A few weeks before the election, we asked a Reagan energy staffer how the governor reconciled his free-market ideology with his support of technologies -- notably synthetic fuels and giant power stations -- that have shown they cannot compete in a free market. His candid, if disquieting, response: "We haven't analyzed that yet."
It is too early to tell whether analysis will prevail in the battle within the Reagan transition team between the economic conservatives and the corporate socialists. The free marketers favor competition, individual choice, de-subsidization and least-cost solutions. The board-room boys are already lining up at the federal subsidy trough to resuscitate victims of an incurable attack of market forces. Will the salutary discipline of the marketplace or the whims of bureaucrats and the influence of friends guide hundreds of billions of dollars of irrevocable investments?
The Department of Energy has never followed a least-cost energy strategy: supplying the amount, type and source of energy needed to provide each energy service in the cheapest way. A cost-cutting approach would list on one piece of paper the various ways to provide comfort or light, run trucks or televisions, make steel or bake bread, and then recommend the cheapest ways first. Such cost ranking by the Harvard Business School energy study found that generally the best buys are efficiency improvements; next, appropriate renewable sources ("soft technologies"); next, synfuels; and last, costliest of all, central power stations. DOE has taken these options in reverse order, worst buys first.
Ninety-two percent of our energy is used as heat or vehicular fuels. The premium uses that can economically justify electricity -- the costliest form of energy -- are only 8 percent, and are met twice over by today's power stations. eYet electricity irrationally commands 65 percent of DOE's R&D budget. For synfuels just to get off the ground requires $20 billion in subsidies and a decade or more. But during 1973-78, the United States already got twice as much energy capacity from raising energy productivity, twice as fast, as synfuel advocates claim they can do at 10 times the cost. In 1979, some 97 percent of U.S. economic growth was fueled by wringing more work from our energy, only 3 percent by increasing energy supply. Millions of individual actions in the marketplace saved money by saving energy, outpacing the centrally planned supply programs by nearly 40 to 1. The second fastest growing contribution to energy supply has been the vast array of renewable sources. Nuclear power, subsidized by tens of billions of dollars over decades, now delivers about half as much energy as wood.
Roger Sant, federal energy conservation manager in the previous Republican administration, has analyzed in Harvard Business Review a "least-cost energy strategy" of buying the cheapest options. If pursued for the previous decade, it would have cut our 1978 purchases of oil, coal, and electricity by about 28 percent, 34 percent, and 43 percent, respectively -- while providing the same energy services that we received in 1978 and costing 17 percent less than we actually paid for them. A new draft study for John Sawhill (now chairman of the Synthetic Fuels Corporation) finds that a least-cost strategy for 1980-2000, if GNP increased by two-thirds, could simultaneously reduce total energy use by one-fourth and non-renewable fuel use by nearly half -- with no life-style changes except a great saving in money and jobs.
Such a conservative policy, removing market imperfections and subsidies so as to "minimize consumer costs through competition," and unleash the genius of private-enterprise innovation, would be the best thing that ever happened to energy policy. It is also consistent with President-elect Reagan's opposition to synfuel subsidies and to the Energy Mobilization Board.
Yet among his strongest constituents, lopsidedly represented on his Energy Advisory Board, are the commercial advocates of precisely those energy technologies that cannot withstand competition. We heard such a synfuel promoter proclaim in Wyoming this fall that, although energy efficiency gains and solar energy are laudable, they won't amount to much in this century, so there will be, he said, a market for his costly synfuel. We responded: "That's fine; that's your business judgment. But you might be wrong. Do you want to put your stockholder's money where your mouth is? Or do you just want to take the profits if you're right and make everyone else pay the costs if you're wrong?" That is, of course, what he wanted; and he was upset to have it described as corporate socialism.
Will Reagan turn out to be a blue conservative or a red socialist? Try these litmus tests:
Will he seek to repeal the synfuel subsidies he opposed?
Will he get DOE's major corporate contractors off welfare and back to work on products they can sell in the marketplace?
Will he allow Westinghouse, et al., who say the Clinch River Breeder Reactor is such a good business deal, to pay for it themselves?
Will he refrain from bailing out the Barnwell reprocessing plant and make the nuclear industry, like the chemical industry, pay for cleaning up its own wastes?
Will he de-subsidize the energy sector? (Solar advocates sought tax credits only because conventional supply enjoys far larger subsidies -- tens of billions of dollars per year. It would be better economics not to subsidize either.)
Will he allow a genuinely competitive marketplace to choose between energy conservation and production? Between big and small businesses?
Will he encourage a least-cost, best-buys-first approach to providing energy services (as the California and Idaho Public Utility Commission require of their utilities)?
Will he stop the bailout of Northwest private utilities at public expense, halt TVA's trend toward ruinous overcapacity, and stop the financing of private utilities' power stations via cheap federal rural-electrification loans?
Will he cancel pork-barrel federal water projects and charge incremental water users truly incremental costs -- often tens or hundreds of times what they now pay?
Will he reject lavish, spendthrift measures in favor of lean, cost-effective investments to ensure national security?
These and similar actions could infuriate some powerful constituents. Yet nibbling at the bullet would betray conservative principles and those who voted for them. It would expand unto national insolvency the federal penchant for fiscally irresponsible lemon socialism -- throwing taxpayers' money at problems. If the litmus paper turns a muddy gray, a major national opportunity for efficient management will have been squandered.