National Energy Act of 1978

Abstract

The National Energy Act (NEA) of 1978 was passed by U.S. Congress in response to the energy crisis of the 1970s. It was designed to resolve a disjointed national energy policy and empower the United States with greater control of its national energy destiny. The NEA and its progeny established energy efficiency programs, tax incentives, tax disincentives, energy conservation programs, alternative fuel programs, and regulatory and market-based initiatives. Results of the NEA have been mixed. Most of the market-based initiatives have been retained, but many of the regulatory initiatives have since been abandoned.

On April 20, 1977, President Jimmy Carter submitted his National Energy Plan (NEP) to Congress—113 specific legislative and administrative proposals. Congress responded by ultimately passing five pieces of legislation, collectively known as the National Energy Act of 1978 (NEA): the Natural Gas Policy Act (NGPA)[1]; the Public Utility Regulatory Policies Act (PURPA)[2]; the Energy Tax Act[3]; the Powerplant and Industrial Fuel Use Act (Fuel Use Act)[4]; and the National Energy Conservation Policy Act (NECPA).[5]

THE PRESIDENT’S PROPOSALS IN CONTEXT

Energy legislation in the United States since 1970 has been closely tied to oil. By the beginning of the decade, the United States had become a net importer of oil. In 1973, the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo against the United States, reducing the availability of foreign crude and throwing world petroleum markets into turmoil. By 1985, its delivered price to U.S. ports had increased fivefold. Congress and every administration throughout the decade responded by passing legislation. Thus, by 1980, our national energy policy comprised over 100 different, interrelated (and sometimes inconsistent) federal policies and programs.


By 1977, oil imports stood at 50% of U.S. oil consumption, and the general consensus was that the U.S. energy situation had grown to “crisis” proportions. As one House Committee stated: “The fundamental problem for U.S. Energy Policy is the insecurity of its oil supply… There is widespread agreement that a continuation of present trends will lead to a very tight world oil market in the mid-1980s.. .The United States faces the problem of making the transition from an era of cheap abundant energy to relative scarcity of expensive energy supplies.”[6]

It was in this context that President Carter submitted his NEP, which proposed both demand-side and supply-side initiatives. Carter’s proposal embraced three broad objectives for the country to regain control of its energy destiny: (1) in the short term, reduce dependence on foreign oil and limit supply disruptions; (2) in the medium term, prepare for the eventual decline in the availability of world oil supplies caused by capacity limitations; and (3) in the long term, develop new, reliable, and inexhaustible sources of energy for sustained economic growth.

To achieve these objectives, the NEP contained three major components: first, an ambitious conservation program for all sectors of energy use to reduce the annual rate of growth of demand; second, measures to induce industries and utilities using oil and natural gas to convert to coal and other abundant fuels; and third, a national pursuit of a vigorous research and development program to provide renewable and other resources to meet domestic energy needs. Major features of the NEP included conservation and fuel efficiency; rational pricing and production policies; reasonable certainty and stability in government policies; substitution of abundant energy resources for those in short supply; and development of nonconventional technologies for the future.

For oil and natural gas, the NEP intended to provide prices that encouraged production from new fields and established a more rational pattern of distribution, while preventing windfall profits. It also intended to promote conservation by confronting oil and gas users with increased prices. The NEP called for expanding the Strategic Petroleum Reserve to one billion barrels, diversifying sources of oil imports, and accelerating the development of contingency plans to reduce U.S. vulnerability to foreign oil supply interruption.

In the transportation sector, the NEP proposed initiatives to reduce the demand for gasoline and other transportation fuels. In energy efficiency, the NEP proposed a reduction of energy wasting in existing buildings, an acceleration in the development of mandatory energy efficiency standards for new buildings, and the establishment of mandatory minimum energy efficiency standards for major appliances. In the electric industry, the NEP proposed the removal of major institutional barriers to cogeneration and to provide an additional tax credit for investment in cogeneration equipment. To promote industrial conservation and fuel efficiency, the NEP proposed an additional tax credit for energy-saving investments (including solar energy equipment) and conservation retrofits of buildings. Lastly, the NEP contained a broad program for utility reform.

The NEP’s reception on Capitol Hill was rocky, but after 18 months of debate, the legislation—now in five pieces— was enacted. The components are described below.

THE NATURAL GAS POLICY ACT OF 1978

In 1954, the Supreme Court held that producer sales of natural gas into the interstate market were subject to the rate and certification requirements of the Natural Gas Act (NGA). When prices in the intrastate gas markets raised above the rates the Federal Power Commission (FPC) set for interstate producer sales in the 1970s, gas producers directed most new gas into the intrastate market, creating recurrent supply shortfalls in the interstate market. These supply shortfalls were exacerbated by the extraordinarily cold winter of 1976-1977 when serious natural gas shortages occurred in regions served by interstate gas pipelines. That winter helped shape the debate in 1977 and 1978 on President Carter’s natural gas proposals. In contrast to the oil embargo whose cause was economic and political, the natural gas crisis was seen, at least in part, as a regulatory problem. Critics of the FPC blamed the crisis on the low price it set for interstate gas. Others argued that the United States was wasting clean, valuable gas on low-priority uses, such as boiler fuel. As the NEP explained, “As a result of regulation under the [NGA], natural gas is now substantially underpriced, and there is excess demand. Existing supplies are being wasted on nonessential industrial and utility uses…[The] intrastate-interstate distinction has also become unworkable, indeed intolerable, as the limited amount of new gas increasingly flows to the unregulated intrastate market at the expense of ,,[7] interstate consumers.

The Carter administration bill went through nearly 18 months of debate in Congress, pitting members from producing and consuming states against each other. Members from consuming states wanted price controls extended to all gas (both interstate and intrastate), while members from producing states wanted deregulation of interstate gas and opposed imposing price controls on intrastate gas.

The NGPA proved to be the most controversial portion of Carter’s energy program. The final product was an intricate compromise that retained most of the elements of the President’s proposals, in particular the extension of controls to the intrastate market, so that all gas produced in the United States was subject to price controls. It also included a key element of the Senate proposal—phased deregulation of the wellhead price of new natural gas. New natural gas and most other gases were deregulated between 1979 and 1987. The NGPA also included an “incremental pricing” mechanism that was designed to allocate the costs of expensive new gas to industrial (rather than residential) users.

WELLHEAD PRICING

Natural Gas Policy Act’s wellhead pricing system was designed to encourage the exploration and production of new natural gas through a series of complex pricing formulas. In effect, gas from new wells or new fields was priced at levels higher than gas from existing wells. The Federal Energy Regulatory Commission (FERC), successor to the FPC, was empowered to regulate all “first sales” of natural gas. A “first sale” was essentially any sale or transfer for value, except sales by pipelines or distributors (other than from their own production). The price that could be obtained by the producer for a first sale varied according to the classification of the gas in the wellhead price determination procedure. In most cases, state, not federal, agencies were to categorize producing wells to determine the appropriate pricing category.

Prior to the NGPA, producing states (other than New Mexico) did not impose price restraints on producer sales of natural gas, and federal price controls on producers extended only to interstate wholesale sales. As noted above, under pre-NGPA regulation, the FPC’s prices for gas sold in the interstate market were lower than unregulated prices in the intrastate market. As a result, interstate pipelines were unable to acquire enough supply for resale. The NGPA remedied this, imposing the same ceiling prices on gas newly committed to the interstate and intrastate markets (Gas already committed to one market or the other generally remained subject to a ceiling price based on pre-NGPA prices.). Federal wellhead pricing was terminated in 1989.

INCREMENTAL PRICING

The incremental pricing provisions of the NGPA were designed to shelter high-priority users from the higher gas prices allowed by the NGPA, and to price gas to low-priority users at the alternative fuel price. However, these provisions never had any practical effect because of changing market conditions, and in May 1987, Congress repealed them.

CURTAILMENT

In the NGPA, Congress played a direct role for the first time in establishing a system of curtailment priorities to allocate the gas supplies of interstate pipelines in their supply shortages. Because of the improved supply situations of the interstate pipelines, these provisions also had little practical effect.

EMERGENCY AUTHORITY AND TRANSPORTATION

The grant of presidential authority in energy emergencies, authorized in Title III of the NGPA, was a substantial reenactment of the Emergency NGA, enacted early in 1977. However, the transportation authority Title III conferred upon FERC represented an important departure from prior law. Specifically, section 311 of the NGPA[8] gave FERC the authority to authorize, by rule or order, any interstate pipeline to transport gas on behalf of any intrastate pipeline or local distribution company (LDC) and to authorize any intrastate pipeline to transport gas on behalf of any interstate pipeline or LDC, all without the need for a certificate, under section seven of the NGA. Transportation so authorized would not render any person subject to the jurisdiction of the NGA. This section, according to the House’s Committee, gave FERC the power to “facilitate development of a national natural gas transportation network without subjecting intrastate pipelines, already regulated by State agencies, to [FERC] regulation over the entirety of their operations.”[9]

Section 311 can be viewed as an important step toward the restructuring of the gas pipeline industry in the 1980s, which permitted pipelines to render unbundled transportation services (i.e., transportation of gas separate from the sale of the commodity). Although unbundled transportation services had been authorized under prior law (e.g., FPC Order No. 528),[10] FERC’s section 311 rule authorized transportation services on a “self-implementing basis,” that is, no prior regulatory approval of the particular transportation service was required.[11] This became a model for FERC’s later blanket transportation rules and Order No. 436 program under the NGA.

Today, of course, the importance of section 311 transportation has been overshadowed by FERC Order No. 636,[12] in which FERC largely took interstate pipelines out of the business of selling gas, requiring them to unbundle and offer transportation service to all customers on a nondiscriminatory basis. FERC has retained utility-type regulation over the interstate transportation function, while allowing the market for gas commodity itself to develop competitively.

It was in this context that FERC began a decade of restructuring the gas industry, issuing a series of orders that brought competition to the pipeline industry and allowed vastly increased customer choice. The NPGA, and FERC policies that implemented the NGPA, were the source of this restructuring. Phased deregulation, integration of the interstate and intrastate markets, and self-implementing transportation were the keys to creating the competitive gas supply market of the 1990s.

THE PUBLIC UTILITY REGULATORY POLICIES ACT

The PURPA is discussed under that heading at p. 1201 ENERGY TAX ACT OF 1978

The President’s proposal to Congress relied heavily on tax incentives and disincentives to elicit new energy production and discourage inefficient uses of price-controlled oil and gas. Not unpredictably, the tax incentives fared better than the disincentives in the legislative process. Congress adopted most of the incentives. However, with minor exceptions, none of the tax disincentives survived the legislative process.

TAX INCENTIVES

The NEA, as introduced, provided for residential energy credits (to encourage individuals to make energy conservation investments) and business energy credits (to encourage business investment in more efficient commercial and industrial facilities and equipment). It also contained tax incentives for geothermal production and changes in alternative minimum tax treatment of oil and gas intangible drilling expenses.

As enacted, the Energy Tax Act of 1978 provided residential tax credits to encourage conservation and business tax credits to encourage energy conservation investments and the production of renewable energy, alternative fuels, and certain high-cost natural gas.

TAX DISINCENTIVES

As introduced, the NEA also contained a series of taxes designed to impose a standby gasoline tax to increase end-user prices of price-regulated crude oil to market levels and to impose additional taxes on industrial users of oil and gas that were designed to shift consumption to other fuels.

First, imposition of a standby gasoline tax at up to 50 cents per gallon was proposed if national targets for reduction in gasoline consumption were not achieved. Second, the President proposed a Crude Oil Equalization Tax (COET) that would have imposed a tax equal to the difference between the ceiling price for price-controlled crude oil and the average cost of crude to refineries. Third, consumption taxes on industrial and utility uses of petroleum products and natural gas were proposed. The petroleum tax, which would be in addition to COET, was to be phased in and capped at $0.50 per MMBTU. The natural gas tax after phase-in was designed to offset the price difference between price-controlled natural gas and distillate fuel oil. Finally, a gas-guzzler tax was proposed on low-fuel-efficiency vehicles.

Except for the gas-guzzler tax, Congress did not accept any of these tax disincentives. The standby gasoline tax was wildly unpopular with the public and did not survive the House. The industrial oil and gas consumption taxes were not enacted. Crude oil equalization tax fell by the wayside in the Senate. It was uniquely unpopular with the oil industry because the administration had proposed both to retain price controls on the industry and increase its taxes. The experience with COET was instructive, however. Two years later, the administration reformulated the tax as a Windfall Profits Tax designed, among other things, to tax gains accruing to producers after decontrol of oil prices. That tax was enacted as the Crude Oil Windfall Profits Tax Act of 1980.

THE POWERPLANT AND INDUSTRIAL FUEL USE ACT

The Fuel Use Act was designed to reduce dependence on oil and petroleum products by providing for expanded use of alternative energy sources by the nation’s electric power plants and major industrial installations. The Fuel Use Act prohibited these facilities from using petroleum or natural gas as a primary energy source unless an exemption was obtained from the Department of Energy (DOE). Power plants and major fuel-burning installations had to comply with detailed criteria to secure an exemption from the Act’s prohibitions.

The self-described purpose of the Fuel Use Act was to conserve natural gas and petroleum for uses other than electric utility, industrial, or commercial generation of steam or electricity for which there are no feasible alternative fuels or raw material substitutes. It was designed to prohibit or, as appropriate, minimize the use of natural gas and petroleum as a primary energy source and “to conserve such gas and petroleum for the benefit of present and future generations.” In other words, when the nation is seeking to solve the problem of a shortage of domestic oil and natural gas, the answer is to require large consumers to substitute other fuels.

In many respects, the Fuel Use Act superseded the largely-ineffective Energy Supply and Environmental Coordination Act of 1974 (ESECA).[13] Energy Supply and Environmental Coordination Act was an emergency program designed by Congress to foster greater coal utilization by power plants and major fuel-burning installations.

To the Carter administration, the NEA provided an opportunity to provide a more effective fuel-switching program than that provided by ESECA. The Fuel Use Act was intended to provide for a swifter conversion process. To its critics, it was a continuation of misguided policy that mistakenly predicted continuing shortages of oil and gas and perpetually higher prices of those commodities.

At the time of its passage, the Fuel Use Act was described as a bold experiment. As might be expected, however, when the apparent shortages in gas and petroleum products eased, enormous opposition to the Act grew. The Fuel Use Act discouraged industrial and large-volume gas use that artificially kept the demand for gas low. The Act prevented the gas industry from expanding its industrial customer base, which in turn prevented the allocation of fixed system costs to a larger number of customers; denied pipelines the opportunity to reduce take-or-pay obligations for undertaken gas; and prevented the construction of new facilities that would use gas as the primary fuel source, thereby denying plant operators and electric utilities the opportunity to take advantage of the short lead time required to construct a gas-fired facility. Moreover, although the Fuel Use Act contained an exemption provision, it had taken DOE from five to twelve months to act on requests for exemption. Therefore, when the statute was repealed in 1987, the repeal encountered very little opposition.

THE NATIONAL ENERGY CONSERVATION POLICY ACT

The theme of conservation is pervasive in the NEP. As President Carter stated to Congress when he submitted his energy proposals in 1977: “[T]he cornerstone of our policy is to reduce demand through conservation. Our emphasis on conservation is a clear difference between this plan and others which merely encouraged crash production efforts. Conservation is the quickest, cheapest, most practical source of energy.”[14]

The prior administration and Congress had attempted energy conservation measures, as well. The principal statute, the Energy Policy and Conservation Act of 1975 (EPCA), had provided fuel-efficiency standards for automobiles and authorized the FEA to prescribe energy-efficiency standards for other consumer products. The NEP included specific conservation incentives targeted to residential consumers and businesses. In the area of buildings, the President proposed a national residential energy conservation program for existing buildings, highlighted by a tax credit for amounts spent on residential energy conservation investments. Utilities were to be directed to offer energy conservation services financed by loans that would be repaid through utility bills. For the low-income sector, direct grants totaling almost $530 million would be provided for conservation investments.

There were other loans and grant programs, including mandatory efficiency standards for new buildings, a federal building conservation plan, and a program to demonstrate solar energy on select federal buildings that would be retrofitted to reduce energy consumption.

The NEP also included a change in the investment tax credit to encourage businesses to invest in energy conservation and renewable energy technologies. Indeed, the proposals for cogeneration, district heating, utility rate reform, and taxes were all seen as part of the overall conservation program.


As passed, the NECPA promoted three major roles for the government in energy conservation: setting energy-efficiency standards designed to cut energy consumption in particularly energy-intensive products or uses; disseminating information about energy conservation opportunities; and improving the efficiency of federal buildings (thereby cutting the government’s own energy bill). The surviving portions of NECPA included a residential program for low-income weatherization assistance, grants and loan guarantees for energy conservation in schools and hospitals, and energy-efficiency standards for new construction. Initiatives in these areas continue today.

In other areas, the implementation of NECPA proved more problematic. For example, NECPA strengthened the appliance energy-efficiency standards program established under EPCA by requiring energy-efficiency standards for thirteen types of appliances, assuming such standards were economically justified. But in 1982, DOE concluded that the energy standards envisioned under NECPA could not be economically justified. Years of litigation and subsequent action by Congress were required before appliance energy-efficiency standards would be established. In 1987, Congress adopted the National Appliance Energy Conservation Act (NAECA),[15] specifying energy-efficiency standards and proposals for periodic updates of such standards for a variety of major household and commercial appliances. National Appliance Energy Conservation Act was amended in 1988[16] and again in 1992[17] through the EP Act. Today, efficiency standards have been prescribed for all major categories of consumer products. The standards program is currently regarded as one of the key policy tools for reducing greenhouse gas emissions.

CONCLUSION

President Carter wanted the United States to regain control of its energy destiny and his administration developed an extensive plan for doing so. While Congress did not embrace all of President Carter’s proposals, many of Carter’s proposals did become law. Whether the legislation accomplished the goals of its drafters is another question. Except in the area of conservation, many of the regulatory initiatives that flowed from the NEA have since proven unworkable or no longer necessary and have been abandoned. For example, the extension of price ceilings to the intrastate natural gas market through the NGPA was an effective mechanism for relieving supply shortages at the time, but is no longer relevant because Congress found that price controls in both the interstate and intrastate markets were unnecessary and phased them out.

On the other hand, most of the market-based initiatives that flowed from the NEA have been retained. The NGPA laid the foundation for the deregulation of natural gas and that task has now been completed with the 1989 enactment of the Natural Gas Wellhead Decontrol Act. The removal of the interstate/intrastate market dichotomy under the NGPA, together with the new gas transportation authority contained in the statute, created a unified national market for gas, eased the supply acquisition problem, and helped remove market distortions. The result was a more efficient allocation of natural gas resources and, after the phased deregulation of wellhead prices, it is probably the greatest contribution of the NGPA. Moreover, the most lasting effect of the NGPA, wellhead decontrol, led to a critical economic change: natural gas has now become a separate and distinct economic commodity. By removing both price and nonprice regulation over most producer sales of natural gas, the NGPA cleared the way for natural gas to be sold as a commodity, unbundled from transportation, by a wide variety of market participants, without regulatory approval.

The lessons learned from the NEA’s tax initiatives remain applicable today. Tax policy in the NEA had an asymmetric quality; Congress would provide credits or deductions, but would not impose consumption taxes. This is still the case, as witnessed from the outcry in 1993 when President Clinton proposed a Btu tax.

Finally, many of the 1970s conservation initiatives are still in place. We continue to have fuel-efficiency standards for automobiles and appliances. EP Act contains conservation provisions that embraced and carried forward energy conservation programs for commercial, residential, and industrial energy consumers.

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