Energy: the Reagan subsidy game

Despite the Reagan administration's statements that businesses should compete "without the benefit of taxpayer subsidies," the White House has offered huge federal benefits to a few selected firms. In fact, the administration has brought the expensive subsidy game to a new high in Washington.

The contradictions and inconsistencies are nowhere more apparent than in the energy budget. While the administration cuts solar and conservation programs by 74 percent, it increases nuclear spending by 35 percent.* While the administration wants to eliminate all "market development" activities for solar and conservation industries, it wants to finance the Clinch River breeder reactor, which David Stockman in 1978 called an outrageous boondoggle for the nuclear industry. While the administrative wants to increase United States security by raising the military budget, it has cut programs that produce near-term energy to reduce our reliance on imported oil and that prepare the country for an energy emergency. And, finally, while the administration wants to eliminate the Solar Conservation Bank and pin all hopes for energy conservation on the impacts of deregulation, it is holding fast to the belief that the oil companies that profit from deregulation should also annually receive $5.2 billion in depletion allowances and deductions for intangible drilling costs.

Subsidies are not new to energy companies. The federal government has been in the energy business for many years. Virtually every form of energy sold in the US benefits from massive federal subsidies for development, transmission, and use. Mineral depletion allowances, accelerated depreciation schedules, investment tax credits, federal assumption of liability for nuclear accidents and high-level radioactive waste disposal, federal ownership and subsidization of uranium enrichment, federal development of synthetic fuels, and the rural electrification programs -- these are just a few of the many mechanisms by which energy prices have been "administratively adjusted" to promote coal, oil, and nuclear power. As a result, the energy marketplace is anything but "free."

In particular, the tax code stands as a monument to the skill and power of lobbyists for various energy technologies. Consider that more than 90 percent of the federal taxes collected from private utilities are returned directly to the utilities through various tax-code loopholes established for their benefit in the tax code. For some perspective, this annual federal subsidy to utilities is three times as large as all the federal expenditures for solar development in the last three decades.

A 1979 report by the Battelle Institute for the Department of Energy conservatively pegged federal subsidies to energy companies since 1918 at $220 billion. Some energy analysts contend that the level of subsidies could be almost twice that figure. A recent report for DOE, for example, concludes that the cost of nuclear electricity would be double its current price if federal subsidies had not been given to the industry since 1957.

Nuclear power subsidies, of course, were promoted in the early 1950s as part of the Atoms for Peace Program with little concern for cost-benefit analysis. Public officials were convinced that high levels of federal support were justified to catalyze the nuclear power industry which presented, in their opinion, a good opportunity for providing cheap electricity. Likewise, oil depletion allowances were first justified to promote a burgeoning but speculative domestic oil industry.

But yesterday's energy realities are today's myths. The nuclear industry has not delivered cheap electricity. In fact, conservation has so decreased energy demand projections that many utilities with excess generating capacity have been forced to cancel planned nuclear expansion. Moreover, when oil depletion allowances were first approved, oil cost approximately $3 per barrel. With the world price now near $40 per barrel, there is little justification for the tax benefit.

Despite these economic changes, the Reagan administration and Democrats proposed larger and larger benefits for energy firms in an effort to win votes from representatives of oil-producing states. The winner was the administration's offer to curtail the windfall profits tax and provide royalty benefits that would cost US taxpayers approximately $46 billion by 1990.

In addition to being inconsistent with free enterprise ideals, the Reagan administration budget and tax expenditures accentuate the decades-old federal bias against new energy sources in favor of oil, coal, and nuclear power. Advocates of new technologies, particularly solar and conservation measures, rest their arguments for federal support upon the government's need to balance this market distortion.

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