Earth Rights Institute - Intergovernmental Competition for Energy Revenues

EXCERPT FROM: "Intergovernmental Competition for Energy Revenues"

by Mason Gaffney

NTA Proceedings, 70th Annual Conference, Louisville, 1977. Proceedings published 1978.

This reading is here for the light it casts on the current and ongoing energy scarcity.
Contains itemized summaries of subsidies to both production and consumption of oil and gas, and how they lead to energy crises.
Bear in mind, this was written in 1977. Some of its specific references are out of date today. The basic ideas, however, are true as ever. That’s one of the good things about basic principles: they endure, while particular applications come and go, like politicians and fashions.

A Word for the Public Interest
In this hurly-burly of intergovernmental competition for revenues, what about the public interest. an efficient allocation, optimal conservation through time. and adequate incentives to produce? The public interest is generally best served by the operation of consumer sovereignty in free markets, free both of private monopoly and public intervention. Government, I trust we have all learned. does not represent the people. Government represents organized groups. The market represents the people better than government. (Government can raise revenues without disrupting the market by seeing that taxation is uniform and neutral.)
Federal taxation has long been soft on the energy industry, violating the equimarginal criterion for neutrality. This practice shifts rents to producing states --either to their treasuries, or to private landowners alert to take advantage of these rents. In addition, producing states have a long history of more or less successful cartel management, raising prices to shift more rents in their direction. Federal intervention through the Connally Hot Oil Act and the Eisenhower quotas on imports and the long subjection of Gulf of Mexico OCS lands to Texas politics were all part of this pattern.
Those who take the sword of politics must face the sword, and consuming states have struck back with their own price regulations which now hold prices below market clearing levels. While there may be poetic justice in this, as an approach to equity it is as crude as surgery with a rusty tin can. As to efficiency, it approaches a national disaster. Preferential tax treatment subsidizes production while price regulation subsidizes consumption. This double subsidy effect is fortified by a long list of like-minded policies hyping up both supply and demand so that they meet at a much higher volume than they would in an unbiased market.
Let's itemize some subsidies to consumption.

There is the highway trust fund which milks drivers on city streets to subsidize subeconomic highway extensions in new and lean territory, spearheading the development of the most energy-intensive land settlement pattern the world has ever seen.

There is considerable exemption of autos and trucks from the property tax, which capital in other forms must pay.

There are promotional (declining block rate) rate structures of gas and electric utilities, which structures are based on obsolete and inapplicable assumptions about unit costs that decrease with volume of sales. They are retained now, not so much to reflect or cause cost savings as to maximize rate bases.

There is utility price discrimination which features cross-subsidized low wholesale rates for primary industries of low value-added, including agriculture.

There is a capital-intensive, energy-intensive bias in military procurement which consumes some 10% of all our energy.

There is the complex of policies that generate urban sprawl, a pattern which causes heavy line losses, heavy auto and truck use. and one-story dwellings which are so expensive to heat.

There is a transcendent bias in favor of primary products (exemplified by but not limited to freight rate structures based on value of service rather than cost of service) which overstimulates energy-intensive primary production.

There is a monument-building bias in public works which turns into an energy-using bias, exemplified by the Interstate Highway System, and the California Water Plan pumping water over the Tehachapis.

There is the effluence-affluence mindset that lets energy users in effect appropriate pollution easements through everyone's air without being charged for the damages. All these and more are subsidies to consumption.

Now let's itemize some production subsidies.

Tax subsidies include the familiar depletion allowance, expensing intangibles, and capital gains treatment.

In addition there are:

deferral of tax on unrealized appreciation of reserves;
exemption from property taxation for operations outside state boundaries, for example in the OCS, and virtual exemption in sparsely populated areas inside state boundaries;
avoidance and evasion of state taxes by multinational corporations;
the foreign tax credit and deferral of tax on unrepatriated profits;
favorable tax treatment of oil tankers using flags of convenience;
(added, April 2005) The privilege of abandoning leaseholds bit by bit, while retaining the sections proven “commercial” (i.e. productive), and expensing for tax purposes the value of the abandoned bits.

In pipeline networks, regulatory bias creates the same incentive to extend subeconomic collection feeder lines as it does distribution lines.

There is an import subsidy implicit in the entitlements system.

There is the concept of letting investments be deducted like expenses so long as the capital remains captive inside the industry, a concept Senator Russell Long is running wild with.

There is a propensity towards premature leasing of public lands, for example in Alaska and the federal OCS, using gross rather than net gain as a criterion of value.

There is discrimination against old production, which in effect milks old producers to subsidize new ones.

There is the long-term effect of vertical integration in the industry which forces each firm to develop its own reserves.

There is the exemption of nuclear power plants from public liability.

There is a general failure to charge the production end of the industry for environmental damage (which subsidizes production, just as giving free pollution rights to consumers subsidizes consumption).

There is regulatory bias which lets utilities invest prematurely in their own reserves, adding the investment to their rate bases.

Subsidized supply and subsidized demand: how do they come about? We have inherited two conflicting cultural traditions to resolve. There is the "natural heritage" tradition which says that subsoil resources are peculiarly affected with a common interest. A second tradition tells us that discovery and exploration of resources are the most worthwhile private activities, deserving subsidized support of incentives.
Instead of asserting the common interest through taxation, in our times we have begun to assert it through maximum price regulation. And, instead of rewarding the discovery of better conservation techniques, we continue to subsidize discovery and extraction of increasingly scarce subsoil reserves.

http://www.earthrights.net/docs/subsidies-prod-cons.html