Electricity Supply: Consideration of Environmental Costs in Selecting
Fuel Sources (Letter Report, 05/19/95, GAO/RCED-95-187).

Electricity rates do not take into account all the costs of the harmful
environmental effects of electricity production.  In meeting federal
environmental requirements, utilities incur costs--for pollution control
equipment, for example--that are considered internalized environmental
costs because they are included in electricity rates.  However, other
costs--those for residual pollution emission, which are not
controlled--are not reflected in electricity rates.  The environmental
and health consequences of these residual emissions are considered
external costs, which are referred to as externalities.  Many states
require utilities to consider these externalities for different energy
sources (such as coal, nuclear energy, natural gas, and renewable
energy) in deciding how to produce electricity.  This report reviews
whether the consideration of externalities affected the use of renewable
energy, such as wind, solar, or geothermal power.  GAO also discusses
how the states consider externalities in planning for electricity needs
and what the Energy Department's role in this activity is.  GAO provides
more-detailed information on California, a leader in the generation of
electricity from renewable energy, and New York, a leader in the
consideration of externalities.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-187
     TITLE:  Electricity Supply: Consideration of Environmental Costs in 
             Selecting Fuel Sources
      DATE:  05/19/95
   SUBJECT:  Renewable energy sources
             Electric utilities
             Alternative energy sources
             Electric power generation
             Utility rates
             Energy costs
             Economic analysis
             Federal/state relations
             Environmental policies
             Health hazards
IDENTIFIER:  California
             New York
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Science, House of
Representatives

May 1995

ELECTRICITY SUPPLY - CONSIDERATION
OF ENVIRONMENTAL COSTS IN
SELECTING FUEL SOURCES

GAO/RCED-95-187

Considering Externalities in Selecting Fuel Sources

(307334)


Abbreviations
=============================================================== ABBREV

  CEC - California Energy Commission
  CPUC - California Public Utilities Commission
  DOE - Department of Energy
  DPU - Department of Public Utilities
  EPRI - Electric Power Research Institute
  EXMOD - Environmental Externalities Model
  FERC - Federal Energy Regulatory Commission
  GAO - General Accounting Office
  ICEM - iterative cost-effectiveness methodology
  kWh - kilowatt hour
  MW - megawatt
  NREL - National Renewable Energy Laboratory
  NYEECS - New York State Environmental Externalities Cost Study
  OTA - Office of Technology Assessment
  PSC - public service commission
  PUC - public utility commission
  PURPA - Public Utilities Regulatory Policies Act of 1978

Letter
=============================================================== LETTER


B-260962

May 19, 1995

The Honorable George Brown
Ranking Minority Member
Committee on Science
House of Representatives

Dear Mr.  Brown: 

Electricity rates do not reflect all of the costs of the adverse
environmental effects of electricity production.  In meeting federal
environmental requirements, utilities incur costs--for pollution
control equipment, for example--that are considered internalized
environmental costs because they are included in the electricity
rates.  However, there are other costs--for residual pollution
emissions, which are not controlled--that are not reflected in the
electricity rates; the costs of the health and environmental impacts
of these residual emissions are considered external costs, which are
referred to as externalities.  Many states require utilities to
consider these externalities for different energy sources (such as
coal, nuclear energy, natural gas, and renewable energy) in deciding
how to produce electricity. 

This report responds to your request that we review whether the
consideration of externalities affected the use of renewable energy,
such as wind, solar, or geothermal power.  In addition, you asked how
the states consider externalities in planning for electricity needs
and what the Department of Energy's (DOE) role is in this activity. 
(This process is discussed in app.  I.) As agreed with your office,
we also obtained more detailed information on California, a leader in
the generation of electricity from renewable energy, and New York, a
leader in the consideration of externalities.  (This information is
in apps.  II and III.)


   BACKGROUND
------------------------------------------------------------ Letter :1

States--not DOE--have the responsibility for deciding whether and how
to consider externalities for their regulated electric utilities. 
The consideration of externalities in the states that undertake it is
generally motivated by a desire to "level the playing field" in
regard to concerns about the environmental consequences of
electricity production.  The environmental costs of producing
electricity with renewable energy are considered to be relatively
low, in contrast to those for fossil fuels.  Therefore, to consider
all costs related to the production of electricity, the costs or
values of externalities are estimated and added to or otherwise
factored into the various fuel source options, usually during the
planning process. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The consideration of externalities in the planning process for
electricity production has generally had no effect on the selection
or acquisition of renewable energy sources, according to experts and
representatives of various sectors of the electricity industry. 
According to these sources, the basic reason is that electricity from
renewable energy usually costs so much more than electricity from
fossil fuels that externality considerations do not overcome the
difference.  Also, in cases in which renewable energy has been used
to produce electricity, according to some experts, its use has
primarily been the result of special programs, such as federally
legislated requirements or state set-asides\1 that require such use. 

States vary greatly in their consideration of externalities, as
discussed in appendix I.  Of the 50 states and the District of
Columbia, 16 states assign a quantitative value to externalities,
such as dollar costs, and 9 states and the District of Columbia treat
externalities qualitatively, by using, for example, a subjective
ranking system for anticipated environmental impacts.  The remaining
25 do not have requirements concerning externalities.  DOE's role in
considering externalities has primarily been to conduct and support
research. 


--------------------
\1 A set-aside is a block of electricity production designated for
renewable sources only. 


   CONSIDERATION OF EXTERNALITIES
   HAS NOT INCREASED USE OF
   RENEWABLE ENERGY
------------------------------------------------------------ Letter :3

The consideration of externalities has not influenced the selection
or acquisition of renewable energy (sometimes called renewables) or
any other type of energy for electricity production, according to
officials representing various sectors of the electricity industry. 
These officials include those representing state agencies and
utilities in California and New York; officials from DOE and two of
DOE's laboratories, the National Renewable Energy Laboratory and
Lawrence Berkeley Laboratory; and officials from the Energy
Information Administration and the Electric Power Research Institute,
a privately funded research organization; and other experts.  They
said that they were not aware of any instances in which the
consideration of externalities made a difference in the fuel source
selection.  In California, which produces more electricity from
renewables than any other state, officials representing the
California Public Utilities Commission and Pacific Gas and Electric,
the largest utility in California, could not provide any examples in
which the consideration of externalities made a difference in the
acquisition of renewables. 

The basic reason is that the average cost of electricity produced
from renewable sources has generally been so much higher than the
cost of electricity produced from fossil fuels that the consideration
of externalities did not outweigh the price difference.  According to
officials from DOE's National Renewable Energy Laboratory, Lawrence
Berkeley Laboratory, Energy Information Administration and the
Electric Power Research Institute, fossil fuels--especially natural
gas--have been relatively inexpensive.  In addition, new technologies
have made fossil fuels more efficient.  Also, the Office of
Technology Assessment concluded in a September 1994\2 study that no
clear consensus exists on the quantitative estimates of externalities
or on the methods for making the estimates.  In states where
externalities are assigned a monetary value, the value is usually too
small to cover the difference in cost between renewables and fossil
fuels. 

According to a June 1994 study by the National Renewable Energy
Laboratory,\3 price was the greatest factor working against the
selection of renewables as a fuel source.  According to one of the
study's authors, there were two cases in which renewables were
selected, but both involved expansion of existing geothermal and
hydroelectric projects' capacity, which resulted in a competitive
price.  The study, which analyzed data from 16 states on bids that
were released in 1993 and open to providers of electricity from all
types of fuel, showed that bidding results announced for 3,583
megawatts\4 of power resulted in the selection of only 55 megawatts
(or 2 percent) for renewable fuel sources at these two projects. 
According to the study, externalities were secondary considerations. 

Refinements in fossil fuel technology, as well as recent
environmental regulations, have also contributed to the limited
impact of externalities.  New technologies have reduced the adverse
environmental effects of fossil fuels.  Furthermore, renewables are
often compared to new fossil fuel generating facilities, which tend
to be environmentally cleaner than older ones as a result of recent
environmental requirements.  Finally, industry's compliance with
these requirements has had the effect of internalizing these
environmental costs, thus reducing external costs. 

Another reason that externalities have not affected the selection of
renewables relates to the fact that there has been a limited need for
additional electrical capacity since states began considering
externalities.  The consideration of externalities is usually limited
to the planning process for developing new capacity and, according to
an official of the Electric Power Research Institute and a December
1994 Energy Information Administration study,\5 the country has not
experienced much of a need for new electrical capacity since the
first state began considering externalities in 1989. 

As a result, electricity produced from renewable energy has generally
been introduced through some special program, such as a federally
legislated requirement or a state set-aside program, rather than
under direct competition with fossil fuels.  For example, enacted in
part to encourage the development of alternative energy resources,
the Public Utility Regulatory Policies Act of 1978 requires utilities
to purchase power from certain nonutility facilities at prices
established by state regulators.  These nonutility facilities include
generators that produce electricity using solar, wind, waste, or
geothermal energy sources and cogenerators that produce both
electricity and heat or steam for industrial or commercial purposes. 
States that established relatively high initial prices for this
electricity saw a rapid expansion in the number of nonutility
generators, mostly cogenerators.  However, according to a September
1993 report by the National Renewable Energy Laboratory,\6 through
the 1980s utilities, under this act, contracted for only about 10,000
megawatts of electricity from projects using renewable energy.  The
Energy Information Administration's December 1994 study states that
new capacity from renewable energy peaked in the mid-1980s, but has
waned since then. 

According to this same report, set-asides offer an alternative that
ensures recognition of the attributes of renewable energy, such as
environmental benefits.  The report notes that California and New
York have established set-asides for renewables.  The California
Public Utilities Commission directed each of the investor-owned
utilities to allocate to renewables a certain percentage of capacity
increases announced for bidding in 1993.\7

In another set-aside, New York's 1994 energy plan describes a
300-megawatt market test and demonstration program for renewables. 
However, as of April 1995, the parties to a Public Service
Commission-approved settlement, which would initiate the program,
have raised objections to the settlement, which, according to an
official with the Commission, are pending resolution.  Finally, as
identified in our April 1993 report,\8 a number of states have
adopted measures that encourage developments in wind power, such as
set-asides, as mandatory or voluntary goals to generate a specified
amount of electricity. 


--------------------
\2 Studies of the Environmental Costs of Electricity, Office of
Technology Assessment (OTA-BP-ETI-134, Sept.  1994). 

\3 Competitive Bidding and Renewable Energy:  1993 Update, National
Renewable Energy Laboratory (June 1994). 

\4 A megawatt is 1 million watts, with a watt being the basic unit of
measurement of electrical power. 

\5 The Impact of Environmental Externality Requirements on Renewable
Energy, Energy Information Administration (Dec.  1994). 

\6 The Impact of Competitive Bidding on the Market Prospects for
Renewable Electric Technologies, National Renewable Energy Laboratory
(NREL/TP-462-5479, Sept.  1993). 

\7 In February 1995, the Federal Energy Regulatory Commission found
that because California's 1993 bid process violated the Public
Utilities Regulatory Policies Act of 1978 and the Commission's
regulations, the California Public Utilities Commission cannot compel
California's investor-owned utilities to award contracts to the 1993
bid winners.  No decision has been made by the commission as to
whether it will appeal this decision. 

\8 Electricity Supply:  Efforts Under Way to Develop Solar and Wind
Energy (GAO/RCED-93-118, Apr.  16, 1993). 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :4

We discussed the factual contents of this report with officials from
DOE's Office of Assistant Secretary for Policy and Office of
Assistant Secretary for Energy Efficiency and Renewable Energy,
California's Public Utilities Commission, and New York's Public
Service Commission.  In general, these officials agreed with the
facts presented.  They provided clarifying information, and we
revised the text as appropriate. 


---------------------------------------------------------- Letter :4.1

We conducted our work from August 1994 to April 1995 in accordance
with generally accepted government auditing standards.  For our
analysis, we relied heavily on interviews with federal and state
officials and experts in the field, as well as on relevant studies
and reports, but we did not independently evaluate these documents. 
Appendix IV describes the objectives, scope, and methodology of our
review in detail.  Appendix V lists major contributors to this
report. 

If you have any questions concerning this report, please call me at
(202) 512-3841. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy and Science
 Issues


STATES' AND THE DEPARTMENT OF
ENERGY'S ACTIVITIES ADDRESSING
ENVIRONMENTAL EXTERNALITY ISSUES
=========================================================== Appendix I

Many states, primarily through their public utility commissions
(PUC), have been in the forefront in requiring regulated utilities to
consider externalities in planning to meet their electricity needs. 
However, states vary significantly in terms of whether or not they
consider externalities and how they consider them.  Of the 50 states
and the District of Columbia, 16 states assign a quantitative value
to externalities, such as dollar costs, and 9 states plus the
District of Columbia treat externalities qualitatively, by, for
example, using a subjective ranking system for anticipated
environmental impacts.  The Department of Energy's (DOE) role in
considering externalities has primarily been to conduct and support
research. 


   STATES' ACTIVITIES IN
   CONSIDERING EXTERNALITIES
--------------------------------------------------------- Appendix I:1

States vary significantly in terms of whether they consider
environmental externalities and, if so, whether they consider them
quantitatively or qualitatively.  States also differ in how they
consider emission types and how they address the impact on air,
water, and land.  Some states, after studying the issue, have decided
not to consider externalities, whereas other states have not taken a
position on the issue.  Recently, two states have changed the way
that they consider externalities because of challenges in the courts
or during externality proceedings at the PUC.  The material contained
in this appendix is primarily based on data from the National
Renewable Energy Laboratory (NREL) and Electric Power Research
Institute (EPRI) for all 50 states and information we obtained from
selected states.  We did not verify NREL's and EPRI's information
with each state. 

States' practices on environmental externalities are still evolving
in terms of whether and how externalities are considered in resource
planning.  In 1990, 17 states had requirements to consider
externalities in their resource planning, according to a study by the
National Association of Regulatory Utility Commissioners.  As of
April 1995, 25 states and the District of Columbia required electric
utilities to consider environmental externalities in their resource
planning processes.  Currently, three other states are considering
adopting similar requirements. 

States' consideration of externalities varies widely, from the 16
states that consider them on a quantitative basis, to the 9 states
and the District of Columbia that consider them on a qualitative
basis, to the 25 states that do not have any requirements concerning
externalities.  (See fig.  I.1.)

   Figure I.1:  States'
   Consideration of Externalities

   (See figure in printed
   edition.)

States that require the consideration of externalities differ in
other areas.  Externalities apply only to regulated utilities, which
in many states are only the investor-owned utilities.  Generally,
externality considerations do not apply to municipal utilities, rural
electric utilities, and nonutility generators, which include
independent power producers, cogenerators, and self-generators. 
Nonutility generators are becoming an increasingly larger part of the
electricity market.  Utilities generally oppose the consideration of
externalities because of the limited applicability to only regulated
utilities.  They believe that this may give the independent power
producers and nonutility generators an advantage in a competitive
market. 

Among the 25 states that currently have no requirements concerning
externalities, 3 are in the process of considering the need for such
requirements, and another 6 considered but rejected requirements to
incorporate environmental externalities in the planning process.  The
reasons cited by several states rejecting requirements include the
following:  Imposing such requirements is beyond their current
authority; the PUC lacks the expertise, staff, resources, and
statutory authority to impose the requirements; information on
state-specific externalities is lacking; and new generating resources
in the future are not anticipated. 


   METHODS FOR ADDRESSING
   EXTERNALITIES
--------------------------------------------------------- Appendix I:2

The consideration of externalities in utilities' resource planning
process can occur in several different ways.  State PUCs have
experimented with various approaches.  According to NREL, seven
approaches for addressing externalities are in use or have been
proposed.  These include the qualitative treatment and six different
quantitative approaches.  Nine of the 25 states and the District of
Columbia have adopted a qualitative treatment, while the remaining 16
states apply a quantitative approach. 

The qualitative approach to incorporating externalities generally
follows informal and loosely defined guidelines.  Under this
approach, a utility lists the types and rates of emissions and
pollutants, describes the potential impacts, and characterizes the
externalities, using categories such as "no impact," "moderate
impact," or "substantial impact." This information is then
subjectively factored into the resource selection process.  A
November 1994 NREL study\9 lists the strengths and weaknesses of the
qualitative approach as follows.  Its cited strengths are that it is
simple and easy to apply and applicable to nonquantifiable
externalities, such as the value of endangered species, biodiversity,
and impacts from carbon dioxide.  Its weaknesses include subjectivity
and an implicit trade-off among options. 

Quantitative treatment of externalities can vary markedly among
states.  The quantitative treatment of environmental costs and
impacts is an approach that typically involves assigning a value to
the environmental effects of electricity generation.  This may
include determining a monetary value for various environmental
impacts of electricity production.  This direct quantification or
valuation of externality costs may be referred to as the
"monetization" of externalities.  For example, some states may
determine a value (the dollars per ton) for various pollutant
emissions. 

Another quantitative approach is for utilities to establish an
"adder" valuation.  Under this method, a specific value is added or
subtracted to the estimated costs of a resource option during the
planning process.  The specified value may be a fixed percentage
(e.g., a 10-percent credit for renewable energy options) or dollars
per unit of energy (e.g., $0.02 per kilowatt hour [kWh]\10 ).  Adders
can be applied easily and immediately; and, as better information
concerning externalities becomes available, the values can be
adjusted to incorporate the new information, according to NREL. 

Some alternative approaches to arriving at the monetized value of
externalities that have met considerable controversy include control
costs or damage costs.  Control costs represent the additional costs
of, for example, equipment to control emissions to some specified
level, while damage costs are estimates of the actual damage to the
environment caused by emissions. 

Among those states that require explicit consideration, 9 states and
the District of Columbia apply a qualitative treatment; the remaining
16 states require the use of quantitative approaches.  Included among
the states requiring quantitative approaches are those states that do
not specify a particular quantification or monetization approach or
method but simply direct a utility to quantify environmental
externalities to the extent possible and practicable.  Seven states
are in the "no specified quantitative approach" category.  The other
nine states have adopted specific approaches when applying monetized
externalities, including percentage adders, specific dollar values
per unit of energy, and monetized values for specific emissions. 
(See table I.1.)

States are increasingly considering environmental and other
socioeconomic externalities as part of the electricity resource
planning and acquisition process.  However, both the methods utilized
and the scope of these considerations differ widely.  According to
NREL, to date there does not appear to be as much attention being
paid to developing externality-related values for projects involving
renewables as for projects involving fossil fuels. 



                                    Table I.1
                     
                     State PUCs' Information on Externalities


                  No                                           $ per
          requiremen  Qualitativ         Not  Percentage      energy          By
State             ts           e   specified       adder        unit   emissions
--------  ----------  ----------  ----------  ----------  ----------  ----------

Alabama            X
Alaska           X\a
Arizona                                    X
Arkansas                                   X
Californ                                                                       X
 ia
Colorado                       X
Connecti                       X
 cut
Delaware                       X
D.C.                           X
Florida            X
Georgia                        X
Hawaii                                     X
Idaho                          X
Illinois                       X
Indiana            X
Iowa                                                 X\c
Kansas           X\b
Kentucky           X
Louisian           X
 a
Maine            X\a
Maryland           X
Massachu           X
 setts
Michigan         X\a
Minnesot                                                                       X
 a
Mississi           X
 ppi
Missouri           X
Montana                                    X
Nebraska           X
Nevada                                                                         X
New                X
 Hampshi
 re
New                                                                X
 Jersey
New              X\b
 Mexico
New York                                                                       X
North            X\a
 Carolina
North            X\a
 Dakota
Ohio                                       X
Oklahoma         X\b
Oregon                                                                         X
Pennsylv                       X
 ania
Rhode              X
 Island
South            X\a
 Carolina
South              X
 Dakota
Tennesse           X
 e
Texas                                      X
Utah                                       X
Vermont                                                X
Virginia                       X
Washingt                       X
 on
West               X
 Virginia
Wisconsi                                                                       X
 n
Wyoming            X
================================================================================
Total             25          10           7           2           1           6
--------------------------------------------------------------------------------
\a The state has considered the issue of externalities and rejected
addressing it; therefore, no requirements exist. 

\b As of April 1995, the state was in the process of considering the
issue of externalities, but no requirements are in place. 

\c Iowa also uses an adder expressed in terms of dollars per energy
unit for the first 120 megawatts of energy produced from renewable
resources. 

Source:  Compiled from NREL's data and EPRI's EPRINET Environmental
Externalities Clearinghouse data base, as updated by GAO with
assistance from Barakat & Chamberlin, Inc., the contractor
responsible for maintaining the data base. 


--------------------
\9 Issues and Methods in Incorporating Environmental Externalities
Into the Integrated Resource Planning Process, NREL
(NREL/TP-461-6684, Nov.  1994). 

\10 A kilowatt hour is 1,000 watts of power supplied steadily for 1
hour. 


   STATES' RECENT ACTIVITIES
   CHANGING THE CONSIDERATION OF
   EXTERNALITIES
--------------------------------------------------------- Appendix I:3

Two states, Illinois and Massachusetts, have recently changed their
approach to considering externalities.  Specifically, the Illinois
Commerce Commission in a November 22, 1994, ruling requires
utilities' resource plans to include a qualitative discussion of
environmental externalities.  The Commission had considered, but
rejected, requiring utilities to use the following approaches:  (1)
using a monetary adder for five specific emissions or (2) adding in
the cost of controlling emissions to comply with future environmental
regulations.  However, the Commission reaffirmed earlier rulings that
the state's least-cost planning laws must require the consideration
of the adverse external environmental impacts of providing utility
service. 

Massachusetts' currently has no requirements to consider
externalities because of the Massachusetts Supreme Court ruling in
December 1994.  Massachusetts' Department of Public Utilities (DPU)
now only directs that utilities continue to consider "reasonably
foreseeable environmental control requirements with cost implications
for ratepayers in weighing resource procurement alternatives." This
approach is more limited than how externalities have been considered
in the recent past.  DPU had previously required the consideration of
environmental externalities in utilities' decisionmaking from 1988 to
1994, specifically requiring the use of monetized values for specific
emissions since 1990.  The Court ruling stated that DPU exceeded its
statutory authority by requiring utilities to use environmental
externality adders in resource planning to account for effects with
no cost implications for ratepayers. 

Massachusetts may yet again change its position with regard to
environmental externalities, according to the Massachusetts Assistant
Attorney General's comments made in January 1995.  The Assistant
Attorney General stated that DPU retains the authority to apply
externality values even after the Supreme Court decision.  Even
though the Supreme Court ruled that DPU cannot consider environmental
costs that would not potentially affect utilities' costs and
therefore rates, it affirmed DPU's authority to address environmental
costs, he elaborated. 


   DOE'S ROLE IN CONSIDERING
   EXTERNALITIES
--------------------------------------------------------- Appendix I:4

DOE's role in considering externalities has been primarily to conduct
and support research.  During the 1980s and 1990s, many externality
studies were completed under the sponsorship of DOE, state agencies,
and utilities.  The Office of Technology Assessment (OTA) identified
eight of these studies as major efforts on the basis of their
comprehensiveness, their influence, and the extent of their
methodological discussion and included an analysis of them in a
September 1994 report.\11 OTA concluded that no clear consensus
exists on quantitative estimates of environmental externality costs
or on the methods for making those estimates. 

DOE has recently supported two major studies on developing
quantitative estimates.  The first study, prepared in 1990 by the
Pace University Center for Environmental Legal Studies, surveyed the
state of knowledge on externalities and attempted to establish
externality values for a range of fuels and technologies. 
Subsequently, in a December 22, 1992, letter to the State Public
Service Commissioners, DOE stated that peer reviewers had identified
"substantial flaws" in the study and that the agency "did not
support" the externality cost estimates. 

The second DOE study, being done in conjunction with the Commission
of the European Communities, is examining the external costs of fuel
cycles for fossil, nuclear, and some renewable fuels.  The
eight-volume study is only partially complete.  Three volumes, one on
the coal fuel cycle and two others on background and methodology, are
now available.  The remaining five volumes, according to DOE
officials, will probably be available by the end of the year.  The
study is intended to summarize what is known and unknown about
quantitative estimation of externalities.  It cautioned against
national or even statewide estimates of externalities by fuel source,
which has been done in previous major studies.  For each fuel source,
the study uses existing data from two sites, one in the Southeast and
one in the Southwest.  The coal fuel-cycle study includes estimates
of the damage costs for various impacts and presents an externality
value in cents per kWh for the sites studied.  It concludes that the
damages caused by emissions for the specific site at the southeastern
location are greater than those for the specific site of the
southwestern location largely because of the higher population
density in the Southeast. 

According to DOE officials, federal funding for the study was about
$3.5 million, more than 80 percent of which was spent under the prior
administration.  DOE has not had sufficient funds available to edit,
publish, and distribute the reports.  Rather, the Oak Ridge National
Laboratory, the lead author of the study, is completing the project
using its own resources. 

The Federal Energy Regulatory Commission (FERC) supported DOE's
fuel-cycle study by commenting on drafts of the report and
contributing funds.  Section 808 of the Clean Air Act Amendments of
1990 required FERC in consultation with the Environmental Protection
Agency to, among other things, calculate the net environmental
benefits of renewables, compare renewables with nonrenewable energy,
and to report its findings to the Congress.  In December 1992, FERC
submitted its report to the Congress,\12

citing its participation in DOE's fuel-cycle study as fulfilling its
requirements to study externalities. 


--------------------
\11 Studies of the Environmental Costs of Electricity, OTA
(OTA-BP-ETI-134, Sept.  1994). 

\12 Report on Section 808 Renewable Energy and Energy Conservation
Incentives of the Clean Air Act Amendments of 1990, FERC (Dec. 
1992). 


CALIFORNIA
========================================================== Appendix II

California leads the nation in producing electricity from renewable
energy sources.  Traditionally, the utilities constructed and
operated their own power plants.  However, in the 1970s, events such
as the oil embargo of the Organization of Petroleum Exporting
Countries and the environmental conservation movement prompted the
state to reduce its dependence on oil and to diversify its fuel
sources with nuclear and renewable resources.  According to the
state's 1992 energy report, renewable resources supplied 11 percent
of the state's electricity generation and over 5 percent of its
capacity in 1991. 


   EXTERNALITY VALUES FOR AIR
   POLLUTANTS ADOPTED
-------------------------------------------------------- Appendix II:1

In 1990, California passed legislation requiring the California
Public Utilities Commission (CPUC) and the California Energy
Commission (CEC) to place values on the costs and benefits of
environmental impacts and explicitly consider them in the resource
planning process.  As a result, CPUC adopted externality values for
five air pollutants:  nitrogen oxide, sulfur oxide, particulate
matter, reactive organic gases, and carbon.  The externality value
for carbon, developed by CEC, is applied uniformly statewide.  The
externality values for the other four pollutants differ depending on
the air quality in the location of the proposed generating facility. 
If the proposed facility is located in an air quality "attainment
area," defined in accordance with the Clean Air Act, CPUC uses the
externality values adopted by the Nevada Public Service Commission. 
If the proposed facility is located in a nonattainment area in
southern California, CPUC uses the South Coast Air Quality Management
District's externality values.  If the proposed facility is located
in a nonattainment area in northern California, CPUC uses the Pace
University study's externality values for sulfur oxide and
particulate matter, CEC's values for reactive organic gases, and a
combination of the South Coast Air Quality Management District's and
CEC's information for nitrogen oxide.  (See table II.1.)



                               Table II.1
                
                    Externality Values for Residual
                               Emissions

                                                          Reacti
                                          Sulf                ve
                                  Nitrog    ur  Particul  organi
Proposed location                     en  oxid       ate       c  Carb
of facility                        oxide     e    matter   gases    on
--------------------------------  ------  ----  --------  ------  ----
Nonattainment area
----------------------------------------------------------------------
Southern CA                        20.14  15.0      4.36   14.39  0.02
                                             5
Northern CA                         5.84  2.87      1.68    2.71  0.02
Attainment area                     4.80  1.10      2.95    0.83  0.02
----------------------------------------------------------------------
Source:  CPUC, Biennial Resource Plan Update:  A Primer (Oct.  1993). 


   EXTERNALITY VALUES RESULTED IN
   LITTLE IMPACT
-------------------------------------------------------- Appendix II:2

These externality values were applied for the first and only time
during the resource planning process in 1993 and ultimately had
little impact on increasing the use of renewables.  In 1993,
California sought proposals from facilities qualified under the
Public Utilities Regulatory Policies Act of 1978 (PURPA) to provide a
total of 1,358.5 megawatts (MW) of new capacity between 1997 and
1999, identified through a complex analysis called the iterative
cost-effectiveness methodology (ICEM).\13 The results of this
analysis provided the justification for new resources and determined
the "benchmark" price the PURPA-qualified facilities must compete
against.  In the ICEM analysis for the 1993 bidding process,
externality costs were considered for the first time, and, as a
result, the need for new capacity was justified on the basis of
environmental as well as efficiency reasons.  According to CEC, the
consideration of externality costs typically justifies accelerating
the addition of a new resource by 1 to 4 years.  However, the
California legislature passed a law, which became effective in 1993,
stating that externality values cannot be used to justify
accelerating a utility's need for new additions by more than 15
months, nor can they be used to force a utility to decommission a
power plant.  Consequently, the passage of this law effectively
precluded accelerating the need for adding new resources beyond 15
months, diminishing the benefit of incorporating externality costs
into the ICEM analysis. 

Nevertheless, the consideration of externality values continued to
affect the process in other ways.  The "benchmark" price established
for bidding was increased because the externality values were
incorporated.  And once contracts are awarded, payments are to
include an "adder" or a "subtractor" based on the net difference in
emissions from the contracting facility versus the projected
emissions used in determining the "benchmark" price.  Thus,
PURPA-qualified facilities could lower their bids by the amount they
expected to receive from an "adder."

However, before the 1993 bidding process was complete, other events
intervened that further diminished any potential impact of having
incorporated externality costs into the process.  In 1991, the state
legislature passed a bill directing that until CPUC completes an
electricity procurement process that values the environmental and
diversity costs and benefits, the Commission shall set aside a
portion of future purchases of new capacity for renewable resources. 
As a result, 297.5 MW of the total 1,358.5 MW of needed capacity
announced for bidding in 1993 was set aside exclusively for renewable
resources. 

Consequently, while bidders that would use renewable resources
successfully competed to supply 495.05 MW of the 1,428.65 MW\14 of
capacity covered by the bids selected in the 1993 process, 304.75 MW
was attributable to the set-aside requirement rather than the
incorporation of the quantified externality values for air
pollutants.  Only 190.3 MW of the non-set-aside capacity was
successfully competed for by bidders that would use renewables.  And
even in these cases, the CPUC officials we spoke with were reluctant
to attribute the success of these bidders to the consideration of
externality values.  According to CPUC officials, some of the winning
bids were low enough to have been competitive even without any
consideration of externality values or potential "adders."

In addition, the entire process became very controversial. 
Utilities, independent power producers, as well as PURPA-qualified
facilities challenged and protested the state's 1993 competitive
bidding process, causing numerous delays in awarding the contracts,
which are still not finalized as of May 1995.\15 As a result,
California has proposed to abandon this process in the future as its
means of allocating contracts to PURPA-qualified facilities. 
However, CPUC officials said that they are not planning to replace
this resource planning process because the state is moving toward
restructuring its electric services industry and allowing consumers
direct access to an open and competitive market for electricity
services. 


--------------------
\13 ICEM is designed to determine the type, size, and timing of
additions to a utility's portfolio of resources that would be most
cost-effective.  ICEM is a sequential process that evaluates
candidate resources one by one to determine how the addition of each
resource would affect the utility's total system costs on the basis
of the candidate resource's capital costs and variable costs during
the first year of planning and the life of that resource. 

\14 California investor-owned utilities were allowed to select
winning bidders providing up to 110 percent of the announced capacity
needs. 

\15 In February 1995, FERC found that because California's 1993 bid
process violated PURPA and FERC's regulations, CPUC cannot compel
California's investor-owned utilities to award contracts to the 1993
bid winners.  No decision has been made by CPUC as to whether it will
appeal FERC's decision. 


NEW YORK
========================================================= Appendix III

New York was one of the earliest states to consider externalities and
has developed a computerized model that can be used to estimate the
value of externalities for a specific location.  The state relies on
a diverse set of fuels to generate electricity.  According to the
1994 state energy plan, 22 percent of New York's electricity came
from coal, 21 percent from natural gas, 19 percent from hydroelectric
power, 17 percent from nuclear energy, and 12 percent from petroleum. 
Imported electricity contributed 8 percent, while renewable resources
and conservation, or demand-side management, programs accounted for 2
percent.  A collaborative effort by the New York State Energy
Office,\16 the State Department of Environmental Conservation, and
the New York State Department of Public Service, the state energy
plan presents an "energy blueprint" to ensure that New Yorkers have a
safe, affordable, and reliable supply of energy that will promote
future economic growth and protect the environment. 


--------------------
\16 The State Energy Office was abolished in 1995. 


   ADDRESSING ENVIRONMENTAL
   CONCERNS IN ELECTRICITY
   GENERATION
------------------------------------------------------- Appendix III:1

New York's Public Service Commission (PSC) did not have any specific
legislative directive to address environmental externalities when the
issue of quantifying them came up in a 1989 supply-side bidding
proceeding.  PSC wanted the bidding process to reflect the different
environmental impacts of the different resources being considered and
its belief that higher costs should be shown for resources with
greater environmental impacts.  As a result, PSC adopted for impacts
on air, water, and land a set of monetary adders, such as the dollars
per ton of various pollutant emissions, which were added to the price
of a project.  The externality costs for emissions to the air were
based on control costs provided in the state energy plan.  PSC drew
upon the studies published by Bonneville Power Administration for
estimating the costs of residual impacts on water and land.  The
externality values were added to bids in order to select the winning
resources and were not paid to the winning bidders. 

The maximum amount of all adders for an average new 100-MW coal-fired
plant's impacts on air, water, and land was 1.4 cents per kWh.  The
following table shows the breakdown of this 1.4-cent adder. 



                              Table III.1
                
                New York PSC's External Cost Valuations

                            (Cents per kWh)

                                                            Mitigation
Externality                                                       cost
--------------------------------------------------------  ------------
Emissions to the air
----------------------------------------------------------------------
Sulfur oxides                                                    0.250
Nitrogen oxides                                                  0.550
Carbon dioxide                                                   0.100
Particulates                                                     0.005
Impacts on water                                                 0.100
Impacts on land                                                  0.400
Total                                                            1.405
----------------------------------------------------------------------
Source:  Sury N.  Putta, "Weighing Externalities in New York State,"
The Electricity Journal (July 1990). 

These externality values reflected pollution control costs.  The
value for emissions of individual pollutants was based on averaging
the costs of different control technologies in order to meet the
pollutant-reduction goals set forth in the state energy plan. 
According to the PSC officials we interviewed, the value for carbon
dioxide was an arbitrary number to serve as a proxy in the
calculation to recognize that carbon dioxide has an externality cost,
though it is difficult to calculate because the pollutant's impact is
extensive.  Therefore, the externality value for carbon dioxide was
an interim number, reflecting land and tree-planting costs, because
there was no agreed-upon value. 

When New York developed the 1.4-cent externality value for the
1989-91 bidding proceedings, utilities could incorporate this value
into their bidding programs in two different ways:  (1) The
externality costs of the bidders' projects could be translated into
an environmental score and added to the scores of other factors for
ranking the bids, or (2) the externality costs could be used to
adjust the bid prices, with the selection of the bids based on the
adjusted prices.  Translating externality costs into an environmental
score required analyzing the utility's method of scoring price and
nonprice factors.  For example, if the cost of power to the utility
was 5.6 cents per unit and the maximum externality cost was 1.4 cents
per unit, then the appropriate maximum score for the environmental
factor would have been 25 percent (1.4/5.6) of the maximum score
allocated for the price factor.  Allocation of an environmental score
in this fashion would place the environmental factor on an equal
footing with the price factor and force the bidders to value the
public resources in designing their projects and the projects' total
costs. 

According to the state energy plan, externalities were considered in
competitive bidding for electric capacity from 1989 through 1991. 
The results of the bids, according to a September 1993 NREL study,\17
showed that out of the bid winners for generating 968 MW, only one
project using renewable energy, a 17.7-MW waste-wood-fired project,
was selected.  Projects using renewable resources won 2 percent of
the total amount awarded.  According to PSC officials, the use of
adders did not influence these decisions.  No more recent bid
proceedings have occurred.  The following table shows the bids issued
and the outcome of the awards. 



                              Table III.2
                
                 Renewable Resources Selected From New
                    York's 1989-90 Competitive Bids

                                                                Renewa
                                                                   ble
                                                                resour
                                                         Total     ces
                                                Reques  select  select
                                            Ye     ted      ed      ed
Utility                                     ar    (MW)    (MW)    (MW)
------------------------------------------  --  ------  ------  ------
Orange and Rockland Utilities, Inc.         19     200   198.5       0
                                            89
Consolidated Edison Company of New York,    19     200   214.2    17.7
 Inc.                                       90
Long Island Lighting Company                19     150   150.0       0
                                            90
Niagara Mohawk Power Corporation            19     350   405.0       0
                                            90
----------------------------------------------------------------------
Source:  The Impact of Competitive Bidding on the Market Prospects
for Renewable Electric Technologies, NREL (Sept.  1993). 

The state's 1992 energy plan recommended a 300-MW market test
demonstration program for renewables.  According to PSC officials,
the PSC approved a settlement adopting such a demonstration program,
but by April 1995, the parties to the settlement had raised
objections to it, and resolution is pending. 


--------------------
\17 The Impact of Competitive Bidding on the Market Prospects for
Renewable Electric Technologies, NREL (NREL/TP-462-5479, Sept. 
1993). 


   ESTIMATING EXTERNALITIES
   THROUGH A COMPUTERIZED MODEL
------------------------------------------------------- Appendix III:2

In response to New York's 1989 PSC Order No.  89-15, dated May 23,
1989, the state began the State Environmental Externalities Cost
Study (NYEECS) to account for environmental effects in its planning
for procuring electricity resources.  NYEECS produced the
computerized New York Environmental Externalities Model (EXMOD) for
the purpose of estimating certain externalities associated with
select electricity resource options on a site-specific basis. 

EXMOD utilizes a data-intensive damage-base approach, which is
recognized by economists as the most appropriate methodology for
valuing environmental externalities.  EXMOD assumes that the
emissions are in compliance with environmental regulations.  It
attempts to estimate the amount associated with any residual
emissions.  As the name suggests, a damage-base approach attempts to
quantify the cost of damages in a fairly specific manner.  Costs
depend not only on the type of the generating facility itself, but
also on its location and the prevailing conditions there.  For
example, a coal-fired generating plant located in a densely populated
area is likely to result in greater damages than an identical plant
in a sparsely populated area.  This approach is in contrast to a
control cost approach of estimating external costs.  This latter
approach assumes that the cost of the externality is equivalent to
the cost of eliminating it.  This would include, for example, costs
associated with installing scrubbers at a coal-fired power plant to
remove emissions such as sulfur dioxide.  Such costs vary less from
one location to another. 

The data imbedded in EXMOD include detailed emissions profiles of
alternative electricity resources, detailed characterization of
population distribution in the state, and prevailing climatic
conditions at different locations in the state.  EXMOD is capable of
evaluating environmental impacts for 19 different electric resource
options.  The options include, for example, four different types of
coal-fired plants, three types of gas-fired plants, a wood-burning
(biomass) plant, and two types of solar plants.  EXMOD places a
monetary value on the environmental impacts of a given resource
option on a site-specific basis. 

EXMOD exhibits both strengths and weaknesses, according to its
developers.  Its strength lies in its ability to characterize options
in a fairly detailed manner that is site-specific.  For example, not
only does EXMOD estimate different externality costs for different
types of coal-fired plants, but it also will calculate different
externality costs for the same kind of plant at a different location. 
Limited data and technical knowledge, however, place important
limitations on EXMOD's ability to estimate externality costs.  For
example, the study to develop the model did not find sufficient
scientific evidence to quantify damages from greenhouse gases,
according to PSC officials.  Therefore, externality costs are not
included for carbon dioxide, which is an air pollutant that
contributes to the greenhouse effect.  Also, the model does not
account for evacuation costs brought about by a nuclear accident. 

EXMOD's estimates of external costs tend to be quite small relative
to the "market" costs of electric generation in New York.  For
example, the average electricity rate in the state is about 11 cents
per kWh, but EXMOD estimates, for instance, that the externality cost
of one type of 200-MW coal-fired plant sited in the "Capital
District" (Albany) varies from 1.07 mills to 1.50 mills per kWh (or
less than two-tenths of a cent).\18

PSC initiated a proceeding in 1992 to consider the role of
environmental externality costs in its resource selection.  Due to
concerns that negative impacts would outweigh positive ones, an
administrative law judge recently recommended discontinuing the
policy mandating monetized externalities and closing the case but
acknowledged that utilities should exercise managerial judgment in
utilizing externalities in their planning process.  Reply briefs are
due in May 1995, and according to PSC officials, a ruling is expected
over the next few months.  In the meantime, according to a PSC
official, investor-owned utilities may use either the 1.4-cent
externality value that PSC calculated or the values developed by
EXMOD. 


--------------------
\18 One mill is one-tenth of a cent. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix IV

States are concerned about the adverse environmental effects of
electricity production.  Therefore, many have required that utilities
factor the impact of these effects into their decisions about the
energy sources they use to produce electricity.  The Ranking Minority
Member, House Committee on Science, requested that we review (1)
whether the consideration of these costs affected the use of
renewable energy and (2) how states consider externalities in
planning for electricity needs and what DOE's role is in this
activity.  The Ranking Minority Member's office also requested that
we obtain more details on California's and New York's programs
considering externalities. 

To determine whether the consideration of these costs affected the
use of renewable energy, we conducted a literature search and
interviewed and reviewed information obtained from federal and state
government officials, experts in the field, and representatives of
various sectors of the electricity industry.  At the federal level,
we interviewed officials in OTA and DOE's Office of Electricity
Policy and Office of Energy Efficiency and Renewable Energy, and the
Energy Information Administration.  At the state level, we
interviewed officials of California's Public Utilities Commission, as
well as New York's Public Service Commission, Department of
Environmental Conservation, and State Energy Office.  The
organizations contacted that have expertise on the issue or that
represent various sectors of the industry included DOE's NREL and
Lawrence Berkeley Laboratory, EPRI, the National Association of
Regulatory Commissioners, the Edison Electric Institute, American
Public Power Association, and the National Rural Electric Cooperative
Association.  They also included the consulting firms of Energy
Research Group, Inc., Resource Insight Inc., and Resources for the
Future; the United States Association for Renewable Energy and Energy
Efficiency Development; and the American Wind Energy Association.  We
also interviewed officials in selected utilities in California and
New York. 

To review how states consider externalities in planning for
electricity needs, we interviewed representatives and/or obtained
studies and information from the following organizations:  DOE's NREL
and Energy Information Administration; California's and New York's
state commissions and utilities; EPRI and its state-specific
electronic data base--EPRINET; the Environmental Externalities
Clearinghouse; the Edison Electric Institute; the National
Association of Regulatory Utility Commissioners; and other
representatives of the electricity industry.  Our work on this
objective relied primarily on NREL's November 1994 study, which we
updated with data from EPRI's EPRINET and supplemented with data from
selected states.  We compared the data in the NREL study to data from
other studies and resolved obvious differences, but we did not
independently verify the data provided. 

Information on DOE's role in this activity was obtained from
interviews and information from officials in DOE's Office of
Electricity Policy and Office of Energy Efficiency and Renewable
Energy.  We also spoke to a representative of Resources for the
Future.  This organization participated with DOE's Oak Ridge National
Laboratory in the DOE-funded fuel-cycle study.  We also interviewed a
representative of FERC, which was a cofunder of the DOE study. 

To obtain information on California's and New York's programs, we
interviewed officials from each state's regulatory agency and
planning commission, reviewed each state's energy plans, and
contacted selected utilities and private interest groups in each
state.  In addition, we attended a seminar on New York's EXMOD and
obtained documentation on it. 

We conducted our work between August 1994 and April 1995 in
accordance with generally accepted government auditing standards. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Bernice Steinhardt, Associate Director
Margaret J.  Reese, Assistant Director
Nancy S.  Bowser, Senior Evaluator
Philip G.  Farah, Adviser
Charles B.  Hessler, Senior Evaluator
Casandra D.  Joseph, Adviser
James M.  Kennedy, Evaluator-in-Charge
Mehrzad Nadji, Adviser

OFFICE OF THE GENERAL COUNSEL

Jackie A.  Goff, Senior Attorney

SAN FRANCISCO REGIONAL OFFICE

Margie K.  Shields, Regional Management Representative
Susan S.  Mak, Site Senior


*** End of document. ***