GOVERNMENT INCENTIVES FOR ENERGY RESOURCE DEVELOPMENT
David L. Richards
Energy Regulation
Summer 1981
The problem of energy supply and exponentially increasing
demand - both nationally and globally - is both real and enduring.
It is the result of a complex set of factors, nearly all of
which are beyond state or regional influence.
In fact, many
factors, such as the stability of O.P.E.C., are to a great
extent beyond national influence.
Any paper analyzing the
merits of state and federal government programs and policy
must first be premised with the fact that there are no simple
solutions to the problem of meeting the nation's energy requirements.
The immediate problem 1s a petroleum (including crude,
products, natural gas, and derivatives) shortage, both national
and global, brought about by political and financial decisions
beyond state or local control.
The potential dislocations
of such a shortage are economic and social, will occur 1n
direct and indirect ways, and can be predicted to some extent.
Despite the fact that energy output in the United States
has increased substantially over the past two decades, all
data indicate that the petroleum shortage will increase at
least through the 1990's even with significant conservation
measures. 1 The shortage can be alleviated only by increasing
the supply of alternative energy sources and by changes in
life style which reduce demand or growth in demand over time. 2
The focus of this paper is energy policy as it exists
within the state of Texas.
Nevertheless, the relationship
between the energy producing industry and the federal government cannot be overlooked or underestimated.
Federal funding of private research and development aimed
at discovering new ways to produce energy are necessary to assure
the United States of future long-term supplies.
Walter S.
Mossberg, an editorial writer for the Wall Street Journal,
noted in a 1978 article that the Carter administration was
drawing up preliminary plans for "the investment of hundreds
of millions of dollars in Energy Department funds, loan guarantees
and possibly small tax incentives to develop substitutes for
oil and natural gas that can be used in the years between 1985
and the end of the century." 3
But how deeply and how broadly
the federal government should become involved in energy research
and development remains an important policy issue to be decided
by Congress as well as the executive branch.
The current approach
of the Reagan administration appears to be energy incentives
through the use of decontrol of price and the dismantling
of "anti-producer" agencies and laws.
recently reported,
"[a] dramatic
As Newsweek magazine
example (of the Reagan Adminis-
tration's policy) was the closing last week of the Denver branch
of the Office of Surface Mining, which helps enforce the stripmining reclamation law.
The move is part of Watt's plan to
reorgan1ze the entire OSM, cutting the staff from 1,000 to 600~ 4
The Reagan administration appears to place primary emphasis
on increased production rather than conservation, but it is
important to note that the hoped for increase in production
will be from a lowering of government standards rather than
an influx of federal dollars.
The
American public's attitude toward the development of
energy resources is mixed and at times contradictory.5
The
current view can probably be characterized as one in which
the need for cheap energy is paramountJbut with continued
heavy emphasis on the need for a clean environment, i.e., a
"we want to have our cake and eat it too" mentality.
Realistically, if the production and distribution of
energy resources are left to the private sector, we will have
to rely on market incentives to induce private enterprise
to conduct research to develop alternative energy sources.
Among these incentives could be the Reagan theory of profits
at the uncontrolled pr1ce, additional price rises, or perhaps
the likelihood that pr1ces will rise if no research is undertaken.
If the federal government chooses to control domestic
prices at current levels, this removes much of the incentive
for private industry to undertake research to develop new
techniques for extracting oil and natural gas from hard-torecover deoposits or from coal.
But if all energy prices are
0 .{)1~~
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....
totally decontrolled there are several reasons why the private
sector might still make inadequate investments in energy research
and development.
As John E. Tilton has noted:
The output of research and development is new
knowledge and technology. Unlike the output
of a steel furnace, an automobile assembly
line, or most other production processes, new
knowledge and technology possess the unusual
quality that they can be sold or given away
and still be used by the transmitting organization.
Indeed, because of imperfections in
the market for new knowledge and technology
due in large part to their nature, firs can
rarely prevent some dissemination of their
research and development results, even if
they try to do so through secrecy or patents.
As a result, the social benefits from research
and development o~ten appreciably exceed the
private benefits.
Firms will engage in research and development when they
expect to earn a profit by doing so.
For some projects, how-
ever, many of the advances in new technology or production
techniques are easily copied by other firms.
Since the benefits
of a successful research and development program will go to
many firms, an individual firm has little incentive to bear
the entire cost of such a program itself.
The result may be
that private companies are not willing to make sufficient
investments in energy research and development to guarantee
that America's future energy needs will be met 1n the most
efficient manner.
One way the federal government could address this problem
would be by strengthening the private sector's incentives to
do research and development.
It could accomplish this by
broadening existing patent laws, granting firms the right
to benefit exclusively from their discoveries, lengthening
the life of patents beyond the current seventeen years, and
by having the courts at all levels of government enforce the
rights of energy producing firms to charge royalties to anyone
using the new technology they develop.?
Another possibility
is for the government to encourage greater cooperation among
firms and perhaps industry trade associations to conduct
research and development.
It is true that this would entail
the creation of a new agency or at least a new department
within an existing agency, a fact not likily to be greeted
with enthusiasm by the Reagan administration.
Nevertheless,
the creation of such an agency would provide greater incentives to the private sector to make research and development
expenditures, since a greater proportion of the returns to
research and development investments would be appropriated
by industry as a whole.
lS
The potential drawback to this approach
that it might increase the monopoly power of the energy
industry.
Before the oil embargo in 1973 over two-thirds of federal
funding of research and development funding was going toward
nuclear power.
At the time such a policy could be considered
reasonable since expanded federal activities in traditional
energy areas were probably likely to supplant or duplicate
research and development already being carried out by the
private sector.
By 1977 federal expenditures on energy research
.
.
and development had reached 3.2 b1ll1on dollars.
lt+H.r
.
~Correct1ng
for inflation this amount was equal to nearly four times the
level of expenditures in 1973, before the oil embargo. 8
Some would argue that eliminating duplication is not,
however, a wise strategy.
Under the William F. Buckley/Adam
Smith view,the chances for technical and economic success are
imp~oved
by duplication; that is, not only does duplication
make it more likely that a solution to a given problem will
be found, but when two different processes are developed to
meet the same goal, such as is taking place in the war over
"video-discs", often a combination of the two proves cheaper
or more efficient than either one.
Federal control over energy research and development
also might have negative effects on private firms incentives
for doing rese~ch and development, as John Tilton notes:
The ability to get research and development
contracts and to please government sponsors
becomes important. This tends to shift the
emphasis from achieving commercially useful
and profitable results to producing difficult
and impressive technical advances that may
or may not be of great use to society. Even
more important, the incentives to produce
any results are diminished because a large
part of the cost of failure is borne by the
government.
In addition, a large portion
of the benefits of success are inappropriable
since the right to patent or withhold inform~
ation on new developments produced under
government contract is limited.9
The other major drawback is one inherent in all government
programs; increased federal control over any project means
that any new technology developed will be developed slower.
Other possible strategies for increasing U.S. energy
resources include: accelerating domestic supplies, energy
conservation and demand management, and emergency programs.l 0
Offshore drilling on the continental shelf could be encouraged
through Secretary Watt's continued efforts to modify federal
leasing policies.
Accelerating and streamlining environmental
impact statements for energy producing industrys will no doubt
be considered by the Reagan administration.
The situation
may arise where the federal government implements a national
energy policy
in response to a severe shortage.
As one report
put it,
Because the marketplace fails to take account
of foreign policy concerns, government may,to
protect the national interest, take actions
that interfere with the price system. Oil
production in the United States has a higher
value to the nation than production in Libya,
for example, because it is more secure.ll
Federal control of the development of energy resources
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has been most extensive in the nuclear power industry.
The
level of future federal involvement is likely to at least
rerna1n at its present level in the wake of the Three Mile
Island accident and the understandable controversy surrounding
the nuclear safety 1ssue.
Many nations already have nuclear
power programs and many more are planning them.
As the
Committee on Economic Development has pointed out, "Nuclear
energy almost certainly will be essential to meeting the
world's future energy needs, but its weapon potential is a
threat ... "l2
Future situations similar to the Iraq/Israel
confrontation are,to a great extent, out of the control of
the U.S. government.
The federal government, however, is
not likely to accept the argument of an inherent lack of
control over foreign nuclear production as a reason for E!J._ya_te
control of American nuclear production.
An unresolved issue of nuclear policy is the proper
role of the U.S. government in the ownership or control
over production and research and development of facilities
for nuclear fuel.
All uranium enrichment in the United States
is now done by the federal government, us1ng facilities originally built for weapons programs. 13
The key point for the United States is that there is an
essential diplomatic role for the federal government parallel
to an essential production and commercial role for private
enterprise. Coordinating these two roles is the immediate
challenge. 14 As it has been noted throughout out our course
on Energy Regulation, the complexity involved in planning the
development and distribution of resources in even one reg1on
1n the economy is immense.
The costs to the public of expanding the federal governments
role 1n the development of energy resources need to be weighed
against the benefits.
Murry L. Weidenbaum asserts that the
direct costs of government regulators to taxpayers in fiscal
1978 reached $3.8 billion and that "professional studies show
that the annual cost to the consumer comes to over $60 billion
a year. II 15
Wh et h er the costs of decreased pr1vate
.
sector
freedom are surpassed by the benefits of future federal control
over the research and development of energy is subject to
dispute.
The answer probably depends on the administration
in power and the type of emergency situation created by national
or inter-national events.
Energy Resources and Texas
Many state institutions are already engaged in a variety
of energy research projects, such as the Crosbyton Solar Energy
Project, and these institutions generally contribute a portion
of the cost of the research.l6
These projects rely on a
patchwork funding pattern whereby state funds are supplemented
with federal matching funds.l7
The most important sources of fuel for electrical generation
1n Texas in the future will probably be coal and , assuming a
renewed interest in the short future, nuclear energy.
With
regard to production of coal and uranium, Texas is not a significant producer of either fuel, and what coal is available 1n
Texas seems to be primarily low gradelignite that is high 1n
ash content and not particularly suitable for generating electricity.l8
Texas imposes no occupation tax on the production
of these fuels, and there 1s no significant regulation on the
production of either, aside from general environmental and
safety regulations.
In any event, most aspects of nuclear
energy use are preempted by federal law, leaving little room
for state action.
With regard to the operation of coal-fired
and nuclear generating plants, perhaps the only important
area for state action
lS
1n connection with federal environ-
mental law, because a state land use planning process might
make it much easier to resolve the problems involved in siting
these plants.
With regard to assur1ng a supply of imported coal from
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other parts of the country, state action may be significant in
helping to solve some of the problems of transportation involved.
There are sources of low-sulpher coal for electrical generation
in New Mexico, Colorado, Wyoming, Montana, and North Dakota,
but the inadequacy of rail facilities between these states and
Texas will probably make it impractical to import coal in unit
trains.l9
For a variety of reasons, the most practical solution
may turn out to be the use of coal slurry pipelines.
This
method involves the crushing of the coal and mixing it with
water, which results 1n a slurry that can be pumped through the
pipeline.
The Black Mesa Pipeline, which connects an Arizona
coal field to a Nevada generating plant, is nearly 300 miles
long, and thousand mile pipelines are apparently feasible with
even existing technology.20
One of the single most important factors in the state's
economy during the next fifty years will be the amount of
oil and gas brought into the state for refining and processing
from offshore wells and foreign countries.
Roughly 28% of
the national refinery capacity is located in Texas, and the
state's economic base is largely founded upon the refining
and petrochemical industries.2 1 The petrochemical industries
are located here because of the concentration of refinery
capacity, which in turn is located here in Texas because Texas
has long been the nation's biggest producing state. But as
domestic in state production declines Texas may find that
in the future it may have idle refinining capability.
In order to maximize crude imports for Texas refineries
this state should consider the desirability of encouraging
the construction of facilities for unloading the very large
crude carriers now being built.
The Port of Houston is 100
miles away from water that is 100 feet deep, the depth required
by the takers, and
nowhe~within
the state's territorial
waters is there water of sufficient depth. 22 This means
that deep water port facilities for Texas will require extensive dredging or construction on the ocean some 25 to 30 miles
offshore. 23
This area lies beyond the three-league limit
claimed by Texas, but it would lie within the limits of the
continental shelf which is claimed by the federal government. 24
Federal control in this area is paramount with regard to American
states, and federal approval would be essential to construction
of any offshore port facility in these waters.
Texas, on
the other hand, cannot unilaterally authorize the building
of such a facility, but present state law would prohibit the
use of any pipeline leading into the waters of the Gulf of
Mexico for handling, loading, or discharging oil into ships,
tahks, or vessels, except in case of an emergency as construed
to exist by the Texas Railroad Commission.25
If a deep water
port is, or becomes, technologically feasible and desirable,
these legal impediments should be cleared up as soon as possible.
In theory, Texas could raise money through an equivalent
of the Federal Windfall Profits Tax and "plow-back" the revenue
into the development of a deepwater port facility or other
form of technology intensive energy resource.
The federal
taxing power is not exclusive, but the commerce clause limits
the power of the states to tax products that are in interstate
commerce or have a substantial effect on interstate commerce.26
In applying these limitations the Supreme Court has attempted
to strike a balance between compelling interstate commerce
to "pay its own way" and preventing the states from establishing
patterns of taxation that discriminate against or unduly burden
interstate commerce.2 7 In general, the states may tax natural
resources produced within the state until they reach the point
at which they enter the stream of interstate commerce, which
~s
usually defined as the point where production and processing
28 A t t
.
.
. 1ntersta
.
t e commerce b eg1ns.
.
cease an transm1ss1on
1n
s a e
tax may also be imposed when there is a "break" 1n the flow of
interstate commerce,29 and a tax may be imposed on goods imported
from out of state that have come to rest in the state for a
sufficient length of time, if the purpose of the interruption
in interstate transportation is not primarily for the facilitation
of further transportation.30
Perhaps the Texas Railroad Commission
or the State Secretary should apply for a declaratory judgment
to determine the exact limits and powers of the state in this
area.
Certainly, state and federal coordination in the develop-
ment of energy resources should be a desirable goal.
Present
energy resources must be maximized to their greatest potential
and new energy sources should be developed without delay. Hopefully a coherent and workable national energy policy which, in
part, provides for increased incentives for new technology will
soon be forthcoming.
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FOOTNOTES
1.
Business Week Index, Business Week,
(June 15, 1981).
2. The major theories can be plotted using demand/suppl y curve anal y sis.
@f
Qf?
fA-, '1('f)fk @ dem~WJ I''"' (_1 ' .<J
CA~I,:J
~~
D
lo
i.lJuP,/'fl
t-•-
lorJPr
truP ,
~
'lnV'"·. tJ
/'{
~-tJr/(''.;1/f ~17'1"1"' -~/~yll'f
(),.,.,A' k"'
1-ht? ~amP. /'f.~~-111-
If) 1, (1.
3.
Walter S. Mossberg, "Carter Starts on Second Energy Proposal,
Though His First Is Still before Congress," Wall Street Journal,
April 11, 1978, p.3.
4.
National Affairs, Newsweek, June 29, 1981, p.32.
5.
Gallup Poll Organization conducted for Newsweek on June 17 and 18,
1981. Public gave opinions reflected by the following figures:
Government regulations
Agree
and requirements to
protect the environment
are worth the extra costs
added to the products and
services the average
person buys.
58%
Qisagree
36%
Relaxing cleaft-air
requirements to permit
industry to burn more coal
rather than imported oil. 55%
36%
Enlarging the area of
offshore oil drilling
on the East and West
coasts.
22%
70%
6.
John E. Tilton, U.S. Energy R&D Policy: The Role of Economics
(Washington, D.C.: Resources for the Future, Inc.,l974), p.29 .
7.
Robert A. White, Patent Litigation Vol. 3,
Company, 1980).
(Matthew Bender &
footnotes
8.
U.S., Executive Office of the President, Office of
Management and Budget, Special Analyses: Budget of
the United States Government, Fiscal Year 1979, p.312.
9.
Tilton, U.S. Energy R&D, p.46.
10.
U.S., Congress, Senate, Committee on Interior and
Insular Affairs, Project Independence, 93rd Cong. 2nd
sess., November 21,1974, pp.57-60.
11.
Ford Foundation Energy Policy Project, A Time To
Choose: America's Energy Future (Cambridge,Mass.:
Ballinger Publishing Co., 1974), p.7.
12.
Committee for Economic Development, Nuclear Energy
and National Security (New York,l972), p.l2.
13.
Id.
14.
Id., pp.24-25.
15.
Murray L. Weidenbaum, "A Free Market Approach to
(cont.)
Economic Policy," Challenge, March-April, 1978, p.41.
16.
House Cornrn. On Science and Astronautics, Inventory Of
Current Energy Research and Development, V&l. I, p. xiv.
17.
Id.
18.
The Energy Institute, Texas Energy: Flows, Forecasts & Policy
Implications, (1974), p.l6.
19.
"Pipeline Transport Wins Out Over Rail," Coal Age 106.
20.
National Petroleum Council, U.S. Energy Outlook-Coal
Avialability 200 (1973).
footnotes (cont.)
21.
See Science Policy Research Division, Library of Congress,
Energy Facts 385 (1973) .
22.
Texas Offshore Terminal Comm'n, Plan for Development of
A Texas Deep Water Terminal (1974) p.31.
23.
Id.
24.
Convention of the High Seas, 13 U.S.T.
25.
See TEX. PENAL CODE ANN. art. 1631 (1972).
26.
See, e.g., Michigan-Wisconsin Pipeline Co. v. Calvert,
347 u.s. 157 (1954).
27.
Id., note 29 at 165.
There the Court stated that:
"Under the Commerce Clause interstate
commerce and its instrumentalities are
not totally immune from state taxation,
absent action by Congress. Frequently
it has been stated that interstate commerce
must pay its own way ... Numerous cases have
upheld state ieview where it is thought
that the tax does not operate to discriminate against commerce or unduly burden
it either directly or by the possibility
of multiple taxation resulting from other
taxes of the same sort being imposed by
other states."
28.
See, e.g., Michigan-Wisconsin Pipeline Co. v. Calvert,
supra note 29.
29.
See, e.g., Kelly v. Rhondes, 188
30.
United Airlines v. Mahin, 410 U.S. 623 (1973).
u.s.
Of0n ~...
(1960),
1 (1903).
~1.