Report Contents
Report#:SR/OIAF/2000-02

Preface

Executive Summary

Introduction

Direct Expenditures and Tax Expenditures

Research and Development Spending for Energy End Use and Electricity

Federal Electricity Programs

Summary of Results

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Federal Financial Interventions and Subsidies in Energy Markets 1999: Primary Energy

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This chapter presents a summary of values of Federal Government interventions in energy transformation and end use markets discussed in Chapters 2, 3, and 4. The estimates are then combined with the estimates for primary energy markets previously published by the Energy Information Administration (EIA), ⁽¹³²⁾ to yield estimates of total subsidies to U.S. energy markets in fiscal year 1999. Summary comparisons are made with the estimates presented in EIA's 1992 subsidy report. ⁽¹³³⁾ Data summarized from Chapters 2 and 3 compare Federal budget outlays for fiscal year 1999 with those for fiscal year 1992. ⁽¹³⁴⁾ Summary estimates of support to the electricity programs described in Chapter 4 also appear here. Where it is feasible, those results compare data for years 1998 and 1990.

The intent of this report is to identify Federal Government programs that directly seek to influence the allocation and pricing of electricity and end-use energy resources. Where it can be determined, a quantitative assessment of the cost of those programs is presented. Given the definitions specified by the Department of Energy's Office of Policy, it is estimated that Federal subsidies for energy transformation and end use totaled $2.2 billion in fiscal year 1999 (Table 20). Direct expenditures, consisting of appropriations to LIHEAP and to DOE's two conservation programs, the Weatherization Assistance Program and the State Energy Program, amounted to $1.4 billion. Thus, two programs specifically addressed to low-income households--LIHEAP and the Weatherization Assistance Program--accounted for 62 percent of all energy transformation and end use subsidies. The three income tax expenditures totaled $0.370 billion. No excise tax subsidies related to energy transformation or end use were determined to be within the report's scope. ⁽¹³⁵⁾ Research and development (R&D) outlays amounted to $454 million in fiscal year 1999.

Table 20. 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)

In 1999, subsidies for energy transformation were distributed across all fuel types (Table 20). Electricity ⁽¹³⁶⁾ received subsidies valued at $614 million, 75 percent of which were attributable to the LIHEAP program. ⁽¹³⁷⁾ Natural gas received $501 million and oil received $255 million, for a total fossil fuel (oil and gas) subsidy of $756 million. End-use activities ⁽¹³⁸⁾ accounted for $559 million, and conservation subsidies ⁽¹³⁹⁾ were $276 billion in fiscal year 1999. At $40 million, renewable fuels ⁽¹⁴⁰⁾ received less than 2 percent of the total.

Support to Federal electric utilities was substantial in 1998 (Table 21), regardless of the method of valuation. ⁽¹⁴¹⁾ In Chapter 4, several alternative approaches are used to estimate the manner and role of Federal support to electricity. The market price comparison is based on the difference between average revenues from sales for resale made by the Federal Power Marketing Administrations (PMAs) and the average wholesale revenues for privately owned utilities in surrounding regions. The 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 return on assets, or historic cost, approach compares cost recovery at Federal utilities with that required in the private sector, where utilities generally recover their operating costs plus depreciation of capital assets, plus some allowance for cost of capital. Because of uncertainties in making financial comparisons between privately owned utilities and nonprofit Federal utilities, low and high estimates are provided for the interest rate and return on asset methods.

Table 21. Summary of Federal Support to Electricity Estimated by Three Valuation Methods, 1998 (Million 1999 Dollars)

Supports made available in 1998 through preferential allocation of power (market price) totaled nearly $1.4 billion (1999 dollars). Nearly half of that amount is attributed to the Bonneville Power Administration (BPA). Low rates of return on assets resulted in supports ranging from $655 million to $1.6 billion (1999 dollars). The Tennessee Valley Authority (TVA) and BPA accounted for most of that amount. Supports arising from access to lower priced capital ranged from $325 million to $2.1 billion (1999 dollars). 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.

The combined findings for fiscal year 1999 primary energy subsidies appearing in EIA's September 1999 report and subsidies for energy transformation and end use appearing in this report are shown in Table 22. The estimated total value for all energy subsidies is $6.2 billion, excluding the supports directed through Federal utility electricity supply. ⁽¹⁴²⁾ This $6.2 billion constitutes only a small portion of total expenditures on energy nationally. In 1995, total expenditures on energy were estimated at $547 billion (1999 dollars), ⁽¹⁴³⁾ meaning that Federal subsidies to all energy are 1.1 percent of total energy expenditures.

Table 22. Summary of Primary Energy and 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)

Fossil fuels received nearly half of the total subsidies in fiscal year 1999 (Table 22). Nuclear and electricity subsidies each amounted to approximately 10 percent. Renewables received nearly $1.1 billion, or 18 percent, but the ethanol excise tax expenditure of $725 million constituted most of the total. End-use subsidies were about 9 percent of the total, most of which was directed to R&D programs. Conservation programs received a little more than 4 percent of the total.

Comparing these findings with those reported in 1992 reveals that subsidies to energy transformation and end use have declined about 10 percent (Table 23). ⁽¹⁴⁴⁾ A 29-percent decline in direct expenditure subsidies is offset by the introduction of two new tax expenditures and an increase in R&D subsidies (Figure 6). Despite a reduction in the value of the interest exclusion on energy facility bonds, tax expenditures increased overall by 75 percent with the introduction of an exclusion from income of conservation subsidies provided by public utilities and tax credits and deductions for clean fuel vehicles. Overall, Federal funding for energy end use R&D increased by 59 percent.

Table 23. 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

Figure 6.  Summary of Energy Transformation and End-Use Subsidy Elements, 1992 and 1999 (Billion 1999 Dollars)

In the 1992 report, total transformation and end use were dominated by two direct expenditures, the LIHEAP program and the DOE Conservation programs; but by 1999, subsidies showed greater distribution across program types (Tables 20 and 24). The share of total subsidies attributable to these two direct expenditure programs declined from 80 percent to 63 percent. The share attributable to tax expenditures increased from 8 percent to 16 percent, while the R&D share increased from 11 percent to 20 percent. Distribution of subsidies across fuels remained broad, with increases for electricity and end use, and decreases for conservation, oil, and gas.

Table 24. Summary of Energy Transformation and End Use Subsidy Elements in Federal Programs by Fuel and Program Type on a Budget Outlay Basis, Fiscal Year 1992 (Million 1999 Dollars)

Overall, Federal energy subsidies are estimated to have declined by 16 percent over the past 7 years, from $7.3 billion in 1992 to $6.2 billion in 1999 (Table 25 and Figure 7). ⁽¹⁴⁵⁾ Contributing to the decline was a reduction in LIHEAP expenditures, from $1.712 billion (1999 dollars) to $1.255 billion, a decline of nearly 27 percent, and a significant reduction in DOE's Weatherization Assistance and State Energy programs. Over the range of energy subsidies addressed in fiscal year 1999, five items were eliminated entirely, resulting in a reduction of $177 million, and four programs were introduced over the period, totaling $464 million.

The largest tax expenditure in 1992, excess of percentage over cost depletion, exhibited the greatest decline both in absolute and percentage terms, dropping from $1.2 billion to $0.3 billion (Table 25). This decline, however, was accompanied by a significant reduction in oil prices over the period, suggesting that much of the reduction in real terms stems directly from the petroleum market. Certain subsidies, however, display noteworthy changes not attributable to macroeconomic changes or changes specific to energy markets (Figure 8). R&D funding for natural gas and end-use activities was significantly higher in 1999 than in 1992, whereas funding levels for programs in nuclear R&D, coal R&D, and direct expenditures for DOE's two conservation programs were significantly lower.

The supports identified by the return on assets (historical cost) method show a significant decline over the period 1990 to 1998. ⁽¹⁴⁶⁾ In 1990 (Table 26), it is estimated that the shortfall in recovering historical costs ranged from $2.2 billion (1999 dollars) in the low estimate to $3.3 billion (1999 dollars) in the high estimate. ⁽¹⁴⁷⁾ In 1998 (Table 21), that shortfall had been reduced, ranging from $655 million (1999 dollars) in the low estimate to $1.6 billion in the high estimate. TVA's recent introduction of higher electricity rates has been important in reducing the overall level of this support. ⁽¹⁴⁸⁾

Table 26. Summary of Federal Support to Electricity Estimated by Three Valuation Methods, 1990 (Million 1999 Dollars)

The market price methodology shows a decline as well. Estimates of that measure of support were $1.9 billion (1999 dollars) in 1990, falling to about $1.4 billion in 1998 (Tables 21 and 26). Again, TVA's higher wholesale rates reduced the overall level of support, but average revenues realized by all the PMAs approached revenues realized by investor-owned utilities, reflecting a reduction in wholesale prices generally, a gradual narrowing of the price differential, and the emergence of more competitive wholesale markets.

Interest rate supports in 1990 could not be reestimated, because certain historical data were not available to EIA. Under a previous methodology, those supports were estimated to range from $1 billion to $1.4 billion (1999 dollars) for the Federal utilities. ⁽¹⁴⁹⁾ In 1998, total interest rate supports to TVA, BPA, and the three smaller PMAs ranged from $182 million to $588 million, ⁽¹⁵⁰⁾ an apparent reduction over the period that is likely attributable to refinancing programs undertaken by TVA and BPA. ⁽¹⁵¹⁾

Reduced interest rates on loans extended or guaranteed by the Rural Utilities Service resulted in supports of $985 million to $1.4 billion (1999 dollars) in 1990. ⁽¹⁵²⁾ The low estimate of support dropped to $144 million in 1998, reflecting the low interest rates prevalent in capital markets, while the high estimate stayed about the same, at $1.557 billion. However, risk to the portfolio of loans made or guaranteed by RUS may have increased greatly in the interim, and several large loans have been written off entirely.

Table 27. Comparison of Outlays to Energy Trust Funds, Fiscal Years 1992 and 1999
(Million 1999 Dollars)