1. Background and Scope of the Analysis

This report was prepared in response to a February 2, 2004, letter from Senator John Sununu, requesting that the Energy Information Administration (EIA) perform an analysis of the energy production, consumption, price, and import impacts that would result from the Conference Energy Bill (CEB).

This report focuses on those provisions that can be modeled using EIA’s National Energy Modeling System (NEMS),³ and, in EIA’s estimation, have the potential to affect energy consumption, supply, prices, and imports. The impacts of the CEB provisions analyzed are estimated by comparing the results of a simulation with all of the provisions that can be modeled with NEMS to the Reference Case of the Annual Energy Outlook 2004⁴ (AEO2004).

Major Provisions of the CEB Included in the Analysis

The following provisions of the CEB were included in the modeling analysis:

• Alaska Natural Gas Transportation System (ANGTS) construction incentives (loan guarantee, treatment plant tax credit)
• Offshore royalty relief
• Section 29 tax credits for unconventional natural gas production
• Renewable fuels standard (RFS)
• Methyl tertiary butyl ether (MTBE) ban
• Removal of oxygenate requirement for reformulated gasoline (RFG)
• New production tax credit (PTC) for advanced nuclear plants
• Advanced coal generation technology incentives
• PTC extension for renewable generation
• Residential initiatives, including weatherization
• Commercial initiatives, including energy conservation product standards
• Investment tax credit for combined heat and power
• Continuation of tax credit for alternative-fueled vehicles

CEB Provisions Not Included in the Analysis

Provisions of the CEB that are not analyzed in this report generally fall into one of four categories:

(1) provisions that cannot be assessed using NEMS and/or those that can only be assessed using proprietary data. For example, NEMS does not explicitly represent electric system reliability, so it cannot be used to quantify the benefits, arguably substantial, of adoption of mandatory reliability rules. Other provisions that fall into this category include: standard market design provisions, State and local community programs, actions that increase natural gas market transparency, development of strategies in the Department of Housing and Urban Development, training, bilateral agreements, centers for excellence in research, treatment of nuclear threats, and international technology cooperation.

(2) provisions that provide authorizations, but do not provide funding. EIA is not able to project the level of future appropriations, and the extent to which such appropriations might be offset by reductions in funding provided under existing authorizations. The bill authorizes several research and development programs, grants, educational programs, voluntary programs, demonstration projects, direct payments for power production, and filling the Strategic Petroleum Reserve.

(3) provisions that provide authority to set standards or establish specific targets at some future date. EIA has no basis for speculating on what levels will ultimately be set. Examples of these provisions include establishment of test procedures for several products such as standby power and ceiling fans, grants to States that allow for rebates towards the purchase of energy efficient products, advanced buildings testbeds, collaboration with States, and “encouragement “ of Department of Energy and Federal Energy Regulatory Commission actions.

(4) provisions that are either not significant to the market as a whole or are not quantifiable. Examples include updates to executive orders, amendments to the North American Free Trade Agreement, assessment studies, Federal purchase requirements, reimbursements for analyses, project coordination, change of Federal land permitting practices, expedited environmental and judicial reviews, pilot programs, and cooperative agreements.

Provisions that are not addressed for one or more of the above reasons could also have potentially significant impacts on U.S. energy markets. The results and findings of this report apply specifically to those provisions that were modeled.

Methodology and Uncertainties

The analysis in this report is mainly based on results of NEMS. NEMS, like all models, is a simplified representation of reality. Projections are highly dependent on the data, methodologies, model structure, and assumptions used to develop them. Because many of the events that shape energy markets are random and cannot be anticipated (including severe weather, technological breakthroughs, and geo-political disruptions), energy market projections are subject to uncertainty. Furthermore, future developments in technologies, demographics, and resources cannot be foreseen with certainty. Nevertheless, well-formulated models are valuable tools to analyze complex policies because they ensure consistency in the accounting and represent key interrelationships to provide useful insights.

EIA’s projections are not statements of what will happen but what might happen, given technology and demographic trends. Because EIA’s Reference Case is based on current laws and regulations, it provides a policy-neutral starting point that can be used to analyze energy policy initiatives. EIA does not propose, advocate, or speculate on future legislative or regulatory changes within its Reference Case. Laws and regulations are assumed to remain as currently enacted or in force; however, the impacts of scheduled regulatory changes, when clearly defined, are reflected.

Notes and Sources