o l d b y t h e government i n terms o f separative work u n i t s and revenues received through f i s c a l year 1978. TABLE 25. Separative Work U n i t s and Revenue from Enriched Uranium Sold Through 1978 ( i n M i l l i o n s ) Separative Work U n i t s Revenues 21,468 21,858 43,326 635,874 695,397 $1,331,271
I f a taxpaying, p r o f i t - m a x i m i z i n g company were s e l l i n g

these enrichment s e r v i c e s t o t h e nuclear power i n d u s t r y , these items would be

Domestic Foreign T o t a1

The i n f o r m a t i o n i n Table 25 i l l u s t r a t e s t h e complexity o f determining f e d e r a l i n c e n t i v e s t o commercial nuclear power f o r enrichment services. approaches have been suggested. Several One approach i s t o assume t h e GAO's e s t i m a t e

( a ) Defined t o i n c l u d e 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 provided t o any e n t e r p r i s e b y t h e Government t o promote i t s p o l i c y .

o f f e d e r a l subsidy f o r enrichment services ($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 t h e t o t a l domestic revenues given i n Table 25, c a l c u l a t e a subsidy. Such a c a l c u l a t i o n y i e l d s a subs 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 t h e domestic enrichment services. The a v a i l a b i l i t y o f enrichment services a t a lower-than-world p r i c e f o r f o r e i g n nations could be an important consideration i n t h e i r buying U.S. reactor plants, The objecand might be looked upon as a subsidy t o commercial nuclear power. than simply developing commercial nuclear power. t h i s aspect i s beyond t h e scope o f t h i s p r o j e c 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 i n a p p r o p r i a t e f o r t h e government t o charge f o r services on t h e same basis as p r i v a t e i n d u s t r y . The enrichment p l a n t s 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, t h e r e f o r e , o n l y out-of-pocket expenses should be considered a subsidy t o t h e u n r e l a t e d commercial nuclear power i n d u s t r y . Perhaps another way t o estimate 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 plants. 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 l a n t s might have been generated by f o s s i l f u e l (coal, o i l , o r gas) p l a n t s i f t h e nuclear indust r y had not evolved. During 1977, t h e cost o f producing e l e c t r i c a l power b y Secondly, t h e U.S. nuclear i n d u s t r y m i g h t T y p i c a l l y c a p i t a l costs nuclear p l a n t s was 16% l e s s than f o r coal p l a n t s (31) and considerably l e s s than f o r o i l and gas f i r e d p l a n t s . have evolved arond n a t u r a l uranium f u e l e d reactors. t h e U.S.

t i v e s o f such sales, as p r e v i o u s l y discussed, seem t o embrace aspects other

A more d e t a i l e d analysis o f

f o r these r e a c t o r s are about 10% higher than f o r LWRs. t h a t amount i s $1.5-2.5 billion.

A t t h e present t i m e
Ten percent o f

investment i n operating LWRs i s about $15-25 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 As noted before, t h e How-

f i g u r e t o be a subsidy t o commercial nuclear power.

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 d o l l a r s . Therefore, t h e maximum subsidy could be t h e t o t a l cost o f these p l a n t s . ever, t h e m a j o r i t y o f t h e i r p r o d u c t i o n has been f o r m i l i t a r y a p p l i c a t i o n s , and o n l y a small percentage has been devoted so f a r t o commercial nuclear power production.

One might wish t o look a t the value o f t h e net investment n o t y e t repaid. The cash f l o w r e c e i v e d from sales o f enrichment services (both f o r e i g n and domestic) has included a p r o v i s i o n f o r depreciation, which averages about 33 years l i f e b u t i s a c t u a l l y f i g u r e d on t h e c a p a c i t y used. unrecovered costs were $1.8 b i l l i o n i n 1978 d o l l a r s . The n e t book value Hence, t h e o f the enrichment p l a n t s as o f June 30, 1971, was $1.13 b i l l i o n .

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 c a p a c i t y used f o r commercial nuclear power compared t o m i l i t a r y needs, b u t r a t h e r t h e recovered costs through sales o f enrichment services. Actual production 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 o n l y used i t s services since 1965 and most predominantly since 1968. The existence o f the enrichment p l a n t s i n f l u e n c e d the t y p e o f r e a c t o 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 , however, 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 i n c e n t i v e . Depending on t h e approach used t o analyze t h e s i t u a t i o n , t h e i n c e n t i v e c o u l d 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 . W have e selected $2.1 b i l l i o n (1978$) as t h e i n c e n t i v e on t h e basis o f t h e $0.6 b i l l i o n G O estimated subsidy o f t h e d i f f e r e n c e between commercial and government p r i c e s A p l u s t h e $1.5 b i l l i o n o u t l a y ( n o t y e t recovered) f o r i n c r e a s i n g t h e enrichment c a p a c i t y f o r commercial purposes. s i f i e d as a market a c t i v i t y . FEDERAL REGULATION O THE NUCLEAR INDUSTRY F Since AEC1s establishment by Congress through t h e Atomic Energy A c t o f 1946, t h e r e s p o n s i b i l i t y b o t h f o r p r o t e c t i n g t h e h e a l t h a ~ s a f e t y o f t h e d 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 t h e c o n t r o l o f nuclear m a t e r i a l s has r e s t e d w i t h t h a t body and i t s successor, DOE. m i n i n g o f t h e o r e t o t h e waste product. f u l and w a r l i k e a p p l i c a t i o n s . 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 t h e This i s p a r t l y so because o f t h e dual uses t o which these m a t e r i a l s , processes, and products may be put--both peaceDuring t h e p e r i o d when a l l nuclear m a t e r i a l s Since 1965, t h e Federal Government has been supplying u t i l i t i e s w i t h enriched uranium and t h e r e f o r e t h i s subsidy i s c l a s -

were owned by the government, control was r e l a t i v e l y simple. Since the passage of t h e 1964 Private Ownership Act, the task has become increasingly difficult. As the construction and operation of nuclear power s t a t i o n s increased, the AEC devoted an increasing share of i t s resources t o regulating t h e indust r i a l uses of atomic energy. In 1965, regulatory a c t i v i t i e s were only 0.2% of t h e AEC budget, whereas i n 1974 they were 2.1%. In 1975, t h e Energy Reorganization Act separated the developmental and promotional functions of nuclear power from t h e regulatory functions. The act created t h e Nuclear Regulatory Commission ( N R C ) , whose purpose was t o regulate the design, construction and operation of central s t a t i o n nuclear power plants and associated f a c i l i t i e s .

NRC plays a major r o 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 , ~ . 4 4 9 )
As stated in the AEC budget requests, the basic purpose of the regulatory program i s : c a r r y out the Commission's s t a t u t o r y r e s p o n s i b i l i t i e s f o r assuring t h a t t h e 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 s a f e t y and t h e common defense and security, and with proper regard f o r environmental quality. ( 3 3 ) The regulatory system encompasses three functions: rulemaking, or the issuance of requirements of generalized a p p l i c a b i l i t y licensing, including review of necessary prerequisite conditions f o r license coordination of policy, enforcement of determinations, and administration of the agency i t s e l f . ( 5 , ~ . 1 7 5 ) 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 r e s p o n s i b i l i t i e s are defined in three pieces of l e g i s l a t i o n : (33)

. . . to

1)

Atomic energy Act of 1954, as amended

2) 3)

N a t i o n a l Environmental P o l i c y Act o f 1969 (NEPA) Federal Water P o l l u t i o n C o n t r o l Act, as amended by t h e 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 t h e r e g u l a t o r y f u n c t i o n of r e v i e w i n g 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 t h e s a f e t y o f proposed r e a c t o r s . I n t h e e a r l y 19705, however, t h e environmental The C a l v e r t C l i f f s issue became a major concern i n s i t i n g considerations.

d e c i s i o n 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 a p p l i c a t i o n s and over 110 r e a c t o r s which were already under l i c e n s i n g review, under c o n s t r u c t i o n , o r i n operation. The e f f e c t o f t h e c o u r t ' s d e c i sion was t o make the AEC d i r e c t l y r e s p o n s i b l e f o r e v a l u a t i n g 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 n u c l e a r r e a c t o r s . (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, from t h e mining o f t h e o r e t o treatment o f t h e waste product. When t h e AEC was reorganized i n t o EROA and NRC, NRC was given 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 disposal of h i g h - l e v e 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 h e 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) 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 nuclear power i n d u s t r y . 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 from s p e c i a 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 r e p o r t , f e d e r a l funds Regulation c o s t s have been categorized as a requirement, 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 i n c l u d e d as an i n c e n t i v e . s i n c e f e e s n o t p a i d are backed by p e n a l t i e s . 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 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.

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. reactor.

Each y e a r 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 The " s p e n t " f u e l elements s t i l l c o n t a i n u s a b l e uranium i s o t o p e s .

The f u e l c y c l e has t o be ended e i t h e r by r e p r o c e s s i n g 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 $ ) Amount Amount 1978 $

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 .

Year

T o t a l i n 1978 d o l l a r s Source: "Nuclear Power Costs and Subsidies," EMD-79-52 June 13, 1979 p. 28 General Accounting O f f i c e ,

The economics of r e p r o c e s s i n g , 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 , are i n dispute. t h e U.S. 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 While 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 and t h o s e 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)

recognized as a key issue affecting public acceptance of nuclear power, basic decisions regarding t h e 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

STORAGE

UTILITY POWER PLANT

FIGURE 5.

Nuclear Fuel Cycle f o r Waste Fuel

Options

The f r o n t end of the fuel cycle--uranium mining and enrichment--was developed on a large scale in the 1940s and 1950s t o meet t h e demands of t h e nuclear weapons program. (34*p'100) As weapon production declined, there was ample capacity t o service t h e growing needs of the commercial power program. As f o r the back-end of the fuel cycle--spent fuel reprocessing, plutonium fabrication and waste storage--all had been treated rather casually as part of

government programs, a c c o r d i n g t o F r i t z F. Hermann, C h i e f Council f o r G.E. ' s Power Generation group. The g e n e r a l assumption was t h a t t h e p r i v a t e s e c t o r
It f i t t e d t h e " c o n v e n t i o n a l eco-

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. 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 t h e s e 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 r d e r 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 i v e n 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 Nuclear R e g u l a t o r y Research i n NRC i s now r e s p o n s i b l e , i n a d d i t i o n , f o r r e s e a r c h t o s u p p o r t NRC's r e g u l a t o r y f u n c t i o n s . 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, p r o t e c t i o n i n s u p p o r 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 support t h e regulated technologies; ERDA was t o be r e s p o n s i b l e f o r developmental o r p r o m o t i o n a 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 t h r o u g h ERDA, o t h e r F e d e r a 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 experimental r e s e a r c h program. ( 3 6 ) U n t i l t h e l a s t few y e a r s o n l y small sums were spent on waste management problems. The problem 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 r e s s u r e u n t i l r e c e n t l y .

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 d e v e l o p i n g and a n a l y z i n g and environmental

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 management R&D were n e g l i g i b l e . f r o m t h e weapons program. Most o f t h e n u c l e a r waste now i n s t o r a g e d a t e s Therefore, o n l y t h e funds a s s o c i a t e d w i t h t h e

management o f , o r R&D r e l a t i n g t o , 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 containment 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 t h e 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 f o r h i g h - l e v e l waste and the cost o f disposal i n a geological formation. (37) Furthermore, the economic d e c i s i o n regarding f u e l r e c y c l e 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 z e o f the r e g i o n a l f u e l c y c l e center, t h e p r i c e o f uranium, and t h e economic c o n d i t i o n s under which t h e r e c y c l e storage f a c i l i t i e s would be financed. (37yp'51) To analyze f u t u r e costs o f waste management i s beyond t h e scope o f t h i s p r o j e c t , b u t p r e l i m i n a r y estimates o f storage and d i s p o s a l costs i n d i a t e t h a t they should add l e s s 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 commercial. These expenditures were accounted f o r under t h e i n c e n t i v e , Research Recent pub1 i c pressures have r e s u l t e d i n an Over 70% i s and Development A c t i v i t i e s . m i l l i o n i n 1978.

increase i n t h e R&D waste managemet budget from $81 m i l l i o n i n 1976 t o $180

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.

f o r research on commercial waste management. accounted f o r i n Table 19. CONCLUSIONS

These R&D funds have been

The Federal Government believed t h a t a t t a i n i n g economically c o m p e t i t i v e nuclear power was a goal o f n a t i o n a l importance.
It was thought t h a t t h e

u n c e r t a i n f u t u r e o f our f o s s i l f u e l reserves and t h e pressure toward h i g h e r c o s t power due t o increased f u e l costs made t h e development o f a new source o f energy an e s s e n t i a l goal. The u n c e r t a i n t y o f r e t u r n on investment and t h e However, i t was a l s o f i r m l y b e l i e v e d t h a t r i s k i n v o l v e d necessitated gover~ment involvement i f nuclear power was t o become commercially v i a b l e . (38) i n s t i t u t i o n s i n the U.S.
i t y systems.

as nuclear power became c o m p e t i t i v e i t should be i n t e g r a t e d i n t o e s t a b l i s h e d and t h a t i t should be produced by t h e e x i s t i n g u t i l -

Although development of an economically c o m p e t i t i v e energy source was t h e b a s i c goal, t h e h i s t o r y o f nuclear energy p o l i c y cannot e a s i l y be divorced from matters 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 p o l i c y . The entanglement o f Government. 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.

From the beginning the development o f commercial nuclear power d r i v e d from manpower, f a c i l i t i e s , technology and c o n t r a c t i n g p o l i c i e s s t a r t e d d u r i n g World War 11. secrecy. power. 9 Through J u l y 1978, nuclear power had c u m u l a t i v e l y produced 1121 x 10 kwh or 3.83 x 10 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 P o l i c i e s concerning i n t e r n a t i o n a l t r a d e and the n o n p r o l i f e r a t i o n o f n a t i o n a l defense purposes was c o n t r o l l e d by t h e government under c o n d i t i o n s o f weapons have p l a y e d important r o l e s i n t h e development o f commercial nuclear

15

Btu,.

Nuclear power accounted f o r 13.0% o f the t o t a l Over t h e past 30 years, we estimate t h a t The t o t a l

u t i l i t y g e n e r a t i n g c a p a c i t y i n 1978. ment o f commercial nuclear power. TABLE 27.

$21 b i l l i o n have been spent by t h e Federal Government t o a s s i s t the developTable 27 presents these f i g u r e s .

An Estimate o f the Cost o f I n c e n t i v e s t o S t i m u l a t e C i v i l i a n Nuclear Power Production ( i n B i l l ions o f 1978 D o l l a r s )

Taxation Disbursements Requirements Traditional Services Nontraditional Services Market Activity

Research and Development Liability Insurance Uranium Industry Enrichment Plant Regulation Waste Management Total (a)

1.65

(a)

- 1.65

17.2 2.1

T o t a l $20.95 B i l l i o n

(a) Not able t o q u a n t i f y ( b ) Included i n R&D costs

does not take into account several nonquantifiable incentives. Neither legislative 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 ~ c o n o m i c so f E l e c t r i c Power Generation 1975-2000." The Nuclear Power Controversy, The American Assembly, Columbia U n i v e r s i t y , P r e n t i c e - H a l l , Englewood C l i f f s , NJ, p. 62, 1976. "Nuclear Power Costs and Subsidies", General Accounting O f f i c e , EMD-79-52, June 13, 1979. Atomic I n d u s t r i a l Forum, Inc. INFO 117, Washington, DC, A p r i l 1978. ERDA A u t h o r i z i n g 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. 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, Seattle, W , p. 19, 1976. A W. H. Zinn and F. K. Pittman, Nuclear Power, U.S.A. Co., NY, p. 9, 1964. McGraw-Hill Book

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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, Baltimore, MD, p. 100, 1968. Atomic Energy Commission, 1974 F i n a n c i a l Report, pp. 9-11. Congress o f t h e U n i t e d States, Hearings before t h e J o i n t Committee on Atomic Energy. 83rd Congress, 2nd Session, S 3323 and H.R. 8862, p. 574, 1954. Considerations f o r Commercializing t h e L i q u i d Metal Fast Breeder Reactor. U.S. General Accounting O f f i c e , EMD-77-5, p. 1, November 29, 1976. H. Green, "Nuclear Power: Review, Vol 71, p. 483. Risk, L i a b i l i t y , and Idemnity." Michigan Law

10.

1. 1
12.

Testimony o f W i l l i a m Gale, Hearings Before t h e 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. 8 4 t h Congress, 2nd Session, Washington, D.C.: U.S. Government P r i n t i n g O f f i c e , p. 240, 1956. Testimony o f Charles H. Weaver, 1956 Indemnity Hearings.

13.

15.

P u b l i c Law 89-210,

S t a t . 855, 1965.

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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." Corporation, p. 2, October 15, 1976. Nuclear Exchange

19 "New Master Policy for Fuel Supply." Nuclear Industry - (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 tt o the JCAE Conqress of t h e United S t a t e s , p o s s i b l e Transfer of the A E C ' s Gaseous iffu us ionP l a n t s t o P r i v a t e Ownership, by t h e Comptroller General of t h e U.S., May 20, 1969. 28. "Evaluation of the A d m i n i s t r a t i o n ' s Proposal f o r Government Assistance t o P r i v a t e Uranium Enrichment Groups.'' U.S. General Accounting O f f i c e (RED-76-36), p. 32, October 31, 1975.

29. 30.

ERDA Authorizing L e g i s l a t i o n FY-1977, Hearings before JCAE, P a r t I : Volume I , pp. 127, 129, January 21, 1976.
"Comnents on Proposed L e g i s l a t i o n t o Change Basis f o r Government Charge f o r Uranium Enrichment Services." U.S. General Accounting O f f i c e , RED-76-30, September 22, 1975. "Federal Government Incentives t o Coal and Nuclear Energy", Congressional Research S e r v i c e , Committee P r i n t 96-IFC20, G.P.O., May 1979.
AEC Gaseous Diffusion P l a n t Operations, AEC, 0R0-684, p. 9, January 1972.

31. 32. 33. 34. 35. 36. 37. 38. 39.

AEC Authorizing Legislation FY-1973, Hearings before t h e JCAE, P a r t I , p. 743, 1973. "How Can W Get t h e Nuclear Job Done?" e Nuclear Power Controversy.

U.S. Atomic Energy Commission, Annual Report t o Conqress, p. 75, 1971. "Development of Interagency Relationships in t h e Regulation of Nuclear M a t e r i a l s and F a c i l i t i e s . " U.S. GAO, RED-76-72, p. 3 , March 10, 1976. Regional Nuclear Fuel Cycle Centers, Vol I : Summary 1977 Report of t h e IAEA Study P r o j e c t , IAEA, Vienna, p. 23, 1977. J . L. Morrison, "Federal Support of Domestic Atomic Power Development The Policy I s s u e s . " 12 Vanderbuilt Law Review, p. 195, 1958. "DOE Announces New Spent Nuclear Fuel P o l i c y , " 1977. RLO-77-33, October 18,

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 Many of the first major proand 47% of the net hydroelectric generation. jects funded by the government were justified to improve navigational facilities, 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 justification 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 projects 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 t h e Secretary of the I n t e r i o r t o locate, construct, operate, and maintain works f o r the storage, diversion, and development of waters f o r the reclamation of arid 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, provide some or a l l of the following: municipal and industrial water supply, hydroelectric power generation and transmission, i r r i g a t i o n water service, water quality improvement, f i s h and w i l d l i f e enhancement, outdoor recreation, flood control, navigation, r i v e r regulation and control, and related uses. All funds are appropriated by Congress. Through contractual agreements w i t h proj e c t beneficiaries, the Bureau arranges f o r 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 a c 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 T A on the Tennessee River and i t s larger t r i V

butaries provides flood regulation on the Tennessee and contributes t o regulation of the lower Ohio and Mississippi Rivers. The system maintains a continuous 9-ft d r a f t navigation channel f o 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 i v e r s t o produce e l e c 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 i n a n c i a l l y self-supporting but other programs are financed primarily by Congressional appropriations. T A operates the river control system, and investigates the need f o r and V f e a s i b i l i t y of additional r i v e r 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 e f f e c t i v e 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. M R EI G A K TN The Federal Government markets e l e c t r i c power through the Bureau of Reclamation, the Tennessee Valley Authority, and f i v e power administrations. The Bureau of Reclamation and TVA have the authority t o construct and operate t h e i r own power f a c i l i t i e s . The f i v e power administrations are the Bonneville, Western, Southwestern, Southeastern, and Alaska. These administrations s e l l elect r i c i t y produced a t dams t h a 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 t h e i r regions, are called Federal Power Programs or Federal Power Systems. The Flood Control Act of 1944 requires the Department of I n t e r i o r t o s e l l power generated a t reservoir projects operated by the Army Corps of Engineers. The r a t e s must pay f o r the cost of producing and transmitting the energy plus amortization of c a p i t a l investment over a reasonable period. The Federal Energy Regulatory Commission must approve the r a t e . atives are preferred customers. Public bodies and cooper-

The Bureau of Reclamation constructs and operates many large projects. However, some of these projects have been transferred t o the power administrations. When a project i s transferred, the Bureau of Reclamation continues t o operate i t b u t t h e power administration assumes r e p o n s i b i l i t y f o r 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 t c . Some of the costs, such as f o r navigation, flood control, f i s h and w i l d l i f e , and recreation, do not have t o be repaid. The costs associated with commercial power production and i r r i g a t i o n water supply must be repaid with i n t e r e s t . Some of the costs allocated t o i r r i g a t i o n 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 also repay more than 2/3 o f the costs a l l o c a t e d t o the B o n n e v i l l e Power A d m i n i s t r a t i o n (BPA) i r r i g a t i o n system. The costs a l l o c a t e d 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 navigation, i r r i g a t i o n and o t h e r purposes. hydropower. 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 n c e n t i v e o n l y t o The transmission systems b u i l t by t h e Alaska Power A d m i n i s t r a t i o n However, t h e transmission systems b u i l t This problem was (APA), Southwestern Power A d m i n i s t r a t i o n (SWPA) and the Bureau o f Reclamation are s o l e l y i n c e n t i v e s t o hydropower. by the BPA and TVA are used by thermal e l e c t r i c p l a n t s also.

d e a l t w i t h by separating t h e transmission costs from t h e generation c o s t s where p o s s i b l e 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. B o n n e v i l l e Power A d m i n i s t r a t i o n The B o n n e v i l l e Power A d m i n i s t r a t i o n (BPA) was created i n 1937. Through a

r e g i o n a l i n t e r c o n n e c t i n g transmission system, i t markets e l e c t r i c power and energy from f e d e r a l h y d r o e l e c t r i c p r o j e c t s 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. regions. By Act o f Congress approved October 18, 1974, t h e B o n n e v i l l e Power Admini s t r a t i o n now has t h e a u t h o r i t y , i n l i e u o f appropriations, t o use i t s revenues o r t o s e l l revenue bonds t o t h e U.S. and m a i n t a i n i t s transmission system. Data on the f e d e r a l investment i n hydropower generation and transmission f a c i l i t i e s are presented i n Appendix E, Table E-11. ( 2 ) t h e i n t e r e s t accrued on t h e f e d e r a l investment. These f i g u r e s i n c l u d e The f l u c t u a t i o n s i n values a r e Treasury i n order t o construct, operate, Through i n t e r r e g i o n a l connections, i t s e l l s and exchanges surplus power t o o t h e r

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 conditions, and t h e c o s 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 Fede r a l Government's spending on hydropower. Also, t h e c o s t o f a p r o j e c t t h a t i s Cost a l l o c a t i o n s a l l o c a t e d t o power can change once the p r o j e c t i s completed. t h e p r o j e c t nears completion.

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

B the end of FY-1978 the net federal investment i n the Federal Columbia y River Power System was $6.66 b i l l i o n . A a r e s u l t of t h i s investment there are s 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 t o 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 i o n kwh. Southwestern Power Administration The Southwestern Power Administration (SWPA) was created by the Secretary of t h e I n t e r i o r in 1943. I t administers t h e s c a l e of e l e c t r i c power generated a t c e r t a i n projects constructed and operated by the Army Corps of engineers in t h e 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 t h e completed f a c i l i t i e s b u t not the i n t e r e s t or repayment on projects under construction. The t o t a l federal investment i s s l i g h t l y higher than t h e number reported here. By the end of FY-1978 the net federal investment in the Southwestern Fede r a l Power system was $1.31 b i l l i o n . 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 t o t a l generation of t h e Southwestern Federal Power System hydroelectric projects from inception t o September 30, 1978 was 82.27 b i l l i o n kwh. Southeastern Power Administration The Southeastern Power Administration (SEPA) was created by the Secretary of the I n t e r i o r i n 1950 t o carry out functions assigned t o t h e Secretary by t h e Flood Control Act of 1944. I t administers the s a l e of e l e c t r i c power from dams operated by t h e 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. transmission f a c i l i t i e s . The SEPA does not own, construct or maintain any Therefore, Table E-13 in Appendix E presents data on

hydroelectric generation only. ( 4 )

By the end o f FY-1978 t h e net f e d e r a l investment i n the Southeastern Fede r a l Power Program (SEFPP) was $1.77 b i l l i o n . a c a p a c i t y o f 2,712,375 W 300,000 k under c o n s t r u c t i o n . The SEFPP has 21 p r o j e c t s w i t h k i n operation and one p r o j e c t w i t h a c a p a c i t y o f W The t o t a l generation o f t h e SEFPP H y d r o e l e c t r i c

p r o j e c t s from i n c e p t i o n t o September 30, 1978, was 131.6 b i l l i o n kwh. Alaska Power A d m i n i s t r a t i o n The Alaska Power A d m i n i s t r a t i o n (APA) was created by t h e Secreatry o f t h e I n t e r i o r i n 1967 t o c a r r y o u t f u n c t i o n s assigned t o t h e Secretary r e l a t e d t o water and power p l a n n i n g and power operations 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 a u t h o r i z a t i o n i n t h e Flood Cont r o l Act o f 1962; and t h e power marketing p r o v i s i o n o f the Flood Control Act o f 1944. The A d m i n i s t r a t i o n 1) plans water, power, and r e 1 ated resources development and u t i l i z a t i o n i n cooperation w i t h other state, l o c a l , and f e d e r a l e n t i t i e s ; and 2) provides operation, maintenance, and power marketing f o r f e d e r a l hydroelectric projects. The power operations and marketing functions i n v o l v e t h e Eklutna and Snettisham h y d r o e l e c t r i c p r o j e c t s , i n c l u d i n g r e l a t e d transmission systems servi n g the Anchorage and Juneau areas, r e s p e c t i v e l y . Table E-14. (5)
B the end o f FY-1978 t h e net f e d e r a l investment i n t h e Alaska Federal y

The c o s t data on t h e hydro-

e l e c t r i c generation and transmission f a c i l i t i e s are r e p o r t e d i n Appendix E,

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 . capacity o f 27,000 k under c o n s t r u c t i o n . W

The AFPP has

W two p r o j e c t s w i t h a c a p a c i t y o f 77,200 k i n operation and a p r o j e c t w i t h a The t o t a l generation o f t h e AFPP from i n c e p t i o n t o September 30, 1978, was estimated 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 V a l l e y A u t h o r i t y (TVA) i s t h e wholesale power s u p p l i e r f o r 160 l o c a l municipal and cooperative e l e c t r i c systems s e r v i n g 2.6 m i l l i o n customers i n p a r t s o f seven states.
It supplies power t o several f e d e r a 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 supplied from 29 dams, 12 c o a l - f i r e d power p l a n t s , 1 nuclear power p l a n 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 Valley; and 12 Aluminum Company of America dams whose o p e r a t i o n i s coordinated w i t h t h e TVA system. Chronological data on t h e f e d e r a l (TVA) investment i n hydropower generat i o n and transmission f a c i l i t i e s are r e p o r t e d i n Appendix E, Table E-15. ( 6 ) These d a t a are r e p o r t e d because t h e y were r e a d i l y a v a i l a b l e , 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 a c c u r a t e l y obtained from t h e f i n a n c i a l statements. assets do n o t i n c l u d e the i n t e r e s t or repayment of the f e d e r a l investment. t h e assets. Therefore, the use o f the assets leads t o a low estimate o f the The f l u c t u a t i o n s i n t h e The In

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 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 .

d a t a are due t o changes i n t h e annual r a i n f a l l , t h e p o l i c i e s o f t h e government, t h e economic s i t u a t i o n , and t h e accounting procedure used t o a u d i t t h e TVA. By t h e end o f FY-1978 t h e n e t f e d e r a l investment i n the Tennessee V a l l e y 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 . w i t h a c a p a c i t y o f 3,269,910 c a p a c i t y o f 1,530,000 The TVA has 30 p r o j e c t s k i n operation and a pumped storage u n i t w i t h a W The t o t a l generation o f t h e TVA

kW under c o n s t r u c t i o n .

h y d r o e l e c t r i c p r o j e c t s from i n c e p t i o n t o September 30, 1978 was 487.0 b i l l i o n kwh. Western Area Power A d m i n i s t r a t i o n The Western Area Power A d m i n i s t r a t i o n (WAPA) was e s t a b l i s h e d on December 21, 1977, w i t h headquarters i n Denver, t o serve t h e e l e c t r i c power needs of an estimated 5 m i l l i o n r e t a i l customers i n 15 western states. The new power a d m i n i s t r a t i o n i s r e s p o n s i b l e f o r t h e f e d e r a l power marketi n g f u n c t i o n s t r a n s f e r r e d from t h e Department o f t h e I n t e r i o r ' s Bureau o f Reclamation t o D E On October 1 1977, under t h e p r o v i s i o n s o f the Department O , o f Energy Organization Act ( 9 1 Stat. 578; 42 U.S.C. 7152). These marketing I n addition, the f u n c t i o n s i n v o l v e t h e s a l e 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 fede r a l h y d r o e l e c t r i c generation f a c i l i t i e s i n t h e 15 s t a t e s . l i n e s and attendent 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. r e s p o n s i b i l i t y f o r c o n s t r u c t i o n , operation, and maintenance o f transmission The 14 s t a t e s t o be served by WAPA are C a l i f o r n i a , Arizona, Nevada, Montana, North Dakota, South Dakota, Iowa, Colorado, Wyoming, Minnesota, Texas, New Mexico, Utah, and Nebraska.

It i s a n t i c i p a t e d t h a t t h e W P w i l l not be completely o p e r a t i o n a l u n t i l AA
1981. C u r r e n t l y t h e WAPA i s c o o r d i n a t i n g i t s assigned a c t i v i t i e s w i t h t h e U n t i l t h e W P i s f u l l y operational, t h e data on t h e AA Bureau o f Reclamation.

hydropower f a c i l i t i e s i n the WAPA r e g i o n w i l l be reported i n t h e Bureau o f Reclamation s e c t i o n 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 Missouri, t h e Upper Missouri, t h e Lower The Colorado, the Upper Colorado, the Central V a l l e y and the R i o Grande.

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 t h e year t h e y occur except investment and replacement costs, and c u r r e n t y e a r ' s i n t e r e s t t h a t cannot be met from c u r r e n t revenues.

2.

Each increment o f investment suballocated 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 t h e r e l a t e d f a c i l i t y i s placed i n service. Replacements must be r e p a i d w i t h i n t h e estimated s e r v i c e l i f e o f t h e equipment.

3.

I r r i g a t i o n and waterfowl conservation a i d must also be r e p a i d w i t h i n 50 years a f t e r t h e major p r o j e c t a d d i t i o n . Chronological data on the f e d e r a l investment i n hydropower generation and

transmission f a c i l i t i e s i s r e p o r t e d i n Appendix E, Table E-16. (7-11) ment expenses.

These data i n c l u d e repayment o f t h e i n t e r e s t , o p e r a t i o n and maintenance and r e p l a c e Because t h e generation and transmission costs were not separ-

able, they are reported as a t o t a l f i g u r e . By the end o f FY-1977 t h e net f e d e r a l investment i n h y d r o e l e c 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 . t o t a l i n s t a l l e d c a p a c i t y o f these p r o j e c t s i s 6,882,500 b i l l i o n kwh. operating. kW. The The t o t a l gross

generation o f these p r o j e c t s from i n c e p t i o n t o September 30, 1977 was 437.00 This gross generation f i g u r e includes o n l y p l a n t s t h a t are s t i l l 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 n o t a v a i l Consequently, 1977 data was r e a p p l i e d t o

a b l e a t the t i m e o f t h i s p r i n t i n g . 1978 f o r e s t i m a t i o n purposes.

The Federal Power Marketing Agencies p r o v i d e a market a c t i v i t y i n c e n t i v e t o hydro-energy b y marketing t h e power produced a t f e d e r a l dams. TVA a l s o t r a n s m i t and wheel power produced by p r i v a t e u t i l i t i e s . i n c e n t i v e t o b o t h hydro-energy and e l e c t r i c energy. compared t o the dam and power1i n e c o n s t r u c t i o n costs. REGULATION O HYDROELECTRIC FACILITIES F The Federal Energy Regulatory Commission (FERC) r e g u l a t e s t h e i n t e r s t a t e aspects o f t h e e l e c t r i c power and n a t u r a l gas i n d u s t r i e s .
I t i s an independent

The BPA and The transmis-

sion 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 The costs associated w i t h t h e a d m i n i s t r a t i v e f u n c t i o n s o f power marketing and wheeling are very small

agency o p e r a t i n g under the Federal Power Act o r i g i n a l l y enacted as t h e Federal Water Power Act of 1920 and subsequently amended b y T i t l e I 1 o f t h e P u b l i c
U t i l i t y Act o f 1935 and t h e Natural Gas Act o f 1938.

Additional r e s p o n s i b i l i -

t i e s have been assigned b y subsequent l e g i s l a t i o n and executive order. Concerning h y d r o e l e c t r i c i t y , the Federal Energy Regulatory Commission issues permits and l i c e n s e s f o r nonfederal h y d r o e l e c t r i c power p r o j e c t s ; regul a t e s the r a t e s and other aspets o f i n t e r s t a t e wholesale t r a n s a c t i o n s i n elect r i c power; issues c e r t i f i c a t e s ; conducts c o n t i n u i n g i n v e s t i g a t i o n s o f t h e 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 n a t i o n a l programs and o b j e c t i v e s , i n c l u d i n g conservation and e f f i c i e n t u t i l i z a t i o n o f resources; r e q u i r e s maximum p r o t e c t i o n o f the environment i n the c o n s t r u c t i o n o f new h y d r o e l e c t r i c p r o j e c t s and transmission l i n e s c o n s i s t e n t w i t h t h e 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 o c a t e s resources consist e n t w i t h t h e p u b l i c i n t e r e s t under the' Federal Power Act. electric utilities. The FERC publishes r i v e r basin a p p r a i s a l s f o r use i n l i c e n s i n g p r o j e c t s .
It also reviews plans f o r dams proposed by other f e d e r a l agencies and makes

I n addition, the

FERC prescribes and enforces a uniform system o f accounts f o r r e g u l a t e d

recommendations concerning f a c i l i t i e s f o r t h e 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 cerI n addition,
i t p a r t i c i p a t e s w i t h other

t a i n federal hydroelectric projects.

agencies i n c o o r d i n a t i n g 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 since 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 defined as e l e c t r i c a l energy produced i n k i l o w a t t hours (kwh). F i v e d e f i n i t i o n s o f costs o f i n c e n t i v e were considered and Two d e f i n i t i o n s were selected: represented i n Appendix D.

1.

The p o r t i o n o f t h e n e t investment i n c o n s t r u c t i o n and o p e r a t i o n o f t h e dam a l l o c a t e d t o power development and t h e exemption o f power revenues from f e d e r a l income taxes. This d e f i n i t i o n includes r e t u r n on t h e investment from power revenues and covers costs o f c o n s t r u c t i o n , operation, maintenance, management and r e g u l a t i o n .

2.

The low i n t e r e s t r a t e s o f f e d e r a l a p p r o p r i a t i o n s and t h e exemption o f power revenues from f e d e r a l income taxes. dams. For d e f i n i t i o n #1, p l a n t investment, generation and c a p a c i t y data were This d e f i n i t i o n i s based on the d i f f e r e n c e between f e d e r a l and p r i v a t e i n d u s t r y costs f o r t h e

used t o estimate t h e c h r o n o l o g i c a l l i s t i n g o f f e d e r a l i n c e n t i v e s shown i n Table 28. A l l amounts are i n 1978 d o l l a r s . This t a b l e was obtained u s i n g t h e 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 cumulative n e t f e d e r a l investment i n h y d r o e l e c t r i c generation f a c i l i t i e s b y t h e end o f FY-1978 was $14.52 b i l l i o n ; t h e t o t a l i n s t a l l e d capac i t y o f these f a c i l i t i e s i s 31,300,456 was 2,500.94 b i l l i o n kwh. kW. The t o t a l cumulative generation

The t o t a l cumulative n e t f e d e r a l investment i n e l e c t r i c i t y transmission f a c i l i t i e s has been $6.22 b i l l i o n . These transmission f a c i l i t i e s are used by
I t i s keyond t h e scope

other e l e c t r i c i t y generating sources as w e l l as hydro.

o f t h i s research t o p r o p o r t i o n t h i s expenditure over t h e a p p r o p r i a t e 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 estimate t h e income t a x exemption i n c e n t i v e i s as follows:
160

R E F E R E N C E S - CHAPTER V
1 .
2. 3. 4.

Federal Power Commission, Hydroelectric P l a n t Construction Cost and Annual Production Expenses, 1 6 t h Annual Supplement, 1972.
U.S.

Department of t h e Interior, Bonneville Power Administration, Annual Reports, 1945-1947, 1951-1952, 1955-1959, and 1961-1976.

U.S. Department o f t h e Interior, Southwestern Power Administration, Annual Reports, 1973-1975.

U.S. Department o f the Interior, Southeastern Power Administration, Annual Reports, 1970-1972, 1974.
U.S. Department of the Interior, Alaska Power Administration, Annual Reports, 1969-1970, 1973, 1974-1976.

5.
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 t h e Tennessee Valley Authority for the Fiscal Years 1947, 1948 ... 1976. Department of t h e Interior, Bureau o f Reclamation, Mid-Pacific Region, Central Valley Project, California, Tentative Power Rate Adjustment Study, August 1975.
U.S.
U.S. Department o f the Interior, Bureau o f Reclamation, Southwest Region,

7.

8.

Rio Grande Project, New Mexico, Tentative Power Rate Adjustment, September 1975.

9.

Department of the Interior, Bureau o f Reclamation, Lower Colorado Region, Parker-Davis Project Power Repayment Study Brochure for Fiscal Year 1974, J u l y 1975.
U.S.

10.

Region, Colorado River Project and Participating Projects Tentative Power Rate Adjustment, September 1975.
1. 1

U.S. Department of the Interior, Bureau o f Reclamation, Upper Colorado

U.S. Department of t h e Interior, 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 t a t e s , O f f i c e o f Management and Budget, The Budget o f the United States Government, 1967 through 1972. Historical S t a t i s t i c s o f t h e Electric U t i l i t y Industry Through 1970. Edison Electric I n s t i t u t e , New York, NY 10016, Tables 54 and 57.

13.

14. 15.

Statistical Year Book of the Electric Utility Industry for 1975. Edison Electric Institute, New York, NY 10016, Tables 545 and 575, October 1976. Statistical Year Book of the Electric Utility Industry for 1976. Electric Institute, New York, NY 10016. Edison

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 participated 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 l e a n i n g 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 l u s experiments i n longwall mining, the use o f diamond d r i l l s , and t h e development 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 laborat o r y examinations and analyses o f t h e chemical c o n s t i t u e n t s o f coal on a mine-by-mine b a s i s and has r e g u l a r l y published r e p o r t s on them. I n a d d i t i o n , by 1985, t h e Bureau o f Mines w i l l have completed major demons t r a t i o n s i n t h e eastern, c e n t r a l and southwestern sections o f t h e c o u n t r y 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 t e g r a t e d e x t r a c t i o n - r e c l a m a t i o n systems. Also, t h e Bureau c u r r e n t l y i s developing improved c o a l treatment technologies t o upgrade t h e q u a l i t y o f coal by reducing t h e amount o f ash, s u l f u r , and o t h e r coal constituents. (2) Utilization The o n l y major growth market f o r c o a l i s t h e e l e c t r i c u t i l i t y i n d u s t r y . I n 1978, 69% o f t o t a l coal p r o d u c t i o n was used f o r power generation. i n g coal exports, consumption by u t i l i t i e s represents over 74% o f U.S. consumption. Excludcoal

On the basis o f coal equivalents, c o a l supplies approxiI n other areas o f c u r r e n t coal u t i l i z a t i o n , approxi-

m a t e l y 60% o f t h e f o s s i l f u e l s consumed f o r power generation as compared t o about 22% f o r o i l . m a t e l y 25% o f p r o d u c t i o n i s used f o r making coke a t home and abroad; t h e r e i s now considerable c o m p e t i t i o n 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 t h e f a c t o r s l i m i t i n g the use o f coal are environmental r e g u l a t i o n s , 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 r e s c r i b e l i m i t s on t h e s u l f u r content o f usable c o a l . industry. This i s a serious problem f o r the e l e c t r i c u t i l i t y T h i s problem i s increased by t h e h i g h cost, and i n some cases ques-

t i o n a b l e e f f e c t i v e n e s s , o f stack gas scrubbers and o t h e r d e s u l f u r i z a t i o n processes f o r reducing c o a l combustion p o l l u t a n t s . Extensive research i s under way t o p r o v i d e 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, s o l v e n t r e f i n i n g , and o t h e 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, c o n s i d e r a t i o n 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 values (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 deterrent 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 processes 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 developments 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 attendant 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 nontraditional 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 federally 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 consideration 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 permit the use of coal t h a t otherwise may be considered environmentally unacceptable, these factors will effectively "reduce" the coal resource base. Coal in i t s solid s t a t e must continue t o play a v i t a l r o l e in national energy supply, notwithstanding the develoment of large-scale alternate 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 heretofore have not been considered of consequence. Whereas coal "resources" refer t o the t o t a l i t y of existing coal, practic a l i t i e s of commercial a v a i l a b i l i t y require us t o consider as readily-available "reserves" only those coals that are mineable under current economic and technological conditions. This narrows the coal reserve base t o approximately 438 b i l l i o n tons. ( I 2 ) These coals are categorized by rank (bituminous, subbituminous, l i g n i t e , anthracite) and by t h e i r amenability t o "underground' mining or "surface" mining (68% and 32% of t o t a 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 conditions, 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 t h a t new technology will increase the percent recovery in underground mining. Among other important delineations for coal are geographic and q u a l i t y differences. Most coal reserves are west of the Mississippi River; many are on federal and Indian lands where leases are required for operation, and gene r a l l y they are f a r from concentrations of industry and commerce. Although about 65% of t o t a l coal resources are estimated t o contain 1.0% or less sulfur by weight and almost half contain 0.7% or less sulfur, most coals of these q u a l i t i e s 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 costly t o produce, as most Western production i s surface mined; b u t , f o r eastern markets, they have high transportation cost. Water availab i l i t y can be a constraining factor i n both the production and use of coal, particularly 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 utilities, 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 appreciably 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 concentrated 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 development, 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 published a detailed study, "Resources and Land Information Demonstration Program," pertaining to coal-bearing areas in the Intermountain West (including the Power River Basin), related water resources, and other valuable information. 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 since 1950, c o a l - r e l a t e d work amounted t o $130 m i l l i o n (1978 do1 1ars)

Tax Rules A p p l i c a b l e t o E x p l o r a t i o n I n 1976 t h e h o l d i n g p e r i o d o f 6 months was extended t o 9 months as a r e s u l t o f Section 1402 b ( l ) ( I ) of t h e Tax Reform Act o f 1976, which amended Section 631 o f the Code. I n 1968, t h e U.S. Treasury estimated t h a t f o r t h a t f i s c a l year t h e revenue c o s t o f t h i s i n c e n t i v e was $5 m i l l i o n . ( 5 ) Federal expenditures f o r e x p l o r a t i o n are defined i n 25 USC 617 ( a ) as those" ...p a i d o r i n c u r r e d d u r i n g t h e t a x a b l e year f o r t h e purpose o f ascert a i n i n g the existence, l o c a t i o n , extent, o r q u a l i t y o f any deposit o f o r e o r o t h e r mineral costs. P r i o r t o 1951, e x p l o r a t i o n expenditures were n o t covered i n t h e Revenue Act even though i t was g e n e r a 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 t h e a c t a l l o w i n g a o r an a l t e r n a t i v e method b y s p e c i f i c deduction o f such c o s t s up t o $75,000,

..., and p a i d o r

i n c u r r e d 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 n o t apply t o o i l and gas e x p l o r a t i o n

which the taxpayer c o u l d e l e c t t o defer amounts up t o t h a t sum not deducted i n t h e c u r r e n t y e a r and deduct t h e amount r a t a b l y as t h e m i n e r a l s 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 t h e 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 i m u l a t e increased domestic mining 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 e s s e n t i a l minerals, removed t h e monetary l i m i t on amounts t h a t c o u l d be deducted c u r r e n t l y . However, t h e law introduced t h e p r i n c i p l e o f r e c a p t u r e
If, how-

t o be applied when t h e mine was s o l d o r reached t h e producing stage.

ever, t h e taxpayer opted t o be s u b j e c t t o a $400,000 l i m i t a t i o n , he c o u l d a v o i d (6,p.1572) t h e e f f e c t s o f recapture. I n 1969, t h e e x p l o r a t i o n expenditure s t a t u t e was amended t o i t s present form. For expenditures i n c u r r e d a f t e r December 31, 1969, t h e law has p r o v i d e d The no p r o v i s i o n f o r deduction o f costs w i t h o u t one o f two forms o f recapture.

r u l e s f o r r e c a p t u r e were analyzed i n a review o f i n c e n t i v e s 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 a p p l i e s i f t h e

second method discussed below i s n o t e l e c t e d ) , i s n o t allowed any deduction f o r d e p l e t i o n w i t h respect t o a p r o p e r t y u n t i l t h e o t h e r wise a l l o w a b l e d e p l e t i o n f o r such p r o p e r t y equals "adjusted e x p l o r a t i o n expenditures" w i t h respect t o such property. The term "adjusted e x p l o r a t i o n expenditures" means t h e excess o f 1) t h e t o t a l explorat i o n costs deducted by the taxpayer i n a l l t a x a b l e years which would have otherwise been c a p i t a l i z e d as b a s i s o f t h e property, over 2 ) t h e amount b y which a l l o w a b l e d e p l e t i o n f o r t h a t p r o p e r t y has been reduced, f o r a l l t a x a b l e years, because e x p l o r a t i o n c o s t s were deducted, r a t h e r than c a p i t a l i z e d .

A taxpayer may e l e c t t h e second

method o f r e c a p t u r e which r e q u i r e s i n c l u s i o n i n gross income o f an amount equal t o the "adjusted e x p l o r a t i o n 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 d u r i n g t h e t a x a b l e 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 The amount allowed h i s f u l l d e p l e t i o n deduction f o r t h e year.

included i n gross income i s added t o the taxpayer's d e p l e t a b l e basis. The f i r s t method, o f course, may a l l o w t h e taxpayer t o spread t h e recapture over several years, whereas the second method r e q u i r e s i n c l u s i o n o f t h e e n t i r e amount i n one t a x a b l e year. Generally, i f a mining p r o p e r t y i s disposed of, t h e l e s s e r o f t h e adjusted e x p l o r a t i o n expenditures w i t h r e s p e c t t o t h e p r o p e r t y o r the excess o f t h e amount r e a l i z e d over the adjusted b a s i s o f t h e property, i s t r e a t e d as o r d i n a r y income. I n t h e case o f a d i s p o s 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 h e f a i r market value o f t h e p r o p e r t y i s used i n place o f t h e amount (6,p.1572) realized. The n e t e f f e c t o f the 1969 changes p r o h i b i t s t h e taxpayer from b e n e f i t i n g f r o m both t h e c u r r e n t deduction o f e x p l o r a t i o n c o s t s and from d e p l e t i o n o f t h e p r o p e r t y when i t reaches t h e p r o d u c t i o n state, o r from c a p i t a l gains 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 nonmetallic 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 formation, 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 constraint to the achievement of production goals for the 1980s. Although 51.5% of the demonstrated coal reserve base is west of the Mississippi 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.

P u b l i c Law 94-377 (S-391) of August 4, 1976, amended t h e Federal Coal Leasing Amendments Act o f 1975. Among t h e changes which encouraged l e a s i n g and Section 2, "No l e s s than 50 per cendevelopment are t h e f o l l o w i n g p r o v i s i o n s :

tum o f t h e t o t a l acreage o f f e r e d f o r lease b y t h e Secretary i n any one year s h a l l be lease under a system o f d e f e r r e d bonus payments;" Section 5 ( d ) ( I ) , "The Secretary, upon determining t h e maximum economic recovery o f t h e coal deposit or deposits served thereby may approve the c o n s o l i d a t i o n o f coal leases i n t o a l o g i c a l mining unit.

A l o g i c a l m i n i n g u n i t i s an area o f l a n d i n which

t h e c o a 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 conservation o f coal reserves and t h e i r resources;" Section 8A (a), "The Secretary i s authorized and d i r e c t e d t o conduct a comprehensive e x p l o r a t o r y program designed t o o b t a i n s u f f i c i e n t data and i n f o r m a t i o n t o evaluate the extent, l o c a t i o n , and p o t e n t i a l f o r developing t h e known recoverable c o a l resources w i t h i n t h e coal lands s u b j e c 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 h e resources i n f o r m a t i o n necessary f o r determining whether commercial q u a n t i t i e s o f c o a l are present and t h e geog r a p h i c a l e x t e n t of the c o a l fields--;" Section 8A (b), "The Secretary s h a l l Government u n t i l m a i n t a i n 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 d a t a o r i n f o r m a t i o n purchased from commercial sources w h i l e n o t under c o n t r a c t w i t h the U.S. a f t e r t h e areas i n v o l v e d have been leased." These amendment statements o f f e r d i r e c t i n c e n t i v e s t o l a r g e p r i v a t e coal developers t o extend t h e i r operations on new o r contiguous c o a l reserves. Section 26 USC 161 (a) d e f i n e s "development expenditure" deductions as those"... p a i d o r i n c u r r e d d u r i n g t h e t a x a b l e year f o r t h e development o f a mine or o t h e r n a t u r a l d e p o s i t ( o t h e r than an o i l o r gas w e l l ) i f p a i d o r i n c u r r e d a f t e r t h e existence o f ores o r m i n e r a l s i n commercially 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 t y p e o f expenditure i n excess o f n e t r e c e i p t s from ores o r minerals had t o be c a p i t a l i z e d w h i l e t h e mine was i n t h e development stage and t o be recovered through d e p l e t i o n when t h e mine became productive. Since t h i s t a x treatment i n h i b i t e d m i n i n g i n d u s t r y expansion, and s i n c e t h e Senate Finance Committee was concerned about t h e shortage o f many e s s e n t i a l metals and m i n e r a l s necessary t o t h e defense e f f o r t , t h e Congress provided f o r

development costs t o be t r e a t e d e i t h e r as a c u r r e n 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 m i n e r a l s were (6,p.1573) sold. I n 1954, t h e c u r r e n t Section 616 o f the Code was enacted. t h e o p t i o n t o deduct c u r r e n t l y o r defer such expenditures.
It continued

Although t h e

expenditures are n o t defined i n t h e s t a t u t e , t h e I n t e r n a l Revenue Service has r u l e d t h a t i t includes 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 t h e mineral accessible by the d r i v i n g of shafts, tunnels, and s i m i l a r proc(6,p.1579) esses or a c t i v i t i e s . Since development expenditures are n o t s u b j e c t t o recapture as are explor a t i o n expenditures under Section 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 t h e development stage. ( 6 ) The general r u l e governing whether a mine i s i n t h e development o r e x p l o r a t i o n stage i s t h a t t h e t a x p a y e r ' s a c t i o n 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 r o p e r t y before t h e advancement from e x p l o r a t i o n t o development can be established. This i n t e n t i o n should be manifested a f t e r t h e existence o f comm e r c i a l l y marketable q u a n t i t i e s o f ores o r other m i n e r a l s has been established. (9) I n 1960, development expenses t o t a l i n g about $13 m i 11i o n were deducted a g a i n s t $2 b i l l i o n o f gross income from mineral p r o p e r t i e s . development expense t o gross income was 0.3%. ( 3 ) Section 26 USC 631 ( c ) provides a gain/loss i n c e n t i v e t o i r o n and coal royalty recipients. Before 1951, t h e r e c i p i e n t s o f bonuses, advances, and The Senate r o y a l t i e s i n coal l e a s i n g t r a n s a c t i o n s were r e q u i r e d t o t r e a t t h e amounts r e c e i v e d as o r d i n a r y income, s u b j e c t t o percentage depletion. Finance Committee i n t h a t year decided t h a t t h e 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 t a x r e l i e f and Section 117 ( c ) ( 2 ) o f t h e I n t e r n a l Revenue Code o f 1939 was enacted, t h e predecessor t o Section 631 ( c ) . (6,~.1570) The e f f e c t o f t h i s i n c e n t i v e p r o v i s i o n has been explained as f o l l o w s ..(6,~.1570) This p r o v i s i o n s t a t e s 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 t h e present and f u t u r e proceeds from assignment o f t h e i n t e r e s t , t o t h e extend such proceeds exceed h i s adjusted d e p l e t i o n I n t h e most import a n t o f the i n d u s t r i e s covered by t h e deduction, bituminous coal, t h e r a t i o o f

basis (plus any deductions disallowed f o r the taxable year by virtue of Section 272 of t h e Internal Revenue Code of 1954) as gain from disposition of an asset used in a trade or business. Therefore, provided the owner has held h i s i n t e r e s t in the coal f o r more than 6 months when the coal i s mined, the r e s u l t i n g gain i s treated as Section 1231 gain. Bonuses received i n connection w i t h the grant of the lease q u a l i f y under Section 631 ( c ) t o the extent a t t r i b u t a b l e t o coal held more than 6 months. An owner qualifying under Section 631 ( c ) i s not e n t i t l e d t o depletion on the r e c e i p t s under the cont r a c t . Section 631 ( c ) does not apply t o income realized by t h e 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 c e r t a i n r e l a t e d partners. Thus, under present law, the r e c i p i e n t s of iron ore and coal r o y a l t i e s are afforded more favorable t a x treatment than most other mineral royalty recipients.

The holding period of 6 months was extended t o 9 months in 1977 and one year t h e r e a f t e r as a r e s u 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 t h a t f o r t h a t f i s c a l year the revenue cost of t h i s incentive was $5 million. ( 5 ) Leasing of coal on federal lands, which are almost e n t i r e l y west of the Mississippi, i s handled by t h e Bureau of Land Management of t h e Department of the I n t e r i o r . In Chapter VII, i t i s estimated t h a t BLM has spent $672.4 million (1978 do1 l a r s ) on f o s s i 1 fuel resource management and leasing a c t i v i t i e s . From 1950 t o 1978 approximately 3% of the value of f o s s 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 d o l l a r s ) can be a t t r i b u t e d t o the coal leasing costs incurred by BLM.

Development o f Coal i n t h e East Coal m i n i n g 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 production, i s almost w h o l l y on privately-owned lands. Most mines have been developed t o supply the open market, although some are owned and operated b y 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 t h e East i n 1975, 37% (2,245) were underground mines, producing 52% o f production. t o t a l ) produced 48% o f Eastern output. ( 3 ) Southern Appalachia (Alabama, V i r g i n i a , and p o r t i o n s o f West V i r g i n i a and Kentucky) has t h e l a r g e s t l o w - s u l f u r coal reserves i n t h e East, although Penns y l v a n i a and I l l i n o i s also have sizeable reserves i n t h e lower ranges o f s u l f u r content. The remaining coals . i n both northern and southern Appalachia c o n t a i n medium-to-high s u l f u r contents, which i s the primary reason f o r i n t e n 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 production i n t h e East i s from l a r g e mines. I n 1975, The 3,750 surface mines (63% o f t h e

f o r t h e country as a whole, over 55% of production came from o n l y 4.6% (284) o f the mines; 71% o f production came from l e s s than 10% o f t h e mines. ( 3 ) As d i s t i n g u i s h e d from the past, when many coal mines were developed w i t h minimal thought t o c o m p e t i t i v e 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 n o t developed w i t h o u t 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 production. E x p l o r a t i o n i n c e n t i v e s c o n s i s t o f t a x a t i o n and t r a d i t i o n a l services. s p e c i a 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. Geological Survey i n supplying i n f o r m a t i o n which, f o r the p e r i o d 1950-1978 amounted t o $130 m i l l i o n . 1950-1978 $20.2 m i l l i o n ) . A market a c t i v i t y s e r v i c e was provided b y t h e Bureau The f i g u r e s were c a l c u l a t e d from budget f i g u r e s f o r The t o t a l f o r o f Land Management i n awarding and Supervising coal m i n i n g leases ( f o r agencies and t h e share o f t h e i r a c t i v i t y t h a t i s coal-related. SpeThe

c i a l t a x r u l e s are designed t o encourage small coal mine operators b y g i v i n g p r i n c i p a l type o f i n c e n t i v e i s t h e n o n t r a d i t i o n a l s e r v i c e provided b y t h e U.S.

t h e e x p l o r a t i o n area i s thus $150.2 m i l l i o n f o r t h e p e r i o d 1950-1978.

MINING
There are many complexities i n v o l v e d i n broadening t h e r o l e o f coal resources i n t h e n a t i o n ' s energy s t r u c t u r e . These i n c l u d e various mining and associated a d m i n i s t r a t i v e and o p e r a t i o n a l considerations, i n c l u d i n g past, present, and p o s s i b l e f u t u r e incentives, both d i r e c t and i n d i r e c t , some o f which are discussed below. Depletion A1 lowance Coal i s a "wasting asset," t h a t i s , t h e value o f c a p i t a l invested i n mines O r i g i n a l l y c a l c u l a t e d on t h e

i s decreased as c o a l reserves are extracted.

basis of the value o f reserves and t h e value o f annual production, t h e coal d e p l e t i o n allowance i s c a l c u l a t e d today as a percentage o f t h e value o f production a t the minemouth. The percentage d e p l e t i o n allowance i s lo%, which i s s u b s t a n t i a l l y l e s s than t h e 22% f o r o i l and gas. t h e property. The maximum allowance i s 50% o f t h e income from Because o f the low p r i c e of coal i n 1960, t h e e f f e c t i v e perFor t h i s analysis, 4% was used from 1950 t o 1974 Prior t o I n 1978, t h e r a t e was reduced t o 46%.

centage was r e p o r t e d as 4%. With higher p r i c e s f o r coal i n r e c e n t years, 5-62 now seems reasonable. ( 7 ) and 6% t h e r e a f t e r . t h a t the r a t e was 52%. A 48% t a x r a t e was a p p l i c a b l e from 1954 t o 1977.

The t o t a l revenue e q u i v a l e n t o f the percentage d e p l e t i o n allowance i s shown i n Table 33. lars. The t o t a l from 1950-1978 i s about $4.7 b i l l i o n 1978 d o l The i n c e n t i v e amounted t o $0.011 per During t h i s p e r i o d about 26 b i l l i o n tons o f coal were produced, equiva-

l e n t t o r o u g h l y 624 q u a d r i l l i o n Btu. m i l l i o n Btu. 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

H i s t o r i c a l l y , among t h e most important f e d e r a l i n c e n t i v e s f o r coal production were t h e p r o v i s i o n s o f t h e National Recovery Act and Bituminous Coal Acts o f 1935 and 1937. Although t h e f i r s t two were h e l d u n c o n s t i t u t i o n a l because o f t h e i n c l u s i o n o f l a b o r provisions, under t h e National Bituminous Coal Act o f 1937 minimum p r i c e schedules f o r coal were s u c c e s s f u l l y establ i s h e d and upheld b y t h e courts. Great Depression. These measures were a d i r e c t outgrowth of t h e T h e i r fundamental purpose was t o prevent unrestrained p r i c e

TABLE 33.

Revenue Equivalent of Percent Depletion Allowance f o r Coal

Value o f Production
,, r,

Ml<. il,"

, , ,",,

A>,"

1070 t

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

M i l l i o n Current $ L i g n i t e and ~ituminous Anthracite 16,214 272

Total

Total
16,486

Revenue Equivalent o f Percent Depletion 430

( a ) Assumed $22/ton for l i g n i t e and bituminous and $37.5/ton f o r a n t r a c 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 a n t r a c i t e coal. Sources: Dept. o f I n t e r i o r , Bureau o f Mines, various Dept. o f Energy, Energy Information dget of t h e U.S. Government, years 1976-1980, Special Analyses section, "Tax Expenditures" chapter. Minerals Yearbook, U.S.

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 qualities, 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 submittal 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 breakdown 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 estimate of $56.2 million (1978 dollars) for coal data collection and analysis for

TABLE 34. Current $ (Thousands)

Cost o f Data C o l l e c t i o n and Analysis, A l l Minerals--Bureau o f Mines Fraction Coal Fraction O i l and Gas 1978 $ (Thousands) Coal as(^)

Year -

TOTAL

56,253

18,392

9,129

(a) Assumes 2/3 o f "petroleum" c o s t f o r o i l , 1/3 f o r gas. ( b ) Estimated.

t h e e n t i r e p e r i o d 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). H e a l t h and S a f e t y The Bureau o f Mines and coal producing s t a t e s 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 H e a l t h and S a f e t y Act o f 1969, which m o s t l y 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 c o a l i n d u s t r y , some o f which are burdensome. A d m i n i s t r a t i o n of the a c t i s now t h e responsiAs a r e s u l t o f t h e Mine S a f e t y The c o s t o f a d m i n i s t e r i n g For t h e b i l i t y o f t h e M i n i n g Enforcement and Safety A d m i n i s t r a t i o n (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. H e a l t h A d m i n i s t r a t i o n i n the Department of Labor. mine h e a l t h and s a f e t y programs, 1950-1978, metal and n o n - m e t a l l i c m i n e r a l mines. i n g programs and a d m i n i s t r a t i v e costs. and H e a l t h Amendments Act o f 1977, t h i s a c t i v i t y i s now t h e Mine S a f e t y and i s given i n Table 35.

p e r i o d 1972-1978, d a t a e x i s t f o r the c o s t of i n s p e c t i o n s o f c o a l mines and f o r The r a t i o was used t o a p p o r t i o n t r a i n For t h e e a r l i e r p e r i o d i t was assumed Thus, c o a l mine h e a l t h

t h a t 0.85 o f t h e t o t a l c o s t was c o a l i n d u s t r y - r e l a t e d .

and safety, e x c l u d i n g R&D, i s estimated 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 i n c e n t i v e , n e g a t i v e i n c e n t i v e , o r merely an increased cost o f doing business i s a m a t t e r of opinion; since i t was n o t intended as an i n c e n t i v e f o r c o a l production, i t s impacts on mine p r o d u c t i v i t y and m i n i n g costs are secondary e f f e c t s . ) As an i n c e n t i v e t o t h e 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 r o v i s i o n s t o make 5-year a m o r t i z a t i o n available. Among them was 26 USC 187, which extended r a p i d a m o r t i z a t i o n t o This p r o v i s i o n was repealed, however, b y Section 1901 o f c o a l mine operators.

t h e Tax Reform Act o f 1976.

The s t a t u t e provided t h a t a taxpayer c o u l d e l e c t a 5-year amortization, i n l i e u o f t h e d e p r e c i a t i o n deduction allowed 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) r e q u i r e d by t h e Fede r a l Coal Mine H e a l t h and S a f e t y Act, as c e r t i f i e d b y t h e Secretary o f t h e I n t e r i o r and placed i n s e r v i c e p r i o r t o January 1, 1976. (10)

TABLE 35.

Expenditures on Yine Health and Safety. Excluding R&D

Thousands o f $ Total 108,361 98,271 22,765 83,066 77,882 56,735 54,009 47,209 20,384 13,903 8,856 8,114 7,443 7,092 6,861 6,604 8,201(~) 7,154(~) 6,78~(~) 5,985 6,063'~) 5,659 4,893 4,861 5,031(~) 4,8~1(~) 4,270(~) 4,058(~) 3,805(~'~) 3,78db) Fraction o f A l l I n s p e c t i o n Funds f o r Coal Mines 0.71 0.76 0.75 0.77 0.79 0.82 0.84 0.84 0.85(~) 0.85(~) 0.85~~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) 0.85'~) 0.85(~) 0.85(~) 0.85(~) 0.85'~) 0.85'~) 0.85'~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) 0.85(~) Current $ 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) 6,081(~) 5,765 5,087 5,154(~) 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)

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

( a ) Estimated. ( b ) I n c l u d e s 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 s u f f i c i e n t concentration of methane gas, ignition and explosion can r e s u l t . The provision was passed t o 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 l e c t r i c a l mine equipment under the act. ( 1 0 , ~ . 7 4 8 4 ) When the investment c r e d i t was reenacted i n 1971, t h e Congress provided t h a t rapid amort i z a t i o n and the investment tax c r e d i t could not both be used f o r the same investment.

The taxpayer was required t o make an election. (10,p.7482)

In 1974, when Congress extended the e f f e c t of the 1969 law f o r an additional year, i t estimated t h a t t h e four amortization s t a t u t e s would r e s u l t in a tax revenue loss of $5 mil lion i n 1975. However, no breakout was given f o r t h i s p a r t i c u l a r incentive. That same projection showed declines of $4 mill i o n , $3 million, $2 million, and $1 million in succeeding years. (10,p.7484) Training Programs As modern coal mining requires s k i l l e d manpower to operate the sophisticated equipment now used i n coal extraction, handling, and treatment, there i s a serious need f o r programs t o t r a i n miners. Such programs need t o be promoted and supported through t h e cooperation of government, industry, and educational i n s t i t u t i o n s in or near those communities which will benefit most from t h e employment of such s k i l l e d workers. Similarly, t h e r e i s an inadequate supply of mining engineers, f o r when t r a i n i n g programs should be established, including t h e cross-training of engineers from other d i s c i p l i n e s . Production and Productivity Incentives f o r the development of small mines are discussed in a preceeding section, "Development of Coal in t h e East." In 1977, coal production reachedan all-time high of 695 million tons. (1) Production of 660 million tons'') was lower during 1978 because of the coal s t r i k e . The value of production has a l s o increased s i g n i f i c a n t l y , from $3.9 b i l l i o n i n 1971 (522 million tons) t o $16.5 b i l l i o n i n 1978 assuming $24.80 per t o n f o r bituminous and l i g n i t e coal and $42.25 per ton f o r anthracite coal.

In recent years, major production has shifted from underground to surface mining (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 continuing 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 conversion 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 t a t e s s u b s t a n t i a l l y impacted b y t h e development r e s u l t i n g from increased coal and uranium mining. t h e Act. The purposes of PIFUA are t o reduce o i l imports and t o s t i m u l a t e the use of coal and o t h e r 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 d w i n d l i n g domestic supp l i e s o f o i l and gas. i s coal. The fuel t h a t i s l i k e l y t o r e c e i v e t h e g r e a t e s t b e n e f i t total The Department o f Energy has estimated t h a t coal use w i l l be PIFUA has been Since t h e The Department o f Energy i s given t h e a u t h o r i t y t o g r a n t exemptions from major p r o v i s i o n s o f

increased fom 9.6 percent t o 11.6 percent as a r e s u l t o f t h e Act. ( I 4 ) energy consumption i s n o t expected t o change s i g n i f i c a n t l y . included as an i n c e n t i v e f o r coal production because t h a t i s one o f t h e purposes s t a t e d b y Congress and i t i s one o f t h e expected r e s u l t s . included. Small Operators

Act was signed o n l y i n November 1978, t h e costs are probably small and are not

It i s not economical o r o p e r a t i o n a l l y f e a s i b l e f o r l a r g e mining organiza-

t i o n s t o e x t r a c t many o f t h e smaller, noncontiguous coal deposits.

And, u n t i l

r e c e n t l y t h e r e was o n l y a moderate i n c e n t i v e f o r small mining operators, who have f l e x i b i l i t y o f s t r u c t u r e , 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 high-Btu coal reserves. 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, Collectively,

small and medium-sized mines c o n t r i b u t e s i g n i f i c a n t l y i n They are e s p e c i a l l y important i n

p r o v i d i n g energy f o r t h e n a t i o n ' s economy.

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 operation, t h e y can r e a d i l y increase o r decrease t h e i r production 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 production was l a r g e l y from small- t o medium-sized mines, since coal from l a r g e r mines was committed t o long-term c o n t r a c t s . With t h e assistance o f f e d e r a l loan guarantees t o t h e smaller underground mines under t h e 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 production t o meet expanding energy requirements would be e x c e l l e n 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 t h e land and water reclamation measures taken b y coal operators p r i o r to, during, and a f t e r stripping. Considerable advances have been made by t h e coal i n d u s t r y i n such reclamation e f f o r t s as rehabi 1i t a t i o n of farmlands, r e f o r e s t a t i o n , development o f r e c r e a t i o n a 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 a e s t h e 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 reclamation i s p o s s i b l e w i t h good management practices. ( 1 ) Although many s t a t e s have enacted l e g i s l a t i o n t o c o n t r o l land reclamation and r e h a b i l i t a t i o n , t h e r e i s considerable l a c k of u n i f o r m i t y i n t h e c o n t r o l s and i n t h e i r e f f e c t i v e n e s s and i n proposed f e d e r a l reclamation measures. Federal r e g u l a t i o n s 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 expectations t h a t have been s e t f o r it. The Surface M i n i n g C o n t r o 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 M i n i n g Reclamation and Enforcement i n t h e Department o f t h e Interior. T o t a l expenses through 1978 were $3.2 m i l l i o n (1978 d o l l a r s ) .

TRANSPORTATION During t h e opening of the U.S. development was apparent. essential. subsidy. f r o n t i e r , t h e need f o r major r a i l r o a d

The v a s t distances i n v o l v e d made r a i l r o a d s

T h e i r development r e q u i r e d such l a r g e investments o f c a p i t a l t h a t This was provided by t h e Federal Government i n t h e form o f land Approximately 94.5 m i l l i o n acres o f r a i l r o a d land grants have Reducing t h e

i t would n o t have been p o s s i b l e t o achieve t h e needed growth w i t h o u t a

g r a n t s 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 i n a n c e construction. been made s i n c e t h e land g r a n t program was i n i t i a t e d i n 1950.

r e q u i r e d investments by t h e r a i l r o a d s p e r m i t t e d 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 m i n i n g and u t i l i z a t i o n o f c o a 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 t h e c o u n t r y was a major i n c e n t i v e i n support o f t h e 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. railroads. 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

Today an u n i n t e r r u p t e d 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 r a n s p o r t a t i o n systems. Except f o r t h e assembly o f coal i n s i l o s o r o t h e r 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 n o t s t o c k p i l e d a t t h e mines because o f t h e added expense i n v o l v e d i n r e l i f t i n g . Accordingly, i f mines do not r e c e i v e the r e q u i r e d 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 l o a d i n g o f c o a l output, t h e y do n o t work o r p r o d u c t i o n i s c u r t a i l e d u n t i l c a r s become a v a i l a b l e . On a l e s s e r scale, t h e same p r i n c i p l e g e n e r a l l y holds t r u e f o r shipments b y t r u c k and barge. I n 1975, approximately 65% o f coal shipments were by r a i l , 12% b y t r u c k , and 1 % waterways. 1 by o Approximately 11% f coal production was used b y p l a n t s a t o r near t h e 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 ) Generally i t i s considered t h a t w i t h s h o r t e r lead times needed f o r t h e p r o d u c t i o n 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 c o n s t r u c t i o n o f new mines and l a r g e coal consuming plants, t h e 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, A t t e n t i o n must be given t o Long-term markets must be however, which r e q u i r e p l a n n i n g and coordination. t r a c k and roadbed r e h a b i l i t a t i o n and c o n s t r u c t i o n .

a n t i c i p a t e d o r assured t o warrant t h e long-term investments t h a t w i l l be r e q u i r e d b y t h e r a i l r o a d s unless f e d e r a l o r o t h e r f i n a n c i a l i n c e n t i v e s evolve. Changing p a t t e r n s o f u t i 1i z a t i o n and coal production can have Potentials f o r s i g n i f i c a n t e f f e c t s on t h e e x t e n 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 m a i n t a i n i n g o r expanding coal movement c a p a b i l i t i e s . s u b s t a n t i a l l y increased movements o f l o w - s u l f u r coal from t h e West t o eastern markets pose d i f f i c u l t questions 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 pipelines. 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 p e r m i t the c o n t i n u i n g use i n t h e East o f i t s medium and h i g h - s u l f u r coals and thus preclude 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 l o w - s u l f u r coals from t h e West t o eastern m a r k e t s - - p a r t i c u l a r l y since western c o a l s g e n e r a l l y have appreciably lower h e a t i n g values than eastern coals.

Similarly, transportation f a c t o r s are important in the consideration of the conversion of e l e c 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 c o l l i e r s and barges) used previously f o r waterborne movement e i t h e r 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 t o approximately 12% as shown in Table 36. The incentives t o coal production from federal expenditures f o r ports and waterways have been estimated i n Table 36. The costs f o r a l l improvements have been multiplied by c o a l ' s share in tons of t o t a l waterborne commerce, giving a t o t a l subsidy of $2.6 b i l l i o n (1978 d o l l a r s ) . Obviously, some ports c a r r y l i t t l e coal but others (Hampton Roads, Baltimore, Mobile) have large coal exports, primarily metallurgical coal. Coal s l u r r y pipelines and e x t r a high-voltage (EHU) transmission of coal produced power over longer distances are other considerations t h a t must be addressed when considering overall national transportation needs and policies in r e l a t i o n t o substantial increases i n coal production and u t i l i z a t i o n . Transportation r a t e s are an important component of the cost of enrgy delivered t o consumers. Overall r a i l f r e i g h t charges f o r coal shipments increased from $3.70 t o $5.23 per ton between 1971 and 1975. (3) Types of shipments are f a c t o r s involed in t h e s e t t i n g of railroad r a t e s , such as the development and approval of u n i t t r a i n s for the d i r e c t shipment of coal from mines t o consumers' plants and other "volume" r a t e s as approved by t h e I n t e r s t a t e Commerce Commission. Other important controls, p a r t i c u l a r l y i n times of emergencies, include changes in railroad car demurrage r a t e s or the amount of f r e e time permitted f o r unloading so t h a t coal cars may be returned

t o active service more quickly.

Federal support of ports and waterways has been a t r a d i t i o n a l government a c t i v i t y , with expenditures c h i e f l y by the Army Corps of Engineers. The

TABLE 36.
Year 1977

Domestic and Foreign Waterborne Shipments ( a )

Total Shipments JMillion Tons)

7 Million

Tons)

Percent Total Expenditure Shipments, ~l (Million $)?c)

Subsidy (Milli8ps of Current I )

Subsidy (Millions of 1978 8 )

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 r a c t i o n of tonnage represented by coal amounted t o $2.6 b i l l i o n from 1950 t o 1978. Federal support of r a i l r o a d s in the l a t e 1800s has been omitted because i t occurred so long ago. Highway support, a minor f a c t o r f o r coal, i s largely balanced by user charges through taxes and has been omitted. W S E DISPOSAL AT Whereas wastes a t mines and preparation plants generally are s o l i d (rock, s l a t e , e t c . ) , acid water and sludge "wastes" a t consumer plants include f l y ash, p a r t i c u l a t e s , s u l f u r dioxide, and where stack gas scrubbers and some other antipollution processes are used, considerable amounts of sludge. Sludge formed i n t h e process of scrubbing i s d i f f i c u l t t o dispose of and nearly doubles t h e bulk of waste from a power s t a t i o n . Although the a i r q u a l i t y emission standards f o r e f f l u e n t s from coal combustion established under S t a t e Implementation Plans (SIP5) and t h e EPA are designed t o reduce pollution, i n t h e absence of adequate supplies of low-sulfur coal and desulfurization processes i t i s v i r t u a l l y impossible f o r users of high-sulfur eastern coals t o meet the standards.

The s o c i o p o l i t i c a l a t t i t u d e s prevalent in parts of the Intermountain West

have been strongly opposed t o western low-sulfur coal u t i l i z a t i o n in t h e area, p a r t i c u l a r l y 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 f o r s a l e in t h e East, t o t h e encouragement of intense mining of low-sulfur eastern coal, and t o research and development of antipollution processes t h a t will permit t h e use of large reserves of standards. the next 10 revised the high-sulfur eastern coals t h a t cannot otherwise meet the Western consumption of western coals i s expected t o double within years. Under the Clean Air Act Amendments (CAAA) of 1977, EPA r u l e s f o r e l e c t r i c power plants s t a r t e d a f t e r September 19, 1978,

t o require removal of specified f r a c t i o n s of the SO2 in the f l u e gas depending on t h e s u l f u r content of t h e coal. This requires t h e 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 h a t

western coal 'formerly had. such as Ohio.

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 o b losses i n h i g h s u l f u r c o a l areas A secondary e f f e c t i s t o f a v o r nuclear over coal i n areas where Since
it i s the cheapest f u e l when a l l new coal p l a n t s must have a scrubber.

these r e g u l a t i o n s d i d n o t apply i n 1977, and are b e i n g implemented i n 1978, no c o s t has been included. CONCLUSIONS Although coal was t h e U n i t e d S t a t e s ' 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 r e c e i v e d much i n t h e way o f f e d e r a l i n c e n t i v e , compared w i t h other energy forms. The l o s s o f two l a r g e markets, steam Only r e c e n t l y d i d locomotives and space heating, produced a d e c l i n e i n t h e i n d u s t r y , slowed o n l y by t h e r a p i d growth o f the e l e c t r i c i t y generation market. coal production reach i t s h i g h o f a generation ago. been included i n t h e f o l l o w i n g t a b u l a t i o n . v i t a l f a c t o r i n U.S. The i n c e n t i v e s f o r

nuclear energy can a l l be considered as d i s i n c e n t i v e s f o r coal b u t have n o t Coal development has n o t been a A l l o f these f a c t o r s e x p l a i n economic wealth r e c e n t l y and i t s developers have n o 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 i n d u s t r y .

why coal i n c e n t i v e s have been smaller than those f o r o t h e r energy forms. The p r i n c i p a l c o a l i n c e n t i v e s 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 d e p l e t i o n allowance ( t a x a t i o n ) , 40%, research ( n o n - t r a d i t i o n a l s e r v i c e ) , 31%, and p o r t s and waterways costs ( t r a d i t i o n a l s e r v i c e s ) 22%. The f e d e r a l r e g u l a t i o n s a f f e c t i n g t h e c o n t r o l and disposal o f waste products o f coal use were n o t intended t o encourage o r discourage t h e production o f coal as such. been tabulated.
I t was a secondary e f f e c t and t h e costs have not

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 l a n t s so t h e use o f western c o a l i n t h e Midwest w i l l be discouraged, b u t few f e d e r a l c o s t s o f t h e Amendments have been i n c u r r e d y e t .

TABLE 37.

Summary of Incentives t o Coal by Type ( i n Millions of 1978 Dollars) Taxation Disbursement Requirements Traditional Services Nontrad. Market Services Activity 3,364 Total

Incentive Area Research and development 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
+
CO

Transportation, ports and waterways

TOTAL

REFERENCES

CHAPTER V I (79),

U. S. Department o f Energy, Monthly Energy Review, DOE/EIA-03517, J u l y 1979.

A N a t i o n a l Plan f o r Energy Research, Development and Demonstration; Creating Energy Choices f o r t h e Future. Volume 1, U.S. Energy Research and Development Administration, 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 r o j e c t Independence B l u e p r i n t . l o Federal Energy A d m i n i s t r a t i o n - U.S. Department o f t h e I n t e r i o r , November 1974. S. M. Surrey, "Tax I n c e n t i v e s as a Device f o r Implementing Government P o l i c y : A Comparison w i t h D i r e c t Government Expenditures." Harvard Law 1970. Review, Harvard U n i v e r s i t y , 83-:708-9, F. M. Burke, Jr., " I n c e n t i v e s t o Develop N a t u r a l Resources: F a c t o r s A f f e c t i n g I n d u s t r i e s Involved i n Natural Resource E x p l o i t a t i o n s ; O i l and I n s t i t u t e on Federal Gas; Hard M a t e r i a l s ; Timber.' 33rd Annual N.Y.U. 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 R e l a t i n g t o t h e Energy I n d u s t r i e s . " Studies i n Energy Tax P o l i c y , ( 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 i n q e r P u b l i s h i n q 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 Grips w i t h t h e P e r p l e x i t i e s o f Coal Mine Taxation." Coal Age 3 81:93, 1976. "Taxation and T a r i f f U.S. Code Congressional and A d m i n i s t r a t i v e News, 1357, West P u b l i s h i n g Company, St. Paul, MN, Vol 7483, Senate Report No. 1974. National Academy o f Sciences, " R e h a b i l i t a t i o n P o t e n t i a l o f Western Coal 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, Lands." B a l l i n g e r P u b l i s h i n g Company, Cambridge, MA, 1974. 1978 Keystone Coal I n d u s 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.

VII.

OIL ENERGY INCENTIVES

There are two major areas o f o i l energy i n c e n t i v e s :

1)

e x p l o r a t i o n and production, i n c l u d i n g t h e 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 a n s p o r t a t i o n , 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 b o t h wholesale and r e t a i l customers. I n c e n t i v e s t o n a t u r a l gas p r o d u c t i o n and recovery are i n c l u d e d i n t h e

f i r s t ( e x p l o r a t i o n and p r o d u c t i o n ) 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 transmission 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 y p e o f company, encompassing d i f f e r e n t needs f o r i n c e n t i v e s . RESEARCH Table 38 shows t h e f e d e r a l funds spent f o r R&D i n t h e petroleum i n d u s t r y d u r i n g t h e p e r i o d 1950 through 1978. m i l l i o n (1978 d o l l a r s ) . The t o t a l f o r t h a t p e r i o d i s $1287.2 The various changes i n o r g n i z a t i o n s w i t h i n the Even w i t h i n

Federal Government and t h e c o n t i n u a l o v e r l a p 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. t h e same p u b l i c a t i o n series, such as t h e NSF s e r i e s on "Research and Development i n I n d u s t r y " and an "Analysis o f Federal R&D Funding by Function," t h e r e are i n c o n s i s t e n c i e s from year t o year. When such i n c o n s i s t e n c i e s were found, t h e data used i n the t a b l e were taken from t h e most r e c e n t sources. These expenditures 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 service. OIL AND GAS EXPLORATION AND PRODUCTION E x p l o r a t i o n and p r o d u c t i o n are t h e f i r s t steps i n making petroleum resources a v a i l a b l e f o r use b y consumers. Since e x p l o r a t i o n and p r o d u c t i o n do n o t n e c e s s a r i l y i n v o l v e c r o s s i n g s t a t e boundaries, many aspects o f t h i s phase o f o i l company o p e r a t i o n s are m a t t e r s o f s t a t e , r a t h e r than f e d e r a l , concern. Any such a c t i v i t i e s on f e d e r a l lands, however, i n c l u d i n g t h e o u t e r c o n t i n e n t a l s h e l f , are under f e d e r a l c o n t r o l . Perhaps t h e most i m p o r t a n t f e d e r a l

TABLE 38.

Federal R&D Expenditures Related to the Petroleum Industry (in Millions o f Dollars)
~

and N a t ~ l. r r l .

Petroleum

Fiscal Year

Gas Research (DOE )

Control o f P n l l l i t i n n from Spillage Waste ( c o a s t Guard)

Seabed Assess e n t

Related Environmental C o n t r o l P ogram (EPA)( f r

- ..- . , ,

Funded R&D for the Petroleum Totals Industry . (Current 8 )

. - - -. - .

Totals (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 r o m NSF "Research and Development i n I n d u s t r y , 1967." ( b ) Data f r o m FY-1963 through FY-1972 are from NSF "Research and Development i n I n d u s t r y , 1972.'' ( c ) Data f r o m FY-1973 through FY-1979 are from NSF " A n a l y s i s of Federal R&D Funding by Function, 1979. ( d ) Data f o r 1978 i s an e s t i m a t e contained i n NSF " A n a l y s i s o f Federal R&O Funding by Function, 1979." ( e ) The emphasis of under-sea m i n e r a l s t u d i e s i s on petroleum. Seventy f i v e percent o f the program c o s t s were a l l o c a t e d t o t h e p e t r o l e u m i n d u s t r y . ( f ) Petroleum r e c e i v e s minor emphasis i n t h i s program. Based on an examination o f t h e 1976 program, 6.7 p e r c e n t 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 petroleum i n d u s t r y . ( 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) Estimates u s i n g 1953 a c t u a l f i g u r e s .

i n c e n t i v e s are those t h a t a l l o w s t a t e conservation c o n t r o l s t o apply t o o i l s o l d i n i n t e r s t a t e commerce. t h e o i l companies. Geological Survey Data The p r i n c i p a l government source o f g e o l o g i c a l i n f o r m a t i o n 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. Geological Survey o f t h e Department o f I n t e r i o r . m i n e r a l resource surveys. form o f o i l (Chapter 111). Table 39 gives the expenditures f o r a l l geologic and I n 1978, 45.5% of t h e energy consumed was i n t h e Applying t h e same percentage f o r t h e p e r i o d Similarly, natural Although t h e c o s t s t o t h e Federal Government o f these i n c e n t i v e s have been small, t h e i n c e n t i v e s have been v e r y s i g n i f i c a n t t o

1950-1978 g i v e s 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 ) . gas i s 22.9% o f t h e 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 e x p l o r a t i o n and p r o d u c t i o n has been contemplated, t h e normal progression has been f o r t h e Bureau o f Land Management t o nominate blocks f o r lease. environmental r i s k , etc. Other government agencies have then requested withdrawals f o r v a r i o u s reasons such as n a t i o n a l defense, h i g h Although t h e r e have been some experiments w i t h Because 1arge companies The l e a s i n g methods, most b i d d i n g i s on t h e b a s i s 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 r o d u c t i o n r o y a l t y . 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 small companies, t h e r e a r e 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. b i d s are reviewed and those considered inadequate are r e j e c t e d . 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 e a s i n g process. Appropriate

environmental impact statements, i n c l u d i n g a r c h e o l o g i c a l surveys and b a s e l i n e To date t h e o f f s h o r e 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 l e a d i n g from e x p l o r a t i o n t o production. Net c o s t t o t h e government i s t h e r e f o r e nonexistent, since t h e The e x t r a i n t e r e s t earned i s g r e a t e r than t h e c o s t s o f a d m i n i s t r a t i o n . and i s a d i s i n c e n t i v e t o small companies. e f f e c t on o v e r a l l p r o d u c t i o n can be made.

procedure probably f a v o r s 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 No q u a n t i t a t i v e assessment o f t h e

TABLE 39.

Geological and Mineral Resource Surveys--Direct Expenditures by the Geological Survey (Thousands of Dollars) Current $

1952 1951 1950 TOTAL

(a) Estimated

Bureau o f Land Management The Bureau o f Land Management plans the use and l e a s i n g o f f e d e r a l lands, including the outer continental shelf. I n a d d i t i o n , i t has r e s p o n s i b i l i t y f o r The costs f o r Since about 74% o t h e r a c t i v i t i e s r e l a t e d t o p l a n n i n g and resource management. 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.

o f the value o f f o s s i l f u e l s produced on leased f e d e r a l land i n 1974 was from o i l , ( I ) and 23% from n a t u r a l gas, these percentages have been used t o calculate the cost o f the incentive. 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 e a s i n g 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 p r o d u c t i o n o f o i l i n the 1920s and e a r l y 1930s i n v o l v e d p h y s i c a l and economic waste, as described i n t h e discussion o f t h e Connally Hot O i l Act. (which f o l l o w s ) . T h i s waste was a matter o f concern f o r both the producing However, proposals t o s o l v e t h e problem s t a t e s and t h e Federal Government.

created a controversy over states, r i g h t s versus t h e power o f t h e 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 c o n d i t i o n s i n general. (2,3) The o i l p r o d u c t i o n code (Section 9c) o f the N a t i o n a l I n d u s t r i a l Recovery Act (NIRA) o f 1933 gave t h e Federal Government a u t h o r i t y t o e s t a b l i s h and enforce conservation. When t h e c o u r t s r u l e d Section 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 f e d e r a 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 s u c c e s s f u l l y opposed by t h e o i l companies and producer states. As an a l t e r n a t i v e t o f e d e r a l r e g u l a t i o n , t h e American Petroleum I n s t i t u t e and the Governor o f Oklahoma promoted the f o r m a t i o n o f an a s s o c i a t i o n o f producer s t a t e s t o c o o r d i n a t e conservation laws, r e g u l a t i o n s , and enforcement. By mid-1935, s i x s t a t e s had r a t i f i e d t h i s compact. The Act o f Congress s t a t e d t h a t e l i m i n a t i n g Oklahoma, Texas, and President 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 l e s s i n g t o t h e compact. p h y s i c a l waste was t h e goal; i n t h i s way Congress avoided t h e 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 . w i t h the Hot O i l Act, brought most o f the U.S. several other p r i n c i p a l producing s t a t e s evolved a s e r i e s o f r e g u l a t i o n s t h a t , o i l i n d u s t r y under c o n t r o l .

TABLE 40.

Expenditures by the Bureau of Land Management for Fossil Fuel Activities (thousands of Dollars)
L e a s i n g and Disposal 28,548 40,45? 9,766 31,341 28,233 70,192(~) 60,842(~) ~7,119'~) 52,715(~) 7,483 6,427 6,125 5,268 5,100 5,497 4,9~2'~) 41,456 37,028 35,968 37,344 34,283 30,766 27,547 ( d ) 40,218 32,969 8,~39(~) 7,140 6,713'~) 5,720 5,014 3,469 2,435 1,933 605 537 804'~) 876 4,199(e) 4,753(e) 4,42~(~) 3,963(d)(e) Resource M a n a m
.

Year 1978 1977 TO 1976 1975 1974 1073 1972 1071 1970 1969 1'368 1967 1066 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 TOTAL

E n e r g y and Mineral Resource Manaqement 81,880 109,568 12,236 37,413 33,018

s2,82lo
112,515'~) 16,502(~) 51,566'~' 45,93~(~) 28,077 ( h ) 21,295 ( h ) 17,136'~) 13,179'~) 9,798 ( f ) 8,691'~' 8,419

Total F o s s i l Fuel and Share o f Leasin

Total in - $ 1978 82,821 121,179 18,928 59,147 55,747 37,164 31,289 26,751 21,254 16,476 15,481 15,797 14,178 14,113 15,399 14,026 20,737 17,206 13,483 11,800 11,274 9,684 8,718 6,249 4,450 3,522 1,108 991 1,666

(f)

7,250'~) 7,015'~) 7,44~(~) 6,664 ( b ) 9,729") 7,967") 6,179 ( b ) 5,355") 5,035 ( b ) 4,290 ( b ) 3,760 ( h ) 2,602 ( b ) 1,876'~) i,a50(~) 454(b) 403'~) 6 ~ 3 ( ~ ) 657(b)

-1,772
672,410

l a ) Estimated. ( 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 1 9 6 4 ) . ( d ) E s t i m a t e d 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 e x a m i n a t i o n . ( f ) 0.2 o f columns 1 p l u s 2. (4) Includes leasing. ( h ) Column 2 t i m e s 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 , t h e 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 r e d u c t i o n due t o The cost o f t h i s i n c e n t i v e t o the Federal Treasury, t h e consumer, and t h e i n d u s t r y has been t o o small t o t a b u l a t e . I n f o r m a t i o n Gathering As p a r t o f the plan t o s t a b i l i z e the o i l i n d u s t r y under t h e NIRA, t h e Bureau o f Mines was i n s t r u c t e d t o gather information on p r i c e s and volumes o f o i l produced. D e t a i l s on t h e 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 The costs f o r o i l data gathering For n a t u r a l gas i t f u e l production are presented i n Chapter V I . amounted t o $9.1 m i l l i o n . b e t t e r o v e r a l l recovery.

f o r the p e r i o d 1964-78 amounted t o $18.4 m i l l i o n (1978).

(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 n a t u r a l gas; see Chapter 111.) Connally 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 time o f the discovery of the East Texas F i e l d i n 1930 was c h a r a c t e r i z e d by close-spaced d r i l l i n g and maximum production from each lease. This r e s u l t e d from operation under t h e d o c t r i n e o f capture, which s a i d t h e owner o f a w e 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 stratum under a neighboring lease. ( 2 ) This r a p i d production r e s u l t e d i n both p h y s i c a l and economic waste. be u l t i m a t e l y produced. s e r v i c i n g unneeded w e l l s . By the end o f 1931, t h e r e 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 r o d u c t i o n o f almost 1 m i l l i o n bbl/day, o r about 40% o f t o t a l By January I n a d d i t i o n , resources were wasted d r i l l i n g and 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

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 t o as l i t t l e as $O.lO/bbl.

o f crude o i l dropped from $l.lO/bbl costs.

1932 about 600 o i l f i e l d s were closed down as t h e p r i c e was below recovery M a r t i a l law was e s t a b l i s h e d 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 plan ( l i m i t i n g each w e l l ' s production t o l e s s than i t s maximum o u t p u t ) b u t the p l a n was declared i n v a l i d by a f e d e r a l c o u r t . (3) As a r e s u l t o f t h i s c h a o t i c s i t u a t i o n , a v a r i e t y o f o i l conservation laws were passed i n t h e producing states. The Federal Government a l s o 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.
Average Domestic Production (Bbl/dav) 8,774,000 8,375,000 8,211,000 63 62 54 Lower

I n c e n t i v e s Under O i l P r i c e Controls
Naval Petroleum Reserve Average P r i c e ( $ / B b l ) New & Alaskan Naval Released S t r i p p e r North Petroleum Oil Oil Slope Reserve 10.13 12.03 12.99 Upper a 10.13 12.03 12.99

Percent o f Production Old Oil New Oi 1 15 16 21 Upper Stripper Oi 1 13 13 15 Released Oil 9 8 10 Alaska N o r t h Slope Old Oil 5.03 5.03 5.02 Lower Tier O i l

Year 1974 1974 1976 Jan.

Tier Oil Tier Oil --

1977 Jan.-June
N c
N

8,W1,000 8,357,M)O 8,701,000

49.3(a)

37.l(')

13.5(') 7.9ib) 13.0

5.16'~) 11.12(~) 0 . 9 7 ' ~ ) 5.21'~) 11.32'~) 1.10 5.46 12.15

13.~9'~) 13.87'~) 13.95 6 . 4 ~ ' ~ ) 12.33'~) 5.22 12.85

July-Dec. 1978

4 ~ . 8 ' ~ )3 5 . ~ ( ~ 13.l(~) ) 37.5 34.4 14.0

Source: M o n t h l y Energy Review, F e d e r a 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 m o n t h l y f i g u r e s .

TABLE 42.

Value of Incentives (Billion $)

1978 Dollars

Stripper Oi 1
1974 1975 1976

Current Dollars New Oil. upper A1 askan Tier Oil, North Released Oil Slope Oil

Naval Petroleum Reserves

Stripper Oi1

New. Released. Alaska North slope, and Naval Petroleum Reserves

Jan. Feb. -Aug Sept. -Dec

N

+
W

1977

Jan. - June July-Dec.

1978

aims o f t h e a c t were t o meet t h e 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 t h e a v a i l a b l e production e q u i t a b l y and a t e q u i t a b l e p r i c e s ; and t o accomplish these o b j e c t i v e s i n ways t h a t would preserve t h e c o m p e t i t i v e v i a b i l i t y o f t h e "independent"(a) segments o f t h e i n d u s t r y . Regulations under t h i s a c t e s t a b l i s h e d 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 t h e 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 r o p e r t i e s producing at, o r l e s s than, t h e i r 1972 production l e v e l s ) , w h i l e a l l o w i n g 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 i c e s . an e x t r a i n c e n t i v e f o r increased production 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 , " new o i l prices. 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. p r i c e p l u s $1.35/bbl. was dropped. 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 c e d a t t h e May 15, 1973 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 The "released o i l ' program September 30, 1975 new o i l p r i c e l e s s $1.32/bbl. was allowed t p be s o l d a t t h e As

P r o v i s i o n s f o r a d j u s t i n g f o r i n f l a t i o n were included b u t due t o

m i s c a l c u l a t i o n caused by l a c k o f data, t h e p r i c e s s e t have n o t achieved the desired average p r i c e s and t h e r e 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 t h e "upper t i e r " p r i c e . The Energy Conservation and Production Act, e f f e c t i v e September 1976, exempted s t r i p p e r o i l from p r i c e c o n t r o l s b u 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 t h e average domestic p r i c e .

For e n t i t l e m e n t purposes, i t i s

considered imported o i l . Alaska's North Slope.

The same r u l e s have been a p p l i e d t o o i l from

The two t i e r ' p r i c e - c o n t r o l system was intended by t h e 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 e x p l o r a t i o n and production. 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 t h e e n t i t l e m e n t program since February 1976 has served as a m i l d i n c e n t i v e 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 t h e r than I n present terminology, independent those o f t h e "Standard O i l Trust." u s u a l l y excludes "major" o i l companies, t h e t o p 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 e x p l o r a t i o n . production, r e f i n i n g , and marketing operations.

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
1

Entitlement Program 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 problems, FEA instituted a system that allocated the price-controlled oil among all refiners. (This program is currently administered by the Economic 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 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 the large amount of imported residual fuel oil priced at the OPEC level and 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 importation of middle distil 1 ates was established.

1
I

I
I

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 program. 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 d e p l e t i o n as computed f o r such property. ( 7 )

An

e s s e n t i a l d i f f e r e n c e between c o s t d e p l e t i o n and percentage d e p l e t i o n i s t h a t t h e former i s s i m i l a r t o d e p r e c i a t i o n and t i e d more t o t h e i n i t i a l c o s t o f t h e asset, whereas t h e l a t t e r takes i n t o c o n s i d e r a t i o n an amount equal t o t h e gross value o f production from t h a t asset. production l i k e l y from the f i e l d . The c h i e f advantage o f percentage d e p l e t i o n i s t h a t i t avoids making t h e u n c e r t a i n estimate o f t h e t o t a l A t t h e t i m e i t was i n s t i t u t e d , t h e f e d e r a l As t h e f e d e r a l t a x r a t e rose, corporate t a x r a t e was 15% and c o s t and percentage d e p l e t i o n gave about t h e same recovery o f c a p i t a l i n t h e wasting asset. t h e advantage o f percentage d e p l e t i o n rose. prompting Congress t o change t h e law. There are v a r y i n g estimates as t o t h e a c t u a l cost o f percentage, as compared w i t h c o s t d e p l e t i o n , t o t h e U.S. dollars. Treasury. For f i s c a l year 1968, a Treasury analysis showed an i n c e n t i v e expenditure o f 1,300 m i l l i o n I n 1971, another estimate, a f t e r changes i n the Tax Code i n That same estimate r e f e r r e d 1969, i d e n t i f i e d a t o t a l t a x c o s t o f t h e excess o f percentage over c o s t d e p l e t i o n f o r a l l minerals o f $985 m i l l i o n . t o an annual revenue l o s s i n 1937 from percentage d e p l e t i o n t o c o s t d e p l e t i o n 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 l o s s o f $2.5 b i l l i o n .
It a l s o noted t h a t t h e

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, t h e percentage d e p l e t i o n i n c e n t i v e became v e r y large,

House estimated t h a t changes i n t h e 1969 Tax Reform Act would increase revenues t o t h e government from changing percentage d e p l e t i o n b y $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 t h e percentage d e p l e t i o n a1 lowance from 27.5% t o 22% and reduced e l i g i b i 1ity. The percentage d e p l e t i o n r a t e was 27.5% o f t h e w e l l head value f r o m 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 d e p l e t i o n percentage deduction i s 1i 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 property. Since 1969, t h e r e has a l s o

( a ) I n 1981 t h e d e p l e t i o n 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 l o w a b l e d e p e l t a b l e 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 t h e o i l e q u i v a l e n t o f gas s p e c i f i e d i n t h e Act).

been a minimum t a x r a t e .

The allowance i s a v a i l a b l e n o t o n l y t o t h e operator Thus, t h e d e p l e t i o n deduction can

o f t h e f i e l d b u t a l s o t h e r o y a l t y holder.

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 c o r p o r a t i o n s 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 estimates r e p o r t e d 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 h e 50% r u l e , t h e minimum tax, and the c o s t d e p l e t i o n alternative. For t h e p e r i o d 1975-78, t h e a1 lowance a p p l i e s o n l y t o small The gas For operators (12) o r an estimated 30% of the t o t a l o i l production. fixed price contract.

p r o d u c t i o n allowance a p p l i e s o n l y t o gas r e g u l a t e d i n p r i c e o r s o l d under

It was assumed t h a t a l l gas met these c r i t e r i a .

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 c o r r e c t e d f o r t h e 50% r u l e and t h e c o s t d e p l e t i o n 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 h e U.S. treatment o f c e r t a i n types o f income. Government, t h e Treasury

Department has made estimates o f t h e l o s s i n t a x revenue due t o s p e c i a l The estimates ( I 3 ) f o r t h e percentage d e p l e t i o n allowance ( i n s t e a d o f c o s t d e p l e t i o n ) and expensing o f i n t a n g i b l e d r i l l i n g costs ( i n s t e a d 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 study f o r t h e p e r i o d beginning i n 1974, t h e f i r s t year t h e y are a v a i l a b l e . marginal t a x r a t e o f up t o 70 percent a p p l y i n g t o t h e l a t t e r . t o t o t a l value o f production. The f i g u r e s i n c l u d e both c o r p o r a t e 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 The t o t a l amount o f these i n c e n t i v e s was apportioned among coal, o i l , and gas according These c a l c u l a t i o n s were confirmed by For years p r i o r t o 1974, t h e This assumes t h a t t h e conversation w i t h t h e Treasury Department.

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 e q u i v a l e n t o f t h e d e p l e t i o n allowance and expensing o f i n t a n g i b l e s . r o y a l t y holders was t h e same as t h e corporate r a t e . The b e n e f i t o f the d e p l e t i o n allowance does n o t accrue e n t i r e l y t o t h e o i l company o p e r a t i n g t h e f i e l d . The r o y a l t y holder and operator apply t h e I n a d d i t i o n , t h e increased allowance t o t h e i r share o f the wellhead value. average marginal personal income t a x o f i n v e s t o r s i n o i l p r o p e r t i e s and

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 i g h e r

royalty.

Under the c o m p e t i t i v e s i t u a t i o n e x i s t i n g today, t h e p r i c e o f t h e Some o f the b e n e f i t i s passed on t o t h e consumer and some

crude can be reduced and t h e operator can s t i l l get h i s d e s i r e d r e t u r n because o f the allowance. i s passed back t o t h e r o y a l t y owner, which c o u l d be t h e Federal Government. Brannon estimates t h a t 40% o f the value o f t h e d e p l e t i o n 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 t h e operator, and 50% as p r i c e reduction. ( I 4 ) Thus, 50% i s a d i r e c t i n c e n t i v e t o t h e producer and l e s s o r 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 prices. government lands. The value t o t h e operator o f c o n s i d e r i n g 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 s u b j e c t t o d e p r e c i a t i o n i s e q u i v a l e n t t o r e c e i v i n g a t a x - f r e e loan from t h e government. 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 given year. I t s value i s For t h i s study, i t has The costs r e p o r t e d here do n o t c o r r e c t f o r t a x losses recaptured b y t h e government i n t h e form o f higher r o y a l t i e s on

been approximated as 6% o f t h e we1 1head value o f production. (10) Since 1950, allowances have amounted t o $50.3 b i l l i o n f o r d e p l e t i o n and $20.1 b i l l i o n f o r t h e treatment o f i n t a n g i b l e s (Table 43). During t h i s time, 76.8 b i l l i o n b b 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 b a s i s o f wellhead value t h a t i s s u b j e c t The t o t a l i n c e n t i v e i s t o t h e i n c e n t i v e , $40.0 b i l l i o n i s a l l o c a t e d t o o i l d e p l e t i o n 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. 12.4 c e n t s / m i l l i o n B t u 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 P r o p e r t y I n Studies i n Energy Tax P o l i c y , e d i t e d 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 s a l e any gain t o t h e e x t e n t o f p r i o r d e p r e c i a t i o n deductions i s t o be t r e a t e d as o r d i n a r y income on s a l e and taxed a t o r d i n a r y 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 r a t e s . However, Brannon p o i n t e d o u t t h a t f o r n a t u r a l resources As a r e s u l t , i f t h e taxpayer i n v e s t s a c e r t a i n i n v o l v e d i n energy production, t h e r e i s no corresponding p e n a l t y on t h e s a l e o f n a t u r a l resource property. 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 I n t a n g i b l e D r i l l i n g Expensing (Oil and Gas)
I\svsllus

L, C

Million Wellhead Value of Domestic Production Million Current $ Oi . 1 Gas Tota -1 1978 $ Total Depletion A1 lowance Oi1 Gas - -

Intangible Drilling Expensing Oi 1 Gas -

TOTAL 1950-1978

40,033

10,269

15,449

4,648

t h e p r o p e r t y a f t e r t h e prescribed h o l d i n g p e r i o d f o r t h e 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 c o s 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 r d i n a r y income. (10,~.23) This f a i l u r e t o provide f o r recapture i n t h e n a t u r a l resource area provides an i n c e n t i v e t o t h e o i l and gas i n d u s t r y . e x p l o r a t i o n cost. (15) The Tax Reform Act o f 1976 added Section 1254 t o t h e 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 11i n g expenses on p r o d u c t i v e we1 1s are t o be recaptured upon t h e d i s p o s i t i o n o f t h e o i l o r gas property. Section 1254 declares t h a t those amounts are t o be t r e a t e d as o r d i n a r y income t o the e x t e n t they exceed t h e amounts t h a t would be allowed i f t h e 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 u s e f u l l i f e o f t h e well. The law a f f e c t s costs p a i d or i n c u r r e d a f t e r December 31, 1975. ( 5 , ~1228) I t was estimated by t h e 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 11i o n by 1981. ( 5 y p This i s a negative i n c e n t i v e i f the previous arrangement These costs have n o t been i s t r e a t e d as t h e baseline, o r i s n e u t r a l i f r e c a p t u r e as e x i s t e d i n h a r d mineral e x p l o r a t i o n i s t r e a t e d as the baseline. included i n t h e f i n a l t a b u l a t i o n . Western Hemisphere Trade Corporations Section 26 USC 921 d e f i n e s Western Hemisphere Trade Corporations and 26 USC 922, t h e method by which a s p e c i a l t a x c r e d i t f o r such c o r p o r a t i o n s i s computed. Although r e f e r r e d t o i n Section 922 as a s p e c i a l deduction, t h e n e 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 a p p l i c a b l e corporate income t a x r a t e t o as much as 14 percentage p o i n t s below t h e a p p l i c a b l e r a t e f o r other domestic corporations. To q u a l i f y under Section 921, t h e domestic c o r p o r a t i o n must do a l l i t s business w i t h i n t h e Western Hemisphere and must be predominantly engaged i n t h e a c t i v e conduct o f a t r a d e or business o u t s i d e t h e United States. Recapture, on t h e o t h e r hand, was introduced i n t o t h e s t a t u t e governing t h e treatment o f hard m i n e r a l

These c r e d i t p r o v i s i o n s were enacted i n 1942 d u r i n g a p e r i o d o f high wartime taxes i n t h e United States and g e n e r a l l y low taxes i n o t h e r Western Hemisphere c o u n t r i e s . They were aimed a t ensuring t h a t U. S. corporations corporate a c t i v i t y i n t h e hemisphere and would not operate a t a disadvantage i n competing w i t h f o r e i g n corporations. T h e i r purpose was t o increase U.S. 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 corporations, might e v e n t u a l l y pass over t o f o r e i g n interests. ( 5 , ~ 818) The Tax Reform Act o f 1976, Section 1052, repeals t h e Western Hemisphere

1 Trade Corporation deduction a f t e r 1979 and provides a c r e d i t beginning a t 1 %

i n 1976 and s c a l i n g down t o zero a f t e r 1979. r a t e as domestic income; t h a t D I S C p r o v i s i o n s Among the reasons given f o r 25 USC 992 ( a ) are a more phasing o u 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 t h e same a p p r o p r i a t e i n c e n t i v e ; and t h a t o t h e r Western Hemisphere c o u n t r i e s have r a i s e d t h e i r t a x r a t e s s i n c e the enactment o f t h i s p r o v i s i o n , 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) amendments contained i n t h e Tax Reduction Act o f 1975. I n f i s c a l year 1968, t h e U.S. i n c e n t i v e t o be $50 m i l l i o n . ( 8 ) Treasury estimated the revenue cost o f t h i s The Senate and House disagreed on t h e
DISC

provisions

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

amount o f t h e increase i n corporate taxes t h i s amendment would produce d u r i n g t h e phaseout p e r i o d b u t b o t h agree t h a t t h e t o t a l t a x savings, by 1980-81,

w i l l be $50 m i l l i o n . ( 5 y p p 260y819)
may have been a d i s i n c e n t i v e . Foreign Tax C r e d i t s

This i n c e n t i v e was used by the petroleum

i n d u s t r y b u t has n o t been an i n c e n t i v e f o r domestic production; i n f a c t , i t

Section 26 USC 901 contains the s t a t u t o r y source f o r f o r e i g n t a x c r e d i t s , s u b j e c t t o t h e l i m i t a t i o n s contained i n Section 904, and t h e s p e c i a l r u l e s f o r o i l and gas, enacted i n 1975 and contained i n Section 907 ( a ) and ( b ) o f t h e Code. The s p e c i a l r u l e s l i m i t e d t h e amount o f t h e c r e d i t a v a i l a b l e t o t h e o i l Furthermore, changes and gas i n d u s t r y on income from f o r e i g n sources.

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 t a x 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 d e r i v e d 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 subsidize t h e 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 t h e o r y o f s u b s i d i z a t i o n and t h e f o r e i g n income taxes dropped p o l i c y i m p l i c a t i o n s o f t h e 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. $44 m i l l i o n , t o $6 m i l l i o n , w h i l e t h e Saudi Government increased i t s t a k e 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 t h e 1975 changes has been described as f o l l o w s : 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 c o u n t r y o f t h e business a c t i v i t y and, t o a v o i d double taxation, t h e taxpayer i s given a d o l l a r - f o r - d o l l a r t a x c r e d i t against t h e U n i t e d States tax. States income tax. The U n i t e d States has a l i m i t a t i o n on t h e f o r e i g n taxes t h a t can be c r e d i t e d i n any 1 year against U n i t e d 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 Under i s c a l c u l a t e d on a "per country'' o r an " o v e r a l l " l i m i t a t i o n . t h e p r o p o r t i o n o f U.S.

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 a x on t h e c o r p o r a t i o n ' s worldwide income i n The t a x on 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. 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 t h e t e n t a t i v e U.S. source income and f o r e i g n source income. t h e taxpayer's worldwide income on a p r o r a t a b a s i s between U.S. The same formula i s a l s o Under t h i s 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 a p p l i e d s e p a r a t e l y t o the income from each f o r e i g n country. n o t exceed the p r o p o r t i o n o f t h e U.S. income. l i m i t a t i o n , t h e c r e d i t f o r taxes p a i d t o each i n d i v i d u a l country may taxes on worldwide income which t h e income from any p a r t i c u l a r c o u n t r y i s o f worldwide The r e s u l t under t h e "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 t h e " o v e r a l l l i m i t a t i o n " i s t o p e r m i t averaging o f t h e taxes on income from d i f f e r e n t c o u n t r i e s w i t h t h e r e s u l t t h a t t a x e s i n high r a t e t a x c o u n t r i e s can be used t o reduce United 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" 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 required that the overall limitation be used to compute the foreign tax credits attributable to foreign oil-related income 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 1272) disallowed tax credits in any taxable year are also included. ( 5 , ~

The f o r e i g n t a x c r e d i t i s t h e major i n f l u e n c e on f o r e i g n source income.

I t 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 c o u n t r i e s t h a t U.S. I n t e g r a t e d petroleum operations 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 214) A study published i n 1975 (lOypp 220-228) concluded t h a t a1 1owed. t h e t a x 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 reduci n g t a x payments than any other types o f f o r e i g n investment. income was $815.39 m i l l i o n i n 1962, $1,001.85 The s t u d y a l s o taxable 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. m i l l i o n i n 1964, $1,029.05 m i l l i o n i n 1968. 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

The amendments i n t h e 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 r o v i s i o n s t o reduce domestic income taxes. For instance, i t i s p r o j e c t e d t h a t t h e adoption o f Section 1035 w i l l produce a d d i t i o n a 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 t a x a t i o n , are nevertheless a d i s i n c e n t i v e t o domestic production. However, since t h e U. S.
I t may have

market was p r o t e c t e d by quotas from 1959-73, t h e impact o f t h e 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 production was small. ( a ) i n f l u e n c e d t h e l e v e l s o f investment a t home and abroad, which i n t u r n i n f l u e n c e d the d i s c o v e r y o f reserves and u l t i m a t e l y production. t h e U.S. was marketed i n Europe and Japan. The impact on consumer was a l s o small since, p r i o r t o 1973, most o f t h e f o r e i g n o i l (Since 1973, w i t h the exception 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 production, t h e r e has been a ready market f o r a l l domestic o i l production.)
O i 1 Import Quotas--1959-1973

I n t h e l a t e 1940s i t appeared t h a t t h e United States was "running o u t o f oil

."

The government was concerned and i n i t i a t e d R&D on' coal conversion and 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

o i l shale development.

( a ) I t c o u l d be argued, on t h e other hand, t h a t generous f o r e i g n t a x c r e d i t s allowed i n t e r n a t i o n a l o i l companies t o subsidize domestic operations. However, t h e r e 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 milliion bbllday in 1956, an increase of 33%. Reserves increased 20% in s p i t e of the increased production. During t h e 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 t h a 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 f a c t o r in the U.S. market, in s p 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 n e 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 t h e r e , and t h e 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 t a b i l i z e d b u t imports of refined products and residual o i l t r i p l e d . In 1959 the Mandatory Oil Import Control Program was proclaimed by President Eisenhower. Quotas were established f o r each section of t h e country. On the West Coast, imports were limited t o the d e f i c i t between domestic supply and demand. East of t h e 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 r e f i n e r i e s were designed o r redesigned t o make as much gasoline and other d i s t i l l a t e products as possible from each b a r r e l , decreasing t h e a v a i l a b 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 t h e quota program.

The quotas f o r crude o i l imports were allocated among r e f i n e r s , using h i s t o r i c a l operating data and a s l i d i n g s c a l e t h a t favored small r e f i n e r s . The inland r e f i n e r s were allowed t o s e l l t h e i r quota privilege t o coastal r e f i n e r s , " t i c k e t s " being worth roughly $l/bbl. Thus, the immediate impact was t o support the U.S. o i l price and t o aid small and inland r e f i n e r s while avoiding increases in e l e c t r i c i t y costs on t h e East Coast. Later provisions allowed asphalt imports outside the quota, aided i n d u s t r i a l development by allowing some products from Puerto Rico and t h e 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 allowed low s u l f u r crude burned i n p l a c e o f high 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 . t o h i g h U.S. I n A p r i l o f 1973, t h i s program was cancelled due demand and increased costs o f f o r e i g n crude.

The cost o f t h e program t o t h e government was small since m i l i t a r y procurement overseas was n o t affeced. The c o s t t o t h e i n d u s t r y was mixed. Domestic Crude o i l costs t o r e f i n e r s were equalized through t h e quota system.

crude o i l producers received higher p r i c e s than would have been o b t a i n a b l e w i t h u n c o n t r o l l e d imports, t a x bases o f major crude o i l producing s t a t e s were maintained, and consumer p r i c e s were higher p r i o r t o t h e embargo, b u t t h e e x t r a reserves developed as a r e s u l t of t h e i n c e n t i v e helped t o reduce t h e impact o f t h e Arab o i l embargos o f 1967 and 1973.
O i l e x p l o r a t i o n and production i n c e n t i v e s amounted t o $108.5 b i l l i o n f o r

t h e p e r i o d 1950-1978. allowance.

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 t h e use o f t h e percentage d e p l e t i o n E x t r a income o f $50.2 b i l l i o n from higher allowed p r i c e s Regulatory a c t i v i t i e s o f t h e Economic Regulatory i n 1974-1978 was assigned t o requirements, even though t h e funds were received from t h e marketplace. A d m i n i s t r a t i o n and i t s predecessors, t h e FEA and FEO, and t h e S t r a t e g i c O i l Reserve c o s t $1.71 b i l l i o n f o r t h e p e r i o d 1974-1978 and were categorized as requirements. N o n t r a d i t i o n a l services, t h e o i l a c t i v i t i e s o f t h e 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 e a s i n g a c t i v i t i e s o f t h e 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 . government agencies, as appropriate. PETROLEUM REFINING AND TRANSPORTATION Since the focus o f t h i s study i s production, 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 r a n s p o r t a t i o n 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 production. The r e a l p r o f i t a b i l i t y i n t h e 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 production, not r e f i n i n g and marketing petroleum. The major o i l companies Costs were determined b y estimates o f taxes foregone, increased value o f sales, o r expenditures f o r

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) Incentive Return in

1978 $

Year 1921 1922

Capitalization
337.1 471.7

Net ~ncome(a)

Income at Incent 'v 10% ~eturn(b) Returnlce

0.7

1950 1951 TOTAL

660.3 759.3

81.3 82.0

66.0 75.9

15.3 6.1

41.6 15.4 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 s u p p o r t i n g the waterways t h e r e was no d i r e c t i n t e n t t o s u b s i d i z e the

petroleum i n d u s t r y , b u 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 (approximately 45 x10 ton-miles i n 1973). The c o s t o f c o n s t r u c t i o n , maintenance, and o p e r a t i o n o f t h e waterways was about 0.1 c e n t l t o n - m i l e d u r i n g 1973. (20) was, t h e r e f o r e , about $45 m i l l i o n . d i s t r i b u t i o n stage o f t h e energy system. The second-order subsidy f o r 1973 T h i s provides an i n c e n t i v e f o r t h e

A longer-range approach t o e s t i m a t i n g t h e s i z e o f t h i s subsidy i s

described under maintenance o f Coastal P o r t s 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 a p p l i e s a l s o t o c o a s t a l Great Lakes p o r t s . I n t h e same way t h e r e i s a second order subsidy t o I n p o r t s t h a t handle the petroleum i n d u s t r y ' s use o f the p o r t s and channels.

r e l a t i v e l y l a r g e tankers, t h e tankers present t h e reason f o r deepening channels since tankers are u s u a l l y t h e deepest d r a f t vessels t h a t use t h e port. Therefore, a l a r g e r - t h a n - p r o p o r t i o n a l amount o f t o t a l dredging c o s t s are i n e f f e c t a second-order subsidy t o t h e d i s t r i b u t i o n stage o f t h e o i l energy system. Federal funds f o r support o f n a v i g a t i o n i n both c o a s t a l p o r t s and i n l a n d waterways are provided through t h e U.S. Army Corps o f Engineers. However, o n l y Table 45 a p a r t o f the commerce u s i n g these waters i n v o l v e s petroleum products.

l i s t s t h e expenditures f o r n a v i g a t i o n programs w i t h i n t h e Corps o f Engineers and a l l o c a t e s those costs as a petroleum subsidy according t o t h e r a t i o o f the tonnage o f petroleum and petroleum products c a r r i e d t o a l l water-borne t r a d e . The subsidy t o t a l s $6.9 b i l l i o n f o r t h e p e r i o d 1950 through 1978. m i l l i o n B t u l t o n , 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 Foreign s h i p s are able t o provide services a t lower c o s t than ships s a i l i n g under t h e U.S. flag. The wages p a i d t o U.S. s a i l o r s and s h i p b u i l d e r s to account f o r the d i f f e r e n c e . other emergencies. However, i t i s i n t h e i n t e r e s t o f the U.S.

A t 390

m a i n t a i n 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 Therefore, t h e Jones Act was passed i n 1915 t o i n s u r e 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 as(d) a Portion of Total WaterBorne Trade Current Dollars ~xpenditure(c) Petroleu 1ndustryTe) Subsidy 1978 Doll r d Industry Subsidy

Fiscal Year

Petroleum Product Movements, Millions Short ~ons(f)

.. ..

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, i the f damages resulting from an occurrence would be greater than the maximum liability, and i there are different economic advantages to supertankers of f 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 t h e G u l f o r A t l a n t i c coasts w i l l tend t o discourage domestic production since t h e y w i l l make t h e i m p o r t a t i o n o f f o r e i g n crude cheaper. abroad. Trans-Alaska P i p e l i n e A u t h o r i z a t i o n Act The discovery o f o i l on t h e Alaskan North Slope provided an o p p o r t u n i t y t o reduce U.S. Alaska. 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 c o u l d be accomplished most e f f i c i e n t l y using a p i p e l i n e across I n i t i a l attempts a t o b t a i n i n g permission t o c o n s t r u c t a p i p e l i n e The Trans-Alaska P i p e l i n e A u t h o r i z a t i o n Act (PL 93-153) s p e c i f i e d I n addition, t h e act established a l i a b i l i t y became bogged down i n c o u r t cases concerning t h e environmental impact statements. steps t o be taken f o r environmental p r o t e c t i o n and t h e requirements f o r environmental impact statements. t r u s t fund. The f e d e r a l funds appropriated t o administer t h e a c t c o u l d 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. They w i l l f a v o r domestic r e f i n i n g , however, since very l a r g e crude c a r r i e r s are t o o l a r g e f o r economical shipments o f r e f i n e d products from

Consideration 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 Ports Act, except t h a t t h e Trans-Alaska P i p e l i n e A u t h o r i z a t i o n Act does l i m i t l i a b i l i t y . Merchant Marine A c t o f 1970 The costs o f c o n s t r u c t i o n and operation o f U.S. than f o r f o r e i g n ships. This makes U.S. f l a g ships are higher Merchant f l e e t .

ships l e s s c o m p e t i t i v e and tends t o I n addition there i s

i n t e r f e r e w i t h t h e continued s t r e n g t h and growth o f t h e U.S. A s t r o n g f l e e t i s needed f o r n a t i o n a l s e c u r i t y reasons. i n c e n t i v e s t o U.S. shipping.

pressure from t h e maritime unions and the shipping i n d u s t r y t o provide

The Merchant Marine Act o f 1970 provided s h i p c o n s t r u c t i o n and o p e r a t i n g subsidies 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 I n a d d i t i o n , loans can be program had been e s t a b l i s h e d as o f October 1973.

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 h e t r a n s p o r t a t i o n sector

o f the o i l industry. The s h i p c o n s t r u c t i o n and o p e r a t i n g subsidies made a v a i l a b l e by t h e Merchant Marine Act o f 1970 have been used f o r passenger ships, general cargo ships, and other s p e c i a l i z e d t r a n s p o r t s , as w e l l as tankers. petroleum i n d u s t r y . t h e U.S. Therefore, i t was necessary t o estimate 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 b y t h e The source o f t h i s data was the Appendix t o t h e Budget o f The budgets f o r t h e Maritime I n addition, the Government f o r FY-1972 through 1978.

A d m i n i s t r a t i o n i n the Department o f commerce provided a c t u a l o u t l a y s f o r FY-1970 through 1975 and an estimated o u t l a y f o r 1976. i n t h e budgets f o r FY-1973 through 1975. industry. amounts programmed f o r c o n s t r u c t i o n f o r d i f f e r e n t types o f ships were provided This breakdown was used t o estimate t h e p r o p o r t i o n o f t o t a l c o n s t r u c t i o n subsidy t o a l l o c a t e t o the petroleum 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 This helped
It was assumed t h a t 50% o f t h e

o p e r a t i n g subsidies f o r b u l k cargo ships and general cargo ships. a l l o c a t e o p e r a t i n g subsidies t o petroleum. w i t h U.S.S.R. was i n c l u d e d i n t h e data).

b u l k cargo o p e r a t i n g subsidy went t o tankers, (25% i n 1976 when g r a i n t r a d e The c a l c u l a t i o n s o f t h e estimated subsidy are shown i n Table 46. through 1978 was $1,300.8 The t o t a l subsidy f o r t h e p e r i o d 1970

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 h e c o s t o f U.S.

ships would be h i g h e r i f t h e subsidy d i d n o t e x i s t . vessels would r e p l a c e U.S.

The c o s t o f f o r e i g n f l a g T h i s subsidy i s an

vessels i s s t i l l lower and i n t h e absence o f the Jones Act preference f o r e i g n vessels, even w i t h t h e subsidy. 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 b u t n o t t o domestic production, s i n c e t h e subsidized s h i p s are n o t n o r m a l l y allowed t o p l y between domestic p o r t s and thus cannot move crude o i l from Alaska t o t h e West Coast, although a six-month permission f o r use o f subsidized tankers t o c a r r y o i l from Alaska was granted. World War I1 P i p e l i n e Construction E a r l y d u r i n g World War 11, German U-boats sank many tankers c a r r y i n g o i l from t h e G u l f p o r t s t o t h e East Coast ports, c r e a t i n g a need f o r crude o i l t o

TABLE 46.

Subsidies from t h e Merchant Marine Act of 1970 (Mi 11 ions of Do1 l a r s ) Operating Subsidy Tankers Total Subsidy Tankers

FY -

Ship Construction Outlay

Current Dollars Ship Construc1;pn Operating Tankers Subsidy

1978 001 1a r s Total Subsidy

N W
o, '

1976 TQ 1977 1978 TOTAL

202.7 42.0 219.4 156.7

( a ) Based on 56% of t h e programmed c o n s t r u c t i o n f o r t a n k e r s ( b ) 50% of t h e i n d i c a t e d portion of t h e operating subsidy f o r bulk c a r r i e r s . ( c ) Based on 8% of t h e t o t a l operating subsidy f o r bulk c a r r i e r s and 50% of t h a t amount f o r tankers. ( d ) 33% of t h e indicated portion of t h e operating subsidy f o r bulk c a r r i e r s .

be shipped overland t o t h e r e f i n e r i e s i n t h e East i n order t o supply t h e m i l i t a r y needs. The Federal Government c o n s t r u c t e d 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 d u r i n g 1942. Federal Government constructed a 20-in. then extended i t t o New Jersey. Big Inch pipelines. World War 11. $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 r o v i d e f o r wartime needs, b u t a f t e r t h e war t h e B i g I n c h and L i t t l e B i g I n c h 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 pipeline. 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 e s s than replacement cost, t h i s provided a subsidy t o the t r a n s p o r t a t i o n stage o f t h e o i l and i n d u s t r i e s . 1973 Program t o Encourage Energy Resource Development I n 1973, i t was n o 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 c a p a c i t y w i t h i n t h e U n i t e d States as t h e r e 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 t h e r e s t r i c t i o n s on imports were suspended, an i m p o r t l i c e n s e - f e e schedule was e s t a b l i s h e d which imposed r e l a t i v e l y higher fees f o r gasoline 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 a d d i t i o n , U.S. refiners c o u l d o b t a i n d u t y - f r e e 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 p e r i o d 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 h e r e f i n i n g stage o f t h e 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 The U.S. During 1943 t h e

pipe1 i n e from Texas t o I l l i n o i s and

These were c a l l e d t h e B i g Inch and L i t t l e

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 d u r i n g Investment i n these p i p e l i n e s was approximately

construction.("^

183-184)

This has made automobile and

t r u c k t r a v e l e a s i e r , more economical, and s a f e r and has t h u s s t i m u l a t e d o i l consumption, e s p e c i a l l y gasoline. demand. Asphalt f o r paving a l s o was i n g r e a t e r i n turn, has s t i m u l a t e d demand The need f o r g a s o l i n e and d i e s e l f u e l ,

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 production. 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 n o 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 n a t i o n a l 55 m i l e per hour speed l i m i t . petroleum. Waste Disposal and Environmental Problems The petroleum-producing i n d u s t r y faces several types o f waste disposal 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 e x p l o r a t i o n and production a c t i v i t i e s ( f o r example, meeting t h e requirements o f t h e National Environmental P o l i c y Act); second, r e g u l a t i o n s a f f e c t d r i l l i n g , operation, and u l t i m a t e abandonment; f i n a l l y , t h e r e are r e g u l a t i o n s t h a t a f f e c t The impact can A recent t r a n s p o r t a t i o n , 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 . This, p l u s s t a t e energy conservation programs which discourage d r i v i n g , can be considered d i s i n c e n t i v e s t o t h e use o f

be delays, out-of-pocket costs, and increased energy consumption.

study analyzing 80 e x i s t i n g and p o t e n t i a l f e d e r a l and s t a t e r e g u l a t i o n s (many o f the l a t t e r r e q u i r e d by f e d e r a l a c t s ) estimated 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 r e d u c t i o n o f demand caused b y t h i s impact would reduce imports, n o t domestic production. However, some production has been l o s t , p a r t i c u l a r l y i n t h e B a k e r s f i e l d , 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 s u l f u r d i o x i d e emission r e g u l a t i o n s . 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 c o s t o f scrubbers i s t o o high r e l a t i v e t o t h e value o f t h e o i l and t h e f i e l d s were shut down. The recent decontrol 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 r e q u i r e d f o r p o l l u t i o n abatement i n t h e o i l i n d u s t r y d u r i n g 1976 was estimated a t 500 t r i l l i o n Btu, c l o s e t o 83 m i l l i o n b b l o f o i l . (23) These f i g u r e s do not i n c l u d e t h e e x t r a c o s t and gasoline consumption brought about by emission c o n t r o l s on cars. Environmental r e g u l a t i o n s are enforced by t h e Geologic Survey f o r d r i l l i n g r i g s and p l a t f o r m s on t h e Outer Continental Shelf, by t h e Coast Guard f o r a l l water-related t r a n s p o r t a t i o n s i t u a t i o n s , and by EPA f o r a l l n o n - t r a n s p o r t a t i o n water cases and a l l f e d e r a l a i r cases on land and i n s t a t e waters. I n addit i o n , t h e s t a t e s a l s o enforce r u l e s and r e g u l a t i o n s , some o f which have been

developed a t federal insistence. Since the regulations were not designed as d i r e c t incentives f o 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 y i e l d s allowed to encourage o i l pipelines are considered a requirement. The value of the incentive, $5.6 b i l l i o n , was calculated from the difference between t h e actual yield and a baseline 10% f o r the period 1921-1951. Funds spent t o maintain ports and waterways, $6.9 b i l l i o n from 1950 t o 1978 are assigned t o t r a d i t i o n a l services. Direct construction and operating subsidies f o r tankers, Total incentives f o r the petroleum refining and transportation category are $13.8 billion.

a disbursement, amounted t o $1.3 b i l l i o n during the period 1970-1978.

CONCLUSIONS
Petroleum used f o r nontransportation-related r e s i d e n t i a l and commercial purposes in 1978 amounted t o 6.4 quadrillion B t u , about 22% of t h e energy used f o r t h i s purpose. For industrial uses i t constituted 26% and 97% f o r transport a t i o n . In addition, o i l provided about 17% of t h e energy used f o r e l e c t r i c i t y generation.
.

The chief incentives and t h e 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 i n t e n t was neither t o encourage or discourage production.

TABLE 47.

Summary of Oil Incentives by Type ( i n Mill ions of 1978 Dollars) Taxation Disbursement Requirements Traditional Services Nontrad. Market Services Activity Total

Incentive Area Research and Development Oil Exploration and Production Geological Survey-data Bureau of Land Management-leasing Bureau of Mines-data Stripper well price incentives Incentives f o r new o i l Economic Regulat r Administration a Intangible d r i l l i n g expensing Percentage depletion a1 1owance

'i 7

Petroleum Refining and Transportation High yield on pipelines Maintenance of ports and waterways Subsidies f o r tankers Tot a1 ( 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." 4(1) Energy Policy - :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. 17.

J. Cook, "Taking the 'AM' out o f ARAMCO."

Forbes 118:38,

1976.

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 M i n e r a l Law I n s t i t u t e , Southwestern Legal Foundation g : 3 4 6 , 1976.

18. 19. 20.

Budget o f the U.S.

Government, 1957 and 1977.

I n t e r s t a t e Commerce Commission 8 9 t h Annual Report t o Congress. L. A. Shabman, "User Charges f o r I n l a n d 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. O i l and Gas Journal, October 15, 1973, p. 58. O i l and Gas Journal, A p r i l 23, 1973, p. 20.

21. 22. 23.

W. J. Sheppard, e t al., "The Economic Impact o f Environmental Regulations on the Petroleum Industry--Phase I 1 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 t h e f a c t t h a t gas reserves are being used f a s t e r than new d i s c o v e r i e s a r e 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 , t h e n a t i o n ' s n a t u r a l gas d i s t r i b u t i o n and transmission companies have j o i n e d t o g e t h e r t o form t h e Gas Research I n s t i t u t e (GRI). consumers.
G R I i s modeled a f t e r t h e E l e c t r i c

Power Research I n s t i t u t e (EPRI) and i s funded b y a charge passed on t o EPRI i s e l i g i b l e t o r e c e i v e R&D funds from i t s members, who pass The FERC annually reviews t h e G R I research Federal a u t h o r i z a t i o n o f such R&D t h e c o s t on t o t h e consumer.

program and budget and authorizes 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. i n s t i t u t e s c o n s t i t u t e an i n c e n t i v e f o r increased production and consumption o f Although t h e f e d e r a l government's e f f o r t s t o increase gas production by nuclear explosions could be considered as a d i r e c t i n c e n t i v e t o t h e increased production o f n a t u r a 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 i m u l a t e t h e use o f nuclear energy and are counted i n Chapter I V , Nuclear Energy Incentives. EXPLORATION I n recent years, t h e n a t u r a l gas p i p e l i n e companies have acknowledged t h e i r c o n t i n u i n g dependence on o i l and gas e x p l o r a t i o n companies. Since e x p l o r a t i o n and d r i l l i n g i s a c a p i t a l i n t e n s i v e business characterized by h i g h c o s t s and r i s k s , t h e n a t u r a 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 e x p l o r a t i o n companies. l a r g e q u a n t i t i e s o f gas are expected t o be found. n a t u r a l gas. This was intended t o s t i m u l a t e e x p l o r a t i o n and a s s i s t them i n developing s i t e s where 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 The FERC has now discontinued t h i s p o l i c y except f o r payments up The c o s t o f t h i s i n c e n t i v e i s r e l a t e d t o This t o 30 days i n advance o f d e l i v e r y . n a t u r a l gas a t t h e expense o f t h e consumer, n o t t h e taxpayer.

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. i n c e n t i v e was small 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 C o n t r o l s I n 1954, i n t h e case o f P h i l l i p s Petroleum versus t h e S t a t e 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 n a t u r a l gas The Court r u l e d t h a t were s u b j e c t t o the same p r i c e r e g u l a t i o n s 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 n a t u r a l gas.

"Regulation o f the sales i n i n t e r s t a t e commerce f o r r e s a l e made by a s o - c a l l e d independent n a t u r a l gas producer i s n o t e s s e n t i a l l y d i f f e r e n t from r e g u l a t i o n 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. u l t i m a t e consumers. Gas Act. ,,(2) The i n t e n t o f t h e Court appears t o be clear; consumers were t o be p r o t e c t e d 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 t h e y 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

I n both cases, t h e r a t e s charged may

have a d i r e c t and s u b s t a n t i a l e f f e c t on t h e p r i c e p a i d by t h e P r o t e c t i o n o f consumers against e x p l o i t a t i o n a t t h e hands o f n a t u r a l gas companies was t h e primary aim o f t h e N a t u r a l

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 n a t u r a l gas. surplus turned t o a shortage. P r i o r t o about 1967, t h e r e was a surplus o f n a t u r a l gas, and average p r i c e s o f gas s o l d 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 higher p r i c e s f o r i n t e r s t a t e gas. ( 2 ) i n 1969, w i t h dramatic increases from 1972 t o t h e present. decreased an average o f 0.7% i n r e c e n t years. ~ n t r a s t a t ep r i c e s Gas production 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 peaked i n 1973, decreased an average o f 6% per year through 1975, and has This decrease, c o i n c i d e n t w i t h t h e e f f e c t s o f t h e o i l embargo, c o n t r i b u t e d 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 i p e l i n e s . I n 1975, t h e FPC took a c t i o n t o increase i n t e r s t a t e p r i c e s ; 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. However, t h i s i n c e n t i v e f o r the consumer became a d i s i n c e n t i v e f o r e x p l o r a t i o n and p r o d u c t i o n once t h e gas

Regulation o f i n t e r s t a t e p r i c e s i s considered as a subsidy o r i n c e n t i v e 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 Because of outstanding contracts, i t d i d The n a t u r a l gas production since 1969.

n o 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 g u r e s u n t i l 1974.

f o l l o w i n g a n a l y s i s estimates the amount o f t h i s i n c e n t i v e through 1978. Table 48 was constructed from a v a i l a b l e 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 d e c i s i o n had much e f f e c t . This a n a l y s i s assumes t h a t a l l i n t e r s t a t e gas c o u l d be s o l d a t i n t r a s t a t e prices, and t h a t i n c e n t i v e f o r promoting production o f n a t u r a l gas. This p r i c e d i f f e r e n c e

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 c e s can be considered t h 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 gives an estimate o f t h e 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 t h e r e was a n e t i n c e n t i v e t o t h e producer, b u t d u r i n g t h e p e r i o d 1974-78 i t was a net d i s i n c e n t i v e . service. gas. The cost o f wellhead p r i c e c o n t r o l s was assigned t o t h e requirements category. I n t h e e a r l y days o f n a t u r a l gas i t was c a l c u l a t e d from t h e higher In p r i c e received by s e l l i n g t o t h e i n t e r s t a t e market times t h e volume. gas, producing a negative i n c e n t i v e . Holding t h e 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 n e t saving f o r t h e consumer who i s g e t t i n g
It has meant a net cost t o those denied s e r v i c e because o f a l a c k o f

r e c e n t 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 The t o t a l n e t i n c e n t i v e has amounted t o a n e g a t i v e $1,048 m i l l i o n f o r t h e p e r i o d 1955-1978. N a t u r a l Gas P o l i c y Act A s u b s t a n t i a l d i r e c t i n c e n t i v e t o producers i s t h e r e l a x a t i o n and eventual removal o f wellhead p r i c e c o n t r o l s on n a t u r a l gas as provided i n t h e N a t u r a l Gas P o l i c y Act. The Act c l a s s i f i e s n a t u r a l 'gas i n t o several Each category i s categories, based p r i m a r i l y upon t h e c o s t o f production. which includes t h e r a t e o f i n f l a t i o n . t h e previous system.

allowed a c e r t a i n maximum p r i c e escalated each month by a prescribed f o r m u l a 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 c e s have been allowed t o r i s e much higher than under This amounts t o a r e d u c t i o n i n a p r o d u c t i o n Because t h e Act d i d not d i s i n c e n t i v e , o r a n e t i n c e n t i v e f o r production.

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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 confusion about the various provisions, 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 supplies was t o some e x t e n t counterbalanced by the extension o f p r i c e c o n t r o l s t o gas production The o v e r a l l impact o f NPGA on n a t u r a l gas production i n 1978 i s considered t o be t o o small t o be measured. R o l l - I n P r i c i n g o f Supplementary Gas Supplies 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 s u p p l i e s 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 a p p l i c a b l e t o a l l customers of a given class, b o t h o l d and new. ( 3 ) The averaging o f p r i c e s takes p l a c e 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 t h e new consumer does n o t completely r e f l e c t t h e incremental p r i c e o f t h e new production. R o l l e d - i n 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 e s s than t h e 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 higher demand f o r n a t u r a l gas than would be t h e case i f new purchasers had t o pay p r i c e s based o n l y on t h e a c t u a l c o s t o f producing and d i s t r i b u t i n g new gas. n a t u r a l gas (LNG). rise).(a) This i s a d i r e c t i n c e n t i v e f o r n a t u r a l gas production, use and p r o d u c t i o n o f s y n t h e t i c n a t u r a l gas, and i m p o r t a t i o n o f l i q u i f i e d (Even w i t h wellhead p r i c e c o n t r o l s , t h e impact on domestic producers a l s o has been f a v o r a b l e since wellhead p r i c e s have been allowed t o This i n c e n t i v e c o u l d n o t be q u a n t i f i e d since 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 a v a i l a b l e . The NGPA r e q u i r e s incremental p r i c i n g o f c e r t a i n categories o f h i g h 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 t h e r i n d u s t r i a l uses as well. Once the incremental p r i c e o f n a t u r a l gas r i s e s t o t h e l e v e l o f Most o f these 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 c o s t increases are r o l l e d i n t o t h e r a t e s o f other customers. dedicated t o i n t r a s t a t e markets.

( a ) I n some r e c e n t cases, incremental p r i c i n g o f imported LNG has been adopted b y t h e Commission, however, i t has n o t y e t been a p p l i e d t o d o m e s t i c a 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, t h e technology t o t r a n s p o r t n a t u r a l gas

economically and e f f i c i e n t l y from t h e producing southwest s t a t e s t o l a r g e p a r t s o f the c o u n t r y was not developed u n t i l t h e l a t e 1920s. The gas i n d u s t r y was t h e second i n d u s t r y t o be designated a p u b l i c

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 f u r n i s h e s what are g e n e r a l l y considered t o be e s s e n t i a l services t o l a r g e

u t i l i t y , a f t e r t h e water supply industry. p a r t s o f t h e population. 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 Early English courts regulated c e r t a i n occupations " a f f e c t e d w i t h a p u b l i c i n t e r e s t , " r e q u i r i n g t h a t t h e y serve a l l who apply w i t h i n the f r a n c h i s e area serve t h e maximum requirements o f a customer provide safe and adequate s e r v i c e 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 s e r v i c e rendered. As the n a t u r a l gas i n d u s t r y r e q u i r e d t h e 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 t h o u t t h e i n f l u e n c e o f competition from o t h e r gas transmission companies. more such u t i l i t i e s s e r v i n g t h e 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 , " b o t h t h e u t i l i t y and t h e p o p u l a t i o n served. company as a p u b l i c u t i l i t y are: b e n e f i t s are r e a l i z e d by Two o r derived from e a r l y common law o f England.

The p r i n c i p a l o b l i g a t i o n s o f a

t o serve a l l who request s e r v i c e i f i t can

be reasonably supplied, t o serve i t s customers w i t h o u t unreasonable d i s c r i m i n a t i o n , t o s e t r a t e s 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 m a i n t a i n adequate and s a f e facilities. I n r e t u r n , t h e companies designated as p u b l i c u t i l i t i e s a r e t h e o p p o r t u n i t y t o earn a f a i r compensated w i t h t h e f o l l o w i n g b e n e f i t s :

r e t u r n upon t h e value o f i t s p r o p e r t y used and u s e f u l i n p u b l i c service, f r a n c h i s e r i g h t s i n i t s area o f operation, e x e r c i s e 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 r e g u l a t e d by s t a t e and l o c a l agencies. However, w i t h t e c h n o l o g i c a 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.

B t h e e a r l y 1930s, y

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 u e n c e over gas produced i n one s t a t e and t r a n s p o r t e d by a company f o r r e s a l e i n another s t a t e . ( a ) I n 1938, t h e N a t u r a 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 transmission companies o p e r a t i n g 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 allows the i n t e r s t a t e n a t u r a l gas transmission companies t o operate i n a m o n o p o l i s t i c manner. Because o f t h e tremendous amounts o f money which must be spent on equipment and p l a n t s when e s t a b l i s h i n g gas transmission l i n e s , i t i s b e n e f i c i a l t o t h e company t o be assured o f a market. The FPC r e q u i r e s t h e company t o o b t a i n a " c e r t i f i c a t e o f convenience and necessity" b e f o r e i t g r a n t s 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 transmission company i s r e s p o n s i b l e 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 p e r i o d o f time, u s u a l l y 20 years, and t o demonstrate t h a t i t can p r o v i d e t h i s l e v e l o f s e r v i c e over t h e same t i m e frame. The customers are t h e r e f o r e assured t h a t once t h e y are hooked i n t o t h a t company's p i p e l i n e , t h e y w i l l r e c e i v e t h e amount o f gas t h a t has been p r e d i c t e d t o be needed w i t h i n a c e r t a i n period. 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 confidence i n gas supply i s k e p t h i g h 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 services rendered t o t h e 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 g e n e r a 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 N a t u r a 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 r a n s m i s s i o n companies b y 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 n e c e s s i t y may acquire r i g h t - o f - w a y and/or o t h e r p r o p e r t y r e q u i r e d by e x e r c i s i n g t h e r i g h t o f eminent domain. ( a ) These concerns arose over the waste o f gas, t h e d e s i r e o f consumers f o r cheap gas, t h e m o n o p o l i s t i c c o n t r o l o f p i p e l i n e s b y 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 exercised i n f e d e r a l d i s t r i c t c o u r t s o r i n s t a t e courts. This r i g h t has o b v i o u s l y increased t h e consumption and u t i l i z a t i o n o f n a t u r a l gas by g r e a t l y reducing t h e time and expense t h a t would have t o be spent i n n e g o t i a t i n g 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 l a n d owners. The u t i l i t y s t a t u s 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 Natural Gas Act was a boon t o producers since t h e p i p e l i n e s c o u l d be c a p i t a l i z e d a t a high debt-to-equity r a t i o by issuance o f new stocks and bonds and d i d n o t produce a d r a i n on t h e cash f l o w o f t h e o i l companies, l a r g e and small, t ' l a t were the producers.
A t t h e time t h e r e was surplus

production c a p a c i t y and b y f a c i l i t a t i n g access t o markets, production from b o t h o i l f i e l d s and nonassociated gas f i e l d s was encouraged. can be counted as an i n c e n t i v e . O v e r a l l Estimate of_-t_h_e_ Cost o f Gas Regulatory Agencies The p r i n c i p a l f e d e r a l i n c e n t i v e s t o t h e n a t u r a l gas transmission and d i s t r i b u t i o n companies have occurred through t h e establishment and a c t i o n s o f t h e FPC and FERC. The passage of t h e N a t u r a l Gas Act i n 1938 charged t h e 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 n a t u r a l gas i n d u s t r i e s . A d d i t i o n a l r e s p o n s i b i l i t i e s o f the commission are t h e 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 transmission o f e l e c t r i c a l power and o i l p i p e l i n e s . The amount o f money spent by t h e Federal Government f o r t h i s i n c e n t i v e t o t h e n a t u r a l gas transmission and d i s t r i b u t i o n companies, was estimated from t h e Appendix t o t h e Federal Budget. Costs estimated i n t h i s manner included t h e costs o f admini s t r a t i o n , personnel, and equipment t h a t were i n v o l v e d i n r e g u l a t i o n o f t h e 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 o c a t e d 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, t h e 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 r e g u l a t i o n ) was n o t recorded i n t h e Appendix t o t h e Federal Budget. Discussion w i t h FERC i n d i c a t e d t h a t a f u r t h e r breakdown f o r those years was not available. An estimated 20% o f these costs, however, were assumed i n l i g h t o f t h e trends i n f u n d i n g f o r t h e two f u n c t i o n s i n l a t e r years. This i s one o f t h e p r i n c i p a l reasons t h a t the c o s 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

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

TABLE 49.

Estimated Net I n c e n t i v e Due t o FERC Regulations o f t h e N a t u r a l Gas P i p e l i n e s and I n t e r s t a t e Producers Regulation o f Interstate Producers Regulation o f Pipe1 ines Net ~ n c e n t i v e s ( ~ ) 1978 $

F i s c a l Year 1978 1977 T O

1949 1938 t o 1948 Total Source: Appendix t o t h e Budget o f t h e United States Government. ( a ) 1969-78 t h e c o s 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 negative incentive. The f i n a l i n c e n t i v e a l s o includes cost o f r e g u l a t i o n o f p i p e l i n e s , other gas programs, and a p r o 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 i we controlled f 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 L N G is more expensive than domestic production at unregulated prices.

P r i o r i t i e s E s t a b l i s h e d 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 t h e FPC i n response t o t h e c u r r e n t shortages o f n a t u r a l gas overrode a l l t h e c o n t r a c t s p r e v i o u s l y e s t a b l i s h e d between

producers, transmission companies, and d i s t r i b u t i n g companies. basis f o r purposes of home h e a t i n g and consumption. 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 r e c t e d on a p r i o r i t y Commercial establishments The NGPA provides t h e were given a higher p r i o r i t y than i n d u s t r i a l companies. situation. While 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 t h e supply o f n a t u r a l gas does n o t increase t h e 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 n a t u r a l gas a v a i l a b l e f o r home h e a t i n g and o t h e r 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 e d e r a 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 A c 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 c o u l d be released i n t o t h e environment from v a r i o u s processes. Many power p l a n t s and i n d u s t r i a l users had been burning c o a l o r h i g h p o l l u t a n t - p o t e n t i a l f u e l s ; however, due t o enactment o f o t h e r low-cost, fuel.

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

these amendments, many p l a n t s converted t o use o f gas as a clean, e f f i c i e n t Passage o f these amendments can t h e r e f o r e be considered as i n d i r e c t The e f f e c t has been small due t o t h e f e d e r a l i n c e n t i v e t o i n d u s t r i e s t o use n a t u r a l gas, thereby i n c r e a s i n g t h e p r o d u c t i o n and u t i l i z a t i o n o f t h i s f u e l . below. The Energy Supply and Environmental Coordination Act o f 1974
DOE i s mandated t o p r o h i b i t c o a l b u r n i n g e l e c t r i c generating p l a n t s from

c u r t a i l m e n t s o f i n d u s t r i a l use and t h e passage o f t h e Act c i t e d immediately

s w i t c h i n g 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." D E can issue p r o h i b i t i o n orders o r f o r b i d t h e use o f o i l o r gas i n power O p l a n t s now u s i n g i t i f a s w i t c h t o c o a 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 n a t u r a l gas u t i l i z a t i o n b u t has no impact on production since gas i s i n s h o r t supply. (Recently, D E has encouraged the opposite, namely, r e p l a c i n g imported f u e l O o i l used i n power p l a n t s w i t h n a t u r a l gas.) WASTE DISPOSAL Althogh t h e n a t u r a l gas i n d u s t r y does n o t have t h e severe waste disposal requirements o f t h e nuclear and coal i n d u s t r i e s , i t does have a few due t o t h e presence o f poisonous and c o r r o s i v e hydrogen s u l f i d e i n c e r t a i n n a t u r a l gas supplies. This s o - c a l l e d sour gas i s found p r i m a r i l y i n Texas, F l o r i d a , To reduce c o r r o s i o n problems, The amine i s Alabama, M i s s i s s i p p i , New Mexico, and Wyoming. solution. stream.

t h e hydrogen s u l f i d e i s scrubbed from t h e gas by an amine o r c a u s t i c Amine scrubbing i s the primary process used today. regenerated by h e a t i n g i t t o d r i v e o f f hydrogen s u l f i d e as a concentrated gas Because o f i t s poisonous nature, t h e released hydrogen s u l f i d e i s Since f l a r i n g releases s u l f u r d i o x i d e t o t h e atmosphere, The r e g u l a t i o n s are 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 l a n t . p o l l u t i o n r e g u l a t i o n s place s t r i c t l i m i t s on f l a r i n g . Clean A i r Act as amended i n 1970.

p a r t o f S t a t e Implementation Plants (SIP) f i l e d under the requirements o f t h e The SIP requirements are designed t o b r i n g Each s t a t e has a s l i g h t l y 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 f e d e r a l ambient standards. i s 2 t o 5 tons per day, depending on t h e s t a t e . Florida.) 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 forbidden when t h e s u l f u r i n p u t ( F l a r i n g i s forbidden i n Since a Claus p l a n t o f 20 long tons per day i s economical because

o f t h e value o f t h e recovered s u l f u r , t h e p e n a l t y o f these r e g u l a t i o n s on producers i s small. F l o r i d a , Oklahoma, and New Mexico have r e g u l a t i o n s r e q u i r i n g t h a t new Claus p l a n t s be desinged t o abate about 99% o f the p o t e n t i a l SO2. 3 stage Claus p l a n t s . This i s t o be compared w i t h t h e 94 t o 96% r e d u c t i o n obtained i n t h e standard 2 o r I n p r a c t i c e t h i s doubles t h e p l a n t c o s t but increases The incremental c o s t f o r t h e t a i l t h e s u l f u r recovered b y o n l y a few percent.

gas cleanup i s a d i s i n c e n t i v e f o r gas production, but, since o n l y one p l a n t has been b u i l t u s i n g t h i s technology, t h e costs have n o t been c a l c u l a t e d .

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 t a t e s . been issued. To date, New Source Performance Standards have n o t

Federal environmental r e g u l a t i o n s o f gas production such as a p p r o p r i a t e disposal 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 Incentives. CONCLUSIONS Natural gas i s a major source o f U.S. energy supplies. I n 1978, t h e The consumption

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 n a t u r a l gas consumption. 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%). by other sectors was; i n d u s t r i a l , 8.28 quads (41.8%); t r a n s p o r t a t i o n , 0.54

The p r i n c i p a l i n c e n t i v e s r e l a t e d t o n a t u r a l gas transmission and p r o d u c t i o n are 1) a f r a c t i o n o f t h e c o s t o f running t h e Federal Power Commission, approximately $248 m i l 1i o n since 1938, and 2) t h e i n c e n t i v e t o t h e producer s e l l i n g i n t e r s t a t e n a t u r a l gas due t o wellhead p r i c e c o n t r o l s , which amounted t o a negative $1,048 m i l l i o n from 1955-1978. (Since 1969 t h e Because o f t h e wellhead c o n t r o l s have been a d i s i n c e n t i v e t o t h e producer.

e f f e c t o f outstanding i n t r a s t a t e c o n t r a c t s a t lower p r i c e s than i n t e r s t a t e c o n t r a c t s , on average, t h e wellhead p r i c e c o n t r o l s d i d n o 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 n c e n t i v e s provided by t h e Federal Government t o t h e development o f the n a t u r a l gas i n d u s t r y .

TABLE 50. I n c e n t i v e Area From O i l Chapter

Summary o f N a t u r a l Gas I n c e n t i v e s by Type ( i n M i l l ions o f 1978 D o l l a r s ) Taxation Disbursement Requirements Traditional Services Nontrad. Services Market Activity Total

Geological Survey-data Bureau o f Land Management leasing Bureau o f Mines-data Intangible d r i l l i n g expensing Percentage d e p l e t i o n a1 1owance Wellhead P r i c e C o n t r o l s Federal Power Commission Regu 1a t ion 4,648 10,269 -1,048

289

Total 14,917 0 -800

- 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 b y N a t u r a l Gas Industry.'' American Gas A s s o c i a t i o n Research and Engineering Q u a r t e r l y Review, Volume 2, No. 3, November 1976. N a t i o n a l Gas Survey. D.C., 1973. Volume 11, Federal Power Commission, Washington,

2. 3.
4.

Gas Rate Fundamentals. American Gas Association, Rate Committee, 420 Lexington Avenue, New York, 17, NY, 1960. S. G. Breyer and P. 0. Macovoy, Energy Regulation by t h e Federal Power Commission. The Brookings I n s t i t u t i o n , Washington, D.C., 1974. S t a f f a n a l y s i s prepared a t t h e 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 , U n i t e d States Senate, "Natural Gas P o l i c y Issues and Options," S e r i a l No. 93-20 (12-55), 1973. A P r e l i m i n a r y E v a l u a t i o n o f t h e Cost o f N a t u r a l Gas Deregulation. Intra-Agency Task Force, p. 21, January 1975.
U.S.

5.

6. 7.

FPC

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 companies 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 generation 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 electricity 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 A d m i n i s t r a t i o n (REA) Department o f Energy (DOE) The Alaska Power A d m i n i s t r a t i o n (APA) The Bonnevi 11e Power A d m i n i s t r a t i o n (BPA) The Southeastern Power A d m i n i s t r a t i o n (SEPA) The Southwestern Power A d m i n i s t r a t i o n (SWPA) The Western Area Power A d m i n i s t r a t i o n (WAPA) The Economic Regulatory A d m i n i s t r a t i o n (ERA) The Federal Energy Regul a t o r v Commi s s i on (FERC) The Energy I n f o r m a t i o n A d m i n i s t r a t i o n (EIA) Department o f the Treasurey (DotT) The I n t e r n a l Revenue Service (IRS) Independent Organizations The S e c u r i t i e s and Exchange Commission (SEC)

* The Tennessee V a l l e y A u t h o r i t y (TVA)

The organizations t h a t have had the l a r g e s t d i r e c t impact on t h e d o l l a r incen t i v e f i g u r e s presented i n t h i s chapter are t h e REA, TVA, BPA, SWPA, and FERC. The actions o f the SEC and IRS i n a d m i n i s t e r i n g t a x and investment i n c e n t i v e s 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 O ACTIONS F Energy-related actions toward e l e c t r i c i t y and estimates 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 a c t i o n s used by these organizations. There are nine d i s t i n c t types of a c t i o n s i d e n t i f i e d i n The types of f e d e r a l a c t i o n s t h e t h e o r e t i c a l chapter, b u t n o t a l l o f them are used as major a c t i o n s t o encourage 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 . a f f e c t i n g t h e e l e c t r i c energy market are:

exhortation taxation requirements

organizational creation and prohibition traditional government services 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, exhortation was a minor action conducted along with the major action of market activity. 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 Government sponsored utility 1. Federal power authorities 2. State power authorities

B.

3. 4.

Municipally owned electric utilities 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 .
2.

Investment tax credits 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 provision 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 c r e d i t s by investor-owned u t i l i t i e s i s summarized in Table 51 according t o the method of accounting employed, 1) flow through or 2 ) deferred. The amounts l i s t e d by the flow through method of accounting i n d i c t s savings passed on t o the customer. The amounts by deffered accounting do not r e s u l t i n a r a t e reduction from savings realized through use of investment tax c r e d i t . N s u i t a b l e method was formed t o convert the data t o o 1978 dollars, so the current dollar figures l i s t e d in Table 51 are low by a f a c t o r 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 Accounting Fl ow-through Deferred Not stated Tot a1

Credits Generated

Amount

Credits Utilized Percent

Number of Companies

860,124,000 3,451,585,000 9,070,000 4,370,816,000

718,393,000 3,060,622,000 61,000 3,779,676,000

23 77 100

68 177 4 249

For purposes of estimating amount of savings t o investor-owned u t i l i t i e s from federal tax c r e d i t s "generated" savings from tax c r e d i t will be used since t h i s column r e f e r s t o the amount l i k e l y t o be u t i l i z e d , considering t h a t t h e provision f o r applying c r e d i t s not currently used can be transferred t o expenses e i t h e r back t h r e e years or forward seven years. incentive amounts t o $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 i b e r a l i z e d depreciation in computing t h e i r tax l i a b i l i t y . They can choose t o adopt accelerated depreciation f o r writing off expenses which i s approximately twice the r a t e of depreciation t h a t i s possible when using the s t r a i g h t l i n e method of depreciating expenses. For accounting purposes, however, u t i l i t i e s maint a i n records on the actual depreciation which i s 50 percent of the accelerated depreciation. Thus, additional deductions from the use of accelerated depreciation are reported as deferred taxes. If the assumption t h a t f u t u r e plant Hence, the tax c r e d i t

m a i n t a i n records on the a c t u a l d e p r e c i a t i o n which i s 50 percent o f t h e accelerated depreciation. Thus, a d d i t i o n a l deductions from t h e use o f accelerated
I f t h e assumption t h a t f u t l r r e

d e p r e c i a t i o n are reported as deferred taxes. r e t a i n e d by u t i l i t i e s .

p l a n t investment w i l l continue t o grow, these deferred taxes are p e r p e t u a l l y Under c o n d i t i o n s o f growth, i t i s u n l i k e l y t h a t I n a few cases, u t i l i t y investment The r e s u l t s o f t h i s deferred taxes w i l l be p a i d out as taxes.

d u r i n g the depression o f the 1930's has been analyzed t o determine what would happen t o deferred taxes d u r i n g a severe economic slump. a n a l y s i s showed t h a t the gross p l a n t o f New England Telephone and Telegraph continued t o grow throughout t h e depression, w i t h t h e exception o f two years.
O f course, more s t u d i e s would have t o be done t o c o n c l u s i v e l y show t h a t

d e f e r r e d taxes would n o t be a f f e c t e d d u r i n g a severe economic slump.

Assuming

a h e a l t h y economy, t h e f o l l o w i n g d e s c r i p t i o n 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 s u b j e c t t o l i b e r a l i z e d

d e p r e c i a t i o n f o r t a x purposes, any lower income taxes r e s u l t i n g from higher d e p r e c i a t i o n deductions i n t h e e a r l y years o f l i f e would be o f f s e t by h i g h e r income taxes i n t h e 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 property, annual d e p r e c i a t i o n charges f o r t a x 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 a d d i t i o n s are a t l e a s t equal t o d o l l a r s o f retirements. 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 r e d u c t i o n s from l i b e r a l i z e d d e p r e c i a t i o n r e s u l t n o t i n t a x d e f e r r a l s , b u t i n permanent t a x savings. ( 3 ) Thus, f o r purposes o f t h i s r e p o r t t a x 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 provided by l i b e r a l i z e d d e p r e c i a t i o n i s t a b u l a t e d 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 f a r , t h i s d e s c r i p t i o n o f t a x a t i o n has concerned o n l y t h e investor-owned utilities. 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 Year Deferred Income ~axes(a) (Million of 1978 Dollars)
NA

2636.620 ( P ) 1869.874 1475.670

1959 1958 1957 1956 TOTAL

490.582 513.742 479.740 443.384 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 Administrations 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 investorowned 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?

Year

Estimated Incentive Provided by Tax Exemption (Millions of 1978 Dollars)

TOTAL

1,626.46

This table includes only the nonhydropower 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 Municipal U t i l i t i e s by t h e Exemption o f Federal Taxes

Annual Electrical Supply by Investor Owned Utilities (Millions of Kilowatt Hours) Tax Rate (1978 Dollars per Million Kilowatt Hours Annual Electrical Supply by Government Sponsored Utilities (Million Kilowatt Hours)
Tax Savings o f Government Sponsored Utilities (Million 1978 Dollars)

Fiscal 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 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 TOTAL

Federal Taxer Paid by Investor Owned Utilities (Millions of 1978 Dollars1 N/A 809.426 596.417 997.296 701.924 1,065.312 1,386.915 1,535.016 1,878.758 2,819.850 3,103.959 2,951.687 3,119.342 3,078.785 3,125.835 3,008.470 3,011.873 2,784.855 2,607.944 2,472.346 2,175.454 2,217.004 2,300.038 2,593.265 2,221.453 2,110.399 1,949.984 1,678.228 1,332.630 1,017.442 884.435 2,108.065 2,320.567 2,588.289 2,716.687 2,818.774 2,758.953 2,515.846 2,084.086 1,829.014 1,692.805 1,589.640

( 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 t a x e s 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 utilities. 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 c o o p e r a t i v e s t h a t borrow f r o m t h e REA amounts t o $6,110.40 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. r a t e t h a n a t a x a b l e u t i l i t y bond. bonds has averaged about 2.25%. With m i l l i o n 1978 d o l l a r s . This f i g u r e i s p r e s e n t e d 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 d e s c r i b e d i n t h e

a t a x exempt s t a t u s , t h e s e 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 Through c o n t a c t s w i t h i n d u s t r y spokesmen we T h i s 2.25% savings a s s o c i a t e d w i t h t h e a b i l i t y Complete d a t a was n o t m i l l i o n 1978 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 t o s u p p o r t l o n g - t e r m debt b y bond i s s u e s s e l l i n g f o r a l o w e r i n t e r e s t r a t e a g a i n 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. p r e s e n t e d i n T a b l e 56. dollars. MARKET ACTIVITY The F e d e r a l Government c o n s t r u c t s , operates and m a i n t a i n s e l e c t r i c i t y The f e d e r a l involvement i n The 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 The e s t i m a t e d s u b s i d y amounts t o $2,441.28

t r a n s m i s s i o n systems and p r o v i d e s l o a n s and l o a n guarantees f o r e l e c t r i c i t y g e n e r a t i o n , 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. 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 R o o s e v e l t a d m i n i s t r a t i o n .

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 Admini 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 F e d e r a l Government i n t h e e l e c t r i c a l energy market. 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. 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 . 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 involvement o f t h e BPA and TVA ( i g n o r i n g The p r i m a r y m o t i v a t i o n behind t h e c r e a t i o n o f t h e REA was t o slow t h e m i g r a t i o n o f A t t h i s time 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 Federal Tax Rate for Investor Owned Utilities Tax Savinas of . , REA Borrowers (Mil lions 1978$)

Year

Gross Operating Revenue of REA Borrowers (Millions 1978$1

--

1941 TOTAL (e) Estimated values.

TABLE 56. Tax-Free Bond Subsidy Provided to Publ'cly Owned Class A and Class B Electric Utilities76) Estimate of the Subsidy Provided by the 2.25% Average Difference 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 2,441.279

Year 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 TOTAL

Long-Term Debt (Mi 1 1 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

the cities had many modern conveniences like electricity and flush toilets. The electrical needs of the cities were served b private utilities. The rural y areas were ignored by the utilities because there weren't enough customers to justify a electric distribution system. The REA was created to provide the n 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 s o 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 continued t h e 2 percent i n t e r e s t r a t e f o r borrowers meeting s p e c i a l s t a t u t o r y c r i t e r i a . REA has made long-term, areas o f the United States. i n t e r e s t - b e a r i n g loans, and guaranteed loans made These borrowers serve about 8.0 m i l l i o n e l e c t r i c REA loans t o f i n a n c e e l e c t r i c and telephone

by others, t o 1,000 e l e c t r i c and 900 telephone systems l o c a t e d i n t h e r u r a l consumers and 3.5 m i l l i o n telephone subscribers, l o c a t e d i n 47 states, t h e V i r g i n I s l a n d s and Puerto Rico. 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 s p e c i a 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 s e t f o r t h i n t h e Act. REA a l s o makes loans i n c o n j u n c t i o n w i t h o t h e r 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 n o n - p r o f i t and cooperative associations, p u b l i c bodies, and o t h e r e l e c t r i c u t i l i t i e s . These loans f i n a n c e t h e construct i o n and operation o f d i s t r i b u t i o n l i n e s or systems, generating p l a n t s and transmission l i n e s t o p r o v i d e i n i t i a l and continued adequate e l e c t r i c s e r v i c e t o persons i n r u r a l areas. About 99 percent of t h e REA-financed e l e c t r i c systems are cooperatives, owned and c o n t r o l l e d b y 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 s u p p l i e r s 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 generation and transmission loans are made o n l y where no adequate o r dependable source o f power i s a v a i l a b l e o r where t h e r a t e s o f f e r e d b y 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 higher c o s t o f power t o t h e consumers than t h e cost from f a c i l i t i e s t o be financed b y REA. Loan Guarantees REA also guarantees loans t o f a c i l i t a t e t h e o b t a i n i n g 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 c o u l d have been made by REA under t h e ACT, and may be made c o n c u r r e n 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 b y t h e borrower and t h e lender, and may be obtained from any l e g a l l y organized l e n d i n g agency q u a l i f i e d t o make, hold, and s e r v i c e 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 t h e REA Administrator. I n t e r e s t r a t e s on FFB loans are determined a t the time each advance of funds i s made and are based upon t h e cost of money t o the FFB. REA acts as agent f o r the FFB, and performs a l l loan servicing functions as authorized by the Act creating FFB. Borrower's dealings are with REA and a l l policies and procedures of REA are applicable t o a guaranteed loan. I n t e r e s t Rates

A special two percent r a t e i s available f o 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 t h in the law. These include e l e c 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 t h e t o t a l cost of d i s t r i b u t i o n and general plant divided by the annual gross revenue a f t e r excluding the cost of power.
Most REA loans bear i n t e r e s t a t the standard r a t e of f i v e percent.
A Revolving Fund f o r Loan Capital

A Rural E l e c t r i f i c a t i o n and Telephone Revolving Fund in the U.S. Treasury i s the source of REA loan funds. This fund i s replenished through c o l l e c t i o n s on outstanding and f u t u r e REA loans and from the s a l e of borrower's notes t o t h e Secretary of t h e Treasury or the money market. Repayment of notes sold i s insured by REA. Limitations on the amounts authorized f o r loans in any one
year may be imposed by t h e 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 t h e f a c t t h a t these borrowers repay t h e i r government loans promptly, often ahead of schedule. O the 12.9 f b i l l i o n loaned through September 30, 1978, l e s s than 1/1,00Oth of one percent has been l o s t through foreclosures or f a i l u r e .

Technical Assistance REA helps develop t h e 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 p o s s i b l e t h e i n t e r n a l s t r e n g t h 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 r e n g t h 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 staff

o f engineering, accounting and management s p e c i a l i s t s , o p e r a t i n g from t h e i r p r i v a t e residences, i s located through t h e United States t o provide d i r e c t assistance t o borrowers. Throughout i t s h i s t o r y the REA has made loans f o r t h e consumption as w e 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 b y t h e REA The amount o f t h e p r i n c i p a l The n e t annual 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 , transmission and generation 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. and t h e i n t e r e s t t h a t has been r e p a i d i s presented i n Table 58. the cumulative outstanding balance.

outstanding REA loans i s c a l c u l a t e d 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 i n c e n t i v e provided t o e l e c t r i c i t y prod u c t i o n by t h e REA can be defined as t h e t o t a l amount o f money outstanding i n 10ans.or the d i f f e r e n c e i n the cost o f c a p i t a l p a i d 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 n c e n t i v e s are s i m i l a r t o those i n t h e The t o t a l amount o f REA loans outstanding a t t h e end o f To estimate t h e i n c e n t i v e hydro-energy chapter.

t h e 1978 f i s c a l year was $18.95 b i l l i o n (1978).

provided by low i n t e r e s t loans t h e net cumulative d o l l a r amount o f o u t s t a n d i n g

REA loans i n 1978 d o l l a r s was m u l t i p l i e d by t h e d i f f e r e n c e between t h e 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 r a t e s 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 estimated i n c e n t i v e u s i n g 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). A d m i n i s t r a t i v e costs o f o p e r a t i n g t h e REA have amounted t o $524.3 m i l l i o n (1978). A d m i n i s t r a t i v e c o s t data i s presented i n Table 61.

Federal Power A d m i n i s t r a t i o n s and t h e TVA The TVA and most o f t h e Federal Power A d m i n i s t r a t i o n s c o n s t r u c t and operate transmission f a c i l i t i e s t o accompany t h e i r generation s t a t i o n s . A

TABLE 57. REA Loans Granted in the Electrification Progr m by Purpose (Millions of 1978 Dollars Per Year) 87) Year Loans for Distribution Lines and Facilities Loans for Transmission Operation Facilities Loans for Consumer Facilities

1937 1936 TOTAL (a) 1976 Fiscal Year Transition Quarter NOTE: Table may not add exactly due to rounding. 277

TABLE 58. Year

Repayment o f REA Loans ( M i l l i o n s o f 1978 D o l l a r s Per Principal Due and Paid Interest Due and Paid Advance Payments

1978 1977 1976(a)

315.988 234.836 52.469

278.694 206.817 47.899

-14.957 -15.286 -8.691

- . .

--

--

1942 1941 1940 TOTAL

1.757 14.720 9.976 6,265.84

31.078 13.810 10.911 3,937.28

437.02

8.824 12.342 1.942

(a) 1976 F i s c a l Year T r a n s i t i o n q u a r t e r NOTE: Table may n o t add e x a c t l y due t o rounding.

TABLE 59.

Net Annua REA Loans Outstanding (Millions of 1978 Dollars Per Year) 77) Total REA Loans Granted f o r t h e E l e c t r i c Program 984.701 Total Payments t o P r i n c i p a l on REA Loans 301.031 Total P r i n c i p a l Outstanding on REA Loans 683.670

Year

TABLE 60.

T o t a l Net Cumulative Outstanding REA Loans f o t h e E l e c t r i c Program ( M i l l i o n s o f 1978 ~ o l l a r s ()7'i

Weighted Average of Y i e l d s on Newly Issued Domestic E l e c t r i c and Gas U t i l i t y Bonds (%) Composite I n t e r e s t Rates on 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 (%) Estimated Cost of Incentives Provided by Low I n t e r e s t REA Loans

Year

T o t a l Net Cumul a t i v e Outstanding REA Loans f o r t h e E l e c t r i c Program

1937 1936 TOTAL

270.32 65.55

TABLE 61. REA Administrative Funds Obligated t the Program (Millions of 1978 Dollars) (77 Year Administrative Funds Obligated Year Administrative Funds Obligated

1959 1958 1957 1956

10.639 10.251 9.900 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 constitute 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 I n c e n t i v e s Used t o S t i m u l a t e t h e Development o f E l e c t r i c Energy ( M i l l i o n s o f 1978 D o l l a r s ) Taxation Traditional Services Market Activity

I n c e n t i v e Area Investment Tax C r e d i t s L i b e r a l i z e d Depreciation Tax Exemption :

Federal Power authorities

- S t a t e 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 A d m i n i s t r a t i o n E l e c t r i c i t y Transmission Subtotal TOTAL 38,829.1 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 r e n t viewpoints and do n o t add o r i n d i c a t e a range. ( d ) Transferred from the hydro-energy chapter. 524.3 524.3

(1)(~3d) 6,224.7 2,447.1'~) 25,171.0 (1) 12,019.0 (2)

REFERENCES
1.
2.

CHAPTER IX

Brannon, Gerald M., Energy Taxes and Subsidies, Energy Policy Project of the Ford Foundation, Ball inger, 1975. Statistics of Privately Owned Electric Utilities in the U.S., Federal Power Commission, Government Printing Office, 1971, 1975, 1976, 1977,
1978.

3. 4.

Glassman, Gerald J. "Objections to Taking Liberalized Depreciation" Public Utilities Fortnightly, March 31, 1966, pp 34. Historical Statistics of the Electric Utility Industry, Edison Electric Institute, New York, NY, 1971. Statistical Year Book of the Electric Utility Industry, Edison Electric Institute, New York, NY, October 1977. Moody's, A Nationwide Survey of Public Utility Progress, 1975, pp 22.

5.
6.

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. 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.

9.

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, development and demonstration of new technology.

8)

Market a c t i v i t y under c o n d i t i o n s s i m i l a r t o those faced by nongovernmental producers o r consumers. F o l l o w i n g the establishment o f t h i s typology, t h e problem became one o f

assigning 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 categories according t o t h e f i v e energy types. simultaneously. Two approaches were taken 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 Engineers and micro-economists

took a broad p e r s p e c t i v e i n i d e n t i f y i n g and measuring i n c e n t i v e s created throughout t h e energy s e c t o r o f t h e economy. focused on i n c e n t i v e s created along the t r a j e c t o r y o f transformation from e x p l o r a t i o n and m i n i n g through transmission and waste disposal.

GENERIC INCENTIVES
The typology o f f e d e r a l a c t i o n s developed i n the t h e o r e t i c a l framework was f i r s t a p p l i e d b r o a d l y t o i d e n t i f y i n c e n t i v e s funded by f e d e r a l i n s t i t u t i o n s d u r i n g f i s c a l year 1978. F o r t y - f i v e o r g a n i z a t i o n a l components spent an e s t i Organizations t h a t mated $13.7 b i l l i o n conducting energy r e l a t e d a c t i v i t i e s . ditures.

emphasized market a c t i v i t y spent 52% o f a l l major f e d e r a l energy-related expenExploration, research, development, and demonstration accounted f o r Organizations whose primary a c t i o n 38.5% expended by 12 organizations. energy-related expenditures. the tax structure. Energy.

i n v o l v e s requirements backed by c r i m i n a l and c i v i 1 sanctions spent 5.5% o f a1 1 Only one o r g a n i z a t i o n was i n v o l v e d i n a l t e r i n g The l a r g e s t s i n g l e energy program was t h e Department o f

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 n c e n t i v e s 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 i d e d among s i x energy sources: nuclear, coal, s o l a r , o i l , o t h e r ( p r i m a r i l y goethermal), and n a t u r a l gas. The s o l a r energy i n d u s t r y received 2.7% o f the i n c e n t i v e s d i r e c t e d 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 n a t i o n a l o b j e c t i v e t o c r e a t e an economically 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 m a t t e r s 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

relations.

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 t h e cost These n o n t r a d i t i o n a l

o f i n c e n t i v e s was i n t h e form o f n o n t r a d i t i o n a l services. perceived p o t e n t i a l f o r nuclear power.

services were p r i m a r i l y applied t o knowledge a c q u i s i t i o n i n t h e area o f t h e Creating i n c e n t i v e s using n o n t r a d i t i o n a l services gave t h e 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 p r o d u c t i o n t h a t c o u l d have been c o n t r a r y t o t h e n a t i o n a l i n t e r e s t , such as weapons development and environmental contamination. I n c e n t i v e s f o r nuclear power are estimated t o have cost the Federal Government $21.0 b i l l i o n over t h e past 30 years. production. The t o t a l costs o f i n c e n t i v e s t o the nuclear i n d u s t r y do not take i n t o account several n o n q u a n t i f i a b l e i n c e n t i v e s . Neither t h e c o s t o f t h e P r i c e Anderson Act ( a l e g i s l a t i v e a c t i o n which removed the l i a b i l i t y insurance roadblock), nor t h e f e d e r a l uranium p o l i c i e s are included because no way was found t o q u a n t i f y them. This i s approximately 8.3% o f t h e t o t a l estimated cost o f a l l i n c e n t i v e s useds t o s t i m u l a t e energy

HYDRO INCENTIVES
The Federal Government constructs, operates, and r e g u l a t e s 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 HisAs by the government t o improve n a v i g a t i o n a l f a c i l i t i e s , c o n t r o l floods, and develop water resources f o r a g r i c u l t u r e , i n d u s t r y , and m u n i c i p a l i t i e s . t o r i c a l l y , h y d r o e l e c t r i c power generation was a secondary consideration. c a t i o n f o r new dams has become power generation. I n the development o f hydropower, t h e 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 cycle, from ownership o f the primary f a c i l i t i e s o f production through d e l i v e r y t o the consumer. 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 i n c e n t i v e s . First, Two

t h e former o b j e c t i v e s have been l a r g e l y accomplished, t h e primary j u s t i f i-

r e t u r n on investment from power revenues and costs o f construction, operation, maintenance, management, and r e g u l a t i o n o f dams t h a t c o u l d be a l l o c a t e d t o power development were calculated. Second, t h e subsidies provided by t h e low

i n t e r e s t r a t e s o f f e d e r a l a p p r o p r i a t i o n s and t h e exemption o f power revenues from income taxes were c a l c u l a t e d on the b a s i s of t h e d i f f e r e n c e s between fede 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 estimated t h a t the costs o f i n c e n t i v e s were $16.9 b i l l i o n f o r h y d r o e l e c t r i c generation. With t h e second d e f i n i t i o n , i t was estimated t h a t t h e costs o f t h e i n c e n t i v e s were $8.9 b i l l i o n f o r production. Hydro power has received 6.7% o f t h e t o t a l estimated c o s t o f i n c e n t i v e s used t o s t i m u l a t e energy production. COAL INCENTIVES More energy has been produced from coal than any other energy source; Loss o f t h e steam locomotive and space h e a t i n g 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 t h e r a p i d growth o f t h e e l e c t r i c i t y generation market. generation ago. Only r e c e n t l y has production reached t h e l e v e l o f a Presently, 74% o f U.S. coal production t h a t i s not exported I n d u s t r i a l production

i s used b y u t i l i t y companies f o r power generation. commercial e n t e r p r i s e s .

accounts f o r the use o f 24% and t h e remaining 2% i s consumed by household o r

The d e p l e t i o n 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 n c e n t i v e t o increased coal production. 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 t h e water-borne movement o f coal, amounted t o $2.6 b i l l i o n between 1950 and 1978. l i o n of i n c e n t i v e s . Though much o f t h e energy produced i n the U.S. over the l a s t 25 years came An estimated $11.7 The n o n t r a d i t i o n a l servi c e s o f research, e x p l o r a t i o n , development, and s a f e t y accounted f o r $3.6 b i l Tra-

from coal, t h e estimated costs o f i n c e n t i v e s used t o s t i m u l a t e coal p r o d u c t i o n were lower than those f o r t h e f o u r other energy sources. t o t a l c o s t o f incentives. OIL INCENTIVES Technical c o n s i d e r a t i o n necessitated d i v i d i n g i n c e n t i v e s t o increase o i l p r o d u c t i o n i n t o two categories: b i l l i o n has been expended f o r i n c e n t i v e s t o t h e coal i n d u s t r y , o r 4.6% o f t h e

1) e x p l o r a t i o n and production 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 Thus, i n c e n t i v e s t o t h e e x p l o r a -

r e c o v e r y o f b o t h c r u d e o i l and n a t u r a l gas. other.

t i o n and p r o d u c t i o n o f one o f t h e s e energy sources a c t e d as an i n c e n t i v e t o t h e 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 p e t r o l e u m conversion. 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 p e t r o l e u m i n d u s t r y were t h e r e d u c 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 allowance. These two i n c e n t i v e s amounted t o $55.5 billion. Another l a r g e c a t e g o r y was requirements, i n which t h e F e d e r a l Government makes demands which are backed up by c r i m i n a l and c i v i l s a n c t i o n s . 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 . r e q u i r e m e n t s t h r o u g h 1978 was $57.5 lion. billion. These requirements 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 The e s t i m a t e d v a l u e o f 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 Research and development and d a t a f r o m t h e G e o l o g i c a l Survey and t h e Market a c t i v i t y and 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 . incentives 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 cost o f incentives. Forty-nine percent o f the cost o f incentives, 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. 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. lion. I n t a n g i b l e d r i l l i n g expensing and Requirements i n t h e f o r m o f w e l l t h e percentage d e p l e t i o n allowance 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 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 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 G e o l o g i c a 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 Fede r a l Government a c t i o n s were $14.6 billion. 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.

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

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 category, accounting for 25.6% of the total energy incentives provided by the Federal 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 i they were f 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 installation 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, providing 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 calculating 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

If d e p r e c i a t i o n were defined as p a r t o f t h e value added,

r e t a i n e d value added. nature o f s o l a r energy. on s t a t e ' s r i g h t s . market.

a more d e t a i l e d a n a l y s i s would be r e q u i r e d because o f t h e c a p i t a l - i n t e n s i v e Since t h e value-added t a x has been termed a f e d e r a l sales tax, t h e r e c o u l d be some controversy w i t h respect t o infringement Since t h e t a x g e n e r a l l y penalizes imports and rewards exports by not t a x i n g exports, i t c o u l d cause some d i s r u p t i o n i n t h e petroleum

Tax-Free I n d u s t r i a l Bonds I n an i n c e n t i v e analogous t o t h e t a x f r e e bonds a v a i l a b l e f o r t h e purchase 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 o r g a n i z a t i o n s would be a b l e t o purchase s o l a r equipment w i t h the proceeds from t h e s a l e o f t a x - f r e e indust r i a l bonds issued b y 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 It i s estimated t h a t t h e c o s t o f

c i p a l must be used f o r s p e c i f i e d purposes.

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 c a t a s t r o p h i c accident a t a nuclear power p l a n t , o f f e r s a precedent f o r a s i m i l a r i n c e n t i v e f o r s o l a r energy. u n c e r t a i n t y associated w i t h a new technology. maintenance. One o f t h e b a r r i e r s t o t h e adoption o f s o l a r technology i s t h e economic r i s k and The r i s k s i n v o l v e d are n o t known due t o t h e l a c k 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 An insurance o r indemnity i n c e n t i v e , whereby t h e Federal Government assumes t h e r i s k , c o u l d p r o v i d e 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 t h e market. It i s estimated t h a t t h e c o s t o f t h i s i n c e n t i v e would be l e s s 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 s o l a 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 l o u d cover. An i n c e n t i v e c o u l d be created b y a l l o w i n g e x i s t i n g gas users

who adopt s o l a r energy t o have higher p r i o r i t i e s t o r e c e i v e l i m i t e d s u p p l i e s o f gas d u r i n g t i m e s o f s c a r c i t y . The g r e a t e s 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 . R e d i r e c t i o n o f t h e Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n The Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n could p r o v i d e grants and lowi n t e r e s t loans f o r t h e c o n s t r u c t i o n of medium-scale s o l a r thermal, e l e c t r i c , p h o t o v o l t a i c and wind energy conversion f a c i l i t i e s . j e c t s using s o l a r resources. over $5 b i l l i o n i n 10 years. Formation o f a S o l a r TVA A l a r g e government c o r p o r a t i o n could be created t o produce energy and s t i m u l a t e t h e economy o f t h e southern " s u n b e l t " s t a t e s . The Federal Government
It i s

The operation and func-

t i o n o f t h e REA c o u l d remain unchanged, b u t i t would be d i r e c t e d t o f u n d proIt i s estimated t h a t such an i n c e n t i v e would c o s t

owns vast areas o f a r i d land i n New Mexico, Texas and Arizona which c o u l d 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 p h o t o v o l t a i c f a c i l i t i e s . estimated t h a t t h i s p r o j e c t would c o s t more than $10 b i l l i o n over 10 years. Federal C o n s t r u c t i o n o f Larqe Solar F a c i l i t i e s Using t h i s i n c e n t i v e , the N a t i o n a l Aeronautics and Space A d m i n i s t r a t i o n , U.S. Army Corps o f Engineers, and Bureau o f Reclamation c o u l d be commissioned t o design, b u i l d and operate l a r g e s o l a r p r o j e c t s such as land and ocean b i o mass, s o l a r thermal e l e c t r i c , ocean thermal energy conversion and p h o t o v o l t a i c facilities. 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 Bonneville, Alaska, Southwest, and Southeast Power A d m i n i s t r a t i o n s . This program would have a
It i s

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 marketing i n f r a s t r u c t u r e . t o exceed t h e n e x t 10 years. Bonus f o r I n n o v a t i v e Uses o f S o l a r Enerqy

estimated t h a t t h i s program would c o s t over $10 b i l l i o n d u r i n g a p e r i o d o f time

This i n c e n t i v e program i s p a t t e r n e d a f t e r the uranium p r o s p e c t i n g bonus program o f t h e 1940-1950s, i n which prospectors who l o c a t e d s i g n i f i c a n t The bonus approach would be uranium deposits r e c e i v e d bonuses o f $10,000.

a p p l i e d t o a wide range o f s o l a 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 b u i l d i n g s , and f a c t o r i e s and t h e use o f s o l a r water h e a t i n g i n b u i l d i n g a p p l i c a t i o n s , housing developments and shopping centers. I n a d d i t i o n , s o l a r e l e c t r i c a p p l i c a t i o n s t o reduce e l e c t r i c demand d u r i n g peak power periods c o u l d a l s o be included. The p o s s i b i l i t i e s o f t h e bonus approach The amount o f t h e f o r i n g e n u i t y and s p e c i f i c a p p l i c a t i o n s i s almost endless. c o u l d be delegated t o i n d i v i d u a l states.

bonus could vary w i t h t h e a p p l i c a t i o n , and a d m i n i s t r a t i o n o f t h e bonus system Each s t a t e c o u l d s e t up i t s own ConThe p u b l i c 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. s i d e r a b l e p u b l i c involvement c o u l d be s t r u c t u r e d i n t o t h e program.

education 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 c o u l d be expected t o a r i s e a t t h e grass r o o t s 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 s u b d i v i d i o n s based on t h e i r own perceived energy needs. range from $10,000 t o $100,000. $100 m i l l i o n per year. Manhattan P r o j e c t f o r Solar Energy This i n c e n t i v e would be baseds on a perceived n a t i o n a l need f o r t h e u t i l i z a t i o n o f s o l a r energy on a crash/large-scale basis. Regional e n t i t i e s fashThe ioned a f t e r the TVA or e x i s t i n g r e g i o n a l u t i l i t i e s would be t h e 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. 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. 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. approach would s e v e r e l y impinge on t h e present s t r u c t u r e s f o r producing, The precedent f o r t h i s approach The i s 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 Power A d m i n i s t r a t i o n . estimated cost i s more than $10 b i l l i o n over a p e r i o d i n excess o f 10 years. Power P l a n t Demonstration Program This i n c e n t i v e would be patterned a f t e r t h e Atomic Energy Commission's Power Reactor Demonstration Program (PRDP). first-of-a-kind U t i l i t i e s would b u i l d small, o f t e n c o l l e c t o r s and the Federal Government would agree t o assume This I t i s estimated t h a t bonuses would
I f each s t a t e awarded between 10 and

l e v e 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 r e c o g n i t i o n and a bonus.

100 bonuses, t h e annual c o s t o f t h e program would range between $1 m i 11i o n and

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 e q u i v a l e n t generating

c a p a c i t y would r e q u i r e .

This i n c e n t i v e accomplishes several o b j e c t i v e s .

It

would f a c i l i t a t e deployment o f s o l a r power p l a n t s , 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.
I t would g i v e hands-on experience

o f s o l a r p l a n t development t o t h e u t i l i t i e s . could be assumed b y t h e Federal Government. 10 years. CONCLUSION

U t i l i t i e s c o u l d be asked t o subCost d i f f e r e n t i a l s Assuming 20 l a r g e c a p a c i t y demon-

m i t proposals f o r i n s t a l l i n g s o l a r systems i n t h e i r grids.

s t r a t i o n p l a n t s , t h e cost i s estimated t o be l e s s than $1 b i l l i o n w i t h i n

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 n c e n t i v e s t o s t i m u l a t e energy production. These expenditures are preA precedent t h e r e f o r e sented i n Table 63 by energy source and i n c e n t i v e type. energy production.

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 I n s i g h t s u s e f u l i n t h e development o f s o l a r p o l i c y can be drawn by c o n s i d e r i n g t h e i n f o r m a t i o n i n Table 63 against a background o f techn i c a l , economic, l e g a 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 t h e l a r g e s t share o f i n c e n t i v e funds. Possible reasons are 1) a l a r g e percentage o f the p o p u l a t i o n enters the o i l market, a t the gasoline 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 necessary f o r a desirable l i f e s t y l e . The g r e a t value placed on o i l b y 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 f e d e r a l i n c e n t i v e s went t o t h e promotion of e l e c t r i c i t y generation and transmission. f o r the public. 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 a v a i l a b l e source o f power The Rural E l e c t r i f i c a t i o n A d m i n i s t r a t i o n was created t o provide 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 smallest percentage o f i n c e n t i v e s . The reasons may be:

1) coal has s u p p l i e d energy over t h e longest p e r i o d o f time; 2 ) i t i s thought

C,

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to be available in abundant quantities; and 3) coal is perceived as an inconvenient 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 controls 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 demonstration. Though popular in promise, nontraditional services are not as flexible 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 a n a l y s i s i n d i c a t e s two apparent r a t i o n a l e s f o r i n c e n t i v e s :

1 ) promo-

t i o n o f a new technology d u r i n g 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 t h e 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 s o l a r p o l i c y were developoed according t o these r a t i o n a l e s , twot 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 n c e n t i v e s should a f f e c t t h e t e c h n i c a l elements o f s o l a r energy production f o r which consumers most o f t e n e n t e r t h e marketplace. During the course o f t h e analysis, i n c e n t i v e s 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 c o s t t o t h e American taxpayer. Examples o f these are t h e Price-Anderson l i a b i l i t y i n d e m n i f i c a t i o n f o r nuclear power, t h e Connally 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 N a t u r a l Gas Act o f 1938. An a n a l y s i s o f the r e s u l t s o f such i n c e n t i v e s i n which t h e Federal Government assumes r e s p o n s i b i l i t y and r i s k c o u l d lend considerable i n s i g h t t o t h e f o r m u l a t i o n o f a s t r a t e g y f o r s o l a 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 f e d e r a l i n c e n t i v e s t o increase energy production. 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 e d e r a l investment i n i n c e n t i v e s t o increase energy p r o d u c t i o n c o u l d be an e f f i c i e n t b a s i s upon which t o i n t e g r a t e c u r r e n t and impending technology, 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 t u d i e s c o u l d be inconsequential w i t h o u t a comprehensive understanding o f the costs and r e s u l t s o f i n c e n t i v e s t o i n c r e s e energy production. 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 t h e Federal Government and t h e p r i v a t e sector. economic analysis. The Fede r a l Government need n o t p r e d i c a t e n a t i o n a l p o l i c y on s h o r t term, microAs confirmed by t h i s study, f e d e r a l j u s t i f i c a t i o n i s predicated on long-term goals met w i t h t h e a i d o f new technology and supported b y s o c i a l values o f t h e nation.

If i t i s s o c i a l l y d e s i r a b l e 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 question 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 r a t e g y and d e t e r m i n i n g 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 t h e 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 d o l l a r s . Table A-1 presents the consumer price index f o r urban wage earners and c l e r i c a l workers and the f a c t o r used t o adjust current dollar values t o

1978 d o l l a r s .

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 F a c t o r

TABLE

A-1.
CP I

(contd)

Year

1978 Factor

APPENDIX B DETAILS OF CHAPTER THREE SPENDING ESTIMATES

APPENDIX B The following pages give d e t a i l s about the estimates of FY-1978 energyr e l a t e d spending used i n Chapter 111. The discussions correspond to each row of Table 3 i n Chapter 111. Sources f o r material in t h i s appendix a r e noted. The notation "Appendix, p. - referes t o the Budqet of the United S t a t e s , " 1980: Appendix. In cases where this source provided i n s u f f i c i e n t 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 (source) U.S. Geological Survey (Appendix, p. 582) Liner l t w r (Energy Farm)

FY 1918 Outlays
(000's)

ROW

ROW 13

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:
ROW

213 Oil

$121,584; 113 Gar

$60,792

14

~ u r e a uof Miner (Appendix, p. 590)

Mining research Mining environmental research Mined land demonstrations Data collection and aoalyrir Mineral land arrerrnents TOTAL (All Coal) state regulatory program grantr Federal regulatory program grantr Mineral instituter Abandoned miner reclamation fund TOTAL (A11 Coal) Minerals, mining, irrigation, and power Alaska Native Fund--power systems TOTAL (Electricity) 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 S U P D O T ~ : 6,067 Program administration: 1 9 6 .7
blZ.13q % of above for coal = 0.77 % of above f o r nuclear = 0.05

Row

15

Office of Surface Mining

ROW 16

Bureau of Indian Affairs (Appendix, pp. 600-1)

ROW

17

Mining Health and Safety Administration (formerly Mine Enforcement and Safety Administration) (Appendix, p. 657)

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 (Appendix, p. 3871 Bonneville vower Administration (Appendix, p. 388) Southwestern Power Adminiitration (Appendix, p. 3891 southeastern Power Administration (Appendix. p. 390) Occupational Health and Safety Administration (Appendix, p. 655)

Entire agency (Electricity]

2,110

ROW

19

~ n t i r eage"$

(Electricity)

349,232

ROW

20

Entire agency (Electricity)

21,249

ROW 21

Entire agency (Electricity1

5,572

ROW

22
,

Entire program: $150,711 Proportion energy-related from PNL-2410

0.8

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 1 0 0 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 Coal Oi 1 N a t u ~ a l gas Nuclear Other 23,029 12,419 54,860 27,611 2,291 361

APPENDIX TO CHAPTER THREE (.contdJ

ROW Row 23 Organization (Source) Emploment Standards A d m i n i s t r a t i o n (Appendix, p. 655) Jurtice-~egal Activities (Appendix, p. 618) 8udget L I ~ ~ S Items ( E n e r w Form) 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 disabled miners (Coal) Legal opinions: S1,349,WD % energy-related from PNL-2410 x 0.2 Land, n a t u r a l resources, and I n d i a n m a t t e r s : X energy-related equals 0.12 TOTAL FY 1978 Outlays (OOO'r) 112,678

ROW

24

270 $8,811

1,057
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-related matters. Included i n these expenditures a r e a t t o r n e y ' s time, s e c r e t a r i a l assistance, t r a v e l expenses, and expenses f o r h i r i n g e x p e r t witnesses. Energyr 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 c o a l S t r i p mining, offshore I n addition, the a l l o c a t i o n for legal a c t i v i t i e s r e l a t e d t o development o f o i l resources, and a i l shale on federal lands. "land, n a t u r a l r e s o ~ r c e s , and I n d i a n m a t t e r s ' were i n c l u d e d a t 12% o f t o t a l , bared upon t h e l e v e l o f energy-related 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 I n d i a n a f f a i r s were then d i v i d e d by energy conrumptian l e v e 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: Electricity Coal Oil N a t u r a l gas Nuclear Other Row 25 Justice-Antritrurt Division (Appendix, p. 620) T o t a l Budget: $42,175,000 % o f energy-related equals 0.12 253 137 604 304 25 4

5,061

Energy accountr f o r 12% o f t h e economy, so we used 12% o f t h e a n t i t r u s t budget. The t o t a l a n t i t r u s t budget equals 142,175. we a l l o c a t e d t h i s e s t i m a t e by our standard 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 r h a r e r : Electricity Coal Oil N a t u r a l Gas Nuc1e.l Other ROW 26 Department o f T r a n s p o r t a t i o n 967 521 2,303 1,159 96 15

Nan-Highway Systems. Fuels and Lubricants, Operational Improvements, Highway A c t i v i t i e s - - t h e r e budget c a t e g o r i e s 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 t w r 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 o w i n g DOT budget c a t e g o r i e r . Research and S p e c i a l Programs c o n s o l i d a t e d working ~ u n d , T r a n r p a r t a t i o n Syrternr Center l ~ o o e n d i x . oo. 688. 7411 Offshore O i l Comoenration Fund (Appendix, pp.'698, 741, 742) Research and development ( p i p e l i n e safety, i n t e i - and multi-modal r v s t m i l R e i p o n r i b l e fo;~&o oh increased e f f i c i e n c y , improved safety, lessened environmental impacts, m i n i m i z i n g adverse irnoact o f enerov c o n s t r a i n t s
~ ~

153 54.445

. ,. ~~. .

. .

0 54,598

TOTAL ( A l l O i l ) ROW 27 I n t e r n a l Revenue S e r v i c e (Appendix, p. 771) Compliance: $728,061 % energy-related = 0.12

87,420.

For t o t a l f i g o r e r , we took 12% of t h e 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 expenditures 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 expenditures 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 : Electricity Coal Oil N~~YI-a1 gas Nuclear Other

~~~

ROW 28

Department of Energy (Appendix, pp. 369-386)

General r c i e n c e and research o p e r a t i o n s (Nuclear) High energy physics: $186, 360 x 0.62 Nuclear physics: $66,240 x 0.62 General science and research c a p i t a l ( N u c l e a r 1 L i f e sciences: f 1,985 High energy physics: 68,807 Nuclear physics: $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 c a t e g o r i e s : research and h i m e d i c a l ; h i g h energy p h y r i c s , and nuclear physics.

l i f e sciences

APPENDIX TO CHAPTER THREE (contd)

ROY Department of Energy, continued Enerqv supply RLD Solw applications Solar technolow 8iom.s~ and Other Nuclear fission Magnetic fusion Geothermal Hydropower Environmental Suppoiting research Multi-lector Uranium enrichment Fas~ilenergy R&O C1 0 . Petroleum
Gas
Energy

Budget Liner Items (Energy Faml

FY 1978 Outlays (Ooo'r)

CaOital

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 MultiSector Budget Allocated LI Percent of Specific Energy Forms 16,735 670,971 373.164 47,857 3,298.827 368.662 116,899

Electricity Coal Oil Natural gar Nuclear Solar Other Total, ~pecific Multirector TOTAL
ROW

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 -

29

Council on ~nviranmental Quality (Appendix, p 68) .

~nvironmental policy development and program evaluation: $2,854 1,027 I energy-related = 0.12

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 (Appendix, p 72) .

Natuial resources, energy, and science: $3,222 % 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 Coal Oil Natural 8.33
Nuclear

Other

443 239 1,056 531 44 7

APPENDIX TO CHAPTER THREE ( ~ c o n t d ]

rn ROW
i (

(Source)

(Enera" Form)

1978 Outlays (000'3) 1,429

Row 3 1

Appalachian Regional Development pr'lgrm Environmental P r o t e c t i o n Agency (re K. P e t t i t , Budget Operations Office)

A l l (Coal)

ROY 32

Energy D i s t r i b u t i o n t o energy forms by canrumption percentages: Electricity Coal Oil N a t u r a l gas Nuclear Other Energy technology a p p l i c a t i a n r D i s t r i b u t i o n t o energy iaurcer by canrumptian percentages: Electricity Coal Oil Natu1.1 gas Nutlea? Other Energy loan program--no expenditures d u r i n g FY-1978

112,824 21,549 11,621 51,334 25,837 2,144 339 145,377 27,767 14,974 66,147 33,291 2,762 436 0

ROW 33

N a t i o n a l Aeronautics and Space Administration (Appendix, p. 819)

Row 34

Small B u r i n e r r A d m i n i s t r a t i o n (Appendix, p. 378) N a t i o n a l T l d n s p o l t a t i o n S a f e t y Board (Appendix, p. 948)

ROW35

P o l i c y and support: 1,756 Accident i n v e s t i g a t i o n s : 7,554 A d m i n i s t r a t i v e law judger: 620 P r o p o r t i o n e n e r g y - r e l a t e d from P N L - ~ ~ I O : P o l i c y and support = 0.26 Accident i n v e s t i g a t i o n = 116 A d m i n i s t r a t i v e law judger = 116

TOTALS

492 1,257 103 1,852

This i s o n e - s i x t h of t h e t o t a l expense f o r t h r e e s a f e t y board a c t i v i t i e s s i n c e " e v a l u a t i o n safeguards i n v o l v e d 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 nuclear a r e t h e t h r e e energy f o r m i considered hazardour m a t e r i a l s i n t r a n s p o r t . Approximately 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 r u p p o r t i n v o l v e s a v i a t i o n . W took t h e remainder of p o l i c y and $Upport PIUSf athe? two items t o get t o t a l energy-related spending. e 116 o Distribution t o = Oil N a t u r a l gar = Nuclear =
Row 36

e n e r w form5 from PNL-2410: 0.61.. 0.35 0.04

Smithsonian SSIE (Appendix, p. 987-8)

A l l : $2,435 P r o p o r t i o n energy-related

0.2

487

T o t a l energy-related spending i s 20% of t o t a l budget, a l l o c a t e d e v e n l y because of t h e e x t e n t of c r a s s - e f f e c t s i n b a s i c vesedrch. This 20% f i g u r e i s d e r i v e d from s e v e r a l broad t o p i c s of s p e c i a 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: Electricity Coal Oil Natu1.1 gas Nuclear Other ROW 37 Nuclear Regulatory C m i r r i a n (Appendix, pp. 950-951) Federal Trade Commission A11 (Nuclear) 93 50 222 112

9
1 287,699

ROW38

M a i n t a i n i n g cmpetition--consumer 53,507 x 0.12

protection: 6,420

Lacking more s p e c i f i c i n f o r m a t i o n . 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 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 m a i n t a i n i n g c o m p e t i t i o n and consumer p r o t e c t i o n .

to

energytr

D i s t r i b u t i o n t o energy t y p e s b y consumption percentages: Electricity Coal Oil N a t u ~ d lgas Nuclear Other

1,226 661 2,921 1,470 122 20

APPENDIX TO CHAPTER THREE ( c o n t d )

ROW

45

General Accounting Office (appendix, p. 421

~ n e r g yand Minerals ~ i v i r i o n ~ i s t ~ i b u t i o n energy type " r i n g consumption percentages: by Electricity Coal Oil Natural gas Nuclear Othei

5,739 1,096 591 2,612 1,314 109 I7

Orqanirationr Mewed i n t o D E O Petroleum Reserves: The Naval Petroleum Reserves were transferred 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 addition, exploration and development of an Alaskan petroleum reserve i s underway and a s t r a t e g i c petroleum reserve program has been established. Total outlays f a r a l l of t h e r e programs are reported below i n D E O section. Oefense Power Administration: Regulation." Emergency preparednerr--part of D E Budget Line Item "Energy Information, p o l i c y , and O
NO

General Services Administration: ~ a t i o n a lScience Foundation: Federal Energy I \ d n i n i r t r a t i o n Federal Power Comniirion

energy a c t i v i t i e s l i s t e d .

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

Energy Research and Development Administratian

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 a p p l i e d t o the unpaid federal 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 r o j e c t s . The p r o j e c t s which use a higher r a t e than 2-1/2% are as f o l l o w s : Broken Bow, DeGray and Stockton 2-5/8%, H a r r y S. Truman as f o l l o w s : F i s c a l Year Through 1963 1964 1965

3%, and Clarence Cannon

3-1/8%.

Interest rates

a p p l i e d t o the unpaid f e d e r a l investment by SPA i n transmission f a c i l i t i e s are

SOUTHEASTERN P W R ADMINISTRATION O E 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 o p e r a t i o n as o f June 30, 1969. A r a t e o f 2.625% was used f o r b o t h 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 o p e r a t i o n a l d u r i n g f i s c a l year 1970, and f o r C o r d e 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 a p p l i c a b l e t o the p r o j e c t s under c o n s t r u c t i o n as o f June 30, 1974, are as f o l l o w s : Carters Jones B l u f f 2-5/8% 2-5/8% Laurel R i v e r West P o i n t 3% 3%

The i n t e r e s t r a t e s have been s e t b y 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 n o t n e c e s s a r i l y been designed t o recover t h e i n t e r e s t c o s t s t o t h e U.S. Treasury t o f i n a n c e t h e investment.

A A K POWER ADMINISTRATION LSA Authorizing l e g i s l a t i o n f o r Snettisham and Eklutna Projects requires t h a t 3% and 2-1/2% i n t e r e s t r a t e s , respectively, be applied t o the net investment of the U.S. Government. This legislation does not permit modification of the i n t e r e s t r a t e t o r e f l e c t the actual cost t o t h e 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 t o a t o t a l of $15 b i l l i o n 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) Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series Series A, A, A, A, B, B, A, B. B; A, B, C, 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 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 A o r i l i. i 9 9 8 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 31, '2002 ( ~ F B') r~ February 28, 2002 (FFB) May 31, 2002 (FFB) January 31; 2003 (FFB)

7.30 7 7.35 7.35

1971 1972 1972 1972 1972 1973 1973 1973 1973 1974 1974 1974 1975 1975 1975 1975 1975 1976 1976 1976 1977 1977 1977 1978

D;
A, B, C, D, A, B, C, A, B, C, D, E, A, B, C, A, B, C, A,

TOTAL LONG-TERM DEBT Short-Term Debt U.S. Treasury Federal Financing Bank (FFB) Long-Term Debt ~ i ~ p r i 1 , 1 9 e l TOTAL SHORT-TERM DEBT TOTAL DEBT

These i n t e r e s t r a t e s d i d not apply when t h e dams were b u i l t . The i n t e r e s t r a t e s on the hydro projects were on the order of 1.875% and 3%.
BUREAU OF RECLAMATION

The current i n t e r e s t r a t e t o be applied t o unpaid balances f o 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 c a 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 i n 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 e c t s t h e current cost of money t o t h e U.S. Treasury. This reflection of current cost of money more nearly approaches actual cost. Fiscal Year Through 1969 1970 1971
%
3 4-7/8 5-3/8

Some completed projects have i n t e r e s t r a t e s t h a t do not correspond t o these and f u r t h e r 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 (In Current Do1 lars)

Year

(a) Estimate

TABLE C-2.

Yearly Gross Operating Revenues Received by t h e Rio Grand? Project o f t h e Bureau Yearly Gross Operating Revenues ( I n Current Do1 l a r s ) 1,390,921(a) 1,390,921(a) 337.251(3)

Year 1978 1977 TO 1976

( a ) Estimate

TABLE C-3.

Yearly Gross Operating Revenues Received by t h e Parker-Da i s Project of t h e Bureau of ~eclamation(9

Year

Yearly Gross Operating Revenues (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 ~ e c l a m a t i o n ( 1

87

Year

Yearly Gross Operating Revenues (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) Yearly Gross Operating Revenues (In Current Dollars)

Year

( a ) Estimate

TABLE C-6.

Yearly Gross Operating Revenues Received by the Alaska Power Administration Yearly Gross Operating Revenues (In Current Do1 1 ars)

Year

TABLE C-7.

Yearly Gross Operating Revenues Received by the Southwestern Power Administration Yearly Gross Operating Revenues (In Current Dollars)

Year
1978 1977

TABLE C-8.

Estimation of the Yearly Hydroelectric Energy Sales Revenue Received by the Tennessee Valley Authority
Total Electricty (Meqawatt-hours) Total Sales Electricity (Millions of Current Dollars) Estimated Sales of Hydroelectricity (Millions of Current Dollars)

Year

Total Hydroelectric EnergyGeneration (Megawatt-hours)

1938 TOTAL

2,365,849 605,075,691

2,379,572 2,156,723,185

6.645 15,795.984

TABLE C-9.

Yearly Gross Operating Revenues Received by the Bonnevil le Power Administration Yearly Gross Operating Revenues ( In Current Do1 1 ars) 267,473,836 223,592,000 75.508.000

Year 1978 1977

TABLE C-10.

Yearly Gross Operating Revenues Received by the Southeastern Power Yearly Gross Operating Revenues (In Current Do1 1 ars)

Year

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 c o n s t r u c t i o n and o p e r a t i o n o f t h e dam a l l o c a t e d t o power development and exemption from f e d e r a 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 a p p r o p r i a t i o n s and t h e exemption from fede r a l income taxes. The b a s i c arguments f o r and against u s i n g d e f i n i t i o n #1 are as f o l l o w s :

Arguments f o r d e f i n i t i o n 1:
It - the t o t a l n e t amount o f money t h a t the Federal Government has spent is

developing hydropower.
0

If f e d e r a l f u n d i n g had n o t been a v a i l a b l e , the c o n s t r u c t i o n o f most o f these p r o j e c t s would have been s e t back 10 t o 30 years w a i t i n g f o r p r i v a t e industry.

Arguments against d e f i n i t i o n 1: The f e d e r a l funds are being r e p a i d w i t h i n t e r e s t and t h e r e f o r e are n o t an incentive. 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 i t had been done by the p r i v a t e s e c t o r i n s t e a d o f t h e Federal Government. Three other d e f i n i t i o n s were considered and r e j e c t e d . 3. Federal expenditures 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 facilities 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 e d e r a l i n t e r a c t i o n w i t h privately-owned dams i s r e g u l a t i o n by t h e Federal Power Commission. c o s t o f t h i s r e g u l a t i o n must be r e p a i d by t h e owners o f the dams. Also, t h e

4.

The gross on n e t investment i n t h e c o n s t r u c t i o n and operation 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 i n c l u d e money spent f o r other purposes ( f l o o d c o n t r o l , navigation, f i s h ladders, etc.) t h e r e t u r n on investment. and would account f o r

5.

The p o r t i o n o f t h e gross investment i n c o n s t r u c t i o n and o p e r a t i o n o f t h e dam a l l o c a t e d t o power development

This d e f i n i t i o n was r e j e c t e d because i t does not account f o r t h e 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 d e s c r i b e s 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 T a b l e D-1 were o b t a i n e d 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 statements o f t h e BPA's Annual Reports. The n e t f e d e r a l The s p l i t 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. and A l l o c a t i o n o f P l a n t Investment" schedule. between t r a n s m i s s i o n and g e n e r a t i o n money was made u s i n g d a t a f r o m t h e "Amount 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 n v e s t m e n t 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 r a n s m i s s i o n . total. The d a t a i n T a b l e 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 T a b l e D-1. 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: C u m u l a t i v e Investment o f Year N H y d r o e l e c t r i c Generation o r Transmission p e r Year o f Year N = The Net The The f e d e r a l i n v e s t m e n t 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 h e Net F e d e r a l Investment i n

t h e Net Cumulative 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 g e n e r a t i o n and t r a n s m i s s i o n p e r y e a r i s t h e n m u l t i p l i e d b y t h e p r o p e r i n d e x 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 p e r y e a r between 1937 and 1945 was n o t The n e t c u m u l a t i v e investment known, so t h e f o l l o w i n g a p p r o x i m a t i o n was used.

i n 1945 was d i v i d e d by t h e number o f y e a r s between 1937 and 1945 and t h e n m u l t i p l i e d b y t h e 1978 d o l l a r i n d e x f o r each y e a r . 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 y e a r 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 . transmission. investment. 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 g e n e r a t i o n and 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

ALTERNATIVE CALCULATION PROCEDURES CONSIDERED T CALCULATE THE FEDERAL O INCENTIVES T HYDROPOWER DEVELOPMENT O This s e c t i o n 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 f e d e r a l i n c e n t i v e s t o hydropower development provided by low i n t e r e s t f e d e r a l a p p r o p r i a t i o n s and exemption from f e d e r a l income taxes. The cumulative net f e d e r a l investment (Ct) can be obtained by summing up the net f e d e r a l investment i n hydropower each year (At) from 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 . a summation o f t h e f o u r f o l l o w i n g cash flows:
0

These values (At and Ct) are

Investment i n f l o w i n the form o f f e d e r a l appropriations. 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 cumulative net f e d e r a l investment (Ct) i s

e s s e n t i a l l y t h e outstanding unpaid balance. r a t e s by Ct and summing over t.

The i n t e r e s t subsidy i s then

c a l c u l a t e d by m u l t i p l y i n g t h e d i f f e r e n c e i n the f e d e r a l and p r i v a t e i n t e r e s t The r e s u l t i n g subsidy f i g u r e i s o n l y

It i s i n other words an

c u r r e n 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. estimate 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 provided t o hydropower development by t h e low

i n t e r e s t f e d e r a l appropriations.

Ct = The cumulative n e t f e d e r a l investment i n hydropower from

i n c e p t i o n t o year t. i n $ l o 6 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 y e a r t. i n %
t
= Subscript time indicator.

A second method t r e a t s t h e n e t f e d e r a l investment each y e a r (At) as a new l o a n t a k e n o u t t h a t year. w i t h i n 50 years.

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 p e r i o d s . i n t e r e s t loans w i t h i n 25 years.

The a p p r o p r i a t i o n s must be r e p a i d The

However, t h e f e d e r a l agencies u s u a l l y r e p a y t h e h i g h e r
I t i s assumed t h a t n i s 40 years.

subsidy i s then c a l c u l a t e d by t h e formula given previously. t h r o u g h 1978. T h i s can be w r i t t e n :

The r e s u l t i n g

s u b s i d y 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 s u b s i d y on a l l funds

T o t a l payment on y e a r t ' s l o a n 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 p e r i o d s , 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

jet.

At = The n e t f e d e r a 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 e d e r a l hydropower marketing 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 f e d e r a l income t a x (Et). revenues. The formula i s n o t a s t r a i g h t percentage because t h e t a x would have t o be supported b y l a r g e r Therefore t h e t o t a l y e a r l y revenues (Rt) are t r e a t e d as t h a t This subsidy f i g u r e i s c u r r e n t t o The subsidy and Rt are i n c u r r e n t d o l l a r s and t h e

which i s l e f t over a f t e r taxes. September 30, 1978.

1978 d o l l a r f a c t o r (Ft) c o r r e c t s them t o 1978 d o l l a r s .

This can be w r i t t e n :

where Ft = The 1978 d o l l a r f a c t o r (from Appendix A) Rt = The t o t a l y e a r l y gross o p e r a t i n g revenues c o l l e c t e d from i n c e p t i o n 6 t o September 30, 1978 by f e d e r a l agencies ( i n 10 c u r r e n t dollars). Et = The average percentage o f revenues t h a t u t i l i t i e s have p a i d i n Federal taxes each year from 1937 t o 1978 ( i n 8). The f o u r t h method uses t h e t o t a l cumulative f e d e r a l h y d r o e l e c t r i c generation (M), charged t h e 1933 t o 1978 average c o s t p e r kwh t h a t p r i v a t e u t i l i t i e s t h e t o t a l cumulative f e d e r a l revenues (R). The reasoning f o r The o n l y basic d i f f e r e n c e s between p r i v a t e

(0) and

t h i s c a l c u l a t i o n i s as f o l l o w s :

u t i l i t i e s and t h e f e d e r a l power marketing agencies are t h a t t h e p r i v a t e u t i l i t i e s pay f e d e r a l taxes, have a higher c o s t o f c a p i t a l and use more t h e r m a l - e l e c t r i c generating p l a n t s .
I f you assume t h a t the f e d e r a l taxes and

higher c o s t o f c a p i t a l have a much g r e a t e r 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 l a n t s are m o s t l y t h e r m a l - e l e c t r i c i n s t e a d 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 b y t h e government and t h e 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 estimate o f the subsidy t o hydropower. This can be w r i t t e n :

where

M = t h e t o t a l cumulative f e d e r a l h y d r o e l e c t r i c energy p r o d u c t i o n 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 HYDROENERGY F A C I L I T I E S : DATA AND RESULTS

APPENDIX E I n t h i s appendix. Tables E-1 t h r o u g h 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 n v e s t m e n t i n hydro-energy; Tables 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 c o n v e r s i o n 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 Hydroelectric Generatio nd Electricity Transmission FacilitiesTa7 Hydroelectric Generation $105 Electricity Transmission $105

Fiscal Year 1978

(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 Hvdroelectric ~lectricitv(b) .~ - Generation Fiscal Transmission Facilities in $105 Year 1978 Facilities in $105
~~~~

?a)

-d

(a) Current Dollars - no adjustment has been made for inflation. (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~Hydroe l e c t r i c Generation F a c i l i t i e s Net Federal Investment i n Generation F a c i l i t i e s $lo5

Fiscal Year 1978

( a ) Current Dollars - no adjustment has been made for inflation. (b) Estimate.

TABLE E-4.

Data From Which t h e Estimates of t h e Net Federal Investment per Ye in t h e Alaska Federal Power Program Were Made

8)

F i s c a l Year

Cumulative Net . . . . Investment in t h e Snettisham P r o j e c t $lo5

Cumulative Net Investment in t h e Eklutna P r o j e c 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 d a t a have not been c o r r e c t e d 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 Electricity Transmission Facilities Assets in Hydropower Plants ($105) Assets in Transmission Facilities ($lo5)
'

Fiscal Year

(a) Current Dollars - no adjustment has been made for inflation.

TABLE E-6.

Cumulative Net F e d e r a l I n v e s t m e n t i n t h e Bureau o f R e c l a m a t i o n ' s Upper Colorado Region t h a t Mu be Repaid w i t h Commerical Power Revenues

7%)

Fiscal Year 1978

Net Federal Investment I n Generation and T r a n s m i s s i o n 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 adjustment 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 Generation and Transmission F a c i l i t i e s ($105)

Fiscal Year 1978

( a ) Current D o l l a r s no adjustment has been made for inflation ( b ) Estimate.

TAS LE E-8.

Cumulative Net Federal Investment in the - Bureau of Reclamation's Upper and Lower Repaid with Missouri Region that Must Commerical Power Revenues (

$7

Fiscal Year 1978

Net Federal Investment In Generation and Transmission Facilities ($105)

(a) Current Dollars - no adjustment has been made for inflation. ( b ) Estimate.

TABLE E-9.

Cumulative Net Federal Investment in the Bureau of Reclamation's Central Valley Project that Must b epaid with Commercial Power Revenues ?a?
Net Federal Investment In Generation and Transmission Facilities ($1051

Fiscal Year 1978

1978 1977 Tq 1976 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960

N/A
762.2 762.2 762.2 644.9 421.8 340.7 143.9 176.6 213.3 583.3 699.8 1,217.5 1,401.4 1,577.5 1,766.6 1,308.2 413.3 548.1 499.2

(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 Proj e c t t h a t Must(9g Repaid with Commercial Power Revenues
Net Federal Investment In Generation and Transmission Facilities ($1051

Fiscal Year 1978

(a) Current Dollars - no adjustment has been made for inflation

.E E-11.

Net Federal Investment in the Federal Columbia River Power System Hydroelectric Generation and Electricity Transmission Facilities per Year (in Mill ion 1978 Dollars)
Hydroelectric Generation
271.07

Year
1978

Electricity Transmission
124.50

TOTAL

6,660.29

3,114.20

(a) Estimated data; see Appendix 0.

T A B L E E-12.

Net Federal Investment in the Southwestern Federal Power System Hydroelectric Generation and Electricity Transmission Facilities per Year (in Million 1978 Dollars)
Hydroelectric Generation Electricity Transmission

Year

TOTAL (a) Estimated data; see Appendix D.

TABLE E-13.

Net Federal Investment in the Southeastern Federal Power Program Hydroelectric 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 Federal Investment i n t h e Alaska Power A d m i n i s t r a t i o n Federal Power Program Hydroe l e c t r i c Generation 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 ) H y d r o e l e c t r i c Generation and Transmission Investment

Year -

TOTAL

172.89

( a ) Estimated 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)
Hydroelectric Generation Electricity Transmission

Year

TOTAL

2,006.53

2,844.94

( a ) Estimated data; see Appendix D.

TABLE E-16.

Net Federal InvestmentIYear in the Hydroelectric Power Projects from Which the Bureau of Reclamation Markets the Power (in Million 1978 Dollars) Hydroelectric Generation and Transmission Investment

Year

~~~

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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14,

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Symposium Tennessee Research, Knoxville

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<

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"ERDA Acts on Waste Storage", Nuclear Industry, February, 1976, pp. 6-8. Future Ownership o f t h e AEC's Gaseous D i f f u s i o n plants,' Hearings b e f o r e t h e J o i n t Committee on Atomic Energy, J u l y 8 and 9, August 5, 7, 8 and 19, 1969. Green, Harold, "Nuclear Power: Risk, L i a b i l i t y & Indemnity," Review, Vol. 71, pp. 478-506, 1973. Michigan Law 100 (1957).

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No. o f Copies S i l v i o J. Flaim, Ph.D. S o l a r Energy Research I n s t i t u t e 1536 Cole Blvd. Golden, CO 80401 Dennis R. C o s t e l l o S o l a r Energy Research I n s t i t u t e 1536 Cole Blvd. Golden, CO 80401 Duane Chapman Energy & Resource Program Room 100, B u i l d i n g T-4 Berkeley, C 94720 A James H a r d c a s t l e Energy Research D i g e s t Dulles I n t e r n ' l Airport P.O. Box 17162 Washington, DC 20041 C a r o l Anderson N a t i o n a l Resources Defense Council 917 1 5 t h St., N W Washington, D 20005 C Max Goldman Texaco Inc. S u i t e 500 1050 1 7 t h St., N W Washington, D 20036 C Jane G r a v e l l e Economic D i v i s i o n Congressional Research S e r v i c e L i b r a r y o f Congress Main B u i l d i n g 1 s t F l o o r - West Side, Room 103 Washington, D 20540 C Ronald W. Szwajkowski Mayer, Brown and P l a t t 231 South La S a l l e S t r e e t Chicago, I L 60604

No. o f Copies Havey A. H a r r i s A t t o r n e y a t Law S t o l a r , Heitzmann & Eder 515 O l i v e S t r e e t Room 1700 St. Louis, MO 63101 Daniel L. Skoler Program Development Counsel American Bar Assoc. 1800 M S t r e e t , NW Washington, DC 20036 Harold P. Green Professor o f Law The N a t i o n a l Law Center The George Washington U n i v e r s i t y 720 20th S t r e e t , N W Washington, DC 20006 K a t h e r i n e McG. S u l l i v a n Assistant Director Public Service A c t i v i t i e s Div. American Bar Assoc. 1800 M S t r e e t , N W Washington, DC 20036 Jan G. L a i t o s A s s i s t . Professor o f Law U n i v e r s i t y o f Denver C o l l e g e o f Law 200 W 1 4 t h Ave. Denver, CO 80204 E a r l F i n b a r Murphy Ohio S t a t e U n i v e r s i t v C o l l e g e o f Law 1659 N High St. Columbus, O 43210 H

W i l l i a m A. Thomas American Bar Foundation 1155 E 6 0 t h S t r e e t Chicago, I L 60637

No. o f Copies George R. P e r r i n e Legal Consultant Tenneco Inc. S u i t e 4300-1100 M i l a n Bldg. P.O. Box 2511 Houston, TX 77001 Prof. Gary Widman Hastings College o f Law 198 M c A l l i s t e r St. San Francisco, C 94102 A P a t r i c k Donnelly Office o f Public Affairs Department o f Energy 1 2 t h and Pennsylvania Avenue Washington, OC 20461 Michael S i l v e r s t e i n , President Enerav Marketing Associates C/O G e r g y ~ s e r - ~ e w s 7 E. 1 2 t h S t r e e t New York, NY 10003 W i l l i a m Fenzel U.S. General Accounting O f f i c e Room A2-2200 Century 21 B u i l d i n g C/O Department o f Enerqv Richard N. Bergstrom Partner--Sargent & Lundy 55 East Monroe Chicago, I L 60603

No. o f Copies Harry E. Bovay Bovay Engineers, Inc. 5009 Carol i n e Houston, TX 77004 Don P. Reynolds ASCE, 345 East 47th S t r e e t New York, NY 10017 Louis L. Meier, Jr. ASCE, 1625 Eye St., NW Washington, D 20006 C ONSITE D E Richland Operations O f f i c e O

H. E. Ransom
P a c i f i c Northwest Laboratory 10 50
D. Brenchley R. Cole (HARC) B. Cone D. Oeonigi K. Drumheller J. Emery A. Fassbender J. Fox J. Goodnight (HARC) H. H a r t y D. Lenerz (Columbus) J. Maxwell (HARC) R. Mazzucchi W. Sheppard P. Sommers (HARC) G. Stacy (Columbus) R. Watts D. Williams Economics L i b r a r y ( 3 ) Technical I n f o r m a t i o n (5) Pub1i s h i n g Coordination (3)

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