Recissions of Previously Authorized Budget Authority

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Mr. Chairman, I am honored to have the opportunity to discussfederal energy policy and the U.S. Department of Energy before thissubcommittee. Last November, the American people made clear theirdesire for a smaller, less expensive, and less intrusive federalgovernment. The federal energy budget is one of the best places tobegin keeping faith with the American people.

Energy production and distribution, like other goods andservices in the economy, should be left to consumers andentrepreneurs in the marketplace, not "planned" by governmentbodies. In fact, the long history of United States oil, gas, andelectricity regulation makes abundantly clear that shortages, pricespikes, and energy crisis are engendered by governmentintervention, not market failure.

Although energy consumers have profited handsomely from thederegulatory undertakings of the 1980s, much more can and should bedone to remove the province of energy from the dead hand ofgovernment planners to the invisible hand of the marketplace. Towhit, this subcommittee should:

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

Eliminate all energy research and developmentexpenditures;

Privatize the federal energy laboratories;and

Privatize the Power MarketingAdministrations.

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

Eliminate the Department of Energy

The first place to begin the dismantling of energy regulation isby the simple elimination of the Department of Energy. The problemwith the DOE is not its administrative structure but the very factof its existence.

A centralized, cabinet-level energy agency is dangerous for tworeasons. First, it offers "one stop" central planning services. Thethousands of pages of regulations that emanated from DOE and itspredecessor agencies in the 1970s is testament to the perils offederal bureaucracy and the temptations that such an agencypresents to the myriad special interest groups that stand to profitfrom federal intervention in energy markets. Second, it provides aready bureaucratic structure for massive intervention in theAmerican economy. The Department is a ready command post from whichwould-be energy "Czars" could quickly revive the disastrouscommand-and-control energy policies of the 1970s.

The Department's responsibilities, with the exceptions notedabove, should not, however, be reshuffled to other agencies; theyshould be summarily ended. Moving organizational boxes aroundbureaucratic flow-charts may provide the illusion of deregulationbut in reality amounts to little more than politicalsleight-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 anexcellent point by observing the degree to which corporatesubsidies litter the federal budget. Although the Secretary seemsto be under the impression that allowing taxpayers to keep theirown money often-times amounts to a "subsidy," corporate welfare isan expensive and egregious burden on the American taxpayer. Perhapsnowhere is this more true than in the DOE budget for research anddevelopment.

Energy R&D spending has cost the American taxpayer plentywithout any real return. Approximately $90 billion has been poredinto such efforts over the past four decades: $50 billion fornuclear energy; $19 billion for coal; $10 billion for solar; $5billion for oil; $3 billion for natural gas; $2 billion forgeothermal; and $1 billion for hydropower. In the last 12 years,the federal government has spent $7 billion on nuclear fusionR&D, yet even DOE concedes that a commercial fusion plantprobably won't be on line until at least 2040. Current spendingtrends indicate another $30 billion will probably be necessarybefore we ever see the first kilowatt of fusion power. Likewise,the federal government has spent $6 billion on renewable energyR&D over the last 12 years despite the fact that generation ofrenewable energy has dropped by more than 10 percent during thattime.

Virtually all economists who have looked at those programs agreethat federal energy R&D investments have proven to be aspectacular failure and a virtual rogue's gallery of some of thebiggest government boondoggles in U.S. history, such as theinfamous Synfuels program, the Clinch River Breeder Reactor, andthe Superconducting Super Collider. A recent report by EconomicsProfessor Frank Lichtenberg of Columbia University for the NationalBureau of Economic Research found that the net impact onproductivity of government R&D spending is far lower than thereturn on privately funded R&D and that the social return onprivate R&D investment is about seven times as great on plantconstruction and equipment. Moreover, perhaps the mostcomprehensive examination of federal R&D programs -- conductedfor the Brookings Institution by economists Roger Noll of StanfordUniversity and Linda Cohen of the University of California atIrvine -- found that energy R&D has been nothing but a "porkbarrel" for political gain.

There are a number of reasons why government R&D effortshave such a poor track record. Typically, government decides whichindustries, technologies, and projects to support on the basis ofpolitical -- 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 mosttechnological breakthroughs -- may be economically strong but areusually politically weak. And as former Senator William Proxmirehas noted, "Money will go where the political power is. Anyone whothinks government funds will be allocated to firms according tomerit has not lived or served in Washington very long." EconomistsNoll and Cohen concur: "The overriding lesson from the case studiesis that the goal of economic efficiency -- to cure market failuresin privately sponsored commercial innovation -- is so severelyconstrained by political forces that an effective, coherentnational commercial R&D program has never been put inplace."

Even if politics could somehow be divorced from the selectionprocess -- impossible in the real world -- it is still doubtfulwhether federal R&D efforts would be wise investments. Privateinvestors, animated by the intense search for profit with their ownmoney on the line, are far more likely to determine which venturesare worth pursuing and which aren't than are elected officials ortheir bureaucratic agents who have far less market information andfiscal discipline than their private counterparts. If privateinvestors find an undertaking too risky for their stockholders andprivate banks find such loans too risky for their depositors, thenshouldn't political officials treat the taxpayer's money with thesame degree of caution and find the undertaking too risky for theirconstituents?

Finally, there is good reason to believe that the very cause oftechnological innovation is harmed by federal intervention andsubsidy. Money is inevitably diverted from more promising competingtechnologies and premature commercialization of federal R&D (acommon problem according to Noll & Cohen) often needlesslydiscredits the undertaking and sets investment back decades.

If energy research and development in a particular technology iswarranted, however, private corporations that stand to profitshould 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 theprivatization of the vast network of national laboratories. Sellingthese facilities would generate billions in federal revenue thatshould be used, not to mask the true state of the budget, but toretire 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 throughthem. That is due not only to the factors noted above, but also tothe fact that -- as pointed out in a recent GAO report -- mostsmall manufacturers cannot effectively use the advancedstate-of-the-art automated technologies produced by the nationallaboratories. As noted by Professor Murray Weidenbaum, director ofthe Center for the Study of American Business, "When a company'sown laboratory comes up with a product or process advance, thereare far fewer barriers to using it than when government takes onthe role. The many pathetic efforts of the Department of Commerceto interest private business in using the research it has financedreminds me of the forlorn street corner vendor trying to peddle hiswares to preoccupied passersby."

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

Power Marketing Administrations

The existence of the five major power marketing administrationsare relics of tired and obsolescent "New Deal" economics that timehas passed by. Sale of those entities is long overdue and promisesto benefit both the taxpayer and the environment

The original case for these federal power programs was based onthe two arguments; that public utilities could provide power at alower cost than the alleged "monopoly" power rates of privateutilities and that the monopoly powers of private utilitiesprevented the furnishing of electricity to rural and sparselypopulated areas. The first argument has been shown to bedemonstrably untrue. The cost of electricity generation for thePower Marketing Administrations is far higher than they are in theprivate sector. Massive cost overruns, over investment in baselinegeneration, and scrapped nuclear facilities that cost tens ofbillions but never generated a kilowatt of electricity are systemicproblems with federal power facilities. Electricity costs are lowerfor consumers of federal electricity than for consumers ofprivate-generated electricity only because of massive taxpayersubsidies. The second argument is irrelevant today given thatvirtually all of America has been electrified

Power Marketing Administrations have today become a massiveexperiment in social engineering, seriously distorting theeconomics of the regions they serve and causing incalculable harmto the environment. The artificially low electricity prices theyoffer to consumers at the federal taxpayer's expense encourage overconsumption of electricity and wasteful patterns of industrialactivity. This in turn leads to more pollution than would otherwisebe the case. Moreover, the operational record of federal powerfacilities is an environmental nightmare. Riparian habitats havesuffered tremendous damage from dams that would never have beenbuilt in the first place by private investors. Emission controlshave performed far less effectively than the industry norm

Today, few economists would even maintain that electricutilities are natural monopolies. Technological innovations havebroken the regulatory assumptions of state public utilitycommissions and direct competition in the provision of electricityis considered a fait-accomplis by utilities, regulators, andcustomers alike. The revolutionary deregulatory program pursued byCalifornia and being considered by other states promises totransform they manner that electricity is generated and sold inAmerica. The days of vast regional government monopolies providingelectricity are numbered, and Congress may as well recognize thereality that competition, not monopoly, best serves the consumer ofelectricity or any other good or service in the economy

The Power Marketing Administrations should be marketed in apublic 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 MarketingAdministrations would generate significant revenue. Congress wouldcertainly start out the 103rd Congress right by using those fundsand those garnered by selling the national laboratories to retireoutstanding federal debt, a significant down-payment that wouldsignal to the American people the end of business as usual inWashington

The Investor's Business Daily reported on January 5, 1995, thatEnergy Secretary Hazel O'Leary proposed that the ClintonAdministration do just that and sell the Power MarketingAdministrations, but her suggestion was rejected by the President.If the Energy Secretary could bring herself to propose such assale, so can the this Congress

Conclusion

The American people demanded last November that the Congressmove to reduce federal spending and the overall size and scope ofgovernment. While some cuts are admittedly harder than others, thecuts proposed above are among the easiest targets before theCongress. To paraphrase a former President, if now, when? If nothere, where?

The vast majority of the programs under this subcommittee'spurview are unnecessary, wasteful, and counterproductive. Thelosers under the status quo are the American taxpayer and theenvironment. The only winners are those corporations that benefitfrom taxpayer-subsidized R&D or federal energy. It is time toput the public interest above the special interest and pull theplug on the Department of Energy and turn out the lights on theprograms overseen by this Subcommittee

Jerry Taylor

Subcommittee on Energy and and Water Development
Committee on Appropriations
United States House of Representatives