Restructuring the Department of Energy

Subcommittee on Government Reform and Oversight
Committee on Government Reform and Oversight
United States House of Representatives

Mr. Chairman and members of the committee, thank you for inviting me to appear here today to offer my views on proposals to restructure the Department of Energy. In brief, I recommend that the Congress.

  • Eliminate the U.S. Department of Energy;
  • Create the National Nuclear Weapons Agency (NNWA) under the direction of a sub-cabinet civilian official to supervise the nuclear weapons program, civilian radioactive waste, and weapons cleanup undertakings. The NNWA should operate as an independent subcabinet agency under the budget and weapons program review of the U.S. Department of Defense (DOD);
  • Renegotiate nuclear weapons cleanup programs assumed by the NNWA to reflect prioritization of containment and neutralization of risk rather than removal and return of sites to pristine conditions;
  • Privatize all laboratories managed by DOE save for two of the three weapons laboratories;
  • Eliminate the direct funding for all research and development programs overseen by DOE;
  • Sell all of the assets held by the Power Marketing Administrations to the highest bidder;
  • Sell the Strategic Petroleum Reserve, the Naval Petroleum Reserve, and all oil shale reserves;
  • Eliminate all energy conservation and renewable fuel subsidies;
  • Eliminate the Energy Information Administration, the Energy Regulatory Administration, the Home Weatherization Program, and all university and science education programs managed by DOE.

A back-of-the-envelope calculation finds that the above agenda would, when fully carried out, lead to annual savings of approximately $10 billion and a one-time gain of approximately $25 billion through asset sales that could be used to reduce the national debt.

The Department of Energy in Brief

The DOE is a large department by any measure. It employs 20,000 federal bureaucrats and has a budget of $17.5 billion per year. Another 150,000 workers are employed at DOE’s national laboratories, cleanup sites, and other facilities.

The department is actually more of a “bomb factory” than anything else. Fully 67 percent of its budget — $11.7 billion - - is directed at nuclear weapon or nuclear cleanup activities. Less than 17 percent of its budget — $3.1 billion — is actually related to energy activities. The remaining 15 percent of its budget — $2.7 billion — is devoted to general scientific research.

Even so, DOE’s management of the power marketing administrations, uranium enrichment activities, and oil and gas holdings provides total revenues of $5.3 billion to the federal government ($1.5 billion in net “profits”). If DOE’s nondefense activities were transferred to a private corporation, that corporation would number 177 on the Forbes list of the 500 largest corporations in America.

DOE’s current mission statement, drafted during two meetings in 1994 involving more than 90 people, is “In partnership with customers,” to:

  • “contribute to the nation’s welfare”;
  • “provide technical information & scientific & educational foundation”;
  • “achieve efficiency in energy, diversity in energy sources, and a more productive and competitive economy”;
  • “improve environmental quality”; and to
  • “secure national defense.”

As noted by reporter Timothy Noah of The Wall Street Journal, the above statement “speaks eloquently, if inadvertently, of the agency’s peculiarly mismatched goals, many of which overlap with those of other federal agencies.”(1)

It in order to safeguard the future of the nation, this Congress must cut $200 billion of annual federal appropriations. When examining federal programs for elimination, the most important questions that should be asked are, in descending order of importance:

  • Is the program in question a constitutional exercise of government authority?
  • Can the objectives of the program in question be met by nongovernmental entities? In other words, if a particular program were eliminated, would market actors prove capable of achieving that program’s goals without government assistance?
  • Is the program’s original mission obsolete or still relevant?
  • Does the program’s societal benefits exceed its record of societal costs?

While the latter two questions will be addressed directly for each program below, the former tests are certainly applicable for the Department as a whole.

Constitutional Questions

As was the Supreme Court recently affirmed in United States vs. Lopez, the Constitution establishes a federal government of enumerated and thus limited powers. Nowhere in the Constitution is the government expressly or even implicitly authorized to “provide technical information” or to “achieve energy efficiency or diversity.” More generally, as the Lopez decision made clear, the Constitution establishes general federal police power. Apart from the explicit power of the federal government over federal territory, therefore, any police power there may be to regulate environmental affairs belongs to the states, as the 10th Amendment indicates.

A strict and proper reading of the Constitution thus draws into question much of DOE’s mission. The traditional arguments used to justify those undertakings is hardly tenable. The General Welfare clause is not properly construed as allowing government to do anything it likes as long as a majority of Congress thinks it “good.” Otherwise, the Founders would hardly have bothered writing a Constitution of enumerated powers in the first place. As Madison, Jefferson, and others made clear, the General Welfare Clause was meant to constrain the exercise of enumerated powers, not to be itself the source of some general power to spend for the general welfare.(2) The Commerce Clause, likewise, was meant to empower the federal government to preempt state protectionism and little more.(3) The tortured legal acrobatics that were employed to defend the federal law against firearms in the proximity of local schools (acrobatics that defy common sense even according to the Washington Post and were explicitly rejected in Lopez) are no more convincing than the tortured justification for energy efficiency investments, federal petroleum fields, electricity generations facilities, or research and development programs.

Program Necessity

DOE’s energy mission is completely unnecessary given that most of its objectives are not only met in the marketplace but can be better met by private parties. Technical, economic, and scientific information, for instance, is routinely generated and distributed by private agents (usually far more accurately as well — recall DOE’s estimate in 1980 that oil would cost $41 per barrel in 1979 dollars by 1990, more than triple today’s price(4)). No one can seriously argue that, were it not for the DOE, the energy industry would be flying blind in the marketplace. Nor can anyone seriously argue that, were it not for government subsidy, private corporations would cease to invest in technological research. Market actors also have every incentive to use energy as efficiently as possible — does anybody seriously contend that government bureaucrats know better than businessmen or consumers how to do anything more efficiently? The proper mix of energy sources is best determined by entrepreneurs directed by market prices. Government’s attempt at “diversifying” energy sources led it in the past, for example, to ban natural gas for electricity generation in 1978 on the theory that it was too scarce (although now it is generally deemed by the very same government to be the energy choice of the future), the boondoggle Synfuels program, and quixotic advocacy of extremely expensive and operationally unreliable renewable fuels. Finally, “productive and competitive economies” are the creation of free markets, not government bureaucracies, and environmental and defense undertakings are best managed by environmental and/or defense agencies, not energy departments.

Energy is no different from any other commodity in the marketplace. Energy production and distribution is better directed by market forces than by government planners and bureaucrats. There is no more reason for a Department of Energy than there is for a Department of Automobiles.

The existence of DOE is generally defended, however, on the grounds that (1) energy is far too important to the economy not to be managed somehow by government agents, (2) the Department is necessary in the event that some new energy crisis were to occur, and (3) that the Department is necessary (in the words of President Jimmy Carter), “to alleviate the consequences of the inevitable shortages of oil and gas and other energy supplies.”

Regarding the first argument, the more important an industry, the more important it is to keep it in the hands of the free market. It is simply unreasonable in light of the economic events of the last century to believe that government is better able to “manage” markets than are the millions of individual actors in the marketplace. Moreover, if an industry’s importance to the nation were to qualify it for a seat at the cabinet table, then one could similarly argue that there ought to be a Telecommunications Department, a Computer Software Department, an Entertainment Department, or a Department of Moral Values.

Popular opinion to the contrary, the impact of energy on the economy is generally overstated. Oil purchases, for example, account for only 2 percent of GNP. Recent macroeconomic analysis finds that the 1974 energy crisis, by means of perspective, only led to a 0.35 percent reduction in Gross National Product during the recession.(5)

Regarding the second argument, the federal government has repeatedly mangled the job of managing energy crisis. For example, the gasoline lines and shortages of 1974 and 1979 were caused not by shortages (global supplies were only reduced by 3 percent and 6 percent respectively) but by wage and price controls adopted in 1972 and the 1975 Petroleum Allocation Act. When the 1990 Kuwait crisis arose, global supplies were initially cut by 5 percent but, without such federal meddling, prices stabilized and no shortages occurred.(6)

In the event of a new energy crisis, the Congress would be best advised to manage energy supply, demand, and fuel diversity by allowing prices to freely guide the invisible hand of the marketplace. Government planners simply do not have a very good track record when it comes to the centralized allocation of resources. Indeed, maintaining a cabinet-level energy department is risky given that it provides a ready structure for the reintroduction of federal energy market interventions and a perfect command post for some future “Energy Czar” to once again punish energy producers and consumers.

Finally, there is no logical reason why increased energy scarcity (note, however, that energy supplies — whether measured by proven reserves, ultimately recoverable stock, or by price trends — have been increasing, not decreasing(7)) should lead us to abandon the free market and turn to government resource planning. Markets may theoretically fail here or there, but the academic literature on the subject clearly establishes that markets excel at efficiently distributing scarce resources.(8) That phenomenon is compounded in the energy market by the existence of the OPEC semi-cartel (“semi” because the OPEC cartel is not a particularly effective monopoly(9)). In OPEC nations, where production costs are far below market price and depletion effects are small, underexploitation of reserves is the norm given their desire to monopolize. Thus, existing energy markets are clearly characterized by, if anything, overcompensation — not undercompensation — for energy scarcity.

The above views might be rare in Washington, but they are orthodoxy among serious economists in academia. As noted by Dr. Robert Gordon, professor of Mineral Economics at Pennsylvania State University and recent recipient of the International Association of Energy Economists’ Outstanding Contributions Award, “the dominant theme of academic writings is that governments have done more harm than good in energy,” a view “almost universally supported by academic energy economists, whatever their political outlook.”(10) Professor Colin Robinson, the British Institute of Energy Economics “1993 Energy Economist of the Year” and fellow of London’s Institute of Economic Affairs, likewise observes that “public choice theorists and Chicago-school empirical researchers have so clearly demonstrated the serious problems inherent in government action that the traditional deus ex machina case which used to be made by old- style welfare economists (that government could always be brought in to set to rights the mess markets were making) is surely untenable.”(11) And America’s dean of energy economics, Morris Adelman of the Massachusetts Institute of Technology, has long held that the federal government should get out of the energy business.

The Military/Industrial Complex

Nuclear weapons production, maintenance and cleanup programs account for the bulk of DOE spending. The former obligation — $4.5 billion annually or 26 percent of the Department’s budget — was historically separated from the Department of Defense out of concern for independent civilian control of nuclear weapons production. The latter obligation — $7.2 billion annually or 41 percent of the entire Department’s budget — largely stemmed from the mismanagement of the former. The national laboratories, the progeny of the Manhattan Project, were originally dedicated to nuclear weapons research, testing, and development, although other labs were put into place up until 1977 to specialize in various research and development activities.

Although the stockpile maintenance and cleanup operations certainly need to be continued, the agency responsible for those activities hardly needs to sit at the President’s cabinet table. Nor is it there any compelling reason for those activities to be under the administrative umbrella of an “energy” department, since “energy” has virtually nothing to do with either administrative function.

It makes far more administrative sense for those activities to be assumed by the Department of Defense. A National Nuclear Weapons Agency (NNWA) should thus be established under the direction of a sub-cabinet civilian official at DOD to supervise the nuclear weapons program and related cleanup undertakings. The weapons-related activities of Los Alamo, Lawrence Livermore, and Sandia should be reduced to reflect post-cold war realities and consolidated within two of the three aforementioned national laboratories and placed under the direction of the NNWA.

Turning the weapons-related programming over to DOD makes sense for a number of reasons:

  • defense-related activities belong to the agency and budget responsible for national defense;
  • submerging those programs in an existing Department helps protect against bureaucratic “mission creep” as was the case at the old Atomic Energy Commission, the predecessor to DOE;
  • merging those weapons producers with the weapons customers help ensure coordination of national strategy; and
  • such an administrative structure more honestly tells the American people exactly how much we are paying for our national defense instead of scattering such expenditures throughout the budget.

Some will undoubtedly decry giving DOD authority over the nuclear weapons program out of concern for civilian control of such weapons of mass destruction. Yet DOD itself must have a civilian secretary and the NNWA should likewise be required to have a civilian secretary. Although such concerns are understandable, the military is already theoretically capable of marshalling operational warheads currently in missile silos, nuclear submarines, and long range strategic bombers. Compared to those tools, authority over weapons design, engineering, and stockpile maintenance seems rather benign.

Environmental Cleanup

Nuclear weapons facilities such as Rocky Flats, Colorado and Hanford, Washington, are among the most contaminated environmental sites in America and are expected to take 30 years or more to remediate. Current cleanup standards negotiated by DOE with state and local communities establish rigorous protocols based on the federal Superfund statute that are aimed at returning sites to near pristine conditions. The U.S. General Accounting Office believes that “the effort to clean up federal hazardous waste sites is likely to be among the costliest public works projects attempted by government.”(12) Estimates of the ultimate cost of such cleanups vary dramatically, but even the most conservative estimate of $200 billion rivals the Savings & Loan bailout. Others peg ultimate cleanup costs as high as $1 trillion.(13)

While cleaning up those sites is certainly a federal responsibility, there are two fundamental problems with DOE’s cleanup effort. First, the Department’s environmental remediation projects are hamstrung by gross administrative inefficiencies. Similar private section remediation projects cost 32 percent less and 18-50 percent less time to complete, while other government agencies undertake equivalent cleanup projects at 15 percent less the final costs incurred by DOE.(14) One of the reasons for the cost differential, according to the Congressional Budget Office, is that “at least 40 percent of the cleanup program’s funds are devoted to administrative and support activities, a level that many reviewers have considered excessive … [they] represent a proportion that is significantly higher than the share spent by some other government agencies that may be forming similar tasks.”(15)

Second, the cleanup standards adopted by the Department are unachievable and thus inordinantly costly. Although this is widely understood in the scientific community, the point was perhaps best made in a report issued three months ago by an advisory board appointed by DOE to study the National Laboratories:

Probably the most important reason behind the slow pace of assessment and cleanup is the low quality of science and technology that is being applied in the field. Many of the methods, such as “pump and treat” for contaminated groundwater remediation, cannot provide the claimed benefits. There is a lack of realization that many — and most experts believe most — existing remediation approaches are doomed to technical failure. Others would require unacceptable expenditures and much extended time to reach their stated objectives.(16)

Nuclear weapons cleanup programs assumed by the NNWA should be renegotiated to reflect prioritization of containment and neutralization of risk rather than removal and return of sites to pristine conditions. In fact, most of the cost associated with DOE cleanups stems from the fact that an attempt is being made to ensure that future residential use of a site like Rocky Flats would pose no risk whatsoever. Simply protecting adjacent landowners from exposure to risks from a site would just as effectively prevent human health risks and do so in a far less costly manner. Most environmental engineers believe that such a change in cleanup protocols on federal sites would cut total remediation costs by at least 50 percent.(17)

The fact of the matter is that current standards for cleanup of nuclear sites negotiated by DOE are, even is desirable, untenable both economically and politically. Unless those agreements are renegotiated, sites will simply remain undealt with given the budgetary restrictions upon the Congress. Moving to a standard of risk neutralization allows far more sites to be cleaned up and correspondingly speedier health protection for the general public.

Finally, the director of the NNWA should be empowered to negotiate pilot remediation programs such as community cleanup partnerships and dutch auctions with private parties. Such auctions entail the federal government asking private companies to bid on how much money the government would have to pay them to assume title and liability for contaminated federal land. Companies would base their bids on how cost effectively they could neutralize a site’s risk to others, the amount of liability insurance necessary for protection in courts, and an appropriate profit margin for their efforts. In short, such a system would harness the creativity and inventiveness of the private sector while still holding them liable for harm. Moreover, dutch auctions would, in all likelihood, dramatically speed the cleanup efforts at hundreds of sites.

National Laboratories

DOE maintains 10 major laboratories and 18 minor laboratories with a joint annual budget of $6 billion and a 50,000 employee payroll. Although funded by the federal government, most are managed by private corporations or universities. The national laboratories today are no longer focussed exclusively on weapons programming, but have instead branched out to include environmental, commercial, and various other research activities now that the cold war is over. For example, 40 years ago, 90 percent of Lawrence Livermore’s budget was devoted to defense activities. Today, only 40 percent of their budget is so targeted.(18)

The most compelling analysis yet presented regarding the national laboratories is found in the February, 1995 Galvin Report, the product of a distinguished corporate/academic task force appointed by the Secretary of Energy. Although the Report was more inclined to support certain federal research and development activities than was warranted (more on this later), it trumpeted “one critical finding” as “so much more fundamental than we anticipated that we could not in good conscience ignore it. The principle behind that finding is: government ownership and operation of these laboratories does not work well.”(19) The prescription?

The principle organizational recommendation of this Task Force is that the laboratories be as close to corporatized as is imaginable. We are convinced that simply fine tuning a policy or a mission, a project, or certain administrative functions will produce minimal benefits at best.(20)

Accordingly, the Congress should turn over each laboratory fee simple to the management agent currently contracted by the federal government to operate the facility. That agent would then retain full ownership rights to the laboratory and be free to operate it as they wish, contracting with public and private entities in the free market. The federal government would retain liability over any environmental contamination at the site and would be responsible — through the NNWA — for remediating any environmental contamination that threatened public health. As noted by the Galvin Report:

We suggest that the country must try one or more concepts that are radically new in order to revitalize the laboratories and to achieve significant improvements. If some parts of a bold solution were to prove to be not as beneficial as this Task Force is confident that they would be, that unto itself should not be a matter of concern. The laboratories and the country would still be better off than they otherwise will be from the continued repetition of federal governing policies.(21)

Indeed, the bill of particulars presented in the Report are can be boiled down to the finding that “The national laboratory system is oversized for its current mission assignments. This appears to be the result of inefficiencies that stem from the current management practices of the laboratories and the DOE; excess capacity in areas associated with nuclear weapons design and development; and political considerations which have inhibited downsizing and laboratory restructuring.”(22) The Report further remarked that “Numerous instances of poor DOE regulatory and management practices have come to the attention of all members of the Task Force during its investigation of the national laboratories. The system has been tried long enough; the evidence is in.”(23)

The vision offered for the labs by the Galvin Report makes sense. “The government should be the customer of the laboratories,” says the Report. “World-class commercial customers do not tell their suppliers how to do things. They simply buy a result for a given price. World-class commercial suppliers are not audited by their customers.”(24)

Even if the same level of public research and development funding is directed through the labs after privatization, the Galvin Report conservatively estimates that 20 percent of current expenditures — $1.2 billion annually — could be saved through reorganization.(25)

The Galvin Report, of course, is not the first such warning about the deteriorating state of the national labs. A long line of U.S. General Accounting Office and Congressional Budget Office reports have similarly concluded that the labs are largely a program in search of a rationale, having lacked for years a coherent or definable mission and suffering greatly from inept management from DOE.(26) Even Dr. Eric Bloch, former director of the National Science Foundation and currently a fellow at the Council on Competitiveness, agrees that, while much of their research is needed, federal ownership of the labs leads to mismanagement, politicization, and scientific atrophy.(27)

Research and Development

DOE is one of the premier research and development agency in the federal government. Approximately $5.8 billion was spent by the DOE on research and development in 1995: $3.2 billion for “applied” energy supply research and development; $1.4 billion for “basic” science research and development (generally high energy and nuclear physics), $490 million for energy conservation research and development; $430 million for fossil energy research and development; and $288 million for the Clean Coal Technology Program. A large chunk of that funding is appropriated in the form of grants and partnerships with private industry in a wide range of industrial areas. Most of it is funnelled through the national laboratory system where the actual work is performed.

It should be noted that the Constitution grants Congress the power to “promote the progress of science and useful arts,” but expressly detailed in Article I, Section 8, the means by which it may do so — “by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

Nevertheless, over the past four decades the federal government has pored $17 billion into general nondefense nuclear science and $63 billion into general energy research and development.(28) “Priority for federal funding of R&D,” observes Dr. Maxine Savitz, “has been given to projects where the risks are so great (but potential awards are so great), the time for commercialization is so long, or potential returns based on present energy price are so low that private investment alone cannot rationally be expected to be adequate.”(29) DOE further justifies those expenditures on the basis that:

Private firms are finding it increasingly difficult to recoup their R&D costs by appropriating exclusively to themselves the true benefits of the R&D. In today’s highly competitive global market, technical secrets are short-lived and too easily stolen, scientists are hired away, and inventions are slightly modified in order to circumvent intellectual property rights. More fundamentally, the R&D itself is often too challenging, requiring large interdisciplinary teams of scientists, working year after year on expensive and unique laboratory equipment. Finally, the structure of certain industries is often to fragmented, or the firms to small, to mount the sustained R&D campaign necessary for success.(30)

Recently, Energy Secretary Hazel O’Leary has further argued that federal energy research and development is crucial for America’s international competitiveness. “All of the U.S.’s competitors have industrial policies,” she told House Appropriations Committee on January 19, 1995. “If the U.S. is to remain competitive, it too must have an industrial policy. This can be done either through a direct investment policy or a taxing policy … The government must aid the private sector in using jointly developed technologies to capture these markets.” After noting that other nations support energy research and development, she asked, “Do we permit some other nation to beat us?”(31)

In essence, the charge is that, in the field of research and development anyway, we find significant, systemic, and fundamental market failure. Although some of the above observations have some merit, many do not. For example, when markets find that a particular research activity involves high risk and minimal return due to low energy prices, the market does not “fail” by not investing in the project; it operates rationally. The fact that employees are free agents who can sell their services to the highest or most satisfactory bidder likewise is not a market failure. If it were, it would be a wonder that the market could operate at all. Complex, long range undertakings are routinely accomplished by the private sector in every other industrial endeavor and are certainly not beyond the capability of universities or even Corporate America. Finally, small companies in fragmented industries are not necessarily disadvantaged in the race for new technologies and developments. In fact, most analysts recognize that it is precisely those firms that produce the most valuable new technologies and radical ideas that advance the march of science. Moreover, joint ventures and industrial research consortiums are certainly capable of overcoming the problem where it might exist.

The proper comparison, however, is not between an imperfect market and a theoretically perfect government, since postulating textbook perfection on the part of government agents is just as unrealistic as doing so for market actors. The proper comparison is between market failure and government failure. And in order to bring the R&D debate back to reality, there are several “government failures” which we might note.

First, many of the imperfections noted by DOE in the private sector apply as much if not more so to federal R&D. Long term government projects are difficult to sustain politically given the short time horizons of legislators forced to face constant elections and thus quick results. Government finds that doing even simple thinks like growing crops and delivering mail a constant challenge. It’s record at accomplishing complex tasks is even more spotty, as the record of NASA, the Strategic Defense Initiative, and various large-scale projects like the Clinch River Breeder Reactor and the Superconducting Supercollider can attest. Federal employees and contractors are scarcely the indentured servants DOE implies are necessary to make a market run efficiently. Governmental undertakings are also plagued by duplication, fragmentation, contradictory efforts, and lack of coordination to say the least. And finally, the technological “breakthroughs” achieved in any single nation are quickly spread throughout the globe just as those breakthroughs can quickly be spread from one corporate competitor to another. “Beating” the Japanese to new solar technology applications, for example, would mean little when Japanese industry has demonstrated time and again its ability to be first in bringing to market technological breakthroughs achieved elsewhere.

Second, private actors are motivated by the pursuit of profit and are thus constantly driven to efficiently meet the demands of consumers. Public officials, as noted by nobel laureate James Buchanan — founder of the “public choice” school of political economics — are driven by an entirely different set of incentives; budget maximization, expansion of regulatory power, job security, etc.(32) As noted by Milton Friedman, “People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention.”(33)

This is because government tends to decide 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 once remarked, “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.”(34)

Third, the idea that basic science (supposedly underinvested in by the private sector and corrected by federal appropriations) is a major catalyst in industrial innovation is simply outdated. Rather, as John Deutch of M.I.T. explains, “The potential contribution of the national laboratories to improve the competitiveness of U.S. commercial industry is oversold. The principle barriers to improving industrial productivity in U.S. industry are not due to our inability to generate new technology, but rather to our inability to apply existing technology and to produce quality products.”(35)

Fourth, as noted by the Galvin Report:

To be effective, near-term R&D work must take place in an environment rich in interactions with users and customers. Market-based influence, direction, and control are critical to success … The more distant the laboratories are from the marketplace, the more remote the likelihood that they will have something useful to contribute to such activities.”(36)

Clearly, Congressional appropriators or bureaucratic servants, isolated as they are from the marketplace and the incredibly detailed and varied knowledge held by millions of private agents, are incapable of intelligently directing societal resources.(37)

Finally, the portfolio of federal energy R&D investments is directed, according to the DOE, at supporting “high-risk, precompetitive research,” which results in a “high-risk portfolio of capital investments in the Nation’s future.”(38) It should not surprise us when government’s “high-risk capital investments” don’t pan out — they are, after all, risky by definition. Government officials, however, are not as worried about losing the money of their stockholders — taxpayers — as is Corporate America.

The likelihood of systemic “government” failure in the realm of energy research and development is not simply a matter of theory. It is a clear matter of record.

Perhaps the most serious examination of federal R&D programs — conducted for the Brookings Institution by economists Linda Cohen of the University of California at Irvine and Roger Noll of Stanford University — found that energy R&D has been an abject failure and nothing but a pork barrel for political gain. “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.”(39)

Other dispassionate observers note that, despite the occasional R&D success, DOE energy research expenditures fail to pay for themselves. Simply put, if the energy research and development investments made by the DOE were made by a private corporation, that company would have gone bankrupt long ago. Given the dramatic sums invested in energy R&D over the past four decades, the government has little to show for its effort save for light water nuclear reactor technology, and even that breakthrough has yet to show significant commercial gain. Although a small success here or there can obviously be demonstrated, the commercial returns on the $80 billion spent in the last 40 years don’t even come close to matching the sums allocated. As the Galvin Commission reported:

The Task Force learned of significant examples of laboratory-developed technology being usefully transferred into industry and of the laboratories providing useful technical services to industry. However, the laboratories are not now, nor will they become, cornucopias of relevant technology for a broad range of industries. A significant fraction of the laboratories’ industrial competitiveness activities concern technologies which are of less than primary importance to their industrial collaborators and/or which these partners could obtain from other sources. There are only a relatively few instances in which the laboratories have technology that is vital to industry and that is uniquely available at the laboratories … [such R&D investments] are unlikely to produce results that will benefit either the agency’s industrial partners or the public in the long run … While there are instances of successful “by-product” R&D, the historical evidence demonstrates that such events are statistically improbable.(40)

Federal energy research and development expenditures should thus be immediately eliminated. Any research needs the government might have to accomplish otherwise constitutional ends — such as the cleanup of federal facilities — should be bid out to private sector entities under the direction of the newly created National Nuclear Weapons Agency at the Department of Defense.

Power Marketing Administrations

In 1994, DOE sold $2.9 billion worth of electric power, a total of 8 percent of the nation’s annual power production. The facilities that generate that power are mostly dams; Hoover, Grand Coulee, and 129 other smaller dams operated by the Army Corps of Engineers and the Bureau of Reclamation. DOE’s five power marketing administrations — the agencies that deliver public power wholesale (with the exception of the Bonneville Power Administration, which also sells power retail) to publicly owned utilities and rural power cooperatives — are together as large as major private power companies. Baltimore Gas and Electric’s sales last year, for example, were $2.8 billion, while Boston Edison’s were $1.5 billion, about half those of power marketing administrations’.

The PMAs were originally justified on two premises; that monopoly electricity corporations would not find enough profit in electrifying rural America and thus government must step in and provide the power; and second, that government could provide power cheaper to consumers because it could do so “at cost” without worrying about a capital costs or profit margins. The former premise is now irrelevant. Rural America is thoroughly electrified and would remain so with or without the PMAs. Moreover, 60 percent of rural America is already served by investor-owned utilities.(41) The latter premise was a socialist chimera. Public electricity generation has proven to be far more costly than private power.(42)

  • The five power marketing administrations overseen by DOE vary in size and significance. Four of them are relatively small and are targeted for privatization by the Clinton administration:
  • The Alaskan Power Administration (APA) delivers power from only two public power plants with a total capacity of 108 megawatts. APA supplies 8 percent of the market in the region served with annual power sales of only $9 million;
  • The Southwestern Power Administration (SWPA) delivers power from 24 public power plants with a total capacity of 2,200 megawatts. SWPA supplies 4 percent of the market in the region served with annual power sales of $103 million;
  • The Southeastern Power Administration (SEPA) delivers power from 22 public power plants with a total capacity of just over 3,000 megawatts. SEPA supplies 2 percent of the market in the region served with annual power sales of $155 million; and
  • The Western Area Power Administration (WAPA) delivers power from 53 powerplants with a total capacity of over 10,000 megawatts. WAPA supplies 9 percent of the market in the region served with annual power sales of $758 million.

The granddaddy of them all, however, is the Bonneville Power Administration (BPA), which delivers energy from 30 public power plants with a total capacity of 22,000 megawatts. BPA supplies 65 percent of the market in the region served with annual power sales of $1.9 billion. The Clinton administration proposes to “corporatize” BPA along the lines of the Tennessee Valley Authority.

Defenders of the PMAs claim that they do not cost taxpayers money. In fact, they argue that PMAs provide an infusion of cash to the federal treasury and that any sale of those assets would mean a net loss to the taxpayer. That argument, however, is spurious on several grounds. First, PMAs generally operate free of local, state, and federal taxes, and the opportunity cost of maintaining public ownership in not figured into the previous calculations. Second, PMAs are not required to amortize their federal loans (received at below market interest rates in the first place at a cost of $1.2 billion to the treasury(43)) on schedule and can extend the term of repayment for years. Old debt with very low interest rates have thus been kept on the books for decades after it would have been normally amortized and paid in full by a private company. Third, PMAs sell power from 100 percent to 300 percent below the prevailing market price in the regions they serve, and that lost revenue — calculated at $2 billion by DOE — is also ignored in the above argument.(44) Fourth, the PMAs that report net revenues due so by not employing generally accepted accounting principles to depreciate their property. A brief review by Deloitte & Touche in January 1995 found that WAPA, for example, was not operating in the black as was claimed but actually lost $250 million in 1993 and $130 million in 1992. Finally, a congressional report titled “Taking the Taxpayer: Public Subsidies for Natural Resource Development” (known general as the “Miller Report”) found that PMAs receive certain site-specific benefits and interagency subsidies that cost the U.S. taxpayer additional money not considered by proponents.

All five of the PMAs should be privatized by asset divestiture and sold to the highest bidder by an Asset Privatization Working Group under the management of the Treasury Department.(45) The divested assets should include the right to market power produced at federal facilities (without any price constraint) and the generation equipment associated with energy production at those facilities. The privatization of PMAs should grandfather in existing operating conditions at hydroelectric generating facilities including minimum flows from the dams and provide a “preference” to current customers that relieves them from current contract requirements if they so desire. Sale of the four PMAs proposed by the Clinton administration are estimated to bring in between $3.4 billion (according to the administration) and $9 billion (according to the EOP Group(46)) to the federal treasury, with Bonneville likely to bring in approximately $9 billion.(47)

It is occasionally argued that, however attractive selling the PMAs might be, there are no buyers for the administrations, that some PMAs like BPA have a negative net value, and no market exists for most of the public generation facilities that provide the power. Nothing could be further from the truth. PMAs are commercial businesses with marketable assets that could readily be sold. A variety of investors — including independent power producers, municipal utilities, investor-owned utilities — are already lobbying for the right to purchase PMA assets, prima facia evidence of a ready market. If power marketing rights were sold with the same restriction on wholesale prices, it might indeed be the case that selling the PMAs would bring in scant revenue to the treasury. Allowing power to be sold at market rates, however, increases the value of those assets tremendously. Finally, much of the debt at Bonneville is held not by the PMA but by the WPPSS and would not greatly affect the value of Bonneville’s assets.

Although there might not be a market for the largest federal dams, such as Hoover or Grand Coulee (although that remains to be seen), there are more than a hundred smaller dams that would find ready buyers. More than 2,000 hydropower facilities are owned by the private sector (compared to 172 facilities owned by the public) and 56 percent of the nation’s hydropower is generated by private companies. Nor are those facilities necessarily small generators. The Conowingo Dam, a 500 megawatt facility in Maryland’s Susquhanna River, and the Brownlee Dam, a 585 megawatt facility on the Snake River, are both owned by non-federal power companies.

Indeed, current PMA customers complain that the Army Corps of Engineers and the Bureau of Reclamation are failing to maintain power facilities or upgrade them. Both organizations are under orders not to expand power facilities so that federal dollars can be used for other priorities. Sale of those facilities would mobilize private capital to fill this need.

The real argument against privatization, however, rests on the charge that selling public power at market rates would increase electricity bills and amount to a “hidden tax increase” on consumers. But even if true, the removal of a subsidy does not constitute a tax increase. Moreover, only 6 percent of America’s consumers receive their power from federal facilities, so the number of power customers effected of any rate increase would be rather small.

Nonetheless, most retail customers of public power would experience no rate increases. The reason is that, even though public power is sold to intermediary wholesale purchasers at between 1 to 3 cents per kilowatt hour, those wholesalers (rural electric cooperatives and municipal utilities) typically resell that power to their customers at market rates — 4 to 9 cents per kilowatt hour.(48) In other words, its not the retail customers of public power that receive the public subsidy; its the rural electric cooperatives and municipal utilities that receive the public windfall. Why those “non-profit” entities choose to mark- up their rates so dramatically is unclear. But privatizing the PMAs could easily be absorbed by those public enterprises without effecting rates. If rates increase regardless, it would be due to the inefficiencies of those public enterprises and not the act of privatization.

Even if wholesale price increases are passed on directly to customers of rural electric cooperatives and municipal utilities, The Edison Electric Institute estimates that rate impacts would be relatively minor:

  • In the Southeastern Public Power Administration, 94 percent of public power customers would experience rates hikes from 0 to 5 percent while only 6 percent of the customer base would experience rate increases of between 5 and 10 percent.
  • In the Southwestern Public Power Administration, 73 percent of public power customers would experience rates hikes from 0 to 5 percent; 17 percent would experience rate hikes of between 5 and 10 percent; 7 percent would experience rate hikes of between 10 and 20 percent; and only 3 percent would experience rate hikes of over 20 percent.
  • In the Western Public Power Administration, 90 percent of public power customers would experience rates hikes from 0 to 5 percent; 8 percent would experience rate hikes of between 5 and 10 percent; and only 2 percent would experience rate hikes of between 10 and 20 percent.(49)

Continued subsidy of electricity prices does economic and environmental damage to those regions served by PMAs. Energy is but one input in the manufacturing process and, like capital or labor, can be substituted for other inputs. When energy prices are held artificially low, manufacturers are encouraged to substitute energy for other manufacturing inputs which can often have the effect of reducing job opportunities. Moreover, artificially low electricity prices lead to greater electricity consumption than would otherwise be the case, which correspondingly increases air and water emissions. Those who highly value energy conservation should also be reminded that maintaining energy subsidies is the surest way to promote excessive energy use.

Governments around the world are privatizing government operated power systems, including Poland, Hungary, Spain, Italy, Argentina, and Peru. In fact, the United States budgets $400 million annually to encourage other countries to adopt market based economic policies and to advance the privatization of industrial assets. It is indeed ironic that the U.S. refuses to take its own advice and has even made it illegal to study the question of power privatization on government time.(50)

Federal Energy Reserves

The federal government maintains a 591 million barrel Strategic Petroleum Reserve (SPR) of unrefined, generally high- sulfur crude oil in five caverns in Texas and Louisiana and a Naval Petroleum Reserve (NPR) consisting of major oil and natural gas fields in Buena Vista, California (the Elk Hills facility), Teapot Dome near Casper, Wyoming, and Naval Oil Shale Reserve Number 3 near Rifle, Colorado.

The Naval Petroleum Reserve was originally set aside to ensure the navy a supply of oil as it converted its fleet from coal to oil before World War I. The fields went undeveloped through two world wars. During the energy crises of the 1970s, Congress decided the government should produce oil and gas at those fields and sell them on the commercial market. Today, NPR includes some of the largest oil fields in the lower 48 states, producing about 60,000 barrels of crude oil a day. Those commercial oil fields are managed by DOE with contractor support.

The Strategic Petroleum Reserve was established in 1975 to serve as an emergency source of petroleum. The SPR can be released by either by an administrative finding of a “severe energy supply disruption” or as a consequence of the mandatory energy-sharing program of the International Energy Agency. Although $21 billion has been spent to build and maintain the stock of unrefined, high-sulfur crude, the SPR has never been used to any significant extent. The SPR had 80 million barrels in the ground during the 1979 energy crisis, but there was no drawdown capability at the time. Although the government had an excellent but rare opportunity to recoup the cost of the reserve in the summer of 1990 during the Kuwait crisis, DOE held on to the reserve out of concern that the crisis could get worse before it got better. By the time prices came down and stabilized, DOE announced an extremely limited withdrawal of oil that was too late to positively affect either markets or consumer confidence.

The high sunken costs for the various SPR facilities will soon increase even further. The temperature of the sorted crude has been elevated by geothermal heating and methane contamination from the cavernous salt formations of the storage facilities, making withdrawal difficult. Major problems in the nearly 20- year old mechanical, civil, and electrical systems also require quick attention. DOE conservatively estimates that the cost for those and several related problems will total approximately half a billion dollars over the next several years.

The various oil reserves of the federal government should be privatized immediately. There is simply no reason for the federal government to be owning productive oil or shale fields. Nor can any Strategic Petroleum Reserve, no matter how large, insulate the United States from the effect of international supply disruptions. Selling the SPR would bring anywhere from $7 billion to $10 billion in revenue to the treasury, while sale of the NPR would, according to the Office of Management and Budget, bring another $1.6 billion into the treasury.

Although it often argued that membership in the International Energy Administration (IEA) precludes selling the SPR, member nations are given the option of securing public or private reserves that can replace oil imports for 90 days. Private reserves in the United States are more than adequate to meet IEA’s requirement. Congress would be well advised to withdraw from the IEA in any event, but that is another matter outside the immediate topic at hand.

The Strategic Petroleum Reserve

First of all, the Strategic Petroleum Reserve is simply not large enough to meet America’s oil demand even in the short term and could never provide significant help in the (extremely unlikely) event of wrenching supply disruptions. The effective withdraw capacity of the SPR is only about 2 million barrels a day, enough to replace but 25 percent of America’s daily oil imports for approximately 90 days.(51) Happily, however, this will make no difference for the military in the event of a complete cut-off of foreign oil. Joshua Gotbaum, Assistant Secretary for Economic Security at the Department of Defense, testified before the Senate on March 29, 1995, that the military could fight two major regional wars nearly simultaneously while using only one-eighth of America’s current domestic oil production.(52)

Moreover, most of the SPR is stocked with high-sulfur crude (purchased for political reasons from Mexico) that would be amply available during any OPEC-induced crisis. It’s low-sulfur crude that the U.S. imports from the Persian Gulf and low-sulfur crude cannot easily be substituted for high-sulfur crude without a great deal of cost and performance sacrifices. Thus, the SPR would be of only limited usefulness in the event of a Persian Gulf crisis.

The SPR is not only incapable of replacing America’s foreign oil needs, it is incapable of dampening price spikes that may result from oil supply disruptions. First, the Congressional Budget Office points out that any announced intent to open the Reserve will add to market uncertainty due to inherent delays between such a decision and final sale. After such a tentative decision to release was announced in 1990, for example, CBO observes that:

Greater uncertainty caused individuals and businesses to hold onto their [oil stocks] … and that additional demand for private stocks raised oil imports and prices — just the opposite of the original intent of the release.”(53)

Second, petroleum is a fungible international commodity. Indeed, Great Britain’s “energy independence” was of little help during the energy crisis of the 70s; domestic price increases were no less severe there than in Japan or any other western nation. Oil prices are heavily influenced by global supply and demand curves, and the SPR is nowhere near large enough to effect international markets and thus incapable of significantly effecting domestic prices. Economists Chantale LaCasse and Andre Plourde point out that the only way an economy can be adequately insulated from international supply disruptions is for it and every other country with which it trades to cease trading with OPEC — an obviously unlikely scenario.(54)

According to virtually all observers, oil supply disruptions are less likely now than ever before. Daniel Yergin, President of the Cambridge Energy Research Associates and author of The Prize, notes that “Present circumstances require a balanced perspective. There is a much more secure base to the world’s energy economy than was the case in 1973 and — under the right conditions — that base could well extend in to the end of the century and into the next.”(55)

Likewise, the CBO has found that “Concern over the inability to secure needed oil during a supply disruption may also be smaller today. Internationally, the number of oil-exporting nations has increased, and the large oil companies have worked to diversify their sources of oil. Thus, oil-exporting nations find it more difficult to cut off supplies totally to individual companies or countries.”(56) Moreover, CBO found that “One of the most important changes that affect energy policy is the smaller effect that oil price shocks have on the economy today compared with the past.”(57)

And as Robert L. Bradley, Jr., president of the Institute for Energy Research has noted, “While volatility with oil supply and prices can be expected given governmental control over the majority of world’s crude, an energy crisis, defined as prolonged price spikes with or without physical shortages, cannot be considered a likely scenario.”(58)

Support for the SPR is little more than an economic security blanket for those traumatized by the fear of some dramatic foreign oil squeeze on the United States. Yet short of a seamless naval embargo, no oil boycott could prevent the U.S. from purchasing oil from the international marketplace, and no serious energy economist expects oil prices to ever equal on a sustained basis the price of putting a barrel of oil — approximately $45 per barrel — in the SPR. If one thinks of the SPR as the functional equivalent of an insurance policy, then the premium on the policy exceeds the benefits under virtually any imaginable scenario.

Often ignored, however, is that the price spikes experienced in 1973, 1979, and 1990 were not caused primarily by international oil shortages. Professor Edward Erickson of North Carolina State University observes rightly that, “we know full well that the price spikes that characterized past oil market dislocations were as much or more demand driven phenomena than they were the effects of any sustained overall supply diminution or uncompensated disruption in the pattern of world oil flows.”(59) Rationing, punishing taxation, trade restrictions, and political embargoes — not dramatic supply cutbacks by producing nations — are what caused the price increases of those years. As noted earlier, international oil supply was only reduced by 3 percent in 1974. It was reduced by double that amount for a few months in 1990 (not because Saddam refused to sell the West oil, remember, but because we refused to allow him to do so) but the economic impact was relatively minor. The difference, of course, was that the United States allowed markets to work properly 5 years ago, whereas the government’s massive intervention in energy markets 21 years ago magnified the impact of the disruption and caused massive economic dislocations.

It is important to bear in mind that periodic, politically- caused supply disruptions are not unique to OPEC oil markets. As pointed out by Professor Richard Gordon:

Supply crisis also have a long history outside OPEC oil — namely draught, flood, and storm damages to crops, coal strikes in the United States, Britain, and Australia, copper strikes in the United States, the effects of oil industry nationalization in Mexico and Iran, the 1956 Suez Canal closing, the 1980 Iran-Iraq war, the civil war in Lebanon (through which oil flows to the Mediterranean), the disruption of cobalt supplies from Zaire, and revolutions in Iraq and Libya. In many of these cases, world supply was not significantly affected. In the others, only temporary rises in price occurred. Political disruption rarely has long-run effects. Even short-run damages can be small.(60)

Also forgotten is the fact that, as pointed out by Erickson, “concerns about oil supplies have long captured the attention of both analysts and the popular audience while revolutions and counterrevolutions were quietly sweeping the demand side markets.”(61) Those revolutions in the advent of the booming oil futures market, the present 120 day reserves now maintained by domestic oil companies (reserves larger than the SPR), and increasing slack in domestic production. Says Gordon, “It can be argued that the absence of well-organized spot markets and government-produced uncertainties were the key problems during oil crises up to 1980.”(62) Indeed, private stockpiles would be even larger were it not for corporate fear of the government’s tendency to impose windfall-profit taxes or price controls when supply disruptions occur.(63) If business is convinced that they will be penalized for recouping the cost of their reserves during price spikes then they will be reluctant to put oil away for use on some future “rainy economic day.”

Even if needed, it is unlikely that the SPR will ever be used given the government’s reluctance to ever pull the trigger and start crude oil withdrawals. There is always a concern that premature draw downs will spook the markets and perhaps deplete a “rainy day” supply that could be more important later if a crisis were to take a worse turn of events. That reluctance to “pull the trigger” is an institutional problem that manifested itself during the 1990 Kuwait crisis and is likely to prevent the Reserve from ever being used according to many observers and former energy officials.

The Naval Petroleum Reserve

The Naval Petroleum Reserves don’t even pretend to operate for a “rainy day,” but instead amount to straightforward federal ownership of productive oil and gas lands. There is no economic rationale for such an arrangement; no military need for the fields; and no credibility to the argument that federal ownership of “the means of production” is superior to private ownership. Even President Clinton concedes the need for selling the NPR. As his FY 1995 budget stated (Appendix, p. 406), “producing and selling this oil is a commercial, not a governmental activity. There is good reason to believe industry can run Elk Hills quite well since it [private industry] accounts for most U.S. domestic oil production.”

Many fiscal conservatives have long opposed the sale of the NPR, maintaining that the Reserve’s assets are worth more in government hands. But the federal government is not producing the assets as aggressively or cutting costs as much as possible, reducing their value compared to what they would be under private ownership. Nor does the federal government have any business operating strictly commercial enterprises simply as a means to produce revenue. It is not empowered Constitutionally to do so and smacks of economic socialism.

Energy Conservation and Renewable Fuel Subsidies

The Department of Energy funds numerous programs that are designed to directly and indirectly subsidize the adoption of energy efficient technologies and the use of renewable fuels. Favored industries receive federal money for technical assistance, information programs, grants, export subsidies, and demonstration projects. More directly, the DOE — under direction of the 1992 Energy Policy Act — pays utilities 1.5 cents per kilowatt hour for power generated from solar, wind, geothermal, or biomass conversion facilities. Those programs should be removed root and branch from the federal budget and all enabling legislation amended or repealed as necessary.

Even is one supports energy conservation subsidies, it must be recognized that State public utility commissions already mandate energy conservation programs and dictate renewable fuel use where practicable. In fact, such state subsidies dwarf the less than $2 billion spent by the federal government in this area.

That is not to suggest, however, that such subsidies are a good idea. The massive, 10 year experiment with state mandatory energy conservation programs (termed “demand-side management” or “integrated planning”) has proven a multi-billion dollar bust with few efficiency gains and significant rate increases for electric power customers.(64) State renewable fuel subsidies and mandates in California — the state most aggressive in promoting such programs — have resulted in electricity rates twice the national average and have sparked a counterrevolution to free electric power companies from monopoly regulation.(65)

In fact, a recent study by Resource Data International prepared for the Center for Energy and Economic Development calculates that:

  • Current policies will only increase the market share of renewable fuels from today’s 2 percent to 4 percent of the market by 2010 but at a cost to ratepayers of $52 billion; and
  • Even if the public subsidized 50 percent of the production costs, renewable fuels would only comprise 11 percent of the market by 2010 and cost ratepayers $203 billion in the process.(66)

Decisions about appropriate fuel choices can be best made by examining prices which, after al