Just about every form and phase of U.S. energy production and use is now regulated. What was not regulated before the 1973-1974 oil embargo, is now. Of the major energy sources—oil, gas, coal, and electricity—only coal escapes direct price controls. Regulation, of course, extends well beyond price controls. It covers environmental controls, safety issues, minimum automobile gasoline consumption per mile, appliance labeling, mandatory coal use in power plants, government-funded energy research, and so forth. Such regulation is not confined to the federal level; much of it is carried on by the state and local governments. Nor have we necessarily seen the limits of energy regulation. For example, in the last Congress, the divestiture or splitting-up of oil companies was extensively considered though not resolved.
The policy question is whether all of this regulation is needed or even helpful. Economists tend to view regulation as a last resort that is acceptable only where there is a failure of the free market. For instance, it appears that regulation of some sort is necessary to control environmental damages from energy production and use because they are external costs that are not included in the market price, and thus fail to motivate the producer or consumer of energy. Other areas are more controversial, and there is substantial agreement that even if the need for government intervention is conceded, much of the existing regulation is confused and at cross purposes.
Probably the main area of confusion concerns energy conservation, price controls, and oil imports. On the one hand, there is tremendous pressure to keep energy prices as low as possible. On the other, energy conservation is advocated to reduce oil imports and other undesirable by-products of rising energy use. At the same time, there seems little recognition that holding prices at artificially low levels discourages both conservation and domestic energy production and encourages consumption and imports.
The Ford administration recognized this dilemma and attempted to lift price controls. To offset the impact of higher prices on low and middle income consumers, it proposed appropriate levels of tax relief. However, few congressmen who cared about being reelected were willing to vote for higher energy prices even if offsetting tax refunds were to be provided. Some minor deregulation of certain types of oil products has occurred within the last year, and the very complex regulation of oil is scheduled to end by 1979. But many informed observers doubt that deregulation will take place on schedule, if at all.
A change in natural gas pricing was attempted last year when the Federal Power Commission (FPC) set the wholesale price of natural gas discovered or produced since 1975 at about three times the previous rate in recognition of the higher costs of obtaining this additional production. However, implementation remains blocked by court actions.
If the FPC price increases on new gas are eventually allowed, they will be averaged with the price of "old" gas. The resulting net increase in price is expected to be only about 5 percent, not large enough to spur much conservation. If, on the other hand, rates to consumers are allowed to rise to a level equal to the cost of producing additional gas, this dramatic price increase would announce that conservation was to be taken seriously. Some of the undesirable effects of higher bills on consumers could be neutralized by an appropriate program of offsetting refunds.
In view of the resistance to deregulation and President Carter's interests in energy conservation, it appears that the incoming Congress may give greater attention to additional subsidies as a more politically attractive way to encourage conservation.
There also continues to be a stirring among regulatory commissions interested in adopting marginal cost pricing for electricity. This involves higher prices as well as prices that vary over the time of day to reflect the variations in costs in producing on-peak and off-peak power. So far, rate changes have been limited to a few time of-day pricing experiments, a tendency towards flatter rates, and a shift away from the volume discount rate (declining block rates) that have favored large residential and industrial users. There are some hopeful signs that fuller implementation of marginal cost pricing will eventually result. Nevertheless, despite some progress, the overall outlook for improvement in energy regulation at remains bleak.
A version of this article appeared in print in the January–March 1977 issue of Resources magazine.
