Except for subsidies to electricity, this report measures subsidies on the basis of the cost of the programs to the Federal budget. Using the Federal budget has the advantage of ease of measurement; however, budget values may understate both the economic costs and the market impacts of specific programs, especially where small subsidies are applied to large existing markets. Some subsidies offer relatively large payments to producers using certain energy technologies that otherwise would be uneconomical at present. In these cases, the immediate effects on markets may be small, but the impact on specific technologies may be significant. Proponents justify subsidies by pointing to expected social benefits that may exceed the expected cost of the program. No attempt is made in this report to evaluate the social benefits that may accrue from these programs.

Energy Transformation and End Use Subsidies

Federal subsidies for transformation and end-use activities are estimated to be $2.2 billion in fiscal year 1999, a decline of about 10 percent in real terms from the total found for similar items in fiscal year 1992 (Table ES1 and Figure ES1). ⁽⁵⁾ It is estimated that direct subsidies--the sum of direct expenditures and tax expenditures--totaled $1.8 billion in fiscal year 1999, of which direct expenditures totaled $1.4 billion. R&D subsidies accounted for the remainder, just over $0.45 billion.

Table ES1. Summary of Energy Transformation and End Use Subsidy Elements in Federal Programs by Fuel and Program Type on a Budget Outlay Basis, Fiscal Year 1999 (Million 1999 Dollars)

Figure ES1.  Summary of Energy Transformation and End Use Subsidy Elements, 1992 and 1999 (Billion 1999 Dollars)

Direct expenditures made under LIHEAP, the DOE Weatherization Assistance Program, and the State Energy Program all have declined somewhat since 1992 (Table ES2), and the share of subsidies attributable to direct expenditures has fallen from 80 percent in 1992 to 63 percent in 1999. The reductions in LIHEAP funding notwithstanding, a large portion of transformation and end use subsidies remain specifically addressed to low-income households. Tax expenditures totaled $370 million in 1999, representing a 75-percent increase since 1992.

Table ES2. Comparison of Estimates of Federal Financial Interventions and Subsidies in Energy Transformation and End Use on a Budget Outlay Basis: Values for Corresponding Categories From the 1992 and 1999 EIA Reports

R&D outlays for transformation and end use have also increased, from the 1992 level of $0.29 billion (1999 dollars) to $0.45 billion in fiscal year 1999. Every end-use area was found to have higher spending levels. Transportation R&D programs showed the largest increase, from $125 million in 1992 (1999 dollars) to $202 million in 1999, a 62-percent increase.

Total Energy Subsidies

The estimated value for all energy subsidies identified in this report and in EIA's September 1999 report is $6.2 billion in fiscal year 1999 (Table ES3). ⁽⁶⁾ Fossil fuels received by far the largest share of these subsidies, nearly half the total. Led by the ethanol excise exclusion, renewables received about $1.1 billion, or about 18 percent of total subsidies. Nuclear, electricity, and end-use programs each accounted for about 10 percent of total subsidies. Conservation programs received about 4 percent of total subsidies. Total subsidies have declined by nearly 16 percent since 1992, a reduction demonstrated across four broad program types (Figure ES2). LIHEAP expenditures have declined by 27 percent and R&D spending by 13 percent.

Table ES3. Summary of Total Energy Subsidy Elements in Federal Programs by Fuel and Program type on a Budget Outlay Basis, Fiscal Year 1999 (Million 1999 Dollars)

Figure ES2.  Summary of Federal Energy Subsidy Elements, 1992 and 1999 (Billion 1999 Dollars)

Generally, these energy subsidies are small relative to the energy economy as a whole, and to the energy companies themselves (Table ES4). The total estimate for all subsidies, $6.2 billion, is only 1.1 percent of total annual expenditures on energy in the United States. The magnitude of subsidies on a per-unit basis varies inversely with expenditures in specific energy sectors. Oil and end-use electricity, which together make up about 86 percent of all energy expenditures, receive negligible subsidies relative to their shares of the energy market. Subsidies to natural gas and coal are slightly higher in proportion to the size of the coal and natural gas sectors of the energy economy. Nuclear energy receives subsidies valued at 16 percent of the nuclear energy sector. The alcohol fuels excise tax exemption provides a substantial per-unit subsidy, valued at 26 percent of the energy sector that is represented by the renewable energy sources grouped in Table ES4.

Table ES4. Magnitude of Energy Subsidies per Unit, 1999

Federal Electricity Support

The total estimate of $2.2 billion for Federal subsidies to energy transformation and end use does not include estimates of support provided through Federal electricity supply programs, because of uncertainties associated with the estimation methodologies. These agencies and programs, the Tennessee Valley Authority (TVA), the Bonneville Power Administration (BPA), the other three Power Marketing Administrations (PMAs), and the Rural Utilities Service are discussed in Chapter 4. Three alternative methods of estimating support are developed and presented there.

The first methodology, a market price comparison, is based on the difference between average revenues from sales for resale made by the PMAs and the average wholesale revenues for privately owned utilities in the surrounding regions. The second approach, an interest rate approach, measures the difference in borrowing costs for recipients of Federal support and what their borrowing costs would be under various benchmark rates. The third methodology, return on assets, compares cost recovery at Federal utilities with that required in the private sector, where electric utilities generally recover their operating costs plus depreciation of capital assets, plus some allowance for cost of capital.

There are inherent difficulties in making comparisons between Federal programs and private suppliers of electricity. The available wholesale price data generally do not capture the variety of power transactions--such as firm and non-firm, contract and spot transactions--that comprise the electricity marketplace. For the return on assets approach, it is difficult to determine the appropriate rate of return, if any, on assets owned ultimately by the public. For the interest rate approach, several benchmark interest rates are compared with the rates paid on debt held by Federal utilities; however, the appropriate selection of a comparison rate is largely a matter of judgment. Because of these uncertainties, the values developed by these methods should be seen as a rough indication of the magnitude of Federal support.

All three methods of valuation suggest that Federal support to selected electricity consumers has declined since 1990 (Tables ES5 and ES6). Estimates of support identified through the return on assets approach show the steepest decline, from $3.3 billion in the high estimate for 1990 (in 1999 dollars) to about $1.6 billion in 1998. The estimates developed under the market price methodology fell from $1.9 billion in 1990 to $1.4 billion in 1998. Interest rate supports to the TVA, BPA, and the three smaller PMAs in 1990 could not be reestimated, because certain historical data were not available. Supports provided through direct loans and loan guarantees administered by the Rural Utilities Service do not appear to have declined. Explicit supports have remained about the same, ranging from $1 billion to $1.6 billion, and implicit liabilities may be much larger. ⁽⁷⁾ Despite the nominal magnitude of these estimates, they are small when compared to total electricity revenues. The highest estimate, $2.145 billion, amounts to only 1 percent of total electricity revenues in 1998; and the low estimate, $325 million, amounts to only 0.1 percent of total electricity revenues in 1998.

Table ES5. Summary of Federal Support to Electricity Estimated by Three Valuation Methods, 1998 (Million 1999 Dollars)

Table ES6. Summary of Federal Support to Electricity Estimated by Three Valuation Methods, 1990 (Million 1999 Dollars)

Energy Trust Fund Outlays

Energy trust funds were described in detail in EIA's September 1999 report on primary energy. The results are briefly summarized in this volume to consolidate all findings. Total outlays for certain energy trust funds have increased since 1992. ⁽⁸⁾ Four show percentage increases, led by the Aquatic Resources Trust Fund (359 percent) and the Pipeline Safety Fund (157 percent). Three show percentage decreases, the largest of which is the Nuclear Waste Fund (down 39 percent). Altogether, outlays from the seven trust funds increased by 19 percent, from $1.95 billion (1999 dollars) in fiscal year 1992 to $2.3 billion in fiscal year 1999. The ultimate costs associated with these programs, storing high-level nuclear waste or repairing damage caused by leaking underground storage tanks, cannot be known with precision, and many of the costs may be realized far in the future. Therefore, costs associated with these programs are not included in summary totals.