Electricity-related R&D encompasses both basic and applied research and includes all aspects of electricity generation, including nuclear, fossil, and renewable energy technologies; transmission and distribution technologies; energy storage technologies; and environmental studies of electricity-related issues, according to DOE’s Deputy Assistant Secretary for Utility Technologies. Electricity-related R&D is funded from several sources. For the last 4 years, DOE has provided about $4.6 billion in funding at its national laboratories, at universities, and in co-funded collaborative research with utilities and manufacturers. Over the same period, electric utilities, primarily private and investor-owned, have spent about $2.3 billion; over the last 3 years, state programs have spent about $200 million. Manufacturers of electric utility equipment have also funded electricity-related R&D; however, current estimates of such funding are unavailable. As the electric power industry moves toward deregulation and increased competition, utilities face significant changes. Historically, utilities have operated as monopolies in protected geographic areas. Many of these utilities were regulated by state public utility commissions that approved the inclusion of electricity R&D expenditures in the rate base. By including these expenditures in the rate base, the utilities have been allowed to earn a fixed rate of return on these expenditures. Driven by a combination of factors, the move toward deregulation gained impetus with the Energy Policy Act of 1992, which promotes increased competition in the wholesale power market. Other factors spurring the move toward competition include large differences in electricity rates among utilities; new low-cost electricity generation technologies; and recent experiences in reduced regulation in other industries, such as telecommunications and natural gas. In April 1996, as a result of the Energy Policy Act of 1992, the Federal Energy Regulatory Commission issued a final rule that now requires electric utilities to make their transmission lines accessible to other utilities or power producers for the transmission of wholesale power. It requires that this open access be made available at the same cost that these public utilities incur to transmit their own power. Regulatory commissions in 44 states and the District of Columbia had adopted or were evaluating deregulation alternatives as of June 30, 1996. Electricity-related R&D funding was generally reduced in 1996 by the federal government, the electric utility industry, and most states that we reviewed. Since fiscal year 1993, DOE’s electricity-related R&D budget has increased, except for fiscal year 1996 when it was reduced to near its 1993 level. Meanwhile, the electric utilities began making reductions 3 years ago. Most state programs we reviewed are also experiencing reductions. The primary reasons for the funding declines are overall reductions in federal and state funding and the increased competition expected from the deregulation of the utilities. Current data on the manufacturers’ R&D spending were unavailable. Figure 1 shows the funding for the two largest sources of R&D for which we have data for the last 4 years. DOE’s 1993 and 1996 budget amounts are similar, while the 1994 and 1995 budgets experienced increases. Meanwhile, the utilities’ investments have decreased each year. After approving increases in previous years, the Congress reduced DOE’s electricity-related R&D budget by about 20 percent in fiscal year 1996 compared to 1995. The reductions occurred in electricity-related R&D activities under both of DOE’s appropriations—Energy and Water Development and Interior and Related Agencies. DOE’s 1997 budget request for electricity-related R&D is about 14 percent higher than the 1996 appropriation. Table 1 presents the major R&D program budgets over 5 years. According to the House and Senate Appropriations Committees’ reports on DOE’s fiscal year 1996 appropriations, the primary reason for the decline was to meet overall budget constraints. For example, the House and Senate Appropriations Committees’ reports on Energy and Water Appropriations made repeated references to budget constraints and budget realities in their reports on DOE’s fiscal year 1996 budget for energy supply R&D activities. Compared to DOE’s request, the House Committee recommended a 24-percent decrease, and the Senate Committee recommended an 18-percent decrease. In separate reports, the House and Senate Appropriations Committees responsible for the Interior and Related Agencies Appropriations recommended reducing DOE’s fiscal year 1996 appropriation for fossil energy R&D programs by about 10 percent below the fiscal year 1995 level and stated their intent to continue reducing this program by a similar percentage each year for the next several years. According to these reports, the reductions will permit the agency to gradually phase down to a funding level more in line with the recommendations of the legislative committee of jurisdiction in the House. DOE’s fiscal year 1997 overall budget request for electricity-related R&D is greater than the 1996 appropriations; however, the budget request for some technologies decreased. For example, the request for the renewable energy and energy-efficiency programs is $146.4 million (or 35 percent) greater, whereas the request for the fossil energy programs is $31.8 million (or 10 percent) less. DOE’s budget attributes the reductions in the fossil energy programs to congressional guidance to reduce these programs by 10 percent per year. R&D spending by the nation’s investor-owned utilities has declined by nearly one-third in 3 years (from 1993 to 1996) after being level in real dollars for the previous 10 years. We gathered data from 80 companies representing the 112 largest operating utilities from a total of 3,000 utilities. These 112 investor-owned utilities, which are privately owned, account for over 93 percent of all nonfederal utility R&D spending and are responsible for about three-quarters of all electricity sales. They reduced their spending for R&D from about $708 million in 1993 to about $476 million in 1996. In 1992, the National Association of Regulatory Utility Commissioners recommended that utilities devote 1 percent of their revenues to R&D. In 1993, 6 of the 112 investor-owned utilities met that target, but since then all 6 have substantially cut back their R&D spending. In 1994, utilities on average devoted about 0.3 percent of their revenues to R&D. Utility R&D managers told us that this average will most likely continue to decline. Of the 80 companies we contacted, the R&D managers of 38 companies predicted cutbacks in R&D spending after 1996, while the managers of only 2 companies predicted increases. The managers from the remaining 40 companies were either unsure, thought their expenditures would remain about the same, or did not provide the information. According to utility R&D managers who were asked why their budgets were being reduced, the main reason was that their companies are preparing for deregulation and competition by cutting costs wherever they can. In the past, utilities were allowed to earn a fixed rate of return on all R&D projects that the public utility commission allowed in the rate base. In a more competitive marketplace, utilities will be forced to price electricity to compete with other utilities and independent power producers. As a result, R&D managers evaluate potential R&D projects on the basis of their likelihood of providing a near-term return to the utility that will allow them to reduce electricity rates. Increased competition was cited as the primary reason for the biggest cutbacks to date by utilities in California, New York, and Florida. The 13 investor-owned utilities in these states have been among the leaders in R&D investments, accounting for 39 percent of the R&D funded by investor-owned utilities in 1993. But they have reduced their R&D spending by 52 percent since 1993. According to utility R&D managers in New York and California, they currently charge customers considerably more than the average price for electricity, and they are under pressure to cut costs in order to be able to compete in a deregulated market. Florida’s major utilities have eliminated nearly all of their R&D funding in order to be cost-competitive with each other and with other electricity suppliers in the region. Other reasons given by 10 companies’ R&D managers for reductions in their R&D were that no new DOE co-funded projects were being initiated and ongoing projects were either reaching completion or being cut back. These projects included coal technology development, renewable energy, and other projects for advanced electricity generation technology. The electricity-related R&D programs that we reviewed at the state level are also experiencing reductions. Of the 11 large programs in the nine states that we reviewed, 7 have been reduced in the past 3 years. Overall the programs have seen a 30-percent reduction in funding, from $83 million to $58 million, since 1993. Most of these programs involved energy-efficiency R&D, and some involved generation technologies of particular interest to that state, such as coal power and renewable energy. The state program officials attributed the declines in these programs to the decreases in major funding sources: (1) utilities’ contributions; (2) oil overcharge revenues; (3) co-funding available for R&D projects from DOE, the Electric Power Research Institute (EPRI), utilities, and industry; and (4) state appropriations. For example, the budget of the Empire State Electric Energy Research Corporation, funded by voluntary contributions from New York utilities, was cut nearly in half, from $19 million to $10 million, between 1993 and 1996. The California Institute for Energy Efficiency, which has funded energy-efficiency R&D at Lawrence Berkeley National Laboratory and various California universities, has also been affected by cost-cutting. The Institute’s primary source of funding was about $4 million per year from California utilities. By late 1994, the utilities no longer provided funding. The Institute is maintaining a skeleton operation using carryover funds but will be unable to continue if another source of funding is not found by the end of 1996. Information on spending on electricity-related R&D by the manufacturers of electric utility equipment is unavailable.