Testimony

Recissions of Previously Authorized Budget Authority

By Jerry Taylor
January 18, 1995
Subcommittee on Energy and and Water Development
Committee on Appropriations
United States House of Representatives

Mr. Chairman, I am honored to have the opportunity to discuss federal energy policy and the U.S. Department of Energy before this subcommittee. Last November, the American people made clear their desire for a smaller, less expensive, and less intrusive federal government. The federal energy budget is one of the best places to begin keeping faith with the American people.

Energy production and distribution, like other goods and services in the economy, should be left to consumers and entrepreneurs in the marketplace, not “planned” by government bodies. In fact, the long history of United States oil, gas, and electricity regulation makes abundantly clear that shortages, price spikes, and energy crisis are engendered by government intervention, not market failure.

Although energy consumers have profited handsomely from the deregulatory undertakings of the 1980s, much more can and should be done to remove the province of energy from the dead hand of government planners to the invisible hand of the marketplace. To whit, this subcommittee should:

Eliminate the U.S. Department of Energy and transfer all weapons-related responsibilities to an independent, nonCabinet agency and environmental activities to the Environmental Protection Agency;

Eliminate all energy research and development expenditures;

Privatize the federal energy laboratories; and

Privatize the Power Marketing Administrations.

Such an aggressive program would prove beneficial to both the energy economy and the American taxpayer. The above budget cuts would save approximately $6 billion annually and provide tens of billions of dollars for federal debt retirement.

Eliminate the Department of Energy

The first place to begin the dismantling of energy regulation is by the simple elimination of the Department of Energy. The problem with the DOE is not its administrative structure but the very fact of its existence.

A centralized, cabinet-level energy agency is dangerous for two reasons. First, it offers “one stop” central planning services. The thousands of pages of regulations that emanated from DOE and its predecessor agencies in the 1970s is testament to the perils of federal bureaucracy and the temptations that such an agency presents to the myriad special interest groups that stand to profit from federal intervention in energy markets. Second, it provides a ready bureaucratic structure for massive intervention in the American economy. The Department is a ready command post from which would-be energy “Czars” could quickly revive the disastrous command-and-control energy policies of the 1970s.

The Department’s responsibilities, with the exceptions noted above, should not, however, be reshuffled to other agencies; they should be summarily ended. Moving organizational boxes around bureaucratic flow-charts may provide the illusion of deregulation but in reality amounts to little more than political sleight-of-hand. By any measure, whether it be in dollars, quads, or kilowatts, DOE has failed the American taxpayer.

Research and Development

Several weeks ago, Labor Secretary Robert Reich made an excellent point by observing the degree to which corporate subsidies litter the federal budget. Although the Secretary seems to be under the impression that allowing taxpayers to keep their own money often-times amounts to a “subsidy,” corporate welfare is an expensive and egregious burden on the American taxpayer. Perhaps nowhere is this more true than in the DOE budget for research and development.

Energy R&D spending has cost the American taxpayer plenty without any real return. Approximately $90 billion has been pored into such efforts over the past four decades: $50 billion for nuclear energy; $19 billion for coal; $10 billion for solar; $5 billion for oil; $3 billion for natural gas; $2 billion for geothermal; and $1 billion for hydropower. In the last 12 years, the federal government has spent $7 billion on nuclear fusion R&D, yet even DOE concedes that a commercial fusion plant probably won’t be on line until at least 2040. Current spending trends indicate another $30 billion will probably be necessary before we ever see the first kilowatt of fusion power. Likewise, the federal government has spent $6 billion on renewable energy R&D over the last 12 years despite the fact that generation of renewable energy has dropped by more than 10 percent during that time.

Virtually all economists who have looked at those programs agree that federal energy R&D investments have proven to be a spectacular failure and a virtual rogue’s gallery of some of the biggest government boondoggles in U.S. history, such as the infamous Synfuels program, the Clinch River Breeder Reactor, and the Superconducting Super Collider. A recent report by Economics Professor Frank Lichtenberg of Columbia University for the National Bureau of Economic Research found that the net impact on productivity of government R&D spending is far lower than the return on privately funded R&D and that the social return on private R&D investment is about seven times as great on plant construction and equipment. Moreover, perhaps the most comprehensive examination of federal R&D programs — conducted for the Brookings Institution by economists Roger Noll of Stanford University and Linda Cohen of the University of California at Irvine — found that energy R&D has been nothing but a “pork barrel” for political gain.

There are a number of reasons why government R&D efforts have such a poor track record. Typically, government decides which industries, technologies, and projects to support on the basis of political — not economic or scientific — considerations. Older, more labor-intensive companies typically exercise the most clout. New and growing firms — the kind that typically produce the most technological breakthroughs — may be economically strong but are usually politically weak. And as former Senator William Proxmire has noted, “Money will go where the political power is. Anyone who thinks government funds will be allocated to firms according to merit has not lived or served in Washington very long.” Economists Noll and Cohen concur: “The overriding lesson from the case studies is that the goal of economic efficiency — to cure market failures in privately sponsored commercial innovation — is so severely constrained by political forces that an effective, coherent national commercial R&D program has never been put in place.”

Even if politics could somehow be divorced from the selection process — impossible in the real world — it is still doubtful whether federal R&D efforts would be wise investments. Private investors, animated by the intense search for profit with their own money on the line, are far more likely to determine which ventures are worth pursuing and which aren’t than are elected officials or their bureaucratic agents who have far less market information and fiscal discipline than their private counterparts. If private investors find an undertaking too risky for their stockholders and private banks find such loans too risky for their depositors, then shouldn’t political officials treat the taxpayer’s money with the same degree of caution and find the undertaking too risky for their constituents?

Finally, there is good reason to believe that the very cause of technological innovation is harmed by federal intervention and subsidy. Money is inevitably diverted from more promising competing technologies and premature commercialization of federal R&D (a common problem according to Noll & Cohen) often needlessly discredits the undertaking and sets investment back decades.

If energy research and development in a particular technology is warranted, however, private corporations that stand to profit should invest their own money in the effort and not attempt to “free-ride” off the American taxpayer

National Laboratories

Eliminating federal energy R&D expenditures would mean the privatization of the vast network of national laboratories. Selling these facilities would generate billions in federal revenue that should be used, not to mask the true state of the budget, but to retire some of the national debt, currently standing in excess of $6 trillion

A multitude of private laboratories, such as the Bell labs, exist and most commercial laboratory advances are achieved through them. That is due not only to the factors noted above, but also to the fact that — as pointed out in a recent GAO report — most small manufacturers cannot effectively use the advanced state-of-the-art automated technologies produced by the national laboratories. As noted by Professor Murray Weidenbaum, director of the Center for the Study of American Business, “When a company’s own laboratory comes up with a product or process advance, there are far fewer barriers to using it than when government takes on the role. The many pathetic efforts of the Department of Commerce to interest private business in using the research it has financed reminds me of the forlorn street corner vendor trying to peddle his wares to preoccupied passersby.”

Any compelling government research need can be met by contracting that work from private universities or laboratories. The national labs could certainly still compete for weapons-related research grants from the federal government but otherwise should be forced to sell their services to the private sector

Power Marketing Administrations

The existence of the five major power marketing administrations are relics of tired and obsolescent “New Deal” economics that time has passed by. Sale of those entities is long overdue and promises to benefit both the taxpayer and the environment

The original case for these federal power programs was based on the two arguments; that public utilities could provide power at a lower cost than the alleged “monopoly” power rates of private utilities and that the monopoly powers of private utilities prevented the furnishing of electricity to rural and sparsely populated areas. The first argument has been shown to be demonstrably untrue. The cost of electricity generation for the Power Marketing Administrations is far higher than they are in the private sector. Massive cost overruns, over investment in baseline generation, and scrapped nuclear facilities that cost tens of billions but never generated a kilowatt of electricity are systemic problems with federal power facilities. Electricity costs are lower for consumers of federal electricity than for consumers of private-generated electricity only because of massive taxpayer subsidies. The second argument is irrelevant today given that virtually all of America has been electrified

Power Marketing Administrations have today become a massive experiment in social engineering, seriously distorting the economics of the regions they serve and causing incalculable harm to the environment. The artificially low electricity prices they offer to consumers at the federal taxpayer’s expense encourage over consumption of electricity and wasteful patterns of industrial activity. This in turn leads to more pollution than would otherwise be the case. Moreover, the operational record of federal power facilities is an environmental nightmare. Riparian habitats have suffered tremendous damage from dams that would never have been built in the first place by private investors. Emission controls have performed far less effectively than the industry norm

Today, few economists would even maintain that electric utilities are natural monopolies. Technological innovations have broken the regulatory assumptions of state public utility commissions and direct competition in the provision of electricity is considered a fait-accomplis by utilities, regulators, and customers alike. The revolutionary deregulatory program pursued by California and being considered by other states promises to transform they manner that electricity is generated and sold in America. The days of vast regional government monopolies providing electricity are numbered, and Congress may as well recognize the reality that competition, not monopoly, best serves the consumer of electricity or any other good or service in the economy

The Power Marketing Administrations should be marketed in a public stock issue. Economists believe that selling TVA would bring $20 billion to the federal treasury while BPA could sell for around $10 billion. Clearly, the sale of all the Power Marketing Administrations would generate significant revenue. Congress would certainly start out the 103rd Congress right by using those funds and those garnered by selling the national laboratories to retire outstanding federal debt, a significant down-payment that would signal to the American people the end of business as usual in Washington

The Investor’s Business Daily reported on January 5, 1995, that Energy Secretary Hazel O’Leary proposed that the Clinton Administration do just that and sell the Power Marketing Administrations, but her suggestion was rejected by the President. If the Energy Secretary could bring herself to propose such as sale, so can the this Congress

Conclusion

The American people demanded last November that the Congress move to reduce federal spending and the overall size and scope of government. While some cuts are admittedly harder than others, the cuts proposed above are among the easiest targets before the Congress. To paraphrase a former President, if now, when? If not here, where?

The vast majority of the programs under this subcommittee’s purview are unnecessary, wasteful, and counterproductive. The losers under the status quo are the American taxpayer and the environment. The only winners are those corporations that benefit from taxpayer-subsidized R&D or federal energy. It is time to put the public interest above the special interest and pull the plug on the Department of Energy and turn out the lights on the programs overseen by this Subcommittee