Date: Tue, 6 Jun 1995 09:59:18 -0400 (EDT) From: Competitive Enterprise Institute To: Recipients of the CEI List Subject: CEI-List: Cheap Elect., Dammed Salmon "If Tax-subsidized BPA Can't Compete, Then Let it Sink." By Paul Georgia, Research and Development Analyst at CEI Appeared in *The Columbian* Wednesday, April 19th, 1995. In seeking ways to reduce the federal deficit, both Congress and the Clinton administration have taken a look at privatizing the federally-owned power marketing administrations. PMAs sell subsidized electricity produced at the 129 federally- owned power plants. The Clinton administration, for its part has proposed privatizing four of the five PMAs -- but not the Bonneville Power Administration. Like all PMAs, Bonneville was created to promote economic development by providing cheap electricity. Launched by Franklin D. Roosevelt in 1937 with one dam, the BPA has since grown into a government colossus that markets hydroelectricity from 30 federal dams on the Columbia and Snake rivers. It provides approximately 50 percent of all the electricity consumed in Idaho, Montana, Nevada, Oregon and Washington. This considerable government presence in the power- generation market has created powerful interests. In particular, the aluminum refining industry, which requires massive amounts of electricity, became a dominant industry in the Northwest due to the availability of subsidized hydropower. As a result the Northwest aluminum industry accounts for 40 percent of U.S. aluminum capacity. The BPA subsidy, which benefits both residential and industrial power users, costs taxpayers approximately $1 billion per year. In 1993, aluminum smelters bought 25 percent of BPA's output, paying 2 cents per kilowatt hour, one-third of the national average for industrial users. Residential electricity rates are only about 55 percent of the national average. These electricity consumers have fought hard to protect their government handout. In the mid-1970s the BPA announced that there were no more viable dam sites on the Columbia River and that it would no longer be able to meet all of the region's electricity demands. BPA's private-sector consumers, including aluminum smelters, would have to buy some of their power from privately owned utilities, raising their rates considerably. The threatened interests went straight to Congress and flexed their political muscle. Part of the solution was to construct not-for-profit nuclear plants to supplement hydropower. The plan was a complete boondoggle. The uncompleted nuclear plants added $4 billion to BPA's already enormous debt load and cost private investors billions of dollars. The taxpayer has not been the only casualty in this pork- barrel promenade. The native salmon populations of the Columbia river have been seriously depleted as a result of the extensive dam building along the Columbia River. Spawning salmon have returned to the Columbia river in fewer numbers each year, from a previous high of 16 million to 2.5 million. Concern for endangered salmon has further complicated the privatization debate. Environmentalists, who have traditionally relied on government to solve environmental problems, resist the idea of turning BPA over to private individuals. They believe that such a move would doom the salmon. Environmentalists have been successful in forcing BPA to spend money for salmon restoration and to build ladders that enable salmon to migrate past dams. Private owners, they believe, would be less charitable. However, government solutions to government-caused problems are rarely successful. And the government, through generous subsidies, has encouraged increasing electricity consumption by artificially reducing electricity rates. The Pacific Northwest consumes 61 percent more electricity per capita than the rest of the United States. This artificially stimulated demand has forced BPA to increase its electricity production capacity, resulting in unprecedented dam building on the Columbia River. Had power generation had been left in the hands of the private sector, such price distortion would not have taken place. Demand for electricity would have been lower, eliminating the need for much of the production capacity constructed by BPA. Finally, BPA is struggling under a new problem with which it is not familiar. The power generation sector has undergone enormous changes over the last few years becoming more and more competitive. BPA, despite its subsidies has been steadily losing market share to natural gas and other energy providers. On March 15 and 16 the Senate subcommittee on energy and water development, which include several senators from the Pacific Northwest, held hearings to decide how to save BPA from the new competitive realities of the electricity market. This is folly; BPA shouldn't be saved. If it cannot compete on the market it should disappear. Fleecing the taxpayer to protect an inefficient non-competitive entity has always been both bad economic policy and bad environmental policy. If western lawmakers -- among the most conservative in Congress -- are serious about cutting spending, they must be willing to eliminate their own pork-barrel projects. Going after unpopular programs such as mohair subsidies is easy. But congressional Republicans cannot rightfully condemn the welfare state while simultaneously protecting one of FDR's most wasteful New Deal projects. If conservatives wish to maintain credibility they must, at the very least, eliminate BPA subsidies. BPA should be forced to compete on a level playing field with other energy providers. Even better would be the liquidation of BPA's assets and the withdrawal of government from the energy business. This would be beneficial to the endangered taxpayer as well as to the endangered salmon. _______ __________ ___________ / | / | | | |__________ | | | | \ | | \ _______ |__________ ___________ COMPETITIVE ENTERPRISE INSTITUTE 1001 Connecticut Ave. NW #1250 Washington, DC 20036 202-331-1010, fax 202-331-0640 Permission to reprint must be obtained from the publishing journal listed above. Permission to copy granted as long as these lines are left intact. To subscribe to the CEI List, send a message to CEI@digex.com. "The Virtual Hand: CEI's free-market guide to the information superhighway" is available for $5. CEI's monthly newsletter, "CEI UpDate," is free to contributors of $25.