Analysis of the Proposed National Energy

Plan

August 1977

NTIS order #PB-273148
Honorable Olin E. Teague

Chairman, Committee on Science

and Technology

U.S. House of Representatives

Washington, D. C . 20515

Honorable Morris K. Udall

Chairman, Committee on Interior

and Insular Affairs

U.S. House of Representatives

Washington, D.C. 20515

Gentlemen:

On behalf of the Board of the Office of Technology

Assessment, I am pleased to forward the results of

the assessment requested by your Committees.

This report provides a balanced and impartial analysis

of the Administration’s proposed National Energy Plan.

We hope that this analysis will serve as a useful

resource, not only for the current debate on the proposed National Energy Plan, but also for the continual

evaluation of the issues it presents.

Sincerely,

EDWARD M . KENNEDY

Chairman

Enclosure

Ill
Foreword

This report is an analysis by the Office of

Technology Assessment of the Administration’s proposed National Energy Plan. It was

made in response to requests from Chairman Olin E. Teague of the House Committee on Science and Technology and Chairman Morris K. Udall of the House Committee on Interior and Insular Affairs.

The National Energy Plan, which was presented to Congress on April 20, 1977,

prescribes goals and principles to guide the

Nation’s energy future. The Administration

also submitted legislation to implement the

Plan. The purpose of the OTA study was to

provide Congress with an independent

evaluation of the Administration’s proposals

and their social and economic effects.

Task groups were assembled to assess the

Plan’s likely impacts on energy supply,

energy demand, and society as a whole. An

additional task group examined the overall

policy implications of the Plan. The task

groups, whose members are identified at

the beg i n n i ng o f this report, w e re

assembled to ac h i eve a balance of viewpoints. They represented major energy industries, energy demand sectors, environmental groups, consumer and public interest groups, academic institutions, and

State and local governments. Each task

group identified and assessed key issues

posed by the Plan. The entire study was

conducted over a 2-month period beginning

in late April 1977.

The report begins with an executive summary, including the major conclusions on

supply, demand, and societal impacts.

Chapter II provides an overall perspective

on the Plan and its policy implications.

There follow chapters for each of the three

impact areas and the issues that need to be

considered. Finally, there are two appendixes: the first measures the magnitude of

the energy problem; the second analyzes

the effect of energy price changes on the

supply of fossil fuels.

The Project Director for this assessment

was Dr. Richard E. Rowberg, who was supported by the Energy Program Staff, led by

Mr. Lionel S. Johns, the Program Manager.

Throughout this analysis and in the planning for it, OTA was assisted by its Energy

Advisory Committee, chaired by Professor

Milton Katz.

DANIEL De SIMONE

Acting Director

Office of Technology Assessment
OTA Energy

Advisory

Committee

Milton Katz, Chairman

Director, International Legal Studies, Harvard Law School

Thomas C. Ayers

president and Chairman

of the Board

Commonwealth Edison Company

Kenneth E. Boulding

Professor of Economics

Institute of Behavioral Science

University of Colorado

Eugene G. Fubini

Fubini Consultants, Ltd.

Levi (J. M.) Leathers

Executive Vice President

Dow Chemical USA

Wassily Leontief

Department of Economics

New York University

George E. Mueller

President and Chairman

of the Board

System Development Corpora ion

Gerard Piel

Publisher, Scientific American

John F. Redmond, Retired

Shell Oil Company

John C. Sawhill

president

New York University

Chauncey Starr

President, Electric Power

Research Institute

*NOte: The OTA Energy Advisory Committee provided advice, crltique, and material assistance

throughout this assessment, for which the OTA staft is deeply grateful. The Advisory Committee, however,

does not necessariIy approve, dIsapprove, or endorse this report. OTA assumes fulI responsibillty for the

report and the accuracy of Its content.
OTA Ad Hoc

Energy Panels

OTA Ad Hoc Policy Panel

Jack Gibbons, Chairman

University of Tennessee

Harry Perry

Chairman, Supply Panel

National Economic Research Assoc.

Charles Berg

Chairman, Demand Panel

Private Consultant

Don Kash

Chairman, Impacts Panel

University of Oklahoma

Gerard Brannon

Georgetown University

Norman Clapp

Development & Resources Corp.

Wilson Clark

Office of the Governor of

California

Herman Daly

Louisiana State University

Robert Dorfman

Harvard University

Garrett Hardin

University of California

Thomas Hughes

Carnegie Endowment for

International Peace

Betty MacDonald

League of Women Voters

John Nassikas

Cox, Langford and Brown

Monroe Newman

Pennsylvania State University

John Redmond, Ex-Officio

OTA Energy Advisory Committee

Shell Oil Company (retired)

Alfred Reifman

Institute for Energy Analysis

Gene Varanini

California Energy Commission

Robert Williams

Princeton University

Herbert Woodson

University of Texas

Joseph Yager

Brookings Institute

Ad Hoc Panels on Supply, Demand, and Societal Impacts

John Andrews

Architect

Robert Ashburn

Long Island Lighting Co.

Harriet Barlow

Rural America

Gerald Barney

Rockefeller Brothers Fund

Stewart Beaubian

Shell Oil Company

Duane Chapman

Cornell University

Thomas Cochran

Natural Resources Defense Council

Norman Coggeshell

Gulf Science & Technology Co.

David Comey

Citizens for a Better Environment

Maudine Cooper

National Urban League

Robert Creagan

Westinghouse Electric

William Cunningham

AFL-CIO

Joel Darmstadter

Resources for the Future

Ronald Doctor

California Energy Commission

Peter Eckstein

United Auto Workers

Martin Elliott

Texas Eastern Gas (retired)

.

VII I
Norman Emerson

Office of the Mayor

City of Los Angeles

Roger Feldman

Le Boeuf, Lamb, Leiby & McRae

Robert Filip

Southern California Gas Co.

Sherman Given

Morley Construction Co.

R. Eugene Goodson

Purdue University

Jerry Grey

private Consultant

Damon Harrison

Kentucky State Dept. of Energy

Marjorie Hart

EXXON Corporation

Alex Hewes

Hewes, Wolf & Jiran

T. Michael Hogan

East Ohio Gas Company

Donald Holtzman

Holtzman Petroleum Co.

Marvin Hughes

U.S. Steel

Brian Ketcham

Citizens for Clean Air

Sheldon Lambert

Shell Oil Company

George Land

AMAX Coal Corporation

Rene Males

Electric Power Research Inst.

Paul Martinka

American Electric Power Co.

Philip Mause

Environmental Defense Fund

James Monaghan

Office of the Governor of Colorado

Bill Moore

Gulf Reston

Richard Morgan

Environmental Action Foundation

Donald Navarre

Washington Natural Gas Co.

Bruce Netschert

National Economic Research Assoc.

Leon Nonemaker

Pennsylvania Power & Light

Erle Nye

Dallas Power & Light

Harold Olin

U.S. League of Savings Assoc.

David Rickelton

AERONCA, Inc.

Blair Ross

AEP Service Corp.

Roger Sant

Private Consultant

T. Robert Santelli

Owens-Illinois

David Schwartz

Michigan State University

Richard Shackson

Ford Motor Company

Rodney Stevenson

University of Wisconsin

Samuel Stewart

Minnesota Energy Agency

Irene Szopo

General Motors

Grant Thompson

Environmental Law Institute

David Tillman

Materials Associates

Robert Uhrig

Florida Power & Light

N. Richard Werthamer

N.Y. State Energy Research

& Development Authority

Walt Westman

University of California

Macauly Whiting

The Dow Chemical Company

James Whittenberger

Harvard School of Public Health

Karl Willenbrock

Southern Methodist University

ix
OTA Energy

Program Staff

Lionel S. Johns, Program Manager

Richard E. Rowberg, Project Leader

Technical Staff

Lynda Brothers Alan Crane

Audrey Buyrn Marvin Ott

Thomas Cotton Nancy Shirk

Pamela Baldwin

Private Consultant

Jack Burby

Potomac Policy, Inc.

Michael Devine

University of Oklahoma

William Galloway

University of Texas

Lincoln Gordon

Resources for the Future

Robert Kalter

Cornell University

Barbara Levi

Private Consultant

Sally Lopreato

University of Texas

Richard Pomp

University of Connecticut

Technical Support

J. Bradford Hollomon

Henry Kelly

Michael Maguire

Support Staff

Administrative Staff

Lisa Jacobson

Linda Parker

Joanne Seder

Robert Rycroft

University of Oklahoma

Dennis Sachs

Private Consultant

George Seidel

Brown University

David Sheridan

Private Consultant

Russell Train

The Conservation Foundation

Jack White

University of Oklahoma

Thomas Wilbanks

University of Oklahoma

Don Veraska

Private Consultant

Sue Crella, Clerical

Ann Willard, Clerical

x
Contents

Chapter

1.

Il.

Ill.

Iv.

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Panel Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supply Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Demand Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Societal Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Overview and Perspective—Policy Panel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Panel Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Panel Perspectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cross-index To Issues Raised by Major Energy Proposals . . . . . . . . . . . . . . . . . . . .

1. Coal Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Domestic Crude Oil Tax and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Natural Gas Pricing and Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Nuclear Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Oil and Gas Consumption Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Utility Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. Buildings Conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8. Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supply Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supply Overview and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oil and Gas Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 1: Oil and Gas Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 2: Oil and Gas Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 3: Liquefied Natural Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 4: Synthetic Natural Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coal Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 5: Coal Production and Demand. . . . . . . . . . . . . . . . . .

Issue 6: Accelerated Eastern Coal Production. . . . . . . . . . . .

Issue 7: Coal Mining Research and Development. . . . . . . . .

Issue 8: Accelerated Production of Synthetic Gas From Coal

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

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

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

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

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

Nuclear Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 9: Licensing Reactors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 10: Public Acceptance of Nuclear Expansion. . . . . . . . . . . . . . . . . . . . .

Issue 11: Breeder Reactors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonconventional Sources Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 12: Nonconventional Energy Goals.. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 13: Solar Incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 14: Long-Term Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contents

Chapter

v . Demand Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Demand Overview and Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 1: Expected Energy Use to 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 2: Replacement Cost Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 3: The Automobile Excise and Standby Gasoline Taxes . . . . . . . . . . . .

Issue 4: The Impact of Truck Fuel Consumption on Meeting the Gasoline

Consumption Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 5: State, County, and Local Government Transportation Fuel Conservation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . .

Issue 6: The Role of Mass Transit in Transportation Energy Conservation .

Issue 7: Transportation Regulation and Energy Conservation . . . . . . . . . . . .

Issue 8: Scope of Buildings Conservation Programs, . . . . . . . . . . . . . . . . . . .

Issue 9: Materials Availability for Building Conservation. ..., , . . . . . . . . . .

Issue 10: Tax Credits for Energy Conservation in Buildings . . . . . . . . . . . . . .

Issue 11: Mandatory Standards for Major Appliances . . . . . . . . . . . . . . . . . .

Issue 12: Communication of Conservation Information. . . . . . . . . . . . . . . . .

Issue 13: Crude Oil Equalization Tax and Heating Use . . . . . . . . . . . . . . . .

Issue 14: The Role of Financial Institutions. . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 15: Conversion of Electric Utilities From Natural Gas. . . . . . . . . . . . . .

Issue 16: Electric and Natural Gas Utility Rate Reform . . . . . . . . . . . . . . . . . .

Issue 17: The Impact of the Plan’s Tax Proposals on Electric Utilities. . . . .

Issue 18: Impacts of the Plan on the Gas Utility Industry .,...,. . . . . . . .

Issue 19: Electric and Natural Gas Utility Conservation Programs . . . . . . . .

Issue 20: The Research and Development Role of the Electric Utilities. . . .

Issue 21: Cogeneration by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 22: Industrial Conversion From Oil and Gas . . . . . . . . . . . . . . . . . . . . .

Issue 23: The Industrial Conservation Investment Tax Credit . . . . . . . . . . . .

Issue 24: Oil and Natural Gas Price and User Tax Provisions . . . . . . . . . . . .

Issue 25: The Effect of the Oil and Gas Use Tax on Petrochemical

Feedstocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 26: Federal Leadership in Industrial Energy Conservation . . . . . . . . . .

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xii
Chapter

VI. Societal Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Societal Impacts Overview and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 1: Macroeconomic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 2: Distributional Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 3: Air Quality Impacts of Increased Combustion of Coal . . . . . . . . . .

Issue 4: Other Environmental Impacts of Coal Utilization . . . . . . . . . . . . . . .

Issue 5: Health Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 6: Impacts of Nuclear Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

issue 7: Alternative Technology—Solar . . . . . . . . . . . . . . . . . . . . . .

Issue 8: Indoor Environments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 9: Health Effects of Diesel-Powered Automobiles. . . . . . . . .

Issue 10: The Role of State and Local Governments . . . . . . . . . . .

Issue 11: The Impact of Utility Rate Reform on Federal-State Relations . . .

Issue 12: Information Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 13: Public Participation in Energy Decisionmaking. . . . . . . . . . . . . . . .

Issue 14: Regional Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 15: Energy Resource Development on Federal Lands . . . . . . . . . . . . . .

Issue 16: Coordination of Energy-Related Programs . . . . . . . . . . . . . . . . . . . .

Issue 17: Adequacy of the Plan’s Oil Import Goals . . . . . . . . . . . . . . . . . . . .

Issue 18: The Question of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 19: The Population Factor and Energy Planning . . . . . . . . . . . . . . . . . .

Issue 20: lmpact of a Petroleum-Scarce Future on the Automobile Industry

Issue 21: Land-Use Patterns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Issue 22: In Defense of Amenities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix I-OTA Background Perspective of Energy Forecasts . . . . . . . . . . . . . . . . . . . .

Appendix n-The Presidential Energy Initiatives: Some Policy Considerations . . . . . . . .

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X111
I. Executive

Summary
Executive

Summary

The National Energy Plan’s assessment of

the world energy crisis is accurate. The

problems are complex and serious and there

is little time for fashioning new policies to

respond to them. If the United States acts

now, it may be able to reassert control over

its energy future and prevent serious

economic, social, and environmental impacts. To postpone decisions to raise energy

prices and reduce energy waste is to risk losing that control, which could mean severe

hardships for all Americans within the next

10 years. The level of U.S. oil imports is the

pressure gauge that will measure how well

American policies are succeeding. If imports

can be held close to the goals of the Plan,

the United States and the rest of the world

may well manage a relatively smooth and

peaceful transition to sustainable energy

resources. If not, the transition may be

neither smooth nor peaceful.

The National Energy Plan correctly

acknowledges that energy problems exist

on so many levels and in so many time

frames that they must be addressed on a national scale. National security, economic

stability, and other national interests are at

stake. Decisions on energy must be made in

consultation with State and local governments and with public and private interest

groups, but the policies should reflect national concerns.

The National Energy Plan is a comprehensive and generally consistent set of policies

that provides a coherent framework within

which Congress can address all energy

policy issues in detail. However, the actions

proposed in the Plan may not be strong

enough to prevent oil imports from reaching

levels that could threaten national security

and economic stability. The Plan’s domestic

oil, natural gas, and coal production targets

represent the upper limits of capacity and

are not likely to be achieved. Clarification of

the uranium supply question is essential to

an orderly expansion of nuclear power

based on light water reactors. To achieve

these levels of supply, the United States

would have to reconciIe the Nation’s environmental goals with the Plan’s supply

goals.

The

energy

energy

crucial

plan’s central theme—promoting

conservation primarily by moving

prices toward replacement costs—is

to national energy policy. However,

the Plan’s overall conservation goals are

modest although the picture is different for

each category of energy use. The fact that

goals may be reached easily in one sector

should not be taken as a signal that conservation efforts may be relaxed or ignored in

another. The projections for energy use in

industry do not reflect the full potential for

energy savings that would occur in that sector if the trend of the past 25 years continues. The goals in transportation may not

be met unless transportation is addressed as

a total system. Stronger measures could produce even greater savings in the residential

and commercial sector than the Plan seeks

to achieve, although the Plan’s overall demand targets probably will be met. Because

of the likelihood of supply shortfalls,

stronger conservation goals may be necessary.

1
Executive

Summary

On the whole, the impact of the Plan on

the economy and employment will be

minor; the consequences of failure to

achieve the Plan’s goals will be far more

severe, The Plan’s proposals for returning

revenues from its proposed energy taxes

should assure financial equity for most lowincome families. it probably will be necessary to expand the Plan to develop special

programs to help regions where the impacts

of high energy prices, new regulations, or

accelerated energy production are particularly severe.

Talent, flexibility, and public support

could be diminished or lost if the States are

not given more responsibility for shaping

and implementing policy than the Plan proposes. If State governments are partners

rather than observers, it will be easier to

enlist both the skills of State officials and

the broad public support the Plan needs in

order to succeed.

Before a National Energy Plan is enacted,

it should focus in detail on programs that

must be started at once to provide adequate

energy sources for the years after 1985. For

example, the Plan does not address the transition from a petroleum base to a new liquid-fuel base such as methanol produced

from plant life. In its present form, the Plan

does not address the question of whether

planned changes in U.S. energy patterns between now and 1985 will strengthen or

weaken the base on which longer range

development will take place. After a National Energy plan is enacted, it must be

monitored carefully both by Congress and

the executive branch. Adjustments will be

necessary to coordinate energy policy with

other national policies and goals such as

materials supply, employment, and air and

water quality,

Panel Findings

Panel members who analyzed the National Energy Plan over a period of 5 weeks

agreed that the goals are valid and the Plan

is sound in principle. They agreed with the

Plan’s premise that the energy problem is

serious enough to call forth strong new

energy policies. ’ As the Plan states:

In developing public policy toward the

energy crisis, all three possibilities—the

most likely case, the optimistic case, and

the pessimistic case—should be considered. It would be foolhardy to base

public policy on the most optimistic

possibility. Even if the future should prove

to be brighter than now appears likely,

steps taken to curb demand and increase

use of abundant resources would still have

been justified to meet the immediate need

to reduce vulnerability.

Each panel concluded its analysis by

emphasizing that the Plan as presented to

Congress provides a framework within

which Congress can work toward a comprehensive set of energy policies. There was

agreement that new national policies are required to carry the United States through a

transition period in which it would

acknowledge that cheap and abundant supplies of energy are no longer available. During that transition period, programs would

be pursued to build a base for long-range

reliance on sustainable resources.

The separate panel findings on supply

and demand raise doubts about whether the

supply targets for oil, gas, coal, and

electricity can be met. These shortfalls, if

they occur, could only be offset by:

. the degree by which the Plan’s implied

target of a 4.3-percent annual increase

in the gross national product is not

1See appendix I
achieved and the degree to which

energy demand would thus be

reduced;

● an increase of oil imports to the extent

that oil is available at acceptable

prices, which would breach one of the

Plan’s most important goals; or

● an increase in supply or decrease in demand through voluntary measures or

changes by the Congress or the executive branch in legislation or regulation.

The major findings of the panels, by

category, are:

Supply Impacts

The levels of domestic supply projected

by the Plan represent the upper limits of

capacity, and supplies of all fuels are likely

to fall below the Plan’s production targets.

For oil and natural gas, production problems

are most likely to occur because of laws and

regulations that may delay necessary exploration and development, particularly on

the Outer Continental Shelf (OCS). Bottlenecks in production of new boilers and

pollution-control devices, coupled with

shortages of capital and manpower and

gaps in the transportation system, could

delay coal production. If delays do occur,

oil production could fail short of the Plan’s

objectives by as much as 1 million to 1.5

million barrels per day. Natural gas production could fall short by the equivalent of up

to 1 million to 1.5 million barrels a day. Coal

production could miss the Plan’s target by

up to 200 million tons per year. Nuclear

power generation could fall short by as

much as 15 percent.

and increased energy production, but it

does not face the possibility squarely and

provide mechanisms for resolving conflicts

between the two. Between one-fourth and

one-third of the 10.6 million barrels of

domestic oil which the Plan anticipates will

be produced each day in 1985 still has not

been discovered. At least 1 million more

barrels a day must be produced from frontier areas such as Alaska or the Outer Continental Shelf by that time to achieve the

Plan’s goals. Proposed new OCS laws could

add to the existing lead times of 4 to 6 years

or more for exploring and developing fields

off the U.S. coastline. The Plan leaves

unresolved the likely conflict between a

doubling of the use of coal in the United

States and the goals of the Clean Air Act. For

example, delays in producing and installing

pollution-control equipment on new utility

powerplants and smaller industrial coalfired boilers could lead to delays in achieving the Plan’s goals for coal production or

delays in achieving the Nation’s air quality

goals.

Although the Plan proposes moving

energy prices toward “the true replacement

cost of energy, ” its proposals would continue to hold the price of natural gas below

the Btu equivalent of other energy

resources. This could prolong a distortion of

energy consumption patterns by continuing

to make gas-a clean-burning premium

fuel-more attractive than alternative fuels.

The Plan’s oil and natural gas price

policies may provide enough funds to support accelerated exploration and development in the next few years, but some

mechanism should be included in the Plan

The Plan acknowledges that there will be

conflicts between environmental protection
Executive

Summary

to adjust prices if

the long term.

domestic oil and

the success of

economy. Errors

more capital is needed in

Increasing supplies of

natural gas are crucial to

the Plan and the U.S.

in judgment on pricing

policies could cause shortfalls over the next

10 years. It is not possible at this point to be

certain that the Plan’s pricing policies will

sustain a flow of funds adequate for

developing some 3 million new barrels of

oil a day in 1985 and an equivalent amount

of new natural gas. For that reason, it seems

prudent to devise some procedure as part of

the Plan for assuring that investment capital

is available to U.S. oil and gas companies

and for adjusting price policies as necessary

in the next several years.

Although there could be slippage in the

construction schedule that could cause production of electricity from nuclear

powerplants to fall 15-percent short of the

Plan’s goal, the midterm future of the industry is in even more doubt. Rising costs,

licensing delays, and slippage in construction schedules have caused the nuclear industry to place a de facto moratorium on orders for new plants after 1985 because the

risks are greater than utilities are willing to

take at this time. Nuclear generation of

electricity can be virtually freed from

uranium resource constraints, but the technologies presently envisaged for achieving

that freedom (plutonium breeders and

plutonium recycle) increase the opportunities for proliferation of nuclear weapons

among nations and terrorists. Alternate reactor systems may be possible that would

generate economical power, substantially

stretch out uranium resources, and reduce

proliferation risks. However, nuclear dependence on nonbreeder reactors over the long

run couId lead to energy constraints,

especially if the more pessimistic estimates

of uranium resources prove to be correct.

Demand Impacts

The Plan’s treatment of transportation

energy conservation focuses too narrowly

on the automobile, The Plan’s goal of a 10-

percent reduction in gasoline consumption

by automobiles and trucks by 1985 probably is too optimistic, but there is not enough

information in the Plan itself to support a

judgment either way. Consumption of

gasoline by automobiles alone can probably

be reduced by more than 10 percent, largely

through the energy-efficiency standards for

new cars that are established in the Energy

Policy and Conservation Act of 1975.

However, increased use of fuel for trucks

could partialIy offset reductions in

automobile consumption by enough so that

the Plan’s goals would not be met,

Although the Plan’s 1985 goal of insulating 90 percent of all homes is too optimistic, its proposals will help reduce the

growth rate of residential-commercial

energy demand, and the overall building

projections of the Plan probably will be

achieved, The Plan focuses too directly on

one- and two-family dwellings, and does

not propose strong enough measures to

achieve the large potential energy savings

from existing commercial (including

multifamily buildings) and industrial buildings.

The Plan’s regulations and tax/price incentives designed to encourage industrial

use of coal may have unintended consequences, Expanded use of coal by industry

will be impeded by the need for new coalhandling facilities, new furnaces and boilers,

and pollution-control equipment. Because

of the uncertainties associated with coal
supplies, difficulties in converting direct

heat equipment to coal, and delays in

availability of pollution-control devices, industries may choose to switch to electricity

rather than coal for some uses (although not

to produce steam), pushing the burden of

coal conversion onto the utility companies.

The proposed oil and natural gas user tax,

which is designed to accelerate a conversion to coal, could put U.S. petrochemical

manufacturers at a worldwide competitive

disadvantage. The projection of coal use in

1985 also is subject to question because it is

based on an industrial energy demand

growth rate about twice the 1950 to 1976

rate. If historical trends continue, the Plan’s

projected industrial energy demand by 1985

would be too high by the equivalent of 200

million tons of coal.

The proposed schedule for converting

utility boilers from natural gas can be met,

but there are circumstances that could upset

this timetable. In particular, the concentration of natural gas boilers in the Southwest

intensifies the capital acquisition problem

to a point that unexpected demand growth

in that area probably would preclude the attainment of the conversion goal. In addition, if conversion to oil on a temporary

basis is prohibited, it is doubtful that both

environmental and conversion goals can be

met within the time period.

The tax credits proposed by the Plan for

cogeneration, conversion, and conservation

in industry will probably accelerate investment decisions in these areas by no more

than a few months. The gap in the expected

rate-of-return between conservation investments and investments made to increase

production is not significantly closed by the

proposed tax credits. It is doubtful that any

acceleration of utility boiler conversion,

beyond the schedule established by previous legislation, will result from the proposed coal conversion tax credit because

the existing schedules do not allow much

flexibility. Limiting the items that qualify for

tax credits in industry and buildings probably will discourage innovation in energy

conservation technologies. The home insulation tax credit may not increase the rate

of investment in home insulation much

beyond that already likely to result from

high heating costs, so that any benefits

might be outweighed by the reduction in

tax revenues.

Societal Impacts

The National Energy Plan will cause a

slight reduction in the rate of economic

growth and contribute to a modest increase

in the rate of inflation in the near term. The

Plan is not expected to have a significant

effect on employment. The consequences

for the economy, inflation, and employment

may be far worse in the long run if new

energy policies are not adopted.

The chances for success of new national

energy policies will improve if State and

local governments are involved as partners

in shaping and implementing the policies.

Principles of federalism alone would argue

for a strong role for States, regions, and

communities in the National Energy Plan. A

growing number of States have created

organizations whose staffs know the energy

problems in their regions in detail and are

capable of dealing with them. The gravity of

the energy crisis makes it essential that new

policies have broad public support, which is
Executive

Summary

more likely to develop if States and communities have more flexibility than the Plan

seems to propose for resolving inequities

and making and enforcing day-to-day decisions.

It is unlikely that the strong measures

necessary to meet the environmental goals

of the Plan are compatible with a substantial

increase in the use of coal on the schedule

proposed in the plan. A deliberate choice

between increased use of coal- and airquality goals probably will have to be made

in the short run, at least in some regions.

Emphasis on immediate accelerated use of

coal may preclude the use of coal technologies that are less damaging to the environment and delay development and introduction of cleaner nonfossil technologies. Even if air quality could be protected in the coal conversion program, there

are other adverse impacts of increased coal

production and use, such as increased levels

of carbon dioxide that are not addressed in

the Plan,

A sustained commitment should be made

now to a wide range of incentives for private development and deployment of solar

and other alternative energy technologies. It

should be possible in the long run to

develop renewable and sustainable energy

resources that have a relatively benign

effect on the environment. But the speed

with which such resources are developed

will depend on the commitments that are

made now to research and development,

The Plan does not commit the United States

to the full range of incentives that are

available for accelerating development of

new technologies, including subsidies for

private research,

One phase of the formulation of the National Energy Plan was an effort to involve

large numbers of private citizens in developing its proposals, but the Plan does not include specific programs for extending that

involvement to future actions. Public participation in shaping and implementing

energy policy may be the key to the success

of such policy. To be effective, public participation should be well-informed, particularly in highly technical areas. A program

of financial support to encourage informed

public participation might contribute to a

smooth transition in U.S. energy policy.

The Plan does not examine the consequences of its short-term energy strategies

and tactics for energy development

programs that must be put in place for the

years after 1985. The Plan proposed fundamental changes in the patterns of energy

supply and demand in a relatively short

period of time. While it is not likely that actions taken during the next 9 years will be irreversible, any new national energy policy

should address the question of whether

changes between now and 1985 will

strengthen or weaken the base on which

long-range development will take place.
II. Overview and

Perspective—

Policy Panel
Overview and

Perspective —

Policy Panel

Policy

Panel

Overview

The Policy Panel is in complete agreement that the United States and all other industrial nations of the world face a serious

energy problem. If the United States tries to

escape short-term sacrifices that can begin

to deal with the problem, it will face real

hardships no more than 10 years from now.

There are no painless options.

The National Energy Plan correctly diagnoses the basic U.S. problem as a case of

domestic demand outstripping domestic

supply. The dominant world problem,

which the United States shares, is the longrun prospect of running out of oil and

natural gas. The National Energy Plan properly focuses on reducing demand for oil and

increasing domestic energy supplies to

avoid a degree of reliance on imported oil

that cannot be sustained, Without immediate action, the growth in world demand for

oil could exceed the production capacities

of exporting nations by the mid-1980’s, If

that were to happen, intense competition

among importing nations over scarce supplies of oil and gas, that they all need to survive, would begin to set the stage for worldwide economic and social upheaval.

The United States cannot deal with the

energy crisis one item at a time, nor can it

put off dealing with what now seem to be

long-range problems in order to concentrate on more immediate concerns. It must

apply its vast resources and technical talents

immediately to solving problems in three

time frames:

. In the near term, by the mid-1980’s,

the United States must reduce demand

and increase domestic production to

reverse the rising trend of oil imports.

The National Energy Plan’s oil import

goal of 6 million to 7 million barrels a

day by 1985 may be arbitrary, but it is

reasonable and achievable.

In the midterm, over a period of about

a generation, the United States must

restructure energy consumption patterns so that the country depends on

oil and natural gas for only a small portion of total supply.

For the long term, the United States

must begin ‘now to intensify a search

for ways to base its energy systems or-i

renewable and sustainable resources.

The time available to achieve the nearterm goal now is so short that strong

measures are essential. Without effective

leadership, these strong measures may fail

to materialize. Many Americans, for example, find it hard to accept the existence of

an energy problem, given the fact that there

are no lines at gasoline stations and lights

still go on at the flick of a switch.

Energy policy in all three time frames

must be national in scope. Several aspects

of the energy problem involve national

security. These include nuclear proliferation, and the possibility of oil embargos or

sudden and steep oil price increases.

Neither private industry nor State and local

governments can deal with energy problems

at that level. Energy supplies and energy

demands are unevenly distributed, not only

in the United States but worldwide, and the

questions of equity which this distribution

poses can only be addressed from a national

perspective. Present national policies have

kept energy prices at artificially low levels

that are not consistent with world forces of

supply and demand. Energy policies must be

9)
Overview and

Perspective —

Policy Panel

corrected to take fully into account the environmental and health costs of energy production and use and to set prices at levels

that encourage efficiency rather than waste.

Such national policies for energy are

needed not to dictate individual choices but

to provide leadership and a base for shaping

public policy to supplement the private

market, assure that national security and national welfare are protected, and encourage

regional equity.

Because energy policies affect many

publics and many problems in many dimensions, they require a mix of instruments for

achieving goals. policies that are adopted in

1977 may not match the needs of the

United States a decade from now. Procedures must be adopted and ratified as

broadly as possible for adjusting policies as

the United States gains experience with a

way of life in which energy is neither abundant nor cheap and as new information

becomes available and new techniques are

developed for producing energy.

The Policy Panel endorses several

features of the National Energy Plan. It has

reservations about several others. Both are

addressed directly in this report and are put

forward to emphasize areas which the Panel

believes deserve special consideration during

congressional review of the National Energy

Plan,

The Policy Panel generally endorses these

features of the National Energy Plan:

. The Plan underscores the gravity of the

world energy problem and suggests a

personal commitment by the President

to the urgent task of slowing the rate

of growth of oil imports before they

reach intolerable levels.

. The Plan focuses on moving away from

heavy dependence on oil and natural

gas—both domestic and imported—

and toward use of more abundant

domestic fuels, particularly coal.

● As drafted, the Plan can achieve reductions in energy consumption without

creating intolerable problems of

unemployment, inflation, or sluggish

economic growth.

● The Plan recognizes that the most

effective long-range conservation

measures are those that lead to improved efficiency in new buildings,

new automobiles, new industrial

plants and other capital stocks, and

concentrates on higher efficiency

standards for those areas.

● The Plan emphasizes the importance of

setting more realistic prices for energy

so that consumers can see total costs

more clearly and can make their

choices accordingly.

. The Plan challenges the wisdom of

relying solely on plutonium breeders

for the next generation of nuclear reactors and seeks to redirect U.S. R&D activities to seek more satisfactory solutions to the problems of nuclear

weapon proliferation.

. The Plan proposes measures to reinforce existing conservation programs

such as the Energy Policy and Conservation Act of 1975 where tougher enforcement actions may be necessary to

reach the goals of the National Energy

Plan.

1()
. The Plan gives attention to cogeneration, which can provide flexibility in

meeting future energy demands

because new capacity can be brought

online in 2 to 3 years after an order is

placed.

The Policy Panel has reservations about

the following aspects of the National Energy

Plan:

●

●

●

●

Domestic supplies of all energy

resources are likely to fall below the

Plan’s projections. Delays in production of oil and natural gas are possible

because of postponements of leasing

schedules on the Outer Continental

Shelf. Regulations may delay the opening of new coal mines. Slippages in

construction schedules and belowmaximum performance of powerplants

may reduce the energy available from

nuclear generators, although total

generation of electricity probably will

meet the Plan’s targets.

Given the seriousness of the energy

supply problem, more drastic energysaving measures than those proposed

in the Plan could be justified.

The Plan probably overestimates

future energy demand in industry.

However, a slower rate of growth in industrial energy consumption than the

Plan anticipates should not be used to

justify a relaxation of conservation

measures in other sectors.

The Plan anticipates higher-thanaverage growth in the gross national

product, continued gains in environmental protection, and a pronounced

shift toward coal as an energy source.

The goals may be commendable, but

the case is not made in the Plan that all

three can be achieved simultaneously.

● The Plan’s goal of expanded coal use is

not likely to be reached. Utilities and

industries are not likely to convert to

coal to the extent the Plan expects

because of stringent environmental

standards, and uncertainties about the

reliability of pollution-control equipment. The consequence of these impediments to coal use may be an expanded use of electricity for many industrial processes.

. The Plan proposes actions that tend to

offset one another. It stresses replacement cost pricing for energy and residential energy conservation. At the

same time, it proposes to hold residential natural gas and heating oil prices

below replacement cost. While this

may be reasonable in the near term, it

should be reexamined for its long-term

implications.

. A National Energy Plan must have the

support of State and local governments to be effective, In order to

assure that support, the Plan should actively engage State and local officials

in policymaking, something it does not

provide in its present form.

. The need for creating and supporting a

variety of education and public participation programs is not stressed in

the Plan. Public involvement can make

citizens more aware of energy

problems and more aware of the consequences of their energy choices.

Programs are needed to expand channels of communication between

citizens and Government officials.

11
Overview and

Perspective—

Policy Panel

. The Plan does not discuss the alternative of allowing prices for energy to

rise to the level at which supply and

demand are balanced. Excessive imports could then be discouraged by

imposing a tariff. Excess profits could

be taxed. Revenues from both tax and

tariff could be used to redress inequities. The end results of this alternative approach should be similar to

those of the Plan and might be less

cumbersome.

Policy

Panel

Perspectives

As one phase of its analysis of the National Energy Plan, the Policy Panel addressed five broad-policy questions. The

conclusions presented below represent the

judgments of the Panel of the effects of the

Plan in these areas.

1. Are the National Energy Plan’s goals

for- supply, demand, and conservation reasonable and are the proposals

for achieving them likely to be effective?

Under the Plan, the United States will use

1.9 million barrels a day of oil equivalent

less in 1985 than it would if there were no

changes in Federal energy policy. In that

respect, the Plan’s overall consumption

goals in 1985 are modest, and should be

fairly easy to achieve. This is true in large

part because the Plan’s estimate of 1985

consumption even without policy

changes—particularly in the industrial sector—is higher than most other published

forecasts.

Given the serious energy problems that

the United States faces, more drastic

energy-saving measures could be justified.

For example, the Plan would not raise the

purchase price of domestic crude oil to the

world price until January 1, 1980. Existing

law would achieve world price levels

several months before that by terminating

mandatory price controls. The Plan would

not raise the average price of natural gas significantly, if at all, because the proposed increase in the price of some interstate gas is

offset by a decrease in the price of some in12
trastate gas. The average price of natural

gas, therefore, will remain below the priceper-Btu of imported oil indefinitely.

The Plan’s overall projection of energy

consumption in the residential and commercial, industrial, and transportation sectors

will probably be met, but there are a number of uncertainties which could prevent

this from happening. The Plan’s proposals

for new capital stock may lead to larger

reductions in energy use in the long-run

than is apparent in the projections for 1985.

Problems exist in each consumption sector which suggest consideration of additional measures:

Residential and commercial: Proposed tax

credits may not encourage enough homeowners to insulate their homes to meet the

Plan’s” stated goals. Additional measures

may be needed, such as a requirement that

structures meet specific energy-efficiency

standards before they can be put up for sale.

More attention is needed on measures to

reduce energy waste in commercial buildings.

Industry: The cogeneration of electricity

and process heat and steam involves both

substantial energy-saving opportunities and

difficult problems. Rapid conversion of industries to coal from oil and gas (in line with

a major Plan goal) could lead to installation

of coal-burning equipment that is either unsuited to cogeneration of electricity or is

less efficient than technology now under

development. It is likely that a slower rate

of growth in industrial energy use than is

projected by the Plan will make it possible

to stretch out deployment of cogeneration

and to take advantage of newer technology.

The Plan relies more on industries shifting

from oil to coal than it does on conservation

as a means of holding down oil imports. The

very large increase in coal production called

for in the Plan appears to be physically

possible. Transportation for coal should be

available, although difficulties may arise in

delivering coal in small batches to large

numbers of widely dispersed industrial

facilities.

A crucial uncertainty is whether the taxes

that would be levied on oil and gas burned

by utilities and industries would provide a

sufficient incentive for investment in coalburning facilities. Uncertainties about coal

supplies, availability of coal-handling and

coal-burning equipment, and meeting

Federal air pollution standards may lead

utilities and companies to keep burning oil

or gas and pay the tax or convert from oil

and gas to electricity. Some of the oil and

gas taxes or the increased costs of electricity

could be passed on to consumers in the

form of higher prices for goods.

Transportation: There are conflicting

forecasts about the effectiveness of the

Plan’s system of taxes and rebates on new

automobiles in reducing gasoline consumption. The tax and rebate system would,

however, create a serious foreign trade

problem unless rebates similar to those proposed for domestic automobiles were

granted for high-performance imported cars.

The Plan’s proposed standby tax on

gasoline may not affect gasoline consumption significantly by 1985 because it would

add a maximum of 35 cents per gallon to

the cost of gasoline in 1985 while fuel-efficiency of automobiles would increase substantially. If larger transportation fuel savings are desired, a higher gasoline tax should

be considered. More efficient and flexible

13
Overview and

Perspective—

Policy Panel

forms of commuter transportation such as

vanpools and “jitney” services also might

be encouraged.

2. Do the provisions of the National

Energy Plan promote or interfere with

other national goals?

The success of any energy policy must be

measured, at least in part, by its influence

on economic well-being, environmental

protection, and other goals. Implementing

the National Energy Plan will affect all of

these goals to some degree, but the influence will be relatively small in each case.

The Plan probably will slow down the

growth of the gross national product slightly

during the next several years, but the longterm benefits for the economy should justify

the short-term costs. An orderly transition

to an economy with high energy costs may

cushion the United States from severe

shocks in later years that could result from

living with present energy policies.

The Plan relies heavily on the price

mechanism to achieve energy conservation,

in some cases in combination with regulatory techniques. Prices of nearly all forms of

energy can be expected to rise under the

Plan, led by an increase in the purchase

price of oil to world market levels. Higher

energy prices wiII be transmitted

throughout the economy and will affect

prices of all goods and services to some

degree. Improved efficiency in the use of

energy should mitigate the inflationary impact, but some additional inflation is inevitable as energy prices rise toward

replacement cost. It should be easier to absorb that impact with gradual moves to

reduce nonessential energy uses than to

wait until world competition for oil forces

sudden increases in oil prices and abrupt

reductions in essential energy uses,

The National Energy Plan does not address its potential impact on employment in

detail. This may not be a serious omission,

because the net effect of the Plan is likely to

be small, with some job losses and some job

gains. To the degree that economic growth

is reduced, the number of available jobs in

some sectors will fall. However, increasing

energy costs may also create new jobs that

substitute labor for energy.

One of the principles of the Plan is that

the United States must solve its energy

problems in a manner that is equitable to ail

income groups and it proposes a program to

carry out the principle. Because lower income families spend a far higher proportion

of their total income for energy than do

those with higher incomes, people least

able to afford higher energy prices will be hit

hardest. However, the rebate system proposed by the Plan will return energy taxes to

the economy and should compensate lower

income groups at least partially for increased energy costs. Without the rebate

plan, or some alternative, the energy

policies proposed in the Plan would cause

serious inequities.

The National Energy Plan addresses the

need to protect the environment. At the

same time, the Plan implictly recognizes the

difficulty of achieving some of its energy

goals without further environmental

damage. The most important impact of the

Plan on the environment will be a shift away

from the use of oil and natural gas to the use

of coal, While there is doubt that the shift

to coal will be achieved on the scale contemplated by 1985, any increase in the use

of coal will affect air quality and land use.

14
The Plan proposes a special Presidential

study committee to improve national understanding of health effects and environmental constraints of increased use of coal,

With or without the Plan, maintenance of

environmental goals—particularly air

quality standards—will be difficult without

vigorous research and development of technologies to control pollution.

3. IS the mix of price increases and

regulations proposed by the National

Energy Plan the most effective approach to energy policy or should the

Plan rely more heavily on decontrol

of fuel prices?

Efforts to set new energy policies have

revived a debate between advocates of

deregulation of fuel prices and advocates of

more vigorous Government intervention

over which approach will be most effective

in changing consumer habits, The National

Energy Plan proposes a mix of policies that

recognizes the advantages and disadvantages of both approaches. The Plan relies

heavily on higher energy prices to change

the patterns of energy demand and its proposals reflect an effort to retain as much as

possible the flexibility of consumer and producer decisions that is characteristic of a

competitive free market. At the same time,

it recognizes that a pure market approach

probably will not cause changes in energy

consumption patterns soon enough to

achieve the Plan’s goals for 1985. It also

recognizes that simply letting energy prices

rise without controls would create serious

problems of equity among different income

groups. This is not to say that the Plan will

necessarily be effective in every respect, but

its effort to move toward “replacement

cost” for energy is a valid starting point.

The Plan probably is correct in its implied

judgment that higher prices for fuel alone

will not change energy consumption patterns fast enough to achieve the goals it sets

for 1985. In transportation, for example,

there is reason to believe that, given a

choice, consumers would not buy enough

fuel-efficient automobiles in time to achieve

a 10 percent reduction in gasoline consumption by 1985. Even the fuel-efficiency

standards for automobiles set by the Energy

Policy and Conservation Act of 1975 may

have to be reinforced if 1985 model cars are

to average 27.5 miles to the gallon.

As with transportation, higher fuel prices

alone probably will not motivate enough

homeowners and landlords to reinsulate

buildings and take other energy-saving steps

to achieve the reduction in energy demand

that the Plan envisions. Additional regulations, standards, and incentives may be required.

The cornerstone of the Plan is a proposal

to raise energy prices through a crude oil

equalization tax, much of which would be

refunded to the public. This is an improvement over the present system of price controls that hold domestic purchase prices

below world levels and encourage overconsumption of scarce fuels.

Americans today pay about $11 per barrel for oil, which represents a mix of three

prices—$5.25 per barrel for “old” domestic

oil; more than $11 per barrel for “new”

domestic oil; and about $14 per barrel for

imported oil. Domestic producers, whose

prices are controlled, in effect subsidize importers to cover the differences between

the $14 world price and the $11 average

domestic sales price.

15
Overview and

Perspective —

Policy Panel

The Plan would retain price controls for

domestic oil. It also would raise U.S.

purchase prices to world prices over a 3-

year period by imposing a tax equal to the

difference between controlled domestic

prices and the world price. Users of oil for

home-heating would be shielded from the

full tax through a rebate to oil distributors

who could demonstrate that they had not

passed on the tax to consumers. Revenues

from the equalization tax would be rebated

on a per-capita basis. The effect on income

distribution should be progressive because

the per capita rebates generally would more

than offset higher costs to families below

the median income.

The wellhead tax in the form proposed

by the Plan would have a smaller effect on

consumer prices and on employment than

some other alternatives because it would

encourage small adjustments throughout

the economy rather than sharply higher

costs in a few sectors. One of the most important impacts of the proposal will be to

end the subsidy on imports that now exists.

Consumers would have to be willing to pay

a higher price for all oil before they would

be willing to pay a higher price for OPEC oil.

This could strengthen consumer resistance

to OPEC price increases, help reduce the

Nation’s staggering oil import bill, and

perhaps lead to a reduction of total OPEC

revenues.

Oil industry revenues would be lower

under the Plan’s proposals than they would

be if oil and natural gas prices were deregulated. However, an OTA study using a model

to simulate future industry response, indicates that, at least in the near term, a higher

price for new domestic oil would not create

significant increases in supply except in

high-cost production regions off the coast

of Alaska. ’

One final equity issue is raised by the

plan’s proposal to impose different levels of

restraint on different energy users, Broadly,

the lightest burden is placed on homeowners, while industrial firms and owners of

automobiles and trucks will be required to

reduce consumption or pay higher costs and

taxes. Within the transportation sector, the

Plan proposes to shift that burden away

from owners of existing cars and on to

purchasers of new cars, where higher costs

can influence choice.

4.

●

●

The important foreign policy questions raised by the Plan are:

Are the Plan’s import goals adequate

to protect against another Arab embargo?

IS the nonproliferation policy outlined in the-plan compatible with the

Plan’s objectives?

The need for a national energy plan

derives in large part from the fact that the

United States now meets about sO percent

of its oil demand through imports and that

percentage is growing. This increase is in

addition to a very high level of oil imports

by Europe and Japan. With the 1973–74 oil

embargo and a subsequent four-fold price

increase, it became clear that Western

energy supplies are fundamentally insecure,

both as to price and quantity. As long as the

United States depends so heavily on foreign

oil supplies, it is vulnerable to the actions of

oil exporting nations, including future embargos or disruptive price increases.

1See appendix II.

16
The energy problem is as much a global

as a national problem, and U.S. energy objectives can be met only in the context of a

favorable international environment. Energy

waste or conservation by one country

affects the supplies available to others.

Consequently, the United States has an interest not only in moderating its own demands but in helping other countries

develop new energy sources and expand

their conservation programs. Because it is

the world’s largest energy consumer, U.S.

energy policies are of major interest to other

countries.

The National Energy Plan’s proposal to

cut oil imports to 7 million barrels a day by

1985 probably is sufficient: (a) to reduce the

risk of a shortfall of import availabilities at

present (real) prices and a consequent

further large increase in the price of oil; and

(b) to enable the United States to weather

another possible embargo if the emergency

oil reserve called for in the Plan is in place

and the International Energy Agency’s (IEA)

automatic oil-sharing arrangements are implemented.

A gradual reduction of U.S. imports of oil

to 7 million barrels a day by 1985 would

place total world import requirements at

about 35 million barrels a day. This would

be within the range of forecasts of the

capacity of oil producing nations in 1985.

However, if U.S. demand were 4.5 million

barrels per day higher, as it is estimated to

be in 1985 without the National Energy

plan, world demand for oil might exceed the

capacity of exporting countries and market

forces could create a large and disruptive increase in price.

An embargo which cut Arab exports of oil

by as much as 50 percent in 1985 would

reduce world oil exports by one-third, and

total oil supplies in the industrial countries

by roughly 20 percent. If the International

Energy Agency could spread this cut evenly,

the United States would suffer a reduction

of 4 million barrels a day. The planned U.S.

emergency oil stockpile of 1 billion barrels

could supply this amount for approximately

8 months, if no special conservation

measures were undertaken, and if no embargo occurred before 1985, the target year

for completing the stockpile.

Concern about the spread of nuclear

weapons has led the Administration to propose an indefinite postponement of further

steps toward a “plutonium economy. ”

Many countries, particularly those with

breeder reactors already under development, view this proposal as a threat to their

long-term energy planning. To mitigate

foreign concerns about continued reliance

upon the present generation of uranium

reactors, the Plan offers U.S. uranium enrichment services to any country that shares

American nonproliferation objectives. This

approach could be augmented by a program

to establish an international uranium

stockpile, which could be accomplished at

less cost than creating a stockpile of the

energy equivalent of oil.

Other measures may have to be taken if

the Administration position is to be acceptable to most countries. These include creating an international agency that could provide spent-fuel storage facilities under

international safeguards, creating multinational and international management of

various stages of the nuclear fuel cycle,

developing market-sharing agreements

among nuclear exporters, and a variety of

measures to reduce the incentive to acquire

nuclear weapons.

17
Overview and

Perspective—

Policy Panel

For the proposed nonproliferation policy

to work, it is important that the United

States persuade other governments that

there are nuclear alternatives to the

plutonium breeder which promise to be

economical, less conducive to proliferation,

and which can be put into operation at least

as rapidly as breeders. One such approach

may be to operate present-day reactors on a

fuel cycle employing denatured

uranium-233 and thorium. This technology

could be developed through a multinational

effort.

Assistance to other governments in the

development of alternative energy technologies such as solar, geothermal, synthetic fuels, and biomass conversion would

be another part of the effort to lead the

world away from the plutonium economy.

An international development program for

such sources, along with conservation technologies, could be a promising approach.

5. Does the National Energy Plan allow

for adequate participation in the

shaping and conduct of energy

policy by State and local governments and by citizens generally?

The National Energy Plan not only fails to

implement an energy partnership with the

States, it appears to alter their existing planning and regulatory authority profoundly.

principles of federalism and equity alone

would argue for a strong role for States,

regions, and communities in fashioning and

implementing energy policy. The fact that

the Plan will require an extraordinary degree

of cooperation from the States makes it

even more essential that the Plan contain

explicit procedures under which regions can

achieve flexibility and resolve inequities

and under which day-by-day decisions can

be made and enforced in regions and States.

18

The role of the National Government should

be to step in when programs that are in the

national interest are rejected or deferred on

parochial grounds.

A growing number of States have created

organizations whose staffs are capable of

addressing energy problems peculiar to their

regions. These organizations give many

States a capability to work toward achieving

the goals of the Plan. if they are involved in

developing energy policy at an early stage,

cooperation and enthusiasm could be

generated which might mean the difference

between success and failure in some

regions.

The Plan mentions the importance of

public participation in energy policy but its

proposals do not address procedures and

mechanisms for involving the public. Public

involvement will provide a means for

citizens to communicate concerns or innovations to policy makers and for Government to communicate proposals and technical information to citizens. Experience indicates that in any policy area as complex and

important as the energy policies addressed

in the Plan, citizens are likely to be cautious

about-or even opposed to-changes in

policy unless they are involved in formulating that policy.
III. Cross-Index to

Issues Raised by

Major Energy

Proposals
Cross-Index to

Issues Raised by

Major Energy

Proposals

The National Energy Plan makes more

than 100 specific proposals for changing

laws or regulations to achieve its objectives.

Some of the proposals are more controversial or will influence supply, demand, and

society more than others. This section presents cross-indexes of analyses of issues in

eight

1.

2.

3.

4.

5.

6.

7.

8.

general areas:

Coal Utilization;

Domestic Crude Oil Tax and Regulations;

Natural Gas Pricing and Regulation;

Nuclear Development;

Oil and Gas Consumption Taxes;

Utility Regulation;

Buildings Conservation; and

Transportation.

The cross-index does not imply an effort

to rank proposals according to importance,

although clearly the Plan’s treatment of

crude oil and natural gas prices will have a

broader impact on energy supply and demand than appliance standards or vanpools.

It is intended only as a guide to detailed discussion of issues raised by the Plan’s proposals in these eight general areas.

1. Coal Utilization

Supply Impacts

Issue #5: Meeting Coal Utilization

Goals, p. 46.

Issue #6: Accelerated Eastern Production, p. 48.

Issue #7: Coal Mining Research and

Development, p. 49.

Issue #8: Coal-based Synthetic Gas,

p. 50.

Demand Impacts

Issue #1: Expected Energy Use to

1985, p. 81.

Issue #2: Replacement Cost Pricing, p.

84.

Issue #20: The Research and Development Role of the Electric

Utilities, p. 126.

Issue #2I: Cogeneration by Industry, p.

127.

Issue #22: Industrial Conversion From

Oil and Gas, p. 131.

Societal Impacts

Issue #3: Air Quality Impacts of Increased Combustion of

Coal, p. 157.

Issue #4: Other Environmental Impacts of Coal Utilization,

p. 160.

Issue #14: Regional Impacts, p. 182.

21
Cross-Index to

Issues Raised by

Major Energy

Proposals

2. Domestic Crude Oil Tax and Regulations

Supply Impacts

Issue #1: Oil and Natural Gas Production Outlook, p. 35.

Issue #2: Oil and Natural Gas Price

Policies, p.39.

Appendix II: p. 216.

Demand Impacts

Issue #2: Replacement Cost Pricing, p.

84.

Issue #13: Crude Oil Equalization Tax

and Heating Oil Use, p.

109.

Issue #17: The Impact of the Plan’s Tax

Proposals on Electric

Utilities, p. 119.

Issue #24: Oil and Natural Gas Price

and User Tax Provisions,

p. 136.

Issue #25: The Effect of the Oil and Gas

Use Tax on Petrochemical

Feedstocks, p. 140.

Societal Impacts

Issue #1: Macroeconomic Impacts,

p. 150.

Issue #2: Distributional Impacts,

p. 153.

3. Natural Gas Pricing and Regulation

Supply Impacts

Issue #1: Oil and Natural Gas Production Outlook, p. 35.

Issue #2: Oil and Natural Gas Price

Policies, p. 39.

Issue #3: Policies Governing Liquefied

Natural Gas Imports, p.

42.

Appendix II: p. 216.

Demand Impacts

Issue #2: Replacement Cost Pricing, p.

.

84.

Issue #15: Conversion of Electric

Utilities From Natural Gas,

p. 113.

Issue #16: Electric and Natural Gas

Utility Rate Reform, p.

115.

Issue #17: The Impact of the Plan’s Tax

Proposals on Electric

Utilities, p. 119.

Issue #18: Impacts of the Plan on the

Gas Utility Industry, p.

121.

Societal Impacts

Issue #1: Macroeconomic Impacts,

p. 150.

Issue #2: Distributional Impacts,

p. 153.

22
4. Nuclear Development

Supply Impacts

Issue #9: Constraints on Expansion of

Nuclear Power, p. 53.

Issue #10: PubIic Acceptance of

Nuclear Expansion, p. 57.

Issue #11 : Administration Breeder

Reactor Proposals, p. 59.

Societal Impacts

Issue #6: Environmental and Social

Impacts of Nuclear Proposals, p. 165.

5. Oil and Gas Consumption Taxes

Demand Impacts

Issue #1 : Expected Energy Use to

1985, p. 81,

Issue #3: The Automobile Excise and

Standby Gasoline Taxes,

p. 88.

Issue #17: The Impact of the Plan’s Tax

Proposals on Electric

Utilities, p. 119.

Issue #24: Oil and Natural Gas Price

and User Tax Provisions,

p. 136.

Issue #25: The Effect of the Oil and Gas

Use Tax on Petrochemical

Feedstocks, p. 140.

Societal Impacts

Issue #2: Distributional Impacts,

p. 1 53%

23
Cross-Index to

Issues Raised by

Major Energy

Proposals

6. Utility Regulation

Demand Impacts

Issue #2: Replacement Cost Pricing, p.

84.

Issue #15: Conversion of Electric

Utilities from Natural Gas,

p. 113.

Issue #16: Electric and Natural Gas

Utility Rate Reform, p.

115.

Issue #17: The Impact of the Plan’s Tax

Proposals on Electric

Utilities, p. 119.

Issue #18: Impacts of the Plan on the

Gas Utility industry, p.

121,

Issue #19: Electric and Natural Gas

UtiIity Conservation

Programs, p. 123.

Societal Impacts

Issue #11 : The Impact of Utility Rate

Reform on Federal-State

Relations, p. 177.

7. Buildings Conservation

Demand Impacts

Issue #1: Expected Energy Use to

1985, p. 81.

Issue #8: Scope of Buildings Conservation Program, p. 100,

Issue #9: Materials Availability for

Buildings Conservation,

p. 103,

Issue #10: Tax Credits for Energy Conservation in Buildings, p.

105.

Issue #11: Mandatory Standards for

Major Appliances, p. 106.

Issue #12: Communication of Conservation Information, p.

108.

Issue #13: Crude Oil Equalization Tax

and Heating Oil Use, p.

109.

Issue #14: The Role of Financial Institutions, p. 111.

Issue #17: The Impact of the Plan’s Tax

Proposals on Electric

Utilities, p. 119.

Issue #19: Electric and Natural Gas

UtiIity Conservation

Programs, p. 123.

Societal Impacts

Issue #2: Distributional Impacts,

p. 153,

24
8. Transportation

Demand Impacts

Issue #1:

Issue #3:

Issue #4:

Issue #5:

Issue #6:

Issue #7:

Expected Energy Use to

1985, p. 81.

The Automobile Excise and

Standby Gasoline Taxes,

p. 88.

The Impact of Truck Fuel

Consumption on Meeting

the Gasoline Consumption Coal, p. 92.

State, County and Local

Government Transportation Fuel Conservation, p.

94.

The Role of Mass Transit in

Transportation Energy

Conservation, p. 95.

Transportation Regulation

and Energy Conservation,

p. 99.

Societal Impacts

Issue #2: Distributional Impacts,

p. 153.

Issue #4: Other Environmental Impacts of Coal Utilization,

p. 160.

Issue #9: Health Effects of DieselPowered Automobiles,

p. 172.

Issue #20: Impact of a PetroleumScarce Future on the

Automobile Industry,

p. 196.

Issue #21 : Land-Use Patterns,

p. 197.

25
IV. Supply

Impacts
Supply

Overview

and Findings

The National Energy Plan correctly

assesses the gravity of the world energy

situation, The Plan accurately conveys the

sense of urgency in its statement that:

. . . the diagnosis of the U.S. energy crisis is

quite simple: demand for energy is increasing, while supplies of oiI and natural gas are

diminishing. Unless the United States

makes a timely adjustment before world oil

becomes very scarce and very expensive in

the 1980’s, the Nation’s economic security

and the American way of life will be gravely endangered. The steps the United States

must take now are small compared to the

drastic measures that will be needed if the

United States does nothing until it is too

late.

The National Energy Plan is a comprehensive and generally consistent set of policies

that will permit the United States to begin

to manage its energy supplies before conflicting claims on diminishing world oil supplies reach crisis proportions, The observations and conclusions that follow are meant

to broaden the understanding of the Plan’s

impact on the Nation’s energy supply

systems. They are intended to raise the

question as to whether the Plan can achieve

its goals and not to challenge its value as a

sound base for establishing U.S. energy

policy over the next several years.

The Plan is a major move in the right

direction. It can be improved with adjustments in detail and in scope.—The National Energy Plan acknowledges the hard

energy choices the United States must make

and the high costs of those choices. The

plan correctly emphasizes that cheap and

abundant energy is a thing of the past. One

of its most important messages is that, even

if the United States could afford to import

unlimited amounts of oil indefinitely,

unlimited supplies of oil simply do not exist

anywhere in the world. The Plan accurately

perceives this in its basic supply goal, which

is to begin to shift the country away from a

near-total reliance on oil and natural gas

toward the use of energy supplies whose

resource bases have a potential for growth.

The goals of the Plan that are designed to

force that change—reducing the rate of

growth in energy demand to 2 percent a

year, reducing consumption of oil and

natural gas and the level of oil imports,

reducing energy waste, and increasing the

application of new technologies for providing energy from other sources including

coal, nuclear power, and the sun-are properly focused.

The levels of supply projected by the

Wan represent the upper limits of capacity

and supplies of all fuels are likely to fall

below the Plan’s goals.—There is little, if

any, margin of error in the production

schedules of the NationaI Energy Plan. There

is no room for delay in opening new coal

mines, exploring for new oil and natural gas

resources-particularly in the frontier areas

such as Alaska and the Outer Continental

Shelf—and putting nuclear powerplants

into operation. Considering the past 7 years

of performance in developing new energy

supplies, it is unlikely that all elements of

the Plan will fall into place precisely on

schedule. The probable causes of delay are

different for each source of energy. In oil

and gas production, delays are most likely

to occur because of laws and regulations

that may postpone access to frontier areas

for exploration and development, particularly on the Outer Continental Shelf. Ad-

’ 2 9
supply

Impacts

ditional coal-production facilities will be

constructed by the coal industry only if new

markets for coal are assured. This may require some short-term tradeoffs between

environmental objectives, since the new

boilers and pollution-control devices may

not be available for the rapid conversion of

plants to coal use. Moreover, manpower

and capital shortages could delay the opening of new underground coal mines, and

transportation bottlenecks could prevent

coal from being delivered where it can be

used, particularly in the East. If such delays

occur, production of oil could fall short of

the Plan’s goals by as much as 1.0 to 1.5

million barrels per day. Production of

natural gas may also fall below the goals by

the equivalent of up to 1.0 to 1.5 million

barrels of oil per day. Coal production could

fall short of the goals by as much as 200

million tons per year (2.4 million barrels per

day equivalent). Nuclear powerplants could

produce up to 15-percent less energy (0.6

million barrels per day equivalent) than the

Plan anticipates.

The Plan contains no contingency plans

for stimulating production of energy or

further reducing consumption in the event

of slippage in one or more sources.—The

incentives proposed by the National Energy

Plan concentrate more on switching demand than on encouraging higher rates of

production. The higher prices proposed for

new oil and natural gas are expected to encourage accelerated exploration for those

resources, at least in the near future. The

Plan’s proposals for creating new markets

for coal should provide the industry with incentives to increase production. However,

as noted above, the Plan’s supply objectives

can be achieved only if all fuels are produced at the rate assumed in the Plan. The

linkage between supply and demand is particularly crucial in coal production. The Plan

provides no direct incentives for new coal

production but relies entirely on creating

higher demand. If, for example, it appeared

5 years from now that oil production would

not reach the Plan’s goals, the only options

would be to increase coal production or buy

more oil on the world market, since there is

virtually no chance that increased production of natural gas or nuclear power could

take up the slack. The Plan should be more

explicit about which of these options would

best make up for insufficient domestic oil

production and what other alternatives

might be offered to make up for shortages.

The Plan fails to acknowledge that there

will be inevitable conflicts between environmental protection and increased

energy production and use. It should face

that possibility squarely and propose

mechanisms for resolving the conflicts.—lf

energy production falls short of the Plan’s

forecasts, it is more likely to be caused by

environmental and regulatory conflicts than

by lack of available resources, capital, or

manpower. For example, more than onethird of the oil and gas which the Plan anticipates will be produced domestically in

1985 still has not been discovered. A large

share of new resources probably will come

from the frontier areas, Alaska and the

Outer Continental Shelf. But environmental

objections and proposed new OCS laws

could delay new production long enough to

cause new supplies to fall short of the Plan’s

goals.

The Plan also may assume too much in its

implied schedule for additional nuclear

generating capacity. Accelerating the licens30
ing process for new powerplants, as the Plan

proposes, deals with only one factor in a

process which now makes the lead time for

nuclear powerplants as long as 12 years.

Other factors include environmental issues,

and the questions of public acceptance of

accelerated nuclear plant construction and

of State authority to grant or deny permits

for building and operating nuclear plants,

Finally, the Plan leaves open the question

of potential conflicts between air quality

and a virtual doubling of the use of coal as

an energy source. The Plan is designed to

encourage greater use of high-sulfur Eastern

coal by requiring “best available” control

technology for al I new coal-fired

powerplants, whether they burn Eastern

coal or lower-sulfur Western coal. What the

Plan does not say is that control equipment

also would be required on many, if not

most, new coal-burning industrial boilers,

most of which are likely to be built near urban areas where air pollution already exceeds Federal standards. Delays in converting powerplants and industrial boilers from

oil or gas to coal that result from the requirement for pollution control could, in

turn, reduce demand and retard the increased production of coal which the Plan

ant ic i pates. Delays in coal production

would prolong the period during which the

United States depends for more than 60 percent of its energy on oil and natural gas.

The pricing policies in the Plan may require revision in a few years to avoid distortions in both supply and demand.—The

Plan projects growth in all domestic energy

production. Without discoveries of new oil

fields, production could decline from today’s levels by as much as 25 percent; the

production of gas could decline by 45 percent. To achieve the Plan’s production

goals, oil and gas discovery rates must at

least double the industry’s finding experience over the past 15 years. This optimistic goal can be justified largely by the

fact that there are still areas of Alaska and

the Outer Continental Shelf which have the

necessary reserve potential. The higher

prices proposed for new oil and gas should

encourage continued exploration, but the

Plan does not clearly establish that the proposed oil and gas pricing policy will provide

the necessary funds to achieve its projected

oil and gas production rates. Rather, the

question is approached as a judgment

which, in the beginning, may be acceptable.

It may be necessary to reopen the question

and make adjustments if discoveries and, in

turn, production fall below the Plan’s goals.

The Plan does move toward correcting

energy price imbalances which it says have

contributed to the current energy crisis by

encouraging the overuse of scarce fuels, in

particular natural gas. The proposal to raise

the delivered cost of petroleum to U.S. consumers to world price levels in 3 years is a

positive step in that direction. However, the

Plan could prolong the distortion of consumer choices among available fuels by

holding natural gas prices below those of

alternative energy sources. The “new gas”

price ceiling would be made equivalent, on

a Btu basis, to the average price of all

domestic crude oil which is lower than the

ceiling price for “new oil”. Furthermore, the

transportation and refining costs of crude oil

are ignored, as is the intrinsic value of

natural gas as a premium fuel. Thus, even at

the new price, gas is substantially cheaper

than competitive fuels. Natural gas will remain a first choice among available fuels as

.31
supply

Impacts

long as it is even slightly below the price of

other fuels. The long-range impact of this

continued disparity in the pricing of natural

gas should be addressed by the Plan.

The Plan’s goal of accelerating development of solar energy is commendable, but

its specific proposals are silent on serious

impediments to expanded use of solar

equipment.— In order to achieve the Plan’s

goal of installing solar energy equipment in

2.5 million homes by 1985, sales must increase at a rate of about 75 percent each

year. Considering the number of institutional barriers to wider use of solar energy

units, that growth rate may be too optimistic. The Plan does not address these

barriers, which include a lack of national

performance standards for solar equipment

that could protect consumers against flawed

systems. The Plan contains no guidelines for

local governments which must approve

solar equipment under their building codes.

It contains no direct incentives for manufacturers to expand facilities and promote sales

of solar devices.

The Plan is silent on post-1985 energy

development: specifically, it does not

relate short-term plans to long-term

energy demands and supply patterns.—

The appropriate focus of the National

Energy Plan is on the period between now

and 1985 because actions are urgently

needed during that time to adjust the patterns of U.S. energy demand and supply to

try to avoid intense world competition over

scarce oil supplies. If the Plan is implemented, the U.S. energy base will be

different in 1985 than it is now. But the Plan

is silent on the question of whether the new

U.S. energy base will provide a strong foundation for developing new energy technologies and resources after 1985.

For example, if the Plan’s petroleum goals

are met, the United States will still depend

on oil and natural gas for about 60 percent

of its energy supplies in 1985. Domestic oil

and gas production, which will represent

about 42 percent of total supply in 1985,

almost certainly will continue to decline

after 1985. Despite these trends, the Plan

does not address the question of U.S.

policies between now and 1985 that are

needed to prepare the country to deal with

a continuing decline in domestic oil and gas

production. The Plan should address the

possibility of directing capital to programs

to accelerate development of synthetic

liquids and gases that can replace oil products and natural gas after 1985.

By 1985, direct burning of coal will provide 29 percent of U.S. energy if the Plan’s

goals are met, compared with 19 percent in

1976. Is this growth trend expected to continue after 1985? If so, the Plan should address that. Achievement of the Plan’s goals

by 1985 will require huge investments of

capital, large manpower training programs,

and extensive research and development,

particularly on clean-burning technologies

for coal. The Plan is silent on the question of

whether similar requirements of capital,

manpower, and research for the period

beyond 1985 can be superimposed on the

short-term requirements without straining

the U.S. economy.

32
The President has proposed to cancel

construction of a breeder reactor, partly in

an effort to lead the world away from a

plutonium energy economy. The decision

apparently assumes ample supplies of

uranium for at least until the year 2000. If

the assumption about uranium supplies is

wrong, however, the United States either

will be left with a stock of light water reactors in the 1980’s for which there is not

enough fuel or reactors will never be built

because of uncertainties about uranium supplies. In either case, energy supplies in the

years after 1985 will be seriously affected.

Oil and Gas

Introduction

The share of total U.S. energy resources

supplied by oil and natural gas together

would drop under the National Energy Plan

from about 75 percent to about 60 percent

in 1985. Even though coal is expected to be

the single most important fuel domestically

produced, oil and gas will be a vital element

in the national energy pattern for decades to

come, and petroleum will remain the sole

source of fuel for most transportation.

It is the goal of the Plan to increase

domestic oil and gas production, reversing a

7-year downward trend. To meet these production goals, discoveries of new oil must

occur at two to three times the annual rate

of discovery since 1965. Discoveries of new

gas also must exceed the industry’s finding

experiences since 1965.

As much as one-third of the domestic

production of oil on which the Plan counts

to meet the overall goals must come from

reserves that have yet to be discovered. If

the U.S. oil industry falls 50 percent short of

the higher new discovery rate that is implicit

in the Plan, domestic oil production can be

as much as 1.S million barrels per day below

the Plan’s goal in 1985. Production of

natural gas would be short of the goals by

about the like amount in barrels of oil

equivalent.

The ability of the industry to meet, or approach the plan’s goals, depends on

whether:

. leases can be made available to industry fast enough for exploration and

development on the Outer Continental Shelf, in Alaska, or in other frontier

areas under Federal management;

33
supply

Impacts

●

●

●

the anticipated quantities of oil and

natural gas actually exist in areas which

geological evidence suggests are the

prime targets for exploration.

enough new oil and gas can be discovered to support a total incremental

production of up to 6 million barrels a

day in crude oil equivalent in 1985.

the pricing proposals in the National

Energy Plan would provide sufficient

investment funds for oil and gas companies to explore and develop new

resources.

Given these uncertainties, it seems likely

that oil production will fall short of the

Plan’s goals by as much as 1 million and 1.5

million barrels a day in 1985 and that

natural gas production will fall short by a

like amount in barrels of oil equivalent.

Higher prices for “new” oil and gas are

likely to encourage the incentive and capital

that industry needs to explore and develop

new areas, at least during the next several

years, However, the uncertainties dictate a

continuing review of these price policies. In

addition, it is not clear how proposed

amendments to the Outer Continental Shelf

Lands Act of 1953 will affect the pace of

offshore exploration and development. As

of mid-June 1977, industry analysts believed

the proposals could add 18 months to 4

years to the existing lead times of 4 to 6

years for offshore production. An Office of

Technology Assessment evaluation of the

proposed amendments, conducted independently of the energy plan analysis, concluded that the amendments could reduce

some of the delays that now exist and the

overall delay introduced by the amendments could be minor.

While these analyses illustrate the range

of uncertainty which exists, it is important

to recognize that the energy plan depends

on a significant portion of new OCS production to meet its goals. Delays in the OCS

development will create shortfalls.

Because of these uncertainties, contingency plans should be included in any

national energy plan which would go into

effect if oil and natural gas production falls

short of the Plan’s goals. Alternative pricing

policies, more rapid expansion of coal production, higher import levels, and further

reductions in energy demand may be considered, Nuclear power is not an alternative

because production of electricity by nuclear

plants probably cannot be increased

beyond the 1985 goal.
Issue 1

Oil and

Gas

Production

Can domestic oil and natural gas production be increased fast enough to

meet the goals set by the National

Energy Plan?

Summary

The estimated base of undiscovered

resources is large and could support not

only the 1985 levels of production envisioned in the Plan but a substantial flow of

petroleum after that. But the rate of discovery and development may not occur fast

enough in the next few years to reverse the

present decline in production. Industry can

add to petroleum reserves only if it has

systematic access to unexplored areas. In

order to match production with the Plan’s

goals, the schedule for leasing in frontier

areas must be accelerated. Because of lead

times of up to 6 years between exploration

and production, discoveries of new oil and

gas must be made in the next 2 to 4 years in

order to produce the 3 million barrels per

day of new oil, and equivalent of new gas

from new discoveries that the Plan requires

to meet its 1985 goals.

Questions

1.

2.

3.

At what rate must reserves be added to

reach the Plan’s goals?

Which areas are most likely to yield

important amounts of new oil and

natural gas ?

Can geopressurized gas reserves,

Devonian shale deposits, or other new

sources provide significant amounts of

new natural gas within the time

covered by the National Energy Plan?

Background

There is no serious question as to

whether resources are available to meet the

goals of the National Energy Plan. There is,

however, a serious question about whether

new oil and gas can be discovered early

enough to reverse the trend in domestic

production which is a key element of the

plan. The foIlowing table shows the range

of “best estimates” of ultimate renewable

resources.

Oil (including NGL) Gas

Billions Bbls. Trillion CF

production in 1976 3

Cumulative production through 1975 126

— Proved reserves, end 1975 39

— Estimated probable additions to known fields 30–60

Total remaining known fields 69–99

Undiscovered fields 72–1 28

19

497

228

60–1 00

288–328

400–800

Total estimate remaining 141 –227 688–1 128
supply

Impacts

.36
U.S. Oil and Gas Production

(Million barrels per day oil equivalent)

From All Fields New Field

Production From Existing Fields Plan Goals Requirements

1976 1985

Oil 9.7 7–7.5

Gas 9.5 5–5.5

Although geologists differ in their assessment of the amount and location of new

resources, the prime targets are the offshore

areas of the Atlantic and Pacific coasts and

offshore areas in Alaska. Exploration continues on the Alaska North Slope as well as

in the lower 48 States and the Gulf of Mexico.

These reserves, if confirmed, appear sufficient to support the present rate of production well past 1985. For the near future, the

possibility that production will fall short of

the Plan’s goals involves a conflict between

leasing schedules and lead times for production. As shown in the table above, oil production from existing fields containing the

known reserves will drop significantly by

1985.

This means that enough new reserves

must be discovered and developed in the

Plan period to make up the difference between production from known reserves and

the Plan’s production goals.

Given overall lead times of 4 to 6 years or

more between the beginning of exploration

and actual production, at least two-thirds of

the above deficiency (about 2.5 million barrels a day) would come from new discoveries made during the period of the Plan.

1985 1985

10.6 3.6–3.1

8.8 3.8–3.3

However, it is probable that by 1990 more

than so percent of all crude oil and gas production will depend on the success of exploration between now and 1985. Under

these circumstances, the performance of the

supply sectors of the oil and gas industry

throughout the period of the Plan is of critical importance to the goals of the Plan, and

of even greater significance to U.S. total

energy supply in the years immediately

thereafter,

The rate of discovery of new reserves of

oil and gas during the period of the Plan

must be two to three times the rate of discovery between 1965 and 1975. This would

be an optimum performance and the expectation that it can be done is justified largely

by the fact that there are still unexplored

areas of Alaska and the Outer Continental

Shelf which are judged to have the necessary reserve potential.

Federal policies are crucial to accelerated

exploration because many of the potential

areas for new oil and gas reserves are public

lands, either along the Outer Continental

Shelf or in Alaska. At present, there is a

moratorium on leasing some public lands.

Amendments have been proposed to the

Outer Continental Shelf Lands Act of 1953

which could significantly add to lead times

for offshore drilling and development.

Another proposal could extend the lead

37
.

supply

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-- - +: .- Exxon Photo

- ---

-- . --

.- -

-- “-

------- - .— -

-

—-- -

-- 

- ‘-’ -

...4

. ~. —

,. -

-- - .-

-- ---

--
times further by requiring federally sponsored exploration of at least one structure in

any proposed leasing area before bids actually are solicited. Delays of several years

could result from these proposals. Another

proposal would require a pause between

exploration and development for preparation of an environmental impact statement

of the effects of development on coastal

areas. It can be argued that new environmental and leasing policies would lead to

better cooperation between coastal States

and the Federal Government and, in turn, to

shorter lead times than now exist.

Another uncertainty involves the actual

location of new resources. Oil company

geologists differ sharply among themselves

and with Federal geologists over the location of new resources. Some estimates show

the bulk of new resources lying offshore.

Others assume that most new oil will be

found on land. Until promising areas actually are explored, the United States cannot put together a reliable inventory of its

actual oil and natural gas resources.

Tertiary or enhanced oil-recovery techniques could add between 0.5 million and

1.0 million barrels per day to domestic production by 1985. However, these are the

most optimistic ranges for tertiary production and they depend on the price of oil and

on perfecting equipment and techniques

that today are still in the testing stage.

Technical and feasibility studies hold out

little hope that major projects to produce

natural gas from Western tight sands, Devonian shale, and geopressurized gas in deep

water reservoirs will be significant by 1985.

Many technological and environmental

problems must be solved before these

resources can be widely exploited.

Issue 2

Oil and

Gas

Pricing

The Plan’s oil and natural gas price

policies may encourage enough exploration and development in the

next few years but some mechanism

should be included for changing

price policies if changes are needed

in the long term.

Summary

Increasing supplies of domestic oil and

gas are important to the U.S. economy and

essential to the success of the National

Energy Plan. In an uncontrolled market,

there does not seem to be any doubt that

steadily rising world prices would ensure

that oil and gas companies could generate

the capital they needed to develop enough

new resources to meet the Plan’s 1985 production goals. The same levels of exploration and development are just as likely to

occur under the Plan’s proposed price for

new oil, at least during the first few years.

But it is impossible to tell at this time

whether the Plan’s price policies will support expanded industry activity indefinitely

and there is no provision for monitoring the

industry’s capital position to ensure that incentives and capital remain at high enough

levels throughout the life of the Plan. Uncertainty about the future investment climate

can be cured by decontrolling oil and gas
supply

Impacts

prices or by including in the Plan a procedure that will ensure that future pricing

policies will support an adequate exploration and development effort.

Questions

1.

2.

3.

Are the Plan’s oil and gas pricing provisions consistent with its stated goal of

stimulating “best efforts” to develop

new supplies of oil and natural gas?

Will these policies, in fact, lead to

development of the volumes of oil and

gas which are entered as goals in the

Plan !

Would alternatives to the Plan’s pricing and taxing policies provide more

assurance that the goals can be met?

Background

Under the Plan, increased supplies of

domestic oil and gas would, in effect, cover

a retreat from the near-total reliance on

both of these fuels for energy in the United

States. If domestic supplies do not rise to

about the levels anticipated by the Plan in

1985, the United States would be forced to

increase oil imports or reduce oil and gas

demand through more stringent conservation measures.

The price and tax provisions in the Plan

would increase incentives for new oil and

gas production and for tertiary oil recovery.

These are offset to some extent by continued price controls on all oil and by new

price controls on intrastate gas. The crucial

question is not whether incentives are increased but whether they are increased

enough to stimulate production of about 6

million barrels a day of new oil and gas

equivalent on which the Plan relies heavily

to achieve its goal of reducing imports to 6

million or 7 million barrels a day in 1985.

40

The answer seems to be yes, at least during

the next few years, It is not possible to

judge at this point whether the Plan’s pricing policies will sustain an indefinite flow of

capital adequate for the required exploration and development, For that reason, it

seems prudent to devise some procedure as

part of the Plan ensuring that the pricing

policy will support an adequate exploration

and development effort.

The Plan does not treat oil and natural gas

consistently. Controls would hold the return

to producers of oil below the world market

price although it does contemplate a world

price for consumers through adjustments in

the crude oil equalization tax. Under the

Plan, natural gas would be sold to households below world energy prices indefinitely.

One aspect of the Plan’s oil pricing policy

that deserves closer study is the proposal

that the sales price for producers be adjusted annually to account for general inflation in the United States. The Plan proposes

to use the gross national product (GNP)

deflator as the basis for annual adjustment,

which probably will mean that the return to

producers will not keep up with real costs.

Costs of production have risen much more

sharply than general costs since the early

1970’s—in the range of 12 to 30 percent.

The Plan does not explain why the GNP

deflator was chosen as the basis for adjustments rather than the actual cost experience

of the industry.
The Plan does recognize that costs may

rise in production of old oil and that even

adjustments for inflation in the $5.25 price

of old oil may not provide incentive to keep

oil flowing from old wells. Its requirement

for a “case-by-case” adjustment in the price

of oil from old wells may be difficult to administer fairly and raises the question as to

whether some production may be lost

because of delays in responding to requests

for adjustments.

The Plan’s treatment of natural gas prices

raises even more serious long-term questions. Under the formula proposed by the

Plan, new natural gas would be sold at a

price based on the Btu equivalence of the

weighted average cost to refiners of all

domestic crude oil. This would be about

$1.75 per thousand cubic feet (Mcf) at the

end of 1977. Flowing gas that is put on the

market when existing contracts expire

would be priced at $1.42 per thousand

cubic feet. Finally, the new and renegotiated intrastate gas would be set at the same

levels as interstate gas.

The end result of the Plan’s approach to

natural gas is to peg its price indefinitely at

levels lower than the price of other competing fuels on a Btu-equivalent basis. The only

exceptions would be for gas sold to industry

and utilities who would pay penalty taxes

for continuing to use gas. This continues a

distortion among the price levels for competing fuels which is a major factor in shortages of natural gas that have occurred in recent years. At the same time, it must be

noted that the higher prices allowed for

natural gas under the Plan should encourage

new exploration and development in the

near term.

For both oil and gas, the price incentives

are limited to “new” properties, defined as

locations 2.5 miles away from, or 1,000 feet

deeper than, existing wells. This definition

is not related to the geologic definition of

“new” wells and could discourage development of the inferred reserve base,

One alternative to the Plan’s proposal for

continued controls combined with a crude

oil equalization tax is decontrol, including a

plowback provision with a tax on excess or

“windfall” profits from existing wells. It

might remove uncertainties about future

changes in pricing policies that might be

made by policymakers with different

philosophies, a possibility that makes it

difficult for today’s investors to assess

future market conditions. The past history of

major changes in directions that make producers and investors wary of controls includes rollbacks on upper-tier oil prices, loss

of depletion allowances for large independents, loss of tax credits for intangible drilling costs for independents, and changing

administrative definitions and rules that

have a major influence on returns from investments. Decontrol would also largely

eliminate the significant cost and effort in

the Government and industry required to

administer the complex system of regulations inherent in the Plan.

41
suppl y

Impact s

Issue 3

Liquefied

Natural

Should

import

gas?

Summary

Gas

the Plan encourage a

policy for liquefied

flexible

natural

Any shortfalls in the domestic production

of oil’ and gas will have to be made up by

imported energy sources. One of the most

immediately available and least capital-intensive sources of supplemental gas supply

is liquefied natural gas (LNG). Import restrictions on fuels such as LNG may diminish the

diversity of energy sources that LNG imports

help make possible. Decisions to impose

restrictions for reasons of national economy

or foreign policy should be weighed against

the desirability of maximum diversity of

energy sources.

Questions

1. Can LNG imports make a critical

2

difference in the event of a serious

shortfall in U.S. domestic energy supplies?

What import policies might reconcile

the need for LNG imports with the

need to implement national economy

and foreign policy objectives ?

Background

Large reserves of natural gas exist in

several producer countries, including

Algeria, Indonesia, Iran, Libya, Nigeria, and

Abu Dhabi. Imports would come primarily

from Algeria and, to a lesser extent, from

Iran. Both countries have applications pending or approved by the Federal Power Commission (FPC), and can be expected to

dominate the LNG market because they

have very high ratios of gas to oil in their

reserves.

Based on projects announced to date,

and those now in place and under construction, LNG imports could provide nearly 1

trillion cubic feet annually by 1980 and

almost 2 trillion cubic feet annually by

1985. This is about 10 percent of projected

domestic gas production in 1985. The long

lead times inherent in licensing and plant

and tanker construction preclude significant

additions above these estimates before

1985.

42
General Dynamics Photo

43
supply

Impacts

Issue 4 Background

Synthetic

Natural Gas

Are synthetic natural gas (SNG)

plants both practical and desirable as

sources of supplemental fuel?

Summary

The manufacture of synthetic natural gas

from naphtha or other petroleum feedstocks

has several advantages for alleviating shortterm gas shortages. The conversion process

is more efficient than that used to make gas

from coal, and plants are flexible and inexpensive to operate. The primary objections

to SNG have been that it simply switches

from one scarce fuel to another and its

possible impact on supplies and prices of

naphtha and other petroleum feedstocks.

SNG plants, however, account for a small

percentage of naphtha used in the United

States, and both naphtha and other

feedstocks should be available on the world

market in the immediate future. All these

feedstocks are easier to import than natural

gas. Revision of present Federal Energy Administration (FEA) restrictions may encourage construction of SNG facilities and

assure adequate feedstock for them. While

SNG is expensive, it is competitive with

other fuel supplements.

Questions

1. What impact will development of additional SNG facilities have on

availability and price of naphtha and

other feedstocks ?

Synthetic natural gas facilities using

petroleum feedstocks primarily provide

peak-storage capabilities for gas utilities

with no underground storage capacity. As

domestic natural gas supplies have

declined, some SNG facilities have been

built to provide base-load, year-round service. While SNG is an expensive fuel supplement, it is competitive with other supplemental fuels in residential and some industrial markets.

In 1976, 13 SNG plants produced nearly

0.3 trillion cubic feet of gas. This production

consumed only 0.5 percent of total U.S.

naphtha supplies. Still, on a regional basis,

the price pressure on naphtha, with

petrochemical demand included, could

become occasionally severe. Nearly 0.16

trillion cubic feet of additional SNG, a 58

percent increase over 1976, could be produced in 1977 if additional use of

petroleum feedstocks were permitted,

Because of past FEA restrictions, an additional 11 plants with a capacity of more

than 0.6 trillion cubic feet of gas per year

have been suspended or cancelled.

Naphtha and other feedstocks are now

and should continue to be available on the

world market in the immediate future, Increased imports of naphtha would help

diversify the U.S. petroleum import picture.

Notwithstanding the possible availability of

feedstocks, synthetic natural gas is not expected to be a significant supplement to our

natural gas supply in 1985.

2. What contribution can SNG make in

alleviation of shortfalls?

44
Coal

Introduction

The United States has more control over

the production of coal during the next

decade than it has over any other energy

resource. Unlike oil and natural gas, known

coal reserves can meet the production

targets of the National Energy Plan without

any new discoveries. Lead times for opening

new mines and building new transportation

systems are short enough that production

could, in theory, exceed the goals of the

Plan, unlike those for nuclear power and

offshore oil development.

According to the Plan’s calculations, coal

production will increase by about 400

million tons by 1985, even without changes

in Federal policy. The National Energy Plan

proposes to raise 1985 production by

another 200 million tons for a total supply

of 1,265 million tons, a 90 percent increase

over 1976 production.

The Plan assumes that the higher production rate will be achieved by creating new

markets for coal and by lifting restraints on

demand, not through any direct incentives

to stimulate coal production. It further

assumes that the expanded market will

result in large part from the Plan’s tax and

regulatory policies, which are designed to

discourage the use of oil and natural gas by

industry and utilities and encourage a shift

to coal.

Several alternative outcomes are possible

under the Plan’s coal proposals:

1. production may fall below the 1985

2

3

4

goals because a requirement for installing best available pollution-control

technology on all new coal-burning

facilities may result in a smaller market

for coal.

Boiler manufacturers may not be able

to produce new coal-burning equipment fast enough to justify an accelerated coal production schedule.

Production could fall short of the

Plan’s goals if strip mining legislation

forecloses development of large

reserves in the West where leases

already have been signed and longrange mining plans have been completed.

The Plan’s proposal to emphasize

Eastern coal production rather than

Western coal production could result

in capital, manpower, and transportation shortages.

Four other general conclusions result

from analysis of the Plan’s coal proposals:

1.

2.

Mining equipment will not be a constraint at coal production levels either

with the Plan or without the Plan.

The penalty taxes and regulations

designed to force conversion of industries and utilities from oil and gas to

coal will expand demand, and, in turn,

production of coal up to a point. If not

offset by uncertainties noted above involving pollution controls and boilers,

this point will probably be close to the

goals of the Plan.
supply

Impacts

3.

4.

Transportation should not be a barrier

to increased coal supplies except for

some regions in the East where roadbeds must be rehabilitated,

No single constraint will be a major

limiting factor in achieving the Plan’s

coal production goals. Capital, manpower, access to reserves, transportation, and rising demand all will be

necessary in the right combination to

reach the goal. A lapse in any of these

areas could cause production to fall

short.

Issue 5

Coal

Production

and Demand

Are the provisions in the Plan sufficient to achieve the goals for production and consumption of coal?

Summary

The Plan contains no direct stimulus for

higher coal production. It assumes that a

complex set of related elements will converge to create a market for 1,265 million

tons of coal in 1985. (The Plan assumes exports of about 90 million tons of metallurgical coal, leaving 1,175 million tons for

domestic use in 1985.) Hundreds of industries and utilities must reactivate coal-burning facilities or buy new equipment before

the demand for coal will expand. High costs

of equipment or an inability of manufacturers of boilers and pollution-control

equipment to fill orders fast enough could

retard the growth in demand for coal, The

Plan contains no fall back measures for dealing with these possibilities.

ERDA Photo
Background

Several conditions must be met before

the market for coal will expand as fast as the

Plan expects it will. Utilities and factories

must buy far more pollution-control equipment than they ever have in the past. Coal

costs must remain competitive with other

fuels. Potential coal users must be assured

that railroads, barges, or coal slurry

pipelines can handle increased shipments

and that adequate and reliable supplies will

be available.

The cost of converting boilers and

powerplants from oil or natural gas to coal

will be high. Large industrial boilers, for example, would probably need pollution-control equipment averaging $4 million per installation. One major utility has estimated

that it will cost about $4 billion to convert

its 6,000 megawatts of generating capacity

to coal. The question of whether these costs

are lower than the penalty costs of continuing to burn oil or natural gas that would be

imposed by the Plan must be decided caseby-case.

One potentially serious barrier to increased demand is the production of large

industrial coal-fired boilers. About a dozen

boiler manufacturers now produce about

200 large boilers— capable of generating

between 250,000 and 300,000 pounds of

steam per hour— each year. Another group

of manufacturers could expand their operations to produce another 200 boilers of that

size per year. However, in order to use the

additional amounts of coal that the Plan

assumes will be used by industry, at least

2,500 new coal-fired boilers must be

manufactured by 1985 to replace existing

boilers. The increased production capacity

must be made available very soon to meet

this goal. In the present market, coal-fired

boilers are three times as expensive as oilfired boilers.

If demand falters, whether because of

cost or because manufacturers cannot fill orders for new equipment from utilities and

factories, production will fall short of the

Plan’s 1985 goals.

ERDA Photo
supply

Impacts

Issue 6

Accelerated

Eastern

Coal

Production

The National Energy Plan does not

take fully into account the capital,

manpower, and transportation consequences of its proposal to accelerate

Eastern coal production.

Summary

Long-range plans of the coal industry call

for mining about two-thirds of U.S. coal in

the East in 1985 and about one-third in the

West. The National Energy Plan proposes to

reduce the Western share of total production and increase the share that will come

from Eastern mines. Such a shift would mean

higher capital requirements, more intensive

manpower recruiting and training, and

rehabilitation of Eastern railroads. These

changes are not addressed in the Plan.

Background

Most forecasts assume that capital will be

available to open new mines in the EastWest pattern reflected in industry plans that

were drawn before the Administration presented its policy proposals. Those plans

assumed a trebling of the coal industry’s

rate of investment during the past decade.

The forecasts also assume adequate manpower and a transportation network that

can accommodate increased coal shipments.

The assumptions may not be valid under

the National Energy Plan. One premise of

the Plan is that, “Coal production and

development is most economical when it is

near major markets., Although coal production will expand in many areas, there should

be large increases in the highly populated

Eastern and Midwest regions, where coal

use in industry and utilities could grow considerably in the future. ” The Plan also states

that its requirements for best available

pollution-control technology on all plants,

regardless of whether they burn low-sulfur

Western coal or high-sulfur Eastern coal,

“should stimulate even greater use of . . .

Midwestern and Eastern coals, ”

Such a shift in regional emphasis could

cause capital problems. Many Western coal

reserves are owned by conglomerates with

relatively easy access to capital. If there is a

major shift to Eastern mines, more of the

development would be undertaken by

smaller companies that might find it more

difficult to raise money than Western companies. Transportation investments also

probably would be higher if Eastern production is increased substantially. In general,

more miles of Eastern roadbed would require upgrading for carrying more shipments

of coal than is the case with Western

railroads.

Manpower requirements would change if

the United States placed more reliance on

Eastern mines and less on Western mines.

Productivity is higher in Western surface

mines than in Eastern surface mines and is

substantially higher than productivity in

Eastern underground mines. Under the coal

industry’s present long-range plans, 80,000

new underground miners and 45,000 new

surface miners must be hired and trained by

1985, Manpower requirements will increase

if more coal comes from underground

48
mines. Underground Eastern mines average

about 9 tons of coal per man. Western surface mines produce about 100 tons per

man. Given this ratio, it takes more than 10

times as many man-days to produce 1

million tons of coal in an underground

Eastern mine as it does in a Western surface

mine. Another potentially serious manpower problem involves foremen. Federal

law requires that each underground crew be

led by a foreman with at least 2 years of experience in underground mining. Because

miners must give up their union benefits for

relatively small increases in pay to become

foremen, there is a chronic shortage of

crewleaders in Eastern underground mines.

Issue 7

Coal Mining

Research and

Development

Mechanization of the coal industry

with existing technology has reached

a point where further increases in

productivity are not likely but the

plan makes no specific recommendations for assigning a high priority to

mining research and development.

Summary

Productivity of underground miners

reached a peak of 16 tons per man-day during 1969 and has since declined to a 1976

average of 9 tons per man-day. The

downturn in 1969 ended a 20-year pattern

of growth resulting from expanded

mechanization of mines and reflected,

among other things, the beginning of enforcement of the Mine Health and Safety

Act of 1969. Underground mining is now so

thoroughly mechanized with existing technology that there seems to be no hope of

reversing current productivity trends unless

a new generation of equipment is deployed.

One example of industry needs is a

system to speedup the removal of coal from

a mine face. Continuous mining machines

are capable of producing coal 10 times

faster than existing equipment can move it

from the mine. New equipment also is

needed to increase the amount of coal that

‘3 4-430 0 - 77 - 5

49
supply

Impacts

can be mined by remote control to reduce

the amount of time that now is spent bolting mine roofs. Finally, no equipment exists

for mining underground coal in the West

where seams run 30- to 70-feet thick, compared with an average thickness of 6 feet in

the East.

Because of the importance the Plan

assigns to meeting its 1985 production

goals, it should designate specific mining

research and assign priorities for programs

that are most likely to help increase production in the relatively near term.

Issue 8

Accelerated

Production of

Synthetic Gas

From Coal

The Plan’s proposal to let market

forces determine future development

of plants for manufacturing pipelinequality gas from coal should be reexamined, particularly in light of the

potential barriers to expanded directburning systems.

Summary

The Plan does not assign a high

producing pipeline-quality gas

with existing technology. The

 priority to

from coal

Plan’s apparent willingness to postpone significant

expansion of a synthetic gas industry until

new technology is available overlooks the

fact that inflation probably will more than

offset any cost advantages of new technology that will not be commercially feasible for 15 years or more,

Questions

1. Why wait for the development of new

technology when gas can be produced

in quantity with existing technology at

a price below that of gas produced by

new technology several years from

now ?

2. Why does the Plan not consider loan

guarantees and other means of accelerating commercial coal gasification

projects, some of which could be in

production on short notice?

50
Background

The National Energy Plan states that,

“The basic Federal role in this process

[conversion of coal to pipeline-quality gas]

is research, development, and demonstration of new technologies. In general, the

Government seeks to avoid subsidization of

existing technologies. ”

The gasifier represents only about 15 to

20 percent of the capital investment for a

gasification plant. That being the case, any

new technology probably cannot reduce

the price of synthetic gas by more than 50

cents per thousand cubic feet (Mcf). Increases in the price of natural gas in 1 year

probably will offset that cost advantage of

new technology and there is no sign that the

new technology can be available on a commercial scale in 10 to 15 years.

Possible Government incentives for production of pipeline-quality gas with existing

equipment include loan guarantees, longterm Government contracts for purchasing

synthetic gas, and direct subsidies.

Nuclear

Introduction

The Plan forecasts 3.8 million barrels per

day equivalent energy from nuclear

powerplants by 1985, compared with 3.7

million without the Plan. This corresponds

to the 141,000 megawatts of generating

capacity that is now operating or under construction, with a 65-percent capacity factor.

It is quite feasible for industry to install this

much capacity because the period from the

start of construction to online operation

need not exceed 7 years. Production

capability is adequate for all components,

and uranium ore and enrichment demands

are well within present capacity projections.

A continuation of financial pressures on

utilities, regulatory changes during construction, and uncertainties about growth projections could force some slippage in this

schedule, however, and reduce the available output, The 65-percent capacity factor

also is attainable but assumes an increase

from past experience which averages about

60 percent (possibly less for the large reactors similar to those now coming on line). If

either of these factors fail to meet expectations, a shortfall of as much as 15 percent

(0.6 million barrels per day equivalent)

could occur.

The source of the increased nuclear

power generation which is assumed by the

Plan is not directly identified. There are

references to an enhanced inspection

program which could contribute to increased reliability (or to more down time

depending on the intent and implementation of the program and the condition of

facilities inspected). In addition, the entire

licensing process is to be studied to resolve

unsatisfactory aspects, but no information is

51
—

Supply

Impacts

given on how this study is to be conducted,

or how its recommendations might change

the situation, except for a reference to

reducing individual licensing requirements

for standardized plants.

The midterm future of the industry is in

considerably more doubt than is its realization of the 1985 goals. A de facto

moratorium on new orders by utilities

shows no sign of ending. The chief reason

for the lack of orders is the financial risk to

which a utility exposes itself when it orders

a nuclear plant. Capital costs and licensing

and construction schedules have increased

so much and become so uncertain that few

utilities can carry the financial burden now,

even though they may be confident that

nuclear power ultimately will be cheaper

than its alternatives.

Another critical factor facing the industry

is public acceptance. Opposition has been

increasing over the years, and a significant

fraction of the general public adamantly rejects the technology. Some of the arguments, particularly those centered on technological issues, can be effectively

answered or shown to be subject to eventual resolution. others, however, raise

philosophical questions concerning the

ability of our present institutions, or even of

society in general, to cope with nuclear

power. This opposition, especially as

manifested in lawsuits and interventions in

the licensing process, has become an important consideration for utilities planning on

nuclear powerplants.

ores are depleted because breeders essentially eliminate resource constraints. The

President, however, has proposed to stop

funding the Clinch River Breeder demonstration LMFBR because of the increased risks of

nuclear weapons proliferation this technology would entail if it were implemented

worldwide. He also has proposed to defer

reprocessing of spent fuel from present

reactors in order to minimize the exposure

of plutonium. Considerable concern has

been expressed over the lack of a readily

available substitute. Without some sort of

breeder, nuclear capacity will be limited to

several hundred reactors, depending on the

extent and extractability of as yet undiscovered ores. Other breeder concepts

that are less vulnerable to proliferation are

even less advanced.

In summary, the plan provides only vague

suggestions for increasing nuclear energy

use and at the same time it proposes to virtually eliminate technologies on which industry has been counting for the long term.

If Congress decides that nuclear power is to

be an integral part of the Nation’s energy

future, more positive steps than those proposed in the Plan may be required to help

the industry overcome problems.

The long term is even cloudier than the

immediate post-1985 period. The intent of

the industry has been to shift to liquid metal

fast breeder reactors (LMFBR) as uranium

52
Issue 9

Licensing

Reactors

If nuclear power is to provide a significant fraction of new energy

sources after 1985, constraints that

have led to a virtual moratorium on

contracts for new plants will have to

be removed in an acceptable manner.

Summary

Utilities are not ordering reactors to be

placed on line after 1985. The main reason

is the financial risk that new orders involve:

costs are too high and the period before any

return can be realized is too long. If

schedules can be reduced, costs will

decrease because about 50 percent of the

capital cost is represented by interest during

construction and escalation, both of which

are increased by delays. The schedule depends on the licensing process which has

been slowing because of increasing caution

on the part of the Nuclear Regulatory Commission (NRC); legal delays by interveners;

antitrust considerations; Federal/State conflicts; the inclusion of generic issues for

specific plants; and new constraints imposed by several recent court decisions.

The licensing process must be stabilized

if orders are to resume in quantity. The Plan

recognizes the problem and alludes to administrative action to reduce the licensing

time. The proposed remedies, however, are

vague and may be insufficient to attain the

desired ends. if Congress decides it is necessary to ensure nuclear growth, it could consider allowing separate Iicensing of sites and

reactor plants, adopting a resolution declaring that nuclear power is a vital component

of the National Energy Plan, and revising antitrust laws and the National Environmental

Protection Act (NEPA). Another alternative

is to create a Government agency, perhaps

similar to the Bonneville Power Administration or the Tennessee Valley Authority, to

build and operate nuclear powerplants.

Questions

1. How will the study of the licensing

process be conducted?

2. How is the licensing process to be

streamlined while maintaining the

highest degree of safety and the legal

rights of the interveners?

3. How will plant capacity factors be increased ?

Background

The greatest impediment to installing additional nuclear power capacity is the magnitude of the exposure of utilities to financial risk, given present government (Federal,

State, and local) policies on licensing and

siting of powerplants and related fuel-cycle

facilities. Cost estimates for post-1985

plants now are approaching $1,500 per

kilowatt capacity (compared with a present

$700) and the time from initial decision to

operation is approaching 13 years. About

half of this cost represents interest during

construction and inflation, both of which

are increased by delays. The present licensing procedures require a substantial expenditure (in excess of $100 million) for

engineering design, environmental studies,

and component fabrication for long-lead

items (pressure vessels, steam generators,

53
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Impacts

containment steel, etc. ) before a construction permit is issued. If a plant is canceled

for any reason, penalty charges can drive the

total obligation close to $200 million. Thus,

a utility incurs a very large obligation even

before ground is broken, when it contracts

for a nuclear powerplant. This obligation

and the massive commitment of funds during construction considerably reduce a

utility’s flexibility in planning.

The present Federal licensing procedure

is a three-way adversary process before an

Atomic Safety and Licensing Board (ASLB)

involving a utility, the Nuclear Regulatory

Commission (NRC), and interveners. The

rules of procedure are spelled out in the

Code of Federal Regulations and tend to

follow judicial procedures, with a great deal

of discretion given to the ASLB Chairman.

There are few limits to the issues that can be

considered, and the Board itself can introduce issues it considers appropriate. The

Board is charged with making a finding as to

whether a proposed nuclear powerplant can

be operated without a significant adverse

impact upon the health, safety, and welfare

of the public. Hearings may extend over 3

years, with transcripts resulting in tens of

thousands of pages. Any party can appeal

any aspect of a decision to an Atomic

Licensing Appeals Board (ALAB) and

ultimately to Federal courts. Issues as

diverse as emergency core-cooling systems,

the need for power, and evacuation procedures, are considered, with prepared

testimony submitted by all parties before

the hearing and cross-examination of witnesses during the hearing. In addition, NRC,

with the assistance of the Justice Department, must determine that an applicant has

not engaged in any anticompetitive practices and that building a plant will not disturb the relative competitive position of an

applicant with respect to neighboring

utilities.

Often NRC and the Justice Department

require that an applicant share ownership of

or the output of a plant with neighboring

utilities as a condition for avoiding an antitrust hearing and/or allowing a construction

permit to be issued.

A recent appeals court decision holding

that NRC procedures for review of the

nuclear waste disposal issue are inadequate

to meet the requirements of NEPA have introduced serious questions as to whether

NRC can license any nuclear powerplant until this issue has undergone a complete

generic review. The Supreme Court is now

reviewing the appeals court decision and a

final ruling probably is many months away.

Another appeals court recently declared the

“limited liability” aspect of the Price-Anderson insurance to be unconstitutional, and

this issue is also being appealed to the

Supreme Court.

Historically, NRC (formerly the Atomic

Energy Commission) has assumed jurisdiction over all nuclear and radiological safety

matters under the Atomic Energy Act of

1954, and was supported in this by the U.S.

Supreme Court. However, certain provisions

of NEPA now allow States to set more

stringent environmental conditions than

those of the Environmental Protection

Agency and recent disagreements between

EPA and NRC and other agencies over the

regulation of environmental radioactivity increases the uncertainties,

President Carter’s plan offers only a

“review” of the licensing process with a

view to administrative changes. An alterna54
Portland General Electric Photo

tive that involves more fundamental revisions is to separate the licensing process

into two stages: 1 ) that part associated with

the plant, and 2) that associated with the

site.

The plant portion of the licensing procedure could be similar to that used to approve a “license to manufacture” floating

nuclear powerplants. Design approval

would be basically a matter for extensive

negotiations between the Federal Government (NRC, EPA, etc. ) and the ven -

dor/architect-engineer to secure approval or

certification of a nuclear “island” and its

associated balance of plant, with the

specification of an appropriate relationship

with the environment. Periodic reviews of

the design might be undertaken at 5-year intervals with modification during this period

limited to safety-related issues and based

on value/impact analysis. Once a nuclear

steam-supply system with its balance of

plant has been approved, no further licensing would be required for a utility to undertake the contractual arrangements and begin

the construction of such a plant on a certified or licensed site.

Siting legislation might provide for joint

Federal, State, and local certification of

nuclear powerplant sites. Precertification of

sites for periods up to 10 years might also

be provided, with the only basis for reconsidering a precertified site being a substantial change in the site characteristics.

Specific provisions could be made to avoid

the application of rules and regulations imposed subsequent to the site certification.

Such a procedure would provide for a

thorough airing of the environmental and

site-related issues well ahead of construction. Site certification might be for a

specified number of megawatts without

55
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regard to reactor type or individual unit size,

thereby providing a utility with a maximum

flexibility at decision time.

If such a procedure were fully implemented and a utility had both a certified site

(with a certification good for 10 years) and

an option to buy any of several preapproved

nuclear powerplants, the time from initial

decision to operation would be only that required for mobilization and construction.

Since designs would be standardized, there

should be substantial savings in cost as well

as improvements in quality associated with

the “learning curve” and prefabrication of

components in a factory environment.

Above all, the uncertainty associated with

the licensing procedure and the attendant

financial risk would be reduced to manageable levels.

Consideration might also be given to

revisions of the antitrust review required by

the 1970 amendment of the Atomic Energy

Act (Public Law 91-560). Its objective of

assuring that the benefits of nuclear energy,

developed at public expense, are shared by

smaller utilities, might better be accomplished through some form of preferred

tax treatment (tax-free bonds for that fraction of the plant equivalent to the power

sold to local utilities or perhaps some form

of extra tax investment credit). Such revisions would reduce delays which would

otherwise be unaffected by streamlined

licensing procedures. Delay clearly is as burdensome to smaller co-owners or

purchasers of power as to principal owners.

If it is deemed necessary to build plants for

the Nation’s energy system, new arrangements would have to be considered. This

could involve mergers or consortia of even

large utilities or public ownership of

generating stations. The Bonneville Power

Adminstration is a possible model; no single

utility could have built Bonneville’s dams,

but all in the region benefited from the project’s low-cost electricity. Even with this approach, however, the problems of the

licensing process would have to be solved

for nuclear energy to be produced at

reasonable cost.

All of these proposals involve relatively

minor modifications to present arrangements. It is possible, however, that the

rapidly rising costs of construction of both

nuclear and large coal plants will put them

beyond reach of all but the biggest utilities.

56
lssue10

Public

Acceptance of

Nuclear

Expansion

There are growing indications of the

possibility that expansion of nuclear

power will be unacceptable to the

public.

Summary

Opposition to nuclear power has become

an important factor to consider in assessing

the future of the industry. Public support is

still broad, but changeable. The arguments

used by opponents have shifted over the

years, and many have been satisfactorily addressed. A fundamental difference between

supporters and opponents is that the former

see problems as solvable and generally

bounded by conservative design, so that

risks are very low. The latter point to a

variety of unanticipated problems and have

little faith in the institutions performing the

analyses and imposing regulations. The

truth probably is generally in between. Industry tends to neglect some scenarios

while opponents emphasize worst-case

possibilities which are much less probable

than risks in other areas which are accepted

with equanimity.

The public is confused, especially by

contradictory scientific testimony. Opposition is likely to continue to grow because

opponents can muster cataclysmic arguments, and the performance of the industry

has been less than totally reassuring. This

trend might be countered by a policy of

public debate of the full range of problems

involving the technology with critics invited

to join in an exhaustive analysis. This might

satisfy many opponents and moderate the

views of others, but there would be a risk of

providing ammunition to opponents who

will not be satisfied until the industry is

closed down.

Questions

1.

24

3.

What are the plans for addressing the

causes of opposition?

How is the general public to be supplied with credible information on

nuclear energy?

Will light water reactor safety research

be augmented?

Background

in the past 5 years, significant opposition

to nuclear power has developed within the

United States. Specific topics of controversy

have moved from one subject to another

with time. Early opposition was directed at

the environmental and health effects of

radiological releases. In turn, the emphasis

shifted to thermal pollution, to catastrophic

accidents associated with possible failure of

emergency core-cooling systems, and to

waste disposal and proliferation. Early opposition took the form of adversary participation in nuclear plant licensing heari

ngs, but more recently the arena has shifted

to the courts, the ballot box, and

demonstrations. Opposition initially came

from a few environmental groups, but it is

now more broadly based.

While the results 01

moratoria in six States

a 2-to-1 majority in

referenda on nuclear

during 1976 showed

support of nuclear

57
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Impacts

power, the base for this support may be

more closely related to economic need than

to any intellectual commitment to nuclear

power. There has been no nationwide

plebiscite on the desirability of nuclear

power. Indeed, the general public seems

confused by the technical nature of the

issues involved and the disparity between

what equally well-qualified adversaries

seem to be saying.

By contrast, opponents feel profoundly

threatened by nuclear technology and are

dedicated to stopping it. Their arguments

can be very effective. Worst-case scenarios

can indeed be horrifying, and the best-informed and most ardent support is hard

pressed to flatly deny that the worst case

will happen. The issue is probability, a complex and subtle consideration that has not

yet even been resolved by the experts. Most

agree that a serious radiological release is

very unlikely at any particular plant, but that

if it did occur, the consequences could be

devastating. The degree of risk which the

public should be expected to bear is an

issue which needs thorough discussion and

public involvement. The relative risk from

nuclear power and its alternatives also

needs considerably more study and comparison.

Critics and proponents react very

differently to problems, and this often leads

to a breakdown in communications between them. Proponents believe that

problems are solvable, and they want to

believe that their solutions are adequate.

The “defense-in-depth” concept, for example, is intended to ensure designs so

conservative that unforeseen problems will

be accommodated by the system. Thus proponents see risks to the public as negligible.

Critics are more likely to want to believe

that design problems are insurmountable.

Some feel that the long list of expensive

retrofits and safety design changes prove

that the technology is not mature, and that

accidents always will find a way to happen.

These very different points of view mean

that proponents will argue that they have

already gone beyond what is necessary to

assure safety, while opponents can overemphasize worst-case scenarios that have

only the remotest probability of occurring.

Many critics agree that some problems

have been satisfactorily addressed and that

new plants are substantially safer than older

ones. Proponents admit that some of the

problems raised in earlier debate were real

and that many improvements have resulted.

Technological problems that remain include

waste disposal, reactor safety (including

vulnerability to sabotage), and safeguards

against plutonium diversion.

Nuclear power may not be a viable

source of energy if public acceptance continues to erode. A massive public relations

campaign certainly is not the answer. Industrial programs have been modestly successful in special situations (e.g., during

referendum campaigns), The promotional

roles played by the Joint Committee on

Atomic Energy and the Atomic Energy Commission were important in bringing the industry into existence, but overoptimistic

promises and heavy-handed tactics may

have helped create the present crisis of

credibility, There is now no Government

agency with an assigned role of promoting

nuclear power.

58
What may be required is heavy involvement of critics in a total analysis of nuclear

problems and regulatory procedures. This

might reassure many critics that legitimate

concerns were being addressed; it also

might identify new issues that should be addressed. Some critics, however, will not accept nuclear energy on any terms. Some

would use access to the system to obstruct

it. Others would find new, possibly

stronger, arguments. Nevertheless, critics

are sufficiently numerous and sophisticated

to require satisfaction in some way.

Another useful step would be to improve

techniques for evaluating risks and for

measuring the costs and benefits of

measures to reduce the risks. This would

contribute to establishing criteria for safety

requirements for nuclear power and other

energy sources. The Reactor Safety Study

(Rasmussen Report) was an important first

effort to quantify probabilities. It has been

subject to charges of bias, however, providing one illustration of the consequences of

failure to involve critics in such studies.

Issue 11

Breeder

Reactors

Nuclear generation of electricity can

be virtually freed from resource constraints, but the technologies that will

allow this (breeders and plutonium

recycle) increase the opportunities

for proliferation of nuclear weapons

among nations and terrorists.

Summary

The Energy Research and Development

Administration estimates uranium reserves

at 1.9 million tons, enough to fuel about

375 light water reactors for 30 years. Other,

less firm, reserves might fuel another 315

reactors. Reprocessing and plutonium recycle would expand these numbers by 20 to

40 percent and breeder reactors would

effectively remove uranium supply constraint, Both technologies would, however,

involve plutonium in a form which is

relatively easy to convert to material that

can be used for nuclear explosives by

governments or terrorists. The President has

proposed a worldwide indefinite deferral of

the use of recycled plutonium, along with a

delay in the construction of breeders, including this country’s Clinch River Breeder

Reactor demonstration plant. Other governments are strongly resisting such moves

because they have fewer alternatives and

they want to be less dependent on imported uranium and enrichment services.

Some argue that the link between commercial plutonium and proliferation can be kept

so small that other, less-controllable routes

to weapons would be easier. Alternatives of

59
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Impacts

varying practicality have been proposed to

ameliorate the situation, but none, not even

a nuclear power moratorium, can eliminate

the risk of proliferation.

Questions

1.

2

3.

4.

What will be the U.S. policy towards

plutonium recycle and the liquid metal

fast breeder reactor (LMFBR) if other

nations continue to refuse to defer

development of the technologies?

What would be the midterm and

long-term strategies for nuclear energy

if reserves prove to be lower than expected?

If alternative fuel cycles prove more attractive with nonproliferation as a major parameter, how will they be implemented both in this country and

abroad ?

How much money and time are required to bring such alternate fuel-cycle technologies to the present level of

light water reactor technology or to

the present level of LMFBR technology?

Background

Present-day reactors extract about 1 percent of the total potential energy from

uranium ores, so the total resource base can

supply no more energy than what is available from remaining oil and gas resources.

Breeder reactors and spent-fuel reprocessing

can extract so to 70 percent of the energy in

the uranium and make economical use of

thorium and vast quantities of low-grade

uranium ore.

The proliferation dilemma stems from the

fact that fissile material can be used for

nuclear explosives as well as for reactor fuel.

Plutonium is produced in existing light

water reactors but very little of it is now

being recovered from spent fuel. If

reprocessing does take place, about 400

pounds of plutonium would be obtained

from a large light water reactor each year. A

nuclear explosive requires between 10 and

20 pounds. The liquid metal fast breeder

reactor, which is the focus of most breeder

research here and abroad, would require

reprocessing of about 3,000 pounds of

plutonium per year, although there is a net

breeding gain of only about 300 pounds

after refueling the reactor.

Unlike low-enriched uranium, which requires expensive and demanding enrichment, plutonium can be purified for

weapons manufacture by relatively simple

chemical means. Nations which possess

spent fuel today (whether from LWRs or

breeders) have the necessary material for

nuclear explosives but reactor safeguards

probably are adequate to detect significant

diversions of spent fuel. In addition, very

few terrorist groups could either secure

spent fuel or reprocess it to manufacture

weapons.

The situation is quite different for a nation which in the future routinely

reprocesses its spent fuel and recycles the

plutonium. So much separated plutonium

would be flowing through the system that

significant diversions might not be

detected. An abrogation of safeguards

agreements could put the entire output of

the plant and its stockpiles at the disposal

of weapons makers.

The President apparently hopes to set an

example for the rest of the world. By refraining from plutonium development, the

60
United States may avoid charges of setting

double standards. Nonproliferation would

clearly be easier to maintain if no government reprocesses. If the United States alone

refrains, however, the effort may backfire by

increasing economic incentives for other nations to reprocess. The Governments of Britain, Germany, Japan, France, and the U.S.S.R.

are proceeding with construction of LMFBRs

and, at least so far, have strongly resisted

efforts to delay their reprocessing because

they believe they have no realistic energy

alternatives.

Other fuel cycles and reactors have been

proposed which are less vulnerable to diversion (e.g., denatured uranium–233 in a double security system, coprecipitation, and

self-sustaining reactors such as the gas core

and molten salt reactors). Some of these

proposals have real promise and should be

studied. The opportunities for diversion can

be reduced and the time required to accumulate an arsenal can be lengthened. It

should be recognized, however, that none

are totally resistant to diversion, though

some could be virtually terrorist-proof.

Mos t wil l also require a

lengthy and costly development period.

Cancellation of the Clinch River Breeder

Reactor demonstration plant has been proposed as part of the President’s energy plan.

There may be, however, nonproliferation

advantages to proceeding with construction. The plant is flexible enough to

demonstrate some of the alternative fuel cycles, such as the use of thorium and

uranium–233 in a fast breeder, and its construction would allow U.S. breeder technology to influence world safeguards.

If nuclear power is to be a long-term option, some sort of breeder, or near breeder,

and reprocessing will be necessary. The

schedule for introduction depends on

uranium resources and LWR growth. Based

on water-reactor development experience,

demonstration and prototype breeder

plants should be online 15 and 10 years

respectively before commercial breeders are

required to meet U.S. energy demand.

About 5,000 tons of uranium are required

during the 30 years of operation of a typical

light water reactor. The ERDA nuclear power

forecasts adopted in 1976* and 1977t and

uranium requirements (0.25 percent tails)

are:

Year Nuclear GWE uranium Committed (tons)

1976 ERDA 1977 ERDA 1976 ERDA 1977 ERDA

1975 39

1980 67

1985 145

1990 250

2000 480

● Edward A. Hannahan, Richard H. Williamson, and Robert

W. Brown, “World Requirement; and Supply of Uranium, ”

presented at the Atomic Industrial Forum, “lnternational

Conference in Uranium, ” September 14, 1976, Geneva,

Switzerland.

39 234,000 198,000

60 402,000 305,000

127 870,000 646,000

195 1,500,000 992,000

380 2,880,000 1,932,000

tAccording to the brlefing charts in the July 7, 1977

testimony of James R. Schlesinger before the Subcommittee

on Fossil and NucIear Energy, Research, and Demonstration

of the Committee on Science and Technology.

61
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Impacts

The ERDA estimate of uranium resources 800,000 tons at $50 per pound). Others

based on costs of extractions are: caution that no major uranium districts have

U.S. Uranium Resources—January 1, 1977—Tons U3O8

$/lb. U308

Potential Resources

Cost Category Reserves Probable Possible Speculative Totals

$10 250,000 275,000 115,000 100,000 740,000

$10-$15 Increment 160,000 310,000 375,000 90,000 935,000

$15 410,000

$15-$30 Increment

585,000 490,000 -190,000 1,675,000

270,000 505,000 630,000 290,000 1,695,000

$30 680,000 1,090,000 1,120,000 480,000 3,370,000

Byproduct 140,000 — — — 140,000

,

Total 820,000 1 ,090,000” 1,120,000 480,000 3,510,000

Note: Uranium that could be produced as a byproduct of phosphate and copper production during the

1975-2000 period is estimated at 140,000 tons U308.

Because the schedule for the breeder is so

dependent on the rate of discovery and exploitation of uranium reserves, the level of

confidence in the potential reserve estimates is a crucial factor. ERDA considers the

proven reserves at $15/lb. (410,000 tons) to

be accurate to within 20 percent, plus or

minus, Confidence levels are not assigned

to any other figures, except to say that the

uncertainty is greater than 20 percent for

the $15-$30 increment and continually

higher for the subsequent categories. The

ERDA estimates are not universally accepted. Arguments are made for both much

higher and somewhat lower figures. Even

the geologic origins of uranium in sandstone

deposits, the most abundant U.S. source,

are in dispute. Proponents of higher estimates point to a lack of exploration in many

areas of the country, the experience with

other ores which have shown a continual

expansion as exploration and technological

development progressed, and the

possibility of using higher cost ores (ERDA

has recently estimated an additional

62

been identified for many years despite intense exploration and note that the rate of

discovery per foot of exploratory drilling is

falling rapidly.

Uranium commitments for both ERDA

LWR projections are shown in figure 1,

together with the ERDA estimates of

reserves. The probable resources of 1.9

million tons will be committed by 1995 for

the higher projection and by the year 2000

for the lower. The uncertainty surrounding

these resource estimates, however, is so

great that there may be a severe uranium

shortage affecting utility decisions to order

reactors even by 1990. Other possible outcomes would involve slipping the breeder

schedule substantially, as the President proposes. If LWR sales do not resume, the

breeder may never be needed. Slippage

does involve a substantial risk, however, if

nuclear energy is to play an increased role as

suggested by the Plan. It also should be
noted that both domestic and foreign consequences will be great if the breeder is

needed but not available, This risk must be

defined and included with proliferation

concerns.

Alternative strategies have been proposed to increase the efficiency of uranium

use without resorting to the LMFBR. The

denatured U233 cycle referred to above is a

dual-security concept in which one set of

domestic burner reactors uses denatured

fuel (a mixture of U233, U238, and thorium)

which is produced in a second set of

closely guarded, perhaps internationally

controlled, breeder reactors (fueled with

plutonium, U238

, and thorium). The burner

reactors would be very similar to present

LWRs with different fuel. The breeders

could be LMFBRs with different fuel than

presently planned. Such concepts deserve

considerable study before a commitment is

made to commercialize the LMFBR. These

alternate fuel concepts could be tested in

the Clinch River reactor or the Fast Flux Test

Facility. An essential element of this

strategy is a large proven reserve of thorium.

Reliable data on U.S. thorium resources are

not now available, however, and estimates

must be assigned a degree of uncertainty

even larger than that for uranium resources.

Other concepts for using thorium could also

extend fuel resources for at least so years.

For example, the advanced Canadian

deuterium uranium reactor (CANDU) is a

near breeder, but it could operate with only

evolutionary changes in present designs.

Figure 1. Uranium Resources and Demand

/

63
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Nonconventional

Sources

Introduction

The National Energy Plan projects that

contributions of solar, geothermal, fusion,

and other nonconventional energy sources

will be negligible through 1985. The

“other” category of supply in Table IX-I,

which rises from 1.5 to 1.7 million barrels

per day of oil equivalent with or without the

Plan, is virtually all hydroelectric power, a

conventional source.

The only explicit goal for any of these

technologies is to “use solar energy in more

than 2.5 million homes” by 1985. The type

of use is not specified, but presumably most

installations will be solar water heating,

with some space heating and other applications. Although this goal will not have a significant impact on national energy patterns,

it does call for a rapid but feasible expansion of the industry.

The Plan’s consideration of solar energy

raises several concerns:

● There is a lack of emphasis on technology capable of producing energy in

the long term. The Plan identifies three

“inexhaustible” energy sources, but

does not define any one of them as

suitable for eventual commercialization. The Plan questions the breeder

reactor’s future, considers fusion a

high-risk option for the long term, and

acknowledges that solar electric

systems, while promising, have not

reached the stage of development

where their economic viability can be

demonstrated. The Plan does not

evaluate alternative technologies in

terms of technical and economic

●

●

●

feasibility, social benefits, or undesirable impacts. As a result, it does not

identify priorities, schedules, or the

role of the Government.

No coherent attempt has been made

to link short-term goals to a long-term

strategy. It may be that miscalculations

about resources or the potential of

new energy technology will mandate a

shift to inexhaustible energy resources

faster than the forecasts contemplate.

Planning should be underway now for

this contingency.

Decentralized energy systems must be

integrated with utilities. Solar- or

wind-energy systems require auxillary

energy sources for backup power. The

Plan calls for such systems, but it does

not directly address the central-station

load-management and integration

problems,

The solar incentives do not go far

enough. The Plan’s solar goal is to be

met through the use of special tax

credits, a 10-percent conservation tax

credit, a public education program,

and a $100 million Federal Government demonstration program. These

are productive measures, but they do

not devote enough attention to system

maintenance, replacement, improvement, and industrial and electric

generation tax credits. The Plan does

not call for direct assistance to

manufacturers who could be encouraged to enter the large potential

foreign market for solar energy equipment.

64
. The Plan does not address the need for

a unified standardization program for

solar equipment. Such standards are

crucial to the wide acceptability of

solar by builders and lenders.

● There are no specific goals for geothermal energy. Legislation is proposed to

give geothermal producers parity with

oil producers in the tax treatment of intangible drilling costs. Parity in other

important areas, such as leasing,

licensing, and preparation of environmental impact statements, is not addressed. The Plan states that Federal

agencies and States will be encouraged

to streamline review of leasing activities, but there is no estimate of

likely impact on production or the environment. The Plan’s proposal for

research may accelerate development

of new types of geothermal resources.

. Geothermal energy is available only in

certain regions such as California and

the Gulf of Mexico. Even between

wells of the same category there are

wide differences i n temperature,

pressure, well depth, fluid composition, and other geologic factors. This

makes standardization of recovery

equipment much more difficult than it

is for oil and gas development and

raises problems for its application.

. Fusion will not be a significant energy

source in this century no matter what

the research budget in the near future,

and the final costs of a program will be

very large indeed. Nevertheless, the

promise of the technology warrants a

large research investment. Fusion reactors could be inherently safer from a

proliferation point of view than the

liquid metal fast breeder reactor and

from a safety point of view than any

solid-core nuclear reactor. Although

they still would produce highly

radioactive waste, they need not invoIve nuclear fission weapons

materials during normal operation

(though they could produce great

quantitie s of plutonium o r

uranium–233 if desired).

● The research and development

philosophy of the Plan is too limited.

The stated realinement of priorities “to

meet the country’s real needs” is commendable, but does not address the

problem of basic research. Too narrow

a focus on near-term “practical” goals

could have serious consequences for

future economic growth, which may

depend on new science and technology. The cost of basic research on

both near-term and far-term goals is

microscopic compared with annual

U.S. energy costs, and long-term

programs should be fully funded and

well staffed.

+4- ’430 o - 77 - 6 65
supply

Impacts

Issue 12

Nonconventional

Energy

Goals

The goal of 2.5 million residential

solar installations by the year 1985

understates the capability of the

technology.

Summary

The goal of 2.5 million residential installations of solar heating/cooling systems

by 1985 is ambiguous. It appears to be unnecessarily limited to space and water heating, ignoring potential industrial and

agricultural uses of solar heat and opportunities for solar generation of mechanical

and electrical energy. The Plan is silent on

other advanced energy systems which could

make a contribution to energy supplies by

1985.

Considering the large percentage of U.S.

energy consumption which is used for residential heating and low-temperature industrial process heat, the goal is overly

modest. Solar energy could make a significant contribution in these areas. The environmental benefits of advanced energy

technologies make them attractive alternatives to increased dependence on fossil

fuels.

The Plan does not address the need for a

set of performance standards for measuring

the output of these advanced energy

systems. Care should be taken in the design

of such standards to ensure they do not discriminate against promising technologies.

ERDA Photo

66
Questions

1.

2.

3.

4.

5.

6.

Why was a goal specified for solar

energy and not for other advanced

energy sources such as geothermal?

Why does the goal address residential

installations and ignore industrial and

farm applications?

Why is the goal limited to the solar

production of thermal energy, ignoring

the production of electric and

mechanical power?

How was the goal of 2.5 million homes

generated? What is the relation of the

goal to plans for implementation of

solar systems after 1985 ?

What is a solar installation? How much

energy will the proposed installations

produce?

Does the Government propose to

establish a system of standards to ensure that consumers will have adequate knowledge about solar systems

available in the market?

Background

The National Energy Plan sets a goal of

2.5 million residential solar energy installations by the year 1985. The goal, stressing

application of one solar technology (lowtemperature thermal), is limited for three

major reasons:

. It ignores other advanced energy

sources which could make a measurable contribution to U.S. energy needs

by 1985. For example, technologies for

utilization of wind and some forms of

geothermal energy are sufficiently

developed to be economic in some

regions of the country.

●

●

The potential savings possible from

the application of solar energy to industrial process heat is overlooked.

Twenty-eight percent of all process

heat is used at temperatures below

5500

F. Solar collectors are capable of

producing temperatures up to 10000F.

in these applications. The Plan sets no

goals for the use of solar energy in

agriculture where needs such as cropdrying and heating animal barns are

easily met by present technology.

No goals are set for the advanced use

of solar energy. While technologies for

conversion of solar energy to mechanical and electrical energy cannot make

as great a contribution as thermal

systems in the next 8 years, they

should not be ignored. They represent

possible building blocks for very significant energy production after 1985.

The Plan recognizes the value of

research and development in these

areas but does not define needed

programs.

The goal of 2.5 million residential installations of solar energy is ambiguous

because residential installation is not

defined. It could mean small water heaters

or large complex heating and cooling units.

The possibilities of meeting the goal and the

potential for displacement of fossil fuel are

very different for those technologies.

67
.

supply

Impacts

The absence of reliable standards for

solar equipment and the lack of manufacturer performance guarantees have made

some lenders hesitant to provide capital for

solar installations. Establishment of performance standards for measuring the energy

production of unconventional technologies

may be the most useful remedy for the

problem. These performance standards

must not be used to discriminate against

“passive solar” technologies. While

“passive systems” may not generate as

much energy per installation as the more

complex “active” systems, their low cost

and simplicity make them suitable for rapid

commercialization, and the energy savings

which they generate can be substantial.

Proper protection for passive systems in

evaluating performance may call for use of

an energy budget approach.

There would be significant environmental

and social advantages from fostering a more

rapid development of advanced energy

sources. The environmental benefits of

many advanced technologies are well

known, as are the benefits of reduced dependence on fossil fuels. In addition the

manufacture and installation of small-scale

advanced energy systems would be a

relatively labor-intensive industry which

could create a large number of jobs, and

contribute to a reduction in unemployment.

Even under the most optimistic scenarios,

advanced energy systems will make a

relatively small contribution to our energy

requirements between now and 1985.

However, there is a very real possibility that

they will be significant after that time. Consumer confidence in new products must be

increased. This can only be accomplished

by a strong commitment to advanced energy

sources now.

ERDA Photo

68
Issue 13

Solar

Incentives

The incentives provided for in the

plan are not sufficient to ensure the

widespread deployment of advanced

energy technologies.

Summary

All the incentives for new technologies in

the plan are focused on increasing demand.

There are no provisions for directly assisting

the industry in setting up large, efficient

manufacturing plants. Nor is there a

mechanism for encouraging foreign sales of

solar energy equipment.

The National Energy Plan includes both

residential and industrial tax credits which

are designed to encourage a conversion to

advanced, inexhaustible energy sources.

These incentives should provide a significant assist to the industry, but they cannot

protect a homeowner against unexpected

maintenance, replacement or improvement

costs of solar heating equipment, which are

still largely unproved. The Plan prices distillate oil and natural gas used for home heating below their replacement cost, which

probably will discourage commercialization

of nonconventional technologies.

It seems to be the intent of the proposed

National Energy Act that advanced energy

equipment loans be covered under the

energy conservation loan provisions, but

the wording of the draft legislation is somewhat vague. Further, there is some question

as to whether the incentives provided are

sufficient for primary lenders to become active in this market,

It is not clear whether solar equipment is

eligible for the “normal” 10-percent plant

equipment tax credit (under the Internal

Revenue Act of 1954). Solar equipment appears not to be eligible for the cogeneration

tax credit, nor does it appear in the definition of an “alternative energy property”

which is the necessary qualification for industrial oil and gas conservation rebate.

Replacement cost pricing of oil and gas

for industry and the imposition of industrial

oil and gas consumption taxes make solar

energy relatively more attractive to the industrial sector. However, the exemption of

the farm sector from the consumption tax

makes solar energy relatively less attractive

for crop drying, a technology that could be

implemented within the timeframe of the

Plan.

Questions

1 .

2.

3.

What evidence is there that the residential solar tax credits are sufficient

to induce installation of this equipment in view of the Plan’s artificially

low prices for home-heating oil and

gas?

Is the Federal National Mortgage

Association authorized to become a

buyer of solar energy and other advanced energy system loans on the

secondary market?

What incentives will be given to primary lenders to encourage them to

make conservation and advanced

energy equipment loans?

6 9
Supply

Impacts

4.

5.

6.

7.

IS advanced energy equipment eligible

for all business energy equipment tax

credits for which coal energy conversions are eligible?

Why are advanced energy system

cogenerators (specifically geothermal)

excluded from the cogenerator tax

credit ?

Why is advanced energy equipment

ineligible for the industrial oil and gas

conservation rebate?

In view of the exemption of the

agricultural sector from the oil and gas

consumption tax, is some further incentive not needed to encourage the

use of solar energy in this sector?

Background

Incentives provided by the Plan for the

introduction of advanced energy technology fall into three broad categories: 1 )

those provided for residential installations;

2) those provided for industrial use; and 3)

the federally financed demonstration

programs:

Incentives to Homeowners.—Initially,

tax credits begin at 40 percent of the first

$1,000 expenditure and 25 percent of the

next $6,400 expenditure on “authorized

solar equipment” (to be defined by Internal

Revenue Service after consultation with the

Federal Energy Administration). The maximum credit would decline to $1,2IO in

1984 and be eliminated thereafter. The

effectiveness of this incentive is diminished

by the pricing policy on home-heating oil

(distillate) and natural gas. Under the provisions of the legislation accompanying the

Plan, the price of home-heating oil will be

controlled at a level approximately 10 to 12

percent below the cost of oil sold for other

purposes; the price of natural gas is controlled at a price per Btu below home-heating oil. These controlled prices for homeheating fuels reduce the incentive to convert to solar.

The Plan designates utilities as lenders

under the National Housing Act, and further

authorizes the Federal National Mortgage

Association (FNMA) to become a buyer of

loans made for the purpose of installing

energy conservation equipment. While it

seems to be the intent of the act to include

solar energy equipment in the category of

“energy conservation equip merit,” the

wording is not sufficiently clear to resolve

this point. The opening of the secondary

loan market is vital to the commercialization

of solar technology. The high initial cost of

this equipment makes obtaining credit a

prerequisite for purchase. The entrance of

FNMA into the market will considerably

ease the reluctance of both lenders and borrowers.

The Plan calls for the “prohibition of discrimination against solar and other renewable energy sources by electric utilities,” but

there is no mention of this in the accompanying legislation. Further, there is a feeling among some lenders that the completion of the necessary forms and reports

necessary to qualify for Federal loan guarantees coupled with the relatively small dollar

value of the individual loans may make

these loans unprofitable for the primary

lenders. This problem deserves careful consideration and further action may be necessary to provide access to the loan market for

purchase of advanced energy systems.

70
Industrial Tax Incentives.—Credits are

included for the installation of solar equipment for plant heating/cooling and industrial process heat. Solar equipment is included in the category of business energy

property and is eligible for a 10 percent investment tax credit. It is unclear whether

solar energy is eligible for the cogeneration

credit. Under the tax laws of 1954, equipment contained within a plant building is

eligible for a 10 percent investment tax

credit; therefore, “business energy property, ” which also qualifies for the 10 percent equipment investment credit, receives

a 20 percent total tax credit. It is unclear

what kind of solar installations, if any,

would qualify for this double credit.

However, it seems clear that in order to encourage the use of advanced energy

systems they should be made eligible for at

least the maximum credit that a conventional system (e.g., coal) would receive if installed for a similar purpose. Advanced

energy systems are not eligible for the oil

and gas conservation tax rebate which is

designed as an offset to the oil and gas consumption tax. This rebate is allowed for investment in coal-fueled equipment, and

logically should also be allowed for installation of solar and other advanced energy

systems.

The policy of raising the prices of natural

gas and refined oil products and the imposing of industrial oil and natural gas user

taxes will make solar power relatively more

competitive in the industrial sector.

However, the legislation controls the price

paid for oil and natural gas by the

agricultural sector at artificially low levels.

This provides a disincentive for the use of

solar energy for crop drying and barn heating. Also technical breakthroughs are necessary for the commercialization of these

devices and the resulting energy saving

could be substantial.

There could be a further sizable incentive

to U.S. solar equipment manufacturers in

foreign sales. Current prices for fossil fuels,

particularly in many developing nations, are

considerably higher than in the United

States, and in many of these nations solar

heating systems are already economically

competitive. Availability of U.S.-built solar

power systems could also help defuse overseas resentment over U.S. moves to

reemphasize plutonium as a nuclear fuel.

Another potential area for solar equipment

which could serve as an incentive to

manufacturers is its integration with

prospective cogeneration, district heating,

or total energy concepts for utilizing waste

heat.

71
supply

Impacts

Issue 14

Long-Term

Planning

Does the National Energy Plan give

sufficient consideration to the

development of long-ter m

(post-1985) supply options?

Summary

The main thrust of the National Energy

Plan is properly directed toward solving the

short- to mid-term energy supply problems.

However, long-term planning is needed to

prevent even more severe problems in the

future. Fossil fuels must eventually be

replaced by “inexhaustible” energy sources.

Of these, only the breeder reactor has

received sufficient development funds to

bring it to the precommercial stage.

However, the breeder involves proliferation

questions which threaten to limit its

widespread commercialization. Since the

alternatives are in a less-developed state,

their funding may have to be raised considerably if the breeder is rejected.

Questions

1.

2.

What mechanisms does the Plan set up

to ensure the orderly development of

long-term inexhaustible energy

sources ?

What criteria will be used to decide

the allocation of research and development funds among available energy

projects?

3. What target dates and decision points

have been set in the development

programs for various long-term energy

sources to ensure that they will be

developed in time to replace fossil

fuels in the latter part of this century?

Background

The National Energy Plan properly

stresses the implementation of short- and

mid-term energy supply problems because

of the present drain on world oil supplies.

However, it should be recognized that longterm planning will be necessary to avoid

other crisis situations in the future. Coal is

planned as a transition fuel to reduce U.S.

dependence on petroleum fuels until after

“inexhaustible” energy sources can be

brought to commercialization. The longterm use of coal as a major fuel source poses

serious environmental questions, even with

the use of “best available” pollution-control

technology and reclamation of strip-mined

land.

Presently contemplated “inexhaustible”

energy sources include the liquid metal fast

breeder (LMFBR) or other breeders, fusion,

and solar electric. The LMFBR, however,

poses sufficiently serious problems for

nuclear weapons proliferation that the President has recommended deferring it pending

a search for alternatives. Neither the technological feasibility nor the economic practicality of fusion has been demonstrated,

and it is extremely unlikely to be a major

power source in this century.

There are many promising advanced solar

technologies, most of which concentrate on

the generation of electricity. However, none

of these systems has been demonstrated to

be economic. Of the advanced systems

under consideration only ocean thermal and

72
space-based solar energy stations are by

themselves suitable for base-load generation. However, central-tower solar-thermalelectric and photovoltaic, two systems

which are much more likely to be brought

to commercialization within this century,

can be adopted to base-load requirements

by the development of advanced energy

storage systems. Presently available

geothermal technology, while well

developed (and suited to base-load requirements), is limited to specific geographic

regions, Advanced systems currently under

development promise to expand the

geographic areas in which this form of

energy can be utilized.

The present plan places so much

emphasis on short-term solutions that the

orderly development of far-future options

may be endangered. Should the Plan’s

stated reemphasis of the fission breeder

program come to pass, the only remaining

base-load option which currently receives

adequate budgetary considerations is

nuclear fusion, which is at best a high-risk

program. Since the Plan clearly identifies the

desirability of satisfying an increasing fraction of energy demand in the future by

electricity (e.g., electric automobiles, p.

101 ), early planning and R&D for alternative

base-load options is essential. The high

costs and long-lead times of these programs

necessitate considerable attention to their

performance and to the question of how the

technologies would be implemented.

73
V. Demand

Impacts
Demand

Impacts

Demand

Overview

and Findings

The National Energy Plan offers a series of

principles and objectives that are sound and

long overdue. If they are translated into

policy, the Nation will take a major step

toward solving its energy problems. An

emphasis on conservation is particularly important because it offers the greatest potential for keeping U.S. dependence on imported energy within the limits imposed by

total world production capability and world

demand. The Plan’s principle that energy

should be priced at replacement cost is fundamental to achieving the needed conservation levels. The strategies and tactics proposed by the Plan are, for the most part,

moves in the right direction to increase

energy-use efficiency and expand the use of

more abundant domestic energy supplies,

There are certain general features of the

Plan with regard to demand that need to

be strengthened .—The Plan’s only provision for increasing supply, other than raising

the price of new oil and natural gas, is to depend on the creation of demand to stimulate supplies. This is particularly true of coal,

where the conversion proposals in the Plan

are expected to be sufficient to bring forth

the needed coal. It is important that there

be constant monitoring of the Plan’s proposals in this regard so that, if “midcourse”

corrections are needed, prompt action can

be taken. The Plan probably does not go far

enough in moving the costs of natural gas

and electricity toward replacements costs.

The Plan’s proposals could continue existing

price distortions and reduce the effectiveness of price signals in motivating consumers to conserve energy. Finally, the Plan

does not adequately coordinate its conservation and conversion goals with the need

for research and development on more efficient ways to use energy, either in the near

term or the long run. Care must be exercised

that the Plan’s proposals do not inhibit innovation and are flexible enough to permit

rapid implementation of new technologies

when they are ready for the commercial

market.

The 1985 projections for energy demand given by the Plan appear achievable

in most cases and may actually underestimate the potential energy savings,

although uncertainties exist in some sectors.—The Plan’s forecast for the energy

growth rates, principally in the industrial

sector, may be higher than what will actually occur. The energy price increases of

the last few years are likely to accelerate

efforts to increase energy efficiency. There

is insufficient information in the transportation sector, because of the focus on

automobiles and gasoline, to determine

whether or not the Plan’s projected 1.1-percent annual energy demand growth rate will

be met. In the buildings sector, the Plan’s

provisions seem adequate to reach the projected 1.1 -percent per year growth rate in

energy use. In the utilities sector, the 4.4-

percent growth rate appears reasonable,

although there is enough uncertainty, primarily about industry plans for electricity

use, so that the rate could range from below

this projection to higher than the 5.8-percent growth rate which present utility plant

construction schedules anticipate. Finally, in

77
Demand

Impacts

the industrial sector, the Plan’s projected

energy demand growth rate of 4.6 percent

per year appears to be much higher than

what will occur, even considering the high

rate of growth in the gross national product

(GNP) assumed by the Plan. Continuing the

historic relationship between GNP and industrial energy demand growth rates would

result in a lower energy demand in 1985

than the Plan’s forecast by the equivalent of

200 million tons of coal.

The Plan’s proposals in the transportation sector appear to be too narrowly

focused.— The Plan concentrates on

automobiles and gasoline consumption and

does not propose an overall transportation

energy policy, The Plan’s goal of a 10-percent reduction in all gasoline consumption

by 1985 probably is too optimistic. Consumption of gasoline by automobiles alone

is likely to be reduced by more than the 10-

percent as a result of fuel-efficiency standards established by the Energy Production

and Conservation Act of 1975, However, increased use of fuel by trucks could partially

offset this, with the result that the overall

goal is not reached. The standby gasoline

tax proposed by the Plan probably will be

triggered, but that alone probably will not

reduce consumption by enough to reach the

goal. Finally, automobile fuel-efficiency

standards may be achieved even without

the Plan’s proposed excise taxes.

The Plan does not consider mass

transportation in its proposals, Efforts

should be initiated to increase the use of

public transportation to promote gasoline

savings in the long term. The Plan also

should consider changes in transportation

regulatory activities to improve overall

transportation fuel efficiency.

The Plan’s provisions for the buildings

sector could be expanded in scope and

consideration should be given to restructuring the Plan’s proposed tax credit proposals.— While the 1985 goal of

weatherproofing 90 percent of all homes

and new buildings is overly optimistic, the

emphasis of the Plan on improving the thermal efficiency of buildings should accelerate an important energy-saving trend. It may

be necessary to require either that information on thermal efficiency of housing be

made available to potential buyers or that

housing meet specified thermal-efficiency

standards at the time of sale if the goals are

to be realized. The Plan’s emphasis on

single-family dwellings and duplexes could

mean that large potential savings from conservation measures in commercial structures

will not be achieved. Further, the Plan’s lack

of strong incentives for conservation in rental housing may result in a negative impact

on the poor, because most low-income

families are renters.

Homeowner tax credits proposed by the

Plan may not be justified because rising fuel

costs are already encouraging homeowners

to reinsulate. Tax credits to encourage solar

systems seem justified, but no consideration

is given to potential savings that can be

achieved through improved design and

other elements of “passive solar” technology, The Plan should consider expanding

application of buildings conservation tax

credits to innovative technologies which

carry higher risk than existing methods but

which might result in greater long-term

gains.

78
The Plan’s proposed schedule for converting utility boilers from natural gas to

coal can be met, but there are circumstances that could easily upset the timetable.—Although the capital required to

convert present natural gas-fired utility

boilers is manageable on a national scale,

the concentration of gas boilers in Texas,

Arkansas, Louisiana, and Oklahoma may

place intolerable burdens on some utilities

in these States, particularly if demand

growth should exceed expectations. The

conversion schedules that are necessary to

reach the 1990 goal are so tight that the

Plan’s proposed oil- and gas-user tax probably cannot accelerate conversion rates. If

there is a choice between converting and

paying the tax, utilities may choose the tax

with a result that some conversion will not

take place on schedule.

The rate-reform proposals of the Plan

move in the direction of cost-based rates

but some provisions may hinder reaching

the objective.—The Plan’s proposal to

prohibit declining block rates may not always be consistent with ‘cost-based’ rates,

Small customers often cost more to service

than large customers on a per-unit energy

delivered basis, and a strictly flat rate across

all customer classes may not resolve rate

discrimination problems. Within a given

class, however, a flat rate should increase

the incentive to conserve. Time-of-day rates

wilI be of Iimited effectiveness until

economical storage systems are developed.

Consideration also must be given to

regional differences when setting time-ofday rate schedules. The probability of success of the Plan’s rate-reform proposals can

be enhanced if they are made more flexible.

The Plan’s provisions on energy prices

and taxes could lead to significant shifts in

the market and operation of natural gas

utilities.—The decline in natural gas consumption by industry which probably will

be accelerated by the tax on gas consumption may be accompanied by an increase in

residential use, provided existing prohibitions on new hookups are lifted. This will

decrease load factors and could lead to increased costs to consumers. In some areas,

reduction in industrial use and voluntary

customer conservation will be sufficient to

create a surplus. If these utiIities are not permitted to sell this gas to new customers, the

utilities are unlikely to promote additional

conservation efforts and seek new gas supplies.

Much of the industrial switch from oil

and natural gas, particularly for direct heat

process, may be to electricity rather than

to coal as contemplated by the Plan.—The

Plan’s objective to substantially increase industrial coal consumption with a series of

price and regulatory incentives may not be

met. The lack of coal marketing and distribution systems on a scale small enough to

handle industrial loads contemplated by the

Plan, the need for new coal handling and

combustion equipment, and the requirement for pollution-control equipment are

likely to make shifts to coal so expensive in

many cases that industry will export the

problems of conversion to the electric

utilities. Under the Plan’s provisions, conversion could be required for units that

would need as little as 25,000 tons of coal

per year. By comparison, a moderate-sized,

coal-fired electric utility will use about 1.5

million tons per year, Conversion to

electricity is not the intention of the Plan,

but it is not necessarily an undesirable

79
Demand

Impacts

result. The relative efficiencies between

coal-combustion and electric-resistance

heating in direct-heat processes would

compensate for coal-to-electricity conversion losses. Research should be expanded to

use electricity more efficiently in these

processes.

The Plan’s cogeneration provisions address the major problems inhibiting its

growth, although the proposals need to be

more closely coordinated with those for

coal conversion.—The Plan offers a set of

proposals which are necessary to remove

barriers to cogeneration development.

Utility interest in cogeneration probably will

remain limited, however, because utilities

are not likely to require more generating

capacity for the next several years than the

plants already under construction would

provide. Utilities cannot be sure that they

will receive an adequate return on resale of

purchased cogenerated power. They also

are concerned about the technical problems

and costs of adding dispersed generating

capacity over which they do not have complete control. If a rapid industrial shift to

coal were to occur as a result of the Plan’s

proposals, and utility interest in cogeneration remained low, much potential

cogeneration capacity would be lost

because industry probably would install

low-pressure, coal-fired boilers. To take advantage of the long-term cogeneration potential, the Plan’s coal policy should have

enough flexibiIity to maintain the

‘cogeneration resource base’ and accelerate

research and development on technologies

for coal-fired cogeneration.

The pricing and tax proposals of the

Plan will increase incentives for industrial

conservation and conversion, although the

tax credits probably are not large enough

to significantly accelerate industrial conservation investments.—The oil and natural

gas consumption tax, the oil equalization

tax, and the price increases proposed for

natural gas will provide additional incentives for industrial energy conservation and

accelerate a reduction in industrial use of

natural gas. But price increases will occur

even without a plan, and the proposed investment tax credit will probably do no

more than accelerate industrial investment

decisions in conservation technologies by a

few months. Even though the proposed 10-

percent credit would be added to an existing 10-percent investment tax credit, it will

not substantially close the gap between

what industry can expect as a rate of return

on conservation investments and what it

can expect from investments to increase

production output. The designation of a list

of items that qualify for the tax credit probably will inhibit innovation in other technologies and processes that might be much

more effective in reducing energy use.

80
Issue 1

Expected

Energy Use

to 1985

The growth rates in energy use projected by the National Energy Plan,

particularly in the industrial sector,

could overstate actual increases in

demand.

Summary

The National Energy Plan projects average

annual growth rates for energy use of 1.1

percent in the residential and commercial

sector, 1.1 percent in the transportation sector, 4.4 percent in the utility sector, and 4.6

percent in the industrial sector. Except for

industry, these are al I significantly below

historical trends, particularly the 1960-73

period. For total energy use, the forecast is

2.5 percent, again below historical trends.

However, the Plan’s projections are higher

than a number of others for the 1976-85

period, giving rise to the question of

whether the Plan has understated the potential for conservation by 1985.

The growth rate for the residential /commercial sector appears to be

achievable, although the original goal of insulating 90 percent of all residential buildings is probably too optimistic. The

Average Annual Growth Rate (Percent)

transportation forecast cannot be evaluated

because the Plan focuses on automobiles

and the effect of the Plan on the other components is not established. The utility sector

projection appears achievable, provided the

increase in demand for electricity from the

industrial sector, caused by a large shift

from oil and natural gas to electricity, does

not exceed planned capacity additions.

Alternatively, there is the prospect that the

utility sector would have a substantial excess of capacity by 1985 if the Plan’s projected energy growth rates prove correct

and the generating plants now under construction are kept on schedule. Finally, the

growth rate forecast in the industrial sector

appears to be too high. The latter, however,

depends critically on the growth rate of the

gross national product (GNP) and could approach the Plan’s value if the GNP growth

rate projection of 4.3 percent per year

holds. If industrial energy demand grows at

a rate close to historical trends, industrial

coal requirements may be as much as 200

million tons below the Plan’s estimate.

Background

The National Energy Plan forecasts energy

use in 1985 that would result from the

Plan’s proposals. The average annual growth

rates derived from these projections are

considerably below the historical trends, except for the industrial sector. This is shown

in the following table:

Sector Plan, 1976-85 1950-1976 1960-1976 1950-1973 1960-1973

Residential/Commercial 1.1 4.0 4.2 4.2 4.7

Transportation 1.1 3.1 3.7 3.4 4.3

Industry 4.6 2.3 2.3 2.95 3.3

Electricity 4.4 7.1 5.9 7.7 6.6

TOTAL ENERGY 2.55 3.0 3.2 3.5 4.0
Demand

Impacts

As seen, the Plan calls for large decreases

in the residential/commercial, electric

utiIity, and transportation energy-use

growth rates. On the other hand, the industrial energy-use growth rate is forecast to

be double the rate between 1950 and 1976.

Residential/Commercial. —Recent large

increases in fuel prices, along with higher

energy-efficiency standards for buildings

and appliances, should act to reduce the

growth rate of energy use in buildings. The

measures proposed in the Plan are aimed at

increasing the incentive to homeowners and

building owners to install conservation

equipment and to tighten regulations

regarding standards for buildings and appliances. The Plan’s goal of insulating 90

percent of the Nation’s residential buildings

by 1985 does not appear to be achievable.

However, one analysis by the Oak Ridge

National Laboratory indicates that the overall projections in this sector will be reached

under the Plan. The principal areas of uncertainty are discussed in the issue papers in

the buildings section of this chapter.

Transportation.—As described in the

transportation section of this chapter, the

plan focuses primarily on automobiles and

gasoline consumption. Although cars and

trucks make up the major portion of the

transportation sector, other components are .- ——.—

large enough to make overall demand

goal unachievablee even if the Plan’s pro- — . —

posed 10-percent reduction in gasoline consumption iS achieved 10-percent

-— —..

reduction is itself uncertain because the

Plan is not clear about future fuel efficiencies of trucks. These uncertainties are discussed in detail in the transportation issue

papers.

Electric Utilities.—The annual utility

growth rate forecast in the Plan of 4.4 percent appears to be reasonable, if the Plan’s

other forecasts hold. There is considerable

uncertainty in this sector, however, which

results from a combination of the

possibilities of a large shift by industry from

oil and natural gas to electricity, of a considerable excess generating capacity by

1985, and of the likelihood that industry

energy-demand growth rates, as forecast by

the Plan, are too high.

Data from the Federal Power Commission

indicates that enough new base-load

generating plants have already been

scheduled for construction by 1985 to meet

an annual growth in electricity demand of

between 5.1 and 5.8 percent. This is well

above the Plan’s projection, and brackets

the 5.5-percent per year growth rate recently forecast by the Edison Electric Institute. Some of this construction can be

deferred or canceled, as has been done

over the past few years, and it is possible

that environmental challenges and safety

considerations may slow down or stop construction of other plants. While there is the

possibility that excess capacity could be in

place in 1985, it is by no means certain.

There are uncertainties in demand which

further complicate the situation. The biggest

uncertainty is the extent to which industry

will shift to electricity rather than direct use

of coal in its effort to use less natural gas

and oil. This, in turn, depends on the growth

rate of industrial energy use, the availability

of natural gas and oil to industry over this

period, and the willingness of industry to

pay the user tax and higher prices for oil and

natural gas if utilities can be assured that

those fuels will be available. The electricity
demand, considering just these uncertainties in the industrial sector, would range

from a value less than that projected by the

Plan to a value that would endanger electric

supply reliability even if all the plants presently under construction were completed

by 1985. An upsurge in electric use by the

residential/commercial sector is not likely

because oil and natural gas prices for homes

will be kept below prices of electricity. In

fact, if moratoriums in hookups of natural

gas to new homes are lifted, the present

growth rate in electricity in this sector

would probably decrease.

Such uncertainties about future growth in

demand for electricity mean that utilities

will have to monitor demand closely to

balance their plans for new generating

capacity with real demand growth. It should

be noted that to the extent that demand

growth for electricity exceeds presently

planned capacity growth, cogeneration will

become more attractive to electric utilities,

because lead times for installation are

shorter than those for cental powerplants.

Industry.—This sector is the most uncertain with regard to energy-use projections.

The Plan assumes that industrial energy demand grows 0.35 percentage points per year

faster than GNP, which is a substantial

departure from the 1950-73 period, during

which energy demand grew 1.1 percentage

points per year slower than GNP. If this

long-term trend were to continue, an industrial growth rate of 3.2 percent would be

expected, leading to industrial energy use of

18.3 million barrels of oil per day equivalent

by 1985. There is also a possibility that the

4.3-percent growth rate of GNP assumed by

the Plan is too high in the light of historical

trends. The principal reason for this is that

during the 1963-73 period, the annual GNP

growth rate of 4,2 percent was accompanied by a very large increase in employment, which grew at a rate of 2.5 percent

per year. This compares to 1.4 percent per

year from 1947 to 1963. The large increase

was a consequence of the post-World War

II baby boom, which will run its course by

about 1980, with the result that the labor

force growth rate should decline considerably. Therefore, even if the productivity

growth rate resumes its 25-year average of

1.7 percent per year, the GNP rate would be

less than the 4.3 percent forecast by the

Plan.

This is not as clear-cut as it appears,

however. Because of the large amount of

unemployment and the increasing number

of women entering the labor force for the

first time, the growth rate in employment

may not decline to pre-1 963 levels by 1985

even though the effect of the baby boom

ends before then, although it may fall below

the 1963-73 level. In addition, the Plan

assumes a very large increase in the

Manufacturers’ Index-about 5.5 percent

per year—in order to drive the unemployment rate down to 4,5 percent by 1982.

This is a large departure from historic trends.

The 0.9-percent per year difference between the index and the projected industrial

energy-use growth rate is near the historical

1.1 -percent per year differential. Therefore

the long-term efficiency trends are still

maintained. Under these circumstances, the

4.6-percent per year industrial growth rate

may not be as far out of line as it first appears. The crucial variables are the expected

increase in employment and productivity,

and the extent to which manufacturing will

have to contribute to the economy over the

next 9 years.

83
Demand

Impacts

Implications. —The Plan projects that

total energy use will grow at an average rate

of 2.5 percent per year to 1985. Combined

with a 4.3-percent annual growth rate in

GNP, a significant decline of the ratio of

these growth rates is forecast. Whereas it

has been about 1.0 for the last 25 years, it is

now forecast to average about 0.6 for the

next 9 years. This is a substantial change

and serves to highlight the significance of

the rate of GNP growth in affecting energyuse projections. For example, continuation

of the 1950-76 GNP growth rate of 3.4 percent per year in conjunction with this 0.6

ratio would produce an annual average

energy-use growth rate of 2 percent and an

energy demand of about 44.4 million barrels

of oil equivalent per day by 1985. This 2.0

million barrel per day reduction below the

Plan’s assumption is equivalent to about

200 million tons of coal. That amount represents nearly two-thirds of the projected increase of coal use by the industrial sector.

Although the effect that any such reduction

of energy requirements may have on coal

use will depend on oil and natural gas

availability and industrial conversion to

electricity, it can be seen that the degree of

difficulty in meeting the coal goals of the

Plan depends intimately on the Nation’s actual energy-demand growth rate.

Issue 2

Replacement

Cost Pricing

The National Energy Plan’s efforts to

move energy prices toward longterm replacement costs represents a

positive step in achieving the goals of

economic efficiency and informed

consumer choice.

Summary

The Plan proposes replacement cost pricing as an essential principle in any national

energy policy, The provisions of the Plan

move toward the principle, but not far

enough to reach replacement cost in every

case. The concept of replacement cost pricing will not be easy to implement, however.

It will be difficult to account for externalities because of an extensive need for

new information, and moves toward

replacement costs must be phased in at a

rate which will avoid severe economic impacts. At the same time, until full replacement costs are charged for all fuels, there

will be less incentive to invest in alternative

energy technologies that could compete

with existing fuels at replacement costs.

Present price policies clearly deter conservation; until they rise to replacement costs,

they will inhibit wider introduction of such

alternative technologies as solar energy.

Replacement costs are obtained for oil

under the Plan’s proposals, although not all

consumers will pay these prices. Natural gas

prices reach replacement levels only for industrial users and then on a schedule that

84
will raise oil prices first. Electric rates will

approach replacement costs upon application of the Plan’s rate-reform proposals, but

consumer choice among these rates is

voluntary. Coal costs are left to be set by

the market, although they will be affected

by other features of the Plan that affect the

purchase price of competing fuels. While

most of these price compromises are proposed to achieve a measure of equity, they

should be carefully monitored to ensure

that they do not forestall even greater

benefits in resources allocation that would

result from full replacement cost pricing.

Background

It is an accepted principle of economics

that to ensure efficient operation of markets

and allow maximum expression of consumer choice, the price paid for a product

should reflect what it would cost to replace,

or produce one additional unit of, the product in question, (This point is also called the

marginal price. )

Where private markets function freely,

the prices at which demand and supply are

in balance can be said to reflect replacement cost values. The fact that U.S. energy

prices have been controlled, both by

Government policy and private action, has

led to the present disparity among fuel

costs.

For example, many people believe that

the regulated rates for electric utilities,

which are based on “historically imbedded”

or average costs of production rather than

on the incremental costs of adding new

capacity, have created a continuous bias

toward over investment in new facilities. As

a result of average-cost pricing, electricity

demand has been higher than it might be,

and a barrier has been created to investment

in conservation. For a consumer, paying the

“average” cost of a unit of electricity is

more attractive than making an investment

in energy-saving measures that would elimi -

nate the need for that unit of energy.

Similar choices have been made with

natural gas. Past policy which set prices far

below the replacement cost has discouraged conservation. The Administration

now seeks to reinforce conservation with

additional, offsetting Government policy,

such as the proposed insulation tax credit.

Finally, an unwillingness by policy makers to

let prices rise above the controlled level has

given rise to a policy debate over whether

to subsidize substitute fuels, such as synthetics or foreign liquefied natural gas,

which are likely to be much more expensive,

The failure to achieve replacement cost

pricing also deters the introduction of alternative energy technologies which do not

have the benefit of “rolled-in” or average

pricing. The primary example is solar technology. There is evidence that there would

be a larger market for solar equipment if all

fuels were priced at their replacement level.

As with conservation, additional Government policy has been proposed to stimulate

this market, which will expand slowly as

long as other energy sources are held at artificially low levels.

Although replacement cost pricing is a

desirable goal, it could have undesirable

side effects. For example, a preoccupation

with the incremental cost of expanding

electric-generation capacity might crowd

out opportunities to experiment with peak-

&5
Demand

Impacts

load dampening by time-of-day rate

schedules as an alternative. Another case in

which replacement cost pricing may be an

imprecise guide to decisions is where prices

must account for externalities. Such externalities, interpreted literally, may place impossible data requirements on the pricing

system and frustrate the realistic application

of replacement cost pricing. A precipitate

shift towards replacement cost prices from

far lower levels may also cause marked impact on income and its distribution, and on

employment and geographic development.

These short-term costs must be weighed

against the benefits of improved resource

allocation resulting from the change.

Nevertheless, the Administration’s effort

to force energy prices towards long-term,

replacement cost levels, as expressed in the

National Energy Plan, represents a move

towards the desirable goals of economic

efficiency and informed consumer choice.

The Plan’s initiatives on pricing would affect

all energy forms to some extent:

●

●

By decontrolling some domestic crude

oiI production and imposing an

equalization tax, domestic crude oil

prices would move to current world

price levels. Replacement cost principles are partially compromised by the

plan’s proposal to authorize a ceiling

on price levels if world prices rise too

sharply and by the Plan’s provision for

rebates of equalization taxes.

New natural gas prices are allowed to

reach a ceiling of $1.75 per thousand

cubic foot. Replacement cost principles are substantially compromised by

shifting the highest-cost gas supplies

exclusively onto industry, setting the

ceiling for other uses below the world

crude oil price equivalent, and retaining “rolled-in” gas utility rate-making

practices. The continued use of

averaged prices shields homeowners

and others from cost increases.

Electricity-rate reform proposals call

for study and subsequent implementation of pricing practices that more accurately reflect cost of service, including seasonal and time-of-day peak demands. While consideration is given to

utility costs which increase as a result

of capacity additions, the language of

the Plan appears to call for placing financial responsibility for such additions on those customers who cause

the increase. True replacement cost

principles would distribute such incremental system costs to all users

because those who do not help create

a need for new generating capacity

would still be using a commodity at a

price below its replacement value,

No pricing initiatives are proposed for

coal, which remains the one energy

source governed by the interplay of

demand and supply. Coal will be indirectly affected by regulatory provisions governing the price of competing

fuels in the electric power market.

While gasoline could escape direct

taxation under the Plan, the tax on

fuel-inefficient cars is designed to

dampen gasoline consumption. The

differential tax on a car that will get 21

miles to the gallon instead of 27.5 is

$600. If a car is driven 100,000 miles in

10 years, the differential gasoline consumption is about 1,000 gallons and

the discounted value (at 10 percent) at

86
the time of purchase, at today’s

gasoline prices, corresponds to a

gasoline tax of $1 per gallon. This is

substantially above replacement cost

at prevailing world petroleum prices,

but presumably is justified by considerations of national security and the

environment. This is one example of

an attempt to include externalities in

the price.

In assessing the Plan’s proposed pricing

policy, it is fair to recognize that, in the case

of some depletable natural resources, there

is a view that replacement cost is not an

adequate measure of the fuel cost to society

of energy production and consumption.

This view holds that environmental damage

and the denial of fuel resources to future

generations must be factored into today’s

costs by pricing energy commensurate with

the cost of so-called “income” or “replaceable” resources. The new costs would be

based on the requirements for providing

energy derived on a sustainable and

ecologically benign basis from the sun. imposition of energy depletion taxes on current resource use would be one means of

moving toward “permanent replacement

costs. ” Another method would be direct

rather than indirect pricing; the full costs of

nuclear services provided by the Government, for example, would be paid by the

electric utility and its customers rather than

indirectly by subsidization and general taxation.

sharply higher producer revenues. Such an

approach might also have generated much

higher prices. But if a price rise to OPEC

crude-oiI equivalents d i d generate

unacceptable windfall profits, tax policy

could be designed to reduce excess earnings and induce investment in new energy

development.

A final question on the proposed price

policies asks which course of action involves more Government intervention in

the Nation’s economic affairs. Mechanisms

proposed to hold prices below replacement

levels will require an extensive system of

Government regulation, control, and

monitoring. The extent to which this role is

sought for Government will influence the

acceptability of the policies.

Had the Plan opted for complete decontrol, energy prices would have been

governed by the OPEC world oil price,

which is not a freely determined market

price. As a result, there would have been

87
Demand

Impacts

Transportation

Issue 3

The Automobile

Excise and

Standby Gasoline

Taxes

The structure of automobile taxes

and rebates in the National Energy

plan may not be needed to meet

standards set in the Energy Policy and

Conservation Act of 1975 (EPCA),

and the standby gasoline tax may not

yield large enough gasoline savings

to justify the difficulties it raises.

Summary

Existing penalties under the Energy Policy

and Conservation Act of 1975 (EPCA)

should persuade manufacturers to hold to

the energy-efficiency schedule set out in the

EPCA automobile tax/rebate system. If not,

the penalty could be raised. The

surcharge/rebate system proposed in the

Plan for increasing costs of “gas guzzlers”

and decreasing the costs of fuel-efficient

automobiles substitutes a Federal pricing

structure for one that manufacturers probably would impose themselves in order to

maintain a balance of high-mileage and lowmileage cars to keep any year’s production

within the EPCA standards. The “standby”

gasoline tax, if fully triggered, will reduce

gasoline consumption, but its incremental

effect i n comparison to improved

automobile efficiency is likely to be small.

In addition, the combination of the gasoline

tax and rebates would affect some segments

of society more than others and questions

as to its “fairness” are therefore raised.

Finally, the Plan only proposes to tax

gasoline directly and does not deal with

other transportation fuels such as jet and

diesel fuel.

Background

The National Energy Plan combines three

policies in an effort to induce consumers to

use less gasoline:

. an oil equalization, or wellhead, tax;

● a standby gasoline tax; and

. an excise tax for i nefficient

automobiles and a rebate on efficient

cars (so-called “gas guzzler” tax).

Although the taxes influence automobile

costs and usage as a package, gasoline price

increases and automobile excise taxes are

examined separately below.

Gasoline price Increase.—Under the

Plan, U.S. prices for oil at the wellhead

would be raised to world prices over a 3-

year period by imposing a tax equal to the

difference between the controlled domestic

price and the world price. The passthrough

from the oil equalization tax to motorists

would be about 7 cents per gallon in the

Plan’s first year, assuming a world price of

$14 per barrel and an equalization tax of $3

per barrel, to raise the U.S. delivered price

to the world price. In addition, the Plan proposes, starting in 1979, to raise gasoline

taxes by 5 cents per gallon in each year the

gasoline consumption exceeds the Plan’s

targets, which move downward from an

88
89
Demand

Impacts

estimated consumption in 1977 of 7.3

million barrels per day to a goal of 6.6

million barrels per day in 1985. The tax

could reach 35 cents per gallon in 1985 and

50 cents per gallon in 1988.

It appears likely that the year-by-year

gasoline-use targets will not be met and the

tax would be triggered. If the full tax is implemented and inflation increases at an annual rate of 5 percent, the net effect by

1988 would be a 29-cent per gallon increase

in 1977 dollars. Combined with the oil

equalization tax, the net effect will be an increase of around 32 cents per gallon by

1988. This is in addition to any increases in

the world price of oil. Even with these taxinduced price increases, the improvements

in the average energy efficiency of new

automobiles would reduce the average real

cost per mile of gasoline.

The increased cost of gasoline to the consumer due to these taxes will have two

direct effects on consumption: (1) it will encourage people to replace fuel-inefficient

cars sooner than they might otherwise; and

(2) it will reduce automobile usage and increase use of other transportation forms

such as carpooling, mass transit, bicycles,

and jitneys. Several projections based on

gasoline usage, although a majority of projected reductions will probably come from

improved automobile efficiency. Of course,

all such projections are uncertain.

In this connection, increased gasoline

prices may have positive psychological

effects. Although gasoline prices increased

drastically immediately following the OPEC

oil price increases in 1973-74, real (adjusted

for inflation) gasoline prices have not increased since that time. This probably contributes to a wide-spread skepticism about

whether there really is an “energy crisis. ”

The gasoline tax would serve as a reminder

that the energy problem is real and has not

gone away. However, the standby tax as

proposed in the Plan would probably be

less effective than a predetermined tax in

reducing consumption of gasoline. The Plan

apparently assumes that consumers will curtail gasoline use to forestall annual tax increases, but it is just as likely that consumers

will figure their individual purchases will

have little effect on national consumption.

If consumers know that a tax would increase

regularly, they might be more readily persuaded to select a more efficient car sooner

rather than later.

Probably the most sensitive issue regarding the gasoline price increases is whether

they affect different segments of society

equitably, The two groups of most concern

are the poor, who generally spend a higher

proportion of their income on gasoline than

other income groups, and the rural population, which has no real alternative to the

automobile. There is no doubt that these

two groups (many citizens fall in both

groups) will suffer greater adverse effects

than others, although the expected net

effects on the average poor or rural dweller

should not be significant under the proposed tax-rebate system.

Another important concern raised by the

proposed standby gasoline tax is that it

focuses on iust one component of a barrel

of oil, ignoring jet

refinery products.

uel, diesel fuel, and other

It is not clear why the

90
Plan specifies incremental increases in the

cost of gasoline but not in the cost of jet or

diesel fuel. An alternative to the standby

gasoline tax would be to implement higher

taxes on crude oil, both imported and

domestic. Such tax increases would be

progressive if they were covered by the

same rebate schedule proposed for the

wellhead tax.

Automobile Excise Taxes and Rebates.—The Energy Policy and Conservation Act of 1975 imposes fuel economy

standards (FES) on new automobiles. A

Department of Transportation study indicates that if manufacturers meet the standards, passenger cars will use 17 percent less

gasoline in 1985 than they do now, even

though there may be 20 percent more cars

on the road.

One course that manufacturers could

take to keep the fuel efficiency of their total

mix of automobiles within the law is to

charge more for cars that perform below the

standard and use that money to cut prices

and promote sales of cars that perform

above the standards. Under such a pricing

structure, the costs of gas guzzlers could

climb high enough to substantially reduce

their sales. In order to meet the standards in

1985, a manufacturer would have to produce five cars that got 36.2 miles per gallon

in order to sell one car that got only 12.5

miles per gallon, assuming a mandated fleet

average of 27.5 miles per gallon. (The figure

is calculated in terms of a harmonic mean

that assumes a total number of miles driven

and not as an arithmetic mean. )

on new cars that perform below standard,

graduated according to their variance from

the prescribed fleet average, and rebates for

cars that are more efficient than the standard requires.

The requirements of the Energy Policy

and Conservation Act prescribe the market

within which automobile manufacturers

must operate over the next 9 years (the

time-frame of the energy plan). If the

tax/rebate system is implemented, the excise tax would replace the higher price that

a manufacturer might charge for a less efficient car. Those funds, then, would be taxed

away and no longer would be available for

the manufacturer to use to reduce prices of

more fuel-efficient cars. In addition, the

Plan’s proposed tax/rebate schedule is fixed

over a full 9-year period and could not be

altered (except by amending the law) in a

year in which the tax (or higher price) for a

fuel-inefficient automobile might have to be

raised substantially in order to discourage

purchase of inefficient cars and keep a

manufacturer’s fleet in balance.

The Plan suggests that the tax/rebate

structure is proposed because there is doubt

that existing penalties are sufficient to keep

manufacturers on the fuel-efficiency

schedule outlined in EPCA. The penalty

under EPCA is $50 on each car sold in a year

for each mile per gallon by which the company’s average falls short of the law’s fuelefficiency standard, Because the penalty is a

fine and not a tax, it would be levied against

after-tax profits and would be the

The Plan proposes to supplement EPCA

fuel-economy standards with an excise tax

91
, Demand

Impacts

equivalent of at least $96 for each mile per

gallon. For a company Iike the Ford Motor

Co., selling about 3 million cars per year,

the penalty for falling short of the standard

by one mile per gallon would be equivalent

to $288 million. If this is not considered to

be sufficient to encourage manufacturers to

meet the standard, Congress could increase

the penalty, perhaps by doubling the $50,

as an added inducement to meet the standards. All of this assumes that the current

standards and penalties will be enforced.

Experience with the Clean Air Act leaves

some room for doubt as to whether this will

actually be the case, although on May 25,

1977, one industry representative stated

before the House Ways and Means Committee that the industry sees no alternative to

meeting the EPCA standards.

Issue 4

The Impact

of Truck

Fuel Consumption

on Meeting

the Gasoline

Consumption Goal

Without a goal for truck fuel consumption that is as unambiguous as

that for automobiles, it will be

difficult and perhaps impossible to

measure the effectiveness of any set

of policies designed to reduce

transportation fuel consumption.

Summary

The National Energy Plan proposes a national goal of a 10-percent reduction in

gasoline consumption by 1985. Although

automobile gasoline consumption will

decrease by more than 10 percent by 1985,

such a decrease could be partially offset by

increases in truck fuel requirements. The National Energy Plan does not offer a goal for

trucks, nor does it consider policies to promote increased energy efficiency in truck

transport.

Background

The National Energy Plan establishes a national goal of a 10-percent reduction in

gasoline consumption by 1985 .

Automobiles presently account for about 72

percent of the Nation’s gasoline consumption. The Department of Transportation m-e92
dieted, before publication of the National

Energy Plan, that gasoline consumption by

domestic automobiles will decrease approximately 23 percent by 1985 as a result

of fuel economy standards established by

the Energy Policy and Conservation Act of

1975. If the Transportation Department

forecast is modified to include imported

automobiles (which would show a smaller

percentage increase in efficiency) the

decrease in consumption would drop to

about 17 percent. Automobile gasoline consumption, therefore, would be well within

the target of a 10-percent reduction as proposed in the Plan.

Nonhighway uses account for about 6

percent of gasoline consumption and trucks

for about 16 percent. These important

shares are not specifically addressed in the

Plan, however. If the overall goal of a 10-

percent reduction in gasoline is to be met,

truck gasoline consumption cannot increase

by more than about 13 percent. The

strategies needed to achieve this goal are

not dealt with in the Plan, although light

trucks (under 6,000-pounds gross vehicle

weight) are subject to fuel economy standards beginning in model year 1979, and the

President has directed the Secretary of

Transportation to commence rulemaking for

heavier trucks.

Any attempt to regulate fuel economy of

heavier trucks raises a number of serious

issues. These issues include:

● The great diversity of body types,

power-train combinations, and cargo

requirements,

● The equally great diversity of duty cycles, trip types, and loaded-to-empty

ratios.

● The fact that fuel economy in trucking

is a I ready a highIy competitive-,

marketable feature which has achieved

some degree of optimization for each

application.

As a consequence of these and other

issues, the study concluded that a voluntary

program of fuel economy improvement was

the preferred course of action, and that

mandated standards were inappropriate.

At the same time, however, many

forecasts are predicting an increase in truck

use in order to support economic growth.

As a consequence, it may be extremely

difficult to limit the increase in truck

gasoline use to the 13 percent necessary to

meet the Plan’s goals. Accelerated conversion to diesel engines in trucks and

automobiles would have the effect of

reducing the level of gasoline consumption

and could prevent the imposition of the tax

on motor gasoline. Of course, switching

vehicles to diesel fuel does not yield a proportional decrease in total oil consumption,

but it does have some advantages in that

diesel engines are more energy efficient and

less energy is used in processing diesel fuel

than gasoline at a refinery.

Department of Transportation Photo

93
Demand

Impacts

Issue 5

State, County

and Local

Government Transportation

Fuel Conservation

The Plan does not address the potential for energy savings from changes

in operation of State, county, and

local motor vehicles.

Summary

State, county, and local governments

own and operate large numbers of motor

vehicles, and there is considerable opportunity for reducing the energy consumption

of these vehicle fleets. However, the National Energy Plan does not explicitly recognize this opportunity nor does it address the

role that the Federal Government could play

in encouraging energy conservation in this

area.

Background

State, county, and municipal governments operate approximately 1,862,000

cars, trucks, motorcycles, and other

miscellaneous motor vehicles. While the

implementation of energy-conservation

measures in vehicle fleet operations requires

that consideration be given to the greatly

varying needs of the users, improvements in

operation and management of these vehicle

fleets presents a major opportunity for

energy conservation.

An initial step that would have both immediate and long-term benefits is the maintenance of a detailed inventory of the vehicles owned, their use, and their gasoline

consumption, Full-sized cars are often used

to transport one person, large trucks to

deliver small loads, a number of small cars

to do the work of a large station wagon or

van, pick-up trucks for site inspection when

subcompact cars would be adequate, etc.

Such surveys could provide a basis for

matching existing vehicles with their most

efficient use, and help to plan future

purchases to meet real needs. Matching the

existing fleet with its most efficient usage

requires an administrative effort at the

respective State and local government

department level in order to:

. plan trips for most efficient vehicle

use;

. combine trips whenever possible;

. match vehicles to job requirements to

achieve maximum efficiency.

Once existing vehicles and their uses are

identified, future vehicle purchases can be

planned to optimize fuel economy by

matching vehicle capabilities with needs.

To promote these types of gasoline conservation activities, the Federal Government

should consider the following:

. Development and distribution of

guides to State and local governments

outlining suggestions on how to promote gasoline conservation.

94
● Support actions by State governments

by developing technical assistance

teams, to assist State and local governments in their efforts.

● Incorporating energy conservation provisions into existing regulations on the

use by State and local governments of

general revenue sharing funds. (Many

State and local governments use these

funds to purchase and operate fleet

vehicles).

. Early action by the proposed Department of Energy, to identify specific

programs and incentives which would

encourage State and local governments to conserve gasoline.

Issue 6

The Role of

Mass Transit in

Transportation Energy

Conservation

Although the Plan gives some recognition to the potential for energy savings with mass transit, no specific

proposals are given for direct action

to exploit this potential.

Summary

The expanded use of mass transit can

assist in meeting energy conservation goals

in the transportation sector. While the impact on energy conservation is relatively

small in the near term (1 977-7985), increased use of public transportation could

play a major role in promoting gasoline savings in the longer term.

Background

The National Energy Plan notes that mass

transit must play a significant role in reducing energy consumption in the transportation sector. At the same time that the Nation is creating disincentives for inefficient

transportation, it must begin to explore a

system of incentives for more efficient alternatives to the private automobile. However,

the Plan does not propose any direct action

that would stimulate the development of

mass transit ,systems.

95
Demand

Impacts

The Office of Technology Assessment

conducted a study for the Congress in late

1975 on “Energy, the Economy and Mass

Transit, ” which provides valuable insight

into the mass transit - energy conservation

issue. Listed below are selected major findings of the OTA report:

1. Transit’s share of total energy consumption is very low at the current

time-less than 1 percent.

2. The energy efficiency of bus transit is

higher than for automobiles. A transit

bus with 30 passengers is six times

more efficient than an auto which carries an average of 1.4 persons. The

operating energy efficiency of heavy

rail transit is also high, but the construction of fixed guideway systems

can consume large amounts of energy.

Department of Transportation Photo

3.

4.

5.

Automobile energy conservation

strategies of various kinds are much

more effective in reducing oil consumption than any transit incentive

strategy. In particular, gas taxes or

other actions which would raise the

price of gasoline by 50 percent would

result in higher transit use and a reduction of about one million barrels per

day of gasoline consumption-more

than ten times the reduction resulting

from a maximum pure transit strategy

for oil conservation.

A combined strategy incorporating

both transit incentives and auto

restraints is the most effective strategy

to promote energy conservation without lowering the efficiency of the transit fleet.

Achieving major increases in the use of

transit and reducing energy consumption has long-run implications for national land-use and urban policy.

There is conflict among the various

analyses conducted to estimate the energy

saving of increasing public transport. A recent study by the Federal Energy Administration projected that doubling transit

ridership by itself would produce a less than

l-percent saving, or about 40,000 to 50,000

barrels per day. In another report, the

American Public Transit Association implies

that transit usage can save up to 178,000

barrels per day.1 The OTA report notes that

the amount of energy saved will depend

upon how public transport ridership increases are achieved, incentives versus disincentives, or combinations of both.

‘American PublIC Transit Association, “Energy Conservation & Public Transit,” 1975.

96
&

“*

I?*

Department of Ttansportation Photo

‘14.4’ 3(1 c) - 77 - 8

97
Demand

Impacts

Because mass transit can have a favorable —Vanpooling or similar commuter

long-term impact on energy consumption, programs with incentives for instituthe National Energy Plan should address tional purchase and management of

Federal policies to encourage the develop- vehicle fleets;

ment of expanded, energy-efficient transit

systems. The policies should consider the

.

— Integrated communications and

management for urban transportaAs petroleum supplies dwindle and increase in cost, transit systems should

be capable of shouldering an increased

burden of providing mobility. Ensuring

that this capability exists requires continuing support of transit operations. In

addition, mechanisms should exist to

ensure fuel availability to transit.

following points: tion systems incorporating taxi, van

1. and car pools, bus service, and the

special transportation needs of

some citizens;

— Combinations of reserved lanes for

multiple-occupied vehicles, restrictions on parking, and incentives for

ride sharing which would promote

high-occupancy commuting.

2,

3.

Research and development programs

centering on means to increase the

energy efficiency of urban transportation systems should be emphasized.

Improved technological solutions for

vehicle efficiency are needed, along

with greater understanding of energy

savings possible through improvement

of management systems. There should

be increased support for investigations

of the linkages between transportation

facilities, development patterns, and

energy demand.

To finance transit-related actions,

gasoline taxes might be used (possibly

with a direct rebate to State/local

governments) to support ventures such

as:

— A transit program for the construction, acquisition, improvement, and

maintenance of mass transit

facilities and equipment and for the

operation of transit svstems:

Federal actions can have dramatic impacts upon the shape and character of urban

areas. For example, policies which promote

energy conservation through such measures

as encouraging growth in a manner that can

be served by energy-efficient transportation

should be explored. Long-term success in

reducing transportation energy consumption will depend on the relative home and

work locations of future urban dwellers.

1

98
Issue 7

Transportation

Regulation

and Energy

Conservation

The Plan does not address transportation regulatory changes with regard

to energy conservation even though

there is a large potential among

regulated carriers for fuel savings.

Summary

There are several transportation areas

where regulatory actions could foster

energy savings. These include changes in

airline routing and duplicate flight

allowances, relaxed restrictions on truck

weight and empty backhauls, allowed joint

rail-truck ownership, and encouragement of

innovative urban transportation actions and

rail operations. Economic, institutional, environmental, employment, or competitive

issues usually dominate the discussion of

such actions, rather than the energy-savings

potential. The Plan should consider

regulatory actions which have the potential

for energy savings in transportation.

Questions

2. Could policies or regulations affecting

trucking be modified in order to promote energy conservation; for example, could actions be taken to promote

full backhauls without other adverse

effects ?

3. Could combined rail-truck or barge-rail

companies save energy? If so, are the

savings large enough to warrant reexamining existing policies in these controversial areas ?

1. Are there reasonable modifications to

Civil Aeronautics Board policies (e.g.

reduction in duplicate routes with low

load factors) that could improve the

energy requirements without significantly affecting the quality of service?

99
Demand

Impacts

Buildings

Issue 8

Scope of

Buildings

Conservation

Programs

The Plan’s insulation* proposals do

not adequately cover all opportunities for energy conservation in

buildings.

Summary

The National Energy Plan places great

emphasis on the conservation potential of

voIuntary, incentive-based decisions of

homeowners to insulate and otherwise improve the thermal efficiency of single-family

and duplex dwellings. Similar opportunities

for savings exist in commercial and institutional buildings. Failure to provide adequate

incentives for owners of rental and commercial property reflects a gap in the program

which may not only have a strong adverse

impact on renters but which will result in

significantly lower energy savings than

could otherwise be achieved.

Questions

1. Why does the Plan focus almost exclusively on single-family homes and

duplexes in promoting savings through

insulation ?

2.

3.

What real incentives exist in the Plan

for owners of multiple-family dwellings and commercial buildings to save

energy ?

Why are buildings conservation

programs voluntary in nature?

Background

Homeowners now appear to be reinsulating at a brisk pace to save money as costs

rise and uncertainties grow about the

availability of future fuel supplies. The Plan

seeks to accelerate this trend with tax credits and utility-based financing opportunities.

While single-family and duplex residential

savings are important to aggregate reductions in fuel use, great potential for savings

also exists in multifamily, commercial, institutional, and industrial buildings. Field

studies indicate that the potential for energy

savings in commercial and institutional

buildings is between 25 and 50 percent of

present demand (American Society of Heating, Refrigerating and Air-Conditioning

Engineers). Since the types of equipment

and labor required for these larger buildings

are different from the materials and skills

used for single-family insulation, the two

efforts are not competitive. Overall savings

can occur faster i n the commer -

cial/institutional area, because of high

energy demand levels for these buildings

and the smaller number of owners.

“Insulation as used in this paper and elsewhere in this

section refers to the covering of a building with nonconducting material to prevent or reduce the transfer of heat; it IS

meant to incIude caulking, weatherstripping, and other actions which achieve this goal.

1 ()()
Department of Transportation Photo

101
Demand

Impacts

The incentives for homeowners to invest

in conservation are already strong. It is

generally accepted that an insulation project will pay for itself in 3 to 5 years. On top

of that, the Plan would allow a homeowner

to write off up to 25 percent of the initial investment.

The Plan relies solely on a new IO-percent investment tax credit to provide incentives for owners of rental units to improve

insulation. More research needs to be done

to determine whether this incentive is sufficient or whether other rewards or motivations (such as expansion of the Plan’s utility

financing program to include these buildings) are needed. An apartment building

owner who does not pay utility or fuel bills

for tenants has little incentive to make a major investment in insulation; the only return

would be a credit against the cost. Tenants

would profit from the fuel savings. Owners

of commercial property who pass on heating and cooling costs would be in the same

position.

A low level of insulation activity by

apartment owners who provide rental units

is likely to have the most severe impact on

low-income families, who must either pay

fuel costs directly or through rent increases.

A related problem may occur with the

Plan’s proposal to prohibit electric utilities

from providing service to new buildings

with master meters. The measure is

designed to foster conservation by tenants—in some cases, up to 30 percent, according to the Plan-but it also would have

the effect of requiring tenants to pay utility

costs in electric heat buildings, thus freeing

a building owner from fuel bills and removing the motivation to insulate.

in view of the high percentage of income

which the poor pay for energy, and the large

number of people who would be eligible for

direct assistance in reinsulating their homes

(approximately one-half of the poor own

houses) funds for the insulation grant

program established under the Energy Policy

and Conservation Act probably should be

increased by more than the Plan proposes.

The Federal Energy Administration estimates

that 14 million families are considered poor

or near-poor, with incomes for a family of

four ranging from $5,850 to $7,300. At the

proposed level of funding, fewer than 1

million families would be assisted over the

3-year life of the program.

Consideration also should be given to expanding the proposed 40-percent matching

conservation grant for insulating public and

nonprofit schools and hospitals to include

all publicly owned buildings and facilities.

The Plan purposely makes all buildings

conservation efforts voluntary, but states

that it may be necessary to invoke such

mechanisms as required minimum levels of

energy performance for buildings at time of

sale. While this approach avoids imposing

requirements which impinge on the private

lives of citizens, it also entirely relies on the

decision to avoid higher utility bills as the

motivator for installation of energy-saving

devices. This raises questions of equity,

102
such as the problem of a low-income tenant

who bears the direct costs of heating fuel.

There also are questions as to whether

voluntary decisions will meet the Plan’s

goals for reducing the amount of fossil fuel

used to heat and cool homes, offices, and

factories. Establishing standards for measuring the energy efficiency of buildings might

produce stronger conservation efforts. Such

standards could be used for energy performance labeling. Requiring that information

about expected fuel costs be provided to

potential home buyers could be an additional incentive for insulating.

Issue 9

Materials

Availability

for Building

Conservation

Shortages of insulating materials may

delay achievement of the National

Energy Plan’s conservation goals for

buildings.

Summary

It is not clear that adequate material supplies will be available to insulate 90 percent

of U.S. homes and all new buildings by

1985. It may be necessary to design and test

new types of electric meters and accelerated production of such meters will be

necessary. For insulation and other products, increased demand may inflate prices.

Questions

1.

2.

What consideration has been given to

the availability of materials in setting

Plan goals for insulation?

Can private industry supply the types

of meters

proposed

reasonable

Background

which will be needed for

u t i I i t y-rate reforms at

prices?

In response to an expanding market for

insulation, many manufacturers of insulating

materials have already expanded capacity.

Expansion of capacity cannot be expected

to continue at a level necessary to meet a

103
Demand

Impacts

sharp, short-term increase in demand

caused by a one-time push for insulating existing buildings. If increased demand leads

to higher prices for material, the incentive to

insulate may be partially offset,

The cellulose insulation industry can be

expected to expand, but there are

difficulties involving standardization and

quality control in this industry. Also, some

shortages exist in the raw materials needed

to manufacture cellulose insulation, particularly paper and chemicals,

The section of the Plan that addresses

electric utility rates requires that utilities

offer their customers either time-of-day

(peak load) pricing or the opportunity to install load management devices. This provision may create an abrupt and large demand

for sophisticated metering devices capable

of recording usage at two or three different

rates. Such meters, containing small computers similar to pocket calculators, are not

now mass produced and are consequently

not available at a reasonable price for small

volume electricity consumers. Manufacturers are not likely to begin the necessary

research and development until they know

the form that peak-load pricing programs

will take. Manufacturers also will need large

orders before they can begin the kind of

mass production that will reduce prices.

Thus, a meter supply problem is very likely

to cause a bottleneck in the implementation

of utility rate reforms.

Other delays in reaching Plan goals may

be caused by the uncertainty as to what performance standards will be required under

new energy criteria for minimum property

standards. The Plan calls for the Department

of Housing and Urban Development to

release these new standards, required by

the Energy Policy and Conservation Act, in

1980. Materials and devices manufactured

for new construction will be responsive to

these standards.

104
Issue 10

Tax Credits

for Energy

Conservation

in Buildings

The proposal to encourage home

energy conservation with a Federal

income tax credit may result in losses

of revenue that are larger than could

be justified by the tax credit’s effectiveness in accelerating energy savings.

Summary

A substantial increase during the last 3

years in home insulation and other conservation measures raises doubts abou t

whether the Plan’s tax credit proposal could

accelerate the pace. Unless a tax credit provides a major increase in home insulation

projects, the reduction in tax revenues

could not be justified. It may be more effective to direct the tax credit at innovative

technologies which carry higher risks but

which could result in

gains.

Questions

1. What is the likely

Federal budget of

credits ?

higher long-term

impact on the

the proposed tax

2 Does available evidence suggest that

privately initiated insulation programs

will accomplish much of the Plan’s

goal even without a tax credit?

3. Should consideration be given to the

use of an “energy budget” for qualifying buildings for a tax credit?

Background

The National Energy Plan calls for a tax

credit to homeowners of 25 percent on the

first $800 and 15 percent on the next $1,400

invested i n residential conservation

measures. This effort to upgrade the thermal

efficiency of buildings could result in a substantial impact on the Federal budget. If as

the Energy Plan says, “conservation pays” at

today’s energy prices and will pay even

more handsomely as energy prices rise, it

may not be necessary to offer tax credits to

stimulate home energy conservation. Private

investment in home insulation and other

Federal Energy Administration Photo
Demand

Impacts

heat-retaining measures has increased

sharply as homeowners have reacted to increasing fuel prices. A tax credit would increase the reward to owners who invest in

conservation, but it is not clear that the national benefits would be commensurate

with the loss of revenue or that greater gains

could not result from the use of these tax

expenditures as direct subsidies for alternative programs to save energy.

The Plan correctly assumes that investments in insulation and other measures such

as storm windows and furnace-efficiency

devices will lead to energy savings. In some

circumstances, however, these savings may

not occur. It is also possible that consumers

will invest any money they save from insulation in energy-consuming devices such as

air-conditioners or balance out the dollar

savings with higher thermostat settings after

insulation is added.

In light of these possibilities, it may be

desirable to direct the tax credit at actual

energy savings rather than at designated

hardware. A tax credit, for example, could

be triggered upon demonstration that total

energy consumption in a household had

been reduced below a given base period.

This approach would also allow for continuing flexibility in implementing the tax credit

proposal, and avoid the problems inherent

in a program based upon a list of devices

specified as acceptable for credits,

Citizens in local jurisdictions which implemented district heating systems could

also receive tax credits in amounts related

to the quantities of energy saved.

Issue 11

Mandatory

Standards

for Major

Appliances

The Plan’s proposal to make home

appliance standards mandatory could

be expanded to make it more effective.

Summary

The proposal in the National Energy Plan

to make mandatory the home appliance

energy efficiency standards developed

under the Energy Policy and Conservation

Act (EPCA) could be strengthened by setting a short-term standard based on existing

technology for immediate application, and a

long-term standard so that research and

development could begin now. Additionally, the Plan should clarify whether or

not States could establish more stringent

standards where these are shown to be

more cost-effective.

Questions

1, Are there plans to provide sufficient

lead time for efficiency standards

which will go beyond present technological capacity?

2. What measures are being taken to ensure Federal-State coordination in selling standards and to allow maximum

flexibility for regional differences?

106
Background

The National Energy Plan proposes the

replacement of the present voluntary

program, as established by the Energy Policy

and Conservation Act of 1975, with mandatory minimum standards on certain major

home appliances. Presumably, the mechanisms set by EPCA for establishing the

standards, with the National Energy Bureau

of Standards performing technical evaluation, will remain. The proposal could be

more effective if a two-part standard was

set. The first part would be based on existing technology and could be applied immediately. Studies at the Oak Ridge National Laboratory have shown that significant energy savings can occur over the next

25 years if more efficient major appliances,

including heating and cooling systems, are

introduced into the market at this time. To

allow for continued development, a second

standard could be set now and introduced

at a later time. This would act as an incentive to begin extensive research and

development to improve major appliance

efficiency even further.

r

f , ,,

-

. .

While energy labeling for small appliances is important in providing correct information to consumers, by far the largest

energy savings will accrue through greater

efficiency in heating, air-conditioning, and

water heating. Appliances generating

central heating account for more than 50

percent of residential energy use. in setting

performance standards, emphasis should be

given to these devices. There are wellestablished standard tests to measure the

coefficient of performance of heat pumps

and the steady-state, full-load efficiencies

of direct combustion furnaces. Use of these

standards will make consumers more aware

of the sources of various reductions in

seasonal performance such as cycling, pilot

light, and hot air duct losses. Finally, the

standards should make homeowners more

willing to replace their existing central heating systems as they become aware of the

economic benefits of using more efficient

heating systems.

A final consideration is the question of

interaction between State and Federal

governments in setting standards. Some

States have already set major appliance efficiency standards and the Plan is not clear on

how its proposals will coordinate with

those. For example, it might be useful to

allow States to set more stringent standards

than the Federal Government for some appliances when it can be shown that that is

more cost-effective for residents of a State.

This would most likely be the case for heating and cooling systems because of large

regional climate differences. Before such an

allowance is made, its effect on appliance

manufacturers who could be required to

build to a number of different standards,

should be carefully examined.

Federal Energy Administration Photo

107
Demand

Impacts

Issue 12

Communication

of Conservation

Information

Effective implementation of a major

insulation program will require increased access to technical and

cost/benefit information for homeowners. The commitment of homeowners to conserve will be reinforced

by Government actions showing

serious efforts to conserve.

Summary

Although the importance of energy conservation in buildings has been widely

publicized, many owners find it difficult to

decide which technical information is valid

when they are making conservation decisions. General public skepticism about the

importance of conservation is underscored

when governmental agencies appear to be

wasting energy, A national energy policy

should emphasize better communications

programs as well as highly visible Government conservation programs.

Questions

1. How can correct and useful information on the technical aspects of buildings conservation best be made available to the public?

2. What can be done to reduce energy

consumption by governments to provide a symbol of equitable sacrifice?

Background

Many homeowners express a desire to

conserve energy, but surveys indicate that

many also are unsure about which actions

are most cost-effective, and many others

believe that “someone else should do it”.

Homeowners have little faith in existing

sources of conservation information such as

utilities and oil companies because they

perceive the sources to have a financial interest. Consumer surveys also indicate that

Government efforts to encourage conservation through general slogans such as “Don’t

be fuelish,” have little or no effect on consumer behavior. These surveys suggest a

need for specific practical advice on how to

conserve, preferably delivered by parties

perceived to be objective, trustworthy, and

well-known to the consumer.

Many organizations with long histories of

public service can provide energy saving information. Financial institutions, professional organizations, labor unions, and other

groups with national and local chapters or

units could effectively participate in a national effort to disburse correct and credible

information. Existing State energy offices

and the energy extension services already

authorized by Federal law could play a major role in providing information to the consuming public. These organizations could

be particularly effective in dealing with

special local or regional needs and could

maintain contact with civic organizations

which are close to the people affected by

energy policy changes and price increases.

An energy plan should be explicit in providing both a role and the necessary financing

for such agencies to help promote conservation policies.

108
Public skepticism about the importance

of conserving energy is reinforced when

Government agencies and officials appear

to waste energy. Every Government car that

exceeds Federal speed limits, every Government building that is lighted for purely

decorative purposes, every Government

office that is too warm in winter or too cool

in the summer contributes to public doubt

that the energy crisis really exists. It probably is necessary to reduce Government consumption of energy for symbolic reasons as

well as conservation.

Issue 13

Crude Oil

Equalization Tax

and Heating

Oil Use

The proposal to spare homeowners

from the full impact of the crude oil

equalization tax is at cross-purposes

with the National Energy Plan’s

efforts to reduce energy consumption in homes.

Summary

The National Energy Plan proposes a

crude oil equalization tax to raise oil prices

to world levels over a 3-year period. The

Plan also proposes to reduce the tax—

through a refund to distributors-n

domestic oil delivered to residential and

small commercial consumers of heating oil.

The effect of this provision runs counter to

the Plan’s goal of reducing energy use,

because these customers would be buying

oil at prices that would reduce their incentive to conserve. The administrative burdens of the proposal on heating oil distributors may put them at a disadvantage compared with electric and natural gas utilities;

the proposal also may cause regional inequities.

Questions

1. Could the conflict between the Plan’s

proposals for conservation and its proposals for lower cost home heating oil

be resolved by distributing the rebate
Demand

Impacts

2

3.

on an annual lump-sum basis rather

than as a current price reduction or

withholding tax reduction ?

Will the rebate scheme place excessive administrative burdens on fuel

oil distributors?

Since imported oil is not eligible for

the rebate, will the rebate create inequitable benefits and hardships in

different regions according to the relative availability of domestic supplies in

those regions ?

Background

The National Energy Plan proposes to

assure lower prices for home heating oil primarily by subsidy payments to distributors

who do not pass on the full crude oil

equalization tax to users of home heating

oiI.

The proposal to cushion residential

energy users from sudden and significant

cost increases is in conflict with another—

and central component of the energy plan:

conservation. The more secure homeowners

are against oil price increases, the less inclined they may be to reduce consumption.

If the rebate were given as a lump sum at

years end-as is proposed with gasoline

taxes and the general crude oil equalization

tax revenues—there would be a significant

time delay between payment of the higher

cost and receipt of the refund. A relative

price increase for fuel oil would then be apt

to dampen demand, despite the fact that

the real income effect of a subsequent

lump-sum rebate would reduce net savings

slightly.

It may be that concerns other than those

for energy savings compel the proposed

treatment of residential oil heating

customers. If, for example, the proposed

scheme is dictated by concern for low-income families, other solutions may be

available that will not undermine conservation impulses.

Another concern raised by the home

heating oil tax-rebate system is the administrative burden it will place on distributors. Under the Plan, distributors would be

primarily responsible for holding down the

purchase price of home heating oil. The Plan

also requires separating domestic from imported distillate oil when giving the rebate

because imports do not qualify. Aside from

the problem of convincing customers that

all of this is being done correctly, the

mechanics of implementing the Plan may be

a burden for some heating oil distributors,

particularly small companies. The approach

also is likely to create intense competition

for domestic supplies. Consumers in regions

heavily dependent on imported distillates

will not benefit from the rebate unless a

complex allocation system is devised to

spread domestic supply equitably across the

country. Such a system is likely to be unworkable. If the tax rebate proposal is to be

carried out, other means for administering it

should be explored.

110
Issue 14

The Role of

Financial

Institutions

The Plan’s proposals probably are not

strong enough to encourage financial

institutions to increase the funds

available for loans for home energy

conservation projects. However, the

impact of rising fuel prices on homeowners may force a more active role

on these institutions.

Summary

Financial institutions have not promoted

loans for residential insulation for two

reasons: 1 ) most such loans are too small to

provide an attractive return to lending institutions; and 2) banks and savings and

loans associations have not been able to

package such loans and pass them on to the

secondary mortgage market.

Questions

1. What incentives are needed to encourage more activity among primary

financial institutions in financing

energy conservation ?

2. What types of new financing mecha3

nisms can be created to meet the

specific needs of homeowners, particularly those planning to invest less

than $1,000 in projects?

Is it appropriate for utilities to function

as federally insured lending institutions

for insulation projects as proposed by

the Plan?

Background

The National Energy Plan offers a number

of mechanisms to expand the role of financial institutions, both primary and secondary, in making loans for home energy conservation measures. While these mechanisms may make some difference in the flow

of funds, the market signals being generated

to homeowners and mortgage holders by

rising fuel prices may exert more influence

on the attitudes of banks and other lenders.

The Plan would amend the Federal Home

Loan Mortgage Corporation Act to allow the

Corporation to deal in packages of small

residential energy conservation loans. This

should help generate more loans. The high

fixed costs of servicing small home improvement loans could, however, continue

to be a barrier to real growth in volume of

such loans. other efforts that could be

made to make small loans profitable to

lenders include uniform processing requirements and arrangements to permit homeowners to reopen their existing mortgage instruments and borrow a “future advance”

against accrued equity.

Barriers to home ownership arising from

fuel costs are now beginning to block home

purchases for growing numbers of

Americans. Delinquent payments and even

mortgage defaults could grow as utility

costs rise. An erosion of savings already has

begun as homeowners draw on funds to

compensate for high winter fuel payments.

These factors alone may encourage first-line

institutions to make small conservation

loans if for no other reason than that they

might protect the investment of the lender

and reduce the rate of mortgage

foreclosures.

111
Demand

Impacts

A possible signal to lending institutions

of the magnitude of energy costs would be

the inclusion of information on ability to

meet fuel costs on forms used to qualify

borrowers for federally backed loans. In addition to present calculations used to determine principal, interest, taxes, and insurance

(PITI), energy costs could be indicated (PITI

+ E). This would focus attention on this cost

component of home ownership, and,

because of the widespread use of these

forms, might also increase general awareness of energy problems.

The problems of financing insulation investments seems to affect middle-income

families most severely. More affluent homeowners tend to purchase energy saving improvements without outside financing. Lowincome families must rely on Federal grant

programs.

The Plan proposes a 2-year study by the

Secretary of Housing and Urban Development to determine an actuarially sound premium rate for energy conservation loans, as

the basis for setting such a rate. This should

be a valuable base for reflecting risks of, and

the proper rate of return on, innovative or

‘‘unproven” technologies.

Financial institutions could play a larger

role in providing information on the costs

and benefits of energy conservation in all

buildings. However, lenders are often reluctant to quantify the savings which might

result from a specific investment, because

they might be held accountable if the savings were substantially below expectations.

Lenders, utilities, and contractors might do

well to cooperate in developing technologies for performing energy audits so

that estimates of potential energy and dollar

savings would be a shared responsibility of

experts in finance, energy, and construction.

Under the Plan, utilities would become

federally insured lending institutions for

purposes of energy conservation loans to

residences. This proposal raises many questions about competition with lending institutions, and about the ability of utility

companies to conform with the regulations

imposed on lending institutions. For many

utility companies, the required paperwork

may not be worth the Federal loan insurance

or guarantees that the Plan seems to offer.

112
Utilities

Issue 15

Conversion

of Electric

Utilities From

Natural Gas

It may not be possible to achieve the

National Energy Plan’s goal of a ban

on the use of natural gas to generate

electricity by 1990.

Summary

The goal of eliminating the use of natural

gas by electric utilities by 1990 can be met,

but the schedule could be easily upset. The

total investment required to make the conversion from natural gas to coal is manageable on a national scale, but regional

differences may place intolerable burdens

on utilities in some locations. A major uncertainty is the extent to which industry

may shift from the use of oil or gas to

electricity rather than coal. If the trend is to

electricity, the added capacity requirements, coupled with the ban on the use of

gas, could easily exceed the financial

capabilities of some utilities. The Plan’s proposals could pose other problems as well.

The Plan excludes only those peak-load

plants which are a “substantial portion of

the total generating capacity” from the ban

on use of natural gas, which means that

minor uses of gas must be converted, These

conversions may be very difficult and costly

relative to the amount of gas that would be

saved. Finally, the Plan’s proposed restrictions on converting to oil, even on a temporary basis, may force some facilities out

of service if an equivalent coal capacity cannot be developed by 1990.

Background

The National Electric Reliability Council

reports that in June of 1976, 59,000

megawatts of gas-fired generating capacity

was in operation in this country, approximately 12 percent of the Nation’s total. The

Edison Electric Institute estimates that the

conversion of this capacity would, under

favorable circumstances, take 8 to 10 years

and cost at least $22 billion in current dol-

\

Energy Research and Development Administration Photo

113
Demand

Impacts

lars. Virtually none of the gas-fired generators is capable of operating with coal and

conversion would essentially involve building a completely new steam supply system.

An incremental expenditure of $22

billion for the industry as a whole is a significant, but perhaps manageable, undertaking. However, Federal Power Commission

data indicate that during 1976, utilities in

four states consumed nearly 70 percent of

all of the natural gas used to generate

electricity: Texas, Oklahoma, Louisiana, and

Arkansas. Due to rising prices for, and

declining availability of, natural gas, electric

utilities in those four States are already on

crash programs to reduce their dependence

on natural gas; their construction budgets

are heavily committed to this purpose, For

instance, one major Texas utility system

which relied exclusively on natural gas in

1972 had converted approximately onethird of its powerplant capacity to coal by

1976 and expected to produce more than

two-thirds of its power with coal and

nuclear units by 1982. Additional expenditures of the magnitude which would be

necessary to accelerate these existing construction programs will be very difficult, if

not impossible, to achieve.

A number of uncertainties greatly

diminish the likelihood of meeting the 1990

natural gas goal. One is whether demand for

electricity will increase because industrial

plants decide to use electricity instead of oil

and natural gas. It appears that this will be

the choice for a large share of industry

which will try to avoid the difficulties and

unknown costs of direct coal use. Such an

increase in demand would occur at the

same time that utilities were trying to

replace natural gas units with coal units.

Two aspects of the Plan seem to compound the gas conversion problem. The primary emphasis of the utility industry conversion program is directed at converting intermediate and baseload equipment, where

most of the natural gas used by utilities is

burned. Present utility plans do not contemplate accelerated replacement of peakIoad generators because they consumed

minor amounts of natural gas and because

costs of replacing facilities would be very

high compared with the small amounts of

natural gas that could be saved. However,

the Plan may upset the utility timetable with

its proposal that peak-load plants may be

exempted, only if it can be shown that a

peaking plant “is a substantial portion of the

total generating capacity” of a utility

system. The Plan’s goals might be better

served if it required conversion only of

peak-load plants that provided a significant

amount of a system’s total capacity. In any

event, some effective exemption for small

use of gas in peaking plants should be considered, especially where utilities face a significant conversion burden under the 1990

deadline for ending the use of natural gas.

Another potentially serious problem arises

from the Plan’s apparent intent to restrict

conversion of gas-fired plants to oil. Most of

the units involved are designed for gas firi ng, but could burn oil at reduced

capacities. Utility conversion plans

generally anticipate moving some gas units

to oil as part of a phased shift to coal or

nuclear power. If natural gas is to be eliminated as a boiler fuel by 1990, utilities may

have to be permitted to shift gas-fired units

to oil as an interim measure.

114
Issue 16

Electric and

Natural Gas

Utility Rate

Reform

Some of the specific utility rate

design and regulation provisions in

the National Energy Act might reduce

the likelihood of achieving the objectives of rate reform.

Summary

The rate reform proposals in the National

Energy Plan provide an opportunity to move

electric and gas utility rates closer to a “costbased” level. More flexibility is needed in

the proposals, however, to increase the

probability that this goal will be achieved.

In particular, the prohibition of declining

block rates may not always be consistent

with “cost-based” rates. As for time-of-day

rates, flexibility is also needed to account

for regional differences and to ensure that

implementing such rates does not create

new peaks. Time-of-day rates for residential

customers will also be of limited effectiveness until economical storage systems are

developed and the public is made more

aware of the advantages of, and opportunities for, load shifting. Finally, more consideration should be given to the use of

marginal or incremental costs in setting

rates which would more closely approach

replacement costs.

In the administrative area, the Plan should

consider extending the coverage to all

utilities generating at least 200 million

kilowatt hours per year to pick up some of

the Nation’s fastest growing utilities. The

Plan should also consider financial assistance to State utility commissions to help

them carry out the Plan’s provisions more

effectively.

Questions

1.

2.

3.

4.

5.

Would the suggested reforms bring

about a large enough decline in

electricity growth rates and new

capacity needs to justify the Plan’s

proposal for an unprecedented

Federal intervention in a traditional

State jurisdiction?

Is there an irreconcilable inconsistency, at least in some instances, between

the goal of cost-based rates and the

prohibition of declining block rates?

IS the legislation too rigid because it

specifies the kinds of rates which must

be offered—i.e,, time-of-day, seasonal,

and interruptible?

Should Federal energy policy require

that rates be based on marginal or incremental costs, which reflect the expense of providing additional generating capacity, rather than the “embedded” cost of existing capacity?

Does the Plan apply to enough utility

systems across the country to provide

maximum coverage and effectiveness ?

Background

The avowed purposes of the proposed

utility rate reform measures are to encourage economic efficiency, reduce consumption of oil, natural gas, and other

energy resources, ensure additional generating capacity, provide fair and reasonable

rates, and prevent States that adopt such

115
Demand

Impacts

reforms from being at a competitive disadvantage with States that do not.

Current utility rates and practices do not

necessarily discourage conservation and

create demands for new capacity to the extent that mandatory federally imposed and

enforced reforms are justified. The Administration’s estimate of 1985 electricity

demand under the PIan is only the

equivalent of 800,000 barrels of oil per day

lower than the demand would be without

the Plan, but it is not clear how much of the

projected reduction in demand would result

from rate reform, It is possible that tampering with peak loads might simply create

new peaks, without reducing new capacity

needs. Questions have also been raised

about the constitutionality of the proposed

Federal role,

Residential customers who use relatively

small amounts of electricity often are the

most expensive customers to serve, due to

requirements of meter installation and reading, bill collection and processing, connection and disconnection, and the ratio of

transmission costs to usage. True “costbased” rates must reflect these costs, yet

the Plan proscribes rates which decline as

consumption increases. In apparent recognition of a possible conflict, the Administration’s draft bill adds the caveat, “to the

maximum extent practicable, ” to the mandate for cost-based rates. Yet there is no

room for compromise in the proscription on

declining block rates.

(based on a customer’s peak demand during

the billing period, and reflecting capacity

costs). Spreading demand charges over

greater kilowatt-hour usage inevitably tends

to reduce the unit cost of demand. This

would appear to violate the requirement

that the effective rate per kilowatt hour not

be allowed to decline as usage increases.

Spreading metering costs and other fixed

customer costs over varying consumption

levels poses the same problem.

This raises a question as to the wisdom of

the extreme specificity of the rate-design requirements in the proposed Plan legislation.

Greater flexibility of actual rate design, subject to review by the Administration for

consistency with national policy goals, may

be more productive.

To illustrate, the table below shows three

rate options for a given situation. Rate No. 1

is the true apportionment of each

customer’s costs to the charge he pays, as

mandated by the Plan. It is actually a declining effective rate. Rate No. 2 is a single flatcommodity rate which observes the Plan’s

prohibition on declining rates, but fails to

reflect true costs of serving each customer.

Rate No. 3, a traditional declining block

rate, relieves the small user of part of his full

cost, but still recovers from him more of his

costs than does the flat-commodity rate.

These examples suggest that greater flexibility in the specifics of rate-design judgments may be desirable.

Utilities can be expected to recover the

added costs of serving low-volume

customers by imposing two-part billing

systems consisting not only of an energy

charge (a per-kilowatt-hour rate reflecting

generating costs), but a “demand charge”

116
Example:

Customer A

Monthly usage 250 kWh

cost of

Rate 1.

Rate 2.

Rate 3.

service (in dollars) 37.50

Charge under 2-part rate 37.50

Effective cost per kWh 15¢ per kWh

Under flat single rate 19.50

(7.8¢$ per kWh)

Under declining block rate 22.50

(9¢ for first 500 kWh;

(6¢ for next 500 kWh)

The blanket prohibition of declining

block rates for natural gas utilities also

should be reconsidered. As with electric

utilities, it is not clear that prohibiting

declining block rates for natural gas is consistent with the concept of basing rates on

the actual cost of service. About 60 to 70

percent of the total revenues represent the

cost of natural gas. The rest covers fixed

costs and the cost of storage to meet winter

peaks, Further, as a system’s load factor

declines, the fixed costs make up a higher

percentage of the total revenues and the

cost per unit of gas to the customer increases. Since small users (residential

customers with high seasonal peaks) have

the lowest load factor, the cost of servicing

these customers per unit of gas is usually

highest among all classes of customer. Current rate schedules are set to reflect these

differences, although they may more than

compensate, leading to subsidies of large

volume users by small users. A flat rate

would eliminate this subsidy, but probably

Customer B Customer C Customer D

500 kWh 750 kWh 1000 kWh

45.00 52.50 60.00

45.00 52.50 60.00

9¢ per kWh 7¢ per kWh 6¢ per kWh

39.00 58.50 78.00

45.00 60.00 75.00

would go too far and favor small users at the

expense of large volume customers. A provision which permitted more flexible rate

setting, perhaps determined after experimentation and on a regional basis, could

eliminate the problem. Elimination of

declining block rates within a given class,

but not among consumer classes (i.e., residential, commercial, and industrial), would

increase the incentive to conserve. A twopart rate schedule probably would be required, however, as in the case of electric

utilities.

As a general proposition, time-of-use

rates are effective in reducing peak demands, improving load factors, and reducing needs for additional generating capacity.

However, there has been little actual experience with these rate devices to date,

and it remains to be seen how effective they

are in actually changing load patterns. Additional measures could be adopted to substantially increase their effectiveness. For

example, a concerted Federal R&D effort in

developing economical thermal-storage

117
Demand

Impacts

devices could eventually enable many more

consumers to shift their use to off-peak

periods. In addition, a vigorous public

education campaign is a necessary part of

any peak-load pricing scheme, Utilities must

help customers adapt to new rate structures,

for example, by showing them how to

change their daiIy habits with regard to such

uses as water heating and air-conditioning.

Presumably, these would be part of a

utility’s conservation program.

There is some concern, too, that peakIoad pricing could backfire in certain cases

by creating new peaks. This could be a

serious problem in summer-peaking areas

where there is a rapid increase in electric

heating. Care should be taken to design

rates which do not encourage off-peak uses

likely to create new peaks, It may be desirable, too, to test load-management options

before mandating that they be offered.

Finally, it may be desirable for the legislation to go a step further, requiring that rates

be based on marginal, or incremental, costs,

which reflect the expense of providing additional generating capacity rather than the

“embedded” cost of existing capacity.

Under the Administration’s draft legislation,

customers who increase on-peak consumption pay historic costs for that increased

use, even though the marginal cost of meeting those needs is much higher. Thus, the

consumer has an economic incentive to use

more electricity, even though conservation

might be a considerably cheaper alternative

under marginal cost pricing.

Dramatic and sudden price changes

should be avoided; gradual changes will

permit adjustments to be made in an orderly

manner and, at the same time, provide appropriate signals for future prices. One

means to achieve the same result as

marginal pricing would be to include construction work-in-progress (CWIP) in the

current rate base. Although this would result

in slightly higher prices in the short term,

price increases would be more gradual than

with orthodox marginal cost pricing.

The utility regulatory proposals in the

Plan and the draft legislation apply only to

utility companies which sell more than 750

million kilowatt hours (kWh) per year. This

excludes approximately 50 (out of 200) investor-owned companies and the majority

of publicly and cooperative owned companies, but it does cover between 85 and 90

percent of the Nation’s electricity generation. it contrasts with electric rate-reform

legislation introduced in the House of

Representatives earlier this year, which

covers all companies selling over 200

million kWh annually. The extra administrative burden which would be imposed by the

lower cutoff may be justifiable in order to

cover some of the Nation’s fastest-growing

electricity companies, such as the rural

electric cooperatives.

The Plan’s electric-rate proposals do not

include Federal financing aid for State utility

commissions. The workload of these agencies is bound to increase as a result of these

Federal requirements and most are already

understaffed and underfunded. It is not

likely that many State governments can

afford to follow the proposed Federal

regulatory policies. The Plan should provide

Federal funding for State commissions to

help cover the higher costs.

In sum, the Plan’s rate proposals need

refinement and added flexibility, but they

can be effective tools for encouraging conservation,

118
Issue 17

The Impact

of the Plan’s

Tax Proposals

on Electric

Utilities

The tax proposals of the National

Energy Plan could affect electric

utilities in ways which would be contrary to the Plan’s long-range goals.

Summary

The Plan proposes a series of fuel taxes

and tax credits which will affect electric

utilities both directly and indirectly. These

proposals may produce unintended consequences that would impede progress

toward the Plan’s overall goals. The most

serious of these could arise from the consumption tax on oil and natural gas, which is

intended to discourage the use of oil and

natural gas to generate electricity. Since

utility conversion schedules are fairly rigid,

many utilities might choose to pay the tax

on oil and gas rather than push construction

projects to meet the conversion schedules.

The Plan’s tax proposals also may result in a

temporary price advantage for homeowners

who use oil and gas for home heating over

those whose homes are heated with

electricity. Owners of all-electric homes will

not receive rebates under the Plan; in addition, they will be paying fuel taxes to the

extent that the utility in their service area

uses oiI and natural gas. Finally, the question

of whether electric utilities are entitled to

tax credits for cogeneration and conservation technologies needs to be clarified.

Questions

1.

2.

3,

4

What side effect will the oil and gas

taxes on utilities create?

What effect will the crude oil equalization tax and rebate program have on

the consumption of electricity and on

utility load factors and expansion

plans?

What effect will the proposed tax

credits for energy conservation

expenditures and solar expenditures

have on utility load factors, peaks, and

capacity needs?

Will utilities be eligible for the 10-percent business energy tax credit which

the Plan proposes for cogeneration and

other conservation measures? If not,

will there be sufficient incentives for

utilities to enter into cogeneration arrangements ?

Background

Utility Oil and Gas Consumption Tax

and Rebate.—Beginning in 1983, utilities

will be taxed for the oil and gas they use to

generate electricity. The companies will be

eligible for rebates of these taxes if they

make investments in equipment needed to

convert to coal or energy sources other than

oil or gas. The tax/rebate combination is intended to provide both a penalty and an incentive, which together will induce a rapid

shift of generating plants away from oil and

gas. The essential question is whether these

provisions will, in fact, accelerate such fuel
Demand

Impacts

conversions. There appears to be little or no

flexibility on conversion schedules between

now and 1983, and the tax and rebate proposal may have little effect on conversions

even after that date. In fact, if the tax is imposed without a parallel mandate to stop

using oil and natural gas, some utilities may

choose to pay the tax and stretch out their

conversion schedule. This becomes plausible when the impediments to conversion

are considered. These include the long-lead

times required for capital expansion planning; the uncertainties associated with complying with ambient air-quality standards;

“best available technology” requirements;

nondegradation policies; limits on the

capacity of the mining industry to meet

rapid increases in coal demand; and bottlenecks in the acquisition of boilers and

other equipment needed for conversion to

coal. In short, it may be both easier and

cheaper, in many instances, for utilities to

pay the tax and forgo the rebate rather than

accelerate their conversion schedules.

Although taxes can be rebated up to

amounts equal to conversion costs, there

can be no net financial gain. A more appropriate mechanism for accelerating conversion might be a direct requirement to

meet conversion schedules, coupled with

exemption from the user tax if the schedule

is met.

Crude Oil and Equalization Tax and Rebates.—From a utility company standpoint,

the major impact of the crude oil equalization tax is a sharp increase in the cost of

fuel. This can be expected to dampen demand, but it also could cause economic

hardship for all-electric residential

customers. Because the Plan provides for

means to keep residential costs of natural

gas and heating oil lower than the industrial

price, the lack of a similar price break for allelectric residential customers will be discriminatory to the extent that electricity is

generated by oil and natural gas.

Tax Credits.—The portions of the bill

that provide tax credits for homeowners

who invest in conservation measures and/or

solar facilities and for businesses that make

similar investments, do not appear to affect

utilities in major ways. There is a possibility

that peak-load problems could be aggravated by extensive shifts to solar heating

and heat pumps as a result of the tax credit

incentives. Extremely cold weather could

cause sudden increases in peak loads as

heat pump and solar-unit owners switched

to electric backup systems, It may be that

specific incentives should be provided for

heat pumps that use oil rather than

electricity as a backup. Incentives also are

probably needed for onsite storage systems

that can provide energy when heat pumps

and solar systems cannot bear the full load.

The tax credits for residential users who

invest in nonsolar conservation measures

apply only to houses built by April 20,

1977. Drafters of the National Energy Plan

apparently felt that new construction standards would require investments in conservation measures, so there was no need for a

120
reward in the form of a tax credit. However,

there will be a time lag of 3 years before

such standards must be adopted by the

States. In the meantime, utility companies

might be required to refuse service to new

residences that lacked specified energyconserving features.

The energy bill is unclear about whether

the 10-percent business tax credit for

cogeneration facilities could be taken by

utilities for their portion of a cogeneration

arrangement. It is not clear, in fact, whether

the business energy tax credit applies to

utilities at all. If utilities are ineligible

because of the separate consumption tax

rebate there may not be enough incentive

for utilities to invest in cogeneration, combined-cycle plants, or other conservation

measures.

Issue 18

Impacts of

the Plan

on the Gas

Utility Industry

The pricing and regulatory provisions

of the National Energy Plan regarding

natural gas use will significantly alter

the market for and operations of

natural gas utilities.

Summary

The provisions of the Plan which discourage the use of natural gas by industry

and electric utilities could lead to substantial shifts of natural gas to the high-priority,

residential-commercial sector, provided

moratoriums on new service are lifted. This

appears to be an implied goal of the Plan,

which states that natural gas supplies

should be reserved for high-priority use.

This shift, however, would decrease a gas

utility’s load factor and increase its storage

requirements, which would, in turn, increase a customer’s fixed charges. Prohibition of new hookups, however, would deter

utilities from finding new supplies and encouraging conservation measures. The provision which permits large volum e

customers to be compensated if their supply contract is terminated will ease the

burden of making the shift. However, not all

industrial customers have entitlements to

their gas supplies and customers who do

not have entitlements will not be able to

obtain compensation. Therefore, inequities
Demand

Impacts

would be created, possibly between direct

competitors, which could be avoided with a

more flexible compensation policy.

Background

The National Energy Plan contains provisions which are designed to decrease industrial and electric utility use of natural

gas. The Plan dedicates the highest priced

gas to industrial customers and requires that

there can be no natural gas used as a utility

boiler fuel after December 31, 1990. These

proposals are designed to accelerate a shift

away from gas that began 3 to 4 years ago.

In some service areas, natural gas surpluses

are forecast for the next few years. Because

the lowest priced natural gas is reserved for

high-priority users (residential and small

commercial), there could be a substantial

shift from the industrial and utility sector to

the residential sector. This would take place

if moratoriums against new hookups that

occur in many service areas were lifted.

Such a shift appears to be an implicit goal of

the Plan, because it specifies that natural gas

should be reserved for the highest priority

customers who would have the most

difficulty converting to alternative fuels.

There would be some difficulties with

this shift, however. First, the greater the percentage of residential customers in a

utility’s load, the smaller the load factor. As

the load factor decreases, the average cost

per unit of gas to a customer rises because

fixed charges represent a greater percentage

of the total cost of servicing a customer.

Therefore, as

customers will

the shift OCCUrS, residential

see increased bills if the

utility is to maintain its financial health.

Further, increased storage capacity would

be needed to take care of the relatively

higher winter peaks. This will also cause the

customer’s bill to rise. One method of

reducing the problem would be to increase

gas use in the summer with a higher air-conditioning load, preferably through efficient

gas-fired heat pump/air-conditioner systems

now under development. The benefits of

doing this would have to be weighed

against the increased use of gas that would

be created.

Another path that may be taken by the

utilities is to encourage industrial customers

to keep using gas and pay the higher prices.

Since most industrial customers appear to

be more concerned with availability of

natural gas than with the possibility that

prices will rise to levels comparable to alternative fuels, they will be inclined to use gas

if a utility can assure supply. This would

benefit the utility since it would maintain

their load factor and keep revenues steady.

The second situation is even more likely

to occur if moratoriums are not lifted;

utilities would otherwise face the prospect

of losing surplus gas to regions where supplies are curtailed. If this occurs, it would

deter utilities from finding new supplies and

encouraging conservation. An aggressive

conservation effort could free-up a substantial volume of gas in any given region. If a

utility were forced to give up this new supply of gas to another region in short supply-even in an emergency situation—

rather than sell it to new customers, the

utility would have no reason to promote

conservation programs. Therefore, if one of

the purposes of the Plan is to shift as much

gas as possible to the residential market, it

122
appears that the moratorium on new

hookups will have to be lifted.

One other provision in the Plan is involved in this issue. The proposal to permit

customers who shift away from gas to sell

their contract entitlements will ease the financial burden of making the conversion

and will add to the industry’s incentives to

do so. But not all users can take advantage

of this compensation because many

customers do not have such contract entitlements. These cases usually occur with

large gas utilities who offer “full service” to

industrial customers and do not sell to them

under specific sales contracts. Therefore, inequities will arise among firms which do

and do not have these contract rights. In

certain cases, such firms may be direct competitors and some could be placed at a

severe competitive disadvantage. By permitting a more flexible compensation policy

under which all customers would be compensated upon termination of the contract,

this problem would be removed. This

would require involvement of a gas utility in

those cases where entitlements were not

owned by the customer, with the consequence that the utility would probably have

to receive some compensation too,

Issue 19

Electric and

Natural Gas Utility

Conservation

Programs

The National Energy Plan’s proposal

to put utilities in the energy conservation business is a departure from

present practice that raises legal,

technical, and economic questions

for which there are presently no

answers.

Summary

The National Energy Plan’s utility program

may be an appropriate and effective means

of insulating 90 percent of existing homes

by 1985, although the goal probably is too

optimistic. However, it is not clear that the

utility conservation program is the only, or

even the best, means of meeting the Plan’s

objective, The proposals raise several legal

questions, including those of liability,

restraint of trade, and fraud; the potential

effects of the program on consumer interests and on the financial integrity of

utilities are not clear; there could be adverse impacts on competing suppliers of

conservation measures; and there is a

possibility that a prescribed list of measures

will stifle innovation.

Questions

1. Do the difficulties associated with

making such a program mandatory for

utilities outweigh the advantages, in

light of other potential means of ac123
—

Demand

Impacts

2.

3.

4.

5.

6.

7.

8.

complishing the goal of insulating or

reinsulating 90 percent of existing

homes?

Are State utility rate-makin g

authorities to implement the conservation program?

How far will utility companies be required to go in pressing their conservation services on their customers?

How are utility companies to deal with

potential legal problems arising from

the program?

What are the financial implications of

the program for the utility companies ?

What will be the criteria for determining whether a utility is offering its conservation services at “fair and reasonable prices and rates of interest” and is

not engaging in “unfair, deceptive, or

anticompetitive acts”?

Will utility programs have an adverse

effect on existing businesses and on

consumer interest?

Does the legislation take the proper

approach in Iisting conservation

measures to be included in the utility

programs ?

Background

It is not clear that the utility program

should be mandatory, in view of the fact

that other means of conservation delivery

and financing are available, including a

voluntary utility program. The proposal to

use convential lending institutions to finance weatherproofing projects also may

present obstacles, including a general reluctance to make loans of less than $1,000, and

the prohibition against refinancing

mortgages that have been purchased by the

secondary market. It does seem clear that

adding financing and marketing of conservation devices to the traditional functions of

utility companies is a break with past

custom that should at least be preceded by

careful analysis to determine whether the

benefits are worth the difficulties.

The Plan and the draft legislation require

utilities to offer conservation services to all

customers, to inspect residential buildings,

and to estimate the energy savings that can

result from weatherproofing and other conservation measures. Customers are not required to accept an offer of such services.

To meet the terms of the Plan, a utility must

go well beyond its traditional relationship

with residential customers-reading electric

or gas meters and billing for services.

The change in relationship raises a number of legal issues. Does a utility’s use of a

particular product of the services of a contractor imply a warranty of products or services ? When a utility supplies its customers

with lists of alternative financing and servicing options, does the implied warranty extend to these alternative sources? If a utility

fails to list or recommend a particular

source, does the installer or manufacturer

have legal recourse against the utility company?

The draft legislation gives a proposed

Secretary of Energy responsibility for determining whether utilities are charging fair

prices and interest rates, or are engaging in

124
anticompetitive practices, but the draft

does not spell out criteria for these decisions. Presumably this will be done by

ruIemaking. It is not clear, however,

whether uniform critiera can be applied to

all utilities and/or al I states, since applicable

laws vary widely. For example, does a

Government determination of “fair and

reasonable prices” imply price fixing,

restraint of trade, and a potentially anticompetitive practice? Most States have delegated interest rate-setting (or at least ceiling-setting) authority to agencies that regulate financial institutions. Does the proposal

create legal and economic conflicts? If so,

how will they be resolved?

Under the Plan, a utility company’s conservation program must be designed and

administered as an integral part of the company’s overall operations. How is capital to

be raised? What will be the impact on a

company’s overall debt service, bond ratings, profit margin, and rate structure? How

will the requirement to enter an essentially

new line of business affect stockholders?

These questions must be answered on an individual company basis. To do so, companies must have sufficient flexibility within

the Federal and State requirements.

At present, approximately 75 percent of

home insulation business is handled by

building supply marketers or do-it-yourself

retailers. The effect of a massive utility

program on such businesses, and—to a

lesser extent—on competing installers,

could be severe. The “reasonable price”

guideline proposed in the Plan will affect

the competitive positions of existing installers and suppliers.

[t may be unwise to fix in law the conservation measures that may be taken under a

mandatory program. While there is some

flexibility built in (the Administrator can add

to or subtract from the list by regulation,

and there is to be variety in the “suggested

measures” for different climates and construction categories), the very existence of a

list may discourage development of new

technologies. For example, is it wise to offer

financing and installation of add-on devices

for old furnaces but not to offer the same

terms for purchases of new furnaces or heat

pumps?

125
Demand

Impacts

lssue20

The Research

and Development

Role of the

Electric Utilities

The tax and expense status of electric

utility research and development

(R&D) expenditures are not adequately addressed by the National

Energy Plan.

Summary

The ninth principle of the National Energy

Plan calls for large-scale conversion from oil

and natural gas to more abundant energy

resources, which for the short term to midterm will be coal. However, the ability to

use more coal will depend on the development of new technologies that allow coal to

be burned in an environmentally safe and

economically efficient manner. Thus, coal

research and development in the private as

well as the public sector ultimately will

determine the degree to which utilities can

reduce consumption of oil and natural gas.

Consequently, it is important to clarify the

tax and expense of the R&D expenditures of

electric utilities so that their efforts can be

maximized.

Questions

1. What is the appropriate role of the

Federal Government in encouraging

utility expenditures in R&D?

2. What is the Electric Power Research Institute (EPRI) role in meeting the R&D

goals implied in the National Energy

Plan?

3.

4.

Will the Internal Revenue Service (IRS)

and State utility commissions continue

to determine the tax and expense

status of utility R&D expenditures?

IS it possible that under the National

Energy Act certain R&D expenses

could be construed as “promotional”

expenses ?

Background

Under the terms of the Administration

draft of the National Energy Act, no new

electric powerplants would be permitted to

use natural gas or petroleum as an energy

source. By 1990, no utility would be permitted to burn natural gas. In order for electric

utilities to be able to expand their use of

coal to meet this schedule for phasing out

oil and natural gas, a significant R&D effort

will be needed, as the Plan points out.

Until 1973, when the Electric Power

Research Institute (EPRI) was established,

most R&D involving electric energy, including equipment and faciIities, was performed

by major equipment manufacturers. As a

result, R&D costs were included in the price

of equipment purchased. EPRI is currently

funded by all major electric utilities, both

investor owned and public, with a budget

of $179,5 million for 1977. There are two

schools of thought as to how R&D by

utilities can best be accomplished. On the

one hand, legislation could encourage

electric utilities to continue, and even to increase, funding of R&D activities in both the

energy supply and the energy utilization

functions. Such legislation might provide

that the Federal Power Commission (FPC)

and State regulatory bodies stipulate that

126
money spent either for funding EPRI or for

individual utility R&D could automatically

be incorporated into rate base and/or expenses, as appropriate, for determination of

electricity rate levels. At present, rate base

treatment of R&D expenditures is subject to

approval on a case-by-case basis, although

approval usually is automatic, at least by the

FPC. Such legislation might also provide that

R&D expenditures be considered as fully tax

deductible and not be construed as “promotional” expenditures. Alternatively, there

may be a need for Federal legislation to encourage increased utility expenditures for

R&D since present arrangements may be insufficient.

In practically all cases, utility R&D

expenditures are considered tax deductible

by the Internal Revenue Service (IRS) and

classed as operating expenses (rate base

items) by the utility commissions, Yet, according to one interpretation of the National Energy Plan, the IRS or a public utility

commission could disallow an R&D expenditure as a valid expense for tax or ratemaking

purposes. Under the circumstances, consideration should be given to the appropriate role of Federal law in relation to the right

of the IRS or the State utility commissions to

determine whether certain expenses may

properly be included for ratemaking or tax

purposes.

Industry

Issue 21

Cogeneration

By Industry

The Plan addresses the major

problems inhibiting growth of

cogeneration, although the proposals

promoting cogeneration need to be

more closely coordinated with coal

conversion policies.

Summary

Considerations of energy conservation,

environment, and economics offer strong

incentives for the expansion of cogeneration of electricity and process steam by industry and utilities. The provisions in the

Plan are both necessary and desirable to

remove barriers to development of

cogeneration. Some areas of concern remain, however, which could keep the Nation from realizing cogeneration’s full potential. Principally, utility interest in

cogeneration will probably be very limited

for the next several years because planned

expansion of generating capacity will meet

or exceed demand. A policy promoting a

rapid industrial shift away from oil and

natural gas could reduce the long-term potential of cogeneration. To this end, there is

a need to identify cogeneration opportunities and to monitor their progress in

order to gauge the adequacy of the Plan as it

addresses cogeneration. More information is

also needed for specific site development.

127
Demand

Impacts

In addition, enough flexibility in the coal

conversion policy should be maintained so

that the “cogeneration resource base” is

preserved, and research and development

should be accelerated on advanced technologies for coal-fired cogeneration.

Other proposals in the Plan will affect the

cogeneration potential. The investment tax

credit may be too small to encourage industry to invest because industrial firms

generally pay higher financing costs than

electric utilities. Taxes on oil and gas used in

industry cogeneration will be about twice

those for electric utilities, thus encouraging

industry to buy power rather than to

develop cogeneration. The Plan does not

consider the problems of potential reductions in reliability that may result from

adding several industrial generators to

electric utility systems over which the

utilities do not have complete control. In

addition, the Plan does not answer the

question of what constitutes a fair rate of

return to the utilities on purchasing and

wheeling cogenerated electric energy.

Finally, strategies are needed for retrofit of

cogeneration facilities. Although these are

not insurmountable difficulties, they will

slow up progress on cogeneration until they

are resolved.

Questions

1. What is an appropriate level of

electricity generated by cogeneration ?

2. Will the provisions of the Plan result in

achieving that level?

3. How will progress in expanding

cogeneration be measured?

Background

While it is reasonable to expect that an

expansion of cogeneration will be in the

public interest, the low rate of construction

of new cogeneration facilities indicates that

the practice is not always in the private interest.

There are a number of ways in which the

existing energy system discriminates against

cogeneration. Strongest of the barriers to

cogeneration by industry, perhaps, are financial practices that favor supply of

electricity by conventional utility systems.

A utility has access to capital at lower rates

than does a cogenerating industry. Industry

must determine the cost of power from a

new facility on marginal considerations. The

price of utility power with which cogeneration must compete is determined from the

average cost. Even the energy program contains subtle disincentives to cogeneration.

The oil and gas consumption taxes of Sec.

1501 are about twice as high for industrial

cogenerators as they are for electric utilities.

There are many considerations that make

electric utilities wary of industry cogeneration. They are concerned that they may

have to pay too high a price for cogenerated

power, and that it will not always be available when needed. Further, utilities may be

required either to make major additions to

transmission grids to accommodate small

blocks of cogenerated power or to sacrifice

transmission capacity in serving this power.

Unless a utility makes an investment in

cogeneration equipment, it is not permitted

under most State regulations to make any

4. Are the Plan’s coal policies compatible

with its cogeneration proposals?
profit on the purchase and resale of

cogenerated power,

Another concern is the effect cogeneration facilities will have on utility system

reliability. The addition of many relatively

small generating systems over which the

utilities do not have complete control may

magnify the problems of load flow and

economic dispatch (mix of generators

online). In this context, it may be appropriate to establish standards that the cogeneration supplier must meet when selling to a

utility.

The proposed legislation contains a number of features which either remove obstacles to or provide incentives for the practice

of cogeneration by industry. Sec. 521 enables any qualifying cogenerator to intertie

with utility transmission facilities in order to

sell surplus power and buy backup power at

fair prices. In Sec. 522, qualifying cogenerators are assured fair rates in the above transactions; they receive exemptions from

Federal and State public utility regulations.

In Sec. 109, qualifying cogenerators could

be exempted from oil and gas conversion in

cases where exemption is necessary to

stimulate construction of generators. Finally,

it is proposed that cogeneration property

purchases should be entitled to an additional 10-percent tax credit.

These provisions are felt to be necessary

and desirable for the extension of cogeneration. They are not perceived to have significant adverse impacts on any sector of the

economy or the society. The principal concern with the proposals, in fact, is that a

credit considerably higher than 10 percent

probably would be needed to motivate potential industrial cogenerators to construct

such facilities. Consideration should also be

given to determining new criteria for rates

utilities can charge for resale of cogenerated

power.

There are other aspects of the energy

plan which motivate cogeneration. Preeminent is the increased cost of energy to the

industrial user as a result of price increases

and taxation, which should make the price

of cogenerated electricity attractive. In an

indirect fashion, the conversion to coal also

offers an incentive. The technical complexity of burning coal as compared with gas or

oil makes a shift to more complex cogeneration relatively less formidable. The proposals to promote industrial conversion to

coal, however, also create a potential impediment to the long-term development of

cogeneration. This can be seen in the

following context:

Demand for new cogeneration capacity

will probably not develop on a large scale

before 1985 because there is a possibility of

excess central station generating capacity.

In 1975, the average utility reserve margin

was 35 percent. Excess reserve margin will

not drop to the 15 to 20 percent range,

which utilities prefer, before the mid-1980’s

if electricity demand grows at the average

rate of 5.8 percent per year in this period

and present plant construction schedules

are maintained. The Plan envisions growth

at 4 percent per year, however, leading to

the possibility of an even longer period of

excess reserve capacity unless many plants

presently under construction are cancelled

or deferred or demand grows more rapidly

than expected. Therefore utility interest in

cogeneration projects will be minimal for

some time. Also, if a shift of industrial

boilers to coal is made too rapidly, a con-

, 1-4’;(1 [ 1 7- - 1(
Deman d

Impacts

siderable fraction of the long-term potential

savings from cogeneration may be lost. If

they are forced to shift to coal before advanced coal technologies are commercially

available and while there is a national excess of generating capacity, many firms will

be unable to work out satisfactory agreements with utilities for the sale of excess

power generated onsite or for the purchase

of backup power. In that case, they may

either install low-pressure, coal-fired boilers

(that cannot be converted for cogeneration)

or they may install steam turbine cogeneration systems (which can produce only a

fraction of the electricity for a given steam

load that a combustion-turbine system

could). In either case the maximum

cogeneration potential would not be

achieved for many years. If industry should

convert steam functions to electricity (e.g.,

steam drives to electric motors) rather than

install coal-fired boilers-as now seems

likely in cases where this is an option—the

cogeneration potential also could be

reduced because the excess capacity might

then be used to meet the added industrial

electricity demand. If industrial conversion

to electricity were great enough to use up

the excess capacity rapidly, cogeneration

could become very attractive to utilities

because additional capacity could be put

online relatively fast. This would most likely

occur if industrial energy growth equal led

the Plan’s projected rate of 4.6 percent.

need to be coupled with a research and

development policy, as suggested by the

plan, to accelerate the development of advanced coal-combustion techniques. The

important point is to not lock out technologies that would have a much greater

potential for long-term energy savings.

To facilitate this, provisions for identifying and monitoring cogeneration opportunities, as long as they exist, should be

made. This would also greatly enhance the

energy program by providing the most valid

test of the adequacy of cogeneration provisions. This record could provide information

long before the actual plants went into service, Since the information is site specific it

would probably be best compiled at the

State or local level. California electric

utilities are implementing such a program

for the State government.

The requirements of cogeneration in new

facilities compared with those in a retrofit

situation are not explicitly treated in the

energy program. Incentives which are adequate to induce cogeneration in the first

situation will fall far short of those required

for retrofit. It is safe to say that the energy

program will produce no retrofit cogeneration except where existing facilities are

being scrapped and replaced for reasons

other than cogeneration.

Under these circumstances, consideration

should be given to scheduling coal conversion with enough flexibility to permit the introduction of coal-fired combustion turbines when fluidized-bed combusters are

perfected and commercialized. This would

130
lssue 22

Industrial

Conversion

From Oil

and Gas

The Plan does not propose methods

to remove the principal constraints

on conversion of industrial processes

to direct use of coal.

Summary

The Plan does not recognize that increased industrial demand for coal is incompatible with presently available means of

distributing and marketing coal. As a consequence, industry may well convert to

electrified processes where possible, and

export the coal-handling problems to the

electric utilities. This will be particularly

true when direct heat equipment must be

converted but it also could involve replacing some steam functions with electricity

(e.g., steam drives with electric motors).

Although apparently not the objective of

the Plan, the direct use of electricity in this

manner could be desirable because of the

relatively low efficiency of direct combustion of coal in many process applications. In

this context the plan should emphasize support by the Federal Government for scientific and technological innovation leading to

the development of effective electrified

processes. The Plan does not appear to adequately take into consideration the consequences of failing to meet the planned conversion goals, and it should contain

specified programs for midcourse corrections. Finally, the Plan touches only lightly

on the feasibility of the industrial use of

solar energy, fuel wood, and burning of

refuse to reduce industry’s dependence on

oil and natural gas.

Background

The Energy Plan relies heavily upon an increase in demand for coal among present industrial consumers of oil and gas. However,

the plan omits specific incentives for production of coal and for development of

systems for coal transportation and marketing to industrial users. At present, the most

effective means for transporting and marketing of coal is in large-volume shipments of

more than 100,000 tons per year in unit

trains or on barges. Coal slurry pipelines

may offer another effective means of

transporting coal in volume. However, the

large-scale systems for coal slurry transport

have not yet been built, and it is questionable whether a large coal pipeline network

can be built within the next 7 years.

By contrast, the market for coal that

would be created by industrial users switching from oil and gas consists of a large number of widely dispersed installations, each

of which can consume only relatively small

amounts of coal. Therefore, the market

would be incompatible with the present

system of distributing coal.

The disparity is important. For example,

unit-train and other volume shipments of

coal become justifiable at about 600,000

tons per year and become economically attractive at about one million tons per year,

but a typical large-scale industrial facility

can consume only about 80,000 tons per

131
1.32
Demand

Impacts

year; a very large industrial boiler plant may

be able to consume as much as 130,000

tons per year. The Administration draft of

the National Energy Act defines major fuelburning facilities as those using 100 million

Btu’s or more per hour and places the oiland gas-user tax on facilities using 500

million Btu or more per year. These lower

limits correspond to about 25,000 tons of

coal per year. By comparison, a 500

megawatt coal-fired powerplant operating

at 10,000 Btu per kilowatt hour would use

about 1.7 million tons of coal per year. Coal

transportation and marketing systems on

the smaller scale envisioned by the Plan

once existed but were abandoned when industry switched to oil and natural gas, and

the present system has been developed primarily for utility markets. To accommodate

the Plan, industries might be relocated so as

to concentrate the demand for coal to utilize present transportation and marketing

systems. This is not possible within the

period covered by the Plan. A system of

coal transportation and marketing might be

developed to serve the industrial market as

it is presently constituted, but this would require new coal retailing facilities to handle

vastly increased volumes of coal shipments

in urban areas where most of the industrial

market exists. It is rather unlikely that this

could be done before 1985. Even if either

course of action were possible, they might

increase the costs of using coal to the point

at which using electricity would be less expensive. Coal costs would also increase

because conversion would require coal

combustion equipment not now commercially available and pollution-control equipment to meet environmental standards.

A third alternative is to use existing distribution systems to deliver coal to central

facilities where it could be converted to

forms of energy suitable for the industrial

market. One possibility is to convert coal to

high-Btu gas and distribute it by pipeline.

But the present costs of high-Btu gasification

of coal are so high that industry probably

would not help finance gasification -plant

construction and it is therefore very

doubtful that high-Btu gas can play any significant role in reducing industrial consumption of oil and gas by 1985.

Low-Btu gasification has limited applicability because low-Btu gas cannot be

piped more than 30 miles and still be competitive in price. Thus the same storage,

coal handling and delivery, and environmental constraints that exist for direct burning of coal by industry apply as well to lowBtu gas.

One final alternative is to convert coal to

electricity in large utility plants and to use

the electricity for industrial processes that

now depend on direct combustion of oil

and gas. Because of the barriers to direct use

of coal, industries that abandon use of oil

and natural gas will probably turn to

electricity. Because such a decision would

require a substantial investment in facilities

to replace existing oil and gas combustion

equipment, a conversion to electricity

would mean that industrial processes would

not be changed again for many years. It is

important to note, however, that the use of

electricity rather than direct-coal firing

would not necessarily be wasteful. First,

electricity would not be used to produce

steam in large boilers but to replace the

functions of the steam, such as using

electric motors rather than mechanical

steam drives. For direct-heat applications,

133
Demand

Impacts

most coal-fired processes operate with enduse efficiencies of around 33 percent. Since

the end-use efficiency of electricity when

used for direct heat is nearly 100 percent,

the difference is sufficient to compensate

for the conversion losses at the powerplant.

Further, it may be possible to develop

electrochemical processes that would use

even less total energy.

If the goals of conversion in the Plan are

to be met without compromising conservation goals, a major research effort is required

on the science and technology of industrial

processes, with a strong emphasis on

electrified processes to replace those which

now rely on direct combustion of oil and

gas. This would be most effective if the Plan

were to include support of basic scientific

research, support of critical demonstration

programs, and Government leadership

through its own research programs and

purchases of effective electrified processes.

Furthermore, the plans for conversion depend on the feasibility of modifying industrial processes so that they may use the

energy from coal as indicated above. If for

any number of economic, technical, or environmental reasons the modifications cannot proceed within the time frame of the

Plan, then the national energy policy should

contain specific programs for midcourse

correct ions.

Finally, a more aggressive approach

toward other means of conversion away

from the use of oil and gas such as solar

energy, burning of refuse, industrial wastes,

and fuel wood, and other energy sources

should be embodied in the Plan. Greater incentives than those presently proposed

would most likely substantially speedup industry’s use of solar energy.

Issue 23

The Industrial

Conservation

Investment

Tax Credit

The investment tax credit designed

to provide incentives for industrial

conservation technology may be too

small and too restricted in scope to

do an effective job.

Summary

The National Energy Plan recognizes the

legitimate need to stimulate industrial investment in energy efficiency and to reduce

the disparity between the regulated rate of

return on an electric utility’s investment in

new energy supply and the rate of return on

industrial capital investment.

The latter, along with the difference in

returns on investment that an industry requires on cost-reduction measures compared to those it expects from plant expansion measures, are significantly greater than

10 percent. The proposed tax credit, even in

conjunction with the existing 10-percent tax

credit, appears to be too small to have a significant impact on industry investment decisions. Designating specific items that qualify

for the credit, as the Plan does, might discourage innovation which could increase

efficiency or even eliminate the use of

energy for a particular process. A more

general qualification for the credit would be

more appropriate. No distinction is made in

the Plan between investments that produce

134
large efficiency gains and those that yield

small gains, and consideration should be

given to developing a performance indicator on which to base a sliding scale of credits.

Background

The disparity between rates of return for

various energy-related investments are such

as to discriminate against energy conservation investments. Industry generally expects

a higher rate of return on investments in

cost-savings measures (such as energy conservation) than on investments in plant expansion or in other measures to increase

productivity. In addition, regulated rates of

return for utilities that invest in energy-supply facilities are at least so percent below

rates available to industry for measures to

reduce demand.

The investment tax credit proposal attempts to address differences in these rates.

In its investment decisions, industry

generally requires a 1 5-percent or larger rate

of return after tax, while a utility is regulated

at roughly 10 percent. Thus, decisions to

build new powerplants, for example, are

made with something closer to a 33-percent

advantage over industrial investments, such

as conversion and cogeneration, than a 10-

percent advantage. The investment disparity is less for oil and gas, but those fuels

are not considered as replacements,

whereas electricity is.

Industry also appears to require a higher

rate of return on investments that increase

energy efficiency and reduce costs than for

those that increase product output. The latter is perceived as most crucial for a company in order to maintain its competitive

position. At least a 25-percent rate of return

is generally required for conservation investments compared to about 15 percent for

“production” investments. These large

differentials are not reduced significantly by

the 10-percent tax credit, even though it is

added to the present 10-percent investment

tax credit. At most, it appears that the proposed conservation credit will accelerate

decisions to invest in conservation by only a

few months.

it is likely that designating a specific list

of qualifying investments, such as those

listed in part C of the Administration draft

of the National Energy Act, would foreclose

many options for conservation. Innovation

for increasing efficiency or outright elimination of energy use is discouraged because

true breakthroughs in the future are not

likely to be considered in a specific list

drawn up today. At a minimum, procedures

should be included in the Plan that allow

new items to be added without delay, It is

also important that investment in new processes or systems be included in the taxcredit provision, since the potential for

energy savings is very substantial. If a

general performance indicator could be

developed on which to base the tax credit,

many of these concerns could be eliminated. The tax credit also could be graduated to match absolute levels of efficiency

achieved by investments in conservation

measures.

135
Demand

Impacts

Issue 24

Oil and Natural

Gas Price and

User Tax Provisions

price and tax provisions designed to

promote industry energy conservation and the use of coal probably will

succeed in the long run, although industry decisions will not be

uniformly affected by the Plan’s pricing proposals.

Summary

The Plan establishes a number of price

and tax provisions which would increase the

price industrial users pay for oil, natural gas,

and electricity. The prime purpose is to

achieve a substantial reduction in use of oil

and natural gas by encouraging more efficient use of energy and an expanded use of

more abundant energy sources. These

measures will serve this purpose over the

long run. However, distortions will appear

along the way because the proposals do not

uniformly achieve replacement costs for all

energy sources. The Plan is likely to achieve

its goal with oil, but to be only partially successful with natural gas and less so with

electricity. As a result, economic waste of

energy may well continue, although on a

smaller scale than at present.

There will be adverse impacts on industry

as production costs rise with increasing

energy costs. These impacts will vary

regionally and by size and type of the industry. In addition, severe problems for gas

utilities could arise, depending on the rate

at which industry reduces its demand for

natural gas. The application of oil and gas

taxes to industry 4 years before they are applied to electric utilities could result in an

inefficient allocation of resources to boiler

conversion or the selling of such facilities to

utilities to avoid the tax. Finally, the tax and

price provisions should provide a strong

stimulus to innovation in developing more

energy-efficient industrial processes and

equipment.

Questions

1.

2.

3.

4.

5.

What portion of the Plan’s goal of a 6

million to 7 million barrel a day reduction in imports can be traced to the oil

pricing provisions? IS the provision a

cost-effective means of achieving the

goal ?

What are the impacts of the oil pricing

provisions on competition in the industrial sector (especially with regard

to smaller companies)?

Have the regional effects of the gas

pricing provisions on industry been

considered ?

Has switching to No. 2 oil as an alternative to industrial gas use been considered as a transition phase in the

conversion to coal?

In general, do the industrial oil and gas

user tax provisions contradict the

Plan’s stated principle of equity?

Background

Oil Pricing Provisions.—The National

Energy Plan retains price controls on oil as

long as world oil prices remain “subject to

arbitrary control, and domestic supplies are 1

136
insufficient to meet domestic needs. ” Thus,

as established under the Energy Policy and

Conservation Act of 1975, current lowerand upper-tier price ceilings of $5.25 and

$11.28/bbl. are retained for producers selIing previously discovered oil. The producer’s selling price of newly discovered oil

would rise over a 3-year period to the 1977

world price, adjusted for inflation, and

would increase each year after 1980 to keep

pace with general domestic inflation rates.

The results of these provisions would be

to raise the price of oil products by the

same absolute amount as the rise in crude

price (i.e., a $1 per barrel rise in crude price

would increase the price of each product by

$1 a barrel). Demand elasticity would

presumably result in reduced consumption

in industry at a rate determined by the

ability of a particular industry to pass on the

oil cost increase in the price of its product

or products, the ability to convert from oil,

the ability to institute conservation and the

degree of that conservation, and the degree

of competitive advantage that would be

gained through conversion and/or conservation. The latter, in turn, depends on the relative prices of alternative energy sources, the

cost of conversion and conservation, and

energy costs in that industry as a percent of

total costs.

The effectiveness of these provisions can

be measured against the goal of reducing oil

imports, It should be kept in mind that industry is not a particularly large user of oil

products. In 1975, for example, it consumed

only 7.4 percent of No. 2 oil and 18,2 percent of No. 6 oil. Moreover, the relationship

of the increase in the oil price, and its effect

on industrial use, to the goal of a 6 million

to 7 million barrel daily reduction in imports

is not clear. There will be some positive

response, however, because demand will be

reduced through increased use of conservation technologies and conversion to less expensive, more abundant energy sources.

These provisions could have adverse impacts on industry. Competition could be

lessened in some industries if smaller,

marginal firms who do not have the financial resources to conserve energy or pay the

higher prices were forced to close. The proposals would also have different effects in

different regions, with consequent disruptions, owing to regional differences in industrial fuel mix. By raising energy costs to

industry, the Plan would make imported

goods from areas where producers have access to cheaper energy relatively cheaper

than domestic goods.

Although a tradeoff of these impacts

normally would occur in determining the

cost effectiveness of an oil price increase, it

should be noted that fuel prices are likely to

climb sharply with or without the Plan.

Therefore, the real question is whether or

not the strategies proposed in the Plan will

reduce the potential disruption as the

United States makes a transition to more

abundant energy sources and more efficient

use of all energy.

The effect of the oil price increase on

technological innovation should be positive. By forcing industry to conserve and

switch to more abundant fuels, the Plan

137
would improve opportunities for the introduction and adoption of new technologies.

Natural Gas Pricing Provisions.—The

proposed natural gas policy would remove

the interstate-intrastate distinction from

“new” gas. All new gas would be subject to

a “price limitation at the Btu equivalent of

the average refiner acquisition price (without tax) of all domestic crude oil. ” A price

limitation of about $1.75 per thousand.

cubic feet (Mcf) is established at the beginning of 1978.

Initially, new gas would cost $1.75 per

Mcf, which is equivalent to crude oil at

$9.43 per barrel. Flowing natural gas would

be guaranteed at its present price and be

allowed to move up to $1.42 per Mcf upon

expiration of existing contracts. The highestpriced gas in this mixture would be dedicated to industries and electric utilities. The

results of these provisions would be to raise

the price of gas to industry by an amount

determined by the mix of new gas, old gas,

and gas from high-cost supplemental

sources, The natural gas pricing proposals,

however, do not move as far toward meeting the “replacement cost” principle as do

the proposals for oil. Although “replacement price” to industry is not defined as

precisely for natural gas as it is for oil, it

would seem to be at least as much as the

Btu equivalent for oil.

The goal of the natural gas proposals is to

reduce industrial use of gas through increased conservation and conversion to

other energy sources, a change that already

is taking place because of curtailments in industrial natural gas supply. The price and tax

provisions in the Plan will undoubtedly accelerate the trend. However, certain uses of

gas cannot be replaced by alternative fuels

as easily as others. Although technically

there are no irreplaceable uses of gas, there

are those which would be far more costly to

replace than others. A consequence of this

would be to increase the attractiveness of

No. 2 fuel oil, even though it may be a higher-cost fuel, because it is the principal

substitute fuel for natural gas. In addition,

industry would be affected by the pricing

proposals in much the same way as

described above for oil. Regional effects

would tend to be greater because of a

greater disparity in regional use of gas by industry relative to regional disparity in oil

use.

The effect on technological innovation

would be positive, for the same reasons that

are true for oil.

Oil- and Gas-User Tax Provisions.—

Under Sec. 1501 of the Administration draft

of the National Energy Act, a consumption

tax would be imposed on industrial use of

petroleum and natural gas beginning in

1979. The tax on electric utility use of the

fuels does not begin until calendar year

1983. Ultimately, the tax rate to industry

will be twice that for electric utilities. The

user tax attempts to pull oil and natural gas

prices into equivalence for industrial users,

but this will not take place immediately and

is limited to the largest industrial users.

The tax on oil and gas use in addition to

oil equalization taxes would mean large

total increases in prices for industry. As

noted, this should accelerate the shift in industry from gas to electricity, coal, or No. 2

fuel oil, depending on the process undergoing conversion and the availability of coal

and fuel oil.

138
There are several possible consequences

of the differing rates and time schedules for

taxing electric utilities and industry. The

principal reason given for these differences

is that utility boilers, being larger, are more

difficult to replace than industrial boilers.

Limited resources for boiler and stack-gas

scrubber fabrication may be used to convert

smaller industrial facilities, rather than large

utility boilers, thereby adding to the constraints on expanding the Nation’s use of

coal. This problem would be reduced to the

extent that industry converts steam functions to electricity. Industry might also sell

some of its steam-generating facilities to

electric utilities to avoid the tax. These two

possibilities alone suggest that the way the

tax provisions are applied differently to industry and electric utilities should be reexamined.

Finally, the oil- and gas-user tax would increase incentives for technological innovation since it would stimulate investigation

of ways to reduce or eliminate the use of

natural gas and oil.

Utility Rates.—The combination of flatter rates and peak-load pricing as outlined in

the National Energy Act (Sees. 512-51 7),

would raise electric rates to industry. The

effect on demand would be mixed. In the

short term, the response would be small

because the present pattern of industrial use

of electricity shows a high load factor and

rather low elasticity. In the long term,

however, there would be greater response

through improved efficiency in new furnaces and electrolytic processes. New

design could allow a peak-load response

with furnaces that could be turned on and

off daily. This would have an adverse impact on utility load factor because industrial

loads would become more cyclical. The efficiency of electricity use would increase,

however, because furnaces could be shut

down when not in use, which is not now

common practice. The impact on industry in

terms of higher energy prices would be the

same as for oil and natural gas. With the exception of centers of aluminum production,

however, these would be fewer regional

differences.

It should be noted that while these proposals may permit electric rates to approach

replacement costs, the differences between

replacement cost of electricity and embedded costs are substantial, not because of

fuel costs, but because new plant costs have

escalated in recent years. This should be

recognized in the Plan since it may inhibit

industrial investments in more efficient

electric processes and equipment in the

short run and encourage the uneconomical

use of electricity. The proposed user tax on

oil and gas may aggravate this problem

since there is no comparable tax on

electricity no matter how it is generated.

Somehow, the replacement costs of

electricity must be apparent to the consumer if the utility rate proposals are to be

most effective.

With regard to natural gas, the proposal

for cost-based gas utility rates is in keeping

with the replacement cost principle. Regardless of wellhead prices, if the costs of new

gas are not somehow reflected in the rates

to consumers, rather than as an average of

139
Demand

Impacts

all gas prices, decisionmaking will differ between consumers and producers. In this proposal, the Plan seems to recognize the need

to maintain State and regional cost

differences in rates.

The influence on technological innovation would be especially strong as there are

large opportunities for efficiency improvement through the development o f

electrochemical processes to replace many

thermal-chemical processes now in use.

These considerations apply in a similar manner with regard to natural gas rate measures,

Issue 25

The Effect of

the Oil and Gas

Use Tax on

Petrochemical Feedstocks

The tax on oil and natural gas for industries that use those fuels as

feedstocks for petrochemicals other

than ammonia and fertilizer could put

these industries at a competitive disadvantage in the world market.

Summary

The National Energy Plan recognizes a

need to maintain a healthy economy and

high levels of employment. Moreover, one

of the policy principles set forth is for an

equitable solution to energy problems in all

sectors of the economy. However, by taxing

oil and gas used as raw materials as well as

for fuels, a selected few industries are disproportionately burdened. The objective of

the tax, to stimulate conversion to coal,

cannot be practically achieved by the

petrochemical industry with available technology. The affected industries will be put

at a competitive disadvantage in world

markets, and their domestic growth rate will

be slowed.

Questions

1. What is the justification for a tax on oil

and gas that are used as raw materials?

140
2. If conversion to coal as a raw material

for industries using oil and gas as

feedstocks is not technically feasible,

what will be accomplished through

these taxes with regard to feedstocks?

Background

A consequence of

tion tax for industry

share the burden of

and gas used as fuel

oil and gas consumps that all industry must

increased costs for oil

. In addition, many inFederal Energy Administration Photo

dustries will experience a small incremental

increase in raw material costs due to the increased costs of oil and gas used in the production of their raw materials. A selected

few industries, however, will be disproportionately burdened because they will have

to pay the full tax on their raw materials (oil

and gas).

The tax may encourage the use of coal

rather than oil or natural gas in many large

boilers and some reduction in the use of oil

and gas may be possible for process heat or

steam. However, no technology is available

that will permit industries which use oil and

gas for feedstocks to use coal as a raw

material, nor is such technology likely to be

developed before 1985-90.

in effect, these industries not only will be

doubly taxed-once for their industrial fuels

and once for their raw materials-but they

cannot escape the double tax because they

must continue to use oil and gas to

manufacture their products.

Prior to the introduction of the National

Energy Plan, projections were for a

petrochemical growth rate that would double the demand for oil and gas feedstock

over the 1975-85 decade. If the cost of

feedstocks rises, the growth rate of the industry is likely to decline. Because the tax is

to be imposed on top of a world price for oil

and gas, the affected industries will be at a

competitive disadvantage in the world

market.

The Plan recognizes these problems and

provides exemptions for oil and gas used as

feedstock in the manufacture of ammonia

and fertilizer. There does not appear to be

any good reason why the same exemption

should not apply to all users of energy

materials for feedstock.

141
Demand

Impacts

lssue 26

Federal Leadership

in Industrial

Energy Conservation

The Plan should place greater

emphasis on the leadership role the

Federal Government can play in encouraging industrial energy conservation and innovation by the private

sector in developing conservation

technologies.

Summary

There are four areas where Federal encouragement and action could provide significant incentives to more efficient use of

energy in industry. Federal leadership could:

●

●

●

●

take advantage of industry’s unique

capacity for innovation to adapt to

new circumstances, if it led to an attractive investment climate for industry in new conservation ideas;

emphasize long-range research and

development efforts in the basic technology and science of industrial processes;

demonstrate, through equipment

purchase, production contracts, and

research grants, that energy efficiency

is a prime consideration;

provide Federal grants' and/or loans to

the Nation’s universities and technical

schools to train engineers in conservation techniques.

Background

The Plan calls for fundamental alterations

in energy use, which generally emphasize

conservation. The alterations entail both

changes in the form and quantity of energy

to be used. These alterations probably will

be accompanied by intense activity to exploit opportunities to optimize them. This

will take place, in large measure, through

the efforts of individual inventors, innovative firms, entrepreneurs, research and

development organizations, and others in

the private sector. The effort will probably

concentrate on total systems and processes

rather than individual items of equipment,

process steps, or unit processes.

The capacity of industry to adapt to new

circumstances through innovation, scientific

progress, and other measures is not adequately recognized by the National Energy

Plan. In fact, the only explicit mention of innovation in the Plan is in connection with

development of nonconventional sources of

energy. The Plan should recognize that industrial innovation in the use of energy can

be at least as important as innovation in

development of nonconventional sources.

For example, the Plan’s listing of conservation devices that would quality for special

tax credits may well direct industrial efforts

toward installing these devices or improving

the performance of existing equipment

when the most effective step might be to

adopt new processes that offer much

greater overall improvements in performance.

In dealing with innovation, the Government should recognize that despite the

many formal computer-assisted techniques

for risk analysis in use today, risk-taking and

progress generally result from sharp con142
flicts of opinion. The existence of such conflict is healthy and should be maintained. It

is the process through which basic assumptions are tested. Government must draw

upon private initiative and private commitment of resources if it is to foster progress

toward solving energy problems.

The Plan also should recognize the need

for long-range R&D in the basic technology

and science of industrial processes instead

of just focusing on demonstrations of nearly

marketable technology. The tests of “relevance” and economic justification presently

employed for R&D projects do not recognize that the most important results of

research often are related only indirectly to

the original expectations, and motives, of

investigators. Those projects that can pass

rigorous tests of justification or “relevance”

do not represent the really venturesome investigations from which progress comes, or

that reflect the popular expectations of

research. In related efforts, the Plan should

incorporate specific measures to elicit wideranging innovative contributions toward improved energy use and improved processes

through direct Government financing of

R&D and its use of its powers to affect the

climate for private investment in R&D.

Through direct purchase of industrialprocess equipment, the purchase of

manufactured products, and the sponsorship of research and development programs,

the Federal Government can influence the

extent to which energy efficiency is taken

into account in developing and using industrial equipment. Similar actions have occurred in the past. For example, numerically

controlled machinery processes, which are

used extensively in U.S. manufacturing,

were brought into being by early efforts of

the Defense Department to fabricate advanced defense systems. In another example, a large part of the capital stock of the

aircraft and shipbuilding industries is owned

by the Federal Government. Opportunity

exists here to influence the development of

more efficient process equipment.

Finally, there is a need for engineers with

special capabilities in various aspects of industrial energy conservation. This does not

necessarily mean that more engineers are

needed, but that those who are trained in

the plant and process areas should be

taught to identify and implement conservation opportunities. The problem is essentially one of disseminating information

bringing practicing engineers up to date in

the current methods available to design improved processes, to instrument production

lines, and to use computer simulation.

Although the National Energy Plan does

not take note of this possibility, a series of

short courses could be developed by

universities or not-for-profit organizations,

handbooks could be written to bring

together the best current design techniques,

and numeric data could be published in

convenient forms for practical use at

relatively small cost to the Government,

Some significant efforts have already been

made in this direction by the Federal Energy

Administration, the Energy Research and

Development Administration, and the

Department of Commerce, but an expanded

effort could help the industrial sector, particularly in small businesses which have

limited technical staff to help improve existing practices.

143
VI. Societal

Impacts
Societal

Impacts

Societal

Impacts

Overview

and Findings

In addition to influencing energy supply

and demand, the National Energy Plan will

affect, directly or indirectly, immediately or

eventually, most aspects of life in the

United States. Although some of the individual impacts are clear, the net effect of

the Plan on particular regions or income

groups or sectors of the economy cannot be

predicted with certainty. Moreover, all the

elements of the impact equation are not

present: some measures for mitigating adverse impacts are not discussed in the Plan,

e.g., in the case of regional impacts. As in

any major policy shift, risk and uncertainty

exist and this must be recognized, although

alternative policies to deal with these risks

could be formulated.

The indicated effects of the Plan on the

overall economy and employment are

likely to be minor but adverse, but these

costs appear small compared to the cost of

increasing reliance on foreign energy

sources.— The basic energy choice to be

made is between a series of immediate actions that may result in an economic

slowdown which the Nation can endure,

and a failure to act at all, which would lead

to a major economic disruption in the

future.

Even though the effects of the Plan on the

overall economy are likely to be small, certain regions, sectors of the economy, and income groups could be more seriously

affected, either by the provisions of the Plan

itself, or by the failure of the Plan to redress

adverse impacts resulting from the general

energy situation as has developed since

1973. The Plan may not fully cushion lowerincome persons from the effects of rising

energy prices, although the general effect

on income distribution shouId b e

progressive. Although no plan should be expected to foresee and offset all inequities,

the National Energy Plan could usefully include a program to monitor its equity

effects and those of the general energy

situation, and a mechanism for proposing

programs to redress inequities.

A number of participants in the analysis

felt that a discussion of energy-related

market structure, in particular horizontal

divestiture, would be useful. However,

OTA, in review, concluded that it did not

have the materials in hand to do an analysis

in enough detail to be a useful contribution

to the debate in Congress.

it is unlikely that the strong measures

necessary to meet the environmental goals

of the Plan are compatible with a substantial increase in the use of coal on the

schedule proposed in the Plan.— A

deliberate choice between increased use of

coal and air-quality goals will probably

have to be made in the short run, at least in

some regions. Moreover, emphasis on immediate, accelerated use of coal may

foreclose some more acceptable, longerrange coal uses and other energy technologies. Even if air quality could be protected during the coal-conversion program,

there are a number of other adverse environmental and social impacts of increased

coal production and use that are not addressed in the Plan. These range from water

pollution, to mining safety, to transportation impacts.

147
Societal

Impacts

The Plan does not provide enough

emphasis on health research.— Health impacts are especially uncertain for coal and

other fossil-fuel technologies because

health research in these areas has been more

limited than the research on the effects of

ionizing radiation. Questions of thresholds

and synergisms are of especial importance

to a thorough understanding of health

effects from all energy technologies. Possible long-term health effects from coal

gasification and liquefaction are of particular concern. There is an urgent need for a

comprehensive and comparative assessment of the health effects of energy supply

systems and for an environmental monitoring system to provide an early warning of

unanticipated environmental problems.

Research also is needed on the possible adverse effects of tight insulation on the indoor environment, and on outdoor emissions from diesel automobile engines.

For a variety of reasons, the role of

nuclear electricity generation is subject to

controversy.— There is no public consensus on the questions of safety, standardization, waste disposal, the environmental

effects of normal operating conditions, and

the probability of sabotage. It may be

especialIy important to undertake a

systematic comparison of nuclear power

with other energy alternatives, with full

public participation, so that a broader consensus about the relative desirability of

nuclear power can be developed.

More encouragement should be given

to less polluting technologies, especially

solar energy systems.— The solar tax credit

is limited to solar cooling and heating in

principal residences, and fails to encourage

a wide variety of applications solar could

have now or in the near future. The encouragement a tax credit would give to

148

solar photovoltaic devices, for example,

might have a very small immediate effect on

energy use, but it could serve to accelerate

the eventual economic competitiveness of a

wider range of solar photovoltaic applications.

The

ments

Energy

serious

of how

roles of State and local governin implementing the National

Plan are not clear.— There is a

question, not addressed in the Plan,

to identify and respond to regional

differences in economies, environment,

resources, and social conditions. National

energy policy will have to not only take

such differences into account, but reconcile

them through continuous interaction with

and participation by the governments

affected.

By emphasizing the leadership role of the

Federal Government to the neglect of State

and local roles, the Plan appears to

downgrade the importance of these levels

of government in energy decision making. It

is not clear from the proposal what information from the Plan’s proposed three-part

energy information program would be

available to the States, although their need

for accurate, up-to-date information is as

great as that of the Federal Government.

The chances for success of a national

energy policy will be enhanced by a

deliberate effort to involve large numbers

of citizens in the technicalities of shaping

that policy.— participation in shaping

energy policy by the large numbers of

organized and unorganized parties with a

vital interest in that policy requires involvement from the earliest planning stages
through every phase of the process. To be

effective, such participants should be well

informed. Since much energy information is

highly technical, citizens’ groups will need

access to expertise which, in turn, requires

sustained financial support. The Plan also

should include a program to provide financial and technical support to help link

citizens’ groups to energy policy development.

Implementation of the National Energy

Plan will have serious and inequitable impacts on some regions of the country, but

the Plan contains no provisions for giving

regions that will be particularly hard hit

either time or money to adjust.— Some

regions of the United States will be able to

adjust to the Plan’s goals for conserving

gasoline more easily than others. Some

areas have particularly great energy needs

for heating and cooling. It is not possible,

given existing technologies, to burn coal in

some regions without risking severe health

problems. Some rural areas, particularly in

the West, are likely to experience severe

community impacts as a result of accelerated fossil-fuel development. There are also

regional differences in the potential for conservation in the industrial sector. Many of

these differential impacts would occur with

or without the Plan. All of them are increased by the PIan, which aside from a

statement that recognizes regional diversity

takes no general account of it.

The acceleration of domestic energy

development mandated by the Plan will

depend significantly on increased production from resources on Federal lands.— If

the Plan’s production goals are to be met,

problems and controversies associated with

managing the development of federally

owned energy resources will have to be addressed more directly, particularly those

problems relating to the role of States in

determining which resources are to be

developed, which laws and regulations are

to be applied, and whether accelerated

development can occur without compromising important economic, environmental, and social values.

The Plan does not adequately link its

short-term proposals to a long-range

energy picture and examine the consequences of its strategies and tactics from

the perspective of post-1985 energy

development.— The Plan proposes fundamental changes during a relatively short

period of time in the patterns of energy supply and demand. It does not address the

question of whether those changes will provide a stronger or weaker base for planning

and development after 1985. For example,

the Plan assumes business-as-usual production of automobiles and trucks between

now and 1985, but does not relate that

assumption to the fact that domestic supplies of oil will almost certainly continue to

decline after 1985. This raises the question

of whether more emphasis should be placed

on developing new sources of fluid energy

immediately in the hope that supplies will

be available in the future to power the stock

of motor vehicles.

The Plan also does not propose specific

programs that could make a start toward

achieving new land-use patterns that are inherently more energy efficient than existing

patterns. Nor does the Plan recognize that

149
Societal

Impacts

continued population growth, including immigration, could jeopardize the goals of any

energy plan. Finally, the Plan does not examine the basic philosophical questions of

continued economic growth and what environmental amenities are to be absolutely

protected, no matter how severe the energy

situation may become.

Issue 1

Macroeconomic

Impacts

What are the likely effects of the National Energy Plan on the growth rate

of real GNP, the rate of unemployment, and the rate of inflation?

Summary

The indicated effects of the Plan on the

economy and employment are likely to be

m i nor but adverse. Moreover, the

macroeconomic costs of the Plan appear

small in comparison to costs of increasing

reliance on foreign energy sources.

Prices of energy products as well as other

products which use energy in their manufacture or distribution will rise as a result of the

Plan. It should be noted that present law

would increase domestic oil prices to the

world market level in 1979 in any case,

because current price controls are

scheduled to expire at that time. These

price increases will add to existing inflationary pressure and may reduce consumer

purchasing power (aggregate demand),

thereby slowing economic growth and increasing unemployment. The extent of such

effects, however, will depend on the effectiveness of proposed rebates of energy tax

revenues in offsetting reduced purchasing

power and the ability of the economy to

respond to changes in relative prices as

energy costs rise. The latter issue relates to

the ability of the economy to institute more

labor-intensive processes as the relative

150
prices of energy, capital, and labor diverge

from their historic relationship, and to the

degree to which public policy can be

designed to encourage labor-intensive processes.

The near-term (1 977-79) macroeconomic

effects of the Plan appear to be relatively

small. However, the mid-term (1 980-85)

effects will probably be larger and of greater

concern. The Plan does not address the

changing influence on the economy it will

have over time, nor does it recognize or

plan for the use of monetary and fiscal tools

in addition to rebates to reduce the adverse

effects of increased prices and taxes.

Forecasts of future macroeconomic impacts are far from reliable. Economic

forecasting models are an important source

of information for policy makers. Because of

the fundamental limitations of models as

simplified representations of the world,

even the best model cannot ensure that the

future will match its projection. Efforts to

ascertain and bound the risks that are implicit in forecasts of macroeconomic impacts would appear productive, as would

the design of alternative policies to deal

with such risk.

Questions

1.

2.

What is the estimated cost to the consumer of higher prices and taxes for

each year of the Plan, compared with

those that would result without the

Plan? How are these costs divided

among the several tax and price proposals?

Are there measures that can mitigate

the inflationary

posed price and

impact of the protax increases?

3.

4.

5,

To what extent will the various proposed rebates offset the loss in consumer purchasing power caused by

higher prices, taxes, and inflation?

How will the income redistribution

features of the tax-rebate system affect

consumption, savings, and wage demands ?

What impacts will a net loss of real

consumer purchasing power have on

the rates of economic growth and

unemployment ?

Background

For the past two decades, the consumption of energy and the production of real

GNP have grown together, both at somewhat over 3 percent per year. The energy

plan proposes the growth of energy consumption be reduced to an average of 2 percent per year by 1985, This proposal raises

the possibility that GNP growth will be

slowed correspondingly and that the rate of

unemployment will increase during the

period covered by the Plan.

Virtually all forecasts agree that the effect

of the Plan on GNP growth and employment

opportunities will probably be quite moderate. Industrial use of energy, the source of

most of the GNP output and job opportunities, is expected to grow at a slightly

higher rate than heretofore, with energy savings coming largely from reductions in

transportation and residential-commercial

energy use. As a result, a GNP that might

amount to $2 trillion in 1985 (in 1972

prices) would be reduced as a consequence

of the Plan by perhaps $1s billion, or less

than 1 percent. Clearly, such estimates

make no pretense of precision; they merely

indicate the general degree of impact. In

151
Societal

Impacts

this instance, the estimated effect can be interpreted as almost negligible from the

standpoint of the overall economy, but it is

more likely to be adverse than favorable.

The likely impact on overall unemployment also is very small. A fairly reliable

historical relationship is that a l-percent

decline in real output corresponds to a 0.3-

percent increase in the unemployment rate.

The anticipated reduction in 1985 output

therefore translates into an overal l

unemployment rate that is higher by 0.2 to

0.3 percentage points. Again, this is a very

tentative estimate, but indicative of the

small macroeconomic impact of the Plan.

Public policy initiatives which would encourage a transition from energy-intensive

to labor-intensive processes would assist in

mitigating any impacts on employment.

An important feature of the Plan is to induce energy conservation and a shift to

more abundant fuels by encouraging the

prices of oil and natural gas to rise. The

direct impact of these price increases are

more likely to be felt by industry than by

the consumer because petroleum products

are already being priced on a marginal cost

basis. New taxes will be imposed on oil and

natural gas used by industries in 1979 and

utilities in 1983 to encourage the use of coal

and the adoption of energy-conserving

technologies. These taxes are likely to be

passed on to the consumer indirectly

through the prices of purchased goods. The

crude oil equalization tax would be

reflected in higher gasoline prices. The only

direct increase in consumer prices for

energy products would result from a proposed standby gasoline tax.

increases in wages, with further inflationary

consequences. This is a slow process, and

the magnitudes of the effects are hard to

foresee. Econometric estimates suggest that

during the first 5 years of the Plan the

cumulative inflationary impetus will be of

the order of 2 percent (i.e., 0.4 percent per

year).

Although the inflationary impact discussed above is not negligible and could be

regarded as a necessary cost of reducing dependence on imported oil, its full impact

may be avoidable. Coordinated monetary

and fiscal policy could be used to moderate

the Plan’s adverse effects on inflation, just

as the Plan’s rebate system is aimed at

reducing the impacts on real purchasing

power and the associated growth-employment impacts.

As indicated, however, increases in the

price of energy to the industrial sector will

lead to greater or lesser increases in the

prices of all commodities, and indirectly to

152
Issue 2

Distributional

Impacts

The National Energy Plan will impinge on many explicit and implicit

social goals. The economic impact

will vary by income class, region, and

sector, posing equity questions that

may require mitigating policies.

Summary

It appears that the Plan will affect various

groups in American society in different

ways, Some groups could be economically

advantaged by the Plan while others will

most certainly be harmed. If the Plan is to be

successful, all Americans will need to

change consumption patterns with respect

to energy and possibly, to some extent,

Iifestyles. Income classes, regions and

economic sectors all will feel these impacts,

often in conflicting and inconsistent ways.

The question is whether any one group is

disadvantaged so adversely as to require

Federal assistance. The Plan deals with this

problem on only one level—that of income

equity. Socially and politically, other distributional classifications will also be important. Moreover, it is even unclear whether

the measures designed to mitigate the Plan’s

impact on the poor will be adequate.

Since distributional impacts of substantial

policy changes are often widespread,

diffuse, and uneven, there is probably no

way to foresee the total ramifications, much

less design mechanisms at the start to offset

all inequities. What the Plan could include,

however, and what is lacking, is a program

to monitor its own equity impacts and those

of the general energy situation plus a

mechanism for effectively proposing

programs of redress.

Questions

1.

2.

3

4.

5.

The Plan attempts to minimize adverse

impacts on lower-income persons.

How likely are these attempts to succeed ?

What mechanisms should be designed

to identify important adverse distributional impacts which might result from

Plan implementation?

Can industries and regions be identified which will be directly affected

by the Plan in a substantial way—

either advantageously or disadvantageousl y?

Have potential secondary equity impacts of the Plan been identified?

Can differential equity impacts with

and without the Plan or with alternative policies be ascertained?

Background

U.S. equity goals have never been stated

as clearly as many other goals but general

agreement might be reached on the following principles: (1) No industry, area, or individual, should be importantly affected by

a public policy unless these impacts have

been weighed carefully; and (2) The adverse

impacts of policy should be borne

progressively, i.e., the greater impact should

be borne more than proportionately by

those better able to bear it.

153
Societal

Impacts

There is no national consensus on

whether the mitigation of inequitable situations should occur as an organic part of the

programs or policies that create them or be

left to the operation of more general

ameliorative measures. In the present instance, the former choice has been made

since the Plan contains mitigating or

ameliorative measures along with its direct

energy proposals. As a result, it can be

evaluated as an equity-preserving or

enhancing plan.

There is, however, a complication. The

energy situation of the United States will be

creating its own impacts on social goals.

The Plan can therefore be evaluated in two

ways, First, it can be judged to see if its provisions minimize its own adverse impacts on

equity goals. Secondly, it can be judged to

see if its provisions effectively offset the adverse impacts on equity goals stemming

from the Nation’s overall energy situation as

it would exist without the Plan, Both standards of judgment are relevant.

Industrial Sector Effects—it is reasonable to expect that uneven effects of the

overall energy situation will be felt in industry, with the largest effects on those whose

direct energy consumption is greatest. The

two largest energy-consuming industries are

chemicals and allied products, and primary

metals. Another obvious target for large impacts is the automobile industry.

Areas and individuals dependent on

these industries are likely to bear a relatively

heavier burden of adjustment to the general

energy situation as the industry product

prices rise at an above-average rate, as demand for their product changes, and as they

alter their techniques and rates of production to adjust to changes in input prices and

output demands. These impacts of the overall energy situation are likely to be exacerbated by the Plan, which makes no proposals to mitigate these general effects or

the extra adversity the plan may impose.

Moreover, the Plan creates price differentials which are likely to create additional

differential impacts. If all tax and rebate proposals are implemented, oil will cost consumers quite different prices for different

uses. By 1988, a barrel of oil at today’s

prices will cost a utility $14, an industrial

user and commercial aviation $17, and a

user of gasoline $36.68. The Plan contains

no explicit recognition of these newly created differentials nor of the effects they may

have on different industrial sectors.

The Plan clearly contains no estimation of

the relative ability of industries to bear the

differentials created either by the general

energy situation or by the Plan. It seems

unlikely, therefore, that impacts will be

equitably borne. No mitigating proposals

are made.

Regions—Since regions are not uniform

with respect to industrial mix (see above) or

relative income distribution, differential impacts on areas are to be expected from

these two sources. There are other reasons

for expecting differential area impacts as

well. Some areas are more rural and will be

most affected by the particular emphasis the

Plan places on curbing gasoline consumption. Some areas have extraordinary energy

needs for heating and cooling because of

climate extremes. Some areas are likely to

experience greater environmental impact

from fuel production and conversion than

others. Community facilities and services in

some areas will be strained by expanded

energy production projects.

154
The most prominent example is coal mining. The Plan calls for a 100-percent increase

in U.S. coal production by 1985—more than

600 million tons per year of new production, and possibly as much as 700 million

tons when replacement of depleted mines is

considered. The primary areas for increased

production will be Appalachian States and

States in the northern Great Plains and the

Southwest. Areas where production takes

place will experience an expansion in

regional employment, total income, and demand for community services and housing.

(See Issue #14.)

Additional examples include families in

rural areas that spend more of their income

for gasoline than urban families, and

families in the South and West that spend

more on this energy product than those in

the North and East. Similarly, an increase in

the cost of home heating and cooling will

more strongly affect areas with more extreme winter or summer climates, depending on the regional mix of fuel oil, natural

gas, and electricity as sources of energy for

home space conditioning. There are also

regional differences in the potential for conservation. Because South-Central States use

more fuel per manufacturing employee than

Western or New England States, they may

be more heavily affected by the Plan.

Many of these differential impacts would

occur without the Plan. All of them are increased by the Plan, which in general takes

no account of them.

Individuals—The Plan was drawn up

with particular awareness of differential

effects on individuals in different income

classes and consequently cannot be faulted

for overlooking these impacts. Though there

are differences of opinion (to be discussed

below), some commentators (the Congressional Budget Office, for example) conclude

that the overall effect of the Plan’s taxes and

rebates would be modestly progressive. (It

should be noted that this conclusion was

based upon the Plan as a whole. Modifications to the Plan could change that conclusion.) That analysis, however, relates only to

changes that would result from implementing the Plan and does not cover differential

effects by income class of the overall energy

situation.

The data confirm what would be expected—the share of income devoted to

energy-related expenditures falls sharply as

income rises. One estimate is that the

lowest-income quartile spends more than

30 percent of its income directly or indirectly on energy, while the highest quartile spends about 10 percent. The Plan does

not address this issue in a substantive way.

It promises “a reformed welfare system”

and a “redesigned emergency assistance

program” to help (p. 90), but these proposals may not go far enough to protect

low-income families, Even the Plan’s proposed per capita rebate of wellhead taxes

will not necessarily assure equity because

not all of the tax will be rebated to individuals (some will go to offset revenue

losses from investment tax credits) and the

tax will not be rebated progressively (Sec.

1403). The proposed welfare and emergency assistance programs may aid the poorest

groups but those just above that level are

likely to have the largest burden imposed

upon them by the overall energy situation.

155
Societal

Impacts

If there should be an added increment to

inflation, as seems likely, or if the Plan

should prove to adversely affect economic

growth, lower-income groups will bear the

brunt of this. The young may be affected by

a further slackening in job opportunities,

coupled with added inflation. The situation

of the young, as affected by the Plan, is not

addressed.

The poor, and particularly the rural poor

who probably comprise most of the half of

the lower-income group who own cars, will

be hit most heavily by the increases in

gasoline prices the Plan proposes. Not only

do they spend a relatively larger proportion

of their income on gasoline, they suffer from

two other handicaps that would make it

difficult to adjust to higher transportation

costs. First, mass transit is not available for

all essential travel, such as to work. Secondly, the poor generally cannot afford

new, gas-economizing cars. They will be the

purchasers in the second-hand market of

“gas guzzlers” whose relative prices will fall

as gas prices rise, bringing them within

reach of lower-income groups. Thus, those

who can afford new, fuel-efficient cars will

be saving money on gasoline while the poor

will be spending more on gasoline. No element in the Plan recognizes or offsets these

possible inequities.

A comparable lack of capital wil l

preclude lower-income homeowners from

taking advantage of the tax-credit programs

for residential insulation or solar energy

units. They may not be able to meet “front

end” costs and they may not be paying

enough taxes to get the full tax credits proposed by the Plan.

One group of Americans who will not be

able to benefit from residential energy conservation programs are tenants who pay for

their fuel but who cannot be reimbursed for

insulation expenses. Tenants who do not

pay for the added cost of heating oil directly

will do so indirectly through higher rents,

but they are not likely to benefit from rebates on home-heating oil. The Plan’s proposed increase in the federally financed

weatherization program will help in sheltering the poor against higher fuel costs.

However, the current program does not extend such help to renters. In addition, the

level of funds available for insulation assistance may be too small. At present, there are

approximately 9 million substandard homes

in the United States, homes which for the

most part are inhabited by the poor. The

weatherization programs will handle only a

small fraction of these structures.

Probably no plan could foresee and offset

all inequities. What the Plan could include,

however, and what is lacking, is a program

to monitor its equity effects and those of

the general energy situation and a mechanism for effectively proposing programs to

redress inequities.

156
lssue 3

Air Quality

Impacts of

Increased

Combustion

of Coal

Strict enforcement of strong environmental regulations will be necessary

to protect air quality while coal production and use increase under the

National Energy Plan; such environmental policies may, in turn, slow the

pace of growth in coal utilization.

Summary

A major shift from petroleum fuels to coal

is a central element of the National Energy

Plan. Under the Plan, coal would provide 29

percent of U.S. energy requirements in

1985, compared with 18 percent in 1976,

reducing demand for oil by the equivalent

of 2.4 million barrels a day. As the Plan’s

coal proposals are implemented, strict environmental protection policies will be required to avoid adverse impacts on air

quality. The Plan requires installation of best

available pollution control technology on

all new coal-burning facilities. Pending

amendments to the Clean Air Act also

would cancel credits for tall stacks, require

control equipment to be installed on all

facilities that do not meet emission standards, and set penalties for noncompliance

with standards and failure to maintain control equipment in good working order. It is

not likely that such strong environmental

measures are compatible with a substantial

increase in the use of coal on the schedule

proposed in the Plan. A deliberate choice

between increased use of coal and air

quality goals may have to be made at some

point in the future.

Questions

1. Under what, if any, circumstances

would a coal-burning facility be issued

a variance from Clean Air Act emission

standards ?

2. Under what conditions would a

powerplant or industrial facility be

allowed to continue to use oil or

natural gas rather than coal ?

3. If all new coal-burning facilities are required to install flue-gas desulfurizers

(FGD), currently considered the best

available technology, would development of other technologies such as

fluidized-bed combustors be delayed?

4. What level of funding is contemplated

in fiscal year 1978 for developing more

effective control and combustion technologies ?

5. To meet the goals of the National

Energy Plan, how many new FGDs or

scrubbers must be manufactured and

installed between now and 1985 ? Can

suppliers meet that production

schedule?

6. Will efforts to make coal combustion

environmentally acceptable delay

development of alternative technologies such as solar which are environmentally cleaner?

157
Societal

Impacts

Background

The National Energy Plan states that

energy goals are to be achieved “without

endangering the public health or degrading

the environment” and “without sacrifice of

air quality standards . . .“ A Presidential

review panel would evaluate the health

effects of expanded coal use (pp. 67-68).

These are commendable goals, but it is

possible that they cannot be achieved without sacrificing the Plan’s goals for coal

utiIization.

For coal combustion, the Plan proposes

that the best available control technology

(BACT) be required on all new coal-burning

facilities. If the Plan’s proposals and the

strongest features of pending amendments

to the Clean Air Act are implemented on

schedule and without exceptions, the sulfur

dioxide, particulate, and nitrogen oxide

levels in the air will ‘not change significantly

as a result of the Plan, assuming the conservation goals of the Plan are also met.

However, combustion of coal releases

more carbon dioxide into the atmosphere

than either oil or natural gas and there are

other inherent conflicts between the Nation’s air quality goals and the Plan’s coal

utilization goals. For example:

1. In certain regions of the United States

that do not yet meet ambient air

quality standards, no new coal combustion can occur unless pollution

from other sources is reduced at a

faster rate than is now scheduled. This

cannot be accomplished either easily

or immediately.

2. Compliance with Federal air quality

regulations depends on State implementation plans and State monitoring

and enforcement mechanisms, which

would delay the effect of new Federal

programs. Some States have adopted

more stringent standards than the

Federal Government, in some cases

restricting or forbidding coal utilization

even where Federal regulations would

allow it.

3. Rapid implementation of air pollution

abatement policies using stack-gas

cleaning is opposed by most public

utilities on the grounds that it is not

reliable, that scrubbers that use lime or

limestone produce unacceptable

amounts of sludge, and that better

pollution control technology will be

available by the 1980’s.

4. It may not be possible to manufacture

scrubbers or other pollution control

equipment fast enough to meet the

1985 goals of the Plan. Delays of compliance may result.

5. The Plan’s emphasis on rapid conversion to coal, coupled with its requirement that the best available control

technology be installed, may divert

capital from research and commercialization of alternative technologies,

such as solar energy units, and conservation technologies.

6. Delays in expanding coal production at

the pace proposed by the Plan may be

necessary or desirable because of environmental, social, and institutional

problems associated with increased

coal production. (See Issue #1 4.)

158
7. Uncertainties exist as to which pollutants need to be regulated and what

levels are tolerable. To the extent that

these uncertainties reflect inadequate

correlations between environmental

causes and health effects, the uncertainties eventually can be solved by

expanded health research and

monitoring. (See Issue #5.)

For these reasons, it is likely that Federal

and State regulatory agencies will be asked

to issue variances from air quality standards

for new powerplants and industrial facilities

and for existing industries to enable a shift

from oil or gas to coal. Arguments for

variances may be compelling: Some coalburning facilities could not be operated

without violating air standards. Better control technology may be available within a

few years. A firm’s economic analysis may

indicate that it makes more sense to shut

down operations than to convert to coal

and comply with air quality regulations. Past

experience indicates that some regions will

prefer deterioration of environmental

quality to losing a major employer. If decisions in such cases are to stress conversion

to coal, granting of variances that delay air

quality compliance schedules probably will

become so common that air quality will

decline in some regions. To a limited extent,

the pressure for variances can be eased by

siting facilities outside metropolitan areas.

One consequence of limited conversion

of oil- and gas-burning facilities to coal

combustion will be continued reliance on

oil as a fuel source. In that case, it would be

important for refineries to retrofit to produce low sulfur oil. An increased supply of

low sulfur oil will result in decreased sulfur

dioxide pollution from oil-burning sources

and hence permit more coal conversions

without degrading a region’s ambient air

quality.

Emphasis on immediate, accelerated

utilization of coal may foreclose some more

acceptable, longer-range coal uses. Additional research is warranted on post- and

pre-combustion cleaning techniques. New

combustion techniques using nonconventional boilers show promise of reducing

emissions, especially nitrogen oxides. For

example, fluidized-bed combustion offers

higher combustion efficiency and cleaner

burning than traditional boilers. Investment

credits or other market incentives could advance these and other cleaner technologies.

Achievement of air quality standards is

also dependent on meeting NEP conservation targets. However, conservation savings

tend to reduce national emission levels (as

in the case of more fuel-efficient autos) and

these savings will normally have far less significance in particular local situations where

coal conversion is at issue.

Environmental Protection Agency Photo

1 5 9
Societal

Impacts

Issue 4

Other

Environmental

Impacts of

Coal Utilization

Even if air quality could be protected,

meeting the coal production and

utilization goals of the National

Energy Plan may result in other adverse environmental and social impacts.

Summary

Although the Plan “intends to achieve its

energy goals without endangering the

public health or degrading the environment” (page 67), its only specific environmental protection proposals concern air

quality and strip mining reclamation.

However, both combustion of coal and conversion of coal to synthetic gaseous and

liquid fuels may result in a much wider

range of environmental and social impacts,

some of which are not presently regulated.

The magnitude of those effects could

jeopardize the realization of the coal utilization goals of the Plan, even if air quality

standards were met.

Questions

1.

160

The Plan supports amendments that

would strengthen the Clean Air Act.

What policies and procedures presently addressed by the Federal Water

Pollution Control Act will protect

water from pollutants such as acid and

water runoff from coal mines, disposal

of water used in precombustion washing of coal, and in coal transportation?

2.

3.

What are the environmental impacts

associated with disposal of waste

products (e.g., sludge) from scrubbers

in the quantity envisioned by the Plan?

What assumptions underlie the Plan’s

conclusion “ that “it appears that

railroads could transport the additional

coal” (p. 65) ?

Background

The National Energy Plan, in outlining its

environmental policy regarding coal (pages

67-68), emphasizes the protection of air

quality and the need for national strip mine

legislation. Mitigation of other specific environmental impacts is omitted from the

Plan except for impacts on public services in

local communities (p. 89). (See Issue #14.)

The potential impacts of a major expansion of coal production and utilization are

extensive. Impacts other than those mentioned in the Plan include the following:

1. Environmental and social impacts of

coal mining. In the West, potential

problems include water consumption

for surface reclamation, contamination

or loss of ground water aquifers,

drainage of highly alkaline waters from

Western mines, and rapid population

increases and boomtown development

in rural areas. In the East, potential

problems include acid-water runoff

from mines (especially after mine

abandonment, or reactivation of old

mines, and in mines above valley

floors), and land surface subsidence.
2.

,

Safety in underground mines, Coal extraction and processing pose health

and safety hazards to miners, other

coal workers, and local populations.

The health and safety record in coal

mining has been among the worst in

the United States, with fatal and disabling injuries most prevalent among

newly employed miners.

3.

4.

5.

Federal Energy Administration Photo

Currently uncontrolled air emissions

from coal combustion. Although subject to some regulation, emissions of

nitrogen oxides are not adequately

controlled by best available control

technology. Radioactive materials, hydrocarbons, carbon monoxide, and

heavy metals in gaseous, liquid, or

solid states are not regulated at all.

Climatic and weather effects. Coal,

like other fossil fuels, releases carbon

dioxide and particulate into the air

during combustion, both of which may

contribute to global climatic changes.

Conversion to coal would increase carbon dioxide emissions because-per

unit of energy delivered-coal yields

11 percent more carbon dioxide than

oil and 67 percent more than natural

gas. An accelerated use of coal would

therefore aggravate any long-term adverse effects on climate that result

from carbon dioxide.

Waste products from pollution control

devices. The harmful emissions from

coal combustion do not disappear

when control technologies are introduced. Rather, the technologies

convert them from one form to

another-gaseous to dissolved solid,

for example. Consequently stack-gas

cleaning produces waste as sludge.

Some scrubbers produce about 3,000

tons of solid suspended in several

thousand tons of water per day for

each Gigawatt of power generated.

Because of the large quantities of

sludge produced, disposal may cause

land-use problems. The moisture content of the sludge, for example, must

be contained to avoid contamination

of ground and surface water.

161
Societal

Impacts

6.

7

Emissions from coal gasification and

liquefaction pIants. Even if air pollutants from these facilities are controlled

under provisions of the Clean Air Act

as amended, waste water and solid

wastes could present problems. For instance, gasification waste water may

have a concentration of inorganic

materials that is as high as that in sea

water, plus organic substances including cyanide, thiocyanate, ammonia

sulfide, phenols, and oils. Waste-water

treatment in the Lurgi gasification

system requires tar-oil-water separation (three stages), filtration, phenol

recovery, ammonia recovery (in an ammonia still), and activated carbon

treatment. Several components in the

system are new techniques, and an

integrated system has never been

operated at commercial scale. Total

quantities of solid wastes will depend

on the ash content of the coal,

generally ranging from 2,000 to 3,300

tons per day from a 250 million cubic

feet per day gasification plant; these

solid wastes will contain most of the

heavy metals from the coal.

Transportation system requirements,

Although the Plan asserts that the Nation’s railroad network is adequate to

deliver anticipated amounts of coal (p.

65), the railroad industry’s capacity to

handle this increased traffic will depend on investment in rolling stock,

and in some areas, improved track and

signal systems. Even where the present

rail network is adequate, increased

coal transportation could result in

longer trains and more frequent trips.

8.

This, in turn, could lead to more accidents, railroad congestion, more frequent delays at automobile crossings,

greater sustained noise levels, and

more dust and air pollution along

railroad rights-of-way. These effects

will be especially noticeable in small

rural towns.

Other transportation and conversion

alternatives, including slurry pipelines,

minemouth power generation, and

liquefaction or gasification of coal

prior to transportation should be considered, especially in the West.

Other long-term impacts. Some scientists believe that coal burning releases

not only relatively well-known and

harmful emissions, but other compounds whose health impacts are presently unknown. These compounds

may have long-term carcinogenic or

mutagenic effects or they may contribute low-level radiation to the environment.

The inescapable conclusion is that coal is

a “dirty” energy source. The sulfur, ash,

heavy metals, radioactive substances, and

carbon usually found in coal are all present,

in altered states, after combustion. Additionally, coal must be extracted and

transported, which requires extensive use of

land, people, and equipment and creates a

range of environmental and health hazards.

Managing these processes so as to avoid the

adverse effects is a challenge which the National Energy Plan does not fully address.

162
lssue 5

Health

Impacts

The long-term health effects of the

energy priorities established by the

National Energy Plan are uncertain.

Summary

Even where standards have been defined

for emission levels and environmental

quality, the following energy-related administrative or information gaps exist: (a)

scientific evidence to document the health

impact of different levels of pollutants; (b)

an effective system to monitor pollutant

levels and maintain health impact statistics;

and (c) a consistently applied approach to

correlating pollution levels and human

health. The uncertainties are especially

great for coal and other fossil fuels, because

health impact research has been sparse

compared to research on ionizing radiation.

Consequently, there is an urgent need for a

more comprehensive and comparative

assessment of health effects of energy supply systems and for an environmental

monitoring system to provide an early warning of unanticipated environmental

problems.

Questions

1. Have the human health impacts of the

National Energy Plan been estimated

(e.g., morbidities and mortalities in

1985 with and without the Plan) ?

2.

3.

4.

5.

IS the threshold concept of pollution

regulation compatible with the protection of human health? Do present

pollution regulations include the synergistic effect of some pollutants? How

frequently should environmental

standards be reevaluated?

As a result of the energy plan, how will

the level of radiation in the environment (nationally and regionally) be

affected by (a) coal utilization, (b)

nuclear power generation, and (c)

geothermal energy development? Are

radiation effects of coal and geothermal facilities monitored?

How will human health be protected

from carcinogenic substances in the

process stream of coal gasification or

liquefaction facilities?

What is the present status of research

on the Iong-term genetic effects of

compounds produced by the conversion of coal to a liquid or gas?

Background

Although environmental protection and

human health and safety are prominent concerns of the National Energy Plan, too little

is known about the health effects of the

energy technologies, processes, and

resources included in the Plan to be certain

of their impact on human health.

Health effects are relatively well understood in at least two areas: (a) physiological

impacts of relatively high radiation levels

and certain radioactive isotopes, and (b)

physiological impacts of relatively high

levels of other possible energy byproducts

(such as heavy metals, cyanide, and some

air pollutants) which have been identified

by searching for the major causes of specific

163
Societal

Impacts

human deaths and illnesses. But even in

those well-studied areas, there is disagreement on the level below which there is no

hazard to human health-or even whether

such a threshold exists.

The energy plan embraces present environmental legislation which regulates

sulfur dioxide, particulate, and nitrogen oxide emissions from fossil fuel combustion,

but the Plan fails to address other possible

environmental contaminants, some of

which may pose greater long-term threats to

human health. Current regulations fail to

provide for synergistic or long-term health

effects. Regulation or precursors, such as

sulfur dioxide, may be insufficient when

reaction products, such as sulfuric acid,

cause the significant health effects. The Plan

supports present protections against contamination from highly radioactive

materials, but it does not consider the

possibility that a general rise in low-level

radiation may be a health hazard. Other

kinds of possible effects that are overlooked

include long-term global climate modification as a result of carbon dioxide build-up

and long-term genertic damage from chemical byproducts of coal gasification

or liquefaction.

In addition to the general lack of information on environmental health, it is still uncertain whether current environmental protection standards are appropriate. Monitoring of air quality and correlation of air

quality changes and human health effects

are needed. Interagency and interoffice

coordination of research on pollutants,

overall air quality, and human health

statistics would help ensure that emission

standards are neither too lenient, allowing

too many adverse impacts on health, nor

too strict.

Scientific and environmental health

research is necessary in areas beyond “best

available control technologies, ” including

those health effects and pollutants which

have not yet been identified. A process for

reviewing and assessing the adequacy of national systems for protecting human health

may help accumulate environmental health

data. The mechanism and process need to

have at least three elements:

1. A continuing assessment of the health

impacts of energy supply technologies,

including (a) an accelerated assessment of the long-term impacts of solid

fossil fuels (coal and oil shale); (b)

special attention to the human health

significance of any chemical compounds and radioactive materials that

are produced by energy supply processes; (c) identification and analysis of

key morbidity and mortality indicators

in the U.S. population, as they relate to

pollution levels; and (d) an increased

emphasis on environmental health in

the training of personnel in health

professions, together with special support for training in understaffed fields

such as environmental toxicology.

164
2. Improvements in monitoring the quantities and characteristics of byproducts

of energy supply facilities, with a

special emphasis on improving the instrumentation for identifyin g

byproducts of facilities burning or converting coal (a recent joint study by the

National Academy of Sciences and the

Nuclear Regulatory Commission found

the Environmental Protection Agency’s

current monitoring programs seriously

deficient).

3. A review of the requirements for

measuring byproducts of energy supply facilities other than light-water

reactors, to see if additional monitoring requirements are needed.

Issue 6

Impacts of

Nuclear

Power

The National Energy Plan’s proposal

to increase nuclear electricity generation raises environmental and social

questions.

Summary

Although the National Energy Plan

emphasizes the increased use of coal to

generate electricity in the United States, it

also calls for light-water nuclear reactors to

play a major role in reducing the Nation’s

domestic energy deficit. “By 1985 . . .

nuclear power could provide as much as 20

percent of electricity supply” (p. 71), twice

its current share. “There is no practicable

alternative” (p. 70). But questions remain

about the safety of nuclear reactors, the impacts of fuel cycle activities necessary to

meet the needs of expanded nuclear power

generation, the potential for sabotage, and

the social desirability of concentrating

electricity generation in the kinds of large

central-station plants implied by nuclear

energy options.

165
Societal

Impacts

Questions

1. In what ways might the protection of

nuclear reactors from sabotage abridge

the civil liberties of the American people?

2. What is the potential for nuclear

power generation on a small scale

(e.g., the “nonproliferating reactor”

design concept recently investigated

by the Energy Research and Development Administration) ?

3. Are there plans to undertake a

systematic comparison of nuclear

power generation with other supply

alternates? To what extent and how

closely would representatives of the

public participate in this comparative

assessment ?

Background (See also Supply Issues

#9, #10 and #11 )

According to the National Energy Plan, as

many as 75 additional light-water nuclear

reactors could be in operation by 1985,

joining the 63 presently operating plants (p.

71). The Plan calls for increased attention to

reactor safety, waste management,

proliferation, and other impact issues; but

disagreement continues to exist about

whether the risk of serious environmental

and social impacts is acceptable.

In addition to concerns about the

reliability of light-water reactors, the impact

issues include:

1. The safety of nuclear reactors. The Plan

notes that “the safety record of lightwater reactors has been good, ” but

many people and groups in the United

States believe that even a small risk of

a serious accident is unacceptable,

especially as the number of operating

reactors increases. Although considerable attention has been given to

the prevention of major accidents such

as a core melt-down, much less is

known about design alternatives that

improve containment of radioactive

materials in case of an accident.

Evacuation plans for population in the

vicinity of nuclear plants may be inadequate. If a major accident were to

occur despite the low probability, not

only could the immediate consequences be devastating, but the public

outcry could force the shutdown of all

other reactors. If a major commitment

to nuclear power had been made, the

disruption to the energy economy

would be severe,

166
2. Other impacts of fuel cycle activities.

A doubling of the number of nuclear

plants will require additional mining,

milling, enrichment, and transportation

of nuclear fuel; and it adds to the

economic and* energy-efficiency arguments for fuel reprocessing and recycling, especially if uranium resources

turn out to be no higher than the more

pessimistic assumptions. Each of these

kinds of activities has environmental,

economic, and social impacts; for example, mining, milling, and enrichment

facilities produce tailings that add to

radiation background. In addition, the

nuclear reactors themselves may affect

the local ecology by discharges from

cooling towers to receiving waters or

the atmosphere (dispersing heat,

moisture, salts, other chemicals, and

low-level radioactive products).

3. The potential for sabotage. There is no

agreement on how difficult it would be

to sabotage a reactor so as to cause

serious damage in an area near a plant.

It should also be noted that seizure

and occupation of a reactor with a

threat of sabotage could cause

widespread disruption, even i f

sabotage efforts were unsuccessful or

the threat was not carried out.

Although NRC has recently upgraded

security at nuclear reactors, questions

about reactor safeguards remain.

4 Social impacts of centralized energy

supply. An element in the social protests against nuclear plants is the opinion that nuclear power furthers the

centralization of the U.S. energy supply

system, favoring capital-intensive infrastructure and requiring technocratic

elites. There are also civil liberty concerns about security and safeguards requirements at nuclear facilities.

For these principal reasons, even a supplementary role for nuclear electricity

generation is open to controversy, and the

issues need to be addressed more clearly

and specifically than in the Plan. It may be

especially important in the next few years to

undertake a systematic comparison of

nuclear power with coal and other energy

supply alternatives. This comparison should

involve extensive public participation, so

that a broader consensus about the relative

desirability of nuclear power can be

developed.

167
Societal

Impacts

Issue 7

Alternative

Technology-Solar

The National Energy Plan underestimates the variety of contributions to

energy production, conservation and

environmental

made by solar

Summary

quality that can be

technology.

Solar technologies can play an increasingly significant role in meeting the Nation’s energy needs in the near future. These

technologies protect the environment,

create jobs, employ an inexhaustible

renewable energy source, and provide an

alternative to dependence on large-scale

central electrification. To fully realize its potential for meeting a variety of the Nation’s

energy needs, solar technology requires incentives beyond the measures of the Plan.

Questions

1. Why does the solar tax credit apply to

only the taxpayer’s principal residence,

(National Energy Act, Sec. 1101 (a)) and

not to vacation homes, rental property,

light industry, or commercial buildings ?

2.

3.

4.

Why does the solar tax credit apply

only to equipment used to heat and

cool buildings and heat water and not

to other applications, which may be as

economical and practical (e.g. photovoltaic power generation for certain

remote-sensing applications) ?

What incentives, other than funding

for research and development, are applicable to alternate energy technologies such as biomass technology,

wind energy, and solid waste?

Some of the most useful applications

of solar technologies may be in

developing countries, especially in

rural and remote areas. What are the

plans for international cooperation in

developing solar systems compatible

with the energy and social needs of

developing countries?

168
Federal Energy Administration Photo

Background

The National Energy Plan provides a tax

credit for installation of qualifying solar

equipment, funding for installation of solar

equipment in Federal buildings, and increased funding of various aspects of solar

research and development (pp. 75-76).

Also, the industrial tax credit for conversion

from oil and gas may encourage use of solar

energy as well as coal. Solar technology is

the only available energy technology which

can claim a neutral environmental impact in

operation, which becomes a positive impact

when one factors in the environmental

degradation avoided by the replacement of

fossil-fuel sources, as well as beneficial

social impacts including job creation and

reduction of total dependence on external,

centralized electric power. The tax incentives specified by the Plan may be ineffective in realizing the variety of contributions

solar energy can make.

Solar energy is a renewable energy source

which has undeniable long-term applications. Additionally, solar technologies have

some immediate applications. On a life-cycle costing basis, solar space and water

heating is competitive with electric space

and water heating in many parts of the

country. Use of solar equipment to produce

air-conditioning, mechanical power (for

pumps and other applications), and

electricity is technically feasible now but

too expensive to compete with conventional energy sources in any but a few

specialized applications. The market for all

solar equipment may grow rapidly even

without Federal support as the price of nonsolar energy sources increases. The policy

which keeps the cost of residential energy

low is a great disincentive to solar energy.

169
Additional incentives for solar technology may be needed to achieve even the

limited solar goals of the Plan. Specifically,

solar incentives, along with energy conservation measures, are needed for new-start

housing. Some States have mandated installation of extremely inexpensive equipment which will permit the installation of,

or retrofit to, solar water heating. Because of

the overriding public policy considerations,

mandating solar installation, where appropriate, or at least evaluating solar water

and space heating has been considered. increased loans for small businesses would

help develop the solar market in the small

industry-commercial sectors. Making nonprofit organizations eligible for guarantees

under the amendments to the Energy Policy

and Conservation Act would also increase

marketability. Mandating consideration of

solar technologies where appropriate for

Federal and State building programs would

encourage public acceptance. Further,

public acceptance can be heightened by

rewarding States and localities for plans

which emphasize renewable energy

sources, through matching grants, revenue

sharing systems, or various other Federal

programs.

Additionally, the Plan mentions three

specific legal and regulatory impacts of implementation of solar technology-+ quipment certification and installation, legal

protection of incident sunlight, and utility

rate regulation which affects solar users

when backup power is required, The Plan

omits specific recommendations in these

areas, but encourages State and local action,

The imprecision of these recommendations

further diminishes the likelihood of expeditious implementation of solar technologies. (See Issue #1 O, on State-Federal

relations. )

Finally, in the general area of alternative

technologies, the Plan fails to address the

issues of economies of scale, respective

capital and labor requirements of the

various energy sources, and social,

demographic, and environmental impacts.

For example, biomass conversion for portable fuels, and medium- and small-scale

energy production systems, except for district heating, are not discussed. A growing

number of energy specialists believe that

the long-range implications of the social,

environmental, and demographic impacts

favor the careful matching of energy quality

to end-use requirements and the use of decentralized, renewable energy sources.

Because of the variety of solar technologies,

its applicability to a variety of applications

must be considered.

The Plan limits institutional attention of

small-scale alternative technologies to creation of an Office of Small-Scale Technology

(p. 80). The Energy Research and Development Administration’s Office of Small-Scale

Technology is currently authorized at $5

million for 1977-78. To have a sufficient impact on policy-program design, the administrative structure for alternative technologies should be prominent and well

funded. Compared to the funding level of

conventional energy sources, the current

funding of the Office of Small-Scale Technology may be insufficient,

170
Issue 8

Indoor

Environments

Energy conservation in buildings may

aggravate some existing health

problems and create new ones.

Summary

Tight insulation in buildings and increased recirculation of indoor air in air-conditioning systems are effective tactics of

energy conservation. However, these tactics

may substantially increase concentration of

pollution indoors. Further, recommended

indoor temperatures need to take into account in a systematic manner factors of

health, behavior, and efficiency.

Questions

1. How much is known about the effects

of tight insulation and recirculating airventilation systems in concentrating

pollutants indoors?

2. How much work has been done on

ways to ensure that energy-conserving

building designs and energy-conserving modifications to existing buildings

are compatible with clean indoor air?

3. What are the projected increases in indoor environmental contamination

from the increased use of potentially

or demonstrably hazardous insulation

materials (e. g., asbestos, rockwool,

fiberglas) ?

4 Does the range of indoor temperatures

recommended for summer and winter

take into account the temperature sensitivity of special population groups

(e.g., the elderly, the chronically ill),

the possible effects on susceptibility

to infectious diseases, and the effects

on performance efficiency?

Background

Although Americans spend about 75 percent of their time indoors, it was not until

recently that studies of indoor pollution

were commissioned; present information on

the health aspects of indoor environments is

very limited. In promoting conservation

measures in buildings, such as insulation (including weatherstripping, caulking, and

other measures for thermal isolation), use of

recirculated air, and restraint in heating and

cooling, energy policy should fully take into

account the possible effects of such

measures on health.

Indoor air quality can be worse than that

outdoors especially for particulate, including toxic substances like asbestos. Asbestos

reaches air in rooms mostly from indoor

sources, such as use of asbestos-containing

talcum powders and the blowing of

asbestos fibers into rooms from asbestosIined ventilation ducts and wall interiors. In

addition, gases such as carbon monoxide

and nitrogen oxides can build up indoors

from the burning of natural gas or oil for

home heating and cooking. Lead is sometimes present in higher concentrations in

nonindustrial buildings than outdoors. Toxic

organic vapors arise indoors from cleaning

fluids and aerosol sprays. Tobacco smoking

further deteriorates indoor air quality.

171
Societal

Impacts

Improved insulation of buildings proposed by the Plan will tend to seal in air

pollutants and toxic substances in the

course of achieving its primary purpose,

which is to retain heated and cooled air. Increased recirculation in forced ventilation

systems also will concentrate pollutants.

Although improved insulation is strongly

encouraged only for residential buildings,

rising fuel costs and tax incentives for fuel

conservation could result in increased insulation for all types of buildings, and a

decrease in fresh air in forced ventilation

systems, This could, for example, affect the

transmission of bacteria and viruses in

hospitals, and schools, and other public

buildings.

A preliminary study at Lawrence Berkeley

Laboratory under contract to ERDA

(LBL-5918) suggests that some indoor

pollutants in the home may rise to levels

several times those in peak polluted outdoor urban areas when the air-change rate

approaches that being considered for

energy conservation purposes. A more

imaginative approach to energy conservation could take advantage of building

design features which promote both energy

conservation and good indoor air quality.

The effects of temperature on performance, health, and disease transmission have

not received the attention they deserve, except for the extremes of heat and cold. Persons with heart disease, for example, are

very sensitive to heat’ and their chances of

surviving a heat wave are smaller without

air-conditioning. Because daily mortality

rates in cities change significantly with

slight changes of temperature and humidity,

there is reason to suspect that there are

more subtle effects as well.

Issue 9

Health

Effects of

Diesel-Powered

Automobiles

The National Energy Plan indirectly

encourages the use of dieselpowered automobiles but little consideration has been given to the

unregulated harmful emissions of

diesel engines.

Summary

The automobile gasoline efficiency

standards of both present Federal legislation

and of the energy plan indirectly encourage

the use of fuel-efficient, diesel-powered

automobiles. Although diesels produce less

carbon monoxide and hydrocarbons than

do gasoline engines, they may also produce

greater amounts of harmful sulfates and fine

particulate.

Questions

1.

2.

What diesel market penetration has

the Administration assumed for

passenger cars and light and intermediate trucks for its projections of

automotive energy demand to 1985?

To 1990? To 2000?

Have studies been undertaken of the

unregulated emissions from diesel

technology? What are the potential

health effects of diesel automobiles,

especially in dense urban areas?

172
3. What studies have been undertaken to

assess the real fuel savings related to a

large-scale adoption of diesel technology for passenger car service? What

are the results?

Background

Federally mandated fuel economy standards in effect for 1978-85 model year cars

(27.5 MPG fleet average for 1985) have produced considerable interest on the part of

legislators, automakers, and agencies such

as the Transportation Department in diesel

technology for passenger cars. General

Motors Corp. will introduce a diesel engine

in one of its lines in 1978. Others may

follow its lead; foreign diesel-powered

automobiles are already available. Some

sources have assumed a 25-percent diesel

market penetration, especially in large cars,

by the 1985 model year.

Diesels are inherently fuel efficient and

produce relatively low carbon monoxide

and hydrocarbon emissions, although emissions of nitrogen oxides with present technology exceed current statutory standard of

0.4 grams per mile. However, diesels also

produce a number of unregulated emissions

that could, under heavily congested conditions, become a serious public health

hazard.

Like conventional spark-ignition internal

combustion engines, diesels emit a variety

of air pollutants, odors, and noises, but of

different degrees and kinds. The important

emissions from diesel engines include visible smoke and fine carbon particles, sulfates

and sulfur dioxide, aldehydes, and selected

nonreactive hydrocarbons, as well as the

conventional gasoline engine emissions.

What little is known about diesel emissions

suggests the need for considerable caution.

This is particularly true for a group of compounds known as polycyclic organic matter

(POM).

The partial combustion of organic matter

produces POM, which contains two classes

of carcinogens: 1 ) polycyclic aromatic hydrocarbons, and 2) aza-arene heterocyclic

compounds. Numerous types of POM have

been measured in soot: pyrene, anthacene,

benz(a)anthracene, benzofIuoranthenes,

chrysene, coronene, fluoranthene and

benzo(a)pyrene. A number of these have

been found to be carcinogenic in animal-exposure studies.

The internal combustion engine also is a

source of POM, but current efforts to reduce

other emissions from such engines have also

reduced POM emissions. Anticipated future

measures point toward continued reductions as a result of catalytic controls.

However, careful attention should be paid

to the misuse of diesel-powered vehicles

such as overloaded operation or poor maintenance. Idle operation typical of congested

urban centers results in high POM emissions

from diesels.

The bulk of POM from diesels is thought

to be associated with fine particulate aerosols. As a result, POM longevity depends on

both the rate of its chemical alteration and

the lifetime of its carrier aerosol. Estimates

of the lifetimes of fine aerosols exceed 100

hours and range up to 40 days. POM may

undergo chemical reaction

hours or up to a few days,

within a few

depending on

173
Societal

Impacts

degree of exposure to sunlight. in addition,

some of the products of POM reaction with

oxygen may also be carcinogenic.

Recent studies have shown that 90 percent of the particles in diesel exhaust are

less than 1 micrometer and that 50 percent

are about 0.3 micrometers or smaller. These

sizes are precisely within the range which is

respirable and which is deposited within

pulmonary air spaces. There is significant retention within the lung of aerosols of this

size. In addition, retention is increased by

hydroscopic sulfate which is present in

diesel emissions.

There presently are several active projects under EPA sponsorship to determine

whether diesel engines emit nitrosamines or

any of their potential precursors (in addition

to nitrogen oxides). However, it is not

known if any studies are underway that address the retention of fine diesel particles in

animal lung tissue. Such experiments should

be carried out before any large changeover

to diesel-powered autos or light-duty trucks

occurs.

Issue 10

The Role

of State

and Local

Governments

Unless State and local governments

have substantial responsibility for national and regional energy policy, the

goals of the National Energy Plan may

be jeopardized.

Summary

The Plan calls for a “foundation of

partnership and understanding” in the implementation of a variety of energy

programs, built upon “active roles” and

“major responsibilities” for State and local

governments. With few exceptions,

however, it is not clear what these roles and

responsibilities are to be. In fact, b y

emphasizing the leadership role of the

Federal Government and largely ignoring

problems of intergovernmental cooperation, the plan appears to downgrade the importance of other levels of government in

energy decisionmaking. This is partly an

issue of the nature of federalism in the

United States, but it is also a question of

how to identify and respond to regional

differences in economies, environment,

resources, and social conditions. National

energy policy will not only have to take

such differences into account, but reconcile

them in a cooperative manner with continuous interaction and participation of the

governments and peoples affected. Failure

to do so could jeopardize success of the

Plan.

174
Questions

1. To what extent does the Plan set the

stage for a major change in planning

and regulatory functions now exercised by the States?

2. To what extent has national energy

planning anticipated the great degree

of cooperation that will be required by

the States to implement the strategies

of the Plan?

3. What will be the role of State and local

governments in: (a) returning rebates

from energy price increases and taxes

to the consumer? (b) developing and

enforcing energy efficiency standards?

(c) facilitating the development of

alternative energy sources?

4. Could State governments be given a

role in the classification of oil and gas

production as “new” or “old?”

Background

The Plan emphasizes the importance of

State and local government participation in

the process for making energy resource

development decisions. And, in some areas,

the Plan defines future State and local implementation roles. For example, attention

is given to State enforcement of the 55

miles per hour speed limit, State responsibiIities in public utiIity reforms and conservation services, and State review of proposals to expedite the movement of

Alaskan oil from the West Coast. In most

cases, however, the Plan only mentions a

possible State or local responsibility or implies some future intergovernmental requirement.

The only specific reference to an active

positive role for State or local governments

involves State utility commissions, which

are directed to reform rate structures in accordance with Federal guidelines. There is a

general reference to an unspecified role for

States in the development of geothermal

resources (p. 78) and in the proposed

energy information system (p. 89). Otherwise, States are essentially treated by the

Plan as enforcers of Federal laws and standards (pp. 40, 63, etc. ) or allocators of Federal

funds (pp. 42, 77, etc.). In some cases they

lose powers that they now have (e.g., over

the pricing of new gas for intrastate markets

and over cogenerated electricity). The discussion of nuclear facility siting and licensing (p. 72) does not mention State governments at all, even though the Nuclear

Regulatory Commission has recognized that

the positive involvement of States is essential to effective nuclear facility regulation.

This appears to represent a reduction of

the present role of State governments in

energy policymaking. State governments

now play a central role in the regulation of

resource extraction, surface mining,

reclamation, energy faciIity siting, electricity

pricing and transmission, and in enforcing

mineral rights laws on other than Federal

lands. In addition, many States are active in

energy conservation efforts, energy demand

estimation, and comprehensive energy

planning. Local governments engage in

land-use planning, enforcement of building

codes, and a variety of other activities that

influence energy supply and demand. It has

even been suggested that a “new federalism” has been formed in recent years, in

which the States have been restored to a full

policymaking partnership with the Federal

Government.

175
Societal

Impacts

Without significant roles and responsibilities for State and local governments,

and a reconciliation of Federal policies with

State policies, a National Energy Plan runs

the risk of failing to reach its goals. Although

the Plan does not exclude a strong State

role, it does not assure it. Examples of cases

where State and local responsibilities need

to be clarified or conflicts resolved include:

1.

2.

3.

4.

5.

6.

In

The implementation of the policy of

conversion to coal;

The role of the States and localities in

residential/commercial weatherization

programs;

The requirement that State energy

offices “encourage” fuel suppliers to

undertake conservation services similar

to those offered by State utilities;

State responsibilities in the siting of

nuclear energy facilities;

The exemption from State utility

regulations for cogeneration facilities;

The role of the States in alternative

energy resource development—

specifically the need to encourage

waste heat utilization, to overcome

the barriers to using solid waste as a

fuel, to facilitate the leasing of

geothermal resources, to modify property taxes to encourage the use of solar

energy, and to develop criteria and

standards for solar equipment.

addition to these areas requiring

further explanation, almost nothing is said in

the Plan about the roles of State and local

government in channeling tax rebates to the

consumer. Nor is there an adequate examination of the role of the States and

localities in determining and enforcing mandatory energy-efficiency standards for new

buildings and certain home appliances.

176

Finally, the Plan does not adequately

identify and explain the role of State and

local governments in its proposed energy

information program, (See Issue #1 2.)

In part, this raises serious questions about

the implementation of the Plan as a truly national plan-not just a Federal Government

plan. In a broader sense, the Plan’s proposals are insensitive to regional differences

in the economic, environmental, and social

impacts of energy programs, For example,

new coal production will be limited to a

few regions, which makes the Plan an instrument of economic growth and a regional

allocator of undesirable effects. Although

the Plan shows a clear concern with equity,

it overlooks the likelihood that some inequities in benefits and costs will be

regional. The process for dealing with these

effects (and the regional concerns that

anticipate them) will need to incorporate

State and local governments as full partners.

In particular, they might help on “fine-tuning” energy programs to adjust to local circumstances,

The details of Federal-State relationships

are as important as the policy conflicts

themselves. For example, Outer Continental

Shelf oil development, strategic and tactical

planning for Alaskan North Slope oil, and

Western Federal coal and geothermal leasing could be facilitated by new planning arrangements, New policy proposals such as

that of conversion to coal will also have to

take into account a series of complex factors

including local preferences for diversity and

risk aversion, air quality constraints,

logistics, and potential land- and water-use

conflicts. For example, if conversion to coal
becomes national policy, the States should

share in setting federally supervised exemption provisions and/or alternative technical

compliance schedules.

Finally, in many cases the States are best

able to determine the most appropriate internal agency or agencies to administer

delegated Federal programs. State-to-State

variations in institutions and infrastructure

may require delegation of responsibility to

the States for efficient administration of

such programs.

Issue 11

The Impact

of Utility

Rate Reform

on Federal-State

Relations

The National Energy Plan does not

fully address the consequences of

some of its proposals for the traditional relationship between State and

Federal utility regulatory agencies.

Summary

The traditional relationship between

State and Federal regulatory agencies has

been formulated over a long period and provides a forum for the development of

diverse and innovative approaches. Several

aspects of the National Energy Plan would

significantly increase the authority of

Federal regulatory agencies (particularly that

of the proposed Department of Energy) by

providing mandatory requirements in

several areas where State commissions now

have exclusive jurisdiction. Thus, the Plan

could lead to changes or modifications in

the historical roles of Government or administrative agencies in energy-related

areas. The long-range consequences of

these changes should be fully explored and

debated.

Questions

1, To what extent could the Plan’s proposals disrupt well-established relationships between Federal and State

regulatory bodies ?

177
Societal

Impacts

2. Are there alternative approaches that

might be less disruptive and equally

effective ?

Background

Several aspects of the Plan would substantially increase the authority of Federal

regulatory agencies in matters now the

province of State commissions. Federal

authority in mandatory weather-proofing

programs, conversion strategies, and national utility rate standards are examples of

fundamental changes proposed by the Plan.

The proposals for national rate design

standards are a good case in point.

The Plan’s approach is similar to those of

the Clean Air Act and the Federal Water

Pollution Control Act. States are given a

period within which to demonstrate that

they can enforce national standards; if they

fail to meet nationally determined

deadlines, responsibility shifts to the

Federal level. One major difference is that at

the time the clean air and water pollution

acts were adopted, States did not have the

experience and competence in environmental law that they have in utility regulation.

While there is general agreement that

peak-load pricing for electric utilities can

lead to energy savings, for example, there

are situations in which the problems of

offering such rates might outweigh the advantages. Mandatory national standards

might override such atypical situations and

create conflicts with State regulatory

policies. A national standard should be used

only where national interests cannot otherwise be protected. One possible alternative

approach would be to offer Federal funds to

support State regulatory activities on the

condition that a State undertake research

leading toward programs to implement the

Plan’s broad goals. In rate design, for example, a State might be obligated to implement rates that would advance the conservation of oil and natural gas in order to

qualify for Federal funds. This would

preserve the concept that the Nation’s

energy situation is serious enough to warrant national policies which State regulators

must follow.

178
Issue 12

Information

Systems

The National Energy Plan may not

meet the needs of State and local

governments for reliable and credible

information to use in their energy

planning and programs.

Summary

The Plan proposes a three-part energy information program designed to inform the

Federal Government on petroleum production and reserves, possible anticompetitive

behavior of major oil companies, and local

energy supplies and consumption patterns

for use in supply emergencies. Except for

collecting and maintaining data on local

supplies and consumption patterns, the role

of State and local governments is not

specified in the Plan. For example, it is not

clear what information on petroleum production and reserves and petroleum company finances will be made available to the

States, although data of this type is important in State energy planning and policy

development. In general, detailed and reliable information is needed by all levels of

government if the overall objectives of the

Plan are to be met.

Questions

1. What specific Information will States

be charged with collecting and will the

Federal Government provide funding

and technical assistance to the States

for this endeavor?

2.

3.

4.

Will oil and gas reserve data and the

information about company finances

be available to State and local governments or will the data be treated as

proprietary and withheld?

State and local governments need information in connection with energy

facility siting and licensing proposals.

How will this need be met?

Will data be made available to the

States in a quickly accessible manner,

for example, through computer terminal links?

Background

The National Energy Plan proposes a threepart energy information program:

1. A petroleum production and reserve

information system.

2. A petroleum company financial data

system.

3. An emergency management information system.

These three systems meet a number of

high-priority information needs of the

Federal Government. However, except for

collecting and maintaining data on local

supplies and consumption patterns, the

roles of State and local governments in the

energy information program are not discussed. This seems to overlook the substantial requirements for reliable information of

governments outside of Washington, D. C.,

on which to base energy planning and

policies, including allocation and contingency programs. For example, it is not

clear whether State governments would

have access to the petroleum production

and reserve information system or the

petroleum company financial data system.
Societal

Impacts

Information shortages are a general

problem in energy policymaking, and have

made it difficult for all levels of government

to deal effectively with energy problems. A

major consequence has been that many

public officials and private citizens are not

convinced that a serious energy problem exists.

Information shortages are particularly

acute at the State and local levels. What appears to be reasonably adequate data on a

national scale often turns out to be inadequate when put to the test of providing support for State or local programs. The

problems include: (1) the aggregation of

data on a national or large regional scale,

when State/local concerns are more

detailed; (2) the selection of factors to be

measured, which may omit items of local

concern; (3) a lack of timely access, either

because Federal data are not made available

or because States and localities find it

difficult to determine what is available; and

(4) a question of credibility, when Federal

data have not been subject to verification

by State or local representatives.

Involving State and local governments in

an extended energy information program

would improve the information base and

enhance its credibility. In addition, it would

assist State and local governments to do

their part in implementing the energy plan

more quickly and effectively. One alternative, for example, would be to expand the

proposed emergency management information system to a more comprehensive

energy management information system,

exchanging information about demand projections and baseline environmental characteristics (collected locally) for information

about technology characteristics and siting

projections (collected nationally).

Issue 13

Public

Participation

in Energy

Decisionmaking

Failure to develop mechanisms for

continuing participation by the

public in energy decisions will make

successful implementation of the National Energy Plan more difficult.

Summary

As presently formulated, the Plan does

not provide any formal mechanism for

public participation in the formulation and

implementation of energy policy. Such participation is a prerequisite for successful implementation of the Plan. Public involvement provides a way for citizens to communicate their concerns to decisionmakers

at all levels and a framework for communicating governmental proposals and

technical information to the public. Without a well-defined role, citizens may be

cautious about-or even oppose-Government policy. Because effective participation

requires technical expertise and full-time attention, financial support could be extended to groups with limited resources

that desire a role in the shaping and implementation of the Plan.

Questions

1. Is there a Federal commitment to

establishing programs for public participation in policy decisions that

would broaden public understanding

and open channels for citizen response

to policy proposals?

180
2.

3.

4.

Will procedures be established to provide citizen groups with reliable and

credible energy information ?

Because effective public participation

requires technical expertise and, at

times, legal representation, can public

funds be provided to ensure that

groups with limited resources can help

set policy proposals?

Can administrative details of the National Energy Plan be effectively coordinated through existing agencies to

avoid proliferation of bureaucracies

with which citizens must deal ?

Background

During the past decade, public insistence

on participating in policy decisions has increased. Requirements for public participation programs have been written into many

Federal laws, in recognition of the fact that

individuals and groups who are not part of

decisionmaking institutions are affected by

Government decisions and frequently can

contribute information and judgments that

improve public policy. There also is recognition that in a republic, public policy requires

public support if it is to succeed. An informed and supportive public consensus is

crucial to policies as basic as energy policies

which will require some sacrifice, or at least

some change of habits, by all Americans.

Public consensus on energy policy is particularly difficult, because awareness that an

energy problem actually exists still is growing and there is no majority opinion about

its causes or its consequences. The willingness of people to support new energy

policies will depend entirely on their understanding of the problem in detail.

The National Energy Plan acknowledges a

need for comment on energy-related legislative proposals as they are considered by

Congress and on administrative procedures

as they are implemented. The Plan also indicates that the Administration wilI encourage

broad national discussion of its proposals.

However, the Plan does not describe a

program for achieving structured public involvement.

Several steps must be taken to involve

the public in energy policy. Access to the

decisionmaking process must be available.

A national energy data center should be

established to provide reliable and credible

information about energy resources and

reserves, the characteristics of energy technologies, and proposed energy faciIity siting

schedules, Information will best meet the

tests of reliability and credibility if it is: (1)

responsive to the concerns of interested

parties, (2) produced by people or institutions who are perceived as being professionally competent, and (3) produced by

people or institutions without a vested interest in the decisions to be based on the information. Information also must flow in

both directions. Public involvement, for example, could facilitate the identification of

important secondary design goals i n

research and development programs and

the evaluation of prototype demonstrations

of technologies prior to a commercialization

decision.

The linkage of citizens with energy

policymaking may require that Federal funds

support broad participation. Participants

with limited financial or technical resources

181
Societal

Impacts

often find it difficult to enter into discussions of energy technologies with industry

or Federal agents because technical details

are not available to them. Financial support

for these parties would ensure that they can

develop professional staff representation.

The particular aims of a program for

public participation must be: (1) to involve

the public early in the policymaking process; and (2) to make public participation a

standard part of policymaking. Many

citizens (and some local and State governments as well) do not have a clear picture of

how energy policy decisions are made.

When avenues for public participation are

blocked, citizens often use legal and political means to delay proposed actions. Early

and regular involvement is one way to increase public understanding of energy

problems and policies and to permit public

sharing of responsibility for the consequences of policy.

Issue 14

Regional

Impacts

Implementation of the National

Energy Plan will have serious and inequitable impacts on some regions of

the country.

Summary

Energy-use patterns, the presence and extent of energy resources, and environmental, economic, and social conditions vary

considerably among the regions of the

country. As an overall approach, the Plan

does not give these problems sufficient

weight or recognition. As a consequence,

social, economic, health, and environmental

impacts that will occur when the Plan is implemented will be distributed inequitably

among various regions of the country. For

example, regions that produce and export

energy will absorb most of the impacts of

energy resource development; regions that

already have air quality problems will suffer

from the Plan’s emphasis on coal conversion; regions whose industries will be

affected by conservation and higher energy

prices will disproportionately bear the

economic costs of the Plan.

While the Plan notes that regional

differences exist, it does not indicate how

they are to be identified, what equalizing or

mitigating actions will be taken, or what the

role of State governments and other interested regional parties are to be. It may

not be possible in setting national policy to

182
meet the needs of all regions of the country,

particularly when some regional needs conflict with national needs. However, it is

possible to seek equitable regional distribution of impacts. Failure to do so, and failure

to involve States and regional organizations

in the process, may mobilize opposition to

the Plan.

There is a need for review and evaluation

of existing regional intergovernmental

organizations and agreements to determine

their adequacy. Organizations and regional

compacts may have to be restructured and

rewritten in order to deal coherently with

energy problems.

Questions

1.

2.

3.

4.

5.

How are significant regiona l

differences that will affect the equitable distribution of impacts to be identified ?

What mitigating actions are to be

taken with regard to the regional distribution of impacts?

Can policies be developed to accommodate regional diversity through flexibility in the application of regulations,

rules, timetables, and tax rates?

Could the regional impacts of the Plan

be addressed by establishing regional

groups of States to work out ways of

dealing with environmental and

economic impacts?

What can be done to protect air

quality and human health in areas such

as Southern California, where coal

burning would aggravate already

serious air quality problems?

Background

The National Energy Plan will cause a

wide range of impacts, some of which will

be peculiar to, or more serious in, some

regions of the country. Impacts on communities in coal-producing regions, particularly in the West, could be particularly

severe, as could impacts of increased use of

coal in areas which already have serious air

quality problems.

Increased Coal Production.—To achieve

the objectives of the Plan, coal production

in the East, Midwest, and West must increase significantly. Increased mining in the

East and Midwest will take some pressure

off of the environment and established

communities in the West. All three regions,

however, may be asked to bear burdens in

the national interest. In many cases,

development can result in significant

changes in land- and water-use patterns, air

and water quality, and lifestyle.

In the West, for example, energy

development will occur for the most part in

sparsely populated, predominantl y

agricultural areas. Farmers will be displaced

and some of their water supplies will be

diverted to coal producers.

Some of the most severe impacts in the

West will result from energy-related

population increases. In small localities, existing schools, medical services, and water

and sewer facilities could not cope with a

sudden influx of population, and in many

cases could not be expanded fast enough to

meet the needs of growing communities.

Capital to expand needed public services

and facilities will not be available to most

local governments in the short term. Over

the long term, revenues from energy production usually will go to counties, while

the greatest demand for services and

183
Societal

Impacts

facilities will occur in towns. Lending institutions often hesitate to make loans for

homes or other private facilities in communities which are in a boom and bust cycle.

The mismatch between the demand for

services and the capacity of local governments to deal with boomtown situations

can result in a wholesale degradation of the

quality of life in some communities, State

help would be available in such situations,

but the Federal Government also has a role

to play, since national policies often will

trigger projects that cause boomtown

problems. The Plan should specifically address creating a system for evaluating such

impacts and for providing Federal assistance.

Few Federal housing, water and sewer,

and transportation programs were designed

to respond to the needs of communities

which are disrupted by major new energy

production projects, Some Federal programs

are being modified but assistance programs

tailored to the needs of such communities

are needed,

Conversion to Coal.—The National

Energy Plan proposals to increase the use of

coal will have considerably different

regional impacts than the coal production

goals discussed above. By shifting industry

and utilities from oil and gas to coal, air

quality problems almost certainly will be

exacerbated in regions that already have air

quality problems, even when the best

available control technology is required,

.

Some areas such as Southern California

will not be able to burn coal without creating serious health hazards. Oil-fired

powerplants were not originally designed to

burn both oil and coal and must be

replaced. There is no transportation system

to deliver coal. In addition, most Southern

California powerplants are in densely

populated air basins where air quality is

already bad. Conventional coal plants, even

with the best available control technology,

are likely to emit more particulate and

sulfur than State law allows. Clean burning

systems such as low-Btu gasifiers or

fluidized-bed coal combustion may resolve

these problems, but these technologies are

not likely to be commercially available until

the late 1980’s.

If coal is to be used in California, more

effective air quality control than that proposed by the Plan will be required. The

Federal Government already has a substantial coal conversion R&D program, but its

focus has been primarily on basic process

technology and economics. Reorienting the

program to accelerate development of clean

coal technologies could help. In addition,

the coal conversion schedule in the Plan

could be adjusted to select a more realistic

clean-coal commercialization timetable. For

example, combined cycle powerplants

could be exempted from taxes on oil use

until 1990, especially where coal conversion and new coal-burning capacity are

limited by special regional economic and

environmental characteristics. Oil and gas

taxes could be deferred in cases where

States produced a long-range coal conversion schedule consistent with national

goals. in such cases, States could administer

conversion programs with occasional

Federal monitoring.

184
Issue 15

Energy

Resource

Development

on Federal

Lands

The National Energy Plan does not

identify and define the role that State

and local governments are to play in

energy resource development on

Federal lands.

Summary

The acceleration of domestic energy

development mandated by the Plan will depend significantly on increased production

from resources on Federal lands. The production goals of the Plan are not likely to be

met unless controversies and problems concerning the management of Federal lands

are resolved.

Much of the accelerated development

called for by the Plan will probably occur on

Federal lands in the West. State governments in the West have expressed concern

that the current Federal land-management

system does not adequately provide for

State participation in decisions about which

resources are to be developed and which

rules and regulations are to apply to

development. Specifically, some State

officials object to current procedures which

allow developers to nominate areas for

development, allow States and other

regional interests to object to the nominations, but leave the final judgment to

Federal officials. States also are concerned

about long delays between nominations

and development which characterize the

present system. In addition, they are concerned about whether effective controls can

be applied when producers activate

hundreds of dormant coal leases that were

signed years ago.

The Administration has acknowledged

that problems exist in current Federal land

management programs. However, if the

Plan’s production goals are to be met,

problems and controversies associated with

managing the development of federally

owned energy resources will have to be addressed more directly, particularly those

problems relating to the role of the States in

determining which resources are to be

developed, which laws and regulations are

to be applied, and whether accelerated

development can occur without compromising important economic, environmental, and social values.

Questions

1.

2.

3.

What role will State governments play

in managing and controlling the

development of federally owned

energy resources ?

Can a land management system be

established which will protect environmental, social, and economic values

and still allow for acceleration of

public resource development ?

Specifically, can the present mineral

leasing system for federally owned

resources be streamlined without compromising environmental standards?

What can be done to control production of coal on land that was leased

years ago?

185
Societal

Impacts

Background

Historically, public lands have been

prime candidates for development because

they are under direct Federal control. The

Federal Government owns or controls vast

holdings of coal, oil, natural gas, oil shale,

and uranium, particularly in the West. Any

attempt to greatly accelerate the development of domestic energy supplies will depend upon the expeditious development of

the resources located on these public lands.

In the Rocky Mountain-Great Plains

region, the Federal Government owns about

43 percent of the land and controls more

than 60 percent of recoverable coal

reserves, 80 percent of the estimated oil

shale potential, and more than 90 percent of

recoverable uranium.

At the present time the West is producing approximately 11 percent of the Nation’s crude oil. It is estimated that 10 percent of the Nation’s natural gas reserve is located in the region, as well as 42 percent of

the coal, and 94 percent of the uranium. All

of the Nation’s high-quality oil shale is in

the West. It is estimated that 80 percent of

future coal development in the West will

occur on Federal land or will involve

federally owned resources.

186
The production potential implicit in the

above data is obvious. However, there are a

number of significant problems that must be

resolved if this production potential is to be

realized. For example, several Western

States are concerned that they will not be

able to influence development on Federal

lands. Some States have more stringent laws

and regulations governing development

than does the Federal Government. This has

led officials in these States to argue that

their responsibility to protect the health,

welfare, and safety of their citizens will be

compromised if State laws and regulations

are not applied, first, in designating areas as

unsuitable for development, and second, to

control resource developments on Federal

lands. These issues are beginning to be

resolved. Recently, the Secretary of the Interior negotiated agreements with Wyoming which permit more stringent State

controls to apply to development. The

Department is also reviewing State reclamation statutes. When State requirements are

as stringent or more stringent than Federal

requirements, States will be given as much

control on Federal lands as is constitutionally possible. Federal strip mine legislation pending before Congress contains a

provision for the application of State

reclamation laws. An issue which is still

unresolved is whether States should be able

to apply broad energy facility-siting laws to

development on Federal land, Because

many Federal projects are planned for location on public lands, the States’ roles with

respect to siting criteria must be resolved in

the near future.

set of procedures that allow for the nomination of lease sites by potential developers

followed by “disnomination” suggestions

by State governments and other interested

parties. A particular lease could be disnomi -

nated on the grounds of its general unsuitability, the unusual nature of an area, or

the expected acute adverse effects of the

development, Under the present system,

the Federal Government asserts a right to

make preemptive decisions, a position that

the States are challenging. Unless this

challenge is dealt with, development on

Federal land will be likely to proceed even

more slowly than it does now.

The leasing system itself is only one of a

number of steps that must be taken to

develop Federal resources. The environmental impact statement process must be completed and numerous State and Federal environmental requirements, such as air- and

water- quality standards, must be met.

Therefore, while the decision to issue a

lease is usually based upon very few criteria,

a potential developer, after he has obtained

the lease, must go to a number of State and

Federal agencies seeking various permits.

Since these processes (i.e., leasing, environmental impact statement, and acquiring

various permits) are generally independent,

it can take us as long as 10 years to open a

coal mine after a developer expresses interest in a given site. A new leasing system

that would allow for the early consideration

of a variety of important environmental,

social, and economic values put forth by

Federal, State and local governments could

A second issue which has significantly

delayed the development of Federal coal

reserves is the present mineral leasing

system, The leasing system is a complicated

187
Societal

Impacts

greatly speed up the process. If these values

were established as criteria for a lease, not

only would there be more competition for

lease sites, but the lease would be immediately consistent with the requirements

of State and Federal environmental standards. In all, the processes of environmental

impact statements, the review and issuance

of the lease, and the application of environmental standards through various permits

could be compressed into a unified process.

The final major problem which exists

concerning the development of Federal

resources is the fact that more than 400 inactive or undeveloped lease sites now exist

throughout the West. For years, developers

bid on, and received, coal leases that they

did not intend to develop immediately. Instead they held these in an inactive status

awaiting a rise in the price of coal. These

leases were made at a time when little attention was given to environmental values.

Consequently, public interest groups and

Government officials alike are now greatly

concerned that if these sites are developed,

a high degree of environmental degradation

will result. As improvements are made in

the leasing system generally, these nonproducing sites must be examined for their

potential as well as their social and environmental impacts.

Issue 16

Coordination of

Energy-Related

Programs

Some Federal policies and programs

may be incompatible with the goals

of the National Energy Plan.

Summary

Many Federal programs were established

long before it was clear that the United

States faced a major energy problem. Some

programs, for example in transportation,

may not be compatible with the goals of the

Plan and may, in fact, require actions that

would work at cross-purposes with energy

policies. In some cases, the conflicts can be

resolved by Executive Order. In others, Congress may have to choose between energy

goals and goals in other programs and

amend laws to reflect that choice, Although

adoption of the Plan need not await an

identification and resolution of Federal

program inconsistencies, effective management of the Plan will require such a review.

Questions

1. What process should be used to identify Federal programs that are not compatible with the goals of the Plan?

2. When a program supporting an Energy

Plan goal and a program in support of

some other national goal are found to

be incompatible, how should the conflict be resolved?

3. To what extent can (and should) Executive Orders be used to establish

priorities among national goals?

188
4 IS there a mechanism for ensuring that

national energy goals are compatible

with State and local plans in energy

and in other program areas?

Background

The Energy Plan represents a major step in

the direction of improved planning for

energy conservation and use. Questions will

arise, however, as to how the goals of the

Plan are to be made compatible with other

goals such as those for transportation, environmental protection, water conservation,

land use, and housing.

The coordination of Federal programs

with respect to particular policy goals is a

well-known problem. The Plan—for understandable reasons-does not identify and

assess the dozens of Federal programs that

affect energy supply, conservation, and conversion. Although the significance of any

single case cannot be evaluated without extensive review, examples of possible inconsistencies include: home mortgage

programs that give preference to singlefamily housing; antitrust policies that may

jeopardize the proposed petroleum company financial data system if the information sharing is interpreted as affecting competition; and the extensive investment of

Federal agencies in energy-consumptive, intercity employee travel.

Two problems arise: (1) how to identify

inconsistencies, and (2) how to resolve any

inconsistencies that are identified. Neither is

easily settled, and the Plan should not be

delayed as a result. However, effective

management of the Plan will require an early

start on the process.

In addition to close interagency coordination, possible alternatives for identifying incompatible programs include requiring

an energy-impact section in all environmental impact assessments and requiring, on a

one-time basis, a broad-brush energy impact assessment of each program for which

Federal funding is sought.

Possible options for resolving inconsistencies ‘ include (1) Presidential Executive

Order, (2) interagency coordination, and (3)

congressional action. Because many of these

decisions will amount to establishing

priorities among national goals, it is important that resolution strategies be considered

as soon as possible, so that future action is

not unduly delayed.

189
Societal

Impacts

Issue 17

Adequacy

of the Plan’s

Oil Import

Goals

Will the Plan’s oil import goals significantly reduce the danger of an oil

shortage in the mid-1980’s and the

vulnerability of the United States to

another oil embargo?

Summary

One major concern that motivated the

plan was a fear that world oil exporting

countries would not be willing or able to

produce as much oil as the importing countries would want to import (at the present

real price) by the mid-1980’s. The Plan also

is designed to respond to the danger of

another politically motivated embargo.

The PIan proposes to hold oil imports in

1985 to between 6 million and 7 million

barrels a day, about 4.5 million below the

estimated amount that would be imported

without changes in U.S. energy policy. If

that import goal is met and if the strategic

oil reserve is developed on schedule, the

ability of OPEC to impose another embargo

or further steep price increases should be

sharply limited.

Questions

1. Is a reduction of 4.5 million barrels a

day sufficient to avoid a strain on production capacity and a consequent

sharp rise in oil prices?

2. Could the United States adjust to any

likely oil embargo without unacceptable economic strain?

Background

The most pessimistic published forecast

of future world energy demand estimates

that by 1985 the members of OPEC will

have to export between 43 million and 47

million barrels of oil daily to meet demand

in the oil-importing countries. World demand, under that circumstance, could only

be met if Saudi Arabia produced between

19 million and 23 million barrels a day.

Saudi Arabia may not be either able or

willing to expand its capacity to that level,

more than twice its 1976 production. There

are a number of reasons for adopting a more

optimistic view of world oil supply and demand. For example, the Organization for

Economic Cooperation and Development

(OECD) projects world oil import requirements in 1985 (OECD reference case) at

about 35 million barrels a day, some 8

million to 12 million barrels below the most

pessimistic case. Under the OECD assumption, Saudi Arabian production could be as

low as 7 million barrels a day with a maximum of 15 million barrels.

The embargo problem is somewhat

different. The key questions involve the

depth and duration of any curtailment of

foreign oil supplies. The Arab embargo and

supply restrictions of 1973-74 did not, in

fact, cut very deep; at its worst point, only

about 3.4 million barrels a day were

removed from the world market. Also, the

embargo lasted only about 5 months.

For purposes of this analysis, it will be

assumed that any future embargo would cut

Arab oil exports by half. It will further be

assumed that by 1985, those countries will
be supplying two-thirds of the total oil import market. Cutting their exports in half

wouId therefore reduce o i I i report

availabilities by one-third. Imports,

however, will represent only about twothirds of total oil requirements of the industrialized countries in 1985, so the cut in

total oil supplies would be roughly 20 percent. If the International Energy Agency

(IEA) emergency plan were to spread this

cut evenly among industrial countries, the

United States would lose about 4 million

barrels a day in total oil supplies, and could

adjust to that loss even over a prolonged

period,

A somewhat more difficult problem

would arise if the IEA plan were not put into

effect and if Arab producers simply cut off

all oil exports to the United States. In 1976,

nearly half of U.S. oil imports came from

Arab countries, By 1985, dependence on

Arab imports could exceed 60 percent.

Without the Plan, this would mean a reduction of U.S. oil supplies of about 7 million

barrels a day, or nearly one-third of total

consumption. If the Plan’s import goals

were achieved, the United States would

lose about 4 million barrels a day, or about

22 percent of supply.

It appears unlikely, even without the IEA

plan, that the Arabs could prevent any of

their oil from reaching the United States.

Even if they did, the United States could adjust for some time to a loss of 4 million barrels a day. The emergency oil reserve of a

billion barrels called for in the Plan would

provide half of that amount for a year and a

half. The other half could be made up by additional conservation measures. The situation would be much more serious if the loss

were 7 million barrels a day. In that event,

either the emergency oil reserve would be

drawn down much more rapidly, or

relatively drastic measures would be taken

to cut oil consumption.

191
Societal

Impacts

Issue 18

The Question

of Growth

The National Energy Plan assumes

that economic growth can and

should continue indefinitely and

does not discuss the desirability or

even the possibility of achieving such

growth in a world with finite

resources.

Summary

The National Energy Plan presents a longrun objective of sustained economic growth

without questioning the appropriateness of

this objective. It is widely recognized that

growth of the gross national product (GNP)

is not an adequate measure of social wellbeing, particularly when GNP would

measure wasted and valuable energy

resources but would not reflect savings in

energy. Furthermore, continued growth of

GNP may not be necessary to achieve basic

social objectives; for example, it may be

possible to maintain high levels of employment while reducing the rates of growth of

GNP and of energy consumption by

substituting labor for energy. Such a shift in

the structure of the economy, and the longterm changes in capital stock that would be

required, are not addressed in the Plan.

In any case, resource availability and ultimate environmental constraints may make

sustained economic growth unattainable.

Questions

1.

2.

3.

4.

Is per capita GNP a satisfactory

measure of national economic well

being? is a more than 4-percent annual

growth in GNP necessary to achieve

social goals?

What changes in capital, technology,

and population distribution will be

necessary to sustain agriculture as oil

and gas become more scarce?

Will future energy sources and delivery

systems require decentralization of the

structural and spatial patterns of our

society?

Will extensive additional sources of

future energy like nuclear fusion be

wisely used to increase human wellbeing? Can and should these sources

be applied to indefinite growth?

Background

The National Energy Plan encourages

conservation and solar energy development, and plans to replace energy-wasteful

capital stocks, both of which actions are

needed over the long term. While the plan

is significantly more farsighted than existing

energy policies, it still does not fully reflect

the long-term problem.

The president’s Plan is based on the

premise that economic growth, measured

by the gross national product, can and

should continue. It is generally accepted

(even among economists) that human

benefit does not derive from annual-average

rates of flow (GNP) but from the stock,

quality, and distribution of the goods available to the population and from other intangible but important values such as access

to cultural amenities or to wilderness.

Furthermore, there is wide agreement now

192
that recent growth in GNP to a large extent

has in fact been growth in resource-wasting

activities. If waste is to be reduced and

human well-being increased, it will be

necessary to abandon the practice of equating “progress” with “economic growth” or

“growth in GNP, ” and to develop more adequate indicators.

The extent to which a 4.2-percent annual

growth figure for GNP, which the Plan contemplates, is designed to provide “full”

employment does underscore the need for

society to alleviate unemployment. But it

assumes that there are no other ways to

achieve employment goals. Substitution of

labor for capital and energy, shortening the

workweek, and lowering artificial barriers to

entry in the labor market are among available approaches.

In the long run, the United States can

adapt to an economy which uses less

energy with greater employment and higher

income levels. Some European countries

such as Sweden and West Germany have

living standards equivalent to or higher than

the United States but use less energy.

Capital and energy have displaced labor in

U.S. manufacturing in the past, and energyintensive goals have been substituted for

labor-intensive goals and services. Labor intensity in the future will differ from labor intensity in the past. However, future growth

is likely in activities which employ more

labor and have fewer requirements for oil

and natural gas. In the long run there will be

growth in rail transportation, urban housing,

solar power, and energy-saving technologies and appliances. There will also be

growth in agricultural and forestry fibers and

materials, coal production, and towns and

cities i n regions with these natural

resources. Each of these activities would

employ more persons and use less energy

than the activities they would displace.

A long-term deficiency in the Plan is

associated with the need it acknowledges

for replacing energy-wasteful capital stocks.

The Plan suggests ways to begin changing

some of the capital stocks, but focuses on

ones that can be changed relatively quickly

(e.g., boilers, engines, buildings, etc.) while

ignoring several that can be changed only

over much longer periods and that waste

even more energy.

Agricultural capital is a case in point. The

national energy policy of the last several

decades has been to replace human labor as

rapidly as possible with petroleum energy,

and no sector has applied this policy with

more vigor than has agriculture. Machines

and chemicals used in agriculture now consume 5 or more calories of oil and gas for

every calorie of grain produced. Additional

human labor will be required to reduce the

energy intensiveness of American

agricuIture.

Even if continued economic growth were

desirable it might not be possible.

Prolonged growth will require increased

combustion of fossil fuels in the next few

decades and new sources of energy from

thermonuclear fusion or solar power in the

next century. Expansion of the processes we

193
Societal

Impacts

generally associate with growth may be

limited by the availability of other resources

and may not be perceived as desirable from

a social or environmental point of view.

Two specific problems involve the uncertain impacts of introducing additional

volumes of carbon dioxide into the atmosphere through increased combustion of

fossil fuels, and the consequences of waste

heat generation. While the Plan proposes a

study of the carbon dioxide problem, the

question of waste heat is not addressed at

all.

Issue 19

The Population

Factor and

Energy Planning

Continued population growth, including natural increase and immigration, makes the goals of the National Energy Plan harder to attain. In

the long run, no plan to curb the

growth in energy demand can succeed without a parallel policy to curb

population growth.

Summary

U.S. energy demand is the product of

population size and per capita consumption. Thus population growth, of which immigration is an important component, is a

factor that must be considered in the

development of an energy plan.

The slowdown in the U.S. fertility rate has

already had a marked effect on projected

energy demand. This trend, however, is

being partly offset by an increasing growth

in the rate of immigration, including illegal

immigrants, which affects both energy demand and unemployment.

Questions

1. What is the optimum population level

for the United States, both as to the

number of people who can be supported, given avaiIable energy

resources, and maintenance of an acceptable quality of life? If it is desirable to stabilize population growth at

such a level, what policies and

uprograms would best achieve this?
2. What effect will an influx of illegal

aliens have upon the achievement of

energy plan goals?

Background

There is a widespread, but erroneous,

belief that the United States has solved its

population problem. The source of this incorrect impression is as follows: the present

(momentary) birth rate in the United States

is at replacement level, which in about 50

years would produce zero population

growth (ZPC), leveling off at about 270

million (compared with today’s 217

million).

population growth, however, proceeds at

a faster pace than these statistics imply. In

fact, the U.S. population is now growing at

about 1.2 percent per year, and if this rate

continues, the population will double in 58

years. There are two reasons for this.

First, there is a bulge in the composition

of the population in the younger, more fertile years. Even at the replacement rate—

one child born for each adult—an increase

in population results because parents remain alive for many years after children are

born.

The second factor is immigration. Estimates indicate that immigration produces a

yearly population increase at least equal to

the rate of natural increase of U.S. citizens,

and the rate of immigration seems to be increasing.

Of particular concern is illegal immigration. By present estimates there are 6 million

to 8 million illegal aliens in the United

States, with as many as 1.2 million new illegal aliens arriving yearly. If current rates

continue, immigration will add 38 million

persons to the U.S. population by the year

2000, of whom at least 25 million will be illegal aliens.

It has been estimated that illegal aliens

already living in the United States consume

more than 1 million barrels of oil equivalent

per day, between 2 and 3 percent of total

U.S. energy demand. This and other aspects

of the immutable relationship between

population and energy demands suggest

that U.S. population policies merit careful

study and debate as an integral part of any

future U.S. energy planning.

195
.

Societal

Impacts

Issue 20

Impact of a

Petroleum-Scarce

Future on the

Automobile Industry

The National Energy Plan does not

address itself to the need for an accelerated search for a substitute for

oil, the energy resource that is likely

to be exhausted first.

Summary

By the end of the century, the fleet of

automobiles and trucks in the United States

could total 200 million. Unless adequate

liquid fuels are in good supply by that time,

the alternatives might well be limited to

simply abandoning large parts of that fleet

or trying to convert cars to electricity. The

loss of mobility that would occur with

prolonged sharp reductions in liquid fuel

supplies and an enforced shutdown of the

U.S. automobile industry and its related

businesses would have unprecedented impacts on the U.S. economy.

Questions

1,

2.

3.

Should alternative fluid-fuel sources

such as alcohols and hydrogen be

given higher research and development priorities?

How can a full range of transportation

services be maintained without fluid

fuels?

Has the possibility that U.S. transportation could be immobilized by high

costs or scarcity of petroleum within

20 years been squarely addressed by

industry or the executive branch?

4. What Federal agency has been charged

with looking at the long-range implications of and alternatives to our present

large petroleum-based transportation

fleet? Will this become a function of

the Department of Energy?

Background

Oil and gas are now burned in applications where coal is available as a substitute.

in other applications, particularly in

transportation, fluid fuels cannot be

replaced on a large scale either by coal or by

electricity. There is no evidence to suggest

that coal liquefaction can provide enough

liquid fuel to provide power for more than a

fraction of the Nation’s automobile and

truck fleet within the next 20 years.

The Plan states that “Government policy

has subsidized and protected energy-inefficient . . . transportation. The interstate highway system has encouraged automobile

use. Local highways have drawn people,

businesses and industry out of central cities

into suburbia” (NEP, p. 4). In this process,

the United States has become almost totally

dependent on the automobile for work,

recreation, and the daily tasks of life. Consumers presently pay approximately onethird of their disposable income for

mobility, divided roughly 50-50 between

personal mobility and the freight costs of

consumer products.

As energy becomes more expensive, the

United States will have an increasing incentive to shift to public transit and efficient

land-use arrangements (Issue #21), This,

196
however, is a slow process. In the meantime, U.S. society and economy would

suffer severe disruptions if prolonged and

sharp reductions in liquid fuel supplies occurred.

The U.S. dependence on transportation

with the vulnerability it conveys underscores the necessity for additional emphasis

on development of other liquid fuel technologies, including alcohol. Alcohol can be

obtained by fermentation from dispersed

biomass and can be used in modern internal-combustion engines.

At a minimum, the National Energy Plan

should make provision for a full-scale

analysis of the potential for disruption of

U.S. transportation as a result of rising oil

costs and dwindling oil supplies.

Issue 21

Land-Use

Patterns

The National Energy Pla n

acknowledges the opportunities for

long-range energy conservation that

are inherent in new land-use patterns

but offers no proposals to start

achieving them.

Summary

Existing patterns of land development,

particularly in suburban areas, often put too

much distance between homes and offices

or factories, between homes and shops, and

between homes and schools. The development pattern in most areas of the United

States makes suburban Americans almost

totally dependent on the automobile. It also

inhibits installation of the kinds of district

heating systems that are common in Europe.

Changes in land-use patterns could promote

the use of district heating and eventually

make it possible to make many trips that

now require an automobile by public

transportation or by foot. But these changes

are long range and fundamental and will

take more than one generation to complete.

They also will require national guidelines,

leadership, and incentives. An example of

the kind of first step that could be taken at

once is to require a long-range “energy impact statement” for all proposed new

transportation programs and for all new urban and suburban construction that involves the use of Federal funds.
Societal

Impacts

Questions

1,

2.

3.

4.

What steps are being taken to plan for

a more energy-efficient distribution of

population and industry in the next

few decades?

What kinds of incentives could encourage people to accept more

energy-efficient living and working

spatial arrangements ? How can the disincentives which frequently exist at

present (e.g., lack of privacy, noise) be

eliminated ?

What consideration has been given to

incorporating a policy-level, land-use

office within the Department of

Energy?

What consideration has been given to

c oo rd i n a t i n g the land-use and

transportation functions of the Departments of Housing and Urban Development and Transportation with those of

the Department of Energy?

Background

During the post-World War II decades of

cheap energy, industrial production was

centralized and products were shipped to

stores throughout large regions and, in some

cases, throughout the Nation. Cheap energy

permitted a scattering of jobs, homes,

schools, and shops, linked in large part by

the automobile. Ninety percent of personal

transportation in this country is by

passenger car and truck. Nearly 75 percent

of all automobile trips cover distances of

less than 10 miles. public transportation can

provide a substitute for automobile trips

only in cases where population densities

and geographical relationships are such that

relatively large numbers of people are

bound for the same destination at about the

Environmental Protection Agency - Documerica Photo

198
I
Societal

Impacts

same time. These time and space relationships do not exist in most suburbs today.

But as fuels for automobiles become scarce

and costly, shoppers and workers will need

other means of travel than the car.

One way to reduce dependence on the

car is to rearrange urban and suburban

development so that work and home or

home and shop are more easily linked by

public transportation or are close enough

together that walking or bicycle riding can

substitute for the car. Rearranging land-use

patterns is not a short-term solution. it will

take over a generation to provide clusters of

homes, workplaces, and parks that will

reduce the need for transportation as such

and still put many amenities within reach of

the home. But the new land-use patterns

must begin somewhere. Any long-range

plan for energy policy should include proposals for beginning such a rearrangement

of living and working patterns in the United

States.

Department of Transportation “ Photo

200
Issue 22

In Defense

of Amenities

Can cost-benefit analysis justify the

sacrifice of irreplaceable national

treasures to meet the need for more

energy?

Summary

If the American people believe that there

are some national treasures that must be

regarded as exempt from sacrifice to meet

energy or economic goals, then the principle should be explicitly recognized. In addition, such national treasures should be identified so that, if a crisis should occur, panic

will not lead the Nation to actions it will

later regret.

Although the National Park system was a

start in this direction, it is highly selective,

focusing on the most popular and obvious

types of landscape for preservation. There is

a danger that anything not already protected, and perhaps a few things which are,

will be destroyed as demands for energy increase.

Questions

1.

2.

Can Americans collectively agree that

there are national treasures (other than

historical shrines) that should be saved

for posterity despite energy demands

in this generation?

Can explicit criteria be worked out,

and agreed upon, for identifying national treasures?

3 Can education in the broadest sense,

including movies and television, convey a vicarious experience of these

treasures to the majority of the people

who cannot have the actual experience? Can such vicarious experience be sufficiently keen to elicit

support for the preservation of

treasures from people who will never

enjoy the direct experience ?

Background

In most hard-nosed energy analyses,

there is an implied threat that what are

called amenities may have to be sacrificed

to meet national energy demands. It is implied that the benefits of amenities are soft

and cannot be quantified at a high-enough

level to justify retaining them in the face of

large and easily quantifiable energy needs.

This issue should be met head on.

Mount Vernon is generally accepted as a

national treasure. The buildings are made

largely of wood; their value as fuel, in barrels of oil equivalent, could easily be calculated. As other fuels increase in price will

there not finally arrive the time when the increasing value of Mount Vernon as an

energy source (which is objectively determinable) must exceed its constant value as

an esthetic and historic monument (which

cannot be objectively determined)? When

this time arrives, do not the principles of

cost-benefit analysis dictate that Mount

Vernon be converted into firewood?

If the answer to this question is yes, there

is no further problem: the pursuit of energy

becomes clear sailing—the United States

must simply determine the Btu value of all

artifacts, treasures or not, and then burn as

needed.

201
Societal

Impacts

But if the answer to this question is no,

then the Nation should say so explicitly,

because the answer can be, and should be,

generalized. If the American people believe

that there are some treasures that must be

regarded as standing above energy considerations, then these should be explicitly

identified in advance of either a crisis or actions taken in panic.

The question of sacrificing a national

treasure will not, of course, first be raised

with a historic amenity like Mount Vernon:

burning this would be unthinkable. But the

possibility of sacrifice has already been

raised for natural amenities—redwood

forests, pristine valleys, and vulnerable

species of plants and animals in danger of

extinction. Can the Nation—should the Nation-protect these treasures against demands for more energy? Should workmen

tear up a beautiful valley to get coal? Should

a forest be demolished to get building

materials?

The issue of replaceability is relevant. In

the case of a landscape which is merely

pretty, it is possible to restore its limited

beauty after strip mining, if the extractive

procedure is properly planned from the outset. The cost of restoration added to the

other costs will increase the price of fuel to

consumers, but it is generally conceded that

justice towards succeeding generations demands that we bear these costs of energy

extraction.

There are, however, many works of

nature that once lost cannot be restored.

The minority who have ever had close contact with a climax hardwood forest or a

virgin prairie can speak for the almost indescribable beauty of these complex

superorganisms. Once destroyed, neither

will be regenerated in a human lifetime: the

forest is replaced by a temperate jungle

called second growth, and the prairie is

followed by an ugly miscellany of weeds. If

no further disturbance occurs, ecological

succession may eventually restore the

original mixture of species, together with

the beauty; but in no case will the succession be complete in less than 500 years-a

period longer than the lifetime of most nations. For all practical purposes, as far as national policy is concerned, destruction of a

beautiful ecological community and the

vital information it contains is irreversible.

Can people defend aesthetic goods

against utilitarian demands? Those who

have experienced the aesthetic delight of

them are more likely to rise to their defense,

but fortunately it is possible for those who

have not had the experience to join in the

defense. What percentage of the U.S.

population has ever seen, or ever contemplates seeing, Mount Vernon? It surely is

less than 10 percent (25 million); yet any

proposal to cut up Mount Vernon for firewood would undoubtedly be rejected by

the great majority of the electorate. The

mere knowledge that this historic shrine is

there is an amenity for most Americans-an

amenity they will defend against the quantitative onslaught of cost-benefit analysis of

the conventional kind.

202
Appendix I
—

Appendix I

OTA Background

Perspective of

Energy Forecasts

Summary

If U.S. energy consumption is allowed to

grow at historic rates and if domestic production remains stagnant as it has since

1970, oil-producing nations may not be able

to meet world demand in 1985. The gap

between world supply and world demand

could be as large as 20 percent, and even

the threat of a shortage of this magnitude

would lead industrial nations to start bidding up prices sharply in the 1980’ s.” The

resulting inflation and the impact of actual

shortages would set the stage for recession

in strong economies and collapse of weak

economies.

Most published forecasts discount the

possibility of ‘such a crisis because of the

assumptions about U.S. consumption and

production that are built into their projections. They assume declining rates of

growth of demand. They assume rapid expansion of U.S. coal and nuclear-energy production. They assume a reversal of historic

declines in domestic production of oil and

natural gas.

Based on these assumptions, most

forecasters expect the United States to hold

its imports to about 10 million barrels a day

in 1985, which would keep world supply

and demand in balance at close to current

world prices. * To achieve this, Saudi Arabian production would increase by about 3

million barrels a day in 1985 to the 12.5

million barrels which the Saudis have said

they are willing to produce that year, Other

industrial nations would require imports of

about 25.3 million barrels a day, roughly

equal to or slightly above the anticipated

capacity of exporting countries outside of

Saudi Arabia.

However, neither declining rates of demand growth or increasing rates of domestic

production can be assumed with certainty.

A prudent national energy policy must consider the possibility that such changes in

historic patterns will not occur rapidly.

Energy demand in the United States could

grow at historic rates and domestic production could follow present trends. If that

were to happen, world oil supply and demand will be thrown sharply out of balance

before 1985.

Recent forecasts conclude that the

volume of oil produced by the oil exporting

nations outside of Saudi Arabia will roughly

equal the oil import requirements of nations

outside the United States of about 25.3

million barrels per day. If historic demand

and supply trends continue, U.S. import requirements would reach about 16.2 million

to 19.6 million barrels a day by 1985. If this

were to be met along with the rest of the

world’s demand, a substantial increase in

production by Saudi Arabia would be

needed. The U.S. import estimate of 16.2

million barrels per day coupled with the expected demand by the rest of the world

would require a Saudi production increase

to about 16.6 million barrels per day. The

high U.S. import estimate and the same nonU.S. demand would mean that Saudi Arabia

would have to produce 20 million barrels

per day, which is considered the most optimistic estimate of their maximum capacity.

“All projections in this paper assume current world

prices

204
In view of the Saudi political situation, it

is not realistic to expect production at either

of these high levels. Some factions among

Saudi leadership argue that the Nation’s

long-range interests lie in producing between 2 million and 6 million barrels a day.

Current Saudi Arabia production is 9.2

million barrels a day.

Even if Saudi Arabia were willing to produce at the high levels, it would leave the

Saudis no reserve capacity to use in

moderating pressures among other

Organization of Petroleum Exporting Countries (OPEC) nations for price increases.

1. Introduction

The purpose of this paper is to establish a

framework on which to base analysis of the

proposed National Energy Plan. It will show

that this Nation faces the possibility of a

substantial gap between demand and

domestic supply which may be impossible

to close with imported oil.

Two published projections and one draft

projection of U.S. energy supply and demand through 1985 are examined. All of

these projections make certain assumptions

about society’s response to higher energy

prices, the rate of discovery of new oil,

trends in the economy, the impact of environmental constraints such as strip mining

regu I at ion, and the rate at which new

energy supplies can be introduced. They

also estimate the effectiveness of laws that

mandate more efficient automobiles and

appliances. While these projections differ in

detail, they all assume significant shifts from

historical rates of growth of supply, demand, or both.

Obviously, if the assumptions are wrong,

the forecasts are wrong. If the response to

higher prices is weak, if existing conservation measures do not work as anticipated, or

if the recent downward trend in energy supply cannot be reversed, U.S. imports could

rise to levels that would threaten national

security and economic stability. To illustrate

how dramatically changes in assumptions

can alter forecasts of the gap between U.S.

energy demand and domestic supply, 1985

demand and domestic supply are calculated

based on continuation of historical trends. It

is intended only to estimate the gap that

could occur between domestic supply and

demand in order to demonstrate the magnitude and importance of the effort that is

needed to bring the Nation’s energy

problem under control.

The projections by the Federal Energy Administration (in draft) * [1 1, the Department

of Commerce [2], and EXXON Corporation

[3], all conclude that U.S. oil imports will

not reach a level that would throw world

supply and demand for oil sharply out of

balance by 1985 or 1990.

Two other forecasts were evaluated, but

are not covered in detail in this paper. One

is a Central Intelligence Agency forecast,

published in April 1977 [41. The CIA says its

forecast “broadly resembles other official

and private forecasts, ” but is less optimistic

about the outlook than most published projections. The pessimism is based in part on a

CIA conclusion that the Soviet Union will be

a net importer of world oil by 1985, adding

to the burden on exporters, and in part on a

judgment that supplies from OPEC countries

assumed by most other forecasts may not

“ The protections in this paper attributed to FEA appear in

the draft of the 1977 National Energy Outlook issued January

1977, These figures are subject to change as a result of

changes in FEA’s assumptions about the effect of various ex -

Istlng and future policies.

205
Appendix I

be available. The possible Soviet import requirements are not considered in this paper.

The principal consequence of including

them “would be to decrease the likelihood of

filling the U.S. domestic supply/demand gap

calculated from a “historic trends” analysis.

Another forecast not covered is a report

on a 1976 United Nations conference of

geologists and economists, which reaches

generally optimistic conclusions about

world oil supply over a period of 40 to 50

years. The U.N. report focuses on new technologies and oil recovery in the period after

1985, while the time span of this paper is

the period between now and th e

mid-1980’s. This paper addresses the important question of production capability within the 1977-85 time frame and not longterm reserve estimates.

Il. The Domestic Picture

The United States depends on oil and

natural gas for 75 percent of its energy, but

domestic production of both resources

peaked early in this decade and oil imports

have been rising steadily since then. Unless

consumption patterns change, imports will

continue to increase through 1985.

In 1970, the United States produced

crude oil at an average rate of 9.6 million

barrels a day [5]. In October 1976, the

United States produced slightly more than 8

million barrels a day [6], Alaska fields onshore will add 2 million barrels a day to

domestic supplies when they are producing

at capacity, but they will not stop the

decline in domestic production. The National Petroleum Council expects primary

and secondary production from known

reserves, excluding the north slope of

Alaska, to drop to 3 million barrels a day by

1985 [7]. The difference between declining

supply and increasing demand can be made

up only with imports and with enhanced

recovery techniques and new discoveries of

domestic oil.

The United States will continue to rely on

oil and natural gas for more than half of its

energy at least through 1985 because largescale new energy systems cannot be put

online before then. Although domestic coal

supplies are vast, coal production can, at

best, probably only hold fossil-fuel contributions to total energy supplies constant

through 1985.

The 1974-75 recession slowed the rate of

growth in energy demand and, at one point,

produced an absolute decline in demand

[51. But the Nation is recovering from the

recession and adjusting to a four-fold increase in the cost of energy, and demand is

rising again. The growth rate will probably

be lower than it was before the 1973-74 oil

embargo, but it is likely to remain strong

enough to widen the gap between demand

and domestic supply.

Growing reliance on imports to bridge

the gap could have disastrous consequences

for the economy and the pattern of life in

the United States. As the president noted on

April 18, oil imports cost $3.7 billion 6 years

ago and may cost $45 billion this year. In

addition to this massive outflow of capital,

the United States remains vulnerable to

cutoffs of supplies similar to the 1973-74

embargo. The “historic trends” analysis suggests that the most crippling consequence

of rising imports may occur in the 1980’s

when the United States could not buy

enough oil to meet demand at an acceptable price.

206
Ill. Standard Forecasts

As part of its analysis, OTA reviewed the

assumptions in forecasts published by the

Department of Commerce, EXXON Corp.,

and a draft forecast by the Federal Energy

Administration.

Table l-l

The first three projections estimate demand in 1985 for the industrial, residential/commercial, and transportation sectors

as well as supply of domestic and imported

oil and natural gas, coal, nuclear, and other

energy. These are shown in table 1-1. Table

I-2 shows the annual growth rates for the

three forecasts and their components.

DEMAND (in Quadrillion Btus)

1976 1985

Sector Actual FEA DOC EXXON

Res/Comm . . . . . . . . . . . . . . . ....27.40 31.6 30,2 34.3

Industrial. , . . . . . . . . . . . . . . . ....27.01 40.5 35.5 37.8

Transport . . . . . . . . . . . . . . . . . . . . 19.36 19.2 21.2 22.2

Total . . . . . . . . . . . . . . . . . . . . 73.77 91.3 86.9 94.3

Electric . . . . . . . . . . . . . . . . . . . . .. 21.37 31.4 32.6 32.5

(Note: Electricity, including conversion losses, has been distributed to the three end-use sectors.)

DOMESTIC SUPPLY (in Quadrillion Btus)

1976

Resource Actual

Oil and NGL. . . . . . . . . . . . . . . . .. 19.6

Natural Gas . .................19. 2

Coal . . . . . . . . . . . . . . . . . . . . .. ..13.7

Nuclear. . . . . . . . . . . . . . . . . . . . . . 2.0

Hydro and Other. . . . . . . . . . . . . . 3.1

Total . . . . . . . . . . . . . . . . . . . . 57.6

IMPORTS (in Quadrillion Btus)

1976

Resource Actual

Oil . . . . . . . . . . . . . . . . . . . . . . . . . 15.4

Natural Gas . . . . . . . . . . . . . . . . . . 1.0

Total . . . . . . . . . . . . . . . . . . . . 16.4

Grand Total . .................74. 0

FEA

23.9

16.9

21.6

7.2

4,3

73.9

FEA

16.0

2.0

18.0

91.9

1985

DOC

21.2

17.4

18.7

7.9

4.7

69.9

1985

DOC

16.9

1.4

18.3

88.2

EXXON

21.7

15.2

20.0

7.5

4.0

68.4

EXXON

23.8

3.4

27.2

95.6
.

Appendix I

Table I-2

Assumed Rates of Growth in Energy Demand

(in percents)

1950-1976

Total Energy. . . . . . . . . . . . . . . . . . 3.0

Transportation ..., . . . . . . . . . . . . 3.1

Residential/Commercial . . . . . . . . 4.0

Industry . . . . . . . , . . . . . . . . . . . . . . 2.3

A. Demand

Both the draft FEA and the Commerce

forecasts assume rates of growth in energy

demand that are about 20 to 30 percent

below the rate between 1950 and 1976 [5]

The assumed rates of growth in transportation, housing, and commercial activities are

about half the historic rate. Only the EXXON

forecast assumes a growth rate about equal

to the 1950-76 experience. (See table l-2.)

The Commerce and draft FEA projections

assume better-insulated buildings, more

efficient automobiles, more efficient electrical appliances, and a slower rate of new

household formation. Both expect higher

fuel prices and new taxes on inefficient

equipment to speed up replacement of existing automobiles and appliances with

more energy-efficient models.

All three forecasts assume that the

growth rate for industry will be close to the

preembargo rate because most “easy” conservation measures have been taken and

further steps will require larger capital investments than the forecasters believe are

likely.

1976-1985

FEA DOC EXXON

2.4 2.0 2.8

1.5 1.0 1.5

1.6 1.1 2.5

4.5 3.1 3.8

B. Supply

All three forecasts assume that problems

associated with development of new energy

supplies will be overcome-capital will be

available for development and conservation

measures, air quality and mining safety

problems encountered with the use of coal

will be resolved, and nuclear powerplants

will be built that satisfy environmental and

safety concerns.

The supply forecasts assume increases in

domestic energy resources of between 10

and 14 Quads by 1985. This rate of growth

means reversing recent trends. Domestic

energy production was virtually stagnant at

about 59.5 Quads between 1970 and 1976,

with an actual drop to 57.6 Quads in 1976.

Electricity: All three forecasts expect

utilities to increase supplies of electricity by

4.5 to 4.8 percent a year, and to use about

35 percent of primary energy supplies by

1985, compared with 28 percent in 1976.

The forecasts assume 7.5 Quads of nuclear

power from new plants generating 92,000

Megawatts (MWe) of electricity at a 60-percent capacity factor and existing plants

generating about 43,000 MWe, operating at

53 percent of capacity [8].

2 0 8
Oil: All three forecasts assume an increase in domestic oil production from the

present 8 million barrels a day to between

10 million and 11.5 million barrels a day.

The increases would come from Alaska production, extensive new discoveries-primarily on the outer Continental Shelf

(OCS)-and increased secondary and tertiary recovery from existing reservoirs. The oil

production forecasts assume removal of

price controls on new and enhanced oil.

The OCS projections assume resolution of

both environmental and technical problems

associated with offshore development and

optimistic rates of discovery.

Natural gas: The forecasts assume a

slowing of the rate of decline in natural gas

supplies as a result of new discoveries,

mostly on the OCS. The forecasts expect

declines in natural gas production over the

9-year period of 11 to 15 percent and

assume decontrol of new gas prices and a

resolution of OCS problems.

Other: The forecasts also assume some

expansion of hydroelectric capacity, generation of some geothermal electricity, and the

use of a small amount of solar heat.

C. Assessment

Although it is possible that the new supplies of nuclear power and coal assumed in

the three “standard” forecasts will be

available in 1985, it is by no means certain.

For example, meeting the implied nuclear

power timetable would mean trebling existing rates of plant construction and resolving

all safety, environmental, and financial

problems that now inhibit the growth of

nuclear capacity.

Cutting demand in transportation, housing, and commercial activities to the levels

assumed in the FEA and Commerce

forecasts will require significant changes in

attitudes and habits. Many economists insist

that low rates of growth in energy demand

cannot sustain the level of economic

growth the Nation needs to reduce

unemployment [91. But limitations on supply, both foreign and domestic, may drive

growth rates to even lower levels than those

forecast.

IV. The “Historic Trends” Analysis

With relatively modest changes in the

assumptions of the “standard forecasts, ”

the gap between U.S. demand and domestic

supply widens by 1985 to about 33 quads

(1 6.5 million barrels per day oil equivalent),

more than double 1976 levels. This shortfall

in domestic supply would occur if present

rates of demand growth do not change and

if aggregate domestic energy production

does not increase faster than historic trends

indicate it will.

209
Appendix I

A. OTA Assumptions economy with its attendant rising

The following analysis suggests that the unemployment by the end of that period-.

United States may be forced to choose be- Projecting historic trends in U.S. energy use

tween strong policies to lower the rate of and production gives the following situation

growth in energy demand during the next [5,101 :

decade and a severe shrinkage of the

Table I-3

DEMAND (in Quadrillion Btus)

Sector 1976

Res/Comm . . . . . . . . . . . . . . . 27.4

Industrial . . . . . . . . . . . . . . . . 27.0

Transportation . . . . . . . . . . . . 19.4

Total . . . . . . . . . . . . . . . . 73.8

DOMESTIC SUPPLY (in Quadrillion Btus)

Resource

Oil and NGL . . . . . . . . . . . . .

Natural Gas . . . . . . . . . . . . . .

Coal . . . . . . . . . . . . . . . . . . . .

Nuclear. . . . . . . . . . . . . . . . . .

Other , . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . .

IMPORTS (in Quadrillion Btus)

Resource

Oil . . . . . . . . . . . . . . . . . . . . . .

Natural Gas . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . .

Grand Total . . . . . . . . . . . . . .

*refer to Table 1-1.

1976

19.6

19.2

13.7

2.0

3.1

57.6

1976

15.4

1.0

16.4

74.0

Historic

Trends 1985

39.0

33.1

25.5

97.6

Historic

Trends 1985

20.3

14.4

18.8

6.8

4.3

64.6

Historic

Trends 1985

32.5

0.5

33.0

97.6

1985

FEA* DOC* EXXON*

31.6 30.2 34.3

40.5 35.5 37.8

19.2 21.2 22.2

91.3 86.9 94.3

FEA

23.9

16.9

21.6

7.2

4.3

73.9

FEA

16.0

2.0

18.0

9-1.9

1985

DOC EXXON

21.2 21.7

17.4 15.2

18.7 20.0

7.9 7.5

4.7 4.0

69.9 68.4

1985

DOC EXXON

16.9 23.8

1.4 3.4

18.3 27.2

88.2 95.6
In this forecast, the average rate of

growth in demand from 1950 to 1976 is

assumed to continue to 1985. * This rate, 3

percent, was chosen because it covers a

period during which higher-than-normal

growth rates of the 1960’s are balanced by

slower growth and, in some cases, absolute

declines in demand, following the 1973-74

embargo. The analysis assumes that the 3

percent figure will reflect recent changes in

the economy, such as a slowdown in new

household formations, recent energy price

increases, and the efficiencies in transportation and appliances mandated by the Energy

Policy and Conservation Act of 1975 [21.

The estimate that domestic production of

oil and natural gas liquids will be about 10

million barrels a day in 1985 is based on

continuation of the 1970-76 rate of decline

in domestic production, offset by production of 2 million barrels a day of Alaska

crude [51. This implies that the decline in

production from existing reservoirs would

be great enough that enhanced recovery

and new discoveries cannot make up the

difference.

The natural gas production estimate is

also based on the continuation of its present

rate of decline (since 1974). The resulting

production in 1985 is about 14.1 trillion

● The period of 1950-76 was chosen to establish the

historic trend in order to minimize the effects of shorter term

fluctuations such as the high 1960-73 growth rate of 4.0 percent and the decline occurring from 1973 to 1975. The

1960-73 period was one in which the decline in real energy

prices was greatest and the substitution of natural gas and

petroleum for coal was at its peak. During that period the annual energy growth rate was slightly higher than the GNP

growth rate. For the 1950-59 period the energy growth rate

was 3. I percent per year compared to a 3.9 percent per year

GNP growth rate. Since real energy prices have risen to levels

higher than in 1950, it is very unlikely that the 1960-73

growth rate can be duplicated. It IS of Interest to note that a

continuation of the 4.0 percent growth rate would lead to a

demand figure of 105 Quads by 1985 which would leave a

gap of 20 million to 22.5 million barrels per day.

cubic feet (Tcf). This is slightly higher than

the 13.8 Tcf which is projected by the

Federal Power Commission [11], (The FPC

projection is based on annual net additions

of reserves of 9.5 Tcf, the average since

1968.) In order to reach the natural gas output of 17 Tcf, which is assumed by the draft

FEA, Commerce, and Exxon projections, net

annual additions to reserves of 14.5 Tcf are

required, a level that has not been reached

since 1967 [1 O]. The “historic trends” estimates do not take into account Alaska gas,

which could total 1.0 Tcf a year but which is

not likely to be available before 1985, even

under the most optimistic assumptions [11.

Total nuclear generating capacity would

be 121,000 MWe in 1985 if all existing

plants and plants that already have been

granted construction permits are completed

and operating. The 1985 calculation

assumes a capacity factor of 60 percent,

compared with the 1976 average of 53 percent [3,8].**

Coal production is estimated at 9 5 0

million tons, 10 percent below the FEA

forecast but identical to the projection of

the National Coal Association. The lower

figure implies that environmental problems

which now limit the use of high-sulfur

Eastern coal will not be fully resolved by

1985 and that its replacement by low-sulfur

Western coal will be held down by production and distribution constraints.

The contributions of hydroelectric,

geothermal, and solar power are identical to

those projected by the FEA draft. Natural gas

import estimates are the volumes of liq-

“*The capacity factor for January 1977 was 67 percent, a

significant Increase over the yearly average. It is not known

whether this wiII be sustained but it IS possible that the

assumption of 60 percent wiII be low. A 70 percent capacity

factor would increase the nuclear contribution by 1.1 Quads

or 550,000 barrels per day equivalent.

211
Appendix I

uefied natural gas (LNG) that can be

delivered through facilities already licensed

[12]. The 1.0 Tcf of imported gas in 1976

comes from Canada and is not likely to be

available in 1985.

This analysis, using historic production

trends, shows a domestic supply of energy

about 5.6 Quads higher than the 1970-76

average because coal and nuclear power

would more than offset the decline in oil

and natural gas production. If, on the other

hand, this were not to occur and domestic

energy production remains constant at 59.5

Quads as it has since 1970, then the supply/demand gap would increase to 38.1

Quads. Translated into import requirements

this would mean that 18.8 million barrels

per day of oil would have to be imported to

fill the gap.

B. World Implications

The forecasts of U.S. energy supply and

demand through 1985 discussed in section

III project that the United States will import

between 8 million and 12 million barrels of

oil a day in that year. They also forecast

domestic production of oil and natural gas

liquids for the United States of as much as

12 million barrels a day.

The different assumptions implicit in the

“historic trends” analysis, however, give a

much bleaker picture. The implications of

the substantial increase in import requirements indicated by this analysis are clearly

seen when the world oil production

capability for that time period is examined.

Various estimates for that period indicate

that the 1985 import requirements for the

non-Communist world outside the United

States will be about 25.3 million barrels per

day [4,13]. This would be approximately

equal to the productive capacity of the

OPEC nations outside of Saudi Arabia

[4,131. OPEC analysts conclude that,

because of internal political pressures, Saudi

Arabia may be unwilling to push its production beyond 12.5 million barrels a day

before the mid-1980’s. Saudi officials also

have warned that unless the rate of growth

in U.S. demand is reduced in the next few

years, Saudi Arabia will make no effort to increase production after 1982.

If the United States were faced with the

demand/supply gap projected by the

historic trends analysis there would be a

shortfall on the world market of 4.5 million

barrels per day assuming Saudi production

of 12 million barrels per day. In the case discussed above where total U.S. domestic

production remained at the 1970-76 levels,

this shortfall would reach about 7 million

barrels per day under the assumption that

non-U.S. world demand remained at the 25

million barrel per day level.

The likely consequences of these

developments about potential U.S. imports

are one of two options for world producers

and consumers in 1985;

. Saudi Arabia will produce between 4

million and 7 million barrels a day

more than Saudi officials have said

they are willing to produce in 1985;*

. the world’s industrial nations will be

in a bidding war over 4 million to 7

million barrels of oil a day that will

drive prices up and still leave some or

all nations short of supplies,

● It should be noted that the maximum productive

capacity of Saudi Arabia has been estimated by the

Petroleum Industry Research Foundation to be about 20

million barrels per day. This is approximately the volume

that would be required if the Saudis were to meet the 7

million barrel per day shortfall. Therefore, not only political

limits, but very possibly physical limits, would be exceeded

by world demand.

212
V. Conclusion References

The “historic trends” analysis suggests

that international shortages and price rationing are inevitable if U.S. oil import demands are not reduced. The basic question

appears not to be whether the economy can

continue to grow under more stringent conservation policies but whether conservation

measures can take hold fast enough to head

off the crippling impact of abrupt oil shortages in 1985. Even if policies designed to

maximize domestic oil and natural gas production succeed, extension conservation

still will be necessary. Conversely, if

domestic energy production does not exceed present levels, conservation measures

probably cannot hold import demands at

levels which producers would be willing to

meet.

The goals of the OTA Energy Policy

analysis are to determine, from the perspective of this paper:

. Which set of related energy policies

is most likely to keep the gap between domestic supply and demand

narrow enough so that it can be

bridged in the short term; and

● What kind of policies are needed to

expand alternative energy supplies

over the long term so that the United

States will have a solid energy base

after world supplies of oil and natural

gas are exhausted.

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

[13]

1977 National Energy Outlook Draft,

Federal Energy Administration, Jan. 15,

1977.

Forecast of Likely U.S. Energy Supply/Demand Balances for 1985 a nd

2000 and Implications for U.S. Energy

Policy, Office of Energy Programs, U.S.

Department of Commerce, Jan. 20,

1977.

Energy Outlook 1977-90, EXXON Corporation, January 1977.

The International Energy Situation: Outlook to 1985, Central Intelligence Agency, Report No. ER77-1024OV,Apri l

1977.

Energy Perspectives 2, U.S. Department

of Interior, June 1976.

U.S. Department of Interior News

Release, Bureau of Mines, Mar. 14, 1977.

Enhanced Oil Recovery, National

Petroleum Council, December 1976.

Monthly Energy Review, Federal Energy

Administration, National Energy information Center, March 1977.

CRS Workshop on U.S. Energy Demand

and Supply for 1975-90, Feb. 28, 1977.

Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United

States and Canada as of December 31,

1975, American Gas Association,

American Petroleum Institute, and

Canadian Petroleum Association,

Volume 30, May 1976.

A Realistic View of U.S. Natural Gas Supply, Bureau of Natural Gas, Federal

Power Commission, December 1974.

Gas Supply Review, American Gas

Association, Volume 5, February 1977.

D. A. Rustow, Foreign Affairs, Vol. 55,

April 1977, p. 494.

213
Appendix II
Appendix II

The Presidential

Energy Initiatives:

Some Policy

Considerations

The recent Presidential Energy Message

to Congress has raised a number of varied

and important issues. The ongoing debate

over the proper course for public policy

would be enhanced, however, if additional

information and quantitative analyses were

available. The purpose of this paper is to

move toward this end with respect to three

diverse, but major, areas of concern. They

include:

Estimates of the price elasticity of supply (supply response to price changes)

for petroleum and natural gas from

future discoveries in the Outer Continental Shelf (OCS) and Alaska.

2. Estimates of the impact of deregulated

domestic petroleum prices on energy

industry profits and capital financing

requirements.

3. Estimates of the number and location

of future coal mine developments

necessary to meet stipulated consumption levels and sulfur constraints.

Price elasticity of supply

Major portions of the undiscovered oil

and natural gas resources in this country

have been forecast to lie in the public domain, either in the OCS or in Alaska (USGS,

1975). Because energy discoveries in these

areas tend to be more expensive to produce

than those in traditional areas and because

of their potential magnitude, the impact of

market prices on their development takes

on special significance.

2 1 6

Any forecast of price response must be

tentative, given the host of factors which

can influence the actual outcome. For that

reason, it is valuable to simulate possible

impacts using models which require all

necessary assumptions to be clearly

specified. Results can then be duplicated or

recomputed using alternative assumptions

and comparisons can be made.

That is the approach used here. A simulation model of private sector behavior under

public domain leasing arrangements provides the basis for analysis. Developed over

a 4-year period under National Science

Foundation funding, the approach has been

widely utilized for policy analysis in the past

(Kalter and Tyner, 1975a; 1975b; 1975c;

Kalter et al. 1975). Using concepts of probability theory and Monte Carlo techniques,

uncertainty in a number of variables which

influence production outcomes can be

handled.

For this analysis, potential hydrocarbon

discoveries in 13 offshore provinces serve

as the focus. ’ Figures II-1 and II-2 outline the

areas covered. Appendix A details the input

data and assumptions used in the analysis.

In general, however, U.S. Geological Survey

forecasts of hydrocarbon resources and

historical data were used as a basis for

deriving field size distributions and the expected number of fields in each OCS

subregion. Investment and operating cost

data were developed from National

petroleum Council information which

allowed estimates to be made for individual

reservoir sizes in five separate cost regions.

Then, the geologic and cost information

developed was used in conjunction with

1

Time was Insufficient to develop the necessary statistical information for an in-depth analysis of the onshore

Alaskan situation. However, the results obtained here can be

generalized to cover such areas. We will return to this point

below.
Figure II-1 Aggregated OCS Provinces Surrounding the Conterminous Lower 48 United States

I

I I

o9

Figure II-2. Aggregated OCS Provinces Surrounding Alaska

,

I

\

9

- *

2 1 7
Appendix II

the Monte Carlo simulation model at alternative levels of expected price. The results

of these simulations, when coupled with

the field number forecasts by size range,

provided the basis for the supply price

elasticity calculations.

Oil price levels of $11.64 per barrel (the

current upper tier regulated price), $13.75

per barrel (approximately the current landed

price for imports), $17.00 per barrel, and

$22.00 per barrel were simulated. Natural

gas prices of $1.40 per thousand cubic feet

(Mcf) (approximately the current regulated

price for new gas), $1.75 per Mcf (the President’s proposed new price level), and $2.25

per Mcf were tested. The current world oil

price is equivalent to a $2.43 per Mcf

natural gas price.

The results are summarized in table 11-1.

Arc elasticity values for various price ranges

are displayed for both oil fields (with associated natural gas) and nonassociated natural

gas fields (with associated natural gas liquids). The analysis assumed that a competitive leasing system, similar to the current

cash bonus approach, would be used to

allocate public domain lands to the private

sector for development and that development would not occur if the chance of a less

than normal profit falls below 50 percent.2

$11.64 per barrel in all but the high-cost

regions of the OCS.3 In these regions (Arctic

Ocean, Central Chukchi, Bering Sea, and

Cook inlet), some price elasticity is exhibited up to a $17.00 per barrel price. But

even then, only the highest cost areas

(Arctic Ocean and Central Chukchi) require

prices of $17.00 per barrel to foster

development. Most production in high-cost

regions will take place at prices equivalent

to current world market prices ($1 3.75 per

barrel). Small oil reservoirs (less than 50

million barrels) usually cannot be profitably

developed in high-cost areas even at $22.00

per barrel, whereas medium- and large-size

reservoirs are developable at prices below

$17.00 per barrel. Overall, supply is price

elastic in the $11.64 to $13.75 per barrel

range only, with moderate inelasticity between $13.75 and $17.00 per barrel and

high inelasticity over $17.00 per barrel.

Thus, supply availability from the OCS

appears more dependent on the pace of

Federal leasing and the size of resource discoveries than on price (assuming that price

is allowed to reflect inflationary impacts

over time).4 Higher prices for the produced

product would merely be reflected in higher

bids for OCS leases if the leasing system

were competitive and methods are devised

to reduce risk to the private sector

developer (such as greater use of contingency payments in lieu of the cash bonus).

The elasticity values calculated are startling but perhaps, on reflection, not surprising. For oil, supply is highly inelastic above

‘That is, a given percentage increase in oi1 prices wiII

result in a small percent change in production. An elasticity

value of one implies that the percentage change in price

2Nelther assumption, however, appears critical to the

results. Supplemental analysis showed that permitting

development whenever after-tax net present values were

positive (regardless of the probability of loss) actually

lowered the elasticity values in the few situations where

development was affected. Using a profit share form of leasing system had little impact on the results.

equals the percentage change in production. A value greater

than one means a greater percentage increase in production

(elastic supply) and conversely for a value less than one (inelastic supply),

4Note that the results shown assume real prices and

relate to total net production. Thus, they give no indication

of the sensitivity of production profiles (or timing) to price

changes.

218
Table II-1 .—Supply Price Elasticity Values by OCS Province Based on Monte Carlo Simulationa

Oil Natural Gas

Province

$11.64- $13.75- $17.00- $11.64- $1.40- $1.75- $1.40-

13.75 bbl. 17.00 bbl. 22.00 bbl. 22.00 bbl. 1.75/Mcf 2.25/Mcf 2.25/Mcf

1. Arctic Ocean . . . . 0.68 2.74 0.45

2. Central

Chukchi. . . . . . . .

3. Bering Sea. . . . . . .

4. Gulf of

Alaska . . . . . . . . .

5. Cook Inlet. . . . . . .

6. North Pacific. . . . .

7. Santa Cruz . . . . . .

8. S. California . . . . .

9. Central and

Western Gulf ., .

10. MAFLA . . . . . . . . .

11. North Atlantic . . .

12. Central

Atlantic . . . . . . . .

13. South Atlantic . . .

Overall. . . . . . . . . . . . .

1.81 — 0,29 0.29

2.99

0.46

0.24

0.20

1.76

2.60

0.32

0.41

0.32

2.60

—

6,23

—

4.08

0.04

4.28

0.83

0.20

0.19

0.04

0.51

0.24

0.10

0.05

0.18

0.20

0.05

0.02

0.03

0.12

1.92

0.41

0.12

0.10

0.09

0.25

0.00

0.05

0.08

0.02

4.24

0.00

0.06

0.03

0.06

2.7.5

0.00

0.12

0.06

0.33

0.20

0.08

0,04

0,08

0.03

0.02

0.04

0.48

0.13

0.12

0.27

0.00

0.03

0.00

0.00

0.04

0.00

0.00

0.04

0,00

0.04

0.18

1.85

0.64

0.08

0.81

0.14

0.04

0.20

0.35

0.11

1.17

0.04

0.00

1.00

0.04

0.69

0.13

0.04

0.41

0.62

a

See Appendix II for input data and assumptions used.

The situation for nonassociated natural With respect to onshore Alaska, the

gas is similar to that for oil. If anything, supply is even more inelastic to price changes.

However, development of gas in high-cost

regions will not commence below $1.75 per

Mcf. Small- and medium-size finds (below

600 Bcf) in many of these regions would

not be developed at prices as high as $2.25

per Mcf. Potential finds in the Bering Sea

and Cook Inlet, however, appear price

responsive over the range simulated. Overall, a unitary price elasticity is exhibited in

the range of $1.40 to $1.75 per Mcf (due to

additional reservoirs that would be

developed in the Bering Sea), but supply is

moderately inelastic between $1.75 and

$2.25 per Mcf.

results shown for higher cost OCS regions

will probably bracket the actual situation.

Geological Survey estimates (1975) indicate

that the bulk of Alaska’s undiscovered crude

oil and natural gas deposits occur in the

North Slope region, with small amounts of

resources in the south adjacent to the Gulf

of Alaska and Cook Inlet. Exploration and

production costs on the North Slope are

roughly equivalent to those in the Bering

Sea and Cook Inlet. For example, exploration costs per well are now approaching 10

million dollars in the N P R-4 area, whereas

2 1 9
.

Appendix II

Table II-2.—Cumulative Production by OCS Province Based on Monte Carlo Simulation

Province

$1 1.64/

bbl.

1. Artic Ocean ., . . . 2167.33

2. Central

Chukchi. . . . . . . . —

3. Bering Sea. . . . . . . 1685.56

4. Gulf of

Alaska ... , . . . . . 1612.46

S. Cook Inlet. . . . . . . 327.24

6. North Pacific. . . . . 586.43

7. Santa Cruz . . . . . . 273.07

8. S. California . . . . . 2081.77

9. Central and

Western Gulf... 2275.3 7

10. MAFLA . . . . . . . . . 1014.49

11. North Atlantic . . . 916.46

12. Central

Atlantic. . . . . . . . 1552.15

13. South Atlantic . . . 792.99

overall. . . . . . . . . . . . . 15285.32

Oil

(million barrels)

Natural Gas

(billion cubic feet)

$1 3.75/ $1 7.00/ $22.00/

bbl. bbl. bbl.

2391.90 3643.27 4018.64

2018.94 3174.43 3349.21

3298.11 3589.41 3749.66

1623.45 1634.53 1702.92

542.01 594.97 622.58

587.46 614.73 621.26

281.47 286.79 288,06

2142.32 2161.32 2176.3 5

2391.74 2409.55 2418.00

1045.46 1061.09 1069.65

927.13 932.69 1034.80

1560.97 1752.31 1806.55

815.43 828.14 835.68

19626.39 22683.23 23693.36

those in the Bering Sea are estimated at 8.5

million dollars (Kalter et al., 1975). Thus, by

analogy, price impacts on supply for similar

sized reservoirs in the North Slope can be

compared with those of the Bering Sea or

Cook Inlet. Similarly, conditions in southern

Alaska may be comparable, with regard to

costs, to those in the Gulf of Alaska or the

North Atlantic.

The results discussed above are basically

confirmed by actual experience. Current oil

prices are apparently adequate to foster

competitive bidding for OCS areas like

Cook Inlet, the Gulf of Alaska, and the

Atlantic. This is apparent from the results of

$1 .40/ $1 .75/ $2.25/

Mcf Mcf Mcf

— 4973.57 5293.26

— 3905.40 4185.2 4

3457.22 6278.61 6856.00

3415.61 3478.30 3496.61

643.62 675.63 1312.70

3124.67 3127.19 3129.24

463.12 467.92 474.53

1580.30 1607.09 1619,03

35494.89 35494.89 35494.89

1734.94 1746.1 5 1761.87

4430.18 4430.18 4430.1 8

3773.77 3802.27 3837.34

1242.84 1243.6 5 1434.15

59361.16 71230.85 73325.04

recent lease sales in those areas. Prudhoe

Bay development is occurring on Alaska’s

North Slope and plans are contemplated to

extend this activity offshore. The only issue

appears to be what reservoir sizes will be

developed once discovery occurs. This

analysis suggests that prices between

$17.00 and $22.00 per barrel (in real terms)

will have little impact on this question.

However, the analysis also suggests (see

table II-2) that hydrocarbon resources may

220
be in short supply relative to demands

Therefore, if continued price regulation is

contemplated as one means of reducing the

economic rent (excess profits) resulting

from hydrocarbon development, taxes

should be substituted to make up the

difference between the controlled price and

the market clearing level. Only in this manner can a situation of excess demand, like

that which has plagued the natural gas

market since the 1960’s, be avoided.

It must be recognized, however, that

unless price elasticity is actually zero, any

form of price regulation will lead to some

degree of inefficiency. This will occur even

with the imposition of an adequate tax to

bring consumer prices up to the world price

level. Without a tax, inefficiencies will

result under all conditions of price elasticity.

The question that must be resolved is

whether the equity aspects of the problem

outweigh any resulting losses in economic

efficiency and whether the price regulationtaxation approach is the “best” means of

treating the equity problem.

Oil price deregulation impacts

Currently, the wellhead prices for

domestic crude oil production are regulated

by the Federal Energy Administration. Production is divided into three components—

old oil, new oil, and stripper-well produc-

‘For example, the simulations indicated that a maximum

of 15 billion barrels of additional oil could be expected from

the OCS at $11.64 pet barrel prices and less than 24 billion

barrels at $22.00 per barrel, The value at current world 011

prtces approached 20 billion barrels. This is roughly a 3.2

year’s supply for the United States at the consumption rate

of 17 million barrels per day (just under the actual rate in

1976).

Similarly, natural gas availability at $1.40 per Mcf just exceeds 59 trillion cubic feet and Increases to 73 trillion cubic

feet at $2.25 per Mcf. The President’s proposal of $1,75 per

Mcf resulted in 71 trillion cubic feet, just about 3.5 year’s

supply at last year’s consumption rate.

tion. Old oil is priced at the so-called lower

tier ceiling which is the sum of the posted

field price on May 15, 1973 and $1.35 per

barrel. The national average price for old oil

was $5.17 per barrel in December of 1976.

New oil was priced at $11.64 per barrel and

stripper production (from wells producing

less than 10 barrels per day) was priced at

$13.30 per barrel (the stripper price has

since risen to world oil price levels).

The exact amount of old and new oil

being produced is somewhat difficult to

determine for a given reservoir or field, In

essence, all oil which is not new oil is old

oil. New oil, however, has changed definition somewhat over the past several years

and its current definition is difficult to apply

without historical information on a field’s

production. Perhaps the best working proxy

for purposes of policy analysis is to classify

all production which commenced after May

15, 1973 as new oil. Although this definition

ignores so-called “released” oil (old oil no

longer controlled at the lower tier price due

to previous Government action), the bias introduced is in underestimating the amount

of oil currently commanding upper tier

prices. Overall, approximately 50 percent of

domestic crude oil production was sold as

old oil in December of 1976, with 36 percent as new and 14 percent as stripper oil.

Aggregate values, such as these, or values

applying to one point in time are, however,

of little value in ascertaining the impact of a

policy which would deregulate domestic

crude oiI prices. For that purpose,

knowledge of future production profiles and

the division of those profiles among regulation categories is needed. Only with that

level of detail can accurate impacts on industry profits and capital financing requirements be assessed.

221
Appendix II

Knowledge of production profiles and

their division implies the availability of

detailed information on a field by field basis

so that proper account can be taken of production decline rates, the timing of production changes between regulatory categories

(i.e., old or new oil to stripper), and the exhaustion of primary-secondary production

in a reservoir. Apparently, information of

this type is not publicly available from

Government agencies or the industry.

For this evaluation, then, information had

to be independently developed. As a basis,

a computerized reservoir data file was used,

covering 835 oil reservoirs (385 fields) in 19

States. This data base was originally

developed, for the Government, by Lewin

and Associates, Inc., as part of a study on

enhanced oil recovery technology (1 977).

From that data base, the following information can be derived for each reservoir:

1. The volume of in-place oil yet to be

produced by primary and secondary

techniques (the FEA has proposed that

tertiary production receive world

prices).

2. The actual production in 1974.

3. The reservoir decline rate.

4. The number of producing wells located in the reservoir.

S. The year in which the reservoir was

first produced.

The data cover approximately 52 percent

of the known remaining oil in place in the

United States and 47 percent of actual 1974

domestic production. By 1976, this figure

had dropped to 40 percent if the decline

rates given are accurate.

Although caution must be used in interpreting the data (due to the use of

222

numerous sources leading to potential inconsistencies and the need to often estimate certain values like decline rates), this

file is probably the best available at the

present time. Given that qualification, the

following steps were taken with the data to

analyze the price deregulation issue.

1.

2.

3.

4.

For each reservoir, 1974 actual production, the decline rate and remaining

primary-secondary reserves were used

to derive a future production profile. It

was assumed, as is conventional, that

field production would decline exponentialIy (Roe-at) through time

(Newendrop, 1975). Cumulative production was constrained so as not to

exceed available reserves.

Based upon the year when field production commenced, the resulting production profile was then initially

assigned to either a new or old oil

category.

Annual production was then divided

by the number of producing wells to

ascertain if and when production from

the field should be assigned to the

stripper category. If this was called for,

the assignment was made at the proper

point in the production time horizon.

Finally, production profiles in the three

price categories (old, new, and stripper) were multiplied by assumed

values for regulated and deregulated

prices in each category. December

1976 price values ($5.1 7 per barrel for

old oil and $11.64 per barrel for new

oil) were used for the regulation

scenario and $13.75 per barrel was

used for stripper production and for

the case of deregulation.

The results are summarized in tables II-3,

II-4, and II-5 for both onshore and offshore
Table n-3.-Annual Oil Production by Price Category from Selected Known 1974

Onshore and Offshore Reservoirs for the Period 1977-94

(million barrels per year)

Onshore Productio n Offshore Productio n Total Productio n

Yea r

Old

0 i l

1977 . . . . 890.8

1978 . . . . 764.8

1979 . . . . 623.5

1980 . . . . 533.5

1981 . . . . 439.1

1982 . . . . 356.7

1983 . . . . 282.4

1984 . . . . 239.1

1985 . . . . 196.5

1986 . . . . 165.4

1987 . . . . 138.0

1988 . . . . 111.0

1989 . . . . 99.0

1990 . . . . 87.4

1991 . . . . 75.0

1992 . . . . 63.4

1993 . . . . 56.0

1994 . . . . 50.4

Total* .. .5171. 9

New Stripper Total* O l d New Stripper Total *

0 i l 0 i l 0 i l 0 i l 0 i l

3.3 105.1

2.9 99,9

2,6 101.7

2.3 92,4

2.1 86.4

1.8 81.7

1.6 78.1

1.4 71.2

1.3 69.4

1,1 66.0

1.0 61.6

0.9 62.5

0.8 56.3

0.7 50.0

0.6 47.1

0.6 43.7

0.5 41.0

0.4 37.5

26.1 1251.5

“Details may not add to totals due to rounding

999.2

867.6

727.8

628.2

527.6

440.2

362,1

311.7

267.2

232.5

200.6

174,5

156.2

138.1

122,7

107,7

97,5

88.3

6449.5

67.2 3.5 0.1 70.8

55.9 3.1 0.1 59.0

46.7 2.7 0.1 49.6

35.4 2.3 0.2 37,9

26.2 2.0 0.1 28.3

20.7 1.7 0.2 22.5

14.6 1.5 0,2 16.3

12.4 1.4 0.2 13.9

9.4 1.2 0.3 10,8

8.1 1.1 0.4 9.6

7.1 1.0 0.4 8.5

6.2 0.9 0.4 7,5

5.5 0.8 0.4 6.7

4.3 0.7 0.6 5.8

3.8 0.7 0.5 5,0

2.4 0.6 0,5 3.5

2.0 0,6 0.4 3.0

1.8 0.5 0.3 2.7

329.7 26.2 5.5 361.3

fields. Table II-3 displays the resulting production profiles through 1994.6 Table II-4

shows the gross revenue received by the oil

industry under the price regulation assumptions and table II-5 indicates the same information for deregulation.

These values need to be read with several

notes of caution, however. First, the production numbers indicate that 90 percent of the

reservoir sample output is initially (1 977)

classified as old oil, while less than 1 percent is new oil and almost 10 percent is

Old

O i l

958.0

820.7

670.2

568.9

465.3

377.4

297.0

251.5

205.9

173.5

145.1

117.2

104.5

91.7

78.8

65.8

58.0

52.2

5501.6

New Stripper Tota l

0 i l

6.8 105.2 1070.0

6.0 100.0 926. 7

5.3 101.8 777.3

4.6 92.6 666.1

4.1 86.5 555.9

3.5 81.9 462. 8

3.1 78.3 378.4

2.8 71.3 325.6

2.5 69.7 278.1

2.2 66.4 242.1

2.0 62.0 209.1

1.8 62.9 181. 9

1.6 56.7 162. 8

1.4 50.6 143.7

1.3 47.6 127. 7

1.2 44.2 111.2

1.1 41.4 100.5

0.9 37.8 90.9

52.3 1257.0 6810.9

derived from stripper production. Although

the sample pertains to less than 40 percent

of total 1977 production, this allocation

among price categories is substantially

different than the December 1976 value for

total domestic production of 50 percent old

oil, 36 percent new oil, and 14 percent stripper production. Obviously, new oil discoveries since 1974 would account for some of

this difference. But major portions may also

be due to our inability to distinguish between price categories with complete accuracy given the information in the data

base. A portion of the distinction may also

‘

iContlnued price reguIation would actually result in

some control well into the next century but the amounts

affected would rapidly decllne and become inconsequential

(relative to the total energy economy).

223
Appendix II

Table n-4.-Annual Gross Revenue Under Continued Price Regulation by Price Category

from Selected Known 1974 Onshore and Offshore Reservoirs for the Period 1977-94

(million dollars)

Onshore ProductIon Offshore Production Total Production

Year

Old New Stripper Total* Old

O i l O i l Oil Oil

1977 . . . . 4605.6

1978 . . . . 3953.9

1979 . . . . 3223.3

1980 . . . . 2758.3

1981. , . . 2270.1

1982 . . . . 1844.0

1983 . . . . 1460.2

1984 . . . . 1236.0

1985 . . . . 1016.1

1986 . . . . 855.1

1987 . . . . 713.3

1988 . . . . 574.2

1989 . . . . 512.0

1990 . . . . 452.0

1991 . . . . 387.5

1992 . . . . 327.8

1993 . . . . 289.3

1994 .., . 260.5

Total” . ..26738.9

38.4

34.1

30.3

26.9

23.9

21,3

18.9

16.8

15.0

13.3

11.8

10.5

9.3

8.3

7.3

6.5

5.8

5.2

303.7

1445.0 6089.1 347.4

1373.1 5361.1 288.8

1398.8 4652,4 241.5

1269.8 4055.1 182.8

1188.6 3482.6 135.3

1123.3 2988.6 106.8

1073.4 2552.5 75.2

978.3 2231.1 63.8

954.1 1985.1 48.4

907.3 1775.6 41.9

847.1 1572.2 36.8

859.5 1444.2 31.8

774.5 1295.8 28.4

687.6 1147.8 23.2

647.8 1042.7 19.6

600.8 935.1 12.4

564.0 859.0 10.5

515.0 780.5 9.5

17208 .044205.7 1704.5

‘Details may not add to totals due to rounding

be due to the known reservoirs, which are

not included in the data file, having a substantially different distribution of production among price categories. For example,

the sample includes most major fields and

reservoirs. The smaller field not included

may therefore contain a greater portion of

the stripper production or “released old”

oil. In any case, the direction of any analytical bias that results from these data

problems appears to be toward overestimating the financial impact of price

deregulation for the sample.

New

Oil

40.2

35.6

31.6

27.2

22.8

-19.3

17.4

15.6

14.1

12.8

11.5

10.5

9.5

8.6

7.9

7.2

6.6

6.0

304.7

O i l

1 . 8

1 . 6

1 . 8

3 . 2

2.0

2.3

3.1

2.3

3.7

5.2

5.3

5.6

5.5

8.3

7.2

6.7

5.0

4.6

75.2

Stripper Total . O l d New Stripper Tota l

O i l O i l O i l

389.4 4953.0 78.6 1446.8 6478.5

326.0 4242.7 69.7 1374.7 5687.1

275.0 3464.8 61.9 1400.6 4927.4

213.2 2941.1 54.1 1273.0 4268.3

160.1 2405.4 46.7 1190.6 3642.7

128.4 1950.8 40.6 1125.6 3117.0

95.7 1535.4 36.3 1076.5 2648.2

81.8 1299.8 32.4 980.6 2312.9

66.2 1064.5 29.1 957,8 2051.3

59.9 897.0 26.1 912.5 1835.5

53.7 750.1 23.3 852.4 1625.9

48.0 606.0 21.0 865.1 1492.2

43.4 540.4 18.8 780.0 1339.2

40.1 475.2 16.9 695.9 1187.9

34.7 407.1 15.2 655.0 1077.4

26,3 340.2 13.7 607.5 961.4

22.1 299.8 12.4 569.0 881.1

20.1 270.0 11.2 519.6 800.6

2084.4 28443.4 608.4 17283 .246290.1

world level (1 3.75) and remain at that real

value throughout the analytical time period.

This is probably a conservative judgment

with the probability of higher real prices

through time being greater. The result

would be an underestimation of deregulation impacts which becomes relatively more

severe through the time profile.

With these points in mind, one would

like to obtain an aggregate view of the impacts resulting from deregulation. If we

restrict our evaluation to known 1974 reservoirs, a range of impacts can be approxiOn the other hand, the deregulation

revenues shown result from the assumption

that all oil prices would rise to the current

224
Table II-5.—Annua[ Gross Revenue Under ‘Price Deregulation by Price Category from Selected

Known 1974 Onshore and Offshore Reservoirs for the Period 1977-1994

(million dollars)

Onshore Product Ion Offshore Production Total Production

Year

Old New Stripper Total* o l d New Strippe r

0 i l Oil Oil Oil Oil

1977 . . . . 12249.0 45.3

1978 . . . . 10515.6 40.3

1979 . . . . 8572.6 35.8

1980 . . . . 7335.9 31.8

1981 . . . . 6037.4 28,3

1982 . . . . 4904.2 25.1

1983 . . . . 3883.4 22.3

1984 . . . . 3287.1 19.8

1985 . . . . 2702.3 17.6

1986 . . . . 2274.1 15.7

1987 . . . . 1897.1 13.9

1988 . . . . 1527.1 12.4

1989 . . . . 1361.7 11.0

1990 . . . . 1202.0 9.8

1991, . . . 1030.6 8.7

1992 . . . . 871.8 7.7

1993. , . . 769.4 6. 9

1994 . . . . 692.7 6.1

Total” . . . 71114.2 358.8

1445.0 13739.4 924.0

1373.1 11929.0 768.1

1398.8 10007.2 642.5

1269,8 8637.6 486.3

1188.6 7254.3 359.8

1123.3 6052.6 284.0

1073.4 4979.2 200.0

978.3 4285.3 169.7

954.1 3674.0 128.7

907.3 3197.1 111.4

847.1 2758.1 98.0

859.5 2399.0 84.7

774.5 2147.1 75.6

687.6 1899.4 61.8

647.8 1687.1 52.2

600.8 1480.3 32.9

563.9 1340.2 27.9

514.9 1213.7 25.3

17208 .088681.04533.2

“Details may not add to totals due to rounding

mated. 7 Assuming that the reservoir sample

will continue to reflect 47 percent of the

production from 1974 reservoirs impacted

by price regulation and that the decline rate

of the remaining 53 percent is similar to that

of the sample, the overall impacted production profile can be approximated.

It is unlikely that the distribution of this

additional production among price categories would be more heavily weighted

toward old oil than that of the sample. Thus,

“If all discoveries since 1974 were permitted to obtain

market price for production, the coverage of the analysis

would be complete. To the extent this is not allowed under

continued regulation, deregulation impacts would be understated. The extent depends on the price level permitted for

this production, the reserves Involved and the associated

decline rates.

47,5

42.1

37.4

32.2

26.9

22.8

20.5

18.5

16.7

15.1

13.6

12.4

11.2

10.2

9.3

8.5

7.8

7.1

359.9

1.8

1.6

1.8

3.2

2.0

2.3

3.1

2.3

3.7

5.2

5.3

5.6

5.5

8.3

7.2

6.7

5.0

4.6

75.2

Total*

973.3

811.8

681.7

521.6

388.7

309.2

223.7

190.5

149.1

131.7

116.9

102.7

92.3

80.3

68.7

48.1

40.8

37.0

4968.3

Old New Stripper Total

O i l O i l O i l

13173.0

11283.7

9215.1

7822.2

6397.2

5188.2

4083.4

3456.8

2831.0

2385.5

1995.1

1611.8

1437.3

1263.8

1082.8

904.7

797.3

718.0

92.8 1446.8

82.4 1374.7

73.2 1400.6

64.0 1273.0

55.2 1190.6

47.9 1125.6

42.8 1076.5

38.3 980.6

34.3 957.8

30.8 912.5

27.5 852.4

24.8 865.1

22.2 780.0

20.0 695.9

18.0 655.0

16.2 607.5

14.7 568.9

13.2 519.5

14712.7

12740.8

10688.9

9159.2

7643.0

6361.8

5202.9

4475.8

3823.1

3328.8

2875.0

2501.7

2239.4

1979.7

1755.8

1528.4

1381.0

1250.7

75647.4 718.1 17283 .293649.3

one extreme of the impact range can be that

all production not in the sample is classified

as stripper oil.

Table II-6 summarizes these results for

two price scenarios. The first assumes a constant deregulated price of $13.75 per barrel,

while the second permits price to compound at 5 percent per year. The total impacted production profile as well as the

range in net income (after taxes) to producers is shown for each deregulation situation. 8

8

It was assumed that 48 percent of the gross revenue addition resulting from deregulation would accrue to the

Federal Government as taxes, with an additional 4 percent

(on average) going to the States. This implies that all producer tax deductions, credits, and exemptions had been

used to offset income taxes on the regulated portion of gross

revenue,

2 2 5
Appendix II

Table n-6.-Net Revenue Gain to Energy Producers from Oil Price Deregulation of Known 1974

Reservoirs for the Period 1977-94

(million dollars)

Year

1977. . . . . . . . . .

1978 . . . . . . . . . .

1979 . . . . . . . . . .

1980. . . . . . . . . .

1981 . . . . . . . . . .

1982. . . . . . . . . .

1983. . . . . . . . . .

1984. . . . . . . . . .

1985. . . . . . . . . .

1986. . . . . . . . . .

1987. . . . . . . . . .

1988. . . . . . . . . .

1989. . . . . . . . . .

1990. ......,. .

1991 . . . . . . . . . .

1992. . . . . . . . . .

1993. . . . . . . . . .

1994. ......,. ,

Total . . . . .

Present

Value Total . . . .

Total

Production

(million

barrels)

2276.6

1971.7

1653.8

1417.2

1182.8

984.7

805.1

692.8

591.7

515.1

444.9

387.0

346.4

305.7

271.7

236.6

213.8

193.4

14491.3

—

$13.75 Deregulated

Price

$ 3952.3- 8409.2

3386.4- 7204.4

2765.0- 5884.1

2347.5- 4994.9

1920.4- 4086.1

1558.3- 3314.5

1226.3- 2609.2

1038.8- 2209.8

850.8- 1809. 6

716.8- 1525. 0

599.6- 1275. 8

484.3- 1030. 9

431.7- 919. 1

378.2- 806. 5

325.7- 693. 3

272.5- 579. 2

240.4 - 510.6

215,7- 459. 3

$22732.7 -48320.8

$15186.3 -32311.4

The annual impacts range as high as $8.4

billion per year in 1977 to a low of $216

million in 1994 for the $13.75 price scenario

with all reservoirs not in the sample

assumed to be under stripper production.

The absolute impact over the 18 year period

could range from a low of $22.7 billion to a

high of $68.6 billion, with a present value

impact (at a 10 percent discount rate) which

ranges from $15.1 billion to $41.1 billion.

These values can be compared to capital

requirements of the industry which have

226

Annual 5-Percent

Compound Price Growth

$ 3952.3- 8409.2

3656.5- 7784. 8

3216.3- 6856. 4

2936.1- 6264. 4

2577.8- 5506. 6

2440.4- 4792.3

1885.3- 4042. 4

1706.1- 3663. 6

1489.3- 3206. 7

1336.1- 2885.3

1188.7- 2574. 8

1017.6- 2217.9

964.2- 2104. 9

897.8- 1964. 4

818.1- 1795.5

723.3- 1594.3

674.9- 1492, 3

641.6- 1422. 6

$32122 .4-68578.4

$19317 .4-41083.2

been forecast over similar periods of time.

The impact of a “plowback” provision as

part of any deregulation policy can then be

evaluated. For example, the 1976 National

Energy outlook (FEA) forecasts the most

likely capital requirements of the petroleum

industry between 1975 and 1984 as $147.6

billion. 9 This is an average of $15 billion per

year. FEA estimated that this could range be9

Thls forecast is in 1975 dollars, pertains only to the exploration, development and production phases of the industry and exludes lease acqulstion costs. Note that It does not

extend to the last 11 years of our analysis.
tween $9 billion and $19 billion per year.

The forecast of maximum net revenue gain

from deregulation is, therefore, just over 56

percent of the average capital requirement

in the best year (1 977). However, for the

reference case, deregulation could result in

as little as 26* percent of capital requirements in the best year. These values decline

to between 7 percent and 24 percent by

1984, Using the $9 billion and $19 billion

range for capital requirements, rather than

the reference case, results in a 21- to 93-percent value for 1977 and a 5- to 41 -percent

value for 1984.

Coal mine developments

A substantial increase in the use of coal

by 1985, as called for by the President’s

plan, will necessitate the establishment of

new mining facilities. Moreover, if air

quality standards are to be met, low sulfur

coal deposits will need to be the object of

these new facilities. Such deposits are often

located in areas which are not traditionally

producers of large quantities of coal. Thus,

for both national and regional planning purposes, information on the number, size, and

general location of these new facilities

would be useful. This type of information is

necessary if evaluations of labor force

issues, reclamation problems, transportation

system adequacy, and the ability to meet air

quality standards are to be made.

For this evaluation, a multiperiod spatial

allocation model of the United States coal

industry (LeBlanc, 1976) was used as the

basis for determining future mine developments through 1985, The model uses exogenous forecasts of consumption in 49

regions and determines the least-cost set of

coal shipments from 33 supply regions

which will satisfy those forecasts given

sulfur, resource, transportation, and market

constraints, as well as production and

transportation economics. More

specifically, the effect of the contract-spot

market aspects of coal sales on delivery and

development patterns over time is considered, along with quality differences

among supply regions in coal sulfur and Btu

content. Model runs take place in a recursive fashion to permit solutions through

time which take account of past contracts

and reserve depletion. Both underground

and surface mining possibilities (with

different resource bases and production

costs) are incorporated. Alternative levels of

sulfur emission and coal consumption can

be investigated. Rail, barge, and minemouth electricity generation (and subsequent transportation of electrical energy

rather than fossil fuel) are evaluated as

possible transportation modes, although

coal transshipment and modal capacity

limitations resulting in possible transportation bottlenecks are incorporated. Additional detail on the model, the data sources

used, and the assumptions specified can be

found in LeBlanc (1 976).

Figures II-3 and II-4 display the demand

and supply regions, along with their central

nodes, used for this analysis. Tables II-7 and

II-8 list these regions. For this evaluation, it

was assumed that 1.164 billion normal

tons.

10 (24 million Btus per ton) of coal

would be consumed by 1985. This is slightly

less than the President’s new goal of 1.279

billion normal tons.11 We assumed an exponential increase in demand from current

10Because a ton of coaI trom differlng supply nodes may

vary in heat content (ie., Btus per ton), a normaltzatlon of

values must occur which places all tons In equivalent units.

11 Note that the White House recently increased the actual tonnage requirements under the energy plan to 1.235

billion tons per day from the previously announced 1,070

billion tons (Wall Street Journal, June 2, 1977),

227
Appendix II

I 4Y I ●

I

Figure II-4. Model Supply Regions and Central Nodes

228
Table II-7 .—Demand Regions

, .

State

Alabama . . . . . . . .

Arizona . . . . . . . . .

Arkansas . . . . . . . .

Colorado. . . . . . . .

Connecticut . . . . .

Delaware ., . . . . . .

District of

Columbia. . . . . . .

Florida . . . . . . . . . .

Georgia . . . . . . . . .

Illinois . . . . . . . . . .

Indiana. . . . . . . . . .

Iowa. . . . . . . . . . . .

Kansas . . . . . . . . . .

Kentucky . . . . . . . .

Louisiana . . . . . . . .

Maryland . . . . . . . .

Massachusetts. . . .

Michigan . . . . . . . .

Minnesota. . . . . . .

Mississippi. . . . . . .

Missouri. . . . . . . . .

Centroid Location

Region Latitude Longitude

01

02

03

05

06

07

08

09

10

12

13

14

15

16

17

19

20

21

22

23

24

(Degrees) (Degrees)

33.23

36.05

34.92

39.27

41.28

38.37

38.53

28.50

33.30

40.07

39.38

41.52

38.46

37.41

30.36

38.55

42.05

42.39

45.45

30.28

38.33

87.05

110.59

92.76

105.20

72.44

75.19

77.07

83.50

84.10

89.00

86.32

92.56

95.11

86.08

93.06

76.42

71.22

83.46

93.35

89.02

91.39

levels (using information on likely additions

to electrical generating capacity for 1980)

allocated among demand regions in the

same ratio as recent forecasts by Johnson

(Gordon, 1975). Table II-9 displays these

allocations (in normal tons) by demand

region for 1980 and 1985. Johnson used

commitments of planned electrical utilities

as his basis and estimated coal’s share of

new capacity as a function of price.

The model was then run for 1980 a nd

1985 under two different sets of supply

constraints. First, for States east of the

Mississippi (regions 1 through 20), logistical

constraints were imposed in each region

State

Montana . . . . . . . .

Nebraska . . . . . . . .

Nevada . . . . . . . . .

New Hampshire . .

New Jersey . . . . . .

New Mexico . . . . .

New York . . . . . . .

North Carolina . . .

North Dakota . . . .

Ohio . . . . . . . . . . .

Oklahoma . . . . . . .

Pennsylvania . . . . .

South Carolina . . .

South Dakota . . . .

Tennessee . . . . . . .

Texas . . . . . . . . . . .

Utah. ., . . . . . . . . .

Vermont . . . . . . . .

Virginia . . . . . . . . .

Washington. . . . . .

West Virginia . . . .

Wisconsin . . . . . . .

Wyoming. . . . . . . .

Region

25

26

27

28

29

30

31

32

33

34

35

37

39

4 0

41

42

43

44

45

46

47

48

49

which limited surface

Centroid Location

Latitude Longitude

(Degrees) (Degrees)

46.10 107.22

41.17 96.28

36.13 115,02

43.09 71.28

40.23 74.29

36.41 108.28

42.35 77.08

35.41 80.12

47.15 100.57

40.00 81.59

34.40 98.22

40.30 78.25

33.28 80.37

44.36 99.46

36.04 86.10

31.53 96.14

40.04 111.22

44.29 73.13

37.23 78.12

46.42 122.58

39.10 80.51

43.22 88.38

42.23 108.02

and underground

development, separately, to 5 million tons

per year or 10 percent of 1973 production,

whichever is greater. Only the existing

reserve base constrained other regions. The

rationale for this scenario is to restrict new

mine openings in the smaller Eastern supply

regions to practical limits of manpower and

land availability. Normally, the 5-million ton

14 -43(1 f) - ‘7’7 - 17

229
Appendix II

constraint was the operational restriction.

Second, it was assumed that the only constraint on new mine development in a given

supply region was the adequacy of reserves

to meet long-term (20-year) contracts. Both

scenarios considered the entire reserve

base, including coking coal, for the analysis.

Coking coal is low in ash and sulfur and high

in Btu content and usually commands a premium price because of these characteristics.

Also, both cases assumed that national

standards on the amount of sulfur oxide

emissions from the consumption of coal

would apply. This standard is now set at 1.2

pounds of SO2 per million Btus of energy

derived and was used for the time period

analyzed. 12

1 2Stack- scrubber technology to remove sulfur after burning was not assumed for this analysis since great technological and Iogistical uncertainty surround its Introduction.

Table n-8.-Supply Regions

State a

Centroid Location

Region Latitude Longitude

(Degrees) (Degrees)

NW Pennsylvania.

SW Pennsylvania .

NE West Virginia .

N West Virginia . .

S West Virginia. . .

Ohio-Pennsylvania

SE Ohio . . . . . . . . .

E Kentucky. . . . . . .

KentuckyTennesseeVirginia . . . . . . . .

Central Tennessee

Alabama . . . . . . . .

W KentuckyIndiana. . . . . . . . .

Central lndianaIllinois . . . . . . . . .

S Illinois. . . . . . . . .

Central Illinois. . . .

N Illinois-Indiana. .

N Missouri. . . . . . .

Missouri-Kansas. . .

OklahomaArkansas . . . . . . .

Texas . . . . . . . . . . .

W North Dakota. .

NW South Dakota

E Montana. . . . . . .

SE Montana. . . . . .

NE Wyoming. . . . .

Washington. . . . . .

SW WyomingColorado . . . . . . .

NE Colorado . . . . .

SE ColoradoNew Mexico . . . .

NW New MexicoColorado . . . . . . .

Arizona-Utah. . . . .

NW Utah. . . . . . . .

W Colorado . . . . .

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

41.30

40.47

39.10

39.02

38.00

40.28

39.45

37.28

37.06

35.45

33.30

37.46

40.00

37.54

39.33

41.07

39.25

37.50

35.28

31.45

47.21

45,30

46.48

45.54

44.27

47.54

41.36

40.25

37.10

36.34

34.54

39.35

39.32

78.14

79.10

80.03

80.28

81.30

80.55

81.32

83.31

82.48

85.28

86.40

87.07

87.30

88.55

89.18

90.10

92.27

94.22

94.48

96.10

102.28

102.00

105.20

106.37

105.22

121.32

109.13

104.42

104.30

108.12

110.09

110.48

107.48

‘N W= Northwest, SW= Southwest, NE= Northeast,

N= North, S= South, SE= Southeast, E= East, W= West.

230
Table ll-9.—Exogenous Consumption Allocation Among Demanding Regions for 1980 and 1985

(thousand normal tons)

Region 1980 1985

Allocation Allocation

Alabama. . . . . . . . . . . . .

Arizona . . . . . . . . . . . . .

Arkansas. ..., . . . . . . . .

Colorado . . . . . . . . . . . .

Connecticut. . . . . . . . . .

Delaware. . . . . . . . . . . .

District of Columbia. . .

Florida . . . . . . . . . . . . . .

Georgia . . . . . . . . . . . . .

Illinois . . . . . . . . . . . . . .

Indiana. . . . . . . . . . . . . .

Iowa. . . . . . . . . . . . . . . .

Kansas . . . . . . . . . . . . . .

Kentucky . . . . . . . . . . . .

Louisiana . . . . . . . . . . . .

Maryland . . . . . . . . . . . .

Massachusetts . . . . . . . .

Michigan . . . . . . . . . . . .

Minnesota . . . . . . . . . . .

Mississippi . . . . . . . . . . .

Missouri. . . . . . . . . . . . .

Montana . . . . . . . . . . . .

23037

5856

4200

4572

179

1557

638

14758

39954

44000

44895

6668

48722

39787

13568

19931

4129

44895

3939

5219

23717

5964

33743

8577

6285

6425

269

2288

942

21617

58523

50000

65760

15576

71512

58278

19874

29201

6056

65760

3939

7645

17114

8736

As a result of these two scenarios, model

runs produced a range of results for the

1980 and 1985 time periods. Table II-10

presents these production values for the

various constraints, supply regions, mining

conditions (surface and underground), and

years. The tonnages shown are in physical

rather than normal, tons. The results indicate marked shifts in the location of new

production facilities are likely under various

constraint levels. This confirms the results of

previous analyses (LeBlanc, 1976). For exampie, in LeBianc’s study, imposition of naRegion

(thousand normal tons)

Nebraska . . . . . . . . . . . .

Nevada. . . . . . . . . . . . . .

New Hampshire . . . . . .

New Jersey . . . . . . . . . .

New Mexico . . . . . . . . .

New York . . . . . . . . . . .

North Carolina . . . . . . .

North Dakota . . . . . . . .

Ohio. . . . . . . . . . . . . . . .

Oklahoma . . . . . . . . . . .

Pennsylvania. . . . . . . . .

South Carolina . . . . . . .

South Dakota . . . . . . . .

Tennessee . . . . . . . . . . .

Texas . . . . . . . . . . . . . . .

Utah . . . . . . . . . . . . . . . .

Vermont. . . . . . . . . . . . .

Virginia . . . . . . . . . . . . .

Washington. . . . . . . . . .

West Virginia . . . . . . . .

Wisconsin . . . . . . . . . . .

Wyoming. . . . . . . . . . . .

Total . . . . . . . . . . .

1980 1985

Allocation Allocation

2996

7916

1281

3486

13338

11019

40854

4255

92746

5466

49604

10079

1186

29696

44000

8598

50

16378

10288

46507

8079

6288

814295

8614

11595

1884

5114

19536

16148

59841

6232

135851

8153

72666

15936

1737

43497

64548

12594

73

23989

15069

68122

5754

9210

1164283

tional sulfur standards resulted in major production shifts toward the Western States

(given the eastern logistical constraint).

Here the situation is similar until the logistical constraint is removed. The total cumulative new eastern development (in tons per

year) for the case with logistical constraints

was only 29 percent of the total, whereas it

rose to 76 percent when these constraints

231
Appendix II

Table 11-10.—lncremental Production Capacity Required by Region, Mine Type, and Year

(thousand physical tons)

Eastern Logistical Constraints

Region 1980 1985

Surface Underground Surface Underground

Reserve Constraints

1980

Surface Underground

1985

Surface Underground

NW Pennsylvania 5000

SW Pennsylvania 7000

NE West Virginia, 5000

N West Virginia. . , 5000

S West Virgini a 7000

Ohio-Pennsylvania 5000

SE Ohi o 5000

E Kentuck y 7000

Kentucky -Tennessee-Virginia 9000

Central Tennessee. 4237

Alabama . 305

W Kentucky-Indiana 9600

Central Indiana-lllmols 5000

S Illinoi s 5000

Central Illinoi s 2123

N Illinols-lndian a 5000

N Missour i 3586

Missouri-Kansa s 2145

Oklahoma-Arkansas 7000

Texa s 22770

W North Dakota’ —

NW South Dakot a 2091

E Montan a —

SE Montana-NE Wyoming 47819

Washington —

SW Wyoming-Colorado 8236

NE Colorad o —

SE Colorado-New Mexico —

NW New Mexico-Colorado 60213

Arizona-Uta h —

NW Uta h 1000

W Colorad o 1787

88

—

4985

5000

7000

3821

5000

5000

5000

5000

5000

—

28514

39965

20269

20279

2000

2000

81918

4000

2000

729

4600

9525

2200

2123

2000

6783

2000

30289

14182

—

2091

27

5140

—

8669

—

—

7014

—

1000

1787

50

—

—

—

—

—

—

43897

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

— —

1 —

1 —

1 —

147774 —

6908 —

— —

1 —

104976 —

2338 —

1 —

— —

22398 —

— —

— —

— —

— —

— —

1 —

3780 —

— —

— —

3541 —

42393 —

— —

11159 —

— —

— —

32593 —

— —

1 —

— —

—

5015 —

5000 —

—

7000

11000

—

7000

—

5000

5000

—

5000

5000 — —

5000 — —

5000

5000

1

— —

—

—

—

—

— —

—

—

—

—

—

—

—

5000

7011

—

—

—

—

—

—

—

—

2991

14259

244921

—

—

—

—

1284?

—

— —

— —

—

—

—

— 47492 — —

— 1 —

—

— —

● These two supply regions have been combined because of their similar geologic and coal characteristics, as well as the

nearly identical production and transportation costs involved.

232
were removed. In the West, new development is concentrated in Montana, Wyoming, and the Northwest New Mexico-Colorado regions. In the East, however, lowsulfur, high-Btu coal in Eastern Kentucky,

Tennessee, Virginia and Southern West

Virginia receive the greatest call for new

development. It should be noted that these

are precisely the deposits whose characteristics make them valuable for coking coal.

If these deposits are difficult to burn i n

utility boilers, expensive to mine, and command a premium price for steel making, as is

often argued (Gordon, 1976), the likelihood

of achieving the result shown will be

remote. However, as indicated above, the

two cases should bracket the range of actual

results.

With that in mind, we can convert the requirements for new additions in productive

capacity for 1980 and 1985 to an estimate

of new mining facilities. The model

assumed (for production cost purposes) that

surface mines would be either 1 million or 5

million ton per year facilities and that underground mines would be 1 million or 3

million ton per year operations. For purposes of analysis, we have assumed that

new western surface mines will average 5

million tons per year capacity, while eastern

surface mines will average only 1 million

tons per year. All underground facilities

were sized at 1 million tons per year. Table

II-11 displays the cumulative new mine

developments, by region, which would be

required by 1985 to approximate the President’s production goal.

of reserves restricts new development. In

either case, new development is concentrated in surface mining operations (78 to 92

percent of the new facilities). Thus, any increase in the average eastern surface mine

size could substantially impact the number

of new mines required (but not the total

production involved). For example, if all

new surface mines average 5 million tons

per year capacity, the number of new

developments would be reduced to between 180 and 192 (the higher number in

the case of the eastern logistical constraint

where somewhat more underground production occurs).

Cumulative new development by 1985

must reach approximately 700 million tons

(a capacity greater than total 1976 production). Since the bulk of this amount is surface mine development (due to lower production costs), the degree of land disruption

involved will heavily depend on the new

mine locations. Western areas, with thicker

and more contiguous coal seams, could be

developed with substantially less disruption

and, perhaps, with more easily accomplished reclamation practices. On the

other hand, development of hundreds of

new strip mines by 1985 may constrain

equipment suppliers and prohibit achievement of the Presidential goal. In any case,

the number of new developments that

would be required in such a short time

period has no antecedent in our history.

The number of new mine developments

required range from 300, in the situation

where logistics restrict access to eastern

deposits, to 585, when only the availability

233
Appendix II

Table 11-11 .—Number of New Mine Developments Required by Region and Mine Type*

Region

Eastern Logistical Constraints Reserve Constraints

Surtace Underground Total Surface Underground Total

NW Pennsylvani a

SW Pennsylvani a

NE West Virginia ., .,

N West Virginia ... ., ., .,

S West Virginia . ,

Ohio-Pennsylvani a

SE Ohio. . : :

E Kentucky . . . .

Ken. -Tenn.-Vlr.. ., ... . .

Central Tennesse e

Alabama . . . . . ., .

W Kentucky -lndian a

Central Indiana-llllnols. . . . .

S Illinois. . ,

Central Illinois . . . . . .

N Illinois-tndiana ,

N Mlssouri ... . . . . . .

Missouri-Kansas ... .. .

Oklahoma-Arkansas .

Texas. . . . . . . . .

W North Dakota, ... . . . .

NW South Dakota . . . ., .,

E Montana . . . . . . . . . .

SE Montana-NE Wyoming .

Washington . . ., .,

SW Wyoming-Colorado . . . . . . . .

NE Colorado....,.,,, .

SE Colorado-New Mexic o

NW New Mexico-Colorado . . . .

Arizona-Utah .,,,,.,, .. ..,.. ,

NW Utah . . ... . . . . . .

W Colorado . . . . . . . . . . . .

Total ., ... , . . . . ... .

8 8

1 2 0

100

10.0

1 2 0

10.0

5 0

1 2 0

14.0

4.2

0.3

9 6

1 0 0

1 0 0

2 1

5 0

0,7

0.4

2.4

6 0

—

1.0

2 9

58.6

—

4.2

—

—

21.5

—

0 2

0.4

233.3

01

—

100

5,0

120

—

—

120

160

—

12.0

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

67.1

8.9

12.0

200

150

24.0

10.0

50

24.0

300

4.2

12 .3

9.6

100

10.0

21

5.0

07

04

2.4

60—

10

2.9

58.6—

4.2—

—

21.5—

0.2

0.4

300,4

—

28,5

40,0

20.3

168 1

8.9

2.0

81.9

109 0

4.3

0 7

4.6

31.9

2.2

2 1

2,0

1 4

0.4

6 1

3.6

—

0.4

0 7

9.5—

4.0—

—

7.9

—

0.2

0,4

541.1

0.1

—

—

—

—

—

—

43. 9

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

44.0

() .1

28.5

40.0

20. 3

168 1

8.9

2.0

1 25. 8

109 .0

4.3

0 .7

4.6

31.9

2.2

2.1

2.0

1.4

0 .4

6 1

3.6

—

0. 4

0 7

9.5

—

4.0

—

—

7.9

—

0 2

0.4

585,1

“Assumes 1 million ton per year underground facilities and surface facilities of 5 million tons per year west of the Mississippi

and 1 million tons per year east of the Mississippi.

234
Appendix A

Supply Price Elasticity

Analysis: Data Sources

and Assumptions

The analytical model used for the Monte

Carlo simulation which served as the basis

for this evaluation was developed under National Science Foundation funding and is

fully detailed in other publications (Tyner

and Kalter, 1976). The interested reader

should refer to them for further details.

The model, however, requires input data

on geologic, cost, and other economic

variables. Many of these values must be in

the form of probability distributions if the

model’s full capabilities to consider uncertainty are to be utilized. The basic information on the values used for this analysis

were developed by the author in other

research (Kalter et al., 1975), A full explanation can be obtained by referring to that

publication. What follows will be a summary of the data used.

The information used pertains to water

depths out to 200 meters. Exploration, investment and operating cost data were

derived from National Petroleum Council

(1973) research and modified to reflect

1975 values and our regional format, Cost

relationships were then derived which permitted investment costs to be estimated for

any size of reserve sample picked by a

Monte Carlo iteration. Table II-A-3 displays

the five cost regions specified for the

analysis and the factors used to determine

actual costs in a given region. Table II-A-4

summarizes the oil and natural gas cost

values used for selected reservoir sizes.

Finally, table II-A-5 displays the values for

other geologic, engineering, time, and

economic variables assumed for the

analysis.

Input data on assumed field size distributions and the expected number of fields for

each OCS subregion are shown in table 11-

A-1 for oil and table II-A-2 for natural gas.

235
Appendix II

Table 11-A-l .—Oil Field Sizes, Standard Deviations, and Estimated Field Numbers by

Field Category and Subregion

Category 1 Fields

Subregion

(less than 50 roll. bbls.)

Mean

(mil. bbls.)

1. Arctic Ocean ., 25. 8

2 Central Chukchi 25. 9

3. Bering Sea . . . ., 23.0

4. Gulf of Alaska 23.9

5. Cook Inlet 17.4

6. North Pacific . . 17.4

 7. Santa Cruz . , 16.2

8. S. Cal. Basins ., 17.2

9. C. and W. Gulf ., 11,7

10, MAFLA ... 12.8

11, North Atlantic ., 1 8 5

12. Central Atlantic. 1 5 0

13 South Atlantlc 12.2

Std. Dev.

(mil. bbls.)

12.9

12,9

11.5

11.9

8.7

8.7

8.1

8.6

5.8

6.4

9,2

7 5

6.1

No. of

Fields

80

75

106

3

27

2

6

20

88

13

7

18

13

Category 2 Fields

(50-100 roll. bbls.)

Category 3 Fields

(greater than 100 mil. bbls.)

Mean

(mil bbls.)

70.0

69.6

69.8

73.1

69.9

73.9

70.1

71.9

70.0

70.8

70.2

71,0

49.6

Std. Dev.

(mil. bbls.)

49.0

48.7

48.9

51,2

48.9

51.7

49.1

50.3

49.0

49.6

49.1

49,7

49.6

No. o f

Fields

27

21

30

1

4

1

1

4

10

1

1

2

1

Mean

(mil. bbls.)

158.7

147.3

147,4

577,9

145.2

567.9

144.9

256.6

155.8

311.8

321.3

320.6

225.7

Std. Dev. No. of

(roil. bbls.) Fields

158.7 18

147.3 17

147,4 14

577.9 3

145.2 3

567.9 1

144.9 1

256.6 7

155.8 6

311,8 3

321,3 3

320.6 5

225.7 3

2 3 6
Table 11-A-2.—Nonassociated Natural Gas Field Sizes, Standard Deviations, and Estimated

Field Numbers by Field Category and Subregion

Category 1 Fields Category 2 Fields Category 3 Fields

Subregion

(less than 300 mil. Mcf) (300-600 mil. Mcf) (greater than 600 mil. Mcf)

Mean Std. Dev. No. of Mean Std. Dev. No, of Mean Std. Dev. No, of

(mil. Mcf) (mil. Mcf) Fields (mil. Mcf) (mil. Mcf) Fields (mil. Mcf) (mil. Mcf) Fields

1. Arctic Ocean . . 154.8 77,4 31 420.0 294.0 10 952.2 952.2 7

2. Central Chukchi. 155.4 77.7 26 417.6 292.3 7 883.8 883.8 6

3. Bering Sea. . . 138.0 69.0 34 418.8 293.2 9 884.4 884.4 5

4. Gulf of Alaska 143.4 71,7 1 438.6 307.0 1 3,467.4 3,467.4 1

5. Cook Inlet 104.4 52,2 7 419.4 293.6 2 871.2 871.2 1

6. North Pacific 104.4 52.2 0 443.4 310.4 0 3,407.4 3,407.4 1

7. Santa Cruz . . . .

8 S. Cal, Basin s

9. C. and W. Gulf.

10 MAFLA . . . . .,

11 North Atlanti c

12. Central Atlantic

13, South Atlantic .

97.2 48.6 1 420.6 294,4 1 869.4

03.2 51.6 3 431.4 302.0 0 1,539,6

70.2 35.1 225 420.0 294.0 24 934,8

76.8 38.4 1 424.8 297.4 0 1,870.8

11.0 55.5 5 421.2 294.8 1 1,927.8

90.0 45.0 8 426,0 298.2 1 1,923.6

73.2 36.6 3 425.4 297.8 0 1,354.2

869.4 0

,539.6 1

934.8 14

,870.8 1

,927.8 2

,923.6 2

1,345.2 1

2 3 7
Appendix II

Table n-A-3.-Cost Regions Used in the OCS Analysis

Region Exploration Development

Number Region Name Area Used Cost Factor Cost Factor

1 . . . . . . moderate Gulf of Mexico 1.0 1.0

South Atlantic

South Pacific

2 . . . . . . moderate-severe Central Atlantic 1.4 1.9

North Pacific

3 . . . . . . severe North Atlantic 1.8 2.8

Gulf of Alaska

4 . . . . . . ice laden Bering Sea, Alaska 2.3 3.7

5 . . . . . . severely ice laden Chukchi Sea 4.6 4.6

Arctic Ocean

2 3 8
Table n-A-4.-Exploration, Investment, and Operating Costs for Oil and Nonassociated Natural Gas

by Reservoir Size and Cost Region

Reservoir

Size 1

15 . . . . . . . . . . . . . . . . . . . . $20.96

20 . . . . . . . . . . . . . . . . . . . . 15.60

65 . . . . . . . . . . . . . . . . . . . . 8.98

175 . . . . . . . . . . . . . . . . . . . . 5.06

525 . . . . . . . . . . . . . . . . . . . . 2.68

1050 . . . . . . . . . . . . . . . . . . . . 1.80

Exp. Costs

per well

(in millions) 3.121

Operating

costs

(initial) .40

90 . . . . . . . . . . . . . . . . . . . . $3.28

150 . . . . . . . . . . . . . . . . . . . . 2.46

390 . . . . . . . . . . . . . . . . . . . . 1.44

1050 . . . . . . . . . . . . . . . . . . . . .83

3150 . . . . . . . . . . . . . . . . . . . . .45

Exp. Costs

Per well

(in millions) 3.121

Operating

costs

(initial) .04

Cost Regions

2 3 4

o i l

$38.85 $57.12 $75.41

28.91 42.51 56.12

16.64 24.46 32.29

9.38 13.79 18.21

4.97 7.31 9.65

3.33 4.89 6.46

4.370 5.618 7.179

.52 .64 .76

Nonassociated Natural Gas

$6.48 $9.39 $12.31

4.86 7.05 9.24

2.85 4.12 5.40

1.63 2.36 3.10

.88 1.28 1.67

4.370 5.618 7.179

.0 .06 .08

5

$94.02

69.97

40.26

22.70

12.03

8.05

14.357

.88

$15.47

11.62

6.79

3.90

2.10

14,357

.09

239
—— —

Appendix H

Table II-A-5 .—Common Input Values for Leasing Policy Analysis

Geologic

Production decline rate, a

Beta (recovery factor), ß

Reserve distributions

Price related

Original oil price, PO

Original gas price, GPO

Mean of oil price change distribution, RP1 MN

Std. dev. of price change distribution, RP1STD

Mean of gas price change distribution, GP1 MN

Std. dev. of price change distribution, GP1 STD

Tax related

Depreciation method, NDEPR

Depreciaiton lifetime, N

Percent investment salvageable, a

Federal corporate tax rate, Ø

Time related

Minimum production time, TMIN

Years of flat production plus production build up, FLATP

Maximum production period, TMAX

Development and exploration period, LAG

Exploration period, LAG1

Production build up period, IBP

Production build up factors, BPP

year 1

year 2

Cost related

Working capital factor, WCF

Triangular investment and operating cost contingency distributions

BMIN, KMIN

BMODE, KMODE

BMAX, KMAX

Rent per acre, RENT

Investment cost allocation during development, F

year 1

year 2

year 3

year 4

year 5

.10

.50

Iognormal

$11.65, $13.75, $17.00,

$22.00

$1.40,$1.75,$2.25

0

.04

0

.05

Sum of Years Digits

15 years

1 00/0

1 00/0

480/o

9 years

5 years

40 years

5 years

2 years

2 years

.5

.8

.1

– .05

0

.1

$3.00

0

.1

.3

.4

.2

2 4 0
Table ll-A-5.—Continued

Percent investment each year that is tangible, YZ

year 1 0

year 2 .7

year 3 .7

year 4 .8

year 5 .8

Exploration cost allocation during exploration, F1

year 1 .4

year 2 .6

Percent exploration cost tangible each year, YZ1

year 1 0

year 2 .3

Other Factors

Discount rate .10

No. of exploratory wells per 1000 acres .5

No. of acres per tract, ACRES 5760

Bonus factor, BFAC .75

No. of M. C. iterations, NLOOP 200

241
Appendix II

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Act Amendments of 1975, Hearings Part 3.

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Kalter, R. J. and W. E. Tyner. An Analysis of

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242
Office of Technology Assessment. An Assessment of Enhanced Oil Recovery Potential in

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