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21 July 15, 1977 CARTER'S ENERGY PROGRAM 1 AN UPDATE With the July 14th vote of 23 to 20, the House Commerce Committee sub committee on Energy and Power agreed to incorporate the Administration's plan for regulating both the interstate and intrastate natural gas markets. This means that the Carter Administration will have, with few exceptions, managed to move its energy program through the House intact. The initial bill was broken up into sections and referred to a number of committees with Interstate and Foreign Commerce and Ways and Means dealing with the most significant portions. In addition to these two committees, other portions of the measure were considered in Banking and Currency, Science and Technology, and Government Opera tions. The various parts will now be sent to the Ad Hoc Committee on Energy which has completed its own hearings and whiclj will reassemble and mark up the bill. It is the goal of the Speaker to have the measure come to the floor prior to the August 5th recess so that action can be completed before the. Members return to their districts.

I 2 The most controversial measure before the Commerce Committee was the deregulation of natural gas. The Administration's::proposal which be Camethe Dingell Amendment will raise the price of gas on the inter state market to $1.75 from its currently controlled price of $1.42.

For the first time, gas on the intrastate market will also come under federal price controls. Currently, it is selling for between $2 and 2.25 depending on the area. Under the provisions of the energy bill it will also sell at the interstate price of $1.75.

The approval of this provision in the Commerce Committee was the re sult of intense lobbying by the Administration. The subcommittee had approved a different plan sponsored by Rep. Brown (R-Ohio) and Rep.

Kreuger (D-Texas) which would have deregulated newly discovered natu ral gas immediately and which would have deregulated offshore natural gas over a five-year period. The Kreuger-Brown measure would also NOTE: Nothing written here is to.be construed as necessarily reflect ing the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress 2 have protected the holders of existing natural gas contracts on the intrastate market from increased prices resulting from bidding for gas on the interstate market I There has been a significant change in the Administration-backqd;?propo sal as it was passed by the Committee. Originally, gas discovered 14 miles from an existing well would have been subject to the $1.75 price Now, however, that distance has been increased to 2% miles This will have the effect of controlling a far larger segment of natu ral gas at thellower $1.42 price. The impact that this change will have on the development of existing supplies which have not been de veloped due to high costs is yet to be determined.

An attempt at a compromise fell':.through when the chairman ruled that an amendment offered by Rep. Wirth which would have provided an ex cess profits tax was not within the Committee's jurisdiction. Rep.

Luken had previously indicated that he would vote for deregulation if such a tax were included.

Essentially the debate over natural gas stemmed from a difference in philosophies. From the 1954 decision in Phillips V. Wisconsin, the public has enjoyed an artificially low price for This fuel vocates of the Carter plan were primarily concerned with price, where as the advocates of deregulation were primarily concerned with con tinuing supply Historical evidence indicates a high degree*,:of price elasticity for natural gas. The fact that the unregulated intrastate market does not suffer from shortages whereas the regulated interstate market does would tend to confirm this,evidence The ad Much concern among the advocates of deregulation was expressed over the projected shortfall of natural gas for this winter's heating season. They felt that this shortfall was only a hint of far more shortages which would result without the advent of deregulation Dr. H. A. Merkle_in an eminent petroleum economist with the University of -Dallas, iiidicated The -increased =price of energy kia Jit-t-le impact in terms of-:the overall economy, however, the lack of it is devastating A recent study released by Rep. Stockman (R-Mich indicates that de control would have brought 25 trillion cubic feet of natural gas onto the market through 1990 which will not be. brought on under the pro visions of the Carter-Dingell measure. The same study indicates that the added cost to the consumer resulting from controlling natural gas prices will be at least $48 billion. It has been further estimated by Rep. Stockman that the cost of replacement fuels for the natural gas not produced as a result of controls will be as much as $168 billion. It should alsozbe noted that under price controls, reserves of natural gas declined by 51 trillion cubic feet over the last five year s As 3 The Commerce Committee has approved the Administration's coal conversion requirements. Basically, these mandate the conversion of all industries which are currentlyburningoil or natural gas to convert to coal by 1982 or natural gas who need additional time to implement conversion may file petitions for waivers of up to five years. All new industrial facilities constructed after April 20, 1977, must .use,coal, and all utility plantsburningoil or natural gas must begin conversion by 1983.

In all instances, the Best Available Control Technology must be used to control emissions facilities must use "scrubbers Within 120 days of enactment of the legislation, users of oil This effectively means that all new and converted ANALVsIs Ignoring the capital requirement for converting boilers from oil or natural gas to coal for the moment, it is worthwhile to look at the cost of pollution control technology ling scrubbers on a utility plant is estimated at $150 per kwh of capacity. This is up from $60 in 1972 anticipated that the cost of such devices may reach as much as $300 per kwh a standard-sized generating plant would cost between $15 and $20 million lion to comply with the Administration's coal conversion requirements Currently, the cost of instal In the near future, it is At the current level, the:-installation of such equipment on The utility industry expects to spend as much as $50.6 bil GAS The House Ways and Means Committee has approved a system of taxes on the use of oil and natural gas by utilities and industry would have three tiers the first tier referring to industrial use of oil or natural gas for purposes other than as a boiler fuel; the second tier referring to the industrial use of oil or natural gas as a boiler fuel; and the third tier referring to the use of either on or natural gas by utilities tier 1 and tier 2 paying a 30C per barrel tax going up to $1 and $3 for tiers 1 and 2 respectively by 19

85. Tier 3 will' begin paying a flat $1.50 per barrel tax in 1983 the taxes imposed on oil for each tier The system The taxes on oil will begin in 1979 with The following table represents YEAR TIER 1 TIER 2 TIER 3 none 1979 30 30 1980 60 60 none 1981 $1.00 $1.00 none 1982 $1.00 $1.45 none 1983 $1.00 $2.00 $1.50 YEAR TIER 1 4 TIER 2 T1.E.R 3 1984 1.00 2 50 $1.50 1985 1.00 3.00 $1.50 taxes will remain at 1985 levels Natural gas will be priced according to a formuita'which will take into consideration the Btu equivalent price of oil. Utilities, however will have a special tax imposed on the burning of natural gas which will begin at 55C per mcf in 1983 and rise to 75C per mcf in 1985 and thereafter Estimates of the impact of the tax on oil and natural gas vary,but are anticipated to run into the tens of billions of dollars hard figures are available, an earlier version of the tax was estimated to cost as much as $39.8 billion through 1985 While no While it is undoubtedly true that the imposition of such taxes will create a strong disincentive for the industrial or utility use of oil and natural gas, the imposition of these taxes will also drain off despejk:ately needed capital which would otherwise be used for the con struction of new facilities and the conversion to coal has been suffering from a shortage of investment capital as it is and this measure is likely to seriously exacerbate that shortage It has been argued that the imposition of these taxes may make the conversion to coal more attractive; however, some observers have contended that given the high costs associated with conversion, some users may just pay the taxes and then pass the costs along to the consumers Our nation Another concern which has been voiced by observers is that the coal industry may not be able to meet the production levels necessitated by:the mandakory--conversion requirements If this is the case, then the users taxes on oil and natural gas will be ineffective, as one cannot burn a fuel which is not available ELECTR I c PoWERGE The House Commerce Committee has voted sweeping changes in the manner in which our nation's electric utility industry will be regulated.

Included in the measure is a significant broadening of the role of the Federal PowerXommission in the setting of rates, and the design of:rate structures. Most of the measures included in the section of the energy bill dealing with utilities come from the Dingell Moffet bill of last year. Basically, the committee's version would 5 impose "peak load" charges, and "marginal cost pricing It also would require certain sharing of facilities and the use of certain types of meters. It is the intent of the::measure to alter current patterns of electric use in terms of when the electricity is being used The reason for this is that power companies tend to incur heavy..demand during certain hours,whi.le,demand significantly dimin ishes-.during others. For example, during the morning hours there is far greater use of ezectricity than there is at night. The utilities generally have supplemental generation capacity known as "peak load generators which are used for meeting the demand during these periods.

These generators, however are fairly expensive to operate and re sultantly raise the overall cost of generation and the amount of fuel used What the Commerce Committee measure would do is to add a specific charge to the customer's bill--for the use of electricity during peak periods. This would be accomplished thro.ugh the use of a special meter which would take the time of use in consideration along with the amount of electricity used. The Committee measure also prokides for what is known as Full or Marginal Cost pricing. By this it is meant that the customer is charged the actual price of generating the power he is consuming. This would be accomplished by estimating the cost for a particular period and varying the rate charged the customer accordingly.

Other portions of the section require the interconnection, pooling or wheeling of facilities by utilities. This basically means that they must share their capacity when they have excess. The intent of this is to achieve the highest levels of efficiency for each utility.

The use of such techniques would require considerable coordination most probably achieved through the use of computers.

Currently, utilities are allowed to have several applications for rate increases before the Federal Power Commission at a given time. This is primarily as a result of the rapid escalation of fuel costs. This practice would be outlawed under the new proposal Also, the Federal Power Commission would be required to outlaw master metering in large buildings, such as apartment houses or condciminiums. The deduction of cost of advertising as a business expense would be disallowed, and fuel adjustment clauses would be done away with There 4s qonsiderable concern among experts in the utility industry over'several segments of this portion of

It has been suggested that the statesoriginally gained the power to regulate utilities because they were closer to the populations:.the utilities served and were, therefore, more able to determine the needs of those populations. The FPC, having a national outlook, may not be in the most favorable position to understand the unique needs of a given state. Further, fear of the bureaucratic tendency to want to standardize the delivery of services has been voiced ments of an industrial state such as Pennsylvania are obviously quite different from those of an agricultural one such as Idaho. Some ob servers are concerned that these differences will not be taken into I consideration in decisions made by the FPC The creation of a twenty-four hour demand I I The require Perhaps the most highly publicized portion of the President's energy message concerned the proposed tax on automobiles which did not meet certain fuel-efficiency standards. This is commonly referred to as a "gas guzzler" tax. The tax as passed differs slightly from the original proposal of the tax did not provide for a rebate of the tax to the purchasers of fuel-efficient automobiles for the retirement of the public debt. The attached tables indicate the tax levels for each model year.(see Attachment A The Ways and Means Committee in the final version Instead, the tax is to be set aside ANALVsIs The "gas guzzler" tax approved by the Ways and Means Committee is another example of the coercive nature of the Administration's ap proach to the energy crisis in the long run, most of the automobile manufacturers have planned to make their models more fuel-efficient anyway, so the measure is really more symbolic than substantive to make some of the-.more expensive models even more expensive. On the other hand, those who purchase such automobiles are not likely While it may have some marginal impact Its only real effect will be 7 to be as concerned with price as t .ey w be with other features As a result, there is likely to be no effect on demand for such cars Q Ho"use Ways and Means has included a repeal of the deduction of state and local taxes on gasoline and other motor fuels.in their section of the energy bill large, again, it will hit the low and moderate income families hardest Similarly, the continuation of the 3C federal tax on gasoline and motor fuels through 1985 will also be felt at the lower levels of the income scale While the deduction may not have been exceptionally J NSULA r 1 ON I House Commerce Committee has passed a section which would have made mandatory the insulation of homes to federally imposed standards prior to sale. This section, however, will be substituted by one.passed by the House Banking and Currency Committee. The Banking and Currency measure essentially provides subsidies of up to $800 for the.,purpose of insulating to low-income families (those at or below the poverty level For individuals with incomes of up to 90% of the national median income, the measure would provide loans of up to $2,200 at subsidized interest rates Additionally 900 million in matching grants will be provided to hospitals, schools, and nursing homes for the .purposes of insulating The federal grants will provide 50% of the funds. In..a .separate move the House Commerce Committee had proposed the mandating of insulation as-a:p~~requis-iteto the resale of a home complished through the barring of loans by federally-insured institu tions fqr'-mortgage:s-on- the resale:.bf those -homes'r he-,measure 'wasi'subj'ect Committee has also mandated mandatory efficiency standards for ap pliances beginning in 1979 This would have been ac- to such intense criticism however, it was withdrawn. The Commerce ANALVsrs The insulation of homes :is anticipated t'g save as:.mubh-;as 30$ qf..-the energy curoenti us$d_'-Sor .heating homes' a.nil."of water The.re:ti.s some que.sticm_;as- go .wheth& or-not the Adrninlstration'.s::goal Qf insulating 90% of h+--h6me$ in 'America by 1985 is realistic, however have indicated that there may no.t be adequate.supplies of fiberglass available to meet the insulation needs of this portion of the act in the time frame indicated by the Administration Some critics 8 Under the Administration's proposal, there are actually three tiers of oil. Beginning in 1978 what has currently been termed "old oil i.e oil which has been in production prior to the 1973 embargo is go ing to be subjected to a $3.50 per barre1':tax. In 1979 it will be brought up to the level of what has currently been termed "new oil."

Both of these tiers of oil will then gradually be brought up to the 1977 OPEC level weighted for inflation through the imposition of ad ditional taxes. Under this section there is also a third tier termed new, new oil" which is oil bro.ught into production after April 20 19

77. This oil will be sold at the 1977 OPEC price. The taxes, less administrative costs for the collection and rebate of them, will be rebated to consumers through a fairly complicated formula.

Basically, the measure will make oil much more expensive and wi1'1:tax away any increase in price. This is3ikely to create a serious dis incentive to production and exploration for new reserves. There is some question as to just how much of the taxes will eventually reach the public as there have already been suggestions from within the Ad ministration that some portions of it be used for various welfare or other social .programs RGY CONSFRVATION TAX CREDITS The House Ways and Means Committee has provided a tax credit for the installation of energy conservation devices or for insuzation. These devices include such things as solar power units and wind generation units. For insulation, taxpayers are allowed to deduct 20% of their expenditures of up to $2,0

00. For solar and wind units, 30% of the first $1,500 is deductible, and 20% of the next $8,500'is.deductible.

Basically, the arguments for insulation have been outlined in a pre ceding paragrph and still hold for this provision. The installation of solar and wind devices is fairly uncontroversial, except that it has been suggested that in their present stage of development, the contribution they can make to conservation is minimal Co The Administration has essentially gotten everything it had requested with the exception of the standby gasoline tax that the total cost of the program as it stands could be as much as It has been estimated 2.85billion through 19

85. There is little doubt that it will exacer bate the nation's current capital shortage seriously and that there will be a growing dependence on foreign oil as a result of'.'the dis incentives to the production of oil and.natura1 gas. There remain I the deliberations in the Senate where here. is congzdLezable -1 4 5ppos'ition conference remains to be seen k3' the-'tax' on: crude -oil and'-.on: the3.regulatiofi. of- na-tugal S Whe-ther or not these portions of the bill are changed on the Senate 9 loor or in By Milton R. Copulos Policy Analyst I 1 Attachment A I) In the case of a 1979 model year automobile The tax is At least 15 0 At least 14 but less than 15 339 At least 13 but less than 14 438 Less than 13 I 553 If the fuel economy of the model type in which the automobile falls is 2 2) In the case of a 1980 model year automobile If the fuel economy of the model type in which the automobile falls is: The tax is At least 17 0 At least 16 but less than 17 249 At least 15 but less than 16 333 At least 14 but less than 15 428 At least 13 but less than 14 538 Less than 13 666 I 3 4 I (3) In the case of a 1981 model year automobile If the fuel economy of the model type in which the automobile falls is: The tax is At least 18.5 0 At least 17.5 but less than 18.5 245 At least 16.5 but less than 17.5 341 At least 15.5 but less than 1G. 5 458 At least 14.5 but less than 15.5 597 4 At least 13.5 but less than 14.5 764 At least 12.5 but less than 13.5 968 Less than 12.5 1,216 4) In the case of a 1982 model year automobile If the fuel economy of the model type in which the automobile falls is The tax is At least 20 0 At least 19 but less than 20 266 At least 18 but less than 19 369 At least 11 but less than 18 2 491 At least 16 but less than 17 636 At least 15 but less than 16 809 At least 14 but less tlian 15 1,015 At least 13 but less than 14 1,964 Less than 13 A 1,565 m i i I I I 1 5) In the case of a 1983 model year automobile The tax is At least 20.5 0 At least 10.5 but less than 20.5 345 At least 18.5 but less than 19.5 450 At least 17.5 but less than 18.5 593 At least 16.5 but less than lr.5 751 At least 15.5 but less than 16.5 938 At least 11.5 but less than 15.5 1,161 At least 13.5 but less than 14.5 1,427 At least 19.5 but less than 13.5 1,747 Less than 12.5 2,134 If the fuel economy of the model type in which the automobile falls is 2 6) In the mse lof a 1984 model year automobile The tax is At least 22 0 At least 21 but less than 23 1 371 At least 20 but less than 91 490 At least 19 but less than 90 631 At least 18 but less than 19 1 797 At least 17 but less t.han 18 1 990 At least 16 but less than 17 1,918 At least 15 but less t.han 16 1,486 At least 14 but less t.11an 15 1,804 At least 13 but less t.han 14 2,183 Less than 13 2,638 If the fuel economy of the model type in which the automobile falls is 3 I' (7) In the case of a 1985 or later model year 4 'automobile If the fuel economy of the model type in which the automobile falls is: The tax is At least 23.5 0 At least 28.5 but less than 93.5 397 At least 21.5 but less than 99.5 L 594 At least 20.5 but less than 21.5 671 At least 19.5 but less than 20.5 843 At least 18.5 but less than 19.5 1,043 At least 17.5 but less than 18.5 1,276 At least 16.5 but less than 17.5 1,550 At least 15.5 but less than 16.5 1,868 At least 14.5 but less than 15.5 2,244 At least 13.5 but less than 14.5 2,688 At least 19.5 but less than 13.5 3,219 Less than 19.5 3,856