Testimony

Recissions of Previously Authorized Budget Authority

Subcommittee on Interior-related Agencies
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 market, not “planned” by government bodies. In fact, the long history of United States oil, gas, and electricity regulation, taxation, and subsidization makes abundantly clear that shortages and energy crisis are engendered by government intervention, not market failure.

Oil and natural gas today are cheap and plentiful, as they almost always have been when not subject to heavy government regulation. 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 Congress should:

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

Eliminate all energy research and development expenditures;

Eliminate all energy conservation programs;

Privatize the Strategic Petroleum Reserve, the Naval Petroleum Reserve, and all federal oil shale reserves;

Privatize the Power Marketing Administrations;

Eliminate the Energy Information Administration; and

Sell federal energy land holdings.

Eliminate the Department of Energy

The first place to begin the dismantling of energy regulation 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. The Department’s responsibilities should not be reshuffled to other agencies; they should be summarily ended.

A centralized federal agency is dangerous because it offers “one stop” central planning. The thousands of pages of regulation that emanated from DOE and its predecessor agencies in the 1970s is testament to the perils of federal bureaucracy. The privatization of energy decision-making, not DOE’s emergency preparedness program, is the nation’s “insurance policy” against any future energy challenge.

Although eliminating DOE as a cabinet department would be helpful, little would ultimately be gained by simply reshuffling program responsibilities from one agency to another. While environmental responsibilities are best handled at the EPA, weapons-related responsibilities should be handled by a smaller, independent, non-Cabinet agency. The rest of DOE’s programming, however, should not be sent hither and yon throughout the federal bureaucracy; they should be eliminated forthwith.

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 is under the impression that allowing taxpayers to keep their own money often-times amounts to a “subsidy,” corporate welfarism is an expensive and egregious burden on the American taxpayer. Perhaps nowhere is this more true than in the DOE budget for energy research and development.

The federal government spends $7.1 billion annually on various research and development programs for the energy industry, a blatant subsidy to an industry more than financially capable to pay for its own such programs. Most of this funding goes to traditional energy industries such as coal, fossil fuels, and nuclear. Moreover, those expenditures have brought very little return to the taxpayer. Virtually every significant advance in energy technology was made by private investment in the private sector — federal research and development undertakings have had little if any real impact on the energy industry (for an excellent overview of the literature regarding the effectiveness of federal research and development spending, see Linda Cohen and Roger Noll, The Technology Pork Barrel (Washington: Brookings Institution) 1991). If those research activities undertaken by the DOE have any merit, let those industries in question pay for it themselves like most other industries are forced to do in a free market economy.

Political favoritism for renewable energy sources (the target of much federal research, development, and production subsidy) is misplaced, particularly since renewable energies each have their own, seldom acknowledged environmental problems, such as avian deaths from electric wind generation, heavy industrial waste from the manufacture of solar equipment, energy inputs that exceed energy outputs from biomass sources, and damaged river habitats from hydropower. If fossil fuels begin to become scarcer, that scarcity will be reflected in rising prices and fuel switching in the marketplace. Government involvement is not necessary.

Market prices, not taxpayer or ratepayer subsidies, should determine America’s fuel choices. Since a price is nothing but a reflection of relative scarcity, it’s axiomatic that if a “green” or “renewable” energy source is more expensive than traditional energy sources, the resources required to “go green” are more scarce than the alternatives.

Energy Conservation

If energy conservation undertakings are warranted — and they often are — then the gains of energy conservation will be reflected in market prices and no subsidy is necessary. If certain energy conservation practices cost more money than they save through conservation, then a subsidy is unwarranted. Either way, there is no compelling need for conservation subsidies. They invariably do more economic harm than good. The federal taxpayer is left holding the tab — nearly $1 billion dollars in 1995.

It is important to keep in mind that energy is simply one of several economic inputs, such as labor, capital, and other natural resources. Often times, it makes economic sense to substitute one input for another. Today, for example, energy is often cheaper than labor or capital, and it makes sense for manufacturers to intensify energy use and substitute that input for another. This is not “wasteful,” but is instead a conservation of resources.

America, despite popular opinion to the contrary, is one of the most energy efficient nations in the world, faces no prospects for energy shortages in the future, and is awash in cheap and abundant energy. Moreover, there are no identifiable “market failures” for energy conservation subsidies to correct. Although conservation advocates argue that subsidies are necessary to offset subsidies for energy production, the best course for the Congress to take is to eliminate all the subsidies in question and not to erect another set to offset other ill-advised economic policies (for a more complete discussion of energy conservation, see Jerry Taylor, “Energy Conservation: The Case Against Coercion, Policy Analysis no. 189, Cato Institute, March 9, 1993).

Federal Energy Assets

The dual attraction of selling federal energy assets to the private sector is the accrual of billions of Treasury dollars that can be used for deficit reduction and the significant stimulus that such a policy would provide to the energy economy. Accordingly, the Congress should sell its five federal power marketing agencies, four naval petroleum reserves, three oil shale reserves, and all DOE research and development laboratories.

All of these entities and programs should be privately reorganized. Power marketing agencies such as the Bonneville Power Administration are poorly managed at taxpayer expense. They historically have caused serious environmental damage by utterly destroying river ecosystems and often generate more pollution than the industry standard. Moreover, their mission of subsidizing electricity usage only serves to encourage inefficient energy consumption (see, for example, David Shapiro, Generating Failure: Public Power Policy in the Northwest (Lanham, MD: University Press of America / Cato Institute) 1989). There is simply no systemic reason why certain regions of the country today cannot operate under privately-owned power authorities. Sale of those entities would save taxpayers $4.2 billion annually in operating expenditures plus whatever they would sell for in the private market.

The federal energy laboratories are blatant subsidies to an energy industry that can “free ride” on taxpayer-funded research and development costs that most other industries rightly pay for themselves. Even Energy Secretary Hazel O’Leary has suggested to the administration that DOE’s five power marketing authorities should be sold-off to the private sector (“Can Energy Department Wither Away?” Investor’s Business Daily, January 5, 1995, p.1). An new, independent agency may want to continue contracting with those laboratories on the matter of federal nuclear-related questions, but the rest of the federal funding directed to those entities should be eliminated.

The Strategic Petroleum Reserve (SPR) has proven to be an abject failure, and its problems have only mounted while it has waited for the energy crisis that has not come — and will not come without a reimposition of price and allocation regulation.

Taxpayers are burdened with billions of dollars of net booked cost in excess of current market value and face expensive upgrades to maintain its withdrawal readiness. It is time to privatize or liquidate the stockpile (currently 591 million barrels) and all related facilities. Not only would this benefit the Treasury with billions in revenue, it would promote good energy policy across the board. Without the SPR’s safety net, government officials would be less tempted to interfere with market prices and allocation. Absent the long shadow cast by the reserve, corporate entities would be encourage to provide for their own stockpiles without fear of being drowned by a flood of government oil (and collapsing prices) in the event large withdrawals were made. Yet even private stockpiles are of little value in today’s oil market, where futures contracts accomplish what stockpiles once did without the sunken costs.

The Naval Petroleum Reserves and various federal oil shale reserves share all the problems of the SPR and should likewise be sold to the private sector.

Public Energy Holdings

The domestic energy industry operates in a regulatory strait-jacket that prohibits the commercialization of vast energy holdings, micromanages commercial practices, and discourages market entry. The rationales for these anti-competitive practices are discredited relics of the progressive era; that government planners are better land managers than private stewards and that energy corporations are natural monopolies that must be overseen by political bodies. It is time to jettison these myths.

The United States petroleum industry has steadily lost market share to foreign oil suppliers. While this partly reflects the fact that the lower-48 states are a very mature oil province, it also is because drilling and production from the most promising regions of the country — the Arctic National Wildlife Refuge (ANWR) and other Alaskan areas, the outer continental shelf, and Point Arguello off California — have been blocked by Congress. Privatizing oil and gas lands would provide a tremendous windfall to the U.S. Treasury, make the much-maligned “high cost” U.S. energy industry more globally competitive, and provide a stimulus to the American economy.

Federal land leasing for oil and gas development has been regulated by the Interior Department since the first claim was made in 1880. Not surprisingly, politicization has hallmarked public land development since. Yet economics, not politics, should dictate how land is used, and those decisions should be made by private land owners, not absentee government planner-landlords. Congress should do more than simply change the rules about how certain public lands like ANWR are used. It should get out of the business of owning commercially valuable real estate altogether and sell those lands to the public. If Boris Yeltsin can do it, so can the United States Congress. Fossil energy on federal lands is worth approximately $420 billion in today’s market. Even in land sales could garner only half of that, $210 billion would be a significant down-payment on the national debt.

Conclusion

Federal energy policy has always been based upon a series of dubious rationales. One is that energy is too important to be left to market forces alone. The truth, however, is that the more important an industry, the more imperative that it be left in the hands of private management. Another fallacy is that energy generation and distribution is a natural monopoly that necessitates strict government regulation. Economists today recognize that “government failure” is a far more serious problem than “market failure.” Monopoly regulation has shown itself in most circumstances to be even more damaging to consumer interests than worst-case scenarios of unrestrained quasi-monopoly practice. Finally, energy security concerns haunt much government regulatory activity, despite the fact that the world is awash with cheap energy and even worst-case distant supply events dictate market management rather than political planning.

In sum, there is no reason to treat energy any differently than any other commodity or service in the economy. Allowing the invisible hand of the marketplace the authority to allocate energy resources would provide massive windfalls to the federal Treasury, reinvigorate the American economy, and institutionalize the plentiful and inexpensive energy for generations to come.

More directly for this committee, $14 billion in annual federal outlays could be eliminated and hundreds of billions of dollars could be invested in retiring the national debt. That would be a good fiscal start for any Congress, and an appropriate one for the 104th.