Congress has
finally started looking for places to cut spending but so far has
left alone federal expenditures on energy. However, the government
wastes billions on unnecessary energy-related spending that should
be on the table. As a start, Congress should stop subsidizing 25
percent of the nation's electricity.
Perhaps the only
silver lining to hurricanes Katrina and Rita was the debate they
opened over excessive federal spending. Rather than keeping
spending in check in anticipation of a rainy day (both figuratively
and literally as it turned out), Washington has been spending
taxpayer money irresponsibly, including authorizations of billions
of dollars in the massive highway and energy bills enacted just
weeks before Katrina hit. When Congress tried to pile
Katrina-related spending on top of everything else, it turned out
to be the proverbial last straw and sparked an overdue
backlash.
Now, Congress is
considering potential spending cuts to offset new expenditures. So
far, the proposed cuts have not included federal spending on
energy. This is due in large part to the high energy prices made
worse by the storms and the belief that federal energy programs are
needed more now than ever. Indeed, some post-Katrina energy bills
would actually increase such spending.
But there is
plenty of federal spending on energy that does not deliver benefits
worth the cost to taxpayers, and there are even a few provisions
that contribute to our energy problems. Many federal energy
programs could be cut back or eliminated without any real loss.
Among the
costliest and least justifiable of such endeavors are the numerous
federal subsidies for electric power. It is time for Congress to
pull the plug on these programs.
The Origins of
Federal Electricity
In the 1930s, the
federal government created a host of programs designed to
facilitate the electrification of rural America. That goal was
accomplished by the 1960s, but these programs live on and have
actually grown into an unnecessary multi-billion dollar annual
drain on the Treasury.
Beneficiaries
include the Tennessee Valley Authority (TVA), the Department of
Energy's Power Marketing Administrations (PMAs), state and locally
owned utilities, and rural electric cooperatives. The TVA and the
PMAs sell federally generated power to the publicly owned utilities
and cooperatives, which in turn provide it to residential and
industrial customers.
These entities
currently provide 25 percent of the nation's electricity. The rest
is generated and sold mostly by investor-owned utilities
(IOUs).
The federal
assistance takes various forms. For one, these entities are exempt
from federal taxes, giving them a big competitive advantage over
IOUs. They also qualify for a variety of federally backed loans at
below-market interest rates and with favorable payment terms.
Moreover, over $10 billion of this debt is in default, and the
American taxpayer will ultimately pick up the tab. These entities
also get the benefit of power provided to them from the federally
run hydroelectric dams, which by law is sold at cost instead of the
market price.
These federal
benefits amount to about two cents per kilowatt hour, giving
federally subsidized power a substantial cost advantage over
market-priced electricity. In effect, all taxpayers are subsidizing
cheap electricity for a relative few. States like Tennessee and
Washington that get this electricity pay far less than those that
do not. And some publicly owned utilities and cooperatives are
using these advantages to encroach on the territory of IOUs and
gain market share.
These federal
expenditures have long since ceased to serve any useful purpose.
Not only have the rural areas that these entities were created to
serve been electrified for decades, but many are no longer even
rural. There is no reason why these federal giveaways should
continue.
The Solution:
Privatize the Electricity
The potential
savings are substantial if these entities were taken off the
welfare rolls and put on the tax rolls. Specifically, the TVA, the
PMAs, and hydroelectric assets should be privatized. Sale of these
assets would generate billions in revenues up front and would then
turn these tax-using entities into taxpaying ones. In addition, the
federal loan programs and below-market federal power for publicly
owned and cooperative utilities should be phased out. By some
estimates, these measures could save tens of billions.
Of course, these
entities are highly reluctant to change, especially when change
means market competition. And their customers, who get the cheapest
electricity in the country-thanks to subsidies from the rest of
us-are also strong proponents of the status quo. Earlier this year,
a modest proposal to slowly raise the price of federal
hydroelectric power to market levels met with strong bipartisan
opposition from legislators in affected areas, especially in the
Pacific Northwest.
Conclusion
As with any type
of spending that benefits a few, there will be political barriers
to making cuts in the electricity sector. The real challenge is
finding a politically viable way of accomplishing it. Nonetheless,
the need to rein in runaway spending should include efforts to end
these costly and unnecessary electric power subsidies and bring our
outdated electricity policy into the 21st century.
Ben
Lieberman is Senior Policy Analyst in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage
Foundation.