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CONGRESSIONAL
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ENERGY: THE SYNTHETIC FUELS CORPORATION (PROPOSED)

ISSUE BRIEF NUMBER 1379090

AUTHOR:
Davis, David Howard

Environment and Natural Resources Policy Division
Abbasi, Susan R.

Environment and Natural Resources Policy Division
iuoe, Ronald C.

Govérnnent Division

THE LIBRARY or conennss
cousnzssxouan RESEARCH sanvxcn

EAJOR ISSUES SYSTEH

DATE ORIGINATED gggzggzg
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FOR LDDITIOHAL INFORHATION CALL 287-5700

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CRS- 1 IB79090 UPDATE-03/OH/80

l§§!.§-P.§§l1_?l1l_.2! A

In March, a conference ‘committee continued to meet to reconcile
differences on S. 932, which would establish a Synthetic Fuels Corporation
(SEC). on June 26, 1979, the House passed its version of S. 932 (H.B. 3930)
which provided for the government to encourage production of synthetic fuels

by means of loan guarantees and purchases. The Senate version of the SFC.

would spend $20 billion in the first phase. The bill also provides for $1u
billion for conservation. -The SPC varies from the $88 billion Energy
Security Corp. President Carter proposed in his television speech of July 15.

The SFC proposal raises questions regarding the proper role of government
in the economy, the Corporation's effectiveness, its accountability,
duplication of functions, and regional impact.

.i2.t;en_2£.tll..§zn.the:c.i2_nel§-$=.2rn9.re.ti.<2n

According to S. 932 the Corporation would be a government-sponsored
enterprise with a congressional charter, located outside the Executive
E .nch, and independent of any governmental agency. yThe Corporation would be
managed by a 5-person Board of-Directors. A Chairman and four other outside
directors would be appointed by the President and confirmed by the Senate.
In addition, the Secretaries of Energy and Treasury,”and the Chairman of the
Energy Mobilization Board would sit on the Board as non-voting members.

Since the SFC would be outside the government, the officers and staff of

~ the Corporation would be exempt from Civil Service rules, and the Corporatio

itself would be exempt from rules that apply to government agencies. 9

The SFC would invest $20 billion in the first two years (Phase I) and $68

billion in the second phase in order to produce 1.5 million barrels per dayv

of substitutes for imported oil by 1995. Funds for the Corporation would
come out of the general revenues or possibly out of the receipts from
proposed windfall profits taxes. vThe Corporation's exclusive objective‘would

.be the development of domestic production capacity: it would not engage in

research and development activity. y B

The Corporation would be authorized to invest in, or vdevelop directly,
production capacity from coal liquids, coal gases, peat, biomass, shale  oil
and unconventional natural gas.  

The Corporation would finance .energy development by means of price
guarantees, Federal purchase agreements, direct loans, loan guarantees, joint
vrntures, and a limited number of government-owned and operated (GOGO) or
g. ernment—owned, company-operated (GOC0) plants.

Inna televised speech on July 15 President Carter proposed a variation of

ens. 2 1379090 UPDATE-03/04/80

the SFC based on ideas Congress was then debating. The President's E

vdiffered only slightly from the SFC. The ESC board would be constituted

differently. The ESC would spend $88 billion by 1990 compared to the SFC's
plan to spend $20 billion in Phase I (two years) and tentatively $68 billion
in Phase II (by 1995). The ESC would not participate in joint ventures; the
SFC would. Funds for the ESC would come from a windfall profits tax. Funds
for the SFC may or may not come from this source.

§ne£3z-I2de2enden2e-Anth2ri:z

In 1975 the Ford Administration under the leadership of Vice President
Rockefeller, as chairman of the Domestic Council, proposed a $100 billion
plan similar to the Synthetic Fuels Corp. This Energy Independence Authority
(BIA) would have been a government corporation with authority to provide
financial assistance for those- sectors of the economy important to the

‘attainment of energy independence for the United States. It would have also

changed Federal Government operations so as to assist in the expediting of
regulatory procedures that affected energy development-

The main purpose of the BIA would have been to encourage the development
of domestic energy sources or the conservation of energy, and to hasten the
commercial operation of new technologies, with a goal of energy independence
by 1985. To the extent practicable, the form of the encouragement was to be
BIA loans or loan guarantees to private business concerns. However, the BIA
was to be permitted to invest directly in energy-related enterprises and
guarantee prices. Grants-in-aid were specifically precluded. The Treasury
was to purchase $25 billion of BIA capital stock. In addition, the BIA was
to be authorized to borrow and incur obligations totalling $75 billion. The
aggregate amount of $100 billion was fixed as the upper limit of the EIA's
actual and potential liability stemming from direct investment, loans, land
guarantees of loans and prices.

A.!eti2nel-Qil.eed-§e§-§2r29re:i9n

As initially proposed in 1973 by Senator Stevenson, a Federal Oil and Gas
Corporation would have been established to explore for natural gas and oil on
Federal lands primarily, but potentially on State, foreign, or private lands
as well. The Corporation, known as FOGCO by its opponents, would have the
power to develop and sell natural gas or oil discovered by exploration or
otherwise obtained by sale, lease, or purchase, including purchases of

imported oil and gas. The Corporation would have had power to enter into‘
ajoint ventures and engage in research on any source of ener9Y: and to  build

and purchase necessary facilities for these operations and for transportation
and delivery of natural gas or oil. It would have been headed by a 3-member

board of directors, appointed by the President with the consent of tthei

senate. The proposed legislation specified that sales of natural gas or oil
by the Corporation "shall be made at fair and reasonable prices designed to
promote competition among suppliers of these energy resources.“ The
Corporation would have been empowered to incur debt for capital purposes.

Senator Stevenson's current proposal in the 96th Congress, the Energy
Company of America (ECA), would have the same powers as the original FOGCO,

mbutiiinw addition it mwould ‘have stronger emphasis on exploration and

development of resources on the public lands, the duty to inventory these
resources, a mandate to use its resources to bring about lower oil  prices,
and most significantly, it could be designated by the President as the

CR5. 3 1379090 UPDATE-O3/014/80

enclusive agent for the United States in purchasing crude fuel resources or
refined products with respect to any nation for which the President
determined that it would be in the interests of the United States to have
such an arrangement. Proponents of a government corporation argue that (1) A
national energy corporation would have the national interest as one of its
major goals, unlike private companies which are motivated by profit
considerations; (2) It would explore for and develop otherwise neglected
resources on the public lands and in non-OPEC foreign countries; (3) It would
stimulate competition among energy companies, not participate in
anti—competitive practices; (a) It would prove a "yardstick" by which to
assess the efficiency of private energy companies andm would provide the
Federal Government with the expertise and experience to better understand the
operations and factors affecting private companies, especially oil companies.
5. 580 and companion bills would establish the RCA; H.R. 509 would establish
a FOGCO . F

Critics of the ECA and FOGCO proposals contend that with tax exemption and
preferential treatment in use of public lands, the corporations would be
unfair competitors. They argue that with the advantages of a Federal
identity and lack of stimulation afforded by the competitive market, these
corporations would prove inefficient users of vital resources.

§n2_3z_§2r29.r9.2i2n-2f.:.e-E9.r theasic.

ENCONO stands for the Energy Corporation of the Northeast. Nine states,
from Maine to Pennsylvania, would join together to finance energy projects.
EHCOH0 could issue tbonds guaranteed by the U.S. Treasury amounting to
approximately $10 billion. Its own unguaranteed financial obligations would
be approximately $750 million. ENCOHO would plan, coordinate, and develop
energy in the region. S. 730, H.R. 2508, H.R. 2511, and H.R. 2599 would
establish ENCONO.

The ESC proposal raises questions regarding the proper role for government
in the economy, the Corporation's effectiveness, its accountability,
duplication, and regional impact.

The proper role for government in the economy is a perennial issue.r While

lmost agree government should intervened in case of market. failure, the

question is whether the market has failed in the areas relevant here. DOE
and its predecessors have controlled the price of crude oil and refined

pproducts since 1971. FERC or its predecessor -- the Federal Power Commission

—- and State PUC's have controlled electric and natural gas prices ever since
t’ se industries were infant. Hence it can be argued that market allocation
has not had a trial.  

Horeover, it is argued; that the existence mof pa government energy
corporation would introduce elements of uncertainty into the market and would
discourage private investmentr inn synfuels, multimately resulting  in less
production instead of more. President Carter based his case for the ESC on

isecurity rather than economics. "To give us energy security, Imam asking for

the most massive peacetime commitment of funds and resources in our nation's

cns- n IB7909O u9nnTn-o3/on/so

history to develop America's own alternative sources of fuel -—- from coal
from oil shale..." (July 15, 1979).‘

with respect to proposals for a national oil company, private oil
companies have been concerned that establishing a government corporation
would be the first step toward- nationalizing the oil industry generally.
This point is vigorously rejected by proponents of the national oil company
concept, who argue that nationalization is no party of the design of a
national oil company whose main purpose is to stimulate competition, not end
it. whether a similar concern would be felt by private industry toward the
Synthetic Fuels Corporation is not clear; the initial purpose of the SFC is
to furnish substitutes for imported oil, not to duplicate present oil company
operations. The SEC is to focus on synthetic fuels, not on conventional oil

and gas. However, private industry's concerns "about the entry of the‘

government into the field may well be similar. since this is a new role for
the Federal Government, and one that could be perceived as likely to expand.

There is ample precedent for government energy corporation both here and 

abroad. Perhapst the closest analogue is the Reconstruction Finance
Corporatieneestablished—in=4932~teeeombat—the~Great—Depression:+—«6thersaaare—
TVA, Amtrak, Conrail, COHSAT, and the Postal Service. Most western
industrial nations have government energy corporations. In Canada, Petrocan
imports oil and Atomic Energy of Canada, Ltd., builds and sells reactors.
The British National Oil Corporation manages North sea oil fields.- Her
Majesty's Government owns n8% of the British Petroleum Company stock. The
French Government owns part of Companie Francaise des Petroles. In Grea’
Britain the National Enterprise Board provides capital for new busines-
ventures including all forms of energy. In Canada, the equivalent
organization is the Canadian Development Corporation. These "precedents,"
needless to say, are subject to widely divided interpretations as. to
relevance and functions merit.

Effieiensz
The Synthetic Fuels Corporation would direct investment into greater

production of energy. This is a goal some economists dispute, believing that
better uses for the money exist. Michael K. Evans, President of Evans

Economics, a consulting firm, noted that such a corporation  would  "make 5

investments that the market doesn't want to make. Inasmuch as investment in
energy has a low rate of return, the net effect would be a lower rate of
growth" (ggg_;Q;g Times, July 22, 1979). ~

Fear that the SPC would be a drag on the economy isv not the economists‘.
only worry. Loan guarantees can have perverse effects. Testifying before

the House Commerce Committee's Subcommittee on Energy wand Power, Barry

’Bosworth of the Brookings Institution (serial no. 94-151, T1976) made four

points against loan guarantees. (1) If more resources go into ener9Yo fewer
will be available in other areas of private investment, consumption,‘ and
government expenditures. Capital devoted to energy would reduce‘ capital
elsewhere, housing and higher risk loans to small business, for example. (7

Loan guarantees do not necessarily increase the total amount of investment in
an’areay by Asignificant amounts. (3) A loan guarantee encourages the
termination of a project at an earlier date than twithout a ‘guarantee. For
example, assume operating costs are $20/barrel of oil equivalent and that
fixed capital costs at $20/barrel require a price of $30/barrel.n vwithout a
guarantee, the plant will make a profit at $30/barrel; but, more important,
it will continue to operate at any price above $20/barrel (operating costs)

cns- 5 11379090 UPDATE-03/04/80

uncil the fixed capital plant is exhausted as a means of minimizing the loss.
However, with a guarantee the firm will default at any price below $30/barrel
and leave the -government with the problem of operating the plant.
Alternatively, either price guarantees or government financial participation
avoid this problem of premature shutdown. (H) In combination with current
tax laws, a loan guarantee program can seriously distort incentives and
become a tax haven rather than a viable economic operation. For example, a
90% loan guarantee together with a 10% investment tax credit results in zero
owner equity after the plant is constructed. If at any time the owner's
equity becomes negative, the rational investor will default. In future years
rapid tax depreciation and depletion lowers the critical level of the loan
guarantee even further. Since many of the knowledge benefits are likely to
accrue in the construction phase and first few years of operation, there is a
strong likelihood of default before the loan is repaid.

Not all economists agree with Bosworth's critique, disputing, for example,
whether housing and small business would be the specific industries to bear
the brunt of loan guarantees for energy. some question whether default would
be a problem, believing the incentive is not great and that government
oversight would present abuse.

Proponents of the SFC hold that even if the Corporation is not efficient
itself, its social goal of reducing American dependence on imported oil
overrides the immediate problems of the ESC's efficiency or inefficiency.
S ‘iety has judged that the overall social return outweights the narrow
economic return. '

hffestizensss

A major question raised by the Synthetic Fuels Corporation iproposal is
whether it would be effective in achieving its goals of increasing domestic
energy supplies and, particularly, whether the large amount of money used by
the SEC to produce its energy goals would not be used more effectively if

xapplied to other techniques or used to provide more sophisticated stimulus to

energy conservation. A    

Major synfuel production would require opening hundreds of new  mines,
building dozens of new plants, recruiting and training several hundred
thousand new workers, manufacturing mining and  refining equipment, and
building new railroads, hopper‘ cars, and pipelines. It is argued that
synfuel production will pollute the air, increase occupational health and
safety risks, dig up land now used for farming, timber, "or recreation, use

‘vast amounts of water, and create social disruption in boomtowns. For such

reasons the 1977 GAO study of coal development concluded that achieving the
HEP goal of 1.2m bi1lion  tons a year was "highly unlikely." A similar
conclusion may apply to a synfuel program.

Organization and management of the SFC may reduce its effectiveness. For
e‘ mple the decision to have a plural directorate is a questionable route to
tame if rapid and decisive action is the objective. The mixedi board of
private citizens and officers  of the government has not generally been

considered a successful mix in the past. Although the criteria for selection.

of the voting directors are not mentioned, it may ' be   based on
"representativeness" rather than knowledge or competence. There is an
assumption that the interests of they Corporationm are compatible with »the
interests of the President and Departmental heads. Once the Corporation is
functioning, it is likely to develop its own values and objectives which may

CRS- 6 1379090 UPDATE-O3/OH/80

or may not be in conformance with the values and objectives of the Preside:
or the Department Secretaries.

The Administration's case here is that the SFC would promote competition.
President Carter wants his proposed BBC to be structured in this manner so it
will be "free to use its independent business judgment“ (New York Times, July
22, 1979). In his televised speech July 15, President“ Carter compared the
ESC to the synthetic rubber corporation, which was so successful during and
after World War II.

assenerehilitz

As a non-governmental entity, the Synthetic Fuels Corporation is to be
exempt from Civil Service rules and other rules that apply to the government.
In its structure and freedom of action it is to be like a business firm.
This has raised questions of accountability. The corporation would not be
directly answerable to the President or Congress. The President. would
appoint the five directors subject to Senate confirmation.

If the SFC is financed through a Trust Fund, this, may raise objections.
Trust funds have been accused of misallocating resources -- they are believed
to stimulate over-investment, to encourage programs to grow autonomously, to
permit programs to outlive their justification, to allow program
beneficiaries to profit at the expense of taxpayers as a whole, to introduce
unwanted rigidities into government decision-making, and to hazard economi
stabilization policy and fiscal management by accumulating huge casu
surpluses which must (by statute) be invested in government securities. At
the same time, others believe that trust funds allocate resources in a manner
more responsive to national needs, that they increase public satisfaction
with government programs, that they make possible dependable funding for
long-term projects, protected from pressures to consider only short-run
goals, and that the proper choice of taxes for earmarking may improve equity
effects as compared to those obtainable without earmarking.

Qunliserien

While the extent to which the Corporation would duplicate functions of DOE
would depend on the specific form it took, potential overlap is apparent.
The most likely area would be with DOB's three applications divisions: (1)
Fossil Fuels, (2) Resources, and (3) Conservation and Solar. The DOE
organization Act assigned the Department responsibility for demonstrating and

commercializing new techniques. Operation of the regional power’

administrations such as Bonneville is another area of potential duplication.
The SFC might duplicate functions of TVA and the State agencies such has  the

* Power Authority of the State of New York. SFC would probably preempt the

proposed Energy Corporation of the Northeast (ENCONO).

3e9ienel_Im2es2

The SFC is most likely to develop Western resources since that is the
location of most new coal and shale oil reserves and since the liquid or
gaseous product is easier to transport than the coal or shale. other Fsites
are in Appalachia and Illinois. Development will mean economic and social
benefits and dislocations at the sites of the new mines -and plants. The
problems of rapid energy development, which sociologists call the Gillette

cns- 7 1379090 UPDATE-03/on/80

syndrome after the boomtown in Wyoming, have caused some States to spurn new
facilities.

Although the Northeast, like the rest of the country, could benefit
substantially from greater supplies of fuel, that region would reap few
secondary economic benefits such as employment in the construction of plants
and mines or consumer spending by new workers. The Northeast, with some
other areas, will be spared the environmental and social burdens of the
undertaking but may experience competition for labor and capital from the
regions of SPC developments.

L§§E§LA2l N

H.B. 3930 (Hoorhead, W. et al.)

Amends the Defense Production Act of 1950 to allow the Department of
Energy and the Tennessee Valley Authority to guarantee loans to expedite
national defense contracts under such Act. Authorizes the President to
provide loans to private business enterprises for the production of energy.
Directs the President to attempt to achieve a specified national production
goal for synthetic fuels and synthetic chemical feedstocks within five years.
Reported from Committee on Banking, Finance, and Urban Affairs with amendment
(H.Rept. 96-165) May 15. Laid on table June 26, 1979, and S. 932 passed in
]’1u. Conference held Dec. 7-17, 1979.

S. 932 (Proxmire)

Amends the Defense Production Act including establishment of Government
corporations for synthetic fuels. Introduced Apr. 9, 1979; referred to
Committees on Banking and on Energy. Reported from Committee on Banking
(S.Rept. 96-166) Bay 15. Passed Senate June 20. Passed House, amended, in
lieu of H.R. 3930 on June 20. Senate Banking Committee reported favorably
September 13. Senate Energy Committee reported favorably Oct. 11, 1979.
Passed Senate Nov. 8, 1979. Conference held Dec. 7-17, 1979.

B§2Q§i§-A!D-§Qfl§3§§§lQ§A;-2Q§§!§!I§
0ff—budget agencies and government-sponsored corporations:
fact sheets. Washington, U.S. Govt. Print. Off., 1977.
80.p.

Revolving funds: full disclosure needed for better congressional
control. Washington, U.S. Govt. Print. Off., 1977. 115 p.

Controlling oil: British oil policy and the British National
Oil Corporation. Printed at the Bequest of Henry H. Jackson,
Chairman, Conmittee on Energy and Natural Resources, United
States Senate. Washington, U.S. Govt. Print. Off., 1977.
118 p.

Petro—Canada: a national oil company in the Canadian context.
Hashington, U.S. Govt. Print. Off., 1977. 65 p.

Is the administrative flexibility originally provided to the
D U.S. Railway Association still needed? Report to the .
Congress by the Comptroller General of the United States.

‘CBS-8 n 1379090 UPDATE-03/on/so
Washington 1978. y52;p.:

Development of domestic energy resources; report together with
dissenting views to accompany H.R. 4514 including cost
estimate of the Congressional Budget Office. “Washington,
U.S. Govt. Print. Off., 1979. 89 p.

QEEQKQLQGY Q? EV§§I§
12/07/79 -- Conference began.
11/08/79 --Senate passed S. 932.
07/15/79 —— President Carter proposed the Energy Security Corporation.

06/26/79 - House passed S. 932 in lieu of H.R. 3930.

AQQLILQEAL.E§EEB§§§§_§QEB§§§
The National Railroad Passenger Corporation ‘-a modern hybrid
corporation neither private nor public. Business Lawyer, v. 31,
; Jan. 1976: 601-619. 9

Uranium enrichment: private or public funds? Congressional
quarterly weekly report, v. 222, Har. 13, 1976: 511-567.

Should the Federal Government enter the oil business? Challenge,
v. 19, Hay-June 1976: 98-51.  

State business. Working papers for a new society, v. 4, spring
1976: 67-75.

A theory of government enterprise. Journal of Political Economy,

Government credit subsidies for energy development. Washington,
American Enterprise Institute for Public Policy Research,
1976. 55 p.

‘Alternative institutional arrangements for developing and
commercializing breeder reactor technology. Santa Honica,
Calif., Band, 1976. 173 p. 0

Railroad policies in Europe and the United States: the impact
9  o£ ideology, institutions, and social conditions. Public
policy, v. 25, Spring 1977: 205-2&0

The role of institutional relationships in French energy policy.
International Relations, v. 5, Nov. 1977: 87-121.

aYardstick competition a prematurely discarded form of

regulatory relief. Tulane Law Review, v. 53, Feb. 1979:i y i§§§§$?“*~
465-491. ’ vv 3?
»Q$Hmn t
Nmeséggmw

Kramer, Donna. Synthetic fuels:t the model of synthetic rubbel h§E¥£§m3qwQ
production during WW II. Issue Brief 79075. ““““%me