We will start off examining the nation's energy infrastructure with the Congressional Research Service (CRS) report, Electricity: The Road Toward Restructuring (May 1, 1998). This report addresses legislation regulating public electrical utilities, in particular the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992. The Energy Policy Act attempted to increase competition by creating "exempt wholesale generators" (EWGs) that can generate and sell electricity at wholesale without being regulated as utilities under the 1935 Public Utilities Holding Company Act.

Implementation of this act will affect the wholesale transmission of electricity from producers to consumers. The effects of these two later laws are addressed in more detail in Electricity Restructuring Background: The Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992 (May 4, 1998).

The next report, Power Marketing Administrations: Reassessing the Federal Role, (October 15, 1997) examines the five federal Power Marketing Administrations (PMAs): Alaska Power Administration (APA), Bonneville Power Administration (BPA), Southeastern Power Administration (SEPA), Southwestern Power Administration (SWPA), and the Western Area Power Administration (WAPA). All five administrations operate under the Department of Energy, but are separate and distinct entities. These PMAs market power generated at federal multipurpose water projects to consumers. Although PMAs currently produce only 6% of the electricity generated in the United States, their very existence remains controversial.

Further issues over whether their power should be sold at discount to public utilities and cooperatives add to the controversy. Debate over whether to transfer these federal assets to the states and localities or even sell them outright ensues. Some believe that such a devolution should be driven by market forces, with the taxpayers receiving benefits through deficit reduction or tax relief, rather than transferring those benefits to the customer base. Others oppose transfer on the grounds of the critical importance of PMA electricity to local economies and the belief that the resulting increased rates would disrupt the economies.

Our last two reports turn to national policy concerns in a specific area: renewable energy. This is broadly defined by the CRS as power that is "derived from resources that are generally not depleted by human use, such as the sun and wind and water movement." These resources can be converted into heat, electricity and mechanical energy through hydropower, biomass conversion and waste combustion and are considered proven technologies. Newer technologies that are fairly well developed but less commercially viable are wind turbines, photovoltaics and geothermal energy.

The first of these reports on renewable energy is Energy Efficiency: Key to Sustainable Energy Use? The Clinton Administration has justified increased spending on energy efficiency programs on three grounds: 1) the dangerous increasing reliance on foreign oil 2) air and water pollution effects of energy consumption and 3) climate change concerns. Consequently, the Clinton Administration is asking for funding in excess of $800 million for the Department of Energy's Energy Efficiency Program, earmarked for research and development. A complimentary program by the EPA requests $231 million for climate-related energy efficiency activities, a $121 million increase over the last fiscal year.

Lastly, we continue our look at renewable energy with Renewable Energy: Key to Sustainable Energy Supply. This report addresses concerns over the Kyoto climate change protocols, the reauthorization of the Intermodal Surface Transportation Efficiency Act (ISTEA) and further proposals for restructuring the electricity industry. The use of biofuels is one of the programs encompassed by the omnibus transportation bill ISTEA, while an innovation called renewable energy portfolio standards (RPS) is considered for application to the energy industry. Such "green pricing" is already in use by some states and utilities.

The Congressional Research Service is an arm of the Library of Congress and is no way affiliated with the CNIE, CSA or any other organization.

© Copyright 1998, All Rights Reserved, CSA

CRS Reports

Electricity: The Road Toward Restructuring

Summary

The Public Utilities Holding Company Act of 1935 (PUHCA) and the Federal Power Act (FPA) were enacted to eliminate unfair practices and other abuses by electricity and gas holding companies by requiring federal control and regulation of interstate public utility holding companies. Prior to PUHCA, electricity holding companies were characterized as having excessive consumer rates, high debt-to-equity ratios, and unreliable service. PUHCA remained virtually unchanged for 50 years until enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA, P.L. 95-617). PURPA was, in part, intended to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Utilities are required to buy all power produced by qualifying facilities (QFs) at avoided cost (the amount it would cost the utility to produce that same amount of electricity; rates are set by state public utility commissions or through a bidding process). QFs are exempt from regulation under PUHCA and the FPA.

Electricity regulation was changed again in 1992 with the passage of the Energy Policy Act (P.L. 102-486). The intent of Title 7 of EPACT is to increase competition in the electric generating sector by creating new entities, called "exempt wholesale generators" (EWGs), that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. This title also provides EWGs with a way to assure transmission of their wholesale power to its purchaser. The effect of this Act on the electric supply system is potentially more far-reaching than PURPA. On April 24, 1996, FERC issued two final rules on transmission access (Order 888 and 889). FERC believes these rules will remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets.

Comprehensive legislation to reduce electricity regulation has been introduced in the 105th Congress, legislation that addresses three issues. The first is PUHCA reform. Some electric utilities want PUHCA reform so they can more easily diversify their assets. State regulators have expressed concerns that increased diversification could lead to potential abuses including cross-subsidization. Other groups have expressed concern that a repeal of PUHCA could exacerbate market power abuses in a monopolistic industry where true competition does not yet exist.

The second is PURPA's mandatory purchase requirement provisions. Many investor-owned utilities support repeal of these provisions. They argue that their state regulators' "misguided" implementation of PURPA has forced them to pay contractually high prices for power that they do not need. Opponents of this legislation argue that it will decrease competition and impede development of renewable energy.

The third is retail wheeling. Retail wheeling involves allowing retail customers to choose their electric generation from any source they want and having their local utility wheel it to them. Currently, this is under state jurisdiction, and some states have moved toward retail wheeling. However, some have argued that the federal government should act as a backstop to ensure that all states introduce retail wheeling, preempting state authority if necessary.

Summary

Electric utilities have been subject to comprehensive federal and state economic regulation since enactment of the Public Utilities Holding Company Act of 1935 (PUHCA) and the Federal Power Act. This regulatory framework remained virtually unchanged between 1935 and 1978. The oil embargoes of the 1970s created concerns about the security of the nation's electricity supply leading to enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA). For the first time, utilities were required to purchase power from outside sources.

This first incremental change to traditional electricity regulation started a movement towards a market-oriented approach to electricity supply. Following the enactment of PURPA, two basic issues stimulated calls for further change: whether to encourage nonutility generation and whether to permit utilities to diversify into non- regulated activities.

The Energy Policy Act of 1992 (EPACT) increased competition in the electric generating sector by creating new entities that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. PURPA began to shift more regulatory responsibilities to the federal government, and EPACT continued that shift away from the states by creating new options for utilities and regulators to meet electricity demand.

As the electric utility restructuring debate evolves, additional policy issues to be addressed may include federal-state jurisdictional roles, stranded cost recovery, industry structure, and non-economic regulatory factors.

Electric utilities have been subject to comprehensive federal and state economic regulation since 1935. Electricity service has been considered a natural monopoly, meaning that the industry has (1) an inherent tendency toward declining long-term costs; (2) high threshold investment and (3) technological conditions that limit the number of potential entrants. The federal regulation scheme was codified in 1935 with the passage of the Federal Utility Act. Its two components, the Federal Power Act and the Public Utilities Holding Company Act of 1935 (PUHCA), defined the nature of federal electric utility regulation until the passage of Public Utility Regulatory Policies Act of 1978 (PURPA).

As the electric utility industry evolved, flaws with the natural monopoly theory became more apparent. First, there is nothing natural about a utility's monopoly to provide electric service because exclusive franchises in the utility's service area are granted by government. Second, several utilities, primarily some municipals, co-ops and publicly owned utilities, do not own all of their generating facilities. For these utilities, contractual arrangements, rather than unified control have been adequate to meet their obligation to serve their customers in an efficient manner.

Summary

The five federal power marketing administrations (PMAs) -- Alaska Power Administration (APA), Bonneville Power Administration (BPA), Southeastern Power Administration (SEPA), Southwestern Power Administration (SWPA), and Western Area Power Administration (WAPA) -- are separate and distinct organizational entities within the Department of Energy. The PMAs' mission is to market power generated at federal multipurpose water projects (about 6% of the nation's total electricity generation) at the lowest possible rates to consumers, consistent with sound business principles. Each PMA has its own specific geographic boundaries, system of projects, statutory responsibilities, operation and maintenance responsibilities, and statutory history.

Over the years, controversy with respect to the PMAs has revolved around three general areas: whether PMAs are needed at all, whether power should be sold preferentially to public utilities and cooperatives, and how best to structure repayment of federal dollars invested in PMAs.

The Administration's FY1996 proposal to sell four PMAs suggested that in its view the federal role of fostering regional growth through low-cost power was no longer necessary; the assets should be transferred to the local entities that use the power, allowing them to make decision about future directions. Others who agree with the Administration on eliminating the federal role suggest that decisions about the future should be driven by market forces, with the taxpayers receiving the benefits of their investment through deficit reduction or tax relief, rather than transferring those benefits to the existing customers. Those opposed to the sale point to the critical importance of electricity to economies served by PMA power and believe that any sale would cause economically disruptive electric rate increases. Indeed, any proposal to divest the government of the PMAs involves a tradeoff between maximizing the return to federal taxpayers for their investment in federal power assets and protecting existing federal power users from potentially economically disruptive effects of escalating electric rates.

Beyond the issue of the appropriate role of government, proposed PMA sales raise issues with respect to the conditions under which any sale would take place. These include the amount of deficit reduction or tax relief possible, the sale price, the disposition of reclamation costs currently assigned to power users, operational control of the facilities being transferred and their integration with the other purposes of the dam, the status of existing power contracts, and preference.

For FY1998, Congress has passed, and the President signed H.R. 2203, providing funding for the PMAs. As signed, the bill provides $3.5 million for APA, including $10 million for repair of a leaking submerged power cable; $12.2 million for SEPA; $25.2 million for SWPA; and, $189.0 million for WAPA.

Summary

Debate in the 105th Congress over the funding and direction of energy efficiency programs involves the FY1999 spending request, the Administration's Climate change Technology Initiative (CCTI), reauthorization of the Intermodal Surface Transportation Efficiency Act (ISTEA), and proposals for restructuring the electricity industry.

The Administration places priority on energy efficiency as the flagship of the nation's effort to establish a sustainable energy economy. It cites continuing oil import vulnerability and environmental problems of air and water pollution and climate change as a rationale for increased energy efficiency spending in FY1999.

The FY1999 request for the Department of Energy (DOE's) Energy Efficiency Program seeks $808.5 million (including $35 million in oil overcharge funding), a $196.8 million, or 32% increase. R& D would increase by $160.8 million, or 35%, and grants would increase by $36 million, or 23%. Transportation R& D would increase by $52.8 million, Buildings R& D would grow by $47.5 million, and Industry R& D would increase by $30.4 million. (See Table 2 at the end of this brief.)

Also, for climate-related energy efficiency activities, the FY1999 Environmental Protection Agency (EPA) request seeks $231 million, a $121 million increase. (See Table 1).

The Kyoto Protocol calls upon the United States to cut greenhouse gas (GHG) emissions to 7% below the1990 level during the period from 2008 to 2012. In response, the Administration has proposed the CCTI, which includes$6.3 billion over 5 years in R& D and incentives for energy efficiency and "clean" energy sources. DOE and EPA FY1999 requests include programs that would catalyze or otherwise encourage developing nations to curb GHG emissions. Congressional concerns are focused on the size of the FY1999 requested increases, whether the CCTI is an attempt to avoid congressional approval of the Kyoto Protocol, and whether developing nations will join in curbing emissions.

Oil imports account for 50% of national oil use, which amounts to $60 billion, or 36%, of the trade deficit. There is some concern that rising demand in developing countries combined with high oil dependence in the transportation sector keeps the nation's economy vulnerable to an energy price shock.

ISTEA supports a number of programs that help reduce energy demand or otherwise conserve energy and prevent pollution. In its proposal to reauthorize ISTEA from FY1998 through 2005, the Administration seeks increases or stable funding for many of these programs. Debate has focused on the level of funding that would be dedicated solely to these programs.

Many states and electric utility companies created demand-side management (DSM) programs primarily to promote energy efficiency as an alternative to powerplant construction. Since electricity restructuring at the state level was first proposed in 1994, utility funding for DSM has dropped about one-third. There are concerns that a federal initiative to restructure the industry could cause DSM to decline further.

SUMMARY

Debate in the 105th Congress over the funding and direction of renewable energy programs bears on the FY1998 spending request, preparations for the Kyoto climate change conference, reauthorization of the Intermodal Surface Transporation Efficiency Act (ISTEA), and proposals for restructuring the electricity industry.

The Administration sees renewable energy as a "pollution-prevention" source that is key to the sustainability of the nation's long-term energy supply. It cites continuing oil import vulnerability and environmental problems of air and water pollution and climate change as a rationale for increased renewable energy spending in FY1998. Others doubt U.S. vulnerability to import embargoes, find global warming threats unconvincing, and would reduce pollution by other means.

The FY1998 request for the Department of Energy (DOE's) Renewable Energy Program sought $329.7 million (including $45.5 million for Electric/Storage funding and excluding $15 million for prior year carryover), a $79 million, or 32%, increase over the FY1997 mark. The Conference mark of $346 million includes a $44 million transfer from the Office of Energy Research (OER). After adjusting for this transfer, the Conference mark is nearly $43 million, or 12%, lower than the request, but it is $35 million, or 13%, higher than the FY1997 mark. (See Table 1 at the end of this brief.)

In preparation for the Third Meeting of the Conference of Parties (COP-3) to the U.N. Framework Convention on Climate Change (December 1997, Kyoto, Japan), the President has directed negotiators to seek a binding target to return greenhouse emissions to 1990 levels during the period between 2008 and 2012, allow flexible mechanisms to meet these goals, and require that developing nations "meaningfully participate" in this effort. It has also proposed a $5 billion package of tax cuts and R& D incentives to encourage energy efficiency and "clean energy" sources. Thus, the negotiating position appears to respond to congressional concern that emission limits include developing nations.

Oil imports make up 50% of national oil use, which amounts to $60 billion, or 36%, of the trade deficit. There is modest concern that rising demand in developing countries combined with high U.S. oil dependence keeps the nation's economy vulnerable.

ISTEA encompasses a number of programs that help prevent pollution by use of biofuels and other renewable energy sources. In its proposal to reauthorize ISTEA through 2005, the Administration seeks increases or stable funding for many of these programs. Debate has focused on the level of funding that would be dedicated solely to these programs.

Some states and electric utility companies created "green pricing" programs and renewable energy portfolio standards (RPS) to reduce the need for conventional powerplants. Proposals to include RPS and other incentives for renewables in congressional electricity restructuring legislation has come under attack from the Cato Institute and the Natural Gas Supply Association.

One report says that, for FY1999, DOE is seeking approval from the Office of Management and Budget (OMB) for large increase in renewable energy R& D spending.