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WebMemo #910 on Energy and Environment

November 7, 2005

Time To Pull the Plug on Federally Subsidized Electricity

By

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.

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