grants constitute less than 5 percent of the total households in the United States.

Discontinuing the grant programs could impose hardships on states that wish to continue their energy conservation efforts but are experiencing financial distress. Many states still rely heavily on such grants to assist low-income households and public institutions. According to DOE, over 20 percent of all eligible buildings have had some energy improvements as a result of the Institutional Grant Program. The Weatherization Assistance Program currently helps weatherize about 100,000 homes per year, and more

than 27 million homes remain eligible for assistance. Such figures may compel continued federal support in the energy conservation area.

This proposal would not affect spending for the three DOE grant programs that are funded by offsetting collections (money that the Department of Energy receives in court settlements resulting from current prosecutions of violations of federal laws regulating petroleum prices in the 1970s). Those collections total $17 million in 1996, with additional amounts estimated to total about $40 million over the 1997-2002 period.

The Strategic Petroleum Reserve (SPR) was first authorized by the Energy Policy and Conservation Act of 1975 (EPCA) to help safeguard the nation against the threat of oil supply disruptions. The SPR is a government-owned stock of crude oil, available for release at the discretion of the President in the event of a severe disruption of supplies or under the obligations of international agreements. The Department of Energy (DOE) has released oil from the SPR in emergency circumstances only once, during the Persian Gulf crisis. It has, in addition, released oil in test sales on two occasions. Early in 1996, DOE initiated a sale of 7 million barrels of SPR oil to help pay for the transfer of over 70 million barrels from the Weeks Island storage site, which is being shut down. The Omnibus Appropriations Act of 1996 has directed DOE to sell another $227 million in oil by the end of 1996.

Once that sale is completed, the reserve will hold about 570 million barrels of crude oil stored in four underground sites. As amended in 1990, EPCA authorizes DOE to store up to 1 billion barrels of oil for emergency use. Without Weeks Island, DOE has storage capacity for up to 680 million barrels and a maximum capability for releasing, or "drawing down," oil from the reserve at a rate of 3.9 million barrels per day (bbl/day). Problems at several of the storage sites have brought the current drawdown capability to about 3 million bbl/day--just over 40 percent of the nation's daily level of crude oil imports in 1995.

This option would scale down the SPR program and sell off enough crude oil to close two of the remaining four storage sites, leaving about 420 million barrels in the reserve. That amount, in combination with the private stocks that would be available for drawdown (that is, stocks in excess of minimum operating inventories) and the capability of oil consumers to reduce purchases and of domestic oil producers to increase output, would enable the United States to replace its net oil imports in 2002 for 60 days. That assessment is consistent with the way private stocks, oil use, and domestic oil production responded to the disruption of world oil supplies in the Persian Gulf War.

Closing down the two sites could generate budgetary savings by avoiding appropriations for their operation and maintenance. Outlay savings from that avoided spending would total $295 million over the 1997-2002 period measured against the 1996 funding level and $449 million over that period measured against the 1996 level adjusted for inflation. Additional proceeds from the sales of crude oil and of storage and transportation facilities at the two sites could bring the total savings to more than $3 billion over the period. Under current law, however, the proceeds from those sales would not count as budgetary savings.

The fundamental rationale for developing the Strategic Petroleum Reserve was an economic one. Specifically, policymakers believed that an emer

gency release of strategic stocks of oil could help the nation sustain its economic output and consumption by lowering oil prices and enabling the economy to reduce its total level of oil imports. Depending on the circumstances of the crisis, a release might also help the economy avoid the costs of adjusting to temporarily higher prices for oil.

Two general areas of concern underlie a proposal to scale back the SPR program. First, institutional changes in the oil market and the economy have reduced the threat and potential costs of disruptions of oil supplies in ways that have lessened the potential benefits of releasing SPR oil in a crisis. Second, recent problems affecting the readiness of the SPR indicate that the future costs of maintaining the reserve will be greater than previously assumed.

The potential benefits from releasing SPR oil are fewer today than they were in the past because the economy is better able to accommodate a disruption of oil supplies without major adverse effects. In particular, a number of institutional changes in the oil market and the economy now allow the United States to significantly lower its requirements for imported oil on short notice. As a result, the nation's payments for imports do not rise commensurately with oil prices. For example, because petroleum prices today are not regulated, the domestic oil market receives the proper price signals to reduce the use of oil and increase domestic production in response to an oil price shock. And institutions such as futures markets have reduced the pressure on businesses to accumulate private stocks of oil during a crisis, which further curtails oil imports. Moreover, the role of oil in the nation's economic activities is smaller today than it was in the past: businesses and individuals make greater use of other fuels and use all fuels more efficiently than in the 1970s, when the SPR was conceived. Thus, any rise in oil prices today has a smaller effect on inflation and, in turn, less impact on real income and consumer expenditures.

Aside from declining benefits, the growing costs of maintaining the SPR also strengthen the case for eliminating it. After nearly 20 years, many of the SPR's facilities are showing signs of age in ways that both reduce the SPR's drawdown capability and point to mounting expenditures in the future for maintenance. Today, the SPR can effectively distribute about 3 million bbl/day for 100 days--far below the design capacity of the reserve. The smaller drawdown capability stems from problems of natural gas seepage into some of the storage caverns and excessive heat, which DOE is currently working to address. The seepage increases the gas content of the oil and makes it too volatile for transportation. Excessive heat in the storage caverns creates higher vapor pressure for the crude oil and increased air emissions during drawdown. Those problems mean that about 200 million barrels of SPR oil cannot be removed safely at this time. A third problem has been water leakage in the Weeks Island caverns, which once held a total of 73 million barrels of oil.

Arguments against eliminating the reserve are rooted in an alternative view of its benefits and costs. Proponents of keeping the SPR contend that the economic costs of maintaining the reserve may still be significantly less than the potential benefits to be gained from releasing its oil during a future disruption of oil supplies. A further argument calls for retaining the SPR as a national security asset. For example, the federal government is a major consumer of oil, and the SPR could be a supply for its use. Moreover, to the extent that the United States is in a position to affect the world supply of and demand for oil through its military and geopolitical activities, it will have greater freedom to pursue those activities if it can use the SPR to mitigate their effects on world oil prices.

The Rural Utilities Service (RUS) is an agency within the Department of Agriculture that, among other activities, offers financial assistance in the form of subsidized loans and grants to electric and telephone companies serving primarily rural areas. This option addresses only the credit subsidies provided through loans for electrification and telephone service that were previously administered by the Rural Electrification Administration (REA). The former REA programs were combined with other loan and grant programs in 1994 to form the RUS. (Additional potential savings from cutting other RUS programs are described in DOM-33.)

For 1996, RUS subsidies to electric and telephone companies total about $100 million. In addition, the agency spends nearly $35 million per year administering those programs. Eliminating the credit subsidies for loans made or guaranteed by the RUS would reduce outlays by an estimated $10 million in 1997 and $368 million between 1997 and 2002 measured from the 1996 funding level. Total savings over that period from the 1996 funding level adjusted for inflation would be $396 million.

Most of the borrowing that the REA subsidized was established in the 1930s, 1940s, or 1950s. Many communities served by those borrowers are now much larger than the original service-area requirement of no more than 1,500 inhabitants. In total, the agency's borrowers serve about 10 percent of the

nation's electricity consumers and about 4 percent of its telephone customers.

Credit subsidies for loans to rural electric and telephone companies were reduced by more than one-half from 1993 to 1994, reflecting the significant changes in the program enacted in the Rural Electrification Loan Restructuring Act of 1993. Moreover, because the cost of federal borrowing declined significantly in 1992 and 1993, the average subsidy provided for the RUS's low-interest (5 percent) loans also decreased. Before passage of the 1993 act, most RUS borrowers were eligible for 5 percent loans. Under the restructured program, some borrowers are still eligible for the 5 percent loans; others may borrow from the agency at slightly higher (although still subsidized) rates; and still others may borrow either at the rate that the Treasury pays to borrow or 7 percent, whichever is less. Although the appropriation for the cost of subsidies for all lending related to rural electrification and telephone service declined from about $200 million in 1993 to about $100 million in 1996, the agency may still make new loans totaling over $1 billion this year.

The savings shown in the table could result from either of two scenarios: discontinue lending and require RUS borrowers to use private sources of capital for all of their loan needs, or continue a federal loan program but eliminate subsidies. A loan program with no subsidy costs would require raising the inter

est rates on loans to rural electric and telephone companies to the level of the Treasury's cost of borrowing; it would also mean charging small loan origination fees to cover the cost of defaults for certain classes of loans. In addition to savings in subsidy costs, some savings in administrative costs could result if all such lending was discontinued. Some of the nearly $35 million per year in current salaries and expenses would be required to administer existing loans, but those costs could be gradually reduced under a no-new-lending option. Potential administrative savings of more than $25 million over the 19972002 period could be achieved by eliminating the program, but those additional savings are not counted in this option.

The loan program for rural electrification and telephone service has largely fulfilled its original

goal of making those services available in rural communities. Yet many borrowers still depend on federal loans to maintain and expand those utilities. Increasing the interest rates or charging origination fees on some loans would raise the rates such borrowers charged their customers, especially in the rural regions that are most affected. Borrowers argue that they need some level of subsidization to keep their service and utility rates comparable with those in urban areas. Most RUS borrowers already use some private financing, however. Because the cost of interest accounts for only a small percentage of the typical customer's bill, eliminating the remaining federal subsidy would have little effect on the utility rates that most borrowers charge their customers.