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Electricity Efficiency and Deregulation Issues
(Released December 2001)



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Since September 11th, issues like domestic energy usage have been eclipsed by more pressing concerns, and high gas prices and rolling black-outs in California no longer make headlines. Yet our energy needs lie at the heart of our foreign policy in the Middle East, and the roots of the current conflict can be traced back to our long history of economic and political involvement in the region.

Having a reliable and affordable energy supply is integral to our economic stability. As the nation with one of the highest rates of per capita energy consumption in the world, we also have a responsibility to develop energy usage patterns that will minimize damage to the environment.

To achieve this, we must find a way to balance our energy supply and demand using environmentally friendly, sustainable, and cost-effective technology.

The U.S. has such a high level of energy consumption that we have to supplement our domestic oil production with foreign imports, primarily from the Middle East. During the energy crisis of the 1970s, oil embargoes jeopardized the security of the U.S. electricity supply and energy bills skyrocketed. Congress began establishing energy efficiency programs in 1974, mainly through Department of Energy initiatives, in an effort to reduce dependence on foreign energy imports. By the late 1980s, states and electricity companies had also started funding energy conservation programs. Their primary motivation was to reduce demand and avoid having to construct new power plants.

The issue of global warming provided another incentive for energy conservation. The electric industry's coal-fired power plants are a major source of pollution and greenhouse gases, and reduction of these harmful side-effects of industry is now seen as one of the major benefits of reduced electricity use.

However, opinion in Washington is divided as to how to encourage the conservation of energy. Recent debate has revolved around budget and conservation issues, as detailed in the Congressional Research Service report, Energy Efficiency: Budget, Oil Conservation, and Electricity Conservation Issues (July 2001). The Department of Energy, House of Representatives, and Environmental Protection Agency (EPA) each suggested different amounts of funding for Energy Efficiency research and grants, and for Climate Protection Energy Efficiency Program initiatives, for fiscal year 2002.

The CRS report also describes a recently proposed energy bill in the House of Representatives, H.R. 4. This bill includes many of the recommendations of the Bush administration's National Energy Policy Development Group report, and the provisions of several other energy bills currently in the House, including authorization to fund more research and development of energy conservation strategies, tax incentives for energy-efficient homes and vehicles, and higher fuel economy requirements for SUVs.

There are many ways to ameliorate our energy problems, though none is an easy or a complete solution on its own. Investment in alternative energies, research and development to produce more efficient systems of fuel usage, and consumer-oriented programs to encourage conservation are some options.

Ironically, economic theory suggests that increasing energy efficiency doesn't always reduce rates of consumption. As described in the CRS report Energy Efficiency and the Rebound Effect: Does Increasing Efficiency Decrease Demand? (July 2001), the rebound effect occurs when increased efficiency of production translates to lower costs for consumers, and consumers then feel able to use more energy while still paying the same amount. The rebound effect can cause the anticipated reduction in demand from an energy conservation strategy to fall short by as much as 40%. It makes it much more difficult to estimate the effects of improved efficiency on important end results like greenhouse gas emissions.

Electricity restructuring is a huge undertaking that has the power to either pave the way for renewable energy production and emissions reduction, or else shut down renewable energy technologies and create a system that will generate more pollution.

Virtually a monopoly until 1935, electricity companies were reined in by the Public Utility Holding Company Act (PUHCA) and the Federal Power Act (FPA), which aimed to prevent abuses of power by regulating interstate utility companies. Fifty years later, the Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted in response to the energy crisis in the 1970s. PURPA was intended to increase production and efficiency of electricity generation, while providing better prices to customers.

The CRS report Electricity: The Road Toward Restructuring (September 2001), provides a description of the issues behind proposed PUHCA and PURPA reforms, and retail wheeling (allowing customers to buy their electricity from the supplier of their choice). Currently, 24 states and the District of Columbia have implemented retail wheeling, and some are calling for federal oversight of such programs.

The effect of retail wheeling on the environment is unknown. Electricity restructuring is causing some power companies in California to reduce their spending on demand-side management (programs that encourage consumers to use less electricity), since these programs are no longer profitable in a system of state-based retail competition. This is causing a decline in energy conservation. Environmentalists fear that federal management of electric power could reduce demand-side management programs even further. In addition, increased demand in some regions might prompt utility companies to renovate their older, coal-fired plants, which are traditionally more polluting than alternative energies.

However, a recent report from the Heritage Foundation suggested that deregulation would force some companies to meet higher standards of efficiency and cleanliness. Current and proposed additions to the Clean Air Act would tighten the regulations on existing coal-fired plants.

As domestic energy needs grow, energy usage and efficiency will become a critical issue. Developing a strategy of production and consumption that will be economically viable and minimally polluting should be one of our top national priorities.

Written by Heather E. Lindsay.