258 March 30, 1983 WHY REAGAN SHOULD KEEP HIS WORD AND SHUT DOWN D.O.E INTRODUCTION Every American voter knew what to expect of presidential candidate Ronald Reagan. During the 1980 election campaign, he often used the cry "Abolish the Department of Energy to symbolize his pledge to curb Washington's burgeoning bureaucracy. Time and again he scored DOE programs as signal examples of the sort of government interventionism and excess he felt w ere at the heart of America's economic ills. For good reason did voters expect that DOE'S abolition would be a top priority during the opening days of the Reagan Administration. Initial indications seemed to confirm this view.

Soon after taking office, Rea gan appointed James B. Edwards a former South Carolina governor, as Secretary of Energy. At an early press conference, Edwards vowed he had come to Washington to !'work myself out of a job." On another occasion he even stated that once he succeeded in eli m inating the energy agency he would "spread salt on the earth to make sure it never rose again. Yet it soon became evident that abolishing DOE would be easier-said than done. While the President continued to assert that the energy unit's demise remained a priority, suspicions grew within the energy industry that the effort to abolish DOE enjoyed only half-hearted support from the White House.

Some of the President's own appointees at DOE were openly hostile to the notion of closing the department. Though th ey opposed the agency's regulatory activities, they wanted the research and development activities maintained. Some even defended DOE'S subsidies for the commercialization of energy technologies--a practice sharply at odds with the President's free market philosophy As a result, a form of guerrilla warfare developed, with top-level DOE officials pitted against the Office of Management and Budget.

Whenever OMB tried to cut a program, the officials fought the 2 cuts through appeals and leaks of information t o congressional committee staffs hostile to the Reagan philosophy. The situation was aggravated by the White House's delay in filling key slots at the department. As a result, Secretary Edwards was, for a time the only Reagan appointee at DOE and had to r ely on bureaucrats--a group hardly committed to the agency's demise-for advice and information.

There even was opposition to dismantling DOE within the energy industry were loathe to see the federal spigot turned off. Other firms benefiting from special advantage through DOE regulation, were anxious to maintain their privileged position: Still other s fearing a proliferation of state energy agencies and an accompany ing morass of contradictory state rules and regulations, took a better a devil you know than one you don'tt1 attitude, and lobbied for continuation of DOE'S regulatory regime Firms heavily involved in government contracts The strongest opposition to abolishing the Department however, came from the Congress. While the agency had existed for only four years when Reagan took'office, it had managed to develop a powerful clique of congressional p atrons. To no small degree, this was the product of pork barrel projects carefully distributed in the home states of key legislators. Synthetic fuels plants, alternate energy projects, and research and develop ment facilities became powerful arguments on behalf of the agency's continued existence.

Even more important to the Congress, however, was the question of who would have jurisdiction over the department's programs if the department were to be abolished. A number of tasks would be performed by governm ent (such as the maintenanc.e of a Strategic Petroleum Reserve, or the production of nuclear weapons whether or not a Department of Energy existed. Congress would continue to exercise a role in these areas through its appropriations and oversight function s . At present, the Energy and Commerce Committee in the House, and the Energy and Natural Resources Committee in the Senate, have primary jurisdiction over DOE If DOE were eliminated, however, there would be no guarantee, particularly in the Senate, that t hese committees would retain jurisdiction over energy issues. Should jurisdictional boundaries change, some programs, their advocates fear, could be jeopardized.

This all has obscured the fact that the rationale for eliminat ing the Department of Energy.remains as strong today as it was in 19

80. As long as there is a Department of Energy, federal policy makers will continue to view energy issues in isolation and will continue to interfere in the market to the detriment of the nation's energy consumers. Th e urge to regulate where no regula tion is warranted, to subsidize where no subsidy is needed, and to send false signals to the energy market is simply too strong to resist. This is history's sad lesson. The only way to ensure 3 that there are no DOE prog rams and bureaucracies destabilizing the energy economy is to ensure that there is no DOE.

THE INHERENT DEFECTS OF DOE The Heritage Foundation's 1980 Mandate for Leadership energy task force report concluded that the central problem is not found in any spe cific deficiency of the agency, but rather in the concept that such an agency is needed in the first place. This concept has its basis in the contention that the government can and should play a major, if not dominant role in the manage ment of the energy market; a contention we flatly reject The major deficiency of the Department of Energy is found in the fact of its existence.

The creation of a cabinet-level department with energy as its sole concern implies that government can manage energy resources mo re efficiently than the market can. History has shown this assumption to be fallacious. Recent experience with oil decontrol has demonstrated clearly that the market allocates energy resources far more efficiently than the government ever could and thereb y maximizes benefits for energy consumers. DOE thus suffers from serious inherent defects Spiraling Intervention DOE has a distorted view of the energy market. It sees energy issues in isolation, rather than as part of the economic whole. Problems thus ten d to be exaggerated and there is a temptation to overreact. But because energy has such a pervasive effect throughout the economy, even small interventions have major consequences As these become apparent, they are used to justify further Ifcorrective inte rvention, setting off an ever increasing regulatory spiral that never acknowledges that it was intervention and regulation that caused the problems in the first place.

Make-work Regulation The department seems to intervene in some cases merely to justify its own existence. This reflects the bureaucratic urge to tinker.

Typical was the department's response to the 1979 Iranian oil boycott. By coercing refiners into producing far more heating oil and diesel fuel than they would have otherwise, DOE caused a r eduction in gasoline production just before the summer peak-driving season. This distortion 'in the production cycle, together with the gross misallocation of supplies caused by.DOE rules, is widely recognized as the cause of the gasoline lines during sum mer 19

79. The agency's policies magnified the nominal 5 4 Had the market been allowed to function properly, supplies would have moved quickly to where they were needed, while refiners would have adjusted their product mix to meet customer demands.

The ma rket's efficiency was demonstrated in 1980, at the start of the war between Iraq and Iran, when a similar drop in world crude oil supplies was hardly noticed by consumers. The key difference function, free' of panic buying inspired by regulation. was that during this Iloil crisis'l the market was allowed to I Distortinq Research The Department of Energy impedes the energy market by subsi dizing some technologies while penalizing others to support one line of research rather than another. stem from politica l rather than efficiency considerations, DOE'S actions cause a further misallocation of resources Since decisions In some instances, the agency's efforts even undermine the viability of those technologies that they seek to aid case of alcohol fuels, for ex a mple, a DOE loan guarantee program which carried with it a requirement that subsidized plants have an annual capacity of 5 million gallons or less, virtually ensured that the program would fail. Private firms engaged in power alcohol production had discov e red already that a minimum annual capacity of 20 million gallons is necessary for efficient and profitable operation only to smaller plants, and investment bankers insisted on such guarantees before granting a loan, producers with viable projects were eff e ctively barred from private capital markets by the very program intended to help them In the But because DOE offered loan guarantees THE CASE FOR LIMITED FEDERAL INVOLVEMENT Although government intervention in.the energy market is unwarranted in most case s , there may be a need for the federal presence in two specific areas: energy emergency preparedness and long-term research and development R&D In both cases, the perceived need arises from what economists call llexternalities.ll These are costs that must b e accounted for, but that no individual or group of individuals, can or will pay for. The classic example of an externality is national defense group has an incentive to assume responsibility for his'share of defense, since the same total level of defense is needed, irrespec tive of what any individual chooses to pay provided for somehow. It therefore falls on government to assume the chore and to assign costs to each taxpayer. To some extent energy emergency preparedness, long-term R&D, and the nuclear fu e l cycle carry external costs and benefits I No one individual or But it must be Enerqy Preparedness In the case of energy security, the externalities arise from the government's broad duty to provide for national defense. To the general public and Congres s, energy security has been synonymous with protection from the effects of an oil supply interruption.

Consequently, most energy security programs aim at assuring adequate oil supplies, domestically and among the nations who have signed the International Energy Agency's shortage-sharing agreement.

Under the Carter Administration, the principal programs of energy preparedness included the expansion of the Strategic Petroleum Reserve (initiated in the Ford Administration), the development of a rationing plan for times of severe interruption of oil imports, creating the Synthetic Fuels Corporation, and the development of a plan, in close cooperation with the International Energy Agency, for the international allocation of crude oil supplies in the event of an other oil embargo.

These measures ignored the supply side-of the oil equation.

Senior officials of the Carter Administration, it seems, did not believe that much new oil remained to be discovered mean s of ensuring energy security therefore seemed to be to share the shortage." To ensure that the burden of the anticipated shortfall was equitably distributed, it was necessary, from the Carter viewpoint, for the government to manage the burden. This ratio nale provided much of the justification for the creation of a Department of Energy The only Such thinking was repudiated by incoming Reagan officials.

For them, long-term energy security was to be achieved in the words of Interior Secretary James Watt, by Ilconserve and conserve and produce and produce.!l This was the role of the market. In their view, the Department of Ener.gy was a barrier to this.

DOE'S conservation programs had achieved few real energy savings. Worse still, the department's controls on crude oil prices encouraged overconsumption. Although major strides in energy conservation had been achieved, noted Reagan Administration officials, such progress could be attributed mainly to market forces--that operated in spite of, rather than because of, DOE'S regulations.

International agreements to share shortages on the world oil market, moreover, were of little value since experience indicated that few nations would abide by them, should an embargo occur.

Real security lay therefore in developing domestic energy resources which only the private sector, through the market system, could accomplish. Until domestic resources were developed, the Strategic Petroleum Reserve would furnish ample protection against a catastro- phic shortfall 1 6 Energy se curity thus is no Though the federal government m reason for aht be neec a Department ed to mainta of Energy n the Strategic Petroleum Reserve, existing agencies, such as the Interior Department could do this.

Research and Development There is relatively w idespread support for the argument that the government can play a useful role in sponsoring scientific research. 'lPurell scientific research will ultimately yield significant benefits to society even though it is impossible at the outset to determine jus t what those benefits will be or to whom they will accrue. Perhaps the most familiar example of this process is the space program, which gave society products ranging from Tang Breakfast Drink and Teflon to the sophisticated cardiac monitors now used in ho spital intensive care units In addition to so-called pure research, however, many Americans accept the notion that there is value in federal sponsorship of llappliedll research, that undertaken toward a specific end.

Unlike pure research, applied research leaves little doubt as to its beneficiaries' identities and this often raises the question Why should they not bear the costs?11 In answer to such questions, advocates of a federal role in applied research argue that, in today's economy, such projects con stitute part of the "infrastructure of commerce.'I As such, the support--of applied science, as of ports and highways, is said to be within the legitimate scope of government.

While it is true that technology lies at the heart of the modern economy, even i f some federal involvement is therefore appropriate the degree of that involvement must be justified and the limits clearly set. The danger that federal research will become politicized, as has happened so often in the past, would suggest that the direct fe'deral role be minimized to the greatest extent possible. Where should these limits be placed?

Recently, the notion has gained currency that direct federal research and development projects should be restricted to those that can be categorized as "high risk, high potential payoff."

The basis of this is the assumption that a private firm would be hesitant to undertake projects of this kind because they lack near-term commercial potential--even though their long-term prospects might be significant. Fusion energy is an example of this. While promising virtually limitless energy, the most optimistic time frame for fusion still puts commercial plants well into the next century. Given the billions of dollars needed to conduct the experiments, no private sector firm would likely proceed on its own. But the potential benefits to society may well be enormous. Like national defense, fusion research is characterized by significant "externalities If 7 Only under extraordinary circumstances, however, can external itie s provide justification for government involvement. The crucial factors are their magnititude and how they relate to other factors in the economy.

At the other end of the spectrum are so-called commercial demonstration projects. these projects are most oft en aimed at building "first of a kind plants to test the commercial feasibility of a new process. The synthetic fuels projects proposed under Carter's Energy Security Act, and possibly the Clinch River Breeder Reactor, fall into this category Popular duri n g the Carter Administration In these cases, the rationale for federal involvement is weak at best. It is based on a faulty notion that the government can demonstrate commercial feasibility of a technology. Yet, a technology is commercially feasible only w h en the market provides it. If government subsidies are necessary for a technology to compete, then it clearly is not commercially feasible. Attempts to force a technology into the market prematurely are destined to fail, no matter how large its federal su bsidy.

On rare occasions, however, national security reasons or similar purposes require the development of technologies even though they may not yet be economically viable be accomplished through the construction of small bench-scale or prototype plants s ized plant (as proponents of the Clinch River Breeder Reactor claim their project to be) may be required in some cases, it would never be necessary to construct a full-size commercial plant This can usually Although the construction of an intermediate The Nuclear-Fuel Cycle In one area of energy, the government unquestionably has a role: the nuclear fuel cycle. The term "fuel cycle" refers to the process whereby uranium or some other fissionable material is mined and enriched to make it suitable as a fuel, burned in a reactor, and finally processed to dispose of the radioactive wastes.

The main reason for a federal role here is the concern over nuclear proliferation. The U.S. government is the only body with the stability and longevity needed to oversee.the long-term management of nuclear waste facilities where several centuries may be needed to effect disposal dominant in the field ever since nuclear power emerged as a viable energy source future. Nuclear weapons production will remain the sole responsi bi l ity of the federal government, as will uranium enrichment, the control of nuclear exports, and a host of other nuclear related matters The federal presence has been That presence will not diminish in the This is insufficient, however, to justify the exist ence of a cabinet-level agency.

DISMANTLING THE ENERGY DEPARTMENT There is no convincing rationale for the existence of a federal energy agency. Where the federal government should or might play an energy role, the functions could easily be assigned to other cabinet departments or performed by a lesser agency.

More important, the orderly dispersal o'f the government's legiti mate energy related functions could lead to a more realistic view of how energy issues relate to the greater economic whole, and a more rational policymaking environment.

Three options have been suggested for abolition of the Department of Energy. These are Outright abolition Merger Downsizing Each has its own advantages and disadvantages, but each ,must be co nsidered in terms of its political feasibility. Indeed, political considerations, more than any other factor, must determine which option should be employed.

Outriqht Abolition Outright abolition would mean the total elimination of the Department of Energ y and the transfer of its legitimate functions to other cabinet agencies. Management of the Strategic Petroleum Reserve, for example, may be assigned to the Interior Department and the nuclear weapons program to the Department of Defense while the Federal Energy Regulatory Commission again could become independent. In the early days of the Administration, outright abolition was the option given the closest.consideration. Outright abolition, however, appears politically infeasible. It ignites jurisdictional concerns within the Senate. And abolition would eliminate the focus for energy programs which Congress seems to want A Merqer Another approach is merging DOE'S continuing functions with another cabinet department the Department of the Interior and the Dep artment of Commerce.

The course of U.S. energy policy wouldlbe quite different under each agency.

Interior, DOE'S programs would likely focus on resource management and development. If Commerce were selected, trade and technolog- ical development undoubte dly would dominate There would seem to be two candidates If the merger were with the Department of the 9 Some proponents of a merger have suggested that DOE'S func tions be divided more or less equally between Commerce and Interior.

Functions most concern ed with resource management, such as coal leasing and maintenance of the Strategic Petroleum Reserve, plus fossil fuel research would go to Interior; the nuclear, solar conservation, and international functions would be transferred to Commerce. Most of DO E'S statistical programs also would go to Commerce.

Merger could save money by eliminating redundant programs.

For example, the Energy Information Agency currently collects a wide variety of statistics on oil imports. But these data are largely duplicated by statistics collected by the Customs Service.

Such information gathering could be unified easily at Commerce with the Customs Service providing the data and Commerce provid ing the computer capability and statistical analysis.

Merger also would lead to the better coordination'of policies.

For example, although responsibility for promoting U.S. coal exports rests with the Department of Commerce, the Department of Energy sets coal targets and is responsible for coal research.

The Interior Department, on the other hand, oversees coal leasing.

While the Reagan Administration's use of a Cabinet Council on Energy and Natural Resources has improved coordination to a degree, there still is considerable bureaucratic inefficiency.

Most important, a merger with one or more agencies would allow energy issues to be considered.within a broader context Downsizinq This final option would eliminate most of DOE'S regulatory functions, while retaining research and development, plus some sta t istical capability, within the department. The new agency which would be below cabinet rank, would be much like the Veteran's Administration or NASA and resemble the Energy Research and Development Administration (ERDA) of the Ford years. This would reduc e unnecessary personnel and could realize real savings to the taxpayer. There is still the danger that it would become a vehicle for. pork barrel projects It is less attractive, there fore, than the merger option, but still politically feasible.

CONCLUSION No option for dismantling DOE, no matter how sensible or carefully constructed, will succeed if the political will to make it succeed is lacking It is not clear that Congress or the White House has summoned that will. During the early days of the Reagan Administration, when officials were asked about abolishing DOE, the answer was always "after the budget and tax bills."

Reagan Administration officials now admit privately that "aboli- tion is not a priority.Il 10 For the energy. industry too, eliminating the Department of The fear of a proliferation of state Energy is not a priority energy agencies remains strong, and Reagan inspired reforms of regulatory programs have eliminated many of DOE'S points of conflict with energy companies. With the general slo wdown of economic activity, some of the same firms that were criticizing DOE'S largesse a few years ago are now eagerly competing for their share of the federal pie.

Yet the original reasons for the agency's termination remain as valid today as they were t wo years ago. The DOE still promotes a distorted picture of energy issues of the market to function. It still sends false and confusing signals through the economy. In short, it still has no reason to exist It still hinders the ability I Milton R. Copulos Policy Analyst