Energy research, production, conservation, and regulation make up the programs in function 270. The function includes the civilian programs in the Department of Energy (DOE): energy-related research and development; operation of the Strategic Petroleum Reserve (SPR); environmental cleanup of federal sites used for civilian energy research and production; development of a repository for nuclear waste at Yucca Mountain in Nevada; and energy conservation grants to states. The costs of regulating energy production and distribution also are included, but those expenses are offset almost entirely by fees charged to the regulated entities. Function 270 also covers federal agencies that generate and sell electricity, such as the Tennessee Valley Authority (an independent agency), and the four power marketing administrations managed by DOE. Loan programs to benefit rural electric and telephone cooperatives, managed by the Rural Utilities Service of the Department of Agriculture, also are included. (DOE's atomic weapons activities are found in budget function 050, national defense.)

Net outlays for function 270 are typically small—and in some years negative—because they include offsetting receipts from fees paid by the nation's nuclear utilities for future storage of nuclear waste; loan repayments to the Rural Utilities Service; and proceeds from the sale of SPR oil, uranium, and electricity. Excluding those receipts, spending for this function will total about $3.9 billion in 2007, the Congressional Budget Office estimates. That amount, although significantly lower than discretionary spending in much of the 1990s, is about 24 percent higher than average spending from 2002 to 2004. Since that time, spending has increased, primarily for energy research, conservation programs, environmental-cleanup expenses for DOE facilities, and other activities authorized under the Energy Policy Act of 2005.

The Department of Energy (DOE) received about $581 million in appropriations in 2006 to fund research into applied technologies for finding and producing petroleum, coal, and natural gas. Those research programs were created at a time when the prices of some fossil fuels were controlled, and as a result, market incentives for the development of technology were muted. Now that energy markets have been largely deregulated and are operating more freely, the value of federal spending for such research and development efforts may warrant reevaluation.

This option would eliminate DOE's applied research programs for fossil fuels, saving $149 million in outlays in 2008 and $2.2 billion over the next five years.

A rationale for ending such programs is that the pursuit of profits should give private suppliers sufficient incentive to develop better technologies and take them to market. Also, private entities are generally more attuned than federal officials are to which new technologies offer commercial promise. Federal programs have a history of funding fossil-fuel technologies that, although interesting technically, have limited practical value and, therefore, little chance of commercial implementation. A related rationale for eliminating the applied fossil-fuel research programs is that DOE could then concentrate on basic energy research that has broad public benefits—such as investigating new sources of energy—and reduce its involvement in developing commercially applicable technology. Arguably, the federal government has a clearer role to play in funding such basic research because the benefits are widespread rather than concentrated in individual companies.

In recent assessments of federal programs, the Office of Management and Budget (OMB) concluded that programs in many areas of fossil-fuel research, such as oil and natural gas technologies, duplicate private-sector spending. (For example, OMB's assessment of the oil-technology program stated: "Actual additional oil reserves attributable to technology developed by the program have been relatively small.") By contrast, OMB found that DOE's program to fund research into developing fuel cells for powering the electrical grid had a clear purpose, was free of design flaws, and served a national need. OMB rated the Coal Energy Technology Program "adequate."

A rationale against implementing the option can be found in assertions made by a panel of the National Academy of Sciences in 2001. The panel concluded that "DOE's RD&D [research, development, and demonstration] programs in fossil energy and energy efficiency have yielded significant benefits (economic, environmental, and national security-related), important technological options for potential application in a different (but possible) economic, political, and/or environmental setting, and important additions to the stock of engineering and scientific knowledge in a number of fields." The panel reported that although many of the earliest fossil-fuel programs (which emphasized synthetic fuels and other large-scale demonstrations) had produced below-average returns, projects since 1986 (which were more diverse and less focused on high-risk demonstrations) had yielded higher returns.

Another argument against this option is that DOE's efforts may help curtail the environmental damage resulting from the production and consumption of fossil fuels: By supporting applied research that enables those fuels to be used with less harm to the environment, their overall cost to society may be decreased. DOE's research programs may also increase energy efficiency and thereby lessen U.S. dependence on foreign oil.

The Energy Policy Act of 2005 established the Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Research program under the Department of Energy (DOE) and directed DOE to begin program activities in 2007. Unlike most other DOE research programs, the ultra-deepwater program is funded by federal revenues from oil and gas leases rather than through annual appropriations.

Under this option, the program would be eliminated, saving $10 million in outlays in 2008 and $185 million over the 2008-2012 period.

Various rationales for implementing this option exist. In proposing to eliminate the program, the Administration argued that it would be more appropriate for the private sector to pay for the research and development (R&D) activities that would be supported by the program rather than for taxpayers to do so. Supporting that position is the general principle that the private parties who benefit from applied research ought to pay for it because they are better able than the public sector to decide how much to spend and on which specific projects. The government, by contrast, is in better position to pay for "basic" research, which produces fundamental knowledge that offers more widespread benefits and ensures that no single company captures the bulk of those benefits. Recent increases in the price of natural gas suggest that private investors have sufficient incentive to identify and develop new sources of natural gas. Moreover, the federal track record in funding other R&D related to natural gas exploration and production is not encouraging: The Office of Management and Budget recently noted that such federal efforts have made only a relatively small contribution to increasing the nation's natural gas reserves.

Another argument in favor of the option is the program's unusual funding mechanism: Funds are derived directly from federal oil and gas receipts rather than through annual appropriations. Such mandatory spending is not subject to the scrutiny of the appropriations process, and the merit of activities funded that way is not considered in the Congress's annual effort to allocate available discretionary funds.

A rationale against implementing the option is found in the legislation that created it. One goal of the program is to support small, independent producers, who do most of the actual drilling for oil and natural gas but cannot afford to develop the technology for drilling in ultra-deepwater on their own. Other arguments include the fact that such research might contribute to the safety of operations at natural gas production sites and to achieving various environmental goals, including the reduction of greenhouse-gas emissions and the sequestration of carbon already in the atmosphere. Federal support for research with possible environmental benefits is consistent with the idea that the cost of damage to the environment is not reflected in market prices for different primary sources of energy. Notwithstanding the current and projected levels of natural gas prices, producers may not have the incentives to undertake the amounts and types of R&D that would be desirable from society's point of view.

In 2006, the Department of Energy (DOE) received $312 million in appropriations to fund research and development (R&D) efforts focusing on solar power and other renewable sources of energy. The primary goals of those efforts were to develop alternative liquid fuels from plant materials (or biomass) and produce electricity from photovoltaic cells. To a lesser degree, funding was allotted for electric-energy storage and power from wind, hydro, and geothermal resources.

This option would eliminate federal funding for applied research on renewable energy, saving $107 million in outlays in 2008 and $1.0 billion through 2012. (The option excludes funding for hydrogen technology, which is included in Option 270-6.)

The principal rationale for this option is the belief that applied research into energy technologies is better left to the specific firms that will reap the benefits of such research. That argument acknowledges that the federal government can play an important role in funding basic scientific research: From society's point of view, market-driven R&D may fund too little basic research because private companies recognize that they may not reap the financial rewards of any resulting scientific discoveries. By extension, federally sponsored researchers typically lack the market incentives and information that guide researchers in private companies to recognize and develop marketable technologies.

Another argument for ending DOE's renewable-energy R&D programs is that many of the projects they fund are sufficiently small and discrete, and have a clear enough market, to attract private funding. Large rapidly growing commercial markets currently exist for several renewable-energy technologies—most notably, wind power and photovoltaic cells. According to industry estimates, the total U.S. capacity for electricity production from wind more than tripled between 2000 and 2005. The wind energy-generation market is even larger in the European Union, where it grew by 18 percent between 2004 and 2005. Similarly, the photovoltaic market, mainly outside the United States, has been expanding by more than 30 percent per year. In such cases, federal support may no longer be needed. Given the large U.S. venture-capital market, continued federal funding may be displacing private investment.

A further rationale for eliminating DOE's applied renewable-energy research is that other government efforts promote the same goals. For instance, the federal tax code provides incentives for the development of liquid fuels from renewable resources, especially biomass. (Ethanol fuels, for example, receive special treatment under the federal highway tax; see Revenue Option 49.) In addition, federal regulations authorized by many different statutes favor alcohol fuels, which now usually mean fuels derived from corn.

Several arguments, however, weigh against ending federal funding for renewable-energy research. First, incentives for private research may be insufficient because energy prices fail to reflect the national-security and environmental risks—including the potential for global warming—posed by the nation's continued dependence on fossil fuels. Second, the United States plays the role of international R&D laboratory for less-developed countries, which often have much higher energy costs. Third, a recent analysis by the National Academy of Sciences showed that many DOE-sponsored renewable-energy programs had met their technical goals to lower the costs and improve the performance of specific technologies. The fact that those technologies are not in widespread use results not from technical failures, according to the analysis, but from even larger decreases in the cost of conventional energy and, to some extent, from institutional obstacles.

The Office of Management and Budget (OMB) reviewed some of DOE's renewable-energy initiatives as part of its assessment of federal programs and rated them "moderately effective" on the whole. In many instances, OMB said, program offices worked to ensure that the research they sponsored did not duplicate efforts by the private sector or other government programs. For example, although the geothermal energy program focuses on drilling methods, as does the oil industry, the geothermal environment is different enough (more difficult to access, subject to more extreme temperatures, and more challenging chemically) to require specialized technologies.

Three applied nuclear energy research programs—the Advanced Fuel Cycle Initiative (AFCI), the Generation IV Nuclear Energy Systems Initiative, and the Nuclear Hydrogen Initiative (NHI)—seek to develop new ways to generate and harness nuclear energy while reducing radioactive waste and guarding against the potential for nuclear proliferation. The AFCI aims to develop a demonstration plant that would extract plutonium and other highly radioactive elements from spent nuclear fuel so as to provide proliferation-resistant recycled fuel for future reactors. The Generation IV initiative seeks to design six new types of reactors that would use fuel recycled by processes developed in the AFCI. (Those reactors would operate at very high temperatures, producing less waste than plants currently in operation and destroying some of the most radioactive and highest-temperature waste elements.) NHI would demonstrate that heat from Generation IV reactors can produce hydrogen fuel at a cost that is competitive with traditional fuel sources.

This option would eliminate funding for the AFCI,the Generation IV program, and the NHI. Such action would save $71 million in outlays in 2008 and $695 million through 2012. That estimate assumes that funding for these programs will remain at 2007 levels, adjusted for anticipated inflation.

One argument in favor of cutting those programs is that the federal government's funding of research should support basic science rather than applied projects because the former can have broader benefits to society as a whole. Firms that operate and build nuclear power plants, for example, would benefit most from technology developed under the AFCI, the Generation IV program, and the NHI without bearing the associated risks. Moreover, the private sector, which must answer to shareholders and creditors, is better situated than the government to judge the commercial viability of such projects. Further, a need for sustained federal support suggests that nuclear energy production might not compete successfully with other energy sources. And, the presence of more nuclear power plants would pose additional safety concerns and potential for contamination, with cleanup costs that could fall to the government. Finally, supporters of this option dispute the claim that the plutonium and transuranic elements extracted in the AFCI processes would inhibit proliferation.

A major rationale against this change is that, under the Atomic Energy Act of 1954, the federal government is responsible for managing nuclear waste. Long-term storage capacity for highly radioactive spent fuel is limited and difficult to obtain—for instance, the depository at Yucca Mountain in Nevada is not expected to accept waste before 2017, 19 years later than originally required by law. Opponents of implementing the option argue that the AFCI separation process would cut the amount of waste requiring such disposal and that Generation IV reactors would further reduce the amount of waste produced. The Nuclear Hydrogen Initiative, they observe, would make hydrogen a commercially viable alternative to fossil fuels. In addition, the public would benefit from reduced emissions of carbon dioxide, nitrogen oxide, sulfur dioxide, and other gases, as nuclear power generates none in producing electricity. They also contend that the technologies developed in those research programs would support the Global Nuclear Energy Partnership, which seeks to expand nuclear energy use overseas while limiting the potential diversion of nuclear materials for weapons uses. Lastly, federal funding of research to advance nuclear energy could be justified because the market might undervalue both the benefits of reduced amounts of safer nuclear waste and the potential environmental costs of carbon-emitting power sources.

The Nuclear Power 2010 program is designed to expand the electric generation capacity of nuclear power in the United States by reducing the private cost of plant design and the cost of licensing nuclear industry participants. No nuclear power plants have been ordered in the United States since 1978, despite the streamlining of the Nuclear Regulatory Commission's (NRC's) licensing process, which was mandated by the Energy Policy Act of 1992, and despite the fact that they generate electricity without emitting greenhouse gases. The Nuclear Power 2010 incentives are offered to the first few industry participants who attempt to license advanced nuclear power plants (plants using nuclear reactor designs that the NRC certified after December 31, 1993, none of which have been previously implemented in the United States). It is hoped that, by demonstrating the revised licensing process and advanced reactor designs, those projects may lead to the construction of advanced nuclear power plants that do not rely on subsidies.

This option would eliminate federal funding for the Nuclear Power 2010 program, which would reduce discretionary outlays by $30 million in 2008 and by $292 million over the 2008-2012 period. The estimate assumes that funding for the program will remain at 2007 levels, adjusted for anticipated inflation.

Supporters of the option argue that it is imprudent to provide public subsidies for projects whose risks and costs would otherwise be prohibitive to private firms. Sharing licensing costs may lead to nuclear industry participants' proposing projects that are excessively risky because the participants do not bear the entire cost of licensing failure. Advocates of canceling the program add that significant risks to public safety exist because of the vulnerability of nuclear plants to terrorist attacks and the potential for a catastrophic nuclear accident. They maintain that nuclear power plants damage the environment through routine radioactive discharges, the creation of long-lived radioactive waste, and the emission of greenhouse gases during plant construction and uranium mining (though not during operation). Another argument for eliminating subsidies for advanced nuclear power plants is that restrictions or taxes on greenhouse-gas emissions would more directly and efficiently reduce such emissions.

Opponents of eliminating the current program argue that only nuclear power plants are capable of generating large quantities of electricity at competitive costs without emitting greenhouse gases. They explain that although advanced nuclear power plants will become commercially viable, subsidies are initially necessary for three reasons: the relatively high regulatory risk facing the first few contractors to test the streamlined licensing process; the large construction costs anticipated for the initial implementation of each advanced reactor design; and the failure of U.S. electricity prices to account for the environmental cost of greenhouse-gas emissions under current regulations. Advocates of the program also note that the U.S. nuclear power industry has a better safety record than other major commercial energy technologies.

In 2006, the Department of Energy received appropriations totaling $232 million for the Hydrogen Fuel Initiative. Federal funding for hydrogen fuel research aims to spur the development and use of hydrogen as a common source of stationary and vehicular power in the next few decades, thus reducing the nation's dependence on foreign oil. Such research addresses both fuel infrastructure—that is, the generation, delivery and storage of hydrogen—and those devices that might use hydrogen to produce energy. A key component of hydrogen fuel research is the FreedomCAR and Vehicle Technologies Program, a joint federal-private effort whose goal is to foster the development of energy-efficient vehicles by promoting research into fuel-cell technology. (Fuel cells generate electricity by stripping electrons from hydrogen fuel. When the electrons are recycled into the remaining fuel mixture and combined with oxygen, only water vapor is emitted.)

This option would end federal funding for the Hydrogen Fuel Initiative, including the FreedomCAR and Vehicle Technologies Program, saving $107 million in outlays in 2008 and $1 billion over five years.

Advocates of this option argue that hydrogen fuel research has been under way for some time in the private sector, that sufficient economic incentives to undertake such research already exist, and that government financial support does not induce greater private-sector efforts. They also point out that the results of a public-private partnership called the Partnership for a New Generation of Vehicles—which preceded FreedomCAR and was established to conduct advanced automotive research—were not encouraging. Specifically, that program lagged in its efforts to create a production-ready vehicle powered by a hybrid (diesel and electric) motor. Foreign car makers ended up being the first to supply the U.S. market with such vehicles.

A related argument is that the federal government should not spend research dollars to promote an infrastructure designed to support a fleet of fuel-cell automobiles because there are alternative ways to reduce the nation's dependence on imported oil. For example, instead of supporting applied research, the federal government could more effectively increase the efficiency of the nation's automotive fleet by raising gasoline taxes or by expanding and increasing fees on vehicles that get low gas mileage. Such action might also bring about more productive research by giving automakers greater incentive to identify and pursue a variety of vehicular technologies that may improve fuel efficiency (and potentially displace petroleum consumption altogether). Alternatives to fuel-cell technology that would power automobiles with relatively little or no use of petroleum include hybrid motors, purely electric motors, and engines powered by various fuel blends. Finally, although hydrogen-powered vehicles emit no pollutants, generating hydrogen fuel using current and foreseeable production technologies does pose significant environmental burdens.

Opponents of the option argue that, without government sponsorship, the private sector would underfund research in this area, for two reasons. First, private firms do not generally take into account the nation as a whole when considering the environmental or national-security benefits of energy-efficient technologies. Second, relative to other investment projects competing for private-sector dollars, the possibility of commercializing hydrogen fuel is far off and fraught with risk. Thus, opponents argue, federal funding is needed to raise the total amount of hydrogen fuel research to a level commensurate with its value to society.

In 2006, the Department of Energy (DOE) received $124 million in appropriations for programs designed to develop energy-conserving technologies for commercial and residential buildings. (Other DOE programs related to energy conservation are discussed in Option 270-8.) Whether federal agencies should be involved in selecting and developing technologies with near-term commercial prospects, however, is the subject of some debate.

This option would eliminate DOE's applied research into energy-conservation technologies for buildings, saving $57 million in outlays in 2008 and $556 million over five years.

The major rationale for this option is that many projects funded through DOE's applied energy-conservation research are small enough and discrete enough—and have a sufficiently clear market—to warrant private investment. In such cases, DOE's efforts may deter private companies from pursuing similar initiatives. In other cases, the results of the research and development conducted by those programs may prove too expensive or esoteric for the intended recipients to implement. Moreover, those programs may duplicate support provided by other federal policies. (For example, federal law sets minimum energy-efficiency standards for appliances, and the tax code favors investments in conservation technologies.) This option illustrates the idea that the federal government should forgo developing applied energy technology, which benefits specific firms in the short run, and concentrate on basic research into the underlying science, which provides broader, longer-term benefits to the energy sector and to society as a whole.

A rationale against the option is expressed in conclusions reached by a panel of the National Academy of Sciences in 2001, which determined that "DOE's RD&D [research, development, and demonstration] programs in fossil energy and energy efficiency have yielded significant benefits (economic, environmental, and national security-related), important technological options for potential application in a different (but possible) economic, political, and/or environmental setting, and important additions to the stock of engineering and scientific knowledge in a number of fields." The panel further concluded that the energy-conservation research programs had particularly benefited the construction industry—a widely dispersed industry with no substantial record of technological innovation.

Another argument against eliminating those programs is that federal research and development in the area of energy conservation could help offset possible failures in energy markets. For example, current energy prices may not reflect damage to the environment—including the potential for global warming—caused by excessive reliance on fossil fuels. Energy conservation could decrease that damage (and thus the cumulative costs to society of producing and using energy) as well as the nation's dependence on foreign oil.

Recently, the Office of Management and Budget assessed some of DOE's applied energy-conservation research programs and rated them "adequate." The building-technology program was cited as coordinating well with private industry and other segments of the government to ensure that its work focused on technologies not yet ready for commercial application. It was also lauded for providing road maps of technological development for industry.

The Department of Energy's (DOE's) Office of State and Community Programs provides grants that support energy-conservation efforts at the state and municipal levels. Weatherization-assistance grants help low-income households reduce their energy bills by installing insulation, storm windows, and weather stripping. Institutional-conservation grants help lessen energy use in educational and health care facilities, and help fund private-sector and municipal efforts to encourage local investment in building improvements. The Office of State and Community Programs also supports state and municipal programs that establish energy-efficiency standards for new and remodeled buildings and promote public transportation and carpooling, among other initiatives.

This option would eliminate funding for DOE's grant programs that support energy-conservation activities at the state and local levels. Ending those grant programs would save $17 million in outlays in 2008 and $161 million over the next five years.

One rationale for eliminating such energy-conservation grants is that other federal programs (for instance, the Low Income Home Energy Assistance Program block grants) promote similar conservation efforts. Moreover, direct federal funding may encourage state and local governments to forgo local funding for energy conservation and redirect their tax revenues to altogether different uses.

A rationale against the option is that ending DOE's grant programs could make it harder for states to continue their energy-conservation efforts. Many states rely heavily on such grants to assist low-income households and public institutions. In addition, reductions in energy use resulting from those programs could help lower emissions of greenhouse gases and other air pollutants.

The Nuclear Waste Policy Act of 1982 authorized the Department of Energy (DOE) to build a long-term storage facility for high-level radioactive waste generated by civilian nuclear power plants and defense activities. Safely disposing of that waste (mainly spent uranium) requires isolating it for perpetuity at secure sites, far from population centers and commercially valuable property. In 1987, the Congress directed DOE to concentrate on the Yucca Mountain region of Nevada as the site for the waste-disposal facility. About 90 percent of the waste to be stored there is expected to come from civilian nuclear power plants. To fund the disposal of their radioactive waste, those plants are required to pay a fee of 0.1 cent per kilowatt-hour of electricity that they generate. Funds collected from that fee are allocated to the federal Nuclear Waste Fund. At the end of calendar year 2006, that fund held about $18.5 billion; another $6.6 billion had already been spent from the fund on site preparations and design.

This option would index the Nuclear Waste Fund fee to increase with inflation each year rather than remain fixed. That change would boost offsetting receipts (which are credited against direct spending) by $22 million in 2008 and by $323 million over the 2008-2012 period.

The Yucca Mountain facility was originally set to open in 1998, but that date was pushed forward to 2010. DOE now does not plan to start accepting radioactive waste at the site before 2017. Final construction of the storage facility awaits the establishment of safety standards by the Environmental Protection Agency and licensing by the Nuclear Regulatory Commission. DOE intends to file a license application with the Nuclear Regulatory Commission by the end of 2008. With delays in opening the repository, the nominal costs of construction and of annual operations continue to increase. Currently, the site is expected to cost a total of more than $57 billion—nearly twice the original estimate. The Administration has proposed legislation that, if acted upon and approved by the Congress, would affect project costs: That proposal is to repeal the statutory cap on the amount of waste that can be stored at the Yucca Mountain facility, reducing the scope of environmental review for the repository, and permanently withdrawing land around the mountain from public use.

Proponents of indexing the Nuclear Waste Fund fee to inflation note that the fee has not changed since 1983 even though estimates of the cost of the storage project have continued to rise. In addition, they say, the national threat of terrorism has increased the importance of the project—and the value of expediting its completion. Terrorist groups have shown an interest in attacking nuclear power plants, and such attacks could involve setting fire to the spent uranium that is stored at the plants (in facilities that are not as secure as Yucca Mountain would be). Also, expediting completion could reduce the risk thatthe federal government would be liable for reimbursing utilities for costs they incur to store commercial nuclear waste on an interim basis. (Reimbursements have already occurred in response to lawsuits that some utilities filed after the government missed the 1998 completion deadline established by the Nuclear Waste Policy Act.) Moreover, as currently designed, the Yucca Mountain facility would not be quite large enough to store all of the spent material—more than 70,000 metric tons—that civilian nuclear power plants are expected to be holding by 2017. (Those plants already store more than 50,000 metric tons of spent nuclear fuel.) Thus, higher fees may be needed to finance expansion of the Yucca Mountain facility beyond the capacity of its current design or to build a second, presumably more expensive, facility.

One argument against this option is that the Department of Energy generally maintains that the current fee would be sufficient to cover all of the expected costs of the Yucca Mountain facility. Another argument is that electricity producers should not have to pay higher fees to cover additional project costs resulting from delays caused by poor government management of the project. Some opponents go further and say that waste producers should not have to continue paying the fee at all, given large uncertainties about whether the Yucca Mountain facility will ever be completed. The project faces technical challenges in the design of storage casks and in ensuring the geological integrity of the selected site (which some observers fear may not be impervious to water seepage or earthquakes). The project is also facing opposition because its location has become less remote since 1982 as a result of the rapid growth of nearby Las Vegas. Opponents also argue that storing spent nuclear material in many places around the United States may be safer than moving massive amounts of such material across the country to Yucca Mountain—through densely populated areas and on critical bridges and tunnels. In their view, it would be less expensive and more cost-effective to improve the storage security at power plants (using the amounts already collected for the Nuclear Waste Fund) than to proceed with the Yucca Mountain project.

The Department of Energy's three smallest power marketing administrations (PMAs)—the Western Area Power Administration, the Southwestern Power Administration, and the Southeastern Power Administration—provide about 1 percent of the nation's electricity. The PMAs generate electricity mainly from hydropower facilities constructed and operated by the Army Corps of Engineers and the Bureau of Reclamation. Current law requires that the electricity be sold at cost—a pricing structure intended ultimately to reimburse taxpayers for all of the costs of operating those facilities, a share of the costs of construction, and interest on the portion of total costs that has not been repaid. The financing terms for repaying the construction costs are generally favorable: For example, the interest rates used for older projects were set by statute, typically at levels below the government's then-current cost of borrowing. Those favorable financing terms and the low cost of generating electricity from hydropower mean that the PMAs can charge their customers much lower rates than other utilities do. Current law also requires the PMAs to offer their power first to rural electric cooperatives, municipal utilities, and other publicly owned utilities.

This option would require those three PMAs to sell electricity at market rates to any wholesale buyer. The higher rates would provide the federal government with about $1 billion in additional offsetting receipts (which are credited against direct spending) over the 2008-2012 period.

There are several arguments for discontinuing the subsidy for federal electricity sales. First, such subsidies are not needed to counter the market power of private utilities because those utilities are kept in check by federal and state regulation of the electricity supply, by federal antitrust laws, and increasingly by competition from independent producers. Second, in many cases, the communities that receive federal power are similar to neighboring communities that do not. Third, federal sales of electricity meet only a small share of the total power needs of households in the regions served by the three PMAs; thus, raising federal rates would have only a modest impact on those regions' economies. Fourth, the PMAs face the prospect of significant future costs to perform long-deferred maintenance and upgrades—costs that could be budgeted for by increasing power rates now. Fifth, when water levels are too low to generate sufficient hydropower, PMAs must purchase electricity from other wholesalers to fulfill the terms of their contracts with customers, even though purchased power is generally more expensive than hydropower and those contracts do not allow the PMAs to pass on the higher costs. Finally, selling electricity at below-market rates can encourage the inefficient use of energy.

A potential drawback of this option is that changing the pricing structure of those three PMAs could greatly increase electricity rates for some of the small and rural communities they serve. Other arguments against this change are that the federal government should continue providing low-cost power to counter the uncompetitive practices of investor-owned utilities and to bolster the economies of certain parts of the country.

The Southeastern Power Administration (SEPA), which is administered by the Department of Energy, sells electricity from hydropower facilities constructed and operated by the Army Corps of Engineers. SEPA pays private transmission companies to deliver that power to nearly 500 wholesale customers, such as rural cooperatives, municipal utilities, other publicly owned utilities, and three investor-owned utilities. SEPA charges rates that are designed to recover for taxpayers all of the costs of current operations, some of the costs of construction, and a nominal interest charge on the portion of total costs that has not yet been recovered. On average, SEPA sells power for about 2.5 cents per kilowatt-hour, compared with more than 5.0 cents per kilowatt-hour for some utilities in that region.

This option would sell the power-generating assets that SEPA uses, such as turbines and generators owned by the Army Corps of Engineers, but not the related dams, reservoirs, or waterfront properties. The sale would also include rights of access to the water flows necessary for power generation, subject to the constraints of competing uses for the water. That sale would net the federal government $1.2 billion in offsetting receipts (which are credited against direct spending) over the 2008-2012 period: about $1.5 billion in proceeds from the sale (based on SEPA's most recent audited statement of its assets and liabilities) minus about $300 million in lost electricity revenues over that period. Proceeds could be higher or lower, depending on the terms of the sale. (In addition, the federal government would save about $47 million a year in discretionary outlays from ending appropriations to SEPA and reducing appropriations to the Corps of Engineers for operations. Those discretionary savings are not included in the table, above.)

Supporters of this option argue that selling federal power-generating assets is consistent with the policy goal of making energy markets more efficient. They say that the original reasons for establishing SEPA—marketing low-cost power to promote competition and foster economic development—are no longer compelling because of the small amount of power that SEPA sells and because of competitive and regulatory constraints on commercial power rates. Moreover, selling federal hydropower facilities would not mean transferring all responsibility for managing and protecting water resources to the private sector. The Corps of Engineers could remain directly responsible for managing water flows for all uses, including the upkeep of basic physical structures and surrounding properties. Or, as has happened with other nonfederal dams, the terms of the federal licenses to operate the facilities (issued by the Federal Energy Regulatory Commission) could determine the management of water flows for competing purposes.

An argument against ending federal ownership of SEPA is that nonfederal entities may lack the proper incentives to perform all of SEPA's functions. Many Corps of Engineers facilities serve multiple purposes, such as managing water resources for navigation, flood control, or recreation as well as for power generation. In addition, selling SEPA could result in higher power rates for its customers, depending on the terms of the sale. Although electricity sold by SEPA meets only about 1 percent of total power needs in the 11 states in which the agency operates, a few rural communities depend heavily on that electricity.

The Tennessee Valley Authority (TVA) was established in 1933 to control flooding, improve navigation, and develop the hydroelectric resources of the Tennessee River for the benefit of a seven-state region in the southeastern United States. Since that time, TVA has developed an extensive network of transmission facilities and nuclear- and fossil-fuel-powered generating plants and has become one of the largest producers of electricity in the nation. TVA is a federal agency, but it operates with many of the advantages of both public and private entities. For example, under current law, the agency controls its spending and rate setting, with no regulatory oversight. Also, TVA has ready access to capital because investors assume that its obligations would be paid off by the government in the event of default, even though current law states that its debt is not backed by the government. And, although the agency has a statutory cap of $30 billion on its bond debt, that cap no longer limits its liabilities because it has found ways to raise capital through various third-party-financing arrangements.

This option would return TVA to its original, more limited function of managing the region's hydropower resources. Other TVA power assets for which a commercial market exists—such as the agency's fossil-fuel and nuclear power plants and its transmission lines—would be sold. (The hydropower assets would be retained because they serve multiple purposes, such as flood control and recreation.) If, as is likely, proceeds were less than the amount of TVA's outstanding debt, taxpayers would probably have to bear some of the cost of servicing that debt (whatever portion that was not defrayed by future receipts from hydropower activities).

This option assumes that the sale of TVA's power-generation and -transmission assets would be completed by the end of 2011 and would raise about $16 billion. Proceeds could be higher or lower depending on the terms of the sale. That estimate is based on recent market transactions for electricity-generating facilities, adjusted for the likelihood that potential buyers would continue to serve customers under substantially the same terms as TVA for several years. The $16 billion estimated market value of TVA's assets is less than the agency's outstanding financial obligations—which currently total about $25 billion—in part because TVA invested some $6 billion in nuclear power plants that were never completed and also experienced significant cost overruns in the construction of other nuclear plants. Thus, some portion of TVA's debt would probably be retained by the government.

One rationale for this option is that the generation and transmission of electricity are fundamentally private-sector activities. In addition, this option would reduce the risk to taxpayers posed by TVA's plans to spend several billion dollars to build new nuclear power plants. Selling the agency's commercial power assets would also eliminate the implicit subsidy that TVA receives because its status as a federal agency earns it high bond ratings. Finally, private-sector operation of TVA's electric-power assets in a competitive environment could result in some increased efficiencies relative to those under federal operation.

An argument against the option is that the agency has played, and could continue to play, a central role in the economic development of its seven-state region. The net benefit to taxpayers from the sale is uncertain because it would depend on the price actually paid for the facilities, on the costs that TVA would otherwise incur if it continued to invest in power and transmission facilities, and on trends in electricity prices and markets. In addition, TVA's ratepayers could face higher electricity prices in the absence of federal subsidies.

The Strategic Petroleum Reserve (SPR)—a stock of government-owned crude oil stored at four underground sites along the Gulf of Mexico—was established to help insulate the United States against a severe disruption in oil supplies. Designed to hold about 727 million barrels of oil, the SPR is currently 95 percent full, just belowits August 2005 peak of 96 percent. The Department of Energy (DOE) can draw oil from the SPR at a maximum sustained rate of 4.4 million barrels per day—or 44 percent of the United States' average daily oil imports and 21 percent of average daily U.S. petroleum consumption—for about 90 days (after that, the maximum draw rate declines). The Government Accountability Office estimates that, since 1976, the United States has spent about $45.2 billion (in 2005 dollars) to build, maintain, fill, and manage the SPR, including $35.1 billion to purchase oil. At a world price of $60 per barrel, the oil in the SPR was worth more than $41 billion as of early 2007.

Prior to the Gulf Coast hurricanes of 2005, the reserve contained 700 million barrels of oil. DOE sold 11 million barrels in response to those hurricanes and expects to replace that oil in 2007. DOE also plans to acquire the additional 27 million barrels needed to fill the SPR to capacity. In addition, the Administration recently proposed doubling the size of the SPR to 1.5 billion barrels by expanding capacity at existing sites and by building a new facility in Mississippi.

This option would require DOE to limit the size and capacity of the SPR to 700 million barrels, prohibiting the acquisition of the 27 million barrels of oil that DOE plans to add to the existing reserve. By limiting the amount of oil diverted to the SPR, this option would reduce outlays (by increasing offsetting receipts, which are credited against direct spending) by $1.5 billion in 2008.

DOE can acquire oil for the SPR through the Department of the Interior's (DOI's) royalty-in-kind program. DOI collects royalties from firms that produce oil and gas on federal lands, including the Outer Continental Shelf. The royalties are based on the amount the firms produce and are sometimes taken in-kind as oil and natural gas instead of cash. Current law authorizes DOE to take custody of in-kind oil for deposit into the SPR that DOI otherwise would sell (putting the proceeds into the Treasury). Diverting the oil into the SPR reduces offsetting receipts from DOI's royalty program by a corresponding amount. To date, the SPR has received, in nominal terms, about $4.3 billion worth of oil in lieu of royalty payments to the government.

Aside from the post-hurricane sale of 2005, DOE has sold oil from the SPR under emergency circumstances only once since it was established in 1975: Citing the risk of economically threatening oil-supply disruptions, more than 17 million barrels of oil were sold during the 1991 Gulf War. Oil has been released from the SPR for non-emergency purposes as well: A total of 5 million barrels was sold in test sales conducted in 1985 and 1990, and, as directed by lawmakers, a total of 28 million barrels was sold in 1996 and 1997 to reduce the federal deficit. On various occasions, a total of about 60 million barrels of oil has been released from the SPR to private firms and later replaced by exchange (with interest): In some cases, the release was in response to a temporary disruption in oil transport, such as a blocked pipeline; in other cases, the purpose was to exchange a particular grade of crude oil in the reserve for a higher quality of crude, or for heating oil (to establish an emergency reserve in the Northeastern United States). This option does not include budgetary savings that would be realized if reducing the size of the SPR led to a diminution of the exchange program and of losses associated with the program.

There are several rationales for limiting the size of the SPR, stemming from changes in the reserve's benefits and costs since 1975. Structural shifts in energy markets and in the U.S. economy at large have reduced the potential costs of a disruption in oil supplies and, consequently, any potential benefits that might arise from releasing oil in a crisis. In particular, the increasing diversity of world oil supplies and the growing integration of the economies of oil-producing and oil-consuming nations have lessened the risk of a sustained, widespread disruption. In addition, the cost of maintaining the SPR has risen because many of the reserve's facilities are aging, requiring unanticipated spending for repairs. Moreover, the government's ability to smooth oil prices through SPR purchases and releases may be limited. For example, DOE's experience with selling oil during the Gulf War and more recently indicates that the process of deciding to release oil and setting prices can itself add to market uncertainty.

There are also several arguments against reducing the current level of strategic petroleum reserves. One contention is that with continued growth in the demand for oil, the United States eventually would be unable to maintain the equivalent of 90 days of net oil imports in reserves of oil or petroleum products (including private stocks) without expanding the SPR. (The United States and other nations have committed to the International Energy Agency to maintain reserves at least at that level.) Consistent with that viewpoint, DOE has proposed expanding the capacity of the SPR to a total of 1.5 billion barrels. Another argument against limiting SPR capacity is that oil supplies from the Persian Gulf and other regions continue to be unstable. U.S. reliance on imported crude oil—particularly from the Middle East—is expected to keep growing, and the probability of terrorist attacks on the oil system may be significant; thus, the benefits of programs, such as the SPR, that are designed to guard against supply disruptions may be growing as well. Finally, in an assessment of federal programs, the Office of Management and Budget in 2005 rated the SPR program "effective" because it considered the program to be well-designed, to have a clear mission, and to make a unique contribution in providing an emergency oil-supply inventory.