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 market, not "planned" by government bodies. Infact, the long history of United States oil, gas, and electricityregulation, taxation, and subsidization makes abundantly clear thatshortages and energy crisis are engendered by governmentintervention, not market failure.

Oil and natural gas today are cheap and plentiful, as theyalmost always have been when not subject to heavy governmentregulation. Although energy consumers have profited handsomely fromthe deregulatory undertakings of the 1980s, much more can andshould be done to remove the province of energy from the dead handof government planners to the invisible hand of the marketplace. Towhit, this Congress should:

Eliminate the U.S. Department of Energy and transfer allweapons-related responsibilities to an independent, non-Cabinetagency and environmental activities to the Environmental ProtectionAgency;

Eliminate all energy research and development expenditures;

Eliminate all energy conservation programs;

Privatize the Strategic Petroleum Reserve, the Naval PetroleumReserve, 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 bythe simple elimination of the Department of Energy. The problemwith the DOE is not its administrative structure but the very factof its existence. The Department's responsibilities should not bereshuffled to other agencies; they should be summarily ended.

A centralized federal agency is dangerous because it offers "onestop" central planning. The thousands of pages of regulation thatemanated from DOE and its predecessor agencies in the 1970s istestament to the perils of federal bureaucracy. The privatizationof energy decision-making, not DOE's emergency preparednessprogram, is the nation's "insurance policy" against any futureenergy challenge.

Although eliminating DOE as a cabinet department would behelpful, little would ultimately be gained by simply reshufflingprogram responsibilities from one agency to another. Whileenvironmental 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 federalbureaucracy; they should be eliminated forthwith.

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 isunder the impression that allowing taxpayers to keep their ownmoney often-times amounts to a "subsidy," corporate welfarism is anexpensive and egregious burden on the American taxpayer. Perhapsnowhere is this more true than in the DOE budget for energyresearch and development.

The federal government spends $7.1 billion annually on variousresearch and development programs for the energy industry, ablatant subsidy to an industry more than financially capable to payfor its own such programs. Most of this funding goes to traditionalenergy industries such as coal, fossil fuels, and nuclear.Moreover, those expenditures have brought very little return to thetaxpayer. Virtually every significant advance in energy technologywas made by private investment in the private sector -- federalresearch and development undertakings have had little if any realimpact on the energy industry (for an excellent overview of theliterature regarding the effectiveness of federal research anddevelopment spending, see Linda Cohen and Roger Noll, TheTechnology 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 mostother industries are forced to do in a free market economy.

Political favoritism for renewable energy sources (the target ofmuch federal research, development, and production subsidy) ismisplaced, particularly since renewable energies each have theirown, seldom acknowledged environmental problems, such as aviandeaths from electric wind generation, heavy industrial waste fromthe manufacture of solar equipment, energy inputs that exceedenergy outputs from biomass sources, and damaged river habitatsfrom hydropower. If fossil fuels begin to become scarcer, thatscarcity will be reflected in rising prices and fuel switching inthe marketplace. Government involvement is not necessary.

Market prices, not taxpayer or ratepayer subsidies, shoulddetermine America's fuel choices. Since a price is nothing but areflection of relative scarcity, it's axiomatic that if a "green"or "renewable" energy source is more expensive than traditionalenergy sources, the resources required to "go green" are morescarce than the alternatives.

Energy Conservation

If energy conservation undertakings are warranted -- and theyoften are -- then the gains of energy conservation will bereflected in market prices and no subsidy is necessary. If certainenergy conservation practices cost more money than they savethrough conservation, then a subsidy is unwarranted. Either way,there is no compelling need for conservation subsidies. Theyinvariably do more economic harm than good. The federal taxpayer isleft holding the tab -- nearly $1 billion dollars in 1995.

It is important to keep in mind that energy is simply one ofseveral economic inputs, such as labor, capital, and other naturalresources. Often times, it makes economic sense to substitute oneinput for another. Today, for example, energy is often cheaper thanlabor or capital, and it makes sense for manufacturers to intensifyenergy 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 themost energy efficient nations in the world, faces no prospects forenergy shortages in the future, and is awash in cheap and abundantenergy. Moreover, there are no identifiable "market failures" forenergy conservation subsidies to correct. Although conservationadvocates argue that subsidies are necessary to offset subsidiesfor energy production, the best course for the Congress to take isto eliminate all the subsidies in question and not to erect anotherset to offset other ill-advised economic policies (for a morecomplete discussion of energy conservation, see Jerry Taylor,"Energy Conservation: The Case Against Coercion, Policy Analysisno. 189, Cato Institute, March 9, 1993).

Federal Energy Assets

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

All of these entities and programs should be privatelyreorganized. Power marketing agencies such as the Bonneville PowerAdministration are poorly managed at taxpayer expense. Theyhistorically have caused serious environmental damage by utterlydestroying river ecosystems and often generate more pollution thanthe industry standard. Moreover, their mission of subsidizingelectricity usage only serves to encourage inefficient energyconsumption (see, for example, David Shapiro, Generating Failure:Public Power Policy in the Northwest (Lanham, MD: University Pressof America / Cato Institute) 1989). There is simply no systemicreason why certain regions of the country today cannot operateunder privately-owned power authorities. Sale of those entitieswould save taxpayers $4.2 billion annually in operatingexpenditures plus whatever they would sell for in the privatemarket.

The federal energy laboratories are blatant subsidies to anenergy industry that can "free ride" on taxpayer-funded researchand development costs that most other industries rightly pay forthemselves. Even Energy Secretary Hazel O'Leary has suggested tothe administration that DOE's five power marketing authoritiesshould be sold-off to the private sector ("Can Energy DepartmentWither Away?" Investor's Business Daily, January 5, 1995, p.1). Annew, independent agency may want to continue contracting with thoselaboratories on the matter of federal nuclear-related questions,but the rest of the federal funding directed to those entitiesshould be eliminated.

The Strategic Petroleum Reserve (SPR) has proven to be an abjectfailure, and its problems have only mounted while it has waited forthe energy crisis that has not come -- and will not come without areimposition of price and allocation regulation.

Taxpayers are burdened with billions of dollars of net bookedcost in excess of current market value and face expensive upgradesto maintain its withdrawal readiness. It is time to privatize orliquidate the stockpile (currently 591 million barrels) and allrelated facilities. Not only would this benefit the Treasury withbillions in revenue, it would promote good energy policy across theboard. Without the SPR's safety net, government officials would beless tempted to interfere with market prices and allocation. Absentthe long shadow cast by the reserve, corporate entities would beencourage to provide for their own stockpiles without fear of beingdrowned by a flood of government oil (and collapsing prices) in theevent large withdrawals were made. Yet even private stockpiles areof little value in today's oil market, where futures contractsaccomplish what stockpiles once did without the sunken costs.

The Naval Petroleum Reserves and various federal oil shalereserves share all the problems of the SPR and should likewise besold to the private sector.

Public Energy Holdings

The domestic energy industry operates in a regulatorystrait-jacket that prohibits the commercialization of vast energyholdings, micromanages commercial practices, and discourages marketentry. The rationales for these anti-competitive practices arediscredited relics of the progressive era; that government plannersare better land managers than private stewards and that energycorporations are natural monopolies that must be overseen bypolitical bodies. It is time to jettison these myths.

The United States petroleum industry has steadily lost marketshare to foreign oil suppliers. While this partly reflects the factthat the lower-48 states are a very mature oil province, it also isbecause drilling and production from the most promising regions ofthe country -- the Arctic National Wildlife Refuge (ANWR) and otherAlaskan areas, the outer continental shelf, and Point Arguello offCalifornia -- have been blocked by Congress. Privatizing oil andgas lands would provide a tremendous windfall to the U.S. Treasury,make the much-maligned "high cost" U.S. energy industry moreglobally competitive, and provide a stimulus to the Americaneconomy.

Federal land leasing for oil and gas development has beenregulated by the Interior Department since the first claim was madein 1880. Not surprisingly, politicization has hallmarked publicland development since. Yet economics, not politics, should dictatehow land is used, and those decisions should be made by privateland owners, not absentee government planner-landlords. Congressshould do more than simply change the rules about how certainpublic lands like ANWR are used. It should get out of the businessof owning commercially valuable real estate altogether and sellthose lands to the public. If Boris Yeltsin can do it, so can theUnited States Congress. Fossil energy on federal lands is worthapproximately $420 billion in today's market. Even in land salescould garner only half of that, $210 billion would be a significantdown-payment on the national debt.

Conclusion

Federal energy policy has always been based upon a series ofdubious rationales. One is that energy is too important to be leftto market forces alone. The truth, however, is that the moreimportant an industry, the more imperative that it be left in thehands of private management. Another fallacy is that energygeneration and distribution is a natural monopoly that necessitatesstrict government regulation. Economists today recognize that"government failure" is a far more serious problem than "marketfailure." Monopoly regulation has shown itself in mostcircumstances to be even more damaging to consumer interests thanworst-case scenarios of unrestrained quasi-monopoly practice.Finally, energy security concerns haunt much government regulatoryactivity, despite the fact that the world is awash with cheapenergy and even worst-case distant supply events dictate marketmanagement rather than political planning.

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

More directly for this committee, $14 billion in annual federaloutlays could be eliminated and hundreds of billions of dollarscould be invested in retiring the national debt. That would be agood fiscal start for any Congress, and an appropriate one for the104th.

Jerry Taylor

Subcommittee on Interior-related Agencies
Committee on Appropriations
United States House of Representatives