oversight

Federal Electricity: Retail Competition Could Create Government Savings

Published by the Government Accountability Office on 1997-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Requesters




September 1997
                  FEDERAL
                  ELECTRICITY
                  Retail Competition
                  Could Create
                  Government Savings




GAO/RCED-97-244
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-277876

      September 30, 1997

      Congressional Requesters

      The federal government is the largest consumer of electricity in the United
      States, spending about $2.8 billion in fiscal year 1995 for the approximately
      50 billion kilowatt-hours (kWh) of electricity it used domestically, at an
      average price of 5.6 cents per kWh.1 Electricity restructuring, which is now
      being implemented or discussed in many states and in the Congress,
      would allow most retail customers, including the federal government, to
      purchase electricity in a competitive market, much as customers now
      choose among different long-distance telephone providers. Many of these
      various regulatory reforms to restructure the electricity industry share the
      common goal of bringing competition to the electricity market by
      guaranteeing customers a choice of service providers.

      As requested, we evaluated whether the federal government could realize
      savings2 if, as expected, lower prices result from retail competition in the
      electricity market. To do this, we estimated the quantities of electricity the
      federal government would have purchased without retail competition and
      the prices it would have paid during 1998 through 2015. This projection of
      prices and quantities is known as our baseline projection.

      To estimate possible savings, we used the results of several published
      forecasts of the extent to which retail competition is expected to reduce
      electricity prices, and we applied these results to our baseline estimates of
      the government’s projected spending for electricity. Unless otherwise
      stated, all dollar estimates represent 1996 present values and are based on
      the period 1998 through 2015.3 We note that secondary effects—that is, the
      ripple effects of lower electricity prices on the economy—could be
      substantial and result in even greater savings to the federal government.
      For example, declining electricity prices could result in greater economic
      growth, leading to increased tax revenues; they also could result in lower

      1
       A watt is the basic unit used to measure electricity. A kilowatt is 1,000 watts. A kilowatt-hour is equal
      to 1 kilowatt of power applied for 1 hour. The average household in the United States uses about
      10,000 kWh of electricity annually, according to the Department of Energy’s Energy Information
      Administration (EIA). In our March 1997 report entitled Energy Consumption: Federal Agencies’
      Electricity Use and Cost (GAO/RCED-97-97R, Mar. 21, 1997), we provided usage and cost data across
      federal agencies. For this report, we revised the fiscal year 1995 data to reflect only that portion that
      would be affected by retail competition and converted the data to constant 1996 dollars.
      2
       As used in this report, the term “savings” does not represent the budgetary savings that might be
      realized annually in the federal budget from lower electricity costs.
      3
       We limited our estimates of these discounted future savings through 2015 because EIA’s projections
      of electricity prices, which we needed to develop our estimates, do not go beyond 2015.



      Page 1                                                         GAO/RCED-97-244 Federal Electricity
                   B-277876




                   inflation rates, leading to smaller increases in federal spending for those
                   programs with benefit levels that are adjusted for inflation. (App. I
                   contains a more detailed discussion of our methodology.)


                   Retail competition in the electricity industry would create savings for the
Results in Brief   government; however, the actual amount of savings is highly uncertain.
                   Using published forecasts of electricity prices under competition, we
                   modeled the federal government’s electricity purchases and estimate that
                   the government could cumulatively save from $1 billion to slightly over
                   $8 billion during the 18-year period from 1998 through 2015 if it purchased
                   the baseline quantities of electricity—that is, the quantities of electricity it
                   would have purchased without retail competition. Our wide range of
                   estimates reflects, among other things, the substantial uncertainty
                   surrounding the future pace of the implementation of retail competition in
                   the United States and the prices paid and quantities purchased by the
                   government. We note that our estimated baseline quantities reflect the
                   effects of uncertainty over non-price factors, such as federal mandates for
                   energy efficiency, on the government’s electricity purchases. Nevertheless,
                   holding these other factors constant, we believe that falling electricity
                   prices would likely cause the government to buy more electricity than the
                   baseline quantities simply because the price would have declined more
                   under competition.4 When this happens, the government could be thought
                   of as “spending” some of its savings (when purchasing the baseline
                   quantities) to buy more electricity. As a result, the government’s spending
                   on electricity might not fall by as much as its savings if purchases were
                   held at the baseline quantities. Adjusting our savings estimate to reflect
                   this case, we estimate that federal spending on electricity could
                   cumulatively decrease by $0.6 billion to $6.5 billion during the same
                   18-year period—that is, 1998 through 2015—because of the decline in
                   prices resulting from retail competition.


                   Federal and state governments are actively considering regulatory reforms
Background         to restructure the electricity industry—an industry with total assets worth
                   about $500 billion and net revenues of over $200 billion annually.5 In 1992,
                   the Congress enacted the Energy Policy Act, which, among other things,

                   4
                    In stating that falling electricity prices would likely cause the government to buy more electricity, we
                   are implicitly holding constant all other factors that could affect the government’s electricity
                   purchases, such as the size of the government. In so doing, we are able to analyze and discuss the sole
                   effect of lower prices resulting from retail competition on the government’s spending for electricity.
                   5
                    The markets for the transmission and distribution of electricity are likely to remain regulated for the
                   foreseeable future.



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promotes market competition in the wholesale electricity industry. (The
wholesale electricity industry is comprised of intermediaries such as
electric utilities that resell electricity to their retail customers.) In addition,
under the act, the states may pursue their own reforms in the retail
electricity market. Currently, a number of bills to restructure the retail
electricity industry to promote a more efficient and market-driven industry
are before the Congress.

Forty-nine states have considered reforming their retail electricity
markets, and 13 states have implemented plans to restructure the industry,
either by enacting legislation or by issuing comprehensive regulatory
orders.6 For example, in California, where a plan is furthest along,
competitive electricity markets and consumer choice are scheduled to
begin in 1998. California’s plan calls for a rate cut of no less than 10
percent for all small customers by January 1, 1998. The plan also calls for
the full recovery of utilities’ stranded costs over a 10-year period.7
However, not all states’ plans call for the full recovery of stranded costs.
For example, the New Hampshire plan calls for all customers to have retail
choice by January 1, 1998 (with a possible delay until July 1, 1998 or later);
utilities will be allowed to recover only some of their stranded costs. The
full recovery of stranded costs is unlikely because, as the plan points out,
the primary goal of restructuring is to lower electricity rates.

During their deliberations, the Congress and the states are discussing the
numerous potential benefits of electricity restructuring in order to bring
about retail competition. These potential benefits include, among other
things, (1) increased competition, (2) lower prices, (3) lower operating
costs for business, (4) smaller regional differences in costs, (5) more jobs,
(6) more reliable service, and (7) a cleaner environment.




6
 The 13 states are Arizona, California, Maine, Massachusetts, Montana, Nevada, New Hampshire, New
Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, and Vermont.
7
 Stranded costs are investments or assets owned by regulated electric utilities that are not likely to be
competitive in a restructured marketplace. For example, some utilities own nuclear power plants that
have very high operating costs, and these plants are not likely to be competitive in the new retail
market. In addition, such power plants often have high debt levels. Estimates of these stranded costs
vary widely, from a low of roughly $10 billion to a high of about $500 billion. The California plan calls
for the recovery of stranded costs through a non-bypassable competitive transition charge.
(Non-bypassable means that the charge will be imposed in such a way that consumers cannot avoid
paying it, whether they stay with their current utility or choose a new supplier.)



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                     If the federal government could purchase its electricity on a competitive
Government Savings   basis, we estimate that it could cumulatively save from $1.0 billion to $8.2
in Electricity       billion during the 18-year period from 1998 through 2015 if it purchased
Spending Could       the baseline quantities of electricity—that is, the quantities of electricity it
                     would have purchased without retail competition. We note that the
Result From Retail   average annual savings in 1998 through 2015 range from a low of about
Competition          $60 million to a high of about $460 million. We further note, however, that
                     our estimates could be below or above this range and are subject to,
                     among other things, substantial uncertainty over the (1) future pace of
                     implementing retail competition in the United States, (2) extent to which
                     competition would reduce electricity prices for the government,
                     (3) quantities of electricity that the government would have purchased and
                     of the prices that it would have paid without retail competition, and
                     (4) prices for electricity that the government would pay with retail
                     competition. In addition, our estimated baseline quantities reflect the
                     effects of uncertainty over non-price factors, such as federal mandates to
                     increase energy efficiency.

                     Nevertheless, falling electricity prices would likely cause the federal
                     government to buy more than the baseline quantities simply because the
                     prices would have declined more under competition.8 As a result, the
                     government’s spending on electricity would not fall by as much as its
                     overall savings. If the government buys more than the estimated baseline
                     quantities of electricity because of lower prices, we estimate that the
                     government’s spending on electricity could cumulatively decrease by $0.6
                     billion to $6.5 billion during the same 18-year period, that is, 1998 through
                     2015, because of the decline in prices resulting from retail competition. We
                     note that the average annual declines in spending in 1998 through 2015
                     range from a low of about $30 million to a high of about $360 million.

                     To estimate the level of savings, we used our baseline for the government’s
                     future spending on electricity. We developed this baseline using the
                     projections of (1) future prices published by the Department of Energy’s
                     Energy Information Administration (EIA)9 for electricity under existing

                     8
                      The price of electricity is one of many factors that influence the amount of electricity that the
                     government purchases. Other factors include, for example, the size of the government, the prices and
                     availability of alternative forms of energy, and the existence of any federal mandates that require
                     federal agencies to use less energy or that in some way affect electricity usage. These other factors can
                     change at the same time that electricity prices change, making it difficult to identify the separate effect
                     of any one factor. By stating that falling electricity prices would likely cause the government to buy
                     more electricity, we are implicitly holding constant these other factors to allow us to analyze solely the
                     effect of the expected lower electricity prices resulting from retail competition.
                     9
                      These projections are contained in EIA’s report entitled Annual Energy Outlook 1997 With Projections
                     To 2015 (Washington, D.C.: Dec. 1996).



                     Page 4                                                         GAO/RCED-97-244 Federal Electricity
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circumstances, that is, assuming no prevailing retail competition and
(2) the government’s baseline usage for three different growth cases. We
then subtracted from this baseline the projections of lower government
spending for electricity using the baseline usage multiplied by the
competitive prices. We used three competitive pricing projections: those
reported by DRI/McGraw-Hill (DRI),10 the Gas Research Institute (GRI),11 and
Citizens For A Sound Economy Foundation (CSE).12 Finally, we discounted
the resulting stream of future annual dollar savings to determine the
present value of these savings. (A more detailed discussion of our
methodology is contained in app. I.)

In developing our baseline of the federal government’s projected
electricity usage, we started with the quantity of kWh the government used
domestically in fiscal year 1995, the latest year for which data were
available. We adjusted this quantity by factors that can both increase and
decrease the quantity of electricity. Increases in usage are likely because
even without the introduction of retail competition, future electricity
prices are expected to fall, according to EIA’s projections, and the
government as a consumer will tend to buy more of a product—even
electricity—if the cost of the product declines. On the other hand, factors
unrelated to the price of electricity could result in a net decrease in
electricity usage. For example, current federal mandates that require
federal agencies to implement energy efficiency measures and possible
future efforts to downsize these agencies could decrease the government’s
electricity usage, offsetting, for example, the increased usage from the
greater use of computers. Thus, the net effect of these non-price factors
could be to lower the federal government’s usage of electricity.

Other types of uncertainty are also associated with any estimates of the
federal government’s savings on spending for electricity. The estimates of
electricity prices under retail competition vary widely, depending on the
key assumptions used in making the estimates and the applicability of the
estimates to the federal sector. For example, we used published estimates
of the extent to which retail competition would decrease electricity prices




10
  DRI/McGraw-Hill,   World Energy Service: U.S. Outlook (Spring 1997).
11
 Gas Research Institute, GRI Baseline Projection of U.S. Energy Supply and Demand To 2015, 1997
Edition (Mar. 1997).
12
 Michael T. Maloney and Robert E. McCormick with Raymond D. Sauer, Customer Choice, Consumer
Value: An Analysis of Retail Competition in America’s Electric Industry. Prepared for and published by
Citizens For A Sound Economy Foundation (Washington, D.C.: 1996).
Page 5                                                        GAO/RCED-97-244 Federal Electricity
B-277876




for specific customer classes,13 but the government’s electricity usage is
spread among all classes. Therefore, simply taking the results of any one
of these classes to determine the government’s savings may overstate or
understate these savings.14 Moreover, because the government generally
pays a relatively low price for the electricity it currently buys,15 the actual
savings from retail competition may be less than they would be for other
customers and therefore are more likely to be at the lower end of our
range of estimates.

Furthermore, the recovery of stranded costs could affect prices under
retail competition. For example, DRI’s and GRI’s price projections under
retail competition include the recovery of large amounts of stranded costs
that are passed on to consumers through higher electricity rates, while
CSE’s price projections include none. We found that CSE’s estimates
resulted in the greatest savings in the government’s spending. While we
realize that other significant factors also affect the amount of the price
declines that would result from retail competition, we believe that the
assumption that stranded costs will be recovered is an important factor
that helps to explain to some degree the differences in the estimates of the
savings. (App. II contains a more detailed discussion of the results of our
simulation analyses of electricity savings.)

In a competitive retail market for electricity, the reduction in federal
spending for electricity would be less than the government’s estimated
savings if federal usage were to increase above the baseline quantities. As
electricity prices declined below the baseline prices, federal usage would
likely increase in response to this additional decline in prices. Thus,
spending would decrease less than it would have if usage had remained at
the baseline quantities. We estimate that the government’s spending on
electricity could cumulatively decrease by $0.6 billion to $6.5 billion during
1998 through 2015 (or about 23 percent less, on average, than the decline
in spending if the quantities purchased were held at our baseline) because
of the decline in prices resulting from retail competition.16 We note that

13
  EIA assigns retail consumers to one of three customer classes—residential, commercial, or
industrial—depending on certain characteristics of the consumers’ facilities. In addition, the classes
are aggregated to form a fourth class—average. Because the federal government’s facilities vary
widely, these facilities are scattered among the first three different classes.
14
 App. II provides simulation analyses that estimate a range of savings to the government using all four
customer classes.
15
  In fiscal year 1995, the federal government paid, on average, 5.6 cents per kWh, while the average
retail price was 7.3 cents per kWh (prices in constant 1996 dollars).
16
  To estimate the increase in the quantities of electricity that would be purchased because of the
further decline in prices brought about by retail competition, we used the estimates of price
elasticity—the degree to which the quantity purchased responds to price changes—obtained from (1) a
discussion with an EIA official and (2) the CSE study.
Page 6                                                        GAO/RCED-97-244 Federal Electricity
                     B-277876




                     the average annual declines in spending during 1998 through 2015 range
                     from a low of about $30 million to a high of about $360 million.

                     We note that this estimate is subject to the same uncertainties as in our
                     estimate of savings. Furthermore, this estimate is subject to the same
                     uncertainty as the baseline about the extent to which the government
                     would likely increase its usage of electricity simply because of lower
                     prices—in this instance, lower competitive prices. (App. II presents a more
                     detailed discussion of the results of our analysis of price effects.)


                     While future prices for electricity are expected to be lower for the federal
Conclusions          government, even under the current regulatory structure, the restructuring
                     of the electricity industry in order to foster retail competition is likely to
                     result in even lower prices. Our analysis shows that the federal
                     government would be likely to receive substantial financial benefits if it
                     had the ability to purchase its electricity on a competitive basis. However,
                     there are uncertainties that would affect the magnitude of these benefits.


                     We provided a draft of this report to DOE for its review and comment. DOE
Agency Comments      stated that our report appears to fairly assess the major issues that affect
and Our Evaluation   federal electricity use and identifies the great uncertainty in the economic
                     environment within which the federal government buys electricity. In
                     addition, DOE said that our analytical approach appears sound in terms of
                     answering the narrow question of how much the federal government could
                     save on electricity expenditures in a restructured environment, and that
                     our range of savings appears reasonable given the large uncertainties
                     surrounding the timing of the advent of retail competition and the
                     treatment of stranded costs. DOE also stated that federal agencies are
                     currently working under Executive Order 12902, which requires a
                     reduction in energy usage by 2005. We note that we included such possible
                     reductions in electricity usage in calculating our savings estimates. In
                     commenting on the secondary effects of lower electricity prices on
                     economic growth and inflation, DOE stated that our discussion appears to
                     be stated with excessive caution. In addition, DOE said that some
                     assessment of the relative magnitude of the effects on the federal budget
                     through reduced inflation compared with the effects resulting from
                     changes in federal electricity costs might be of great interest to readers of
                     this report. We recognize the potential importance of reduced inflation and
                     other secondary effects on the federal budget, and as we stated in the draft
                     report, these effects could be substantial and result in even greater savings



                     Page 7                                        GAO/RCED-97-244 Federal Electricity
B-277876




to the federal government. However, for this review, we concentrated our
efforts on quantifying the direct effect of lower electricity prices on federal
expenditures, and while we agree that some assessment of the magnitude
of these secondary effects would be useful, we did not explicitly estimate
their magnitude. DOE’s complete response is presented in appendix III.


We conducted our work from May 1997 through September 1997 in
accordance with generally accepted government auditing standards. As
arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after the
date of this letter. At that time, we will send copies to the Secretary of
Energy, the Administrator of the Energy Information Administration, and
the Secretary of Defense. We will also make copies available to others on
request.

If you or your staff have any questions concerning this report, please call
me at (202) 512-3841. Major contributors to this report are listed in
appendix IV.




Susan D. Kladiva
Acting Associate Director, Energy,
  Resources, and Science Issues




Page 8                                         GAO/RCED-97-244 Federal Electricity
B-277876




Congressional Requesters

The Honorable Thomas J. Bliley, Jr.
Chairman, Committee on Commerce
House of Representatives

The Honorable Dan Schaefer
Chairman, Subcommittee on Energy and Power
Committee on Commerce
House of Representatives

The Honorable James M. Inhofe
Chairman
The Honorable Charles S. Robb
Ranking Minority Member
Readiness Subcommittee
Committee on Armed Services
United States Senate




Page 9                                 GAO/RCED-97-244 Federal Electricity
Contents



Letter                                                                                               1


Appendix I                                                                                          12

Objectives, Scope,
and Methodology
Appendix II                                                                                         15
                        Federal Government Usage and Average Rates in 1995                          17
Analyses of Savings     Federal Government kWh Usage Over 1998-2015                                 17
and of the Decline in   Federal Government Electricity Prices Over 1998-2015                        18
                        Savings and the Decline in the Government’s Spending:                       19
the Government’s          Simulations—a Range of Estimates
Spending for            Savings and the Decline in the Government’s Spending: Estimates             21
Electricity
Appendix III                                                                                        27

Comments From the
Department of Energy
Appendix IV                                                                                         29

Major Contributors to
This Report
Tables                  Table II.1: Savings on Electricity Spending If Fiscal Year 1995             22
                         Usage Grows by 1 Percent Annually Because of Non-Price
                         Factors, 1998-2015
                        Table II.2: Savings on Electricity Spending If Fiscal Year 1995             22
                         Usage Grows by Zero Percent Annually Because of Non-Price
                         Factors, 1998-2015
                        Table II.3: Savings on Electricity Spending If Fiscal Year 1995             23
                         Usage Declines by 1 Percent Annually Because of Non-Price
                         Factors, 1998-2015
                        Table II.4: Declines in Electricity Spending If Fiscal Year 1995            24
                         Usage Grows by 1 Percent Annually Because of Non-Price
                         Factors, 1998-2015




                        Page 10                                     GAO/RCED-97-244 Federal Electricity
Contents




Table II.5: Declines in Electricity Spending If Fiscal Year 1995            24
 Usage Grows by Zero Percent Annually Because of Non-Price
 Factors, 1998-2015
Table II.6: Declines in Electricity Spending If Fiscal Year 1995            25
 Usage Declines by 1 Percent Annually Because of Non-Price
 Factors, 1998-2015




Abbreviations

CSE        Citizens For A Sound Economy Foundation
DOD        Department of Defense
DOE        Department of Energy
EIA        Energy Information Administration
FEMP       Office of Federal Energy Management Programs
GRI        Gas Research Institute
kWh        kilowatt-hours


Page 11                                     GAO/RCED-97-244 Federal Electricity
Appendix I

Objectives, Scope, and Methodology


              We evaluated whether the federal government could realize savings1 if
              lower prices in the electricity market result from retail competition, as is
              expected. In making this savings estimate, we developed a baseline
              representing the projections of government spending for electricity
              purchased without retail competition. We subtracted from this baseline
              the projections of spending for electricity that are based on these same
              quantities but with lower electricity prices resulting from retail
              competition. In addition, we estimated the government’s decline in
              spending, which is less than its savings because the quantities purchased
              will increase further than in the baseline as competitive prices fall below
              baseline prices. In estimating savings and the decline in spending, we did
              not develop our own model to estimate the extent to which retail
              competition is expected to reduce electricity prices for retail customers.
              Instead, we applied the results of several published forecasts to our model
              of the government’s projected spending for electricity. In addition, our
              analyses apply only to the effects of retail competition on the generation of
              electricity—transmission and distribution markets for electricity would
              likely still be regulated.

              We note, however, that our savings and spending decline estimates could
              be below or above our estimated ranges and are subject to major
              imprecision because of, among other things, the substantial uncertainty
              over the (1) future structure and pace of implementing retail competition
              in the United States, (2) quantities of electricity that the government would
              purchase with and without retail competition, and (3) prices that the
              government would pay with and without retail competition. In addition, in
              making these estimates, we calculated ranges because they could more
              reliably present the uncertainty over these estimates. Moreover, we note
              that the secondary effects—that is, the ripple effects of lower electricity
              prices on the economy—could be substantial and result in even greater
              savings and declines in spending for the federal government.

              In estimating the range of possible savings to the federal government, we
              (1) developed a baseline representing the projections of the federal
              government’s annual demand (both the prices paid and the quantities
              consumed) for electricity under existing circumstances, that is, without
              prevailing retail competition; (2) subtracted from the baseline the
              projections of lower government spending for electricity on baseline
              quantities, but with the lower prices that could result from retail
              competition; and (3) discounted the resulting stream of future annual

              1
               As used in this report, the term “savings” does not represent the budgetary savings that might be
              realized annually in the federal budget process from lower electricity costs.



              Page 12                                                      GAO/RCED-97-244 Federal Electricity
Appendix I
Objectives, Scope, and Methodology




dollar savings over the 18-year period 1998-2015 to determine the 1996
present values. To determine the range of possible declines in spending for
the federal government, we used the above procedure for estimating
savings, but with the projections of lower government spending for
electricity as a result of retail competition based on larger quantities than
in the baseline. That is, the government could be thought of as “spending”
some of its savings to buy more electricity.

To construct the baseline, we (1) revised the 1995 data on actual federal
electricity expenditures obtained from the Department of Energy’s (DOE)
Office of Federal Energy Management Programs (FEMP)2 to reflect only
that portion of the data affected by retail competition and (2) projected
future government prices on the basis of prices for the AEO97 reference
case contained in DOE’s Energy Information Administration (EIA) report
entitled Annual Energy Outlook 1997 With Projections To 2015.3 We did
not assess the reliability of the computer data or verify the accuracy of the
FEMP data and the basis for the EIA projections used to construct the
baseline. However, we did discuss FEMP’s procedures for validating the
data submitted by the agencies.

To identify possible savings and the declines in spending associated with
the competitive purchase of electricity, we used the price declines
projected by DRI/McGraw-Hill (DRI),4 the Gas Research Institute (GRI),5 and
the Citizens For A Sound Economy Foundation (CSE).6 We used these
competitive pricing projections because they were the only ones we were
able to identify that considered the effects of retail competition for all


2
 See Energy Consumption: Federal Agencies’ Electricity Use and Cost (GAO/RCED-97-97R, Mar. 21,
1997). We provided FEMP’s data on usage and cost across federal agencies. For this report, we revised
the fiscal year 1995 data to reflect only that portion that would be affected by retail competition and
converted the data to constant 1996 dollars.
3
 The EIA reference case estimates average, residential, commercial, and industrial electricity prices
under the assumption of “limited competition.” It assumes (1) competitive pressures from the
wholesale electricity markets and (2) the more limited “anticipation effects,” but not the actual
implementation, of full retail competition.
4
 DRI/McGraw-Hill,   World Energy Service: U.S. Outlook (Spring 1997).
5
 Gas Research Institute, GRI Baseline Projection of U.S. Energy Supply and Demand To 2015, 1997
Edition (Mar. 1997). We note that GRI’s price projection incorporates only some of the details of retail
restructuring—those aspects that could be dealt with through their model assumptions. GRI did not
deal with those aspects that required a more involved effort, such as methodology updates. Therefore,
GRI’s electricity price declines can be considered lower than what would otherwise be expected if
GRI’s projections had assumed full retail restructuring.
6
 Michael T. Maloney and Robert E. McCormick with Raymond D. Sauer, Customer Choice, Consumer
Value: An Analysis of Retail Competition in America’s Electric Industry. Prepared for and published by
Citizens For A Sound Economy Foundation (Washington, D.C.: 1996).



Page 13                                                       GAO/RCED-97-244 Federal Electricity
Appendix I
Objectives, Scope, and Methodology




consumers and were not limited to a particular geographic region. We
reviewed each study and contacted officials at these organizations to
further discuss the results of their analyses. However, we did not verify the
accuracy of, or the basis for, these projections, which we used to
determine declines in electricity prices resulting from retail competition.

In addition to the above studies, we reviewed the following studies to
identify other possible sources to use for our cost savings analysis: a
March 1996 Department of Defense report to the Congress, Procurement
of Electricity From Most Economical Source; a January 1997 report by the
Heritage Foundation, Energizing America: A Blueprint For Deregulating
The Electricity Market; a November 1996 report by the Congressional
Research Service, Electricity: The Road Toward Restructuring; and a
March 1997 DOE presentation on “Electricity Prices in a Restructured
Electric Power Industry.” Although time constraints did not allow us to
include the results of price declines from retail competition estimated by
EIA in its August 1997 report, Electricity Prices in a Competitive
Environment: Marginal Cost Pricing of Generation Services and Financial
Status of Electric Utilities—A Preliminary Analysis Through 2015, we did
review the report.




Page 14                                      GAO/RCED-97-244 Federal Electricity
Appendix II

Analyses of Savings and of the Decline in
the Government’s Spending for Electricity

               This appendix provides the detailed results of our analyses to provide a
               range of estimates of savings to the federal government that might occur if
               the federal government had the ability to procure its electricity
               competitively. We note that our analyses apply only to the generation of
               electricity. Transmission and distribution markets for electricity would
               likely still be regulated. Specifically, we estimated the (1) savings that
               would likely occur with lower prices resulting from retail competition to
               purchase our baseline quantities, that is, the quantities the government
               would likely have purchased without retail competition and (2) decline in
               the government’s spending that would likely occur with lower prices
               resulting from retail competition to purchase our baseline quantities plus
               the additional quantities above our baseline because competitive prices
               decline more than baseline (noncompetitive) prices.1 We note that under
               both the competitive and noncompetitive scenarios, electricity prices
               would fall, but the decline would be substantially more under retail
               competition.

               In estimating savings and the decline in the government’s spending, we did
               not develop our own model to estimate lower prices from retail
               competition but used the results of three expert studies and applied their
               results to project usage and prices for the government. The three studies
               used were (1) DRI/McGraw-Hill (DRI),2 (2) GRI,3 and (3) the Citizens For A
               Sound Economy Foundation (CSE).4 We note, however, that any estimates
               of savings and the decline in the government’s spending resulting from
               retail competition are subject to major imprecision because of, among
               other things, the high level of uncertainty surrounding the future structure
               and pace of implementing retail competition in the U.S. electricity
               industry, the future quantities of and prices for electricity purchased, and
               the extent to which retail competition reduces electricity prices for the
               government in particular.

               1
                As the term noncompetitive is used here, we mean the electricity generation charges under the
               “existing circumstances” scenario. That is, retail electricity prices are regulated, but cost reductions
               are assumed to result from competitive pressures in the wholesale market for electricity, as well as
               from suppliers’ preparations for retail competition.
               2
                DRI/McGraw-Hill,   World Energy Service: U.S. Outlook (Spring 1997).
               3
                Gas Research Institute, GRI Baseline Projection of U.S. Energy Supply and Demand To 2015, 1997
               Edition (Mar. 1997). We note that GRI’s price projection incorporates only some of the details of retail
               restructuring—those aspects that could be dealt with through their model assumptions. GRI did not
               deal with those aspects that require a more involved effort, such as methodology updates. Therefore,
               GRI’s electricity price declines can be considered lower than what would otherwise be expected if
               GRI’s projections had assumed full retail restructuring.
               4
                Michael T. Maloney and Robert E. McCormick with Raymond D. Sauer, Customer Choice, Consumer
               Value: An Analysis of Retail Competition in America’s Electric Industry. Prepared for and published by
               Citizens For A Sound Economy Foundation (Washington, D.C.: 1996).



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We estimated for the 18-year period 1998 through 2015, in terms of 1996
present values, (1) the savings that would likely occur from lower
electricity prices, because of the implementation of full retail competition,
for the purchase of the baseline quantities of electricity under
noncompetitive circumstances, that is, under “existing circumstances” and
(2) the decline in the government’s spending that would likely occur from
lower prices because of retail competition, taking into account the
baseline quantities purchased plus the purchase of additional quantities of
electricity, which would likely result from competitive prices falling below
baseline prices. By definition, the decline in the government’s spending
would be less than its savings because the quantities purchased for the
competitive scenario are larger. We have defined both our savings and the
decline in spending as relative to a baseline for prices, quantities, and
dollar spending. This allows us to estimate how much less the federal
government would spend than it would otherwise have spent over future
years—isolating the effect of retail competition on spending.5

Specifically, for any future year, our estimated savings is defined as the
noncompetitive price minus the competitive price, multiplied by the
quantity of electricity that would likely be purchased under the
noncompetitive price scenario. The decline in the government’s spending
is defined as the noncompetitive price multiplied by the quantity of
electricity that would likely be purchased under the noncompetitive price
scenario, minus the competitive price multiplied by the quantity of
electricity that would likely be purchased under the competitive price
scenario. For either measure, we discounted each of the resulting streams
of future savings and declines in spending over these years, and summed
each of them over the period 1998-2015 to obtain their 1996 present values,
that is, their values in discounted 1996 constant dollars.6




5
 It is also possible to define both savings and the decline in the government’s spending as relative to a
base year (e.g., 1997) price rather than to baseline prices. However, we did not choose these
definitions because they would include increased savings and declines in the government’s spending
that are not attributable to retail competition. This is because these increases would have occurred
even without retail competition.
6
 We use a real (i.e., inflation-adjusted) discount rate of 3.8 percent. This rate is based on a 30-year
federal government bond nominal rate of 6.5 percent (the approximate rate when our analysis was
performed), minus a forecast average annual inflation rate of about 2.7 percent over the period 1998
through 2015. The inflation rate used was the annual percentage change in the gross domestic product
implicit deflator from WEFA’s first quarter 1997 forecast in its U.S. Long-Term Economic Outlook
[Revised] (Vol. 1). A real, rather than a nominal, discount rate is used because our data are already in
1996 constant dollars.



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                     Using FEMP’s fiscal year 1995 data on actual federal electricity usage and
Federal Government   cost,7 we adjusted the data to reflect only that portion that would be
Usage and Average    affected by retail competition. For example, according to the Department
Rates in 1995        of Defense’s (DOD) records, total spending for electricity in fiscal year 1996
                     includes nondomestic spending of about 25.5 percent of its total spending
                     and electricity usage of about 12.6 percent of its total kilowatt hours
                     (kWh).8 Because spending on electricity used at facilities outside the
                     United States would not be affected by the restructuring of the electricity
                     industry in the United States, we subtracted this 25.5-percent share from
                     the total 1995 DOD spending; we made a similar adjustment of 12.6 percent
                     for 1995 kWh usage in fiscal year 1995. In addition, we made other
                     appropriate adjustments to FEMP’s fiscal year 1995 spending and kWh
                     usage data for other agencies. We converted these adjusted dollar figures
                     to reflect constant 1996 dollars. We then calculated the 1995 average
                     price—that is, the rate in cents per kWh of electricity used by the federal
                     government—by dividing the government’s total spending on electricity by
                     its total kWh.


                     The extent to which the federal government’s kWh usage of electricity will
Federal Government   increase or decrease in future years depends upon its future price as well
kWh Usage Over       as upon non-price factors affecting demand. As with any commodity, as its
1998-2015            price decreases (increases), the quantity purchased will increase
                     (decrease), all other factors affecting demand remaining constant.
                     Non-price factors that might increase future demand are, for example, the
                     increased use of computers. Non-price factors that might decrease future
                     demand are, for example, the increased use of energy conservation
                     measures and the downsizing of the federal government. In our analyses,
                     we treat the price effect on quantity purchased separately from the
                     non-price effect on quantity. For example, electricity usage in kWh could
                     be increasing because of price reductions yet simultaneously decreasing
                     because of the combined effect of all non-price factors—leading to a net
                     positive or negative overall effect on quantity purchased.

                     We assume that the quantity of kWh used will increase over the level in the
                     base year (1995) because of the price effects—price is assumed to fall
                     under both the competitive and noncompetitive scenarios. Quantity

                     7
                      FEMP coordinates federal energy efficiency efforts and reports annually to the Congress on federal
                     energy consumption and conservation activities by executive branch agencies. For fiscal year 1995,
                     FEMP’s data were for 28 executive branch agencies and did not include the judicial and legislative
                     branch agencies. According to the data provided by legislative branch officials, the legislative and
                     judicial branches’ usage is less than 1 percent of the government’s electricity usage.
                     8
                      Fiscal year 1996 was the first year DOD collected data on nondomestic usage.



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                     Analyses of Savings and of the Decline in
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                     increases more under the competitive scenario because the price falls
                     more. In either scenario, the amount of the increase depends on the
                     estimated demand elasticity for electricity with respect to electricity price.9
                      For the quantity effects, because of the non-price factors, we assume a
                     range of three alternatives: (1) an increase of 1 percent per year, (2) a zero
                     percent increase per year (no effect), and (3) a decrease of 1 percent per
                     year. The net effect on total kWh usage is determined by the combined
                     effects of both price and non-price factors.


                     We did not develop our own model to estimate electricity prices for the
Federal Government   federal government in 1998 through 2015 under either the noncompetitive
Electricity Prices   or competitive scenarios. For the noncompetitive scenario, we used EIA’s
Over 1998-2015       AEO97 reference case, which estimates average, residential, commercial,
                     and industrial electricity prices under the assumption of “limited
                     competition.” It assumes (1) competitive pressures from the wholesale
                     electricity markets and (2) supplier preparation for, but not the actual
                     implementation of, retail competition. We believe that this scenario best
                     reflects the extension of the current situation into the future, without any
                     further action by either the states or the federal government with respect
                     to electricity markets. We assumed that the federal government’s average
                     base price in 1995 would decline over the forecast period at the same
                     percentage rates as did the EIA forecast prices for the average, residential,
                     commercial, or industrial classes, respectively.

                     For the competitive scenario, we used the average, residential,
                     commercial, and industrial electricity price estimates from three
                     alternative studies: (1) CSE,10 (2) DRI, and (3) GRI. We assumed that the
                     federal government’s average base price in 1995 would decline over the
                     1996-2015 period at the same percentage rates as did the CSE, DRI, and GRI
                     forecast prices. The CSE study assumes immediate full retail competition
                     with no recouping of stranded costs by the utilities. The DRI study
                     estimates electricity prices under the assumption of reaching full retail
                     competition in the electricity markets by 2001 and assumes substantial
                     amounts of stranded cost recovery. The GRI study assumes only some of
                     the effects of retail restructuring but also assumes substantial amounts of



                     9
                      This demand elasticity is defined as the percentage change in the quantity demanded divided by the
                     percentage change in its own price, all other factors affecting demand held constant. Because quantity
                     rises as price falls, and vice versa, this elasticity is of a negative sign. Note, however, that higher
                     (lower) elasticity values represent elasticities that are higher (lower) in terms of absolute value.
                     10
                         For CSE, we analyzed the electricity price declines for the “average” customer class only.



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                      Analyses of Savings and of the Decline in
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                      stranded cost recovery.11 Therefore, CSE’s forecast prices are generally
                      much lower than those of either DRI or GRI.


                      The estimated values for savings and the declines in spending for federal
Savings and the       electricity will vary, depending upon a number of assumptions, any one of
Decline in the        which may prove in the future to have been inaccurate. We performed
Government’s          simulation analyses to account for at least some of the potential sources of
                      variation and to estimate how much such changes in our assumptions will
Spending:             affect our estimates of savings and declines in spending. Our simulations
Simulations—a Range   account for four major causes of variation in our estimates of savings and
                      declines in spending. First, to account for variations in competitive prices,
of Estimates          we used the estimates of competitive electricity prices from three
                      sources—DRI, GRI, and CSE. Each source uses (explicitly or implicitly) a
                      different model of the U.S. economy, with different equations and assumed
                      (or model-derived) forecast values for such variables as real gross
                      domestic product, inflation, labor force and productivity growth, interest
                      rates, and perhaps most importantly, natural gas, coal, and petroleum
                      prices.

                      Second, to account for differences in prices for different types of
                      consumers, we used the percentage declines in the price forecasts for
                      average, residential, commercial, and industrial customers, respectively.
                      Which category the federal government most resembles is subject to
                      debate. Third, to account for the effects of non-price factors on kWh used
                      by the federal government, we assumed a growth range represented by
                      three cases: (1) an annual growth rate of 1 percent, (2) zero annual
                      growth, and (3) an annual decline rate of 1 percent.12 With these different
                      assumptions, over the 18-year period from 1998 through 2015, this total
                      kWh change because of non-price factors would range from an increase of
                      19.6 percent to a decrease of 16.5 percent.


                      11
                        Stranded costs are investments or assets owned by regulated electric utilities that are not likely to be
                      competitive in a restructured marketplace. For example, some utilities own nuclear power plants that
                      have very high operating costs, and these plants are not likely to be competitive in the new retail
                      market. In addition, such power plants often have high debt levels. The estimates of these stranded
                      costs vary widely, from a low of roughly $10 billion to a high of about $500 billion. DRI estimates
                      stranded costs at about $247 billion, of which at least 90 percent are recovered from ratepayers
                      through a non-bypassable transmission access charge and a rate surcharge. GRI estimates stranded
                      costs at $100 billion, of which 80 percent is recovered from ratepayers through some type of
                      transmission charge.
                      12
                       To select possible growth ranges to use in our analyses, we used actual growth rates for the federal
                      government over the last 10 years and last 5 years, respectively. According to our March 1997 report
                      entitled, Energy Consumption: Federal Agencies’ Electricity Use and Cost, (GAO/RCED-97-97R,
                      Mar. 21, 1997), the annual growth rate was a positive 1 percent over the 10-year fiscal year period
                      1986-95, and over the last 5 years, a negative 1 percent.



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Finally, we needed to account for price elasticity. The estimates for
elasticity are also subject to much debate. For the short short-run
(assumed to be reached in the year 2000) and the long short-run (assumed
to be reached in 2005), for the customer class “average,” we used elasticity
estimates of –0.05 and –0.15, respectively—elasticity numbers suggested
as reasonable by an EIA analyst. For the long-run (assumed to be reached
in 2013), for the customer class “average,” we used CSE’s long-run elasticity
estimate of –0.976. We also used CSE’s long-run elasticity estimates for the
residential, commercial, and industrial customer classes, –0.795, –0.450,
and –1.702, respectively.

The elasticity estimates for the three customer classes cited above for the
two short-run cases were adjusted up or down from the short-run
elasticity estimates for the average customer class by the percentage that
their long-run elasticity estimates were above or below the corresponding
long-run estimate for the average customer class. Additional simulations
that we could have performed include using a series of higher (or lower)
sets of elasticity estimates. All other factors being held equal, such
simulations would result in higher (or lower) estimated savings.13 For the
decline in the government’s spending, the effect is more complex. If the




13
  As elasticity increases (decreases), savings increase (decrease) because of the rise (fall) in the
quantity increase that results from the decline in noncompetitive prices. A larger (smaller) quantity
increase results from higher (lower) estimates of elasticity. These larger (smaller) increases are
multiplied by the difference between the noncompetitive and competitive prices.



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                      Analyses of Savings and of the Decline in
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                      elasticities were increased, the spending decline would decrease. If the
                      elasticities were decreased, the spending decline would increase.14

                      We also could have performed many other mix-and-match simulations
                      using average, residential, commercial, or industrial price behavior
                      (percentage declines) with average, residential, commercial, or industrial
                      price elasticities—for a total of 16 different simulations. For example, we
                      believe that a reasonable scenario would be to use the percentage changes
                      in industrial prices with the commercial class elasticities. This is because
                      (1) the government’s average base price is already fairly low compared
                      with the average price for retail consumers—the industrial class has the
                      lowest prices—and (2) the government’s price elasticities may be
                      low—the commercial class has the lowest elasticities.


                      Tables II.1, II.2, and II.315 show the cumulative savings estimates,
Savings and the       reflecting the kWh usage assumed in our baseline, that is, the
Decline in the        noncompetitive price scenario. The estimates for the present value of
Government’s          savings in 1998 through 2015 range from (1) $1.0 billion for the GRI
                      industrial projection, assuming a one-percent yearly decline in usage from
Spending: Estimates   non-price factors (table II.3) to (2) $8.2 billion for the CSE average
                      projection, assuming a one-percent yearly increase in usage from

                      14
                        The federal government’s decline in spending can be divided into three components. The first two
                      components are the difference between noncompetitive and competitive prices multiplied by,
                      respectively, the base year quantity and the increase in quantity because of non-price factors. The third
                      component is the noncompetitive price multiplied by the increase in quantity because of the decline in
                      noncompetitive prices, minus the competitive price multiplied by the increase in quantity because of
                      the decline in competitive prices.
                      The sum of the first two components is always positive over the 1998-2015 period since competitive
                      prices are always less than noncompetitive prices. The estimate of elasticity is not included in either of
                      these two components; the estimate of elasticity is included as a multiplicand in the third component.
                      However, the third component is generally negative. Although competitive prices are generally much
                      lower than noncompetitive prices, the increase in quantity because of the decline in competitive prices
                      (compared with its comparable increase because of the decline in noncompetitive prices) is, on a
                      percentage basis, very much larger than is the percentage decrease in competitive price below
                      noncompetitive price.
                      For example, according to our analysis of the CSE case, in 1998 through 2015, the federal government
                      would purchase about 123 billion kWh more electricity than it would have purchased had its usage
                      remained at the 1995 base year level of about 50 billion kWh over the period. This increase is about 260
                      percent more than the about 34 billion kWh additional electricity purchased over the period in our
                      baseline compared with the government’s usage had that usage remained at the 1995 base year level.
                      This percentage greatly exceeds the percentage decline in competitive prices below baseline prices,
                      resulting in a negative value for the third component.
                      We then multiply the increase (decrease) factor in the elasticity estimate by this negative-value
                      component—for example, by a factor of 1.5, if elasticity increases by 50 percent and by 0.5, if elasticity
                      decreases by 50 percent. Therefore, if elasticity increases (decreases), the decline in spending
                      decreases (increases).
                      15
                        All savings estimates are given in discounted 1996 constant dollars (billions). The estimates for
                      present value reflect the discounting of the savings in 1998 through 2015 using a real discount rate of
                      3.8 percent.



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                                      Analyses of Savings and of the Decline in
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                                      non-price factors (table II.1). The average annual values over 1998 through
                                      2015 range from a low of about $60 million to a high of about $460 million.

Table II.1: Savings on Electricity
Spending If Fiscal Year 1995 Usage    Dollars in billions
Grows by 1 Percent Annually Because                                                                          Present value (discounted
of Non-Price Factors, 1998-2015       Studies’ estimates for each type of class                                           1996 dollars)
                                      DRI (average)                                                                               $5.5
                                      DRI (residential)                                                                             6.1
                                      DRI (commercial)                                                                              6.4
                                      DRI (industrial)                                                                              2.9
                                      GRI (average)                                                                                 2.3
                                      GRI (residential)                                                                             3.1
                                      GRI (commercial)                                                                              2.4
                                      GRI (industrial)                                                                              1.3
                                      CSE (average)                                                                                 8.2
                                      Note: Includes quantity increases because of the elasticity effect of lower prices.



Table II.2: Savings on Electricity
Spending If Fiscal Year 1995 Usage    Dollars in billions
Grows by Zero Percent Annually                                                                               Present value (discounted
Because of Non-Price Factors,         Studies’ estimates for each type of class                                           1996 dollars)
1998-2015
                                      DRI (average)                                                                               $4.9
                                      DRI (residential)                                                                             5.5
                                      DRI (commercial)                                                                              5.7
                                      DRI (industrial)                                                                              2.6
                                      GRI (average)                                                                                 2.1
                                      GRI (residential)                                                                             2.7
                                      GRI (commercial)                                                                              2.1
                                      GRI (industrial)                                                                              1.1
                                      CSE (average)                                                                                 7.3
                                      Note: Includes quantity increases because of the elasticity effect of lower prices.




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Table II.3: Savings on Electricity
Spending If Fiscal Year 1995 Usage   Dollars in billions
Declines by 1 Percent Annually                                                                              Present value (discounted
Because of Non-Price Factors,        Studies’ estimates for each type of class                                           1996 dollars)
1998-2015
                                     DRI (average)                                                                                      $4.3
                                     DRI (residential)                                                                                      4.8
                                     DRI (commercial)                                                                                       5.0
                                     DRI (industrial)                                                                                       2.3
                                     GRI (average)                                                                                          1.8
                                     GRI (residential)                                                                                      2.4
                                     GRI (commercial)                                                                                       1.9
                                     GRI (industrial)                                                                                       1.0a
                                     CSE (average)                                                                                          6.4
                                     a
                                      $1.01 billion, rounded to two decimal places.

                                     Note: Includes quantity increases because of the elasticity effect of lower prices.



                                     Tables II.4, II.5, and II.616 show the estimates for the federal government’s
                                     cumulative decline in spending, reflecting the two kWh usages assumed in
                                     our baseline and competitive price scenarios. The estimates for the
                                     present value of spending declines in 1998 through 2015 range from
                                     (1) $0.6 billion for the GRI industrial projection, assuming a 1-percent
                                     yearly decline in usage from non-price factors (table II.6), to (2) $6.5
                                     billion for the CSE average projection, assuming a 1-percent yearly increase
                                     in usage from non-price factors (table II.4). The average annual values
                                     over 1998 through 2015 range from a low of about $30 million to a high of
                                     about $360 million.




                                     16
                                      All declines in spending estimates are given in discounted 1996 constant dollars (billions). The
                                     estimates for present value reflect the discounting of the declines in spending in 1998 through 2015
                                     using a real discount rate of 3.8 percent.



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                                      Analyses of Savings and of the Decline in
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Table II.4: Declines in Electricity
Spending If Fiscal Year 1995 Usage    Dollars in billions
Grows by 1 Percent Annually Because                                                                          Present value (discounted
of Non-Price Factors, 1998-2015       Studies’ estimates for each type of class                                           1996 dollars)
                                      DRI (average)                                                                               $4.3
                                      DRI (residential)                                                                             5.0
                                      DRI (commercial)                                                                              5.7
                                      DRI (industrial)                                                                              2.0
                                      GRI (average)                                                                                 1.7
                                      GRI (residential)                                                                             2.4
                                      GRI (commercial)                                                                              2.1
                                      GRI (industrial)                                                                              0.8
                                      CSE (average)                                                                                 6.5
                                      Note: Includes quantity increases because of the elasticity effect of lower prices.



Table II.5: Declines in Electricity
Spending If Fiscal Year 1995 Usage    Dollars in billions
Grows by Zero Percent Annually                                                                               Present value (discounted
Because of Non-Price Factors,         Studies’ estimates for each type of class                                           1996 dollars)
1998-2015
                                      DRI (average)                                                                               $3.7
                                      DRI (residential)                                                                             4.3
                                      DRI (commercial)                                                                              5.0
                                      DRI (industrial)                                                                              1.7
                                      GRI (average)                                                                                 1.4
                                      GRI (residential)                                                                             2.1
                                      GRI (commercial)                                                                              1.8
                                      GRI (industrial)                                                                              0.7
                                      CSE (average)                                                                                 5.5
                                      Note: Includes quantity increases because of the elasticity effect of lower prices.




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Table II.6: Declines in Electricity
Spending If Fiscal Year 1995 Usage    Dollars in billions
Declines by 1 Percent Annually                                                                               Present value (discounted
Because of Non-Price Factors,         Studies’ estimates for each type of class                                           1996 dollars)
1998-2015
                                      DRI (average)                                                                               $3.1
                                      DRI (residential)                                                                             3.7
                                      DRI (commercial)                                                                              4.4
                                      DRI (industrial)                                                                              1.5
                                      GRI (average)                                                                                 1.2
                                      GRI (residential)                                                                             1.7
                                      GRI (commercial)                                                                              1.6
                                      GRI (industrial)                                                                              0.6
                                      CSE (average)                                                                                 4.7
                                      Note: Includes quantity increases because of the elasticity effect of lower prices.



                                      For either savings or the government’s decline in spending, tables II.1
                                      through II.6 show that the estimates of CSE are larger than those of DRI,
                                      which in turn are larger than those of GRI. For example, in table II.1, the
                                      savings estimates for the CSE average customer are $8.2 billion; for the DRI
                                      average customer, $5.5 billion; and for the GRI average customer,
                                      $2.3 billion. The lower savings estimate for GRI because of its higher price
                                      projections reflects, in part, the fact that its modeling methodology did not
                                      incorporate all of the aspects of full retail restructuring in the electricity
                                      markets.

                                      In addition, tables II.1 through II.6 show that the industrial price behavior
                                      assumption yields the smallest savings or decline in spending estimates
                                      compared with the estimates for the average, residential, and commercial
                                      customer classes. Although the industrial price elasticity assumptions
                                      were the highest, the percentage decreases in industrial prices were much
                                      less than those for the other customer classes. For example, for DRI, in
                                      table II.1, the savings estimates decrease from $6.4 billion for the
                                      commercial class to a low of $2.9 billion for the industrial class. The latter
                                      result reflects the much smaller percentage declines in forecast prices for
                                      the industrial customer.

                                      Tables II.1, II.2, and II.3, for savings, reflect the 1-percent, zero-percent,
                                      and minus 1-percent, respectively, annual growth rates in the quantity of
                                      electricity used because of non-price factors. Tables II.4, II.5, and II.6, for
                                      the decline in spending, reflect the 1-percent, zero-percent, and minus
                                      1-percent, respectively, annual growth rates in the quantity of electricity



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used because of non-price factors. As expected, the savings and the
decline in spending decrease as the quantity increase is lowered because
of non-price factors. For example, for the DRI average customer, in tables
II.1 through II.3, the estimates of savings in 1998 through 2015 fall from
$5.5 billion (with 1-percent annual growth because of non-price factors) to
$4.3 billion (with 1-percent annual decline because of non-price factors).
Thus, the less that electricity usage expands from non-price factors, the
less will be the savings resulting from the implementation of full retail
competition. For the estimates of the decline in spending, shown in tables
II.4 through II.6, the effect is the same, with these spending declines falling
from $4.3 billion to $3.1 billion.

If the assumed elasticity estimates for the federal government were to
decrease by 50 percent, the savings estimates would be smaller, all other
factors held constant. For example, the lowest end of our range,
$1.01 billion (table II.3) for savings decreases to $0.96 billion (a
$0.05 billion decrease). For the decline in spending, the lowest end of our
range, $0.6 billion (table II.6) increases to $0.7 billion (a $0.1 billion
increase).

If we assume, as a mix-and-match simulation, the industrial sector price
reductions, but with the elasticity estimates for the commercial sector that
are used in tables II.1 through II.6, our savings estimates are lower
because commercial sector elasticities are lower than those of the
industrial sector. The estimates for the declines in spending are higher
because the elasticities for the commercial sector are lower. The small
percentage declines in industrial prices keep both savings and the decline
in spending low. For example, for savings, using GRI’s forecast for
industrial prices and a 1-percent annual decline in usage because of
non-price factors, savings are $1.0 billion in table II.3. This number falls to
$0.9 billion (a $0.1 billion decrease) using the commercial sector
elasticities. For the decline in spending, using GRI’s forecast for industrial
prices and a 1-percent annual decline in usage because of non-price
factors, the decline is $0.6 billion in table II.6. This number rises to
$0.8 billion (approximately an $0.2 billion increase) using the commercial
sector elasticities.




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Appendix III

Comments From the Department of Energy




               Page 27       GAO/RCED-97-244 Federal Electricity
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Comments From the Department of Energy




Page 28                                  GAO/RCED-97-244 Federal Electricity
Appendix IV

Major Contributors to This Report


                       Peg Reese
Resources,             Jay R. Cherlow
Community, and         James M. Kennedy
Economic               Michael S. Sagalow
                       Daren K. Sweeney
Development            Daniel G. Williams
Division, Washington
D.C.
                       Joseph Kile
Office of the Chief
Economist
                       Susan W. Irwin
Office of General
Counsel




(141036)               Page 29              GAO/RCED-97-244 Federal Electricity
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