Electric Utility Restructuring

Historically, utilities have operated as monopolies in protected geographic areas regulated by state public utility commissions. These commissions have allowed utilities to recoup their expenditures on electricity research and development (R&D) from their customers. Today, the electricity industry is experiencing a large-scale restructuring that will promote competition among electricity providers. Because electricity rates will no longer be set by regulation but rather by competitive forces in the marketplace, funding for electricity R&D will likely be affected. This testimony discusses funding for electricity R&D and the implications for electricity R&D arising from initiatives to restructure electric utilities.

GAO noted that: (1) Congress provided the Department of Energy (DOE) over $6.7 billion for electricity R&D in fiscal years (FY) 1993 through 1998; (2) however, except for FY 1994 and FY 1995, funding levels have declined; (3) specifically, funding increased by about 15 percent from 1993 to 1995, then it decreased by about 30 percent; (4) key budget categories comprising electricity R&D also show wide variation; (5) as stated in GAO's 1996 report, the primary reason for DOE's reduction since FY 1995 has been Congress' overall effort to reduce the federal budget; (6) during calendar years 1993 through 1996, funding for electricity R&D by electric utilities decreased about 33 percent to $476 million ($506 million in 1998 constant dollars), and further reductions were expected; (7) utilities, in an effort to cut costs in anticipation of a shift from a regulated to a deregulated environment, were reducing their R&D budgets because of the expected increase in competition in the electricity market; (8) state-sponsored electricity R&D programs that GAO reviewed had also reduced their spending; (9) the declines in state programs were attributable to reductions in major funding sources, including utilities' contributions; (10) concurrent with the reduction in R&D funding, a shift in the types of R&D funded by electric utilities had occurred, primarily resulting in a decrease in collaborative and longer-term projects; (11) many utilities were shifting away from these projects, which may benefit all electric utilities, to those they believed would help their own competitiveness in the near term, that is, proprietary R&D projects with a short-term payback; (12) electricity R&D funding by the federal government, the electric utility industry, and most states is declining because of budget reductions and restructuring prospects; (13) at the same time, as the electric utility industry undergoes rapid changes in an era of emerging competition, pressure exists for all federal agencies to demonstrate that they are making effective use of the taxpayers' dollars; and (14) given the inherent difficulties in measuring the benefits of R&D, the economic consequences of these funding declines are unclear.