Meeting Energy Demand in the 21st Century: Many Challenges and	 
Key Questions (16-MAR-05, GAO-05-414T). 			 
                                                                 
Plentiful, relatively inexpensive energy has been the backbone of
much of modern America's economic prosperity and the activities  
that essentially define our way of life. The energy systems that 
have made this possible, however, are showing increasing signs of
strain and instability, and the consequences of our energy	 
choices on the natural environment are becoming more apparent.	 
The reliable energy mainstay of the 20th century seems less	 
guaranteed in the 21st century. As a nation, we have witnessed	 
profound growth in the use of energy over the past 50		 
years--nearly tripling our energy use in that time. Although the 
United States accounts for only 5 percent of the world's	 
population, we now consume about 25 percent of the energy used	 
each year worldwide. Looking into the future, the Energy	 
Information Administration (EIA) estimates that U.S. energy	 
demand could increase by about another 30 percent over the next  
20 years. To aid the subcommittee as it evaluates U.S. energy	 
policies, GAO agreed to provide its views on energy supplies and 
energy demand as well as observations that have emerged from its 
energy work. This testimony is based on GAO's published work in  
this area, conducted in accordance with generally accepted	 
government auditing standards, and on EIA's Annual Energy Review,
2003 and its Annual Energy Outlook, 2005.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-414T					        
    ACCNO:   A19480						        
  TITLE:     Meeting Energy Demand in the 21st Century: Many	      
Challenges and Key Questions					 
     DATE:   03/16/2005 
  SUBJECT:   Alternative energy sources 			 
	     Coal						 
	     Coal resources					 
	     Electric energy					 
	     Electric power generation				 
	     Energy						 
	     Energy consumption 				 
	     Energy demand					 
	     Environmental monitoring				 
	     Fuels						 
	     Gasoline						 
	     Natural gas					 
	     Nuclear energy					 
	     Oil importing					 
	     Petroleum prices					 
	     Policy evaluation					 
	     Projections					 
	     Renewable energy sources				 
	     Strategic planning 				 
	     Energy planning					 
	     Energy sources					 

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GAO-05-414T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Energy and Resources, Committee on Government
Reform, House of Representatives

For Release on Delivery

Expected at 2:00 p.m. EST MEETING ENERGY

Wednesday, March 16, 2005 DEMAND IN THE 21ST

CENTURY

                       Many Challenges and Key Questions

Statement of Jim Wells, Director Natural Resources and Environment

GAO-05-414T

[IMG]

March 16, 2005

MEETING ENERGY DEMAND IN THE 21ST CENTURY

Many Challenges and Key Questions

  What GAO Found

America's demand for energy has, in recent decades, outpaced its ability
to supply energy. As a result, the country has witnessed rapid price
increases and volatility in some markets, such as gasoline, and
reliability problems in others, such as electricity, where the blackout in
2003 left millions in the dark. Given these recent and sometimes
persistent problems, as well as concerns about the impacts of energy
consumption on air, water, and other natural resources, there is a growing
sense that action is needed.

Today, fossil fuels (coal, oil, and natural gas) provide about 86 percent
of our total energy consumption, with the rest coming from nonfossil
sources such as nuclear (8 percent) and renewables, such as hydroelectric
energy and wind power (6 percent). Overall, the majority of the nation's
energy consumption is met by domestic production. However, imports of some
fuels have risen. For example, over the past 20 years, imports-primarily
oil and natural gas-have doubled, and in 2003 these imports comprised
about one-third of total domestic energy consumption. Imports are expected
to increase still further in order to meet future domestic consumption. In
light of the current and expected levels of imports, the United States is,
and will increasingly be, subject to global market conditions, with the
transportation sector especially affected. Global markets may face future
difficulties in meeting the growing energy demands of developed nations
while also meeting the demands of the developing world, particularly
considering the explosive growth in some economies, such as China's and
India's. If world supplies for some fuels do not keep pace with world
demand, energy prices could rise sharply.

GAO believes that a fundamental reexamination of the nation's energy base
and related policies is needed and that federal leadership will be
important in this effort. To help frame such a reexamination, we offer
three broad crosscutting observations. First, regarding demand, the amount
of energy that needs to be supplied is not fate, but our choice.
Consumers, whether businesses or individuals, choose to use energy because
they want the services that energy provides, such as automated
manufacturing and advanced computer technologies. Accordingly, consumers
can play an important role in using energy wisely, if encouraged to adjust
their usage in response to changes in prices or other factors. Second, all
of the major fuel sources-traditional and renewable-face environmental,
economic, or other constraints or trade-offs in meeting projected demand.
Consequently, all energy sources will be important in meeting expected
consumer demand in the next 20 years and beyond. Third, whatever federal
policies are chosen, providing clear and consistent signals to energy
markets, including consumers, suppliers, and the investment community,
will help them succeed. Such signals help consumers to make reasoned
choices about energy purchases and give energy suppliers and the
investment community confidence that policies will be sustained, reducing
investment risk.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I am pleased to participate in the Subcommittee's hearing on the future
direction of our nation's energy policies. Plentiful, reliable,
inexpensive energy-in its various forms, including gasoline, natural gas,
and electricity-has been the backbone of much of modern American economic
prosperity and the activities that essentially define the American
lifestyle. The United States accounts for only 5 percent of the world's
population but consumes about 25 percent of the energy used each year
worldwide. U.S. energy demand has increased over 25 percent since 1980,
and in 2003 amounted to the equivalent of about 790 billion gallons of
gasoline, or roughly 2,800 gallons for every man, woman, and child in the
country.

As shown in figure 1, energy consumption in the United States has grown.
While energy demand across residential, commercial, and the industrial
sectors includes demand for all types of energy sources, such as oil,
coal, and natural gas, demand in the transportation sector is almost
completely oil dependent.

Figure 1: Energy Consumption by Sector, 1949-2003

Note: BTU stands for British thermal units and is a standard unit used to
measure energy consumption. In 2001, the average household in the United
States consumes about 92 million BTUs per year.

Increasing demand across our economy has, at times, strained our energy
system. For example, in recent years, natural gas prices have nearly
tripled and crude oil prices have more than doubled, and gasoline prices
now exceed $2.00 per gallon in Washington, D.C., San Francisco, and other
major cities. In addition, our energy supplies have also witnessed
problems, most notably in 2003 when the largest blackout in U.S. history
left as many as 50 million people in the dark. Further, there have been
indications that our energy infrastructure has not kept up with changes in
our demand for energy as illustrated by (1) the nation's refinery capacity
not keeping pace with the increasing demand for gasoline, leading to
increased imports of gasoline, and (2) the electricity sector's
transmission constraints periodically limiting the flow of electricity in
parts of the country. Lastly, our energy dependence on other countries has
increased,

raising greater concern about international turmoil in the Middle East,
Russia, Venezuela, and elsewhere.

As shown in figure 2, the United States has increased production
(generally through the extraction and use of oil, coal, and other fuels
from the land) of a wide range of fuels over the past 50 years to help
meet consumer demand. Today, fossil fuels account for about 80 percent of
our total domestic energy production, with the rest coming from nonfossil
sources such as nuclear electric energy, hydroelectric energy, and
nonhydroelectric renewable energy sources, such as wind power. Despite the
fact that the United States produces most of its energy, imports of some
fuels are rising to meet growing U.S. consumption.

                  Figure 2: U.S. Energy Production, 1949-2003

As shown in figure 3, over the past 50 years net imports of energy have
increased. This increase has been most dramatic over the past 20 years,
during which time energy net imports more than doubled, reaching 32
percent of our total consumption in 2003. The vast bulk of these imports
are oil and natural gas.

Figure 3: Domestic Production and Net Imports Needed to Meet Consumption,
1949-2003

Nearly all energy is supplied by private companies that also own the
energy supply infrastructure. Some of these companies are multinational
corporations with worldwide shareholders, while others operate only
locally. Further, most of the fuels used in the energy sector-including
oil, coal, natural gas, and nuclear fuel-are sold at prices determined by
competitive markets and, in some cases (such as crude oil), international
markets.

Over the years, the federal government has intervened in energy markets,
providing tax credits and other benefits to suppliers and consumers of
traditional and renewable energy. For example, the federal government has
granted tax incentives, direct subsidies, and other support to the
petroleum industry, as well as tax and other benefits to the ethanol

industry, in an effort to increase U.S. energy supplies. Similarly, the
federal government has also provided tax credits for the production of
energy using renewable energy resources, such as wind turbines. While
these tax incentives generally work to increase the production of energy,
they also generally decrease revenues accruing to the U.S. Treasury.

Looking into the future, daunting challenges lie ahead. As shown in figure
4, the Energy Information Administration (EIA), within the Department of
Energy (DOE), estimates that U.S. energy demand could increase by about
another 30 percent over the next 20 years, if current trends hold. Meeting
these projected increases could be more challenging in the natural gas and
petroleum industries, because consumption of these fuels is forecast to
increase by 37 percent and 33 percent, respectively, during that period.
In addition, forecast imports for these two fuels are expected to rise by
over 140 percent and 60 percent, respectively.

Figure 4: Forecast Energy Consumption, 2002-2025

Unless changes are made, meeting the forecast increase in energy demand
could further stress an already strained system. From a domestic
perspective, the nation already faces energy supply constraints and higher
prices for some important fuels, as well as environmental problems such as
persistent air pollution in some cities. In addition, from an
international perspective, the United States is increasingly subject to
global markets for key energy sources, such as crude oil and,
increasingly, for natural gas. Global markets may face difficulties in
continuing to meet the growing energy demands of developed nations such as
the United States, while also meeting the demands of the developing world,
particularly in light of the explosive growth in some economies, such as
China's and India's. If world supplies do not keep pace with world demand,
energy prices could rise sharply.

Just last month, as part of our 21st Century Challenges report,1 we
identified two broad questions focused on reexamining the nation's energy
base and related policies:

o  To what extent are federal energy policies and incentive structures
adequately preparing the nation to satisfy its energy needs over the long
term?

o  What is the appropriate balance between efforts to promote enhanced
production of fossil fuels, alternative renewable energy sources, and the
promotion of energy conservation?

Given the importance of energy to our nation's economy and current
lifestyle choices, it is generally recognized that a secure, affordable,
reliable, and environmentally sound energy supply is needed. However, the
reliable energy mainstay of the 20th century seems less guaranteed in the
21st century. In the context of developing our nation's energy policies,
we are providing our views on energy supply and demand based on our
published work in this area, conducted in accordance with generally
accepted government auditing standards. In addition, we are providing
information on forthcoming work, as GAO continues to report on a range of
energy activities and policies of the federal government. In summary,
based on past work and considering recent EIA forecasts, three broad
crosscutting observations emerge that could help frame congressional
efforts to develop the nation's energy policies:

o  First, regarding demand, the amount of energy that needs to be supplied
is not fate, but our choice. Consumers, whether businesses or individuals,
choose to use energy because they want the services that energy provides,
such as automated manufacturing, advanced computer technologies, and many
high-technology household amenities. However, consumers can play an
important role in using energy wisely by, among other things, choosing
technologies that deliver the same services but that use less energy or
reducing their energy usage when it is valuable to them to do so. For
example, in electricity markets some utilities and system operators have
created a variety of electricity pricing and other programs that encourage
customers to adjust their usage in response to changes in prices or other
factors. These "demand response" programs offer substantial benefits to
participants and improve the functioning of these markets because they

1GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

provide more accurate price signals to consumers and encourage more
careful energy use while providing better incentives for conservation
and/or energy efficiency.

o  Second, all of the major fuel sources-traditional and renewable-face
environmental, economic, or other constraints or trade-offs in meeting
projected increases in demand. Consequently, all energy sources will be
important in meeting expected consumer demand in the next 20 years and
beyond. Meeting future demand will be particularly challenging for the
transportation sector, where the United States is almost completely
dependent on oil-more than half of which is imported. With just 5 percent
of world population, the United States consumes roughly 45 percent of
world gasoline. Further, the same international markets that supply U.S.
needs will also need to supply countries in the developing world, such as
China and India, which are experiencing increases in demand that far
exceed even our own increasing thirst for oil.

o  Third, whatever federal policies are chosen, providing clear and
consistent

signals to energy markets, including consumers, suppliers, and the
investment community, will help them succeed. Energy consumers need clear
and consistent signals so that they can make reasoned choices with regard
to purchases of energy-consuming equipment that help to determine their
long-term energy demand. Energy suppliers require clear signals regarding
national policies and confidence that those policies will be sustained
over time in order to undertake the substantial investment needed to
support expected increases in consumption. The investment community also
needs these clearly articulated policies to determine how much to invest
in current and future infrastructure, new products, and new technologies.

Specifically, our testimony presents an overall energy picture, discussing
each of the major energy sources used in the United States, along with
consumer demand. We end each fuel discussion with examples of key
questions facing the Congress, the executive branch, states, industry, and
consumers.

Oil is the largest single energy source used in the United States and
remains perhaps the most visible energy source to most consumers. Oil, and
the gasoline refined from it, provided the critical energy for the
automobile that mobilized America. Oil remains at the center of the
transportation sector and at the center of our national energy policy
debate.

  Oil: Our Largest Energy Source, but Mostly Imported

In 2003, oil accounted for about 40 percent of the total U.S. energy
consumption and the United States consumed about 7.3 billion barrels of
crude oil-about 20 million barrels per day. Most oil is used in the
transportation sector as gasoline, diesel, and jet fuel, with oil-based
products accounting for over 98 percent of the U.S. transportation
sector's fuel consumption. In addition, oil is also used as a raw material
in the manufacturing and industrial sectors; for heating in the
residential and commercial sectors; and, in small amounts, for generating
electric power. Although the United States accounts for about 5 percent of
the world population, we consume about 25 percent of total world oil
demand. Although today the United States and its industrialized
counterparts currently account for the bulk of the world oil demand,
demand is growing rapidly in the developing nations, especially those in
Asia, such as China and India.

The United States relies on imported oil for more than half of its supply
and appears likely to increase its reliance in the future. Historically,
the United States produced most of the oil it consumed. However, U.S. oil
production began to decline in 1970 and has dropped by about 40 percent
since then. Since 1970, imports of crude oil and other products have
increased 255 percent, and imports now comprise nearly 56 percent of the
U.S. oil supply. Part of the reason for the rising imports is cost; it has
been less costly to purchase oil produced in other countries than it has
been to produce it in the United States.

Rising U.S. imports have increasingly been supplied by countries belonging
to the Organization of Petroleum Exporting Countries (OPEC), which
collectively provided about 42 percent of our total imports during 2003.
Since about 20 percent of our imports came from the Persian Gulf region
and 14 percent came from Saudi Arabia, our reliance on these imports has
made the United States subject to the political instability of the Middle
East witnessed in recent years. We also import a large amount of oil from
our neighbors in North America; about 30 percent of our imported oil came
from Canada and Mexico. Going forward, the United States will increasingly
rely on imported oil because although the United States is currently the
world's third largest oil producer, U.S. proven oil reserves account for
only about 2 percent of total world reserves. In contrast, OPEC holds
about 68 percent of total world oil reserves.

The prices of crude oil and refined petroleum products, such as gasoline
and home heating oil, have been volatile over the years. Since the 1970s,
the crude oil market has, at times, been heavily influenced by the OPEC
cartel. Because the member countries control a large share of world

production and total reserves, these countries have been able to influence
crude oil prices by limiting supply through the use of country-by-country
production quotas. These quotas have, at times, served to maintain a tight
balance between world supply and world demand. However, because of the
relative political instability in the Middle East and some of the other
OPEC countries (such as Nigeria and Venezuela), occasional oil supply
disruptions and price shocks have been a fact of life for about the past
30 years and may remain an issue for the foreseeable future. Although
crude oil prices play a large role in determining the prices for gasoline
and other refined petroleum products, other factors also influence the
volatility of gasoline prices, including limited refinery capacity, low
inventory levels relative to demand, supply disruptions, and regulatory
factors-such as various gasoline formulations that are used to meet
federal and state environmental laws. Federal and state taxes on gasoline
and other products serve to raise the level of prices, but these taxes do
not fluctuate often and so do not contribute to price volatility.

Demand has pressed the limits of the production and delivery
infrastructure in the oil industry in recent years. While U.S. crude oil
production has fallen, rapidly rising imports have required more ocean
tankers of crude oil to be off-loaded each year-forcing expansions of
ocean crude oil terminals and coastal refineries. Because some refineries
have closed, and no new ones have been built since 1976, there are fewer
refineries available to convert crude oil into gasoline and other
products. Although increases in overall output have been achieved through
expanding capacity at the remaining refineries and operating those
refineries at very high production levels, the nation's domestic refining
capacity has lagged overall demand growth for petroleum products. Further,
the network of pipelines that delivers refined petroleum products also
operates at high levels of capacity, sometimes limiting the amount of fuel
that can be shipped. Finally, the capacity of gasoline terminals that
distribute fuel to local gas stations is also limited in some parts of the
country.

Over the past 30 years, the federal government has undertaken many efforts
designed to influence petroleum markets and demand for petroleum based
fuels. For example, in the mid-1970s, the federal government developed the
Strategic Petroleum Reserve, part of an international reserve effort
designed to mitigate the economic impacts on world economies of any large,
sustained disruption to the oil supply. In addition, the federal
government has supported a number of research and development and
regulatory efforts designed to reduce demand for petroleum fuels in
transportation. For example, the federal government

supported the Partnership for a New Generation of Vehicles in order to aid
U.S. automobile manufacturers in developing gas-electric hybrid vehicles.
In addition, the federal government has encouraged the development and
deployment of technologies focused on identifying alternatives to
petroleum-based fuels, such as the recent FreedomCAR initiative-a program
to help develop fuel-cell technologies for vehicles.

GAO has issued numerous reports on aspects of the petroleum sector,
including gasoline markets and government efforts to reduce consumption of
gasoline in vehicles among other areas. We also have reported on
government efforts to improve gasoline vehicle efficiency through the use
of gasoline-electric hybrid technologies and to shift vehicle fuel use to
alternatives such as compressed natural gas or hydrogen-powered fuel
cells. GAO has also noted that low gasoline prices do not reflect external
costs associated with gasoline use, such as health and environmental
impacts of air pollution or the economic cost that may result from the
nation's vulnerability to oil price shocks. Consequently, low gasoline
prices work to discourage energy efficiency and the use of alternative
fuels. Most recently we reported on the effects of mergers and market
concentration in the U.S. petroleum industry, noting that mergers and
increased market concentration that occurred in the mid-to-late 1990s
contributed to higher wholesale gasoline prices-averaging about 1 to 2
cents per gallon. Other factors such as changes in gasoline formulations
and supply disruptions may have also contributed to higher gasoline prices
during this period. Later this year, GAO will release a primer on how
gasoline is made and distributed, what factors influence the price of
gasoline, and why gasoline prices change, among other things. In
forthcoming work requested by the Congress, GAO will report on the
presence of multiple fuel formulation requirements in some parts of the
country and how the expansion of these fuels have affected prices.

Key Questions:

o  What are the potential implications for the United States of increased
world reliance on oil supplies from politically unstable sources, such as
OPEC countries?

o  To what extent can the United States increase refining capacity and
other delivery infrastructure to meet growing demand for petroleum
products?

o  What are the implications if there are further consolidations in the
U.S. petroleum industry?

o

  Coal: Balancing the Use of an Abundant Domestic Resource with Its
  Environmental Consequences

Are there ways to better reflect the full societal cost of using gasoline
in gasoline prices, and what are the trade-offs of doing so?

Coal has been a key energy resource in the United States for over 100
years. Over this time, the use of coal has provided low-cost electricity
but has brought with it environmental consequences, such as air pollution.
Choices regarding the use of coal revolve around balancing these
consequences, in the light of new technologies to reduce them, with the
energy benefits of using this plentiful domestic resource.

In 2003, coal accounted for about 23 percent of total U.S. energy
consumption. Nearly all of the coal consumed in the United States, 92
percent, was used in the production of electricity, with almost all the
remaining 8 percent used directly by industries such as steel
manufacturing. Coal-fired power plants provided about half of total
electricity generation in the United States in 2003, with larger shares in
some parts of the country such as the mountainous West and the Midwest.
Coal is expected to remain a vital element in the country's energy supply;
EIA's most recent forecast indicates that coal would continue to provide
about 20 percent of the country's energy needs in 2025.

The United States has substantial domestic coal resources, leading some to
refer to the United States as "the Saudi Arabia of coal." Nearly all of
the coal used in the country is produced domestically. In 2003, using EIA
data, estimates of recoverable U.S. coal reserves could last over 250
years, based on current usage. Coal is generally extracted from either
surface, or underground mines, however underground coal also contains
combustible gas, called coal bed methane, that can be removed using wells
and burned to produce usable energy similar to conventional natural gas.
Coal reserves are located across the country, with large reserves in the
West, the Midwest, and the Appalachian Mountains, but consumption of coal
from the West has increased sharply in recent years. A large portion of
the coal reserves are located on federal lands and are subject to direct
federal controls, such as payment of royalties, limits on the amount of
federal land an individual company may mine, and requirements that surface
land be restored to conditions similar to natural conditions when mining
ends. Partly owing to the abundance of coal and technological improvements
in the mining industry, coal prices have been declining in real terms
since the mid-1970s.

The production and use of coal have a variety of environmental
consequences, including those related to mining and those related to the

pollution that is emitted when coal is burned. Surface mining has the most
significant impacts on land resources, in some cases substantially
altering the terrain. Both surface and underground mines can significantly
affect water resources by introducing pollution or silt into groundwater
or waterways. Regarding air quality, combustion of coal in power plants
emits pollutants and contributors to pollutants such as nitrogen oxides
(NOx), sulfur oxides (SOx), particulate matter (PM), and toxic chemicals,
such as mercury. Although some older power plants emit high levels of
these substances, significant advancements have been made in the
development of new power plants, utilizing new technologies that
substantially reduce emissions. In addition to these pollutants, coal
plants release a substantial amount of carbon dioxide, a gas that is
common in nature but has been linked with the "greenhouse effect," a
greater-thannormal rise in the planet's temperature. Although some
countries have agreed to attempt to reduce emissions of carbon dioxide and
other "greenhouse" gases, the United States does not currently regulate
the emissions of such gases. However, DOE has supported research focused
on developing a zero-emission coal-fired power plant that would not emit
any pollutants or carbon dioxide into the air. In 2005, according to an
industry policy group, 100 or more power plants featuring advanced
technologies that substantially reduce emissions of pollutants are being
considered for development in the United States.

We have issued reports and testified on two primary coal related issues:
technologies supported under DOE's Clean Coal Technology program and the
environmental consequences of using coal in power plants. Over the past
several years, we have reported on the Clean Coal Technology program,
noting that while DOE has reported successes in deploying new
technologies, there have been management problems with the program and
that there may be important lessons that should be considered in future
similar efforts, such as the value of cost-sharing agreements and federal
cost-sharing limits. We have also reported (1) that coal-fired power
plants that have not been required to install modern pollution reducing
equipment emit higher levels of pollutants such as NOx and SOx than plants
where this equipment is present, and (2) that increased electricity
generation in order to meet expected growth in demand may increase
emissions of certain pollutants. In forthcoming work requested by the
Congress, GAO will report on the effectiveness and cost of technologies to
reduce mercury emissions, a toxic element present in coal that is emitted
when coal is burned.

Key Questions:

o  How can the federal government balance the use of this abundant
domestic energy source with its regulated and unregulated environmental
consequences?

o  Where will additional coal be mined, where will new power plants be
located, and are additional infrastructure improvements needed?

o  What is the potential role for coal bed methane, what are the
trade-offs of extracting it, and what, if anything, should the federal
government do to influence its development and production?

o  What changes in controls, if any, should the federal government make to
how coal can be mined on federal land and elsewhere?

o  What role, if any, should the federal government play in providing

  Natural Gas: A Widely Used and Versatile Fossil Fuel

incentives for using coal in ways that are safer for the environment?

Natural gas, the fuel of choice recently, is one of the most versatile and
widely used fuels-significant amounts are used as a raw material in the
fertilizer, chemical, and other industries; for space heating in the
industrial, commercial, and residential sectors; and for electricity
generation. Until recently, prices have been low and use of natural gas
for space heating and for electricity generation has expanded rapidly.
Meeting the projected future growth of natural gas demand through
delivering additional supply poses challenges.

Natural gas plays a vital role in meeting the country's national energy
demand, accounting for about 23 percent of the total energy consumed in
the United States. Use of natural gas has been growing rapidly since the
mid-1980s, with consumption increasing by about 35 percent from 1986
through 2003. Natural gas demand has been the greatest in the industrial
sector, accounting for about 37 percent of total demand in 2003; followed
by the residential sector and electric power, each accounting for about 22
percent; then the commercial sector, at about 14 percent. The rest, about
3 percent, is used in the transportation sector, mostly as fuel for
pipelines. A significant share of the increased demand in recent years has
resulted from increased use of natural gas to generate electricity. This
use has increased by 79 percent since the repeal of the Powerplant and
Industrial Fuel Use Act in 1987, which had restricted construction of
power plants using oil or natural gas as a primary fuel; natural gas is
now the primary

fuel in new power plants. EIA estimates that total natural gas demand
could increase 50 percent in the next 25 years.

Although natural gas prices remained low for many years, in recent years
they have increased dramatically. From 1995 to 2004, average wellhead
prices for natural gas increased nearly three-fold; rising from $1.55 per
thousand cubic feet to $5.49 per thousand cubic feet. These higher prices
for natural gas may have contributed to industrial companies reducing or
ceasing U.S. operations. EIA data indicate that demand has fallen rapidly
in the industrial sector, where consumption decreased by 16 percent from
1997 through 2003.

Historically, almost all the natural gas used in the United States has
been produced here, but a small and growing share is imported. Most
natural gas production involves extracting gas from wells drilled into
underground gas reservoirs, although some natural gas is generated as a
by-product of oil production. In 2003, domestic sources provided about 85
percent of total consumption. Historically, most of the country's natural
gas came from Texas, Oklahoma, and Louisiana. However, the Rocky Mountain
region, Alaska, and areas beneath the deeper waters of the Gulf of Mexico
are becoming increasingly important in supplying natural gas. Overall,
from 1994 through 2003, domestic annual production held steady at about 19
trillion cubic feet. In 2003, the United States imported about 15 percent
of the total natural gas consumed, with nearly all of it coming from
Canada via pipeline. However, a small share is shipped on special ocean
tankers as liquefied natural gas (LNG) from countries such as Trinidad and
Tobago, Nigeria, and others. Looking ahead, the Energy Information
Administration estimates that U.S. consumption could increase to about 31
trillion cubic feet (TCF) by 2025, expanding the gap relative to U.S.
production and requiring increasing imports to meet U.S. needs.

The United States still has substantial undeveloped natural gas resources,
but some of these resources are located under federal lands, and access to
some of these resources is restricted. For example, about 40 percent of
the natural gas resources on federal land in the Rocky Mountain region are
not available for development. Additional natural gas reserves are located
in federally controlled offshore areas or other areas and are not
available for development at this time. Extensive drilling for natural gas
can substantially modify the surrounding landscape, and in some cases can
adversely affect wildlife and its habitat, degrade air and water quality,
and decrease the availability of groundwater to ranches and houses that
may depend upon it. The federal government is required to consider these
environmental consequences when determining if, and how, natural gas

will be extracted from federal lands. In response, the natural gas
industry has and continues to use more advanced drilling methods and
processes to mitigate future adverse impacts.

Meeting the sharp increases forecast for natural gas demand could also
require substantial increases in infrastructure, such as new pipelines and
LNG terminals. In particular, increasing natural gas supplies may require
greater pipeline capacity and new pipelines. For example, over the past 20
years the federal government has considered a variety of issues with
financing and building a new pipeline across federal and state lands to
deliver natural gas from Alaska. The federal government is involved in the
regulation and permitting of natural gas pipelines, particularly those
that must traverse federal lands. To meet the need for sharply higher
imports of natural gas, some experts believe that the United States may
need to build more LNG terminals. To date, however, such facilities have
not been built due to economic, safety, and security concerns.
Consequently, it is not clear whether the United States can effectively
compete with other countries for these supplies.

Over the last several years, we have issued a number of reports on natural
gas, including reports on the natural gas markets and their oversight,
various approaches for compensating the federal government when natural
gas is removed from federal land, and the impacts of higher natural gas
prices on certain industries. In 2002 and 2003, for example, we issued
reports analyzing natural gas markets and their oversight. We noted that
(1) prices generally increase because limited supplies have not been able
to react quickly enough to changes in demand; (2) the federal government
(e.g., the Federal Energy Regulatory Commission and EIA) faces significant
challenges in overseeing natural gas markets and ensuring that prices are
determined in a competitive and informed marketplace, minimizing
unnecessary price volatility; and (3) buyers of natural gas have options
to reduce their exposure to volatile prices through the use of longterm
contracts and financial hedging instruments. In forthcoming work requested
by the Congress, GAO will report on federal efforts to understand and
manage risks associated with potential terrorist attacks on LNG shipments
and other tankers.

Key Questions:

o  Should the federal government encourage further development of domestic
natural gas on federal lands, and can it ensure that environmental impacts
are adequately mitigated?

o  What are the infrastructure needs of the natural gas industry,
including natural gas pipelines generally and in Alaska in particular, and
what role, if any, should the government play in facilitating the
development of this infrastructure?

o  What are the implications for consumers (residential, commercial,
industrial, and electric power) of the increasing reliance on natural gas
to generate electricity?

o  What are the economic and other barriers and/or trade-offs to
developing an infrastructure to support increases in LNG shipments, and
what role, if any, should the federal government play?

o  To what extent is the federal government positioned to ensure that
natural gas prices are determined competitively?

  Nuclear Energy: Emission-Free Energy Source, but with Waste Storage Problems
  and Safety/Security Concerns

Nuclear energy was once heralded as the single answer to all of the
country's energy woes, with predictions that electricity would soon be
"too cheap to meter." While these enormous expectations have not been met,
nuclear energy has become an important part of the country's current
energy picture and may remain that way for years to come. Whether we can
continue to rely on, or expand our use of, nuclear energy in the future at
existing plants or at new plants based on new designs, hinges on solving
the long-term waste storage problem as well as resolving concerns over
safety and security.

Nuclear energy currently accounts for about 8 percent of U.S. national
energy consumption. Nearly all nuclear energy is used to generate
electricity, and nuclear plants are important contributors to total U.S.
electricity production, providing about 20 percent in 2003. The first
commercial nuclear power plant came on line in 1957, and the country
witnessed a flurry of construction from the late 1960s through the 1980s.
Many nuclear plants operating today were initially licensed for 40 years,
and many are now approaching the end of their licenses. Since an accident
at the Three Mile Island nuclear plant in 1979 raised concerns regarding
the safety of nuclear plants, no new plants have been ordered in the
United States, and none has been brought on line since 1996. In addition,
many of the plants that were completed witnessed multibillion dollar cost
overruns.

Over the past several years, a number of nuclear generating units have
been retired, but because the remaining 104 units have increased their

productivity, the output actually increased by about 13 percent from 1998
through 2003. This increase in productivity has been impressive; the
average annual capacity factor2 has increased from 71 percent in 1997 to
90 percent in 2004. These increases in productivity and other improvements
have led some plant operators to seek to operate some plants at somewhat
higher capacity.

There appears to be renewed interest in extending the licenses of some
existing plants and even building new plants. Interest in nuclear power
plants has increased, in part, because they do not emit regulated air
pollutants such as nitrogen oxides, sulfur dioxides, and particulate
matter that can be costly to control, or carbon dioxide, a greenhouse gas,
that many in the electricity industry believe might be regulated in the
future. Given the improved performance, limited air emissions, and
production cost advantages of nuclear power plants, some companies
operating existing nuclear plants have already had them relicensed through
the Nuclear Regulatory Commission (NRC) to operate for up to another 20
years, and others have started similar efforts. In addition, there have
been trade industry reports that a number of utilities and other energy
companies are actively considering submitting applications to build new
plants. Over the past 20 years, plants have continued to be built
overseas. New designs have emerged and foreign manufacturers have gained
significant experience building them. Nuclear energy plays a large role in
supplying energy in France, Germany, Canada, Japan, and other developed
nations. Although nuclear plants remain very costly to build compared to
some other plant types, they have lower fuel and other operating costs and
can produce electricity at a lower cost than new plants that use fuels
such as coal or natural gas-the primary energy source used in new U.S.
power plants. In this country, NRC has approved new reactor designs and
NRC and the Department of Energy are working to reduce the approval and
construction lead times for potential new plants.

Although the United States has a large domestic supply of uranium, the
nation increasingly relies on international markets to obtain the nuclear
fuel used here. Historically, the fuel used at U.S. reactors has been
produced here. However, several factors have combined to reduce the
competitiveness and capacity to domestically supply reactor fuel,
including falling prices for reactor fuel on international markets and

2Capacity factor is the ratio of electricity generated to the amount of
energy that could have been generated if the plant ran every hour of every
day in the year.

factors surrounding the 1998 privatization of the United States Enrichment
Corporation (USEC). In response to the changes in the market, USEC closed
the Portsmouth, Ohio, fuel plant leaving only the facility at Paducah,
Kentucky, as the domestic source. Both France and Japan have advanced
facilities that produce nuclear plant fuel, and these provide a large and
growing share of international supplies, including those used in the
United States.

Although nuclear plants do not emit pollutants, they produce radioactive
waste, including the highly radioactive waste that must be stored in
isolation for thousands of years. The federal government committed to
develop a permanent storage facility that would receive this waste by
1998, but delays have pushed the potential opening of the facility to the
2012 to 2015 time frame. Efforts to develop the facility have focused on
storing the waste deep under Yucca Mountain in the desert north of Las
Vegas, Nevada. In 2002, NRC reported that about 45,000 tons of spent fuel
from nuclear plants was stored in the United States. Because the permanent
repository has not been completed, the highly radioactive waste remains
stored at power plants and other facilities and has been the subject of
several lawsuits.

Nuclear power plants have been operated safely, largely without incident.
Nuclear power plants contain radioactive materials that if released could
pose catastrophic risks to human health over an expansive area, but are
designed and operated to avoid such an event and incorporate measures to
protect the plant from attack. The Nuclear Regulatory Commission, among
other things, oversees these plants, conducting periodic inspections of
the plant equipment and evaluating security. However, since the terrorist
attacks of September 11, 2001, nuclear plants have emerged as a key
security concern and attention on these plants has increased. Industry
expects that new plant designs will further reduce safety and security
risks, incorporating features that, among other things, automatically cool
the nuclear reaction.

We have issued a number of reports dealing with aspects of nuclear energy
covering three key areas: NRC's oversight of safety issues at the existing
nuclear plants; the development of a permanent storage facility for the
highly radioactive waste produced by nuclear plants; and the potential
vulnerability of these plants in light of the terrorist attacks of
September

11. In May 2004, we issued a report on the discovery that corrosion had
eaten a pineapple-sized hole in the nuclear reactor vessel head at the
Davis-Besse power plant in Ohio that did not result in a radioactive
release but highlighted problems with NRC's inspections and oversight. We
have

issued a series of reports, spanning more than 20 years, that focus on
various aspects of developing of a permanent nuclear waste storage
facility. In 2002, we reported (1) that it would be premature for DOE to
recommend the facility at Yucca Mountain to the President as a suitable
repository for nuclear waste; (2) that DOE was unlikely to achieve its
goal of opening a permanent storage repository at Yucca Mountain by 2010;
and (3) that DOE did not have a reliable estimate of when, and at what
cost, such a repository could be opened. We have also issued reports
concerning the vulnerability of nuclear power plants to terrorist attacks.
In September 2004, we testified that NRC was generally approving plants'
new security plans on the basis of limited details in the plans and
without visiting the plants. In forthcoming work requested by the
Congress, GAO will undertake a comprehensive review of NRC's reactor
oversight process and how NRC ensures that plants operate safely. GAO will
continue to examine homeland security issues related to protecting
commercial nuclear power plants from terrorist attacks.

Key Questions:

o  What role should nuclear energy continue to play in providing the
nation's energy needs in view of the aging of existing plants?

o  Should new nuclear power plants be built in the United States, and can
their design and construction make sense from a business standpoint while
providing the safety and security assurances important to surrounding
communities?

o  How can existing and future nuclear waste generated by power plants be
managed in an appropriate and timely manner?

o  Are changes needed in how the industry and NRC ensure that plants are

  Electricity: In the
  Midst of Change

operated safely and securely, and is enough being done to protect nuclear
plants from terrorist attacks?

Electricity has emerged as one of the essential elements in modern life.
Today, electricity lights our homes, enables our businesses to be more
productive through the use of computers, and creates the basis for our
modern quality of life, providing power for everything from our morning
coffee to our nightly television news. Unlike the other types of energy
that we have discussed-so-called primary sources of energy-electricity is
generated through the use of the other energy sources (such as when
natural gas is burned in power plants to generate electricity). Encouraged

by the federal government, the electricity industry is in the midst of
historic changes. Assessing that transition and determining whether the
federal government can improve how electricity markets function remains a
focus for federal policy.

Electricity use has grown steadily in recent years. From 1980 through
2003, the quantity of electricity sold increased by 75 percent, with the
largest increases coming in the residential and commercial sectors.
Electricity is used in these sectors for space heating and for cooling,
lighting, and operating small appliances, such as computers and
refrigerators. Industrial consumption declined slightly over this period,
reflecting the contraction of manufacturing, including some large
industrial users of electricity such as the aluminum and steel industries.

In 2003, over 70 percent of electricity was generated using fossil fuels,
with over 50 percent coming from coal-fired power plants, about 16 percent
from natural gas, and small amounts from petroleum and other fossil fuels.
In recent years, new power plants have predominantly relied on natural
gas. Nuclear energy provides about 20 percent of electricity generation,
hydroelectric energy provides about 7 percent, and a variety of renewable
resources, such as wind turbines, provide the remainder.

The federal government has a direct role in supplying electricity, through
the federally controlled Power Marketing Administrations, which market
electricity produced by federally owned dams and other power plants and
which own an extensive transmission network to deliver that electricity.
These entities initially aided in the federal mission to bring electricity
to rural areas; however, most now serve major metropolitan areas, in
addition to some rural customers.

Historically, electricity has been produced and delivered by local
monopoly utilities within a specific area, but this has been changing. The
electricity sector is restructuring to foster more competition and provide
an increased role for open markets. Competition is already under way for
the wholesale markets that the federal government regulates. To facilitate
fair wholesale competition, the federal government has also pressed for
change in what entities control transmission lines-by approving the
creation of independent transmission operators to take the place of
utilities in performing this function. Some states, such as California and
Pennsylvania, had also moved to introduce competition to state-regulated
retail markets, where most consumers obtain their electricity. Although
the electricity industry is restructuring to include a greater role for
competition, the federal government still oversees wholesale electricity

markets through the Federal Energy Regulatory Commission (FERC). Because
federal actions have restructured wholesale markets nationwide and states
have variously chosen to restructure the markets that they oversee, the
national electricity market is currently a hybrid, somewhere between
competitive and regulated.

Unlike the other forms of energy, the amount of electricity supplied by
power plants must be balanced, on a second-to-second basis, with the
amount of electricity consumed in homes and businesses. To do this,
utilities or independent entities direct the production of electricity and
its movement over transmission lines to avoid blackouts. In some cases,
such as in California in 2000 and 2001 and more recently in the Northeast
in 2003, the balance between supply and demand was disrupted and blackouts
occur.

Electricity demand is projected to increase by at least 36 percent by
2025, and the industry may require significant investment in power plants
and transmission lines to reach those levels. The National Energy Policy
Development report estimated that the United States may need to add as
many as 1,900 power plants to meet forecasted demand growth. In addition,
because the existing network of power lines frequently experiences
congestion, the capacity of many key transmission lines may need to be
increased to move electricity from these new plants and improve the
reliability of the existing system.

We have reported on the development of competition in the electricity
industry and evaluated the oversight of electricity markets. For example,
in one report we found that the way the market was structured in
California enabled some electricity sellers to manipulate prices. We also
reported on the ability to add new power plants in three states,
concluding that the success of restructured markets hinged on private
investment in power plants and that this investment was reduced by higher
levels of perceived risk in some markets, such as in California. Further,
we recently reported on the potential value of empowering consumers to
manage their own electricity energy demand in order to save money and
improve the functioning of these markets. Allowing consumers to see
electricity prices enables them to reduce their usage when prices are
high-reducing their energy bills and improving the functioning of the
markets. Following the 2003 blackout, we issued a report that highlighted
challenges and opportunities in the electricity industry, including
whether reliability standards should be made mandatory and whether control
systems critical to the electricity industry have adequate security.
Regarding oversight of electricity markets, we reported that while the
Federal Energy Regulatory

Commission has made progress in revising its oversight strategy, it still
faced challenges in better regulating these markets. In forthcoming work
requested by the Congress, GAO will assess progress in reporting
electricity market transactions for use in developing market indexes and
the adequacy of controls over this reporting.

Key Questions:

o  To what extent does the division of regulatory authority between the
federal government and the states limit the electricity industry's ability
to achieve the benefits expected from the introduction of competition in
electricity markets?

o  What changes are necessary to federal and state monitoring and
oversight of electricity markets to ensure that they are adequately
overseen?

o  Will FERC's actions to promote reliability be sufficient, or will
additional actions be needed to improve compliance with reliability rules?

o  How does continued uncertainty about how the future of electricity
restructuring and electricity markets affect electricity companies,
investment in new plants and transmission lines, and consumer prices?

o  What role should the federal Power Marketing Administrations play in
restructured electricity markets?

o  To what extent are homeland security principles being integrated into
new electricity infrastructure and business processes?

  Renewable and Alternative Energy Sources: What Role Will They Play in the
  Future?

Renewable energy sources, such as hydroelectric dams, ethanol, wind
turbines, and geothermal and solar applications, currently comprise a
small percentage of the total energy resources consumed in the United
States. Several alternative sources, such as hydrogen and fusion power,
may offer potential long-term promise, but research remains at an early
stage. While these renewable and alternative energy sources have a nearly
unlimited domestic supply, are perceived as relatively clean, and help
diversify the U.S. energy supply, technical problems and high costs
relative to other options have limited their use.

According to EIA, in 2003 renewable and alternative energy sources
accounted for slightly more than 6 percent of the total U.S. energy
consumption. Hydropower is the largest single source in this category and

makes up over 45 percent of all renewable and alternative energy consumed.
Hydropower generation, which varies due to weather conditions, has
fluctuated at about the same level since the 1970s. Wood accounts for
about 34 percent of total renewable energy, although its use has declined
since 1989. Waste and other byproducts, such as municipal solid waste,
landfill gas, and biomass, account for about 9 percent and their use has
been relatively flat since the mid-1990s. Geothermal energy use has
decreased slightly since it peaked in 1993 and now accounts for about 5
percent of the total. Alcohol fuels, such as ethanol, make up about 4
percent of the total, but their use has increased rapidly in recent years,
almost doubling from 1999 through 2003. Wind energy accounted for about 2
percent of the total renewable energy consumed in 2003 but has witnessed
substantial and persistent growth in recent years, more than tripling from
1998 through 2003. Solar energy accounts for about 1 percent of all
renewable and alternative energy consumed, and its use has declined
slightly but steadily since 1997, although use of some specific solar
technologies such as photovoltaic solar cells that convert sunlight
directly into electricity has grown in recent years.

Renewable energy technologies are increasingly becoming part of global
markets and are, in some cases, owned by large multinational energy
companies such as oil companies. Solar and wind energy have grown
substantially in these markets, but remain at relatively low levels in the
United States. Growth in wind power has benefited from improvements in
wind turbine technology and the availability of government tax credits
here and overseas, both of which have improved the competitiveness of wind
power technologies with more traditional forms of energy. EIA estimates,
however, that if the federal government removes the tax credit, the U.S.
growth in the generation of wind power will almost stop. However, EIA
estimates that if the government maintains the tax credit, wind power
generation in the United States is expected to grow nearly seven-fold over
the next 20 years. Solar technologies, especially solar cell technologies
that produce electricity, have supplanted traditional technologies, such
as generators for some remote applications, and sales of solar cells have
expanded rapidly worldwide, albeit from a small base.

Several alternative sources may offer long-term promise, although they are
not ready for widespread application. Technologies such as hydrogen power
and fusion are currently being developed as new sources of energy. While
these technologies have the potential to deliver large amounts of energy
with fewer environmental impacts than traditional energy sources, they
cannot be counted upon to deliver significant amounts of energy in the
near future due to significantly higher costs and technical challenges.

To date, use of hydrogen fuel cells still requires the extraction of
hydrogen from another fuel source, such as natural gas, and currently this
extraction is too costly to compete with other sources of energy. In
addition, the infrastructure to support hydrogen power has not been built.
While fusion also may have the ability to provide an abundant and clean
energy source, research on this technology remains at a very early stage.

We have issued several reports describing the viability and technical
progress of several renewable and alternative energy sources supported by
the federal government. A continuing theme of these reports has been that
when the government invests money into research and development
initiatives, it is important to keep one eye on the technical goals and
one eye on the marketplace. We have noted that the success of the
investment should be measured by its contribution to increasing the use
and feasibility of an energy source, rather than reaching specific
technical research and development goals. In forthcoming work requested by
the Congress, GAO will report on the impact of wind turbines on birds and
other aspects of the environment, as well as geothermal energy development
in the United States.

Key Questions:

o  Should the federal government establish clear and measurable goals for
the development and use of renewable and alternative energy sources, and,
if so, how should progress toward these goals be measured?

o  What should the federal government's role be in researching and
developing existing and future sources of renewable and alternative energy
sources?

o  What are the costs and benefits of increasing our use of renewable and
alternative energy sources?

o  What are the implications of renewable energy mandates for deploying
renewable energy technologies and for electricity markets?

  Reducing Energy Demand through Efficiency and Consumer Choice: the
  Often-Overlooked Energy Option

Experts have long contended that energy strategies that reduce demand can
cost less, be brought on line faster, and provide greater environmental
benefits compared to strategies that increase the amount of energy
supplied-particularly if demand reductions decrease fossil fuel
consumption and related pollution. Such strategies include improving the
efficiency of energy we already use and allowing consumers to choose when
it makes the most sense to conserve energy. Despite their advantages,
however, opportunities to improve efficiency and consumer choice are often
overlooked.

Overall, energy demand in the United States has trended steadily upward
for the last 50 years. While demand has increased, the amount of energy
the country uses relative to its economic output has fallen. The amount of
energy used for each dollar of gross domestic product has dropped by about
half from 1970 through 2003. The reduction has been even more striking
when examining the industrial sector, where energy used per dollar of GDP
has fallen by over 60 percent since 1970. It is not clear whether this
reduction reflects a decrease in energy intensive industries, such as
aluminum and steel manufacturing, improvements in energy efficiency, or
some combination of the two.

The federal government has, periodically, made efforts to reduce demand,
encourage energy efficiency, or both. To reduce demand, the federal
government has, among other things, encouraged consumers to voluntarily
limit excessive heating and cooling of homes and to reduce the number of
miles that they drive. To encourage energy efficiency, the federal
government has established energy efficiency standards for such things as
home appliances, air conditioners, and furnaces, as well as provided
incentives for purchasing energy-efficient equipment. In the
transportation sector, the federal government has required automakers to
meet overall efficiency standards-known as Corporate Average Fuel Economy
(CAFE) standards-for the vehicles they sell. The federal government has
also made investments to improve energy efficiency and save money on
energy at its own buildings through the Federal Energy Management Program
and utilizing energy savings performance contracts.

Federal efforts have met with some success. According to the American
Council for an Energy Efficient Economy and the Alliance to Save Energy,
energy efficiency investments made from 1973 through 2003 saved the
equivalent of 40 to 50 quadrillion BTUs of energy in 2003, equal to about
40 to 50 percent of total energy consumption and more than any single fuel
provided. Several organizations, including a panel of several national

laboratories, estimate that many opportunities for additional improvements
in energy efficiency remain untapped.

At times, however, federal efforts to reduce energy demand and improve
energy efficiency have had to compete with efforts to keep energy prices
low. For example, residential and commercial sectors of the economy have
until recently been somewhat protected from price volatility by regulated
prices for electricity and natural gas and thus have been less likely to
reduce their consumption of these sources. Moreover, inflationadjusted
energy prices have generally declined, until recently. Reducing demand
when prices are falling has been difficult for several reasons. For
example, because energy-consuming equipment, such as air conditioners,
furnaces, and lighting systems, is generally costly to purchase and lasts
many years, consumers do not want to replace it unnecessarily. In
addition, consumers are often not aware of the energy inefficiency of
their homes and businesses. Falling energy prices have also made it more
difficult to demonstrate the cost-effectiveness of spending money to
replace aging and inefficient equipment, particularly for residential and
commercial customers. In contrast, when consumers face prolonged period of
higher energy prices, they are more likely to identify and adopt
cost-effective strategies for reducing their energy demand. For example,
following prolonged supply disruptions and price increases for gasoline in
the 1970s, consumers in the 1980s chose to purchase more fuel-efficient
vehicles, pushing up overall fuel efficiency averages nationwide. In the
late 1990s the opposite has been true; relatively low prices for gasoline
have encouraged consumers to choose to purchase larger and less
fuel-efficient vehicles.

GAO has examined policies designed to reduce demand in electricity
markets, as well as efforts to develop more fuel-efficient automobiles. In
August 2004, we issued a report finding that electricity demand programs
that better link the electricity prices consumers pay with the actual cost
of generating electricity offer significant financial benefits to
consumers, improve the functioning of electricity markets, and benefit the
federal government by lowering its utility bills. In March 2000, we
reported on the Partnership for a New Generation of Vehicles (which sought
to develop a family sedan that could drive about 80 miles on a gallon of
fuel) and found that the vehicle being developed did not match consumer
vehicle preferences and that automakers would not be manufacturing such a
vehicle for U.S. markets. In forthcoming work requested by the Congress,
GAO will evaluate the Department of Energy's program for setting energy
efficiency standards for appliances.

Key Questions:

o  What are the benefits and costs of potential federal efforts to reduce
energy demand?

o  Are there economic, regulatory, or other barriers preventing the
adoption of cost-effective, energy-efficient technologies that could meet
consumer needs?

o  Are there promising energy-saving technologies that are nearly
costeffective that the federal government should consider encouraging
through the use of consumer incentives?

o  Are there emerging energy-efficiency technologies that are past basic
research but that could benefit from federal and industry collaboration?

o  Which technologies offer the greatest long-term potential for reducing
demand, and should they be considered for intensive federal research?

o  To what extent are retail price structures impeding the deployment of
cost-effective and energy-efficiency technologies?

Conclusions Given the increasing signs of strain on our energy systems and
our growing awareness of how our energy choices impact our environment,
there is a growing sense that federal leadership could provide the first
step in a fundamental reexamination of our nation's energy policies. As
the Congress, executive agencies, states and regions, industry, and
consumers weigh such a reexamination, we believe that it makes sense to
consider all energy sources together, along with options to encourage more
efficient energy use and consumer choices to save energy. While a balanced
energy portfolio is needed, striking that balance is difficult because of
sometimes competing energy, environmental, economic, and national security
needs.

Clearly none of the nation's energy options are without problems or
tradeoffs. Current U.S. energy supplies remain highly dependent on fossil
energy sources that are either costly, imported, potentially harmful to
the environment, or some combination of these three, while many renewable
energy options still remain more costly than traditional options. On the
other hand, past efforts to reduce energy demand appear to have lost some
of their effectiveness in recent years. Striking a balance between efforts
to boost supplies from these various energy sources and those focused on
reducing demand presents challenges as well as opportunities.

In the end, the nation's energy policies come down to choices. Just as
they did some 30 years ago in the aftermath of the major energy crises of
the 1970s, congressional choices will strongly influence the direction
that this country takes regarding energy issues-affecting consumer,
supplier, and investor choices for years to come. Consumer choices made
from today forward will determine to a great extent how much energy will
be needed in the future. In the same way, energy suppliers have choices
about how much of each type of energy to provide, based increasingly on
their interaction with competitive domestic and sometimes global markets
for energy. Choices made by consumers and suppliers will be influenced by
state and local entities, along with regional stakeholders in some areas
of the country, which have authority over key decisions that affect such
things as the siting of generation and transmission facilities as well as
access to their lands. Similarly, investors have choices regarding where
to invest their money, whether in new power plants, refineries, research
and development for new technologies, or outside the energy sector all
together. Yet, many of these choices may be significantly influenced, or
even overshadowed, by broader forces that are beyond our control, such as
expected energy demand growth in the developing world.

In closing, providing the American consumer with secure, affordable,
reliable, and environmentally sound energy choices will be a challenge. I
would like to note that more than 30 years ago, during the first energy
crisis, our nation faced many of the same choices that we are confronting
today. How far have we come? Have we charted a course that can be
sustained in the 21st century? In 30 years, will we again come full circle
and ask ourselves these same questions about our energy future? The answer
to this final question lies in our collective ability to develop and
sustain a strategic plan, with supporting incentives, along with a means
to measure our progress and periodically adjust our path to meet future
energy challenges.

I would be pleased to respond to any questions that you, or other Members
of the Subcommittee, may have at this time.

For further information about this testimony, please contact me, Jim
Wells, at (202) 512-3841. Contributors to this testimony included Godwin
Agbara, Dennis Carroll, Mark Gaffigan, Dan Haas, Mike Kaufman, Bill
Lanouette, Jon Ludwigson, Cynthia Norris, Paul Pansini, Ilene Pollack,
Melissa Roye, Frank Rusco, and Ray Smith.

  Contact and Acknowledgments

Related GAO Products

Oil Energy Markets: Effects of Mergers and Market Concentration in the
U.S. Petroleum Industry. GAO-04-96. Washington, D.C. May 17, 2004.

Research and Development: Lessons Learned from Previous Research Could
Benefit FreedomCAR Initiative. GAO-02-810T. Washington, D.C.: June 6,
2002.

U.S. Ethanol Market: MTBE Ban in California. GAO-02-440R. Washington,
D.C.: February 27, 2002.

Motor Fuels: Gasoline Prices in the West Coast Market. GAO-01-608T.
Washington, D.C.: April 25, 2001.

Motor Fuels: Gasoline Prices in Oregon. GAO-01-433R. Washington, D.C.:
February 23, 2001.

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO Work.
RCED-00-301R. Washington, D.C.: September 25, 2000.

Cooperative Research: Results of U.S.-Industry Partnership to Develop a
New Generation of Vehicles. RCED-00-81. Washington, D.C.: March 30, 2000.

Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil and
Shipping Industries and Consumers. RCED-99-191. Washington, D.C.: July 1,
1999.

International Energy Agency: How the Agency Prepares Its World Oil Market
Statistics. RCED-99-142. Washington, D.C.: May 7, 1999.

Energy Security and Policy: Analysis of the Pricing of Crude Oil and
Petroleum Products. RCED-93-17. Washington, D.C.: March 19, 1993.

Energy Policy: Options to Reduce Environmental and Other Costs of Gasoline
Consumption. T-RCED-92-94. Washington, D.C.: September 17, 1992.

Energy Policy: Options to Reduce Environmental and Other Costs of Gasoline
Consumption. RCED-92-260. Washington, D.C.: September 17, 1992.

Alaskan Crude Oil Exports. T-RCED-90-59. Washington, D.C.: April 5, 1990.

  Coal

Energy Security: An Overview of Changes in the World Oil Market.
RCEDDEG88-170. Washington, D.C.: August 31, 1988.

Clean Air Act: Observations on EPA's Cost-Benefit Analysis of Its Mercury
Control Options. GAO-05-252. Washington, D.C.: February 28, 2005.

Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology Program.
GAO-01-854T. Washington, D.C.: June 12, 2001.

Clean Coal Technology: Status of Projects and Sales of Demonstrated
Technology. RCED-00-86R. Washington, D.C.: March 9, 2000.

  Natural Gas

Nuclear

Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural
Gas Availability and Prices. GAO-03-1148. Washington, D.C.: September 30,
2003.

Natural Gas Flaring and Venting: Opportunities to Improve Data and Reduce
Emissions. GAO-04-809. Washington, D.C.: July 14, 2004.

Natural Gas: Analysis of Changes in Market Price. GAO-03

46. Washington, D.C.: December 18, 2002.

Energy Deregulation: Status of Natural Gas Customer Choice Programs.
RCED-99-30. Washington, D.C.: December 15, 1998.

Nuclear Regulation: NRC's Assurances of Decommissioning Funding During
Utility Restructuring Could Be Improved. GAO-02

48. Washington, D.C.: December 3, 2001.

Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca
Mountain Repository Project. GAO-02-191. Washington, D.C.: December 21,
2001.

Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian
Highly Enriched Uranium. GAO-01-148. Washington, D.C.: December 15, 2000.

Nuclear Regulation: Better Oversight Needed to Ensure Accumulation of
Funds to Decommission Nuclear Power Plants. RCED-99-75. Washington, D.C.:
May 3, 1999.

Nuclear Waste: Impediments to Completing the Yucca Mountain Repository
Project. RCED-97-30. Washington, D.C.: January 17, 1997.

Renewable/ Renewable Energy: Wind Power's Contribution to Electric Power
Generation and Impact on Farms and Rural Communities. GAO-04-Alternative
756. Washington, D.C.: September 3, 2004.

Geothermal Energy: Information on the Navy's Geothermal Program.
GAO-04-513. Washington, D.C.: June 4, 2004.

Department of Energy: Solar and Renewable Resources Technologies Program.
RCED-97-188. Washington, D.C.: July 11, 1997.

Energy Policy: DOE's Policy, Programs, and Issues Related to Electricity
Conservation. RCED-97-107R. Washington, D.C.: April 9, 1997.

  Multiple Fuel

Electricity

Energy Markets: Additional Actions Would Help Ensure That FERC's Oversight
and Enforcement Capability Is Comprehensive and Systematic. GAO-03-845.
Washington, D.C.: August 15, 2003.

Energy Markets: Concerted Actions Needed by FERC to Confront Challenges
That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14,
2002.

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO Work.
RCED-00-301R. Washington, D.C.: September 25, 2000.

Electricity Markets: Consumers Could Benefit from Demand Programs, but
Challenges Remain. GAO-04-844. Washington, D.C.: August 13, 2004.

Electricity Restructuring: 2003 Blackout Identifies Crisis and Opportunity
for the Electricity Sector. GAO-04-204. Washington, D.C.: November 18,
2003.

Air Pollution: Meeting Future Electricity Demand Will Increase Emission of
Some Harmful Substances. GAO-03-49. Washington, D.C.: October 30, 2002.

Electricity Markets: FERC's Role in Protecting Consumers. GAO-03726R.
Washington, D.C.: June 6, 2003.

Electricity Restructuring: Action Needed to Address Emerging Gaps in
Federal Information Collection. GAO-03-586. Washington, D.C.: June 30,
2003.

Lessons Learned From Electricity Restructuring: Transition to Competitive
Markets Underway, but Full Benefits Will Take Time and Effort to Achieve.
GAO-03-271. Washington, D.C.: December 17, 2002.

Restructured Electricity Markets: California Market Design Enabled
Exercise of Market Power. GAO-02-828. Washington, D.C.: June 21, 2002.

Air Pollution: Emissions from Older Electricity Generating Units.
GAO02-709. Washington, D.C.: June 12, 2002.

Energy Markets: Concerted Actions Needed by FERC to Confront Challenges
That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14,
2002

Restructured Electricity Markets: Three States' Experiences in Adding
Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002.

California Electricity Market: Outlook for Summer 2001. GAO-01-870R.
Washington, D.C.: June 29, 2001.

California Electricity Market Options for 2001: Military Generation and
Private Backup Possibilities. GAO-01-865R. Washington, D.C.: June 29, 2001

Energy Markets: Results of Studies Assessing High Electricity Prices in
California. GAO-01-857. Washington, D.C.: June 29, 2001.

Electric Utility Restructuring: Implications for Electricity R&D.
T-RCED-98-144. Washington, D.C.: March 31, 1998.

  Energy Production on Federal Lands

(360551)

Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind
Pilots Is Needed. GAO-03-296. Washington, D.C.: January 9, 2003.

Alaska's North Slope: Requirements for Restoring Lands After Oil
Production Ceases. GAO-02-357. Washington, D.C.: June 5, 2002.

Royalty Payments for Natural Gas From Federal Leases in the
Outer-Continental Shelf. GAO-01-101R. Washington, D.C.: October 24, 2000.

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