LYNDON B. JOHNSON SCHOOL OF PUBLIC AFFAIRS POLICY RESEARCH PROJECT REPORT 
Number25 
TEXAS ENERGY ISSUES: 1978 
A Report by The Texas Energy Issues: 1978 Policy Research Project Lyndon B. Johnson School ofPublic Affairs The University of Texas at A us tin 
1978 

Library of Congress Card Number: 78-61151 
© 1978 The Board of Regents The University of Texas 
FOREWORD 
The Lyndon B. Johnson School of Public Affairs has established interdisciplinary research on policy problems as the core of its educational program. A major part of this program is the policy research project, in which a team of several faculty }llembers, each from a different profession or discipline, and graduate students with diverse backgrounds work t~gether on an important public policy issue. These projects are conducted in response to public and governmental needs. 
This report is the outgrowth of a policy research project conducted at the School during 1977-1978 to examine a number of policy issues facing the State of Texas in the conservation, development, and environmental impacts of energy resources. Funded by the Ford Foundation, the project had as its client orientation the several sta.te agencies represented in the Texas Energy Advisory Council, chaired by Lieutenant Governor William P. Hobby, whose full cooperation and occasional participation greatly facilitated the project. 
The study of Texas Energy Issues: 1978 was undertaken in response to the need by Texas policy makers for a wide range of infonnation on the technical, environmental, economic, and public interest implications of Texas' response to national (as well as state) energy requirements. . 
The intention of the LBJ School is to develop men and women with a capacity to perfonn effectively in public service and as a consequence of our program, to make available infonnation that will enlighten and inform those in decision-making roles. The project which resulted in this report has helped to accomplish the former; it is our hope and expectation that the report itself will contribute to the latter. 
. Elspeth Rostow 
Dean 

POLICY R~EARCH PROJECT PARTIOPANTS 

A. Scott Anderson, B.A., The University of Texas at Austin Eugene Barta, B.A. (Political Science), Texas A&M University Richard J. deG. Bloch, B.S. (Biology), University of Wisconsin Gregg R. Cannady, B.A. (Political Science), Rice University 
J. Chris Dobbs, B.J. (Public Relations), The University of Texas at Austin Laura R. Doll, B.A. (French), Virginia Polytechnic Institute Jeffrey D. Dunn, B.A. (Economics), Texas A&M University John Gooding, B.A. (Government), The University ofTexas at Austin; J.D., George Washington University Angela Agee Hatton, B.A. (Political Science), Trinity University 
G. Scott Johnson, B.A. (Government), The University of Texas at Austin Robert Palmer,B.A. (Political Science), Colorado College 
J.R. Prestidge, B.A. (Political Science), Texas Tech University Daniel Rabovsky, B.A. (Physics), Dartmouth College Mark Sayers, B.A. (Political Science), The University ofMichigan Judith Shifrin, B.A. (Government), The University ofTexas at Austin Randolf L. Streng, B.A. (Government), The University ofTexas at Austin Michael Tolleson, B.A. (Economics), The University of Texas at Austin Carol Sue Tombari, B.A. (Geography), Middlebury College Shirley Walker, B.A. (Government), The University ofTexas at Austin 
Stephen H. Spurr, Project Director. Professor ofBotany and Public Affairs, Lyndon B. Johnson School ofPublic Affairs, The University of Texas at Austin 
Marian Blissett, Co-director. Associate Professor of Public Affairs, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin 
William L. Fisher, Professor of Geological Sciences; Director, Bureau of Economic Geology, The University of Texas at Austin 


PREFACE 

Texas Energy Issues: 1978 is a report of a policy research project at the Lyndon B. Johnson School of Public Affairs designed to bring the competence of the academic community in Texas to bear upon the formulation of state policies that would enhance Texas' capacity to contribute to our national energy needs while at the same time safeguarding the state's natural environment. Specific policy problems were identified in consultation with the Lieutenant Governor functioning as Chainnan of the Texas Energy Advisory Council, the new state office guided by the heads of the several state agencies con­cerned with energy problems. Financial support was provided by a grant from the Ford Foundation. 
In 1973 the Arab states instituted an oil embargo and the Organization of Petroleum Exporting Countries (OPEC) raised the price of oil fourfold, greatly affecting the economies of western industrialized nations. Americans, who account for thirty-two percent of global energy consumption, were stung by the realization that they were dependent on foreign sources of oil and vulnerable to the caprice of foreign governments. The Nixon Administration responded to the energy crisis with Project Independence, geared toward making the U.S. self-sufficient, partly through the development of alternative fuel sources. In 1977, the Carter Administration submitted its National Energy Plan (NEP) for Congressional approval. In the spring of 1978, parts of the massive plan were still being considered. The general thrust of the NEP is to encourage conservation of energy and the use of alternative fuels . Schedules of tax incentives and tax penalities are proposed to provide motivation for compliance. 
Traditionally the leader in domestic fuels production, Texas has a special stake in national energy policy. Of special concern to Texans is legislation that affects consumption patterns of oil and natural gas. Beyond that, Texas shares with the nation as a whole concern for issues related to permitting and siting of energy facilities, the transition from conventional to alternative fuels, and environmental and community impacts of energy resource development. 
These problems were the focus of the 1977-78 Energy Policy Research Project at the Lyndon B. Johnson School of Public Affairs. This publication is a compilation of summaries of individual issue briefs which examine energy policy issues. Part I (Chapters 1-4) addresses the problems of the pennitting and siting of energy facilities. The papers deal with state and federal law and institutions, as well as the public response to nuclear power development. Part II {Chapters 5-8) addresses economic, financing, and taxation problems. It includes an examination of the effect of price changes on oil and gas production, price redetermination clauses in gas sales contracts, existing and potential energy taxes, and an examination of the issues surrounding horizontal divestiture. 
Problems of coping with the energy crisis are examined in Part III {Chapters 9-11), which discusses transitional issues. A comparison of state and federal directives mandating industrial conversion from natural gas to other fuels is the subject of the boiler conversion issue brief. The special problems faced by the agricultural sector in a time of diminishing traditional fuel supplies, and energy development through credit assistance also are discussed. 
The last sections examine the impact of large-scale energy developments on both the natural and human environments. Part IV (Chapters 12-14) examines environmental impact, as reflected in federal regulation of mining and industrial pollution. Community impact is the topic of Part V {Chapters 15-17). It includes a description of assistance programs for energy impacted communities, a case study of the effect of a nuclear power plant on a rural Texas community, and an analysis of the effect of unit coal train movements on communities along the way. 
This final report represents the efforts of many researchers and advisors. Even so, it embraces a wide variety of technical areas that cannot be completely understood without extensive training and experience. However, the research presented here has a policy focus frequently absent or inadequate in technical reports. It is our hope that what may have been sacrificed in the way of technical expertise is counterbalanced by the effort made to discuss the wide and varied scope of problems confronting the State. 
The multifaceted nature of this subject has necessitated a broad perspective in juxtaposing these many factors. Though not totally comprehensive, we believe this report provides the framework for an effective discussion of public policy issues surrounding energy in Texas. 
vii 

Texas Energy Issues: 1978 
We are grateful to the many individuals whose contributions of information and assistance have served in the development of this report. In particular we wish to thank the following who briefed the project members at length: 
Alvin Askew, Governor's Office ofEnergy Resources; 
T.L. Austin, Jr., Chairman ofthe Board, Texas Utilities Co.; 
James A. Bill, Associate Director, Center for Middle Eastern Studies, The University ofTexas at Austin; 
Bob R. Dorsey, former Chairman of the Board, Gulf Oil Corporation; 
William L. Fisher, Professor ofGeological Sciences; Chairman, Council on Energy Resources, The University of Texas at 

Austin; Peter T. Flawn, Professor of Geological Sciences and Public Affairs, The University of Texas at Austin; President, 
Geological Society ofAmerica; 
Lt. Gov. William P. Hobby, Chairman, Texas Energy Advisory Council; 
Milton L. Holloway, Executive Director, Texas Energy Advisory Council; 
Michael Hutsell, Texas Office ofState-Federal Relations; 
Sally C. Lopreato, Research Scientist, The University of Texas at Austin; 
John J. McKetta, Jr., E.P. Schoch Professor ofChemical Engineering, The University ofTexas at Austin; 
William J. Murray, Jr., Petroleum Engineer, Energy Consultant; 

W. Stephen Piper, Director ofEnergy Analysis, Alliance to Save Energy; 
Walt W. Ros tow, Professor ofEconomics and ofHistory, The University ofTexas at Austin; 

S. Fred Singer, Professor ofEnvironmental Studies, University of Virginia; 
Gary C. Vliet, Associate Professor ofMechanical Engineering, The University of Texas at Austin; 
Mack Wallace, Chairman, Railroad Commission, State of Texas; 
Carroll L. Wilson, Director, Workshop on Alternative Energy Strategies, Massachusetts Institute ofTechnology; 
Herbert Woodson, Professor Electrical Engineering; Director, Center for Energy Studies, The University of Texas at 

Austin. 
Many others, state officials and faculty alike, were generous with their time and help. Field trips were arranged by R.P. Smith, Industrial Generating Company, and by Jim Parsons, Houston Lighting and Power Company. 
Each topic is summarized first as an Executive Brief and second in a short chapter. The same chapter numbers are used for a given topic in each of the two presentations. More extensive discussions are available in the files of the Lyndon B. Johnson School of Public Affairs. 


SUMMARY AND RECOMMENDATIONS 

In Texas Energy Issues: 1978, nineteen graduate stu­dents and three faculty members of the University of Texas at Austin examined several facets of the current energy and related environmental status in the state through the mechanism of a Policy Research Project of the Lyndon B. Johnson School of Public Affairs. Most of the issues were found to be well defined, the subject of study by public officials in the state, and generally capable of resolution by the political process. The group finds that: 
(l) 
Public laws relating to both energy and the environment are so interrelated that the two concerns must be treated as a single policy area. 

(2) 
While the disposal of nuclear was(es is primarily a matter of federal concern, the input of state governments has influenced in the past and will continue to influence actions within the respective state boundaries. 

(3) 
Although approximately twenty-five states have passed laws regulating the siting of power plants, it is by no means clear that Texas should follow suit. 

(4) 
Based on referenda in six states having about one-fifth of the country's electorate, nearly two-thirds of the people are less concerned by the possibility of a disastrous nuclear accident or the problems of long-term nuclear waste disposal than they are by the need for nuclear power to meet future electrical energy needs. 

(5) 
Although the production of oil and gas in Texas peaked in 1972 and probably will continue to decline in future years, the gap between production and consumption can be minimized by price deregulation. 

(6) 
Renegotiation clauses in Texas producer gas sales contracts have the potential to create temporary market imbalances throughout the state and prolong their effect. The Railroad Commission should analyze a sample of gas purchase contracts in a gas-price model to anticipate these effects. 

(7) 
Severance taxes on lignite and uranium ore, as well as a refinery tax, offer opportunities for additional revenue to the state of Texas as income from current oil and gas severance taxes inevitably declines. 

(
8) Since nationwide studies indicate that the coal industry is currently competitive, there seems little reason at the present time to support legislation requiring major oil companies to divest themselves of coal properties. 


{9) Pending national legislation under the National Energy Plan requiring the conversion of gas-fired boilers to alternative fuels is generally more rigorous than the regulations imposed by the Texas Railroad Commission under Gas Utilities Docket 600. However, in the case of existing major fuel burning installations other than boilers, Docket 600 is more restrictive and perhaps should be modified to conform to national standards. 
{10) Any mandatory reallocation of oil and gas supplies that might be required should take into considera­tion the seasonal usage patterns of agriculture and the inability of the agricultural industry to substitute other fuels in place of petroleum products immediately. 
{I I) A major function of government is to shift capital resources from some sectors of the economy to others in order to enhance a particular activity or exercise control over its use . Credit assistance in directing capital into new energy development is politically attractive, but there is little evidence to support its effectiveness, primarily because of the neglect of opportunity costs. 
(I2) The state and federal laws regulating the surface mining of coal and lignite are generally compatible and feasible. But problems will arise in the application of the federal law in Texas if much of the lignite-bearing land is classified as "prime agricultural land," requiring the separa­tion and sequential replacement of top soil and subsoil in the mining operation. 
{13) Under the Clean Air Act Amendments of 1977, the Texas Air Control Board should qualify for and assume the management of the "prevention of significant deteriora­tion" program. 
(14) As a means of ensuring a more cost-effective and timely approach to improving the condition of air quality in nonattainment areas in Texas, the Environmental Protec­tion Agency should allow the "banking" of reduced emission credits on a case-by-case basis. 
(I 5) State and federal assistance may be needed to facilitate the adjustment of local communities to the problems associated with a boom-town economy. 
{16) Joint ownership of power plants by public and private utilities may create revenue shortfalls for communi­ties located near the construction site. Under state law publically owned utilities enjoy a tax-exempt status which raises important questions of equity for impacted commu­


Texas Energy Issues: 1978 

nities. In the case of Matagorda County and the South Texas Project, the results of the power plant development seem to be generally positive, but this example may not be typical of others in the future. 
( 17) Greatly increased rail traffic arising from the importation of western coal into Texas will create real and social costs to Texas communities. The need for more and better signals at minor railroad crossings constitute but one example of costs that must be met by some new or diverted public revenue. 


TABLE OF CONTENTS 
FOREWORD 
POLICY RESEARCH PROJECT PARTICIPANTS 
PREFACE 
SUMMARY AND RECOMMENDATIONS 

PART I: PERMITTING AND SITING ENERGY FACILITIES Chapter 1: Federal Agencies and Laws Dealing with Energy and the Environment Chapter 2: Siting of Nuclear Waste DisP.osal Facilities Chapter 3: State Power Plant Siting Authorities Chapter 4: State Referenda on Nuclear Power Development 
PART II : ECONOMICS , FINANCING, AND TAXING OF ENERGY: CURRENT ISSUES Chapter 5: Effect of Governmental Policies on Texas Oil and Gas Production and Reserves Chapter 6: Price Redetermination in Texas Producer Gas Sales Contracts Chapter 7: Current and Alternative Energy Taxes for Texas Chapter 8 : Horizontal Integration in the Energy Industry 
PART Ill : ECONOMICS , FINANCING, AND TAXING OF ENERGY: TRANSITIONAL ISSUES Chapter 9: Boiler Fuel Conversion Chapter I 0: Energy Needs of Texas Agriculture Chapter 11 : Role of Government Credit Assistance in Financing New Energy Development 
PART IV : ENVIRONMENTAL IMPACTS OF ENERGY DEVELOPMENT Chapter 12 : Impact of the Federal Surface Mining Act on Texas Lignite and Uranium Mining Chapter 13: Impact of Prevention of Significant Deterioration Requirements Upon 
Texas Energy Development 
Chapter 14: The Offset Policy in Nonattainment Areas: Implications for Texas 

PART V: COMMUNITY IMPACTS OF ENERGY DEVELOPMENT Chapter 15 : Assistance Programs for Energy Impacted Areas Chapter 16: The South Texas Project: A Case Study Chapter 17 : Unit Coal Train Movements to Texas 
iii 
v 
vii 
ix 
Executive Brief Text 
1 2 25 3 31 4 35 5 41 
7 8 45 9 49 
IO 57 11 65 
13 14 71 15 75 16 81 
17 18 87 
19 93 20 99 
21 22 103 23 107 24 113 


PART I 
PERMITTING AND SITING ENERGY FACILITIES 

The following four chapters cluster around the general issue of per­mitting and siting energy facilities, ranging from the federal perspective to the role of state government and attentive publics. The specific issues discussed are not meant to provide a comprehensive examination of the problems related to permitting and siting. Rather they serve to highlight a few of the more controversial areas which may require future state and public consideration. 
The introductory chapter presents an overview of the federal agen­cies and environmental legislation related to the licensing of power facilities. 
Chapter 2 discusses current federal policy with regard to the siting .of nuclear waste disposal facilities, and outlines some of the policy alterna­tives for Texas in response to anticipated future federal actions. 
States also face policy decisions in siting major power facilities. Chapter 3 focuses on legislation to establish state power plant siting authorities. It also presents Texas policy options. 
The concluding chapter describes the initiatives which have been held in several states to determine the future of nuclear power plant develop­ment. 
Texas Energy Issues: 19 78 
CHAPTER 1: 


Federal law regarding the permitting and siting of energy facilities is complex and in a state of flux. Thus, the description provided here is necessarily simplified and subject to change. The principal agencies involved include the following: 
Federal Power Commission: The FPC has authority over interstate transmission of energy and the development of hydroelectric power. This latter authority includes a strict duty to accommodate environmental values. 
Nuclear Regulatory Commission: The NRC exercises licensing authority over nuclear power plants. The licensing process includes roles for other agencies as well. On the question of preemption of state regulation, states generally have more latitude than is often assumed. 
Federal Energy Administration: The FEA (now part of the Department of Energy) plays a role in the conversion of the nation's generating capacity from oil and gas to coal. 
Corps of Engineers : The Corps is responsible for protecting navigational and environmental interests from development projects affecting waters subject to federal control. In fulfilling this obligation, the Corps issues several types of permits. 
Environmental Protection Agency: The EPA's approval is needed for a wide range of energy projects. Its primary areas of concern are air and water pollution. 
Department of the Interior: Interior is the lead agency for Outer Continental Shelf development and enforcement of federal stripmining legislation. 
Other Agencies: Fish and Wildlife Service, Coast Guard, Geological Survey, and the Departments of Labor; Health, Education and Welfare; and Commerce. 
The permitting and siting of energy facilities is regulated by a number of pieces of major federal legislation. These statutes include : 
Fish and Wildlife Coordination Act: Although the substantive effects of this Act are not totally clear, it is an important source of environmental protection duties for agencies such as the Corps of Engineers. 
FEDERAL AGENCIES AND LAWS DEALING WITH ENERGY AND THE ENVIRONMENT 
National Hnvironmental Policy Act: NEPA requires environmental impact statements for major federal actions significantly affecting the human environment. In addition, the Act imposes substantive (if vague) obligations on federal agencies to minimize adverse environmental im­pacts. 
Endangered Species Act: Establishes very strict environ­men ta! protection duties in certain instances. 
Coastal Zone Management Act: Establishes an important program of state and federal cooperation in dealing with the problems of balancing economic growth and environ­mental values in coastal and offshore areas. 
Submerged Lands Act: Gives the States control of submerged land · beneath both their inland waters and the territorial sea. It is important for offshore oil and gas development. 
Outer Continental Shelf Lands Act: Defines those submerged lands subject to federal control. It is an important guide for OCS oil and gas development. 
Power plant licensing is largely a matter of federal Jaw. The relevant statutes are diverse and large in number, having been developed over a Jong period of time in order to satisfy a variety of needs. There has never been . legislation that comprehensively addressed power genera­tion in all its modes and in all its contexts. 
The result of this incremental, even incidental, approach is a complex, fragmented assortment of governmental institutions. The fragmentation of jurisdiction leaves gaps in what might be termed the ideal decision-making process with respect to power plants. 
As a result, state decision-makers are faced with a complex challenge when they attempt to coordinate with their federal counterparts. The most important conclusion of this study, however, is thatTederal Jaw on energy and the environment is such that these two concerns must be treated as a single policy area. 
A. Scott Anderson 

Part I: Permitting and Siting Energy Facilities 

CHAPTER 2: SITING OF NUCLEAR WASTE DISPOSAL FACILITIES 
ISSUE DEFINITION 

Radioactive wastes are produced throughout the nuclear fuel cycle. The largest and most toxic amounts are generated during reactor operation. These wastes require rigorous storage and disposal methods to protect the health and safety of current and future generations. Thus, they present unique technical and institutional challenges. The federal government is currently developing a nuclear waste management and disposal program which may have a significant impact on the State of Texas. 
BACKGROUND 

Burial in geologic formations is considered the most viable waste disposal alternative. In 1976, the Energy Research and Development Administration (ERDA)-now in the Department of Energy (DOE}-began a program to identify suitable sites for six pilot disposal facilities to receive commercial nuclear wastes. The first two reposi­tories will be located in salt deposits. Two of the four salt formations being considered-the Interior Gulf Coast salt domes and the Permian basin salt formation-underlie parts of Texas. 
POLICY ANALYSIS 

Geologic and environmental surveys will play an impor­tant role in repository site selection. However, even if a site in one of the Texas salt formations is considered geologi­cally and environmentally suitable for a repository, other factors, such as public and political opposition, could prevent it from being developed. 
Some states (New Mexico, Vermont, and Louisiana) have recently passed legislation which controls various aspects of the waste disposal program. These actions are probably inconsistent with the doctrine of federal pre­emption. However, the federal government has not cha! lenged the states. DOE officials have, instead, decided to work with affected states and, if necessary, to defer to state opposition. Therefore, while state legislation cannot legally prohibit the federal government from conducting parts of the national waste disposal program within a state, it can be used as an effective political mechanism to voice opposition to repository siting within a state. 
POLICY ALTERNATIVES 
There are three policy alternatives available to the State of Texas in dealing with the waste disposal program. First, the state can encourage repository siting in Texas. A statement by the Governor or a legislative resolution could communicate the state's willingness to participate in the program if geologic and environmental surveys prove favorable. 
Second, the state can discourage repository siting in Texas. The Governor could ask DOE to stop all feasibility studies in Texas. The legislature could pass a resolution opposing or a law forbidding the disp osal of nuclear wastes in the state. 
Third, the state can allow feasibility studies to continue while deferring encouragement or discouragement of actual respository siting until after potential site locations have been identified. 
Angela Agee Hatton 

3 
Texas Energy Issues: 1978 
CHAPTER3: STATE POWER PLANT SITING AUTHORITIES 
ISSUE DEFINITION AND BACKGROUND 
The power facility siting process involves a reconciliation of opposing forces: political, social, and economic. The federal government has a primary role in siting nuclear facilities, and to a lesser degree, fossil-fueled power pro­jects. While nuclear reform legislation is pending in Con­gress, no strong consensus has emerged from the numerous bills being circulated. Nevertheless, there are three major directions federal legislation could take with regard to facility siting. The federal government could: 
(I) 	
Create a national power plant siting authority or set criteria for states to follow in siting. Ifa state failed to enforce the criteria, the federal government could take over the program. 

(2) 	
Provide funds for states to develop their own siting programs. 

(3) 	
Speed up the siting process by authorizing early site approval, site banking, or generic licensing of plants. 


POLICY ANALYSIS 
States also have substantial independent authority in approving power facilities. In recent years, approximately twenty-five states have passed siting regulations. The most frequently cited objectives for siting legislation are to provide: 
guidelines and criteria for siting suitable sites; 
-orderly and reliable mechanisms for the approval of 
such sites; 
the means to assure long-term availability of suitable 
sites for future use; and 
a mechanism to avoid federal preemption. 

Within the framework of these objectives, siting policies may involve one-step certification, long-range planning, increased attention to environmental considerations, short­ened processing time, and designation or creation of a lead agency (e.g., a siting authority). Typical siting legislation includes early site planning and certification of power plant sites and transmission corridors, requirements for proving need, assessments of environmental impact, and proof of conformity with regulations. 
There is not widespread agreement on the "success" of state siting legislation. From the industry's or utility's point of view, state requirements for thorough environmental reviews merely duplicate federal requirements and create unnecessary, costly delays in project construction. The states which have passed legislation cite as advantages cost savin~ (to the state and rate-paying customers) and increased public participation in the siting process. 
POLICY ALTERNATIVES 
Texas has not followed other states in establishing a siting authority and its options remain open. The absence of a major effort to pass siting legislation in Texas may be due to the relative lack of significant siting controversies as well as the general abundance of open space in the state. The chance for controversy will increase, however, with state efforts to build more coal-fired plants and to phase out natural gas-fired facilities. It is obviously to the advantage of all parties to have problems revealed before cost investments are made. 
The basic policy options to the State of Texas include the following: 
(1) 	
retain the current regulatory system, at least until firm federal guidelines emerge; 

(2) 	
establish a lead siting agency with centralized authori­ty; 

(3) 	
inventory possible power plant sites and initiate long-range planning efforts; 

(4) 	
coordinate the hearing procedure among state agen­cies so the utility could-present its case at one time; 

(5) 	
establish a "one-drop" procedure which would con­solidate all siting information into a single application form, copies of which would go to the relevant state agencies; and 

(6) 	
focus on public participation by instituting mecha­anisms for formalized local input into siting decisions. 


LauraR. Doll 

Part/: Permitting and Siting Energy Facilities 
CHAPTER4: 

ISSUE DEFINITION AND BACKGROUND 

During 1976, voters in seven states voted on initiatives that would have placed new controls on the spread of nuclear power plants. In all states, the controls were rejected. 
In California, more than 313,000 nuclear opponents signed a petition circulated during 1975 to put an anti­nuclear power initiative, the Land Use and Nuclear Power Liability and Safeguards Act, on the 1976 primary election ballot. This proposition was defeated by a more than two-to-one margin (3,986,770 to 1,924,304). 
The California initiative, called Proposition 15, sought to set certain conditions for continuation and expansion of nuclear power in the state. Among these. was one which would have required removal of insurance-liability limits on nuclear energy. It would also have authorized the state legislature to detennine the adequacy of reactor safety and waste disposal systems with cutbacks in plant operation if initiative conditions were not met by specified dates. 
Points of significance in understanding the defeat of Proposition 15 include clarification of pro-and con­initiative forces, comparison of campaign spending totals, legislation and litigation influencing the vote, important objections to Proposition 15, and confusion surrounding the issue. 
The pronuclear side of the Proposition 15 issue was aided by the timely passage of three bills directing the state's Energy Commission to detennine the technical feasibility of radioactive waste reprocessing of waste dis­posal and of siting nuclear reactors underground. If the necessary steps of waste technology cannot be spelled out, the legislature would have veto power on the siting of new nuclear plants. 
STATE REFERENDA ON 
NUCLEAR POWER DEVELOPMENT 

On November 2, 1976, voters in six additional states . defeated citizen initiatives designed to impose rigid safety 
requirements and other restrictions on nuclear power 
expansion. Although generally modelled after the California 
initiative, none of the others contained stringent progressive 
derating schedules for operating plants. 
All six proposals would have required state legislative 

approval for establishing effective operation of safety 
systems, and of the development of adequate methods for 
radioactive waste disposal prior to power plant construc­
tion. In addition, a nuclear utility would have had to 
assume full liability for damages resulting from a nuclear 
accident, unless liability was assumed by the federal 
government. 
In Arizona, · Colorado, Ohio, and Washington voters 

rejected the initiatives by approximately the same two-to­
one margin that occurred in California four months earlier. 
In Montana and Oregon, the initiatives lost by smaller 
margins. 
POLICY ANALYSIS 
With approximately twenty percent of the electorate in the United States having now had the opportunity to express their opinion on policy issues related to nuclear safety, an obvious interpretation of the results is that a majority of the voting public is Jess concerned with the possibility of a disastrous nuclear accident or the problem of long-term nuclear waste disposal than it is with the need for nuclear power to meet future electrical energy needs. 
Judith Shifrin 

5 

PARTU 

ECONOMICS, FINANCING, AND TAXING OF ENERGY: CURRENT ISSUES 
Chapters 5-8 explore the role of government in the regulation and taxation of energy resource development. The analysis is primarily con­cerned with public policies toward conventional fuel resources and re­flects current problems in the oil and gas industries. 
The questions addressed include: Is there a production response to changes in the prices of oil and natural gas (Chapter 5)? If interstate natural gas is deregulated in price, how will prices in Texas respond, given the nature of price redetermination clauses (Chapter 6)? What is the current structure of state taxes on energy in Texas and how will revenues be affected by different taxing policies (Chapter 7)? And how has horizontal integration by the major petroleum companies affected competition and resource development in the energy industry (Chap­t~r 8)? 
7 
Texas Energy Issues: I 978 
CHAPTERS: 

BACKGROUND 
The average price of crude oil ranged narrowly for many years from $2.58 per barrel in 1952 to $3.98/bbl in 1973, but has increased to $8.07 /bbl in 1976 and is still rising. 
In 1973, Texas intrastate natural gas was priced at an average of 26.5 cents per thousand cubic feet in 1973, but by 1976, the average had risen to 68.6 cents/mcf with some sales being as high as two dollars. 
The number of oil and gas wells drilled has increased sharply in the last five or so years, but production peaked in 1972. Despite the increased drilling activity, the proven reserves of oil and gas continue to decline. 
POLICY ANALYSIS 
As part of its ongoing assessment of national energy policy, the Council on Energy Resources of the University of Tecas at Austin has dealt with price and supply relationships and has concluded that: 
(I) 	
from 1971 to 1976, composite prices per barrel of oil and gas equivalent rose, as did total industrial expen­diture for exploration, drilling, and production; 

(2) 	
over the past 30 years, the volume of oil and gas dis­covered has been directly related to the amount of exploratory drilling done; 

(3) 
nationwide, 	a reasonably adequate reserve exists to support current rates of usage for more than 50 years; 

(
4) 	as reserves added per unit of total drilling and dis­coveries per unit of exploratory drilling diminish over time, the ability to exploit reserves and resources will diminish; and 



EFFECT OF 
GOVERNMENT AL POLICIES ON 
TEXAS OIL AND GAS 
PRODUCTION AND RESERVES 
(5) present conditions do not suggest that constraints imposed by equipment shortages will be serious. 
POLICY ALTERNATIVES 
The Texas Energy Advisory Council has developed a series of projections of the Texas energy future. It estimates that a "Business as Usual" scenario will result in a decline of oil and gas production in Texas of 3.8 percent per year compared to a growth in energy demand of 2.8 percent per year. Under the "Maximum Government Control" model, oil and gas production is estimated to decline 5.0 percent per year while energy demand should increase 2.2 percent per year. With a "Free Market" policy, oil and gas · production is estimated to increase 0.2 percent per year while demand will increase 2.7 percent per year. 
Following price deregulation of interstate natural gas, the Texas Energy Advisory Council projects an average wellhead price of $1.53/mcf by 1985. Gas production would decline with continued interstate ceiling&, but, under deregulation, would increase by more than 50 percent over levels projected for continued current policies. 
RECOMMENDATIONS 
To provide the lead time needed to develop alternate energy resources, Texas should produce as much oil and gas as feasible. Production has been and will continue to be responsive to price. Given an appropriate set of govern­mental policies, substantial energy supplies can be produced from Texas soil for a number of decades to come. 
J. Chris Dobbs 

Part II: Economics, Financing, and Taxing of Energy: Current Issues 
CHAPTER6: 	PRICE REDETERMINATION IN TEXAS PRODUCER GAS SALES CONTRACTS 
ISSUE DEFINITION 

Since 1971, renegotiation clauses have become routine in producer gas sales contracts in the Texas intrastate market. These clauses provide for upward price adjustments based on the prevailing highest prices in the market. No state agency now requires the filing of the contracts or summaries of their provisions, and therefore the effect of specific price movements on other gas prices in Texas cannot be predicted with confidence. The issues are whether the state government should: 
(1) 	
monitor producer gas sales contracts, and/or 

(2) 	
take any action to limit the allowable types of con­tract provisions? 


BACKGROUND 

Renegotiation clauses can have important consequences. They can spread local temporary market imbalances throughout the state and prolong their effect. The result would be higher prices than those in a stable market. Residential consumers would have to curtail their gas use or cut into their family budgets. Texas industry and commerce would face a cost-price squeeze and a competitive disadvan­tage. Gas producers might also suffer if consumers were locked into high-priced gas supplies that left them with little extra money to buy additional gas. The collapse of the Lo-Vaca system and the possibility of the deregulation of interstate gas prices are two important sources of market instability that the operation of redetermination clauses could spread and amplify. 
POLICY ANALYSIS 

A simplified model of price movements in the Texas gas market demonstrated the shift of large amounts of old gas into the higher price brackets within the intrastate market. Within the interstate market , the price of old gas was not greatly affected by the high prices paid for interstate gas not subject to price ceilings. 
POLICY ALTERNATIVES 

The state could collect and classify gas purchase con­tracts in order to build a simple, yet reliable and effective, predictive model of the Texas gas market. The model would enable public officials to decide whether state action is needed, and if so, what that action should be. Another type of model would use price and production information regularly compiled by the Comptroller and the Railroad Commission. These data make possible a detailed statistical model of prices in the Texas gas market. 
RECOMMEND A TIO NS 

(I) 
The Railroad Commission should collect a broadly representative sample of gas purchase contracts in order to make a preliminary analysis of their characteristics and determine the information needs of a full-scale model. 

(2) 
The Texas Energy Advisory Council, with the cooperation of the Railroad Commission and the Comptrol­ler, should use existing price and production data to develop a statistical description of the structure and dynamics of Texas gas prices. 


Daniel Rabovsky 

9 
Texas Energy Issues: 1978 
CHAPTER 7: 
ISSUE DEFINITION 
Three major energy taxes-Motor Fuel Taxes, Oil Sever­ance, and Natural Gas Severance Taxes-contribute 30.4 percent to total state tax collections. Increasing revenue from these taxes has helped to provide the state with a SI .98 billion surplus for state government in FY 1977. This analysis seeks to answer the questions. Are current tax rates serving adequately? What alternative taxing policies are available? What do historical trends and current events portend for energy taxing policy in the future? 
BACKGROUND 
In Texas, severance taxes have been used to gain a portion of the value of oil and natural gas production. Oil production is taxed at 4.6 percent of the market value at wellhead; natural gas at 7.5 percent. Because the tax is based on the value of the resource produced, the state has experienced dramatic revenue gains with the advent of higher oil and gas prices. Revenue from Natural Gas Severance Taxes increased from $125 million in FY 1973 to $474 million in FY 1977. Oil Severance Tax revenue increased from $210 million in FY 1973 to $431 million in FY 1976. Revenue fell in FY 1977 to $4 28 million. Production of both oil and natural gas peaked in 1972 and has been declining steadily since then. Motor Fuel Taxes (five cents per gallon for gasoline) have produced a slow increase in revenue growth in recent years. 
Perhaps because of rapidly increasing production, inter­est in imposing severance taxes on the production of lignite and uranium surfaced in the 65th Legislature. Although none of the proposals passed, it seems certain that the issue will be raised in the future as production of both lignite and uranium increase. 
Refinery taxes, proposed in the Legislature since 1949, received active support in the last session, without success. The potential tax base for such a tax is considerable. Texas' fifty refineries account for 26 percent of the refining capacity in the United States. 
CURRENT AND ALTERNATIVE ENERGY TAXES FOR TEXAS 
POLICY ANALYSIS 
As long as prices increase faster than production declines, the state will experience a net gain in revenue from existing severance taxes on oil and natural gas. At some future time, due to the rapid depletion of the state's oil reserves, higher prices will be unable to offset declining production. Since intrastate prices for gas are often four times as high as for interstate gas, Texas consumers, by virtue of marketplace taxation, are paying a dispropor­tionate share of the gas severance tax. Interstate 111ers consume 37 percent of Texas gas, yet pay only 31 percent of the tax. 
Any tax on the production of lignite will manifest itself in the fonn of higher utility bills for Texas consumers since all Texas lignite is consumed within the state. On the other hand, all uranium presently produced in Texas is exported. Texas is expected to continue to be a net exporter of uranium until 2000. Thus, any tax on uranium would be largely exported. A refinery tax on the magnitude of S percent of value of refinezy input probably woold not lead to a flight of the Texas refinery industry. Revenue from such a tax would be sufficient to displace current revenue from oil and gas severance taxes. 
POLICY AL1ERNA11VES 
The state currently does not need to increase revenue from any source, given its budget surplus. From a position of equity it could be argued that a minimum tax should be imposed on low-priced, largely interstate, gas. While the revenue magnitudes from both lignite and uranium taxes are relatively low, they provide one policy option should the state require additional revenue in the future. 1be refinery tax, although not needed at the present, is the heir-apparent to oil and gas severance taxes which will inevitably generate less revenue as depletion of the state's oil reserves continues. 
Michael ToDeson 

Part II: Economics, Financing, and Taxing ofEnergy: Current Issues 


CHAPTERS: 

ISSUE DEFINITION 

More than a dozen proposals dealing with horizontal integration in the energy industry have been introduced in the 95th Congress. In the past, bills of similar intent have also been referred to as horizontal dismemberment or, more commonly, horizontal divestiture proposals. The impetus for such legislation is a concern that the major oil companies are too big and powerful and that their participation in the development of alternative resources would adversely affect competition. 
In the context of this report, essentially all of these terms refer to legislative proposals which would limit the acquisition (i.e. horizontal integration) of alternative energy resources or require the sale (i.e. horizontal divestiture) of any such current assets by "major" oil and gas producers. Majors are defined and characterized by their "vertically" integrated structure. That is to say, they are engaged in the full production cycle including exploration, development, refining, transporation, and marketing. In some respects the oil industry's entry into alternative energy resources such as coal, oil shale, and tar sands has elements of vertical divestiture, aince these resources can be processed for use as a refinery feedstock. 

BACKGROUND 

The petroleum industry most recently became the target of serious divestiture proposals during the early 1970s. The 1973 Arab oil embargo, the 1974 quadrupling in the world price of oil, and the posting of record 1974 profits in the petroleum industry gave new support to the proponents of divestiture. Several Senate divestiture proposals have been narrowly defeated in the past, but the issue has never been brought to the floor in the House. Only two of the current proposals have been discussed in hearings and are thought to be politically viable. These are HR 7816, the "Public Energy Competition Act," introduced by Representative Morris Udall (D-Az.), and S 1927, the "Energy Industry 
HORIZONTAL INTEGRATION IN THE ENERGY INDUSTRY 
Competition and Performance Act of 1977," introduced by Senator Edward Kennedy (D-Mass). 

POLICY ANALYSIS 
Debate on horizontal integration generally centers on 

the oil industry's effect on competition and the benefits 
and need for the petroleum industry's participation in the 
development of a!l energy resources. Most studies agree that 
the industry has much to contribute to the development of 
alternative energy sources (e.g. coal synthetics, oil shale, 
etc.) as well as existing fuel sources (e.g. coal and uranium). 
Disagreement primarily centers on whether the energy 
industry is competitive enough to bring about a realization 
of this potential. Several recent government studies carried 
out by the Tennessee Valley Authority (TVA), the Federal 
Trade Commission (FTC), and the General Accounting 
Office (GAO) have ad4ressed themselves to this issue. They 
have specifically examined the structure of the coal 
industry and its competitive elements. 
All of these agencies used the same public information; 

however, the FTC and GAO also used the results of a FTC 
survey of one hundred coal companies which was taken 
under oath. Both the FTC and GAO reports concluded 
generally that "the United States coal industry is competi­
tive" (GAO, cover summary); that "the structure of the 
United States coal industry during the survey period was 
conducive to competition" (FTC, p. 152). Though starting 
with most of the same data, TVA found the recent entry of 
large companies into coal mining to be increasingly concen­
trated, thus raising the prospect of oligopolistic market 
power. Other nongovernmental analyses of the coal indus­
try tend to support the findings of the FTC and GAO 
reports. While differences in methodologies partially ac­
count for statistical discrepancies among the reports, some 
of TV A's conclusions appear to be inconsistent with their 
own tables. 
G. Scott Johnson 


PART III 

ECONOMICS, FINANCING, AND TAXING OF ENERGY: TRANSITIONAL ISSUES 
The role of government in helping society adapt to the transition from a petroleum-based economy to one of greater dependence upon alternative energy resources is discussed in Chapters 9-11. 
The specific issues analyzed include the effects of the proposed National Energy Plan and Texas Railroad Commission's Docket 600 on boiler conversion in Texas (Chapter 9); the effect of rising petroleum prices on Texas agriculture (Chapter 10); and the role of government credit assistance in financing new energy development (Chapter 11 ). 
Texas Energy Issues: 1978 

CHAPTER9: BOILER FUEL CONVERSION 
ISSUE DEFINITION 
In 1970 Texas was 99 percent dependent on natural gas for industrial and utility boiler fuel operations; however, recently natural gas prices have begun to rise, and supplies have begun to decline. In order to promote conversion from natural gas to other fuels, the Texas Railroad Commission issued Gas Utilities Docket 600 and President Carter introduced a provision in the National Energy Plan for phasing out the use of natural gas as a boiler fuel. The NEP and GUD 600 are different and could possibly have different impacts on Texas' industries. 
BACKGROUND 
GUD 600 provides that (I) the transportation and sale of more than 3000 mcf/d by a Texas gas utility for use as a boiler shall be illegal; (2) there shall be a IO percent reduction in deliveries to boiler fuel consumers who averaged 3000 mcf/d and a 25 percent reduction is mandated by January I, 1985; and (3) the Commission has the authority to issue exceptions. 
The NEP, as out of Conference Committee, divides boilers in to four categories. "New electric powerplants" and "New major fuel burning installations" (MFBI) may not use natural gas or petroleum as a primary fuel. "Existing electric powerplants" may not use gas after January I, 1990, although a systems compliance option may be taken that would give the utilities more time to convert. "Existing major fuel burning installations" which had been initially constructed for or later modified to use coal could not bum natural gas or petroleum. 
POLICY ANALYSIS 
GUD 600, with the exception of existing MFBis, is less stringent than the NEP. Assuming a content of one million BTU/Mcf of gas, the NEP would regulate installations with an input of 100 Mcf/hr (100,000,000 Btu/hr+ 1,000,000 Btu/mcf = 100 mcf/hr) or 2,400 mcf/day. Since under GUD 600, only plants using more than 3,000 mcf/day would be under regulation, the NEP would be regulating smaller boilers. 
In the case of existing MFBis, GUD 600 is more stringent than the NEP because the Railroad Commission's GUD 600 would require phasedown regardless of whether the installation was built or modified to use coal. In the cases of both GUD 600 and the coal conversion provisions of the NEP, the application of exceptions is critical, since each has the potential for numerous exceptions. 
From all indications, electric utilities will probably be able to meet the requirements of both GUD 600 and the NEP. Other industries in Texas may be in a different position. Texas industry currently uses about one third of the natural gas burned in Texas under boilers with an average use of 3000 Mcf/d; however, only 7.4 percent of currently licensed coal· and lignite·fired capacity is owned by industries other than utilities. Assuming an average lead time of eight years for an average coal or lignite fired plant, Texas industry may have some difficulty meeting GUD 600's phasedown order. 
CONCLUSIONS AND RECOMMENDATION 
If Texas utilities and other industries are to comply with the Railroad Commission's Docket 600 and with the proposed legislation on boiler conversion arising from the National Energy Plan, the allowance of reasonable excep· tions is essential. 
The proposed national legislation is less stringent than Docket 600 with regard to existing major fuel burning installations, giving rise to the possibility that Texas gas might be exported for uses o·utstate that were not permis· sible instate. Modification of Docket 600 to eliminate this possibility should be given serious consideration. 
Shirley Walker 

Part III: Economics, Financing, and Taxing of Energy : Transitional Issues 
CHAPTER 10: ENERGY NEEDS OF TEXAS AGRICULTURE 
ISSUE DEFINITION 

The energy situation facing the U.S. is of concern to all industries. The agriculture industry is no exception. In fact, because of its dependence on petroleum products, the agriculture industry will be greatly affected by rising oil and gas prices and/or oil and gas shortages. 
BACKGROUND 

In 1974, sixteen percent of the nation's energy usage was consumed by the production, processing, distribution, and preparation of agricultural products. In the same year, Texas ranked number three and number one, nationally, in total BTUs consumed in livestock and crop production, respectively. Texas used 10 percent of the energy consumed by agriculture in the U.S. 
POLICY ANALYSIS 

A major objective of the National Energy Plan (NEP), as proposed by President Carter, is energy conservation. To encourage conservation, several portions of the NEP include proposals to increase oil and gas prices. Because the intrastate market in Texas is currently unregulated, such proposals will affect Texas agriculture differently than they will affect the agriculture industry in other states. 
One proposal includes setting a national price ceiling of $1.75 per mcf on natural gas. Some regions of the state are currently paying more than $1.75 per mcf and such a proposal would be beneficial, in the short run, to these regions. In the High Plains region, however, natural gas currently costs $1.25 per mcf. This fifty cent increase in gas prices would increase the cost of irrigation anywhere from twenty-five cents per acre-inch to forty-eight cents per acre-inch. Such an increase is not seen to be a critical factor in future crop production. In fact, without the imposition of $1. 7 5 per mcf price ceiling, natural gas prices are expected to exceed $2.00 per mcf on the intrastate market in the near future. A GEAC report states that an increase in natural gas prices from $1.25 per mcf to $2.50 or $3.00 per mcf, with management costs included in production, would cause a 23 percent decline in irrigated acreage, a 34 percent decline in net crop income , and a 36 percent decline in land values on the Texas High Plains. 
Another concern to the agriculture industry in Texas is the possibility of a natural gas shortage that might occur if the unregulated intrastate market is replaced by a single regulated national market. Basically for each 5 percent reduction in natural gas supply, irrigated acres decline 5 percent and producer net returns decline approximately 4 percent. 
POLICY ALTERNATIVES 
The NEP realizes the critical situation facing the agriculture industry and has exempted "certain agriculture users" from the proposed industry conversion tax. How­ever, the term "certain agriculture users" is vague and needs to be more sharply defined. Any mandatory reallocation of oil and gas supplies that might be required should take into consideration the seasonal usage patterns of agriculture and the inability of the agricultural industry to substitute immediately other fuels in place of petroleum products. 
Unlkke other industries agriculture has the capacity to expand its energy base through the production of biomass. Solar and wind power are also potential energy sources for a number of agricultural activities, and their application should be given serious consideration. In development new approaches federal R&D funds and energy conservation programs could be of great assistance in reshaping agricul­tural practices to fit alternative energy systems. 
Gregg R. Cannady Texas Energy Issues: 19 78 

CHAPTER 11: 	ROLE OF GOVERNMENT CREDIT ASSISTANCE IN FINANCING NEW ENERGY DEVELOPMENT 
ISSUE DEFINITION 

The use of credit assistance (which includes loans and loan guarantees by a government entity) for enhancing new energy development has grown rapidly in recent years. As a government interventionist policy, however, credit assis­tance has received relatively little analysis. The major issues associated with such assistance programs include: (1) whether any assistance to the private sector is really needed or desirable, and (2) whether credit assistance is the most effective and efficient method of intervention. 
BACKGROUND 

Although credit assistance for energy development is a relatively new phenomenon, credit programs can be traced back to the Depression. Several sectors of the economy (e .g., the housing industry) are heavily subsidized by loans and loan guarantees. An important political factor encour­aging such programs is that they are "off-budget" and thus require no outlays until a borrower defaults. Congress has recently enacted three modestly sized credit assistance programs for energy development, and several state and regio1:al groups have also expressed an interest in establish­ing credit-lending institutions on a regionalized basis. 
POLICY ANALYSIS 
Credit assistance is justified under the assumptions that: 

(I) the private sector is either unwilling or unable to provide the risk capital necessary to finance alternative energy resources, and (2) it can be an effective method of reducing the lead-times required to develop alternative resources. The analysis suggests that these assumptions are somewhat dubious, since government regulations and uncer­tainty over government policy appear to be the primary factors inhibiting new energy investment. The issue thus becomes a dilemma between promoting the socially worth­while goal of energy development or the continuation of certain controls and regulations that may also be viewed as equally worthwhile. 
Credit assistance has substantial economic effects. 
Rather than expanding the supply of capital, such assis­
tance tends to shift 	capital from some sectors of the 

economy into the subsidized sector. This shift may deter 
investment in related energy sectors (e:g., enhanced oil and 
gas recovery). It will also tend to raise interest rates, since 
the supply of capital available to unsubsidized sectors has 
been artificially reduced. 

The political _problems of credit assistance generates at least three major policy issues, including: (1) the tempta­tion to extend controls over the subsidized firms (in areas ·often unrelated to the activity being subsidized); (2) the temptation toward favoritism in lending credit; and (3) the dilemma between equity and efficiency goals. Administra­tive issues are also difficult to reconcile, especially for those regional groups attempting to establish new credit lending institutions. Issues include: (1) the degree of public and private sponsorship; (2) the scope of the subsidized projects; and (3) the manner in which the obligations are 
financed. 
Complicating these economic, political, and administra­
tive issues is the fact that there is little evidence substanti­
ating the effectiveness of credit subsidies or the degree of 
subsidy, primarily because of the neglect of opportunity 
costs. Nevertheless, once these issues and problems are 
openly acknowledged and competing goals are reconciled, 
credit assistance can become a viable alternative to other 
interventionist policies, or can be an offsetting device for 
other policies that hamper energy development. 
Jeffrey D. Dunn 


PART IV 
ENVIRONMENTAL IMPACTS OF ENERGY DEVELOPMENT 

As energy development proceeds, the environmental effects of that development will be a factor of importance to policy makers in Texas. The environmental laws and regulations are far from being totally clear, and the impacts may be potentially serious. 
The impact of the Federal Surface Mining Control and Reclamation Act on the regulation of Texas lignite and uranium mining (Chapter 12) will depend in large measure on the interpretation of the law by the Department of the Interior in promulgating its regulations. Highly controversial sections of the statute-such as the definition of "prime agricultural lands" -have already been appealed to the federal courts and will require time to resolve. 
In the concern for air quality, the Clean Air Act Amendments of 
1.977 raise problems of compliance. Where air quality is presently acceptable, the "prevention of significant deterioration" (PSD) require­ments may limit the establishment of new power plants and industries (Chapter 13). In areas of nonattainment where air quality is currently below national standards, the offset policy may create industrial growth problems of equal seriousness (Chapter 14 ). 
Texas Energy Issues: 19 78 
CHAPTER 12: 

ISSUE DEFINITION 
A major energy policy issue facing the State of Texas today is the regulation of surface mining operations. Texas state law regulates surface mining of lignite coal and uranium ore. Federal law pertains almost exclusively to coal surface mining operations. Lignite is included. Uranium mining is covered by the state but not by the Federal law. 
There are a number of environmental problems which can result from surface mining. They include land and water quality degradation, soil degradation, waste disposal problems, and various problems associated with unre­claimed mined lands. In attempting to protect the environ­ment, federal law has raised several policy issues of importance to Texas. These include: (I) the proper role of the federal government in surface mining regulation; (2) tradeoffs between environmental protection and mining of the state's energy resources; and (3) issues arising from the implementation of the federal law in Texas. 
BACKGROUND 
Texas possesses large deposits of lignite coal and uranium resources which are recovered by area strip mining and open pit mining techniques respectively. The mining of these minerals is expected to increase greatly in the near future. Production of lignite is expected to increase from about 14 million tons in 1976 to about 58 million tons in 1985. Uranium production could triple between 1977 and 1985, although production estimates are less reliable than for lignite. This increased production will disturb large amounts of land and could create substantial environmental problems. 
POLICY ANALYSIS 
The Federal Surface Mining law has caused a good deal of controversy over the role of the federal government in 
IMPACT OF THE 
FEDERAL SURF ACE MINING ACT 
ON TEXAS LIGNITE AND URANIUM MINING 
regulation of mining activity. Environmentalists have ar­gued that adequate protection of the environment requires strong national controls. Many federal officials have con­curred in this viewpoint. Industry representatives and many state officials on the other hand have argued that the states are doing an adequate job and that federal regulation is unnecessary and costly. 
In Texas, several issues have arisen which could pose difficulties for the mining industry and the Texas Railroad Commission. The most important issues are: (1) federal requirements pertaining to surface mining on "prime agricultural lands"; (2) language differences between the federal and state laws over reclamation standards; (3) federal requirements for topsoil handling and replacement; and (4) federal requirements for protection and restoration of hydrologic balance on mined lands. The State of Texas has filed suit against the Department of the Interior to prevent implementation of the regulations pertaining to prime agricultural lands. The suit alleges that the federal provisions governing surface mining on these lands (as defined in the Act and Regulations) would have a seriously adverse effect on production of Texas lignite. 
CONCLUSIONS AND RECOMMENDATIONS 
These issues are yet to be resolved. What is clear is that effective regulation of surface mining operations is primar­ily dependent on the effectiveness of stllte programs. A federal/state cooperative effort in this area is crucial to the realization of the goals of the Federal Act. Such an effort is possible only if adequate administrative flexibility is al­lowed between federal and state agencies. The diversity of surface mining impacts is such that rigid federal controls are likely to be counterproductive. There is also a need for a high degree of coordination between Texas state agencies in this area. 
Mark Sayers 

Part IV: Environmental Impacts ofEnergy Development 

CHAPTER 13: 	IMPACT OF PREVENTION OF SIGNIFICANT DETERIORATION REQUIREMENTS UPON TEXAS ENERGY DEVELOPMENT 


ISSUE DEFINITION 

One ol the most signiflcan t issues affecting both the development of new electric generating facilities in Texas and the conversion of existing plants from natural gas and oil to lignite and coal concerns the impact of the "prevention of significant deterioration" (PSD) provisions of the Clear Air Act Amendments of 1977. 

BACKGROUND 

The PSD requirements seek to limit the extent to which existing air quality that is better than the established minimum standards can be degraded. The Clean Air Act establishes three classes. and pollution by sulfur sioxide and particulates exceeding existing levels would only be allowed up to a particular specified increment in each. In Class I areas. virtually any increase in sulfur dioxide or particulates would be prohibited. Class II standards would permit moderate. well-controlled growth. In Class III. deterioration would be allowed all the way to minimum standards. The primary mechanism developed by the Act to assure the maintenance of the PSD ceilings is the preconstruction review and permitting process required for most large new or modified emissions sources. This process is designed to assure that these sources meet new source perwrmance standards. employ best available control technology . and not cause the PSD ceilings to be exceeded. 

POLICY ANALYSIS 

PSD requirements will have important impacts on energy production and utilization in Texas in several respects. New construction or modification of petroleum refineries or fossil-fuel generating plants will first have to meet the PSD preconstruction requirements and increment ceilings. These requirements will make the siting of such plan ts very important and perhaps restrict their location in certain areas. PSD will also have particularly important consequen­ces for the development and use of Texas lignite. These consequences include possible problems in meeting the PSD particulate increment in the surface mining of lignite, and in meeting the particulate and sulfur dioxide ceilings with the emissions from mine-mouth lignite power plants. l\nother potentially important impact would arise if the secondarv growth associated with an energy facility is made sub.1ect to PSD requirements. 
There are several important unresolved issues concerning the scope of the new PSD requirements, especially as. to which emitting facilities must comply. A related question is whether emission increases from sources not subject to PSD requirements will be counted against an increment. 
Implementation of the new PSD requirements raises some important institutional and administrative issues. Of particular interest are when the Texas Air Control Board (TACB) might obtain authority from EPA, which currently handles the program in the State, to administer PSD, and how the area redesignation process provided by the Amendments will operate. 
There are substantial areas where PSD and the "offset" requirements for nonattainment areas overlap. Sources locating near the boundary line between attainment and nonattamment areas will have to meet both the PSD and "offset., requirements. 


RECOMMENDATION 
The T ACB should assume control of the PSD program from EPA as soon as possible. Coordination between the State and EPA and parties affected by PSD can significantly lessen the poten tial adverse· impacts of PSD requirements on energy development and utilization in Texas. 
John Gooding Texas Energy Issues: 1978 

CHAPTER 14: 	THE OFFSET POLICY IN NONATTAINMENT AREAS: IMPLICATIONS FOR TEXAS 
ISSUE DEFINITION 

Included within the Clean Air Act Amendments of 1977 are provisions specifically addressing the problems of growth in nonattainment areas. Such areas, which have pollutant levels in excess of the National Ambient Air Quality Standards (NAAQS), are now required by law to employ the use of offsets as a condition for further growth and in order to reduce pollutant levels so that attainment is reached by 1982. Offsets are the simultaneous reduction of pollution in existing plants to more than compensate for the added pollution in new plants. This may prove especially difficult in Texas for two reasons: rapid growth and boiler conversion. The U.S. and Texa~ are faced with the two often conflicting goals of environmental quality and .energy independence. Certain tradeoffs must occur. 
BACKGROUND 

The concept of offsets in nonattainment areas has existed since December 31, 1976 via Environmental Protec­tion Agency (EPA) interpretive ruling. The Texas Air Control Board (TACB) is strongly opposed to the use of offsets. However, the 1977 Clear Air Amendments, when coupled with the TACB's failure to obtain an offsets waiver, mandate that offsets be used in Texas. Most of the nonattainment areas that exist in Texas are over the NAAQS for either photochemical oxidants or particulates (TSP). The photochemical oxidant problem is due largely to the presence of automobiles, refineries, and petrochemi­cal plants. High TSP levels in the state are due primarily to high natural background dust levels. Perhaps the region of the state that will be most affected by boiler conversion will be the Houston-Galveston area, in that a number of factories there may interact to create hazardous atmos­pheric conditions. 
POLICY ANALYSIS 
The EPA views the offset policy as a means of allowing growth in nonattainment areas. It is expected that the present list of nonattainment areas in the state will be expanded in the future as increased monitoring efforts discover new nonattainment areas. It is inevitable that an industry will try to locate in an area it believes to be attainment, only to find out after monitoring that the area is nonattainment. Most of such areas, when found, will be nonattainment for photochemical oxidants. The EPA may well come under increased pressure to relax the photo­chemical oxidant standard as many critics presently feel it is unrealistically low. 
Currently, the EPA does not allow industry to bank excess offsets. This policy may adversely affect air quality in that industry is encouraged to hold back on cleaning up existing facilities until offsets are needed. When the TACB submits its revised State Implementation Plan (SIP} in 1979, the SIP will supersede the present offset policy. It is expected that the T ACB will try to minimize the use of offsets and instead use other measures to insure that "reasonable further progress" is made in reducing pollutant levels. It is also expected that Texas will not show statewide attainment by the legal deadline of 1982. 
RECOMMENDATION 
As a means of ensuring a more cost-effective and timely approach to cleaning up nonattainment areas, the EPA should allow the banking of emissions on a case-by-case basis. If allowed by the EPA and adopted by the TACB, emissions banking would introduce needed flexibility to the offset policy. 
Eugene Barta 



PARTV 

COMMUNITY IMPACTS OF ENERGY DEVELOPMENT 
Much of the large scale energy development presently occurring in Texas is located in rural areas. This is especially true in the case of lignite, coal, and nuclear plants. Such developments usually benefit the communities in the long run, but in the short run, serious problems may develop. It is important to the future of energy development in Texas that such short-run problems be dealt with in a timely fashion. 
Community impacts analyzed here include state and federal assis­tance programs for energy impacted communities (Chapter 15), a case study of the impacts associated with the South Texas Project (Chapter 16), and the local concerns for Texas communities associated with increased rail shipments of coal to Texas (Chapter 17). 
21 
Texas Energy Issues: 1978 
CHAPTER 15: ASSISTANCE PROGRAMS FOR ENERGY IMPACTED AREAS 
ISSUE DEFINITION 

Many communities are experiencing a rapid growth rate due to energy related industries. The community impacts which are often associated with energy development have led to much discussion as to the role local, state, and federal governments and industry should assume in mitigat­ing the negative community impacts of energy develop­ment. 
BACKGROUND 

Energy impacted communities often have special growth problems. First, alternative locations for development are often not feasible. Second, much of this development is occurring in rural communities. Third, the population of these communities was stable or declining before the energy development was undertaken. A sudden increase in popula­tion and the accompanying demand for basic services place great stress on the distribution oflocal resources. 
POLICY ANALYSIS 

Many factors influence a community's ability to cope with energy-induced growth. One such factor is population. A recent study by John Gilmore concerning boom-town growth reports that a IS percent annual population growth rate leads to institutional breakdowns in the labor market, housing market, and the capacity for financing local public facilities (Science, February 1976). The quality of life in the community drops. As a result, worker satisfaction and productivity suffer. Thus, the community is no longer the desirable place it once was to live in. In addition, the energy industry located in the community faces increased costs because of lower worker productivity. 
POLICY ALTERNATIVES 

One possible response to the energy-impacted communi­ties would be to let the development occur without any intervention on the part of government or industry. This policy may result in a disintegration of community services, a degraded quality oflife and lower worker productivity. 
Another possible response involves the development of programs by government and industry to mitigate the possible negative .impacts of energy-induced growth. 
Precedent for federal action in assisting boom-town development has been set by such programs as the Trident ·Impact Assistance Program. Two additional federal pro­grams which may have relevance for energy-impacted areas are the Coastal Zone Impact Program and National Energy Plan. 
Several state governments have developed avariety of programs to avoid boom-town problems. Many of these programs provide some type of funding to enable these growth communities to avoid short-term revenue deficits. 
Industry also can play a role in providing impact 

assistance to communities. Companies can provide financial 
assistance and expertise. In many energy-impacted areas, 
industry has been actively involved in reducing the negative 
aspects of energy-induced growth. 
Robert Palmer 

Part V: Community Impacts ofEnergy Development 

CHAPTER 16: THE SOUTH TEXAS PROJECT: A CASE STUDY 
ISSUE DEFINITION 

The South Texas Project (STP) is a nuclear power plant under construction near Bay City in Matagorda County. It is a joint venture between two privately-owned utilities and the publicly-owned utilities of Austin and San Antonio. The public partners refuse to pay property taxes on their shares of the project, which constitute 44 percent of the total. They claim exemption because of their status as public bodies. The State Attorney General has ruled that the publicly-owned utilities are tax-exempt under Article I435a, passed by the Texas Legislature in 1973. Neverthe­less, Matagorda County is suing Austin and San Antonio for delinquent taxes. Since joint public-private electrical gen· erating ventures may be common in the future, this case explores one of the hidden costs of development-the tax-exempt status of publically-owned electric utilities. 
BACKGROUND 

Although it is currently experiencing a reactivation of its petroleum industry and an accompanying economic boom, Matagorda County is basically rural and sparsely populated. The impact on small communities such as Bay City and Palacios of a large project like the STP can be massive. More than 2,500 construction workers, many of them bringing their families, have poured into the Bay City area. Community impacts are one reason that Matagorda County seeks tax revenue from Austin and San Antonio in order to defray the costs of the additional services and other expenses incurred as a result of the STP siting. 
Austin and San Antonio maintain that their shares of the STP serve "public purposes" as defined in Texas law, and thus are entitled to tax-exempt status. Matagorda County argues that electricity generation is a profitable business and should be taxed accordingly. Furthermore, it states Art. 1435a may be unconstitutional since it was passed as a special law to benefit a targeted population. 
COMMUNITY IMPACTS 

Because Matagorda County is growing rapidly, it is difficult to isolate the effects of the STP from those of other growth-inducing agents in the region. However, the STP appears to have contributed to rising land values, a construction boom (to satisfy construction workers' de­mands for housing), the growth of secondary industries to service STP laborers, a higher standard of living (through wages paid to workers hired locally), and an increased tax base. Construction vehicles have damaged local roads severely and created traffic congestion. The crime rate has more than doubled since STP construction began . 
POLICY ANALYSIS 
AND ALTERNATIVES 


Due to the generally positive effects of growth and the difficulty of pinpointing them , community impacts alone do not constitute adequate rationale in this particular case for altering the status quo-the tax-exempt status of Austin and San Antonio. However, there are other issues to consider. Foremost is the question of equity. IfAustin and San Antonio consumers do not pay their "fair share" of the cost of the STP, taxpayers in Matagorda County or customers of the private utilities may have to make up the difference. Another consideration may be the risk posed by a nuclear power plant. Although safety has not been an issue in Matagorda County , perhaps it should be dealt with. Requiring that taxes be paid on the entire project would be a form of financial compensation to the host community for possible risk. 
Another option is for the state to make payments in lieu of taxes to Matagorda Counzy, to avoid the situation of one municipality taxing another. Alternatively, the status quo could be maintained, with a thorough study made of how other states handle the taxation of joint public-private energy-producing ventures. 
Carol Tombari 

Texas Energy Issues: I 978 

CHAPTER 17: 


ISSUE DEFINITION 

Unit coal train movements to supply Texas with western coal will be increasing in the near future. This inquiry seeks to illuminate to some degree the effects these coal shipmen ts will have on public safety at coal train impacted street and highway crossings by 1985. 

BACKGROUND 
Estimates of 1985 Texas demand for we.stern coal range from 40 to 85 million tons depending upon the scenario used and the sectors included in the estimate. Through 1985, the only available method to move western coal economically to Texas is the unit train, which consists of 100-110, 100-ton capacity cars hauled by five to seven locomotives at an average speed of 25 mph. 


POLICY ANALYSIS 
The major coal producing field now and through 1985 will be the Powder River Basin area served by the Burlington Northern (BN) railroad. By 1985, approxi­mately ten trains a day will be required along the most heavily traveled zone of the BN to supply 20 million tons per year to meet the minimum demands of four Texas power plants. 

UNIT COAL TRAIN MOVEMENTS TO TEXAS 
Sixty people were killed in grade-crossing accidents in Texas during 1976. The addition of these unit train movements will increase the danger of crossing accidents as measured by the "priority index" formula of the Depart­ment of Highways and Public Transportation. 
The present funding for installation of safety devices is very limited for city /county crossings which represent 12,843 of the 15, 193 railroad crossings in the state. The vast majority of funding for safety projects is directed at crossings on state and federal highway systems. To alleviate the shortfall of available resources to deal with city /county crossings some additional revenue is needed. 


POLICY ALTERNATIVES 
Should the state decide that it should bear the costs of increasing public safety at local city /county crossings impacted by increased rail traffic generated by coal shipments, some new or diverted revenue would be needed. 
The social costs of rail transportation are already recognized, and the adoption of some mechanism to deal with these costs would be a positive step for Texas communities. 
J.R. Prestidge 

CHAPTER 1 

FEDERAL AGENCIF.S AND LAWS DEALING 



WITH ENERGY AND THE ENVIRONMENT 

Federal law regarding the permitting and siting of energy 

facilities is complex and in a state of flux. This chapter 
makes no effort to conceal the fragmented, less-than­
comprehensive nature of the institutions which shape 
federal action in the energy/environment area. Nevertheless, 
the description provided here is necessarily simplified and 
subject to change. The most important conclusion which 
can be drawn from this chapter is that federal law makes it 
~ssible to treat energy concerns and environmental 
concerns separately-they are inextricably linked as a single 
policy area. 
This chapter discusses the relevant authorities of the Federal Power Commission, the Nuclear Regulatory Com­mission, the Federal Energy Administration, the Corps of . Engineers, and the Environmental Protection Agency. There then follows a discussion of six federal statutes with broad ramifications for the licensing and permitting activi­ties of these agencies. (Additional agencies and statutes are mentioned briefly when the context requires.) The six statutes of primary concern are the Fish and Wildlife Coordination Act, the National Environmental Policy Act, ·the Endangered Species Act, the Coastal Zone Management Act, the Submerged Lands Act, and the Outer Continental 
Shelf Lands Act. 
All agencies are referred to by their names as they 

existed prior to the Department of Energy Organization 
Act of 1977.1 It should be noted, however, that all Federal 
Energy Administration functions have been shifted to the 
Department of Energy. Furthermore, all FPC power plant 
licensing has been transferred to the new Federal Energy 
Regulatory Commission. Both the 1977 Act and subse­
quent legislation must be examined in order to determine 
whether any particular agency's jurisdiction has been 
affected, for the Act does not integrate federal activities 
relating to energy into a comprehensive whole. (The 
Nuclear Regulatory Commission, for example, has not been 
merged.) 
FIVE KEY AGENCIES 

Federal Power Commmion (FPC) 
The FPC has authority over interstate transmission of energy and the development of hydroelectric power. The FPC does not have authority over thermal electric plants despite language in the Federal Power Act that enables the FPC to license uses of "surplus water ...from any Govern­ment dam...."2 (Such water is often necessary as a cooling agent for nuclear and fossil fuel plants.) 
FPC licenses for hydroelectric plants are subject to various conditions, including possible revocation or altera­tion. The agency has a strict duty, based both on the National Environmental Policy Act (NEPA) and the Federal Power Act itself, to accommodate environmental values. 3 
Nuclear Regulatory Comrnmion (NRC) 
The NRC exercises licensing authority over nuclear power plants through a two-step process: construction permits and operating licenses. A construction permit is required for both actual construction and significant preconstruction activities. The latter are referred to as "commencement of construction" and are defined as "any clearing of land, excavation or other substantial action that would adversely affect the environment of the site."4 
Applicants for construction permits must submit envi­ronmental reports sufficient to enable the NRC to prepare an environmental impact statement (EIS) that will satisfy the requirements of NEPA. The report must include a cost-benefit analysis. This must quantify relevant factors to the fullest extent practicable and provide qualitative discus­sion to the extent that such factors cannot be quantified. The NRC uses this information to develop its own cost-benefit analysis.5 Although it is clear that the NRC must also consider information from sources other than the applicant,6 the procedures by which this must be done are not yet settled as a matter of law.7 On the one hand, both judicial deference toward the administrative process and the general nature of the Administrative Procedure Act give the NRC much discretion regarding its decision-making prac­tices. On the other hand, NEPA works as a substantive restriction on this flexibility. For example, NEPA requires consideration of "responsible scientific opinion concerning possible adverse environmental effects" which is contrary to the official agency position.8 In order for a court to be able to determine whether the NRC (or any other agency) has met this duty it is necessary that the court be provided with a record that adequately demonstrates "genuine 

25 

Texas Energy Issues: 1978 
dialogue" and proper ''ventilation" of the issues. 9 
Applicants for operating licenses must submit environ­mental reports discussing the same matters as are required in construction permit applications, but only to the extent that the material differs from that discussed previously or reflects new information. Thus, redundancy is minimized. Nevertheless, strong sentiment in both Congress and the NRC currently favors combining the construction and operating applications into a single licensing action. A danger in such a reform stems from the fact that approxi­mately 60 to 70 percent of the ten to twelve years usually required to bring a nuclear plant on line is consumed by factors other than environmental review.10 Thus, even with regulatory reform, lead times will be such that new, material information might be expected to arise between the construction and operating phases. 
NRC licensing is necessary, but not sufficient, govern­mental authorization for a nuclear power plant: 
(l) 	
Generally, state public utility commissions must issue a certificate of public convenience and necessity based on power needs and other (often environmen­tal) considerations. 

(2) 
Under section 	401 of the Federal Water Pollution Control Act (FWPCA), the EPA (or the appropriate state agency if 401 delegation requirements have been satisfied) must certify that any discharge will comply with FWPCA requirements. (The "discharges" of primary concern to the EPA are heat, surface run-off, and dredge spoil; the jurisdictional line between the EPA and the NRC as to radiation discharges is hazy,11 but the courts tend to hold that Congress intends the EPA's role to be secondary regarding this problem.) In addition, state permits are required for nuclear facility impacts on land, air, and water (allocation and quality). States differ in their re­quirments. State .standards which happen to be stricter than federal standards are not necessarily preempted-states generally have more latitude in this area than is often presumed, 12 and preemption issues must be determined according to the specific details of each conflict. 

(3) 
The EPA (or the appropriate state agency if delega­tion requirements have been satisfied) must review water quality aspects looking toward issuance of a permit under the National Pollution Discharge Elimi­nation System (NPDES) of section 402 of the FWPCA. 

(4) 	
Because most power stations derive their cooling water from navigable waters, Corps of Engineers 404 dredge and fill permits are usually required for the water intake and discharge structures. Section 401 of the FWPCA, referred to in number two above, makes the 404 permit subject to EPA approval. 


(5) Under 	certain circumstances, the licensing process includes roles for other agencies as well. For example, a nuclear plant that impacts federal land administered by the Department of Agriculture (or some other land management agency) must receive that Depart­ment's approval. 
Federal Energy Administration 
The FEA has authority to require fossil-fuel fired power plants in the early planning stages to be designed to use coal as the primary energy source.13 This facilitates the conver­sion of the nation's generating capacity from oil and gas to more abundant hydrocarbons. Prior to issuing orders, the FEA conducts an environmental analysis. 
Corps of Engineers 
Historically, the Corps has primarily been a construction agency with a mandate to protect and enhance navigation. However, court decisions interpreting the Refuse Act of 1899, NEPA, the Fish and Wildlife Coordination Act, and the Federal Water Pollution Control Act have given the Corps additional duties relating to environmental protec­tion.14 This mandate extends beyond the scope of tradi­tional definitions of navigable waters. Since the legislative history of the FWPCA reveals that Congress intended to ·expand this authority to the full extent possible under the Commerce Clause, 15 the Corps now issues permits for projects affecting "nonnavigable" waters such as swamps 
and wetlands. 
Virtually all nuclear and hydroelectric facilities must 
obtain Corps permits. This is also true of coal and lignite 
power plants. This is especially significant in light of the 
fact that these latter facilities are not subject to relatively 
comprehensive regulation such as that imposed by the FPC 
and the NRC. Thus the Corps is the "lead" federal agency 
for coal plants almost by default; the agency's concern is an 
incidental one, stemming from a more fundamental interest 
in waterways in general. 
The incidental nature of its concern notwithstanding, 
the Corps can veto or significantly modify a generating 
facility for environmental protection reasons. For example, 
section 404 of the FWPCA requires the agency to specify in 
each permit an acceptable disposal site for authorized 
discharges of dredged or fill material. The Corps selects 
these sites through a "balancing" of environmental and 
economic factors, 16 subject to veto by the EPA for 
environmental reasons. 
Environmental Protection Agency 
The EPA's approval is needed for a wide range of energy 

26 

Federal Agencies and Laws Dealing with Energy and the Environment 
projects. Its primary areas of concern are air and water pollution. 
EPA activities under the Clean Air Act, as amended through 1977, are treated in later chapters. Yet a few key points will be touched on here: 
(a) 
The Energy Supply and Environmental Coordination Act of 1974 specified that no action taken under the Clean Air Act is to be deemed "a major federal action significantly affecting the quality of the human environment."17 Thus NEPA's EIS requirements are inapplicable. The courts had reached the same conclu­sion independently .18 

(b) 
If rigorously applied, the Clean Air Act's prevention of significant deterioration policy might significantly curtail the growth of coal-fired power plants. Al­though the Energy Supply and Environmental Coor­dination Act of 1974 allows the EPA to relax clean air goals with respect to coal-fired plants, relaxation may not be allowed if the plant is located in an air quality region where the primary standard is being violated.1 9 


EPA permits under the Federal Water Pollution Control 

Act are important because the discharge of any pollutant is 
otherwise unlawful. The permit of greatest relevance to 
energy facilities is the section 402 permit, or the National 
Pollutant Discharge Elimination System (NPDES) permit. 
Section 402(b) allows the Administrator, after finding 
compliance with a number of conditions, to approve 
individual state programs for administering this permit 
system. 
The functions of the NPDES permit are to translate 

national effluent standards into limitations tailored to the 
discharger's particular operation, translate general water 
quality standards into particular limitations, and define 
final compliance dates for matters such as the installation 
of pollution control equipment. 
KEY STATUTES 

The permitting and siting of energy facilities is governed by several pieces of major federal legislation. These statutes include: 
The Fish and Wildlife Coordination Act of 195820 
The 1958 amendments to the Fish and Wildlife Coordi­nation Act require that federal agencies give wildlife conservation "equal consideration" with other features of water resource development. Additionally, the amendments establish the goal of wildlife enhancement, rather than merely the prevention of destruction. The basic mechanism for enhancement is mandatory consultation by the planning agency with the United States Fish and Wildlife Service and the relevant state wildlife agency. The weight which the planning agency must give to the consultation varies with the type of project being considered. For major projects such as hydroelectric power plants the recommendations of the wildlife agencies must be given "full consideration." (The recommendations typically take the form of "mitiga­tion plans" -suggested modifications in project design or suggested acquisition of land valuable as wildlife habitat to replace that which will be lost because of the project.) Where various water-related projects for which federal permits (but not comprehensive project planning) are required, the wildlife agencies can recommend that such permits be denied. However, the Act does not specify the amount of deference (if any) which the permitting agency must give the recommendation. The most significant permits plagued by this failure are those required by the Corps of Engineers pursuant to Section 404 of the FWPCA. These permits are required for the cooling systems of almost all power plan ts. 
The difficulty of assessing the substantive requirements of the Coordination Act is made even more arduous because the courts have repeatedly dismissed Coordination Act claims when brought in conjunction with NEPA claims.21 Furthermore, a General Accounting Office study has indicated that, quite apart from these legal vagaries, the Act's policies have "not been effectively carried out" as a practical, administrative matter. 2 2 
The National Environmental Policy Act of 19692 3 

NEPA requires environmental impact statements for "major federal actions significantly affecting the human environment."24 Yet it should also be understood that the Act is more than a paper shuffling device-it imposes substantive (if vague) obligations on federal agencies to minimize adverse environmental impacts. For example, section lOl(b) states that "it is the continuing responsi­bility of the Federal Government to use all practicable means, consistent with other essential considerations of national policy," to move toward achieving various environ­mental goals.2 5 Section 102 directs that certain types of actions (of which EIS preparation is one) must be under­taken "to the fullest extent possible." Section 105 stresses that the policies and goals of the Act are "supplementary" to those in "existing authorizations of Federal agencies." Thus courts have held that NEPA provides supplemental environmental criteria to the Corps of Engineers' power to issue dredge and fill permits2 6 and to the Nuclear Regula­tory Commission's power to license power plants.2 7 · 
Texas Energy Issues: 1978 
The environmental impact statement process is the central feature of NEPA. It combines the legislative objectives of full disclosure, consultation, and reasoned decision making.28 Section 102(2)(c) requires that an EIS address five subjects: 
(l) 
the environmental impact of the proposed action ; 

(2) 
any 	adverse environmental effects which cannot be avoided should the proposal be implemented; 

(3) 
alternatives to the proposed action ; 

(4) 	
the relationship between local short-term uses of man's environment and the maintenance and en­hancement of long-term productivity ; and 

(5) 	
any irreversible and irretrievable commitments of resources which would be involved in the proposed action should it be implemented. 


No attempt will be made here to summarize the vast amount of scholarly literature generated in response to NEPA.29 Two points are worth stressing, however. The first is that courts are particularly demanding when examining statements for actions undertaken by agencies which are unlikely to sympathiz.e with environmental concems.30 The second is that the Supreme Court has affirmed that while a reviewing court (confronted with a NEPA claim or anything else) is not to substitute its judgment for that of the agency's, the court nevertheless has a duty to take a "hard look" at substantive agency decisions in order to determine whether they are ''arbitrary, capricious, or an abuse of discretion."3 1 
The EndanFfed Species Act of 19733 2 
The fundamental thrust of NEPA is to ensure that environmental concerns are balanced along with the factors which give rise to developmental pressures. In contrast, section 7 of the Endangered Species Act imposed on each federal agency a virtually absolute duty of ensuring that its actions do not jeopardize endangered wildlife (including plants) or their habitats.33 Courts have demonstrated a willingness to enforce this statute quite strictly .34 The Act's requirements apply to all "actions authorized, funded, or carried out"35 by federal agencies; NRC licenses, and FPC licenses. Even Corps of Engineers and EPA permits are subject to the restriction. 
Coastal Zone Management Act (CZMA)3 6 
This Act, passed in 1972 and significantly amended in 1976, lays the foundation for an important program of state and federal cooperation in combining economic growth with environmental protection in coastal and offshore areas. The CZMA is a totally voluntary grant-in-aid program. Those states which choose to participate, however (all thirty of the eligible states are taking part), must adopt mandatory land development controls. The Secretary of Commerce (acting through NOAA, Office of Coastal Zone Management) can provide up to 80 percent of the state's costs of program development over a period of four years. Further monies for program operation are contingent on the state's program being approved by the Secretary. 
As of this writing, only Washington and Oregon have approved programs. The proposed programs of California, Massachusetts, and Wisconsin must await the outcome of court battles between NOAA and the American Petroleum Institute. Although a number of legal issues are involved, it is probably fair to say that the crux of the matter is that the energy industry feels that NOAA has not sufficiently emphasized the CZMA's requirement that states "consider" the "national interest" in energy development.3 7 The cases may tum on whether this is a substantive requirement to step up energy activities, or whether the language is satisfied by evidence of consideration in a procedural sense. Proponents of such a less restrictive interpretation may draw support from the fact that the 1976 CZMA amend­ments explicitly provide that the Commerce Secretary shall not insist on particular energy facility siting proposals as prerequisites to program approval.38 On the other hand, the legislative history of the 1976 amendments shows that Congress contemplates that coastal areas must bear the impacts of greater energy development. 3 9 
The ultimate approval of a given state's Coastal Zone Management Program can have a great impact on federal activities which affect energy development and environmen­tal protection within that state's coastal region. This is so because once the program is approved, federal agencies "conducting or supporting activities directly affecting the coastal zone" or undertaking "any development project in the coastal zone" must generally act in a manner which is, to the "maximum extent practicable, consistent with [the program]" (emphasis supplied).40 The Act's consistency provisions are much too complex to be discussed here. Furthermore, they raise difficult constitutional problems and problems of statutory construction which have yet to be faced by the judiciary. It is clear, however, that the consistency provisions potentially represent a major shift of decision-making authority from Washington, D.C. to the states. 
The Submerged Lands Act4 1 
This statute gives states control of submerged land beneath the territorial sea as well as that beneath their inland waters. Thus it"is important for offshore oil and gas development. 

28 

Federal Agencies and Laws Dealing with Energy and the Environment 
1he Outer Continental Shelf Lands Act4 2 
TI1is statute defines thooe submerged lands which are subject to federal control. It is an important guide for oil and gas development on the Outer Continental Shelf. 
A. Scott Anderson 

REFERENCES AND NOTES 
1 Department of Energy Organization Act, P.L. 95-91, 91 Stat. 565, August 4, 1977. 
2 16 U.S.C. §797(e)(l970). 

3 The pertinent language in the Federal Power Act mandates that projects be responsive to both commerce and "other beneficial public uses, including recreational pur­poses .... " Id. §803(a). On this basis, the courts forced the FPC to take environmental considerations into account even before NEPA; e.g., Scenic Hudson Preservation Conf. 
v. FPC, 354 F.2d 608 (2d Cir. 1965) (subsequent case history omitted). NEPA has intensified the degree of consideration required. Greene County Planning Board v. FPC, 455 F.2d 412, 419, 420 (2d Cir.), cert. denied, 409 
U.S. 849 (1972). 
4 10 C.F.R. §50.IO(c) (1977). 

5 The problems with cost-benefit analysis where envi­ronmental amenities are concerned are enormous; the identification, quantification, and valuation of relevant factors is plagued by a high degree of uncertainty. It has been stated flatly that "available data... do not provide a reliable quantitative basis for relating costs of environmen­tal regulations to their benefits to health and the environ­ment." Committee on Energy and the Environment, Na­tional Research Council, Implications for Energy Produc­tion and Consumption 3 (I 977). 
6 Committee for Nuclear Responsibility, Inc., v. Seaborg, 463 F.2d 783,787 (1971) (construing NEPA). 
7 NRDC v. NRC, 547 F.2d 633 (D.C. Cir 1976) [Ver­mont Yankee] voided NRC conclusions as to the costs associated with the uranium fuel cycle. The case has recently been reversed and remanded by the Supreme Court because the Justices felt that the Circuit Court had interfered too strongly with administrative discretion. However, this writer predicts that if, on remand, the Circuit Court simply adopts the concurring opinion of Judge Tamm, who wants to remand to the NRC for further explanation, rather than further proceedings, the Supreme Court will ultimately affirm the next rejection of the NRC's conclusions. 
8 Supra note 6. 

9 The language in the text is drawn from the majority opinion in the now-reversed NRDC v. NRC, note 7. Judge Tamm's concurrence, 547 F.2d 633, 658-61, is also con­cerned with incompleteness and lack of sensitivity in the record generated by the NRC. However, he shares the Supreme Court's fear that the majority approach would lead to "overformalization of the administrative decision­making process." The concerns are (1) that such overforma­lization will not improve decisions, and (2) that the courts are peculiarly unsuited for optimizing administrative pro­cesses (note, however, that Judge Tamm is perfectly willing to invalidate NRC findings as being "arbitrary and capri­cious"). 
1 0 This statistic is drawn from NRC data presented by P. Strauss, "The NRC Role and Plant Siting," in Energy and the Public Lands II (proceedings of a conference sponsored by the University of Utah College of Law and the Environmental Law Institute held in Park City, Utah, August 17-20, 1977). 
11 See M. Baram, "Radiation from Nuclear Power Plants: The Need for Congressional Directives," 14 Harv. J. Legis. 905 (1977). 
1 2 An excellent review of state/federal relations in this area is C. Bishcoff, "Nuclear Power Regulations: Defining the Scope of State Authority," 18 Ariz. L. Rev. 98 7 (1976). 
1 3 The implementing regulations may be found in l 0 

C.F.R. § 307.3(a) (I 977). 
14E.g., United States v. Standard Oil Co., 384 U.S. 224 (1966) (Refuse Act); Zabel v. Tabb, 430 F.2d 199 (5th Cir. 1970), cert. denied, 401 U.S. 910 (1971) (NEPA and Fish and Wildlife Coordination Act); NRDC v. Callaway, 392 F.Supp. 685 (D.D.C. 1975) (Federal Water Pollution Control Act). 
1 5 This expansion was explicitly referred to in the House-Senate Conference Committee's report: "The con~ ferees fully intend that the term 'navigable waters' be given 
29 

Texas Energy Issues: 1978 
the broadest possible constitutional interpretation .... " Quoted in M. Baram, Environmental Law and the Siting of Facilities 137 (1976). 
1 6 The factors considered by the Corps are set forth in greater detail in 33 C.F.R. §209.120(0(1)(1976). Many commentators feel that the Corps' procedures and stan­dards do not provide for adequate consideration of environ­mental values; e.g., W. Rodgers, Environmental Law 407 ( l 977); note, "Environmental Impact Assessment for Water Resource Projects: The Army Corps of Engineers," 45 George Washington L. Rev. 1095, 1118-19 (1977). In fairness, however, it must be pointed out that uncertainty as to the identification, quantification, and valuation of environmental features is inherent in the art of impact assessment itself. 
17 15 U.S.C.A. §793(c)(l)(l976). 
1 8 E.g., Portland Cement v. Ruckelshaus, 486 F .2d 375 (1973), cert. denied, 417 U.S. 921 (1974). It should be remembered, however, that to exempt action from the EIS requirement is not necessarily to obviate other require­ments of NEPA. 
19CA VEAT: the statement in the text of EPA's author­ity has not been thoroughly double-checked in light of recent Congressional action on energy and air quality. See generally 42 U.S.C.A. §§7001-7626 (1977-78 pamphlet). 
20 16 U.S.C. § §661-667e (1970). 
21 See generally, Environmental Law Institute, The Evolution ofNational Wildlife Law, 200-09 (1977). 
22 General Accounting Office, Improved Federal Efforts Needed to Equally Consider Wildlife Conservation with Other Features of Water Resource Development, app. IV at 43 (1974). 
2 3 42 U.S.C. § §4331 et seq. (1970). 
24Id., §4332(2)(c). 
25 Id. §433l(b). 
26 Zabel v. Tabb, 430 F.2d 199, 214 (5th Cir. 1970), cert. denied, 401U.S. 910 (1971). 
2 7 Calvert Cliffs' Coordinating Committee v. AEC, 499 F.2d 1109 (D.C. Cir. 1971), cert. denied, 404 U.S. 942 (1972). 
28 W. Rodgers, Environmental Law 730 (1977). 

2 9 A good introduction in F. AndeISon, The NlllioNll Environmental Policy Act, in Environmental Law Institute, Federal Environmental Law 238 (E.L. Dolgin v. T.G.P. Guilbert eds (1974). 
30See H. Leventhal, ••Environmental Decision-making and the Role of the Courts," 122 Univ. Penn. L. Re11. 509, 515, 525 (1974). 
31 Citizens to Preserve Overton Pad: v. Volpe, 401 U.S. 402 ( 1971 ). The Court has reaffirmed this position, albeit pointing out that the standard must be a narrow one, in Kleppe v. Sierra Club, 96 S.Ct. 2718, 2731 n.21 (1976). It is probable that the Vermont Yankee litigation referred to in notes 7 and 9, iupra, and accompanying text, will make a substantial contribution to this area of administrative Jaw. 
32 16 U.S.C. §§1531-1543 (Supp. V, 1915),asamended by Act of July 12, 1976, P.L. 94-359, 90 Stat. 911. 
33/d. §1536. 

34See, e.g., National Wildlife Federation v. Coleman, 529 F.2d 359 (5th Cir. 1976), cert. denied, 91 S.Ct. 489 (1976); Hill v. TVA, 549 F.2d 1064 (6th Cir. 1977) (this latest incarnation of the infamous Tennessee Snail Darter case has recently been affirmed by the Supreme Court; Congress is responding, however, and the minnow's days may be numbered). 
35 Supra, note 33. 
36 16U.S.C.,§1451 et seq. (Supp. V., 1975). 
3 7 Id. § 1455(c)(2)(8). 
38 16U.S.C.A.§1456a(i). 
39 1976 U.S. Code Cong. & Adm. News 1768. 
40 16 U.S.C. § 1456(c)(l)-(2) (Supp. V, 1975). 

41 43 U.S.C. §1301 et seq. (1970). The textual ••discus­sion" of the Submerged Lands and OCS Acts is, obviously, rather clipped. For an excellent discussion at a more appropriate level of detail, see N. Jones, Jurisdiction Over Offshore Petroleum Developments: The Coastal States and the Federal Government (Library of Congress Congressional Research Service, HD 9560 U.S.E. 76-lSA 581/216, Jan. 13, 1976). 
42 43 U.S.C. §1331 et seq. (1970). See generally, N. Jones, supra note 41. 
30 
CHAPTER 2 

SITING OF NUCLEAR WASTE DISPOSAL FACILITIES 

ISSUE DEFINmON 

Radioactive wastes are produced at most stages in the nuclear fuel cycle. The largest and most toxic amounts are generated during nuclear reactor operation and are removed annually in the form of spent fuel. 
Some of the readioactive isotopes in spent fuel decay very rapidly. Others remain highly radioactive for hundreds of thousands of years. Therefore, spent fuel must not cinly be handled and stored very carefully in the short term, but rigorous long-term disposal methods are required to protect the health and safety of future generations. Thus, radio­active wastes present unique technical and institutional challenges. 
Utilities in the United States have been using nuclear energy to generate electricity for eighteen years; however, no national policy on radioactive waste disposal exists. Uncertainty and disagreement in the technical and scientific communities, public opposition, and numerous institutional delays have hindered the development of a suitable waste storage and disposal program. 
This situation has prompted some observers to question whether the public and private sectors in this country will ever be able to adequately solve the waste storeage problem. As Harvey Books of Harvard University has stated: 
No single aspect of nuclear power has excited so per­sistent a public concern as has radioactive waste management.... I would predict that, should nuclear energy ultimately prove to be socially unacceptable, it will be primarily because of the public perception of the waste disposal problem.1 


BACKGROUND 

Management and disposal of radioactive wastes are closely related. Management is the interim handling and storage of radioactive wastes. But simple management, no matter how secure in the short term, cannot reasonably be extended for the essentially indefinite period of time re­quired for long-lived wastes to decay to stable, nonradio­active forms. At some point, management must give way to some form of permanent disposal which will not require human attention in the coming centuries. 
Several methods have been suggested for the permanent disposal of radioactive wastes. These include ocean disposal, ice sheet disposal, extraterrestrial disposal, deep hole disposal, and burial in geologic formations. 2 
Burial in geologic formation has long been considered the most viable alternative. It is the best understood and most widely favored method. The accessible geologic formations which could be used include granite, clay, shale, limestone, and rock salt deposits. Salt formations have characteristics which make them particularly suited for waste disposal. 
Site selection for waste repositories must be based on criteria which minimize the risks of radiation contamina· tion of the ambient environment.3 The risks associated with the disposal of radioactive wastes can never be reduced to zero. However, risks can be minimized through careful siting if accurate data are made available from exhaustive geologic and environmental surveys of prospective loca· tions. 
From 1960, when the first nuclear power plant began to operate in the United States, to 1974, the Atomic Energy Commission (AEC) was responsible for supervising the nuclear industry. During this period, the waste problem was never given a high priority by the AEC. 
In 1974, the newly created Energy Research and Development Administration (ERDA) became responsible for the research, development, and demonstration of energy technologies. Recognizing the importance of the waste problem, the agency began a program to identify suitable sites for six pilot disposal facilities to receive commercial nuclear wastes. ERDA began investigating four salt forma­tions for potential repository locations. Two of these salt formations-the Interior Gulf Coast salt domes and the Permian Basin salt formation-underlie parts of Texas. 
On October 1, 1977, ERDA's functions were absorbed by the new Department of Energy (DOE). The waste disposal program is now being administered by DOE's Division of Waste Management, Production, and Reproces­sing. 
Throughout the history of the nuclear industry in the United States, the waste management practices of the 
31 
Texas Energy Issues: 19 78 
federal government and the private sector have been extremely shortsighted and the problem of waste disposal has been largely ignored. These critical issues are now being addressed. However, the current program has experienced numerous setbacks and delays, and there are still many institutional and political obstacles which must be over­come before the federal government can establish a badly needed comprehensive waste management and disposal policy. 
POLICY ANALYSIS 

Two regions in Texas are currently being investigated as possible areas for siting of a waste disposal facility. The Permian Basin salt formation is located in the Texas Panhandle and extends north into parts of Oklahoma. The Texas portions of the Interior Gulf Coast salt domes are located in Northeast Texas. 
The Bureau of Economic Geology at the University of Texas at Austin has contracted with OOE to conduct geologic studies in both of these regions. The bureau may recommend specific site locations in one or more salt domes as early as the fall of 1978. Final recommendations on specific site locations in the Permian Basin are expected in 1982.4 
Geologic studies are designed to ensure that the site 

selection process meets public health and safety and 
engineering feasibility requirements. The selection process 
also involves a series of environmental studies to ensure that 
all natural and human environmental values are taken into 
consideration as required by the National Environmental 
Policy Act. 
The NUS Corporation of Rockville, Maryland has 

contracted to prepare plans for environmental surveys of 
the two regions under consideration in Texas. When 
completed, the final environmental survey plans will be 
used as planning documents by the program contractors 
responsible for preparing the environmental surveys. 
Geologic and environmental aspects will not be the only 
considerations in the site selection process. Even if a site is 
geologically and environmentally suitable for a repository, 
other factors, such as public and political opposition, could 
prevent it from being developed. 
In the past, the federal government has exercised 
exclusive control over nuclear materials through various 
regulatory mechanisms. However, in recent years, as the 
public has become more and more concerned about the 
impacts of nuclear power, various state and local govern­
ments have been trying to assume some control over 
nuclear materials within their jurisdictions. Areas of the 
greatest state legislative and regulatory activity are siting of 
nuclear power plants, transportation of radioactive materi­
als, and radioactive waste disposal. 

The legislatures in South Dakota, New Mexico, Ver­mont, and Louisiana have all passed laws which control various aspects of the federal waste disposal program within their states. Similar legislation may be considered in the Texas Legislature in 1979. The staff of the Texas House Committee on Energy Resources is preparing a report on waste disposal prospects in the state. And, at the present time, the committee chairman, Representative Joe Hanna (D-Breckenridge ), is considering proposing to the full committee that it introduce legislation to the sixty-sixth Texas · Legislature which would express state intent to exercise some control over the site selection process in Texas. 
Legislation of this kind is commonly thought to be inconsistent with the doctrine of federal preemption as spelled out in 1971 in the landmark case of Northern States Power Company v. State of Minnesota. 5 The federal government has not chosen to challenge any of these laws and seeks a reaffirmation of federal preemptive rights primarily because it wishes to avoid any unnecessary confrontations with states over the waste disposal program. 
Public opposition halted investigations of potential repository sites in Lyons, Kansas in 1972, and in Alpena County, Michigan in 1976. Because of these incidents, DOE officials are aware of the great potential for extreme adverse public reaction to the waste disposal program. To avoid similar incidents in other states, DOE officials have decided to work with the states affected by the waste disposal program and, if necessary, to defer a state's opposition to the program. 
This policy is a recognition of the great political sensitivity of the waste problem. DOE officials are aware that if they do not voluntarily respect a state's wishes, Congress could force them to do so. There is a great deal of sentiment in Congress at this time for recognizing states' rights in matters of nuclear energy. 
Therefore, while state legislation cannot legally prohibit 

the federal government from conducting parts of the 
national waste disposal program within a state, it can be 
used as an effective political mechanism for voicing state 
opposition to repository siting within a state. 
POLICY ALTERNATIVES 
There are three basic policy alternatives that can be adopted by the State of Texas in dealing with DOE's waste disposal program. First, the state can encourage the siting of a repository in Texas ifgeologic and environmental surveys are favorable. Also, utilities in Texas will soon be using nuclear reactors to generate electricity. It can be ar­gued that because S<lme nuclear wastes are going to be created in Texas, the state has a responsibility to cooperate in any way it can with DOE to arrive at an adequate solu­

32 
Siting ofNuclear Waste Disposal Facilities 

tion to the waste disposal problem. A statement by the Governor or a legislative resolution could be used to com­municate the state's willingness to participate in the waste disposal program. However, there is always going to be some measure of risk associated with the disposal of nuclear wastes. Risks can be minimized through careful siting and operation, but no community can ever be completely sure that a nearby repository will remain secure and free from accidents. For this reason, many individuals would probably oppose waste disposal in Texas and bring political pressure on the state government not to encourage it. 
The second policy alternative available to the state is to discourage repository siting in Texas. The Governor could ask DOE to stop all studies in the Texas portions of the Permian Basin salt formation and the Interior Gulf Coast salt domes. The legislature, through resolution or legisla­tion, could forbid the storage or disposal of nuclear wastes in the state. In the past, similar expressions of state would have caused the federal government to defer to the state and abandon waste disposal projects within the state (e.g., Alpena County, Michigan). 
In the third policy alternative, the state could allow geologic, environmental, and other feasibility studies to continue, while waiting to encourage or discourage actual siting of a respository until after potential site locations have been identified. The state will receive valuable data from the geologic surveys now being conducted by the Bureau of Economic Geology and it could insist that study reports from other contractors be made available to the state as well. If one or more locations are eventually found to be geologically and environmentally suitable for waste disposal, the state would still have the option to refuse to permit repository siting in Texas. If current DOE policies remain the same, and there is no reason to believe they will change, no nuclear waste repository would be sited in Texas if the state objects. 
Angela Agee Hatton 




REFERENCES 

1 Quoted in Luther J. Carter, "Radioactive Wastes: Some Urgent Unfinished Business," Science, vol. 195, no. 4279 (February 18, 1977), p. 661. 
2 Nuclear Energy Policy Study Group, sponsored by the Ford Foundation, Nuclear Power Issues and Choices (Cam­bridge, Massachusetts: Ballinger Publishing Co., 1977), 
p. 246. 
3 Ernest E. Angino, "High-level and Long-lived Radio­active Waste Disposal," Science, vol. 198, no. 4320 (Decem­ber 2, 1977), p. 886. 
4 Interview with L. Frank Brown, Associate Director of the Bureau of Economic Geology at The University of Texas at Austin, February 24, 1978. 
5 447 F.2d 1143 (1971). 


BIBLIOGRAPHY . 

Angino, Ernest E., "High-level and Long-lived Radioactive Waste Disposal," Science, vol. 198, no. 4320 (December 2, 1977). 
Carter, Luther J., "Nuclear Wastes: Popular Antipathy Narrows Search for Disposal Sites," Science, vol. 197, no. 4310 (September 23, 1977). 
____"Radioactive Wastes: Some Urgent Unfinished Business," Science, vol. 195, no. 4279 (February 18, 1977). 
Cohen, Bernard L., "The Disposal of Radioactive Wastes from Fission Reactors," Scientific American, vol. 236, no. 6 (June 1977). 
Comptroller General of the United States, Report to the Congress, Nuclear Energy's Dilemma: Disposing of Haz­ardous Radioactive Waste Safely. EMD-77-41 (Septem­ber 9, 1977). 
33 
Texas Energy Issues: 1978 

Kuhlman, Carl W., "ERDA Waste Management Program," Proceedings of Conference on Public Policy Issues in Nuclear Waste Management. Sponsored by ERDA, NRC, National Science Foundation, Council on Environmental Quality, EPA, October 27-29, 1976. 
Nuclear Energy Policy Study Group, sponsored by the Ford Foundation. Nuclear Power Issues and Choices. Cam­bridge, Massachusetts: Ballinger Publishing Co., 1977. 
Samuelson, Robert J., "Now That We've Got the Reactors, What Do We Do with the Used-Up Fuel," National Journal, vol. 9, no. 45 (November 5, 1977). 
U.S., House of Representatives, Committee on Interior and Insular Affairs, Subcommittee on Energy and the Envi­ronment, Hearings on States Rights, Moratoria, and NRC Licensing Reform, 95th Congress, 1st Session, June 13, 14, and 17, 1977. 

Wargo, J.R., "States Passing Nuclear Laws with Unprece­dented Frequency," Nuclear Industry, vol. 24, no. 6 (June 1977). 
34 
CHAPTER 3 


STATE POWER PLANT SITING AUTHORITIES 

ISSUE DEFINITION 

The problems of providing energy have been com­pounded in the past decade by increasing environmental awareness and need for more efficient sources of power. In the context of these difficulties, siting of power plants has emerged as a critical element in the energy supply chain. The siting process for any power facility involves a reconciliation of opposing forces-political, social, and economic. Virtually no major power facility can be built without adhering to substantial and often conflicting state, federal, and local procedures. Every aspect of regulation that involves additional analysis by the utility increases the total cost of the project, and the scale of these projects makes construction schedules sensitive to delays, further adding to the cost. This paper examines one state's response to these problems, the establishment of power plant siting authorities. In addition, it outlines some of the policy options for Texas. 
BACKGROUND 

Federal siting procedures with regard to nuclear facilities have been discussed in Chapter One entitled "Federal Agencies and Laws Dealing with Energy and the Environ­ment." 
Fossil-fueled generating plants are subject to many of the same federal regulations as nuclear facilities. However, no single federal agency corresponds to the Nuclear Regulatory Commission (NRC) in the licensing process. As a result of the 1972 Federal Water Pollution Control Act Amendments, all projects now must demonstrate compli­ance with the National Environmental Policy Act, the Clear Air Act, and the Federal Water Pollution Control Act (as well as others where applicable). To date, more than seventy projects have Environmental hnpact Statements, most prepared either by the Rural Electrification Adminis­tration (REA) or the U.S. Army Corps of Engineers.2 Depending upon the type of development proposed and the location of the project, the licensing process for fossil plants could take thirty-three to forty-eight months from the selection of a site to the state of construction.3 The process will usually take another year if no site has been determined by the utility. 
President Carter's National Energy Plan expressed con­cern about licensing problems and delays, particularly those involved with nuclear facilities. While nuclear reform legislation is pending in Congress, no strong consensus has emerged from the numerous bills being circulated. Never­theless, there are three major directions for federal legisla­tion with regard to siting policies, and all have been proposed in one form or another: 
(1) 
The federal government could create a national power plant siting authority or set criteria for states to follow in siting. If a state failed to enforce the criteria, the federal government could take over the program. (This option would be similar to the precedure set forth in the Federal Water Act.) 

(2) 
The federal government could provide funds for states to develop their own siting programs, a procedure which would operate like the Coastal Zone Management Program. 

(3) 
The federal government could speed the siting process by authorizing early site approval, site banking, or generic licensing of plants. 


POLICY ANALYSIS 

Many states have chosen to take active roles in establish­ing various forms of power plant siting regulations. Current­ly, thirty-one states have laws requiring demonstration of need for power; thirty-seven states have some degree of siting regulations which are associated with the review and approval of the site selection process and the issuance of a certificate of "site compatibility"; and twenty-two states have some form of environmental policy act, fourteen of which do not permit any construction to begin until environmental review and approval is completed and the certificate ·of environmental compatability is issueci.4 
The 1970 annual meeting of the National Association of Regulatory Utility Commissioner (NARUC) provided a catalyst for much of the state legislation when it approved a "Model State Utility Environmental Protection Act" and urged its passage in all states.5 
Most state siting legislation has at least a few basic 

Texas Energy Issues: 1978 
components of the NARUC proposal. Siting laws typically include early site planning and certification of power plant sites and transmission corridors, requirement for proving need, assessments of environmental impact, and proof of conformity with regulations. The most frequently cited objectives for the legislation are: 
to provide guidelines and criteria for selecting suitable 
sites; 
to provide orderly and reliable mechanisms for the 
approval of such sites; and 
to provide the means to assure long-term availability 
of suitable sites for future use.6 
Within the framework of these objectives, siting policies most often result in one-stop certification, long-range planning, increased attention to environmental considera­tions, shortened processing time, and establishment of a lead agency. 
Maryland's siting law was one of the earliest and most 
innovative in the United States. The Power Plant Siting Act 
of 1971 had four basic components: monitoring, site 
evaluation, research, and site acquisition, all of which 
overlap to some extent. The program is funded by an 
Environmental Trust Fund which is financed by a surcharge 
on the electricity generated in Maryland. The surcharge rate 
is 0.1 mill per kilowatt hour, not to exceed 0.3 mills. The 
0.1 mill generated approximately three million dollars in fiscal year 1973. 
The monitoring program measures air and water pollu­
tion throughout the state. The site evaluation program has 
responsibility for predicting all effects of locating a power 
plant at a particular site, including biological, economic, 
and social effects. The Department of Natural Resources 
prepares an environmental impact statement on all pro­
posed sites. If the sites are acceptable, the state may 
purchase them for eventual sale to the utilities. For nuclear 
power plants, the state has proposed joint hearings between 
the Nuclear Regulatory Commission and the Maryland 
Public Service Commission to avoid duplication of data and 
to reduce time. The state has incorporated several state 
hearings and permits into a single hearing before the Public 
Service Commission (PSC). The PSC can overrule any other 
state agency, including the Power Plant Siting Commission, 
in making its final decision. 
The research program focuses on problems relating to 
siting and monitoring in Maryland, and has considered 
issues such as estuarine circulation studies, natural draft 
cooling, tower salt drift and plume behavior, and effects of 
power plants on the social and economic structure of the 
surrounding area. 
The site acquisition program established by the Act has the responsibility for making an alternative site available to a power company whose site has been judged unsuitable by state or federal agencies. This program prevents substantial delay and increased costs. The program identifies, investi­gates, and acquires the alternative power sites with input from the utilities as to the feasibility of the sites. Maryland has acquired one thousand acres on a bay under eminent domain for $1,300,000 (as compared to an anticipated private cost of $2,500,000). In addition, the state expects to acquire an abandoned naval training center which can be sold to a utility. 7 

The Director of the Maryland Commission has testified that the program has saved state electric utility consumers $25 rnillion.8 To substantiate this claim, he cited the example of the Brandon Shores fossil-fueled power plant. The Department of Health felt that the plant would have violated air quality standards. However, the Siting Commis­sion was able to show that air standards would not be degraded. The PSC issued the permit, overriding the Health Department. The money saved by retaining this site was estimated at $300,000,000. 
Maryland's electric utilities and the PSC must prepare long-range plans and develop forecasts for electric demand and supply with a ten-year plan, updated annually. 
The Maryland viewpoint (as well as that of other states) is summarized by the following statement: 
It is the state, not the federal government who is most capable and most competent to balance the environmental and economic costs and benefits of a power plant constructed at a particular site. An exception is made for radiological and reactor safety of nuclear plants, considerations which the state program could not perform as effectively and effici­ently as the Nuclear Regulatory Commission. On the other hand, the state does not think that the NRC can match the local experience, reliability, and accuracy of the state's own environmental and socioeconomic deliberations without conducting an extremely expensive and duplicative detailed site investigation program.9 

In 1974, Maryland's General Assembly concluded that the power plant siting program was satisfying the legislative intent of the bill. 1 0 
Table l lists basic characteristics of some state siting laws; it is not comprehensive. The most complete source for state legislation in this area is a publication compiled by the Southern Interstate Nuclear Board entitled "Power Plant Siting in the U.S." 
There is no widespread agreement on the "success" of state siting legislation. From the industry's or utility's point of view, state requirements for thorough environmental reviews merely duplicate federal requirements and create unnecessary, costly delays in project construction. State 
36 
State Power Plant Siting Authorities 

TABLE 1 CHARACTERISTICS OF STATE SITING LEGISLATION  
State  Certification Authority  i nvironmental Review Authority  Provision for Site Inventory  Requirement for Utility Forecasting  
Arizona  Corporation Commission and Power Plant Siting Committee  Power Plant Siting Committee  no  10 year plan  
Arkansas  Public Service Comm.  Dept. of Pollution Control & Ecology  no  2 year plan  
California  Energy Resources Con­servation & Development Commission (ERCDC)  ERCDC  yes  5, 10, 20 year plans  
Connecticut  Power Facility Evaluation Council  Interagency review  no  10 & 20 year plans  
Florida  Dept. of Pollution Control (DPC) & Division of State Planning (con­current review)  DPC  preliminary review of proposed sites  10 year plan  
Kentucky  Public Service Comm.  Dept. of Natural Resources  no  none  
Maryland  Public Service Comm.  PSC  yes  10 year plan  
Massachusetts  Electric Power Facilities Siting Council  lnteragency review  no  10 year plan, every 5 years  
Montana  Bd. of Natural Resources & Conservation  Bd. of Natural Resources & Conservation  no  10 year plan  
New Hampshire  Public Utilities Comm.  Site Evaluation Comm. & interagency review  no  10-15 year plan  
New Mexico  Public Utilities Comm.  Interagency review  no  none  
New York  Power Siting Board (PSC for transmission lines)  Power Siting Board  no  10 year plan  
Ohio  Power Siting Comm.  Power Siting Comm.  no  10 year plan  
Oregon  Nuclear & Thermal Energy Council (N&TEC)  N&TEC  no  10 year plan  
South Carolina  Public Service Commission (PSC)  PSC  no  10 year plan  

Source: Southern Interstate Nuclear Board,Power Plant Siting in the United States, Atlanta: September 1974. 
37 


Texas Energy Issues: 1978 
programs are often viewed as "one more layer of Govern­ment" with which to contend. The states which have passed legislation cite as advantages cost savings (to the state and rate-paying customers) and increased public participation in the siting process. · 
POLICY ALTERNATIVES 

Texas has not followed the pattern of other states in establishing a siting aurhority, and its options remain open. The absence of a major effort to pass siting legislation in Texas may be due to the relative lack of significant siting controversies as well as the general abundance of open space in the state. The chance for controversy will increase, however, with state moves to site more coal-fired plants and to phase out natural gas-fired facilities. Furthermore, if there are going to be problems · with a site, it is to the advantage of all parties to have them uncovered as soon as possible, before costly investments are made. 
What are the basic state policy options? 

(I) 
Texas may retain the current regulatory system, at least until firm federal legislative guidelines emerge. If the federal government passes laws giving more authority to states with regard to siting, Texas may have to alter its fragmented approach or face federal preemption. In the meantime, power utilities appear comfortable with the current state procedure; it has worked for them in the past, and they are skeptical that they would benefit from a procedural change. Most of the criticism of regulation from utilities is directed toward the federal government. State agencies involved in siting are similarly comfortable with their duties, and they are not likely to welcome a new procedure if it involves diminishing their relative authori­ties. 

(2) 
The most ambitious approach to state siting would be to establish a lead siting agency with centralized authority. If Texas followed the NARUC model, the likely lead agency would be the Public Utility Commission (PUC). However, as one of the youngest agencies in the state, it is unlikely that it would be politically feasible for the PUC to assume a substantial new authority at this time; the Commission itself probably would not advocate such a major shift of responsibilities. The General Land Office and Parks and Wildlife are other options for the lead agency. 


There are other alternatives which fall between the previous two extremes. 
(3) 
Texas might wish to set up an inventory of possible power plant sites. This could be done by a state agency working with utilities, following the Maryland example. 

(4) 
The state might also wish to initiate some long­range planning efforts, a common feature of siting bills. Currently, the PUC does not require utilities to submit any regular demand forecasts. Such a plan could serve a useful function with regard to examination of overall state development needs and patterns, much like the Texas Water 


· Plan. 
(5) 
It might be possible to coordinate the hearing procedure among state agencies so that the utility could present its case only one time; this could also facilitate an appeals procedure. If federal legislation is passed to allow joint state and federal hearings, a coordinated state proce­dure would be essential. 

(6) 
The State could opt for a "one-drop" procedure which would consolidate all siting information into a single application form, copies of which would go to the relevant state agencies. Under this procedure, agencies would have access to a complete package of information which could facilitate interagency coordination. From the utility's point of view, the new form might be seen simply as unnecessary duplication of effort and might cause delays, since data for all permits would have to be gathered before any submis­sion could be made. 

(7) 
Another state approach could focus on public participation by instituting mechanisms for formalized local input into the siting review. For example, local representa­tives might participate in hearings on various permits, following the New York pattern. 


There is no single solution to power plant siting problems. Before changing its policies, Texas must deter­mine the siting problems which are specific to this state, and it must decide on the extent to which state resources can help solve those problems. Regardless of forthcoming federal decisions, Texas will have to fashion a policy mechanism which is suited to the unique character of its state government. 
Laura R. Doll 

38 
State Power Plant Siting Authorities 


REFERENCES 

1 U.S., House of Representatives, Committee on Interior and Insular Affairs, Subcommittee on Energy and the En­vironment, Hearings on States Rights, Moratoria, and NRC Licensing Reform, Part I, 95th Congress, 1st session, June 13, 14, and 17, 1977, p. 2. 
2 J.R. Calvert, "Licensing Coal-fired Power Plants," Power Engineering, vol. 82, no. 1(January1978), p. 34. 
4 U.S., House of Representatives, op. cit., p. 2. 

5 Bureau of National Affairs, Inc., Environment Reporter: Monograph No. 15, vol. 4, no. 8 (June 22, 1973), p. 6. 
6 U.S., House of Representatives, op. cit., p. 2. 

7 Texas Law Institute of Coastal and Marine Resources, "Power Plant Siting in the Texas Coastal Area," prepared by Barbara Little, March 1976, p. 35. 
8 Ibid., p. 41. 
9Ibid., p. 38. 
10Ibid.,p.39. 


BIBLIOGRAPHY 

Bureau of National Affairs, Inc., Environment Reporter: MonographNo.15, vol. 4,no. 8 (June 22, 1973). 
Calvert, J.R., "Licensing Coal-fired Power Plants," Power Engineering, vol. 82, no. 1(January1978), pp. 34-42. 
Christie, John J., "In-Fighting Delays Reform Bill," Nuclear Industry, vol. 25, no. 1 (January 1978), pp. 42-43. 
Evans, Victoria A., "State Environmental and Siting Laws for Power Facilities," Power Engineering, vol. 80,'no. 8 (August 1976), pp. 51-53. 
Myhra, David, "Fossil Projects Need Siting Help Too,'' Public Utilities Fortnightly, September 29, 1977, pp. 24-28. 
Nuclear Industry, "Stronger State Siting Proposal Awaits Legislative Sponsorship," vol. 24, no. 8 (August 1977), 
p. 31. 

Southern Interstate Nuclear Board, Power Plant Siting in the United States, Atlanta, Ga., September 1974. 
Texas General Land Office, "Industry Facilities' Siting Study,'' (Draft), January 5, 1978. 
Texas Law Institute of Coastal and Marine Resources, "Power Plant Siting in the Texas Coastal Area," pre­pared by Barbara Little, March 197 6. 
U.S., House of Representatives, Committee on Interior and Insular Affairs, Subcommittee on Energy and the En­vironment, Hearings on States Rights, Moratoria, and NRC Licensing Reform, Part I, 95th Congress, lst ses­sion, June 13, 14,and 17, 1977. 
Valentine, Paul C., "State Power Planting Siting Regula­tions: the California Possibility for Significant Public Participation," ALl-ABA Course of Study no. 3239, Atomic Energy Licensing and Regulation, Denver, Colo­rado, October 21-23, 1976. 
Wargo, J.R., "States Passing Nuclear Laws with .. Unprece­dented Frequency," Nuclear Industry, vol. 24, no. 6 (June 1977), pp. 24-27. 

CHAPTER 4 

STATE REFERENDA ON NUCLEAR POWER DEVELOPMENT 


ISSUE DEFINITION 

During 1976, voters in seven states rejected initiatives which would have placed new controls on the spread of nuclear power plants. 
The first initiative was held in California on June 8, 1976. The California initiative sought to set certain conditions for continuation and expansion of nuclear power in the states. The initiative, formally the Land Use and Nuclear Power Liability and Safeguards Act, was better known as the California Nuclear Initiative, Proposition 15, or Prop 15. The issue is most clearly drawn by the titles proponents and opponents applied to the vote. Its propo­nents called it the Nuclear Safeguards Initiative and said it was an attempt to let the people decide on measures that would ensure their safety. Opponents called it the Nuclear Shutdown Initiative in the claim that it was simply an effort to ban nuclear power plants in the state. 
Points of significance in understanding the defeat of Prop 15 include: (1) clarification of pro-and con-initiative forces; (2) comparison of their campaign expenses; (3) leg­islation influencing the vote; (4) important objections to Proposition 15; and (5) confusion surrounding the issue. 
Of the seven state initiatives, Prop 15 in California was the first and most widely publicized. bi Arizona, Colorado, Montana, Ohio, Oregon, and Washington, initiatives reached the ballot on November 2, 1976. These six votes were similar to that of California in form , requirements, objec­tives, and results. It is therefore useful to evaluate citizen initiatives as a means of energy policy making by examina­tion of Proposition 15 as a political issue. 

BACKGROUND 

In California, more than 313,000 nuclear opponents signed a petition to put the Land Use and Nuclear Power Liability and Safeguards Act on the 1976 primary election ballot. On June 8, 1976, the proposition was defeated by a more than two-to-one margin (3,986,770 to 1,924,304). 
The statute provided for a cutback in nuclear plant output and a prohibition of new nuclear plant construction unless specifications were met. The first such condition applied to the limit of $560 million imposed by Congress in the Price-Anderson Act on liability for damage caused by a nuclear plant accident. 
If the limit were not removed by law or by waiver by a utility within one year after the initiative vote, no new fission-power plants were to be allowed in California, and the output of each plant failing to guarantee full compensa­tion would be cut back to 60 percent of full power. Beginning five years after the initiative, the power level would be cut back another 10 percent until the limit on liability was removed. 
The other conditions involved were reactor and fuel disposal safety. Within five years after the initiative, the state legislature would have had to find, by a two-thirds vote, that "the effectiveness of all safety systems" in California nuclear plants had been "demonstrated by comprehensive testing in actual operation," and that the radioactive wastes could be stored or disposed of "with no reasonable chance" of adverse effects. In the absence of such a finding, the prohibition of new plants, the cutback to 60 percent and the subsequent 10 percent cutbacks would have gone into effect.1 
Proponents of the initiative argued that nuclear reactor safety mechanisms have never been adequately tested, that there have been a large number of reactor accidents, that a major accident could devastate an entire region, and that the risks of nuclear power outweigh the benefits. The initiative, they said, was aimed at forcing the industry and its government regulators to improve safety procedures and to back up their belief in nuclear safety by abandoning the current liability limit.2 
Leading the initiative campaign was the Committee for 

Nuclear Safeguards, aided by California environmentalist 
groups such as The People's Lobby and Project Survival. 
Proposition 15 also had the support of national groups such 
as the Sierra Club and Friends of the Earth. 
By far the greater patt of California's political and 

business establishment opposed the proposition. Leading 
the opposition was the California Committee for Environ­
mental and Economic Balance, which represented a coali­
tion of labor unions, utilities, and various other business 
and development interests. 
Liberal financial support for the "No on 15" campaign 

(in the context of the initiative , a "no" vote meant "yes" 
Texas Energy Issues: 19 78 

to nuclear power) came from utilities and other corpora­tions both within California and from outside the state. More than $5.2 million was spent by supporters and opponents of Proposition 15 to win votes in the June 8 election. Opponents of the initiative outspent supporters by a margin of better than three-to-one. Total spending by opponents was $4,033,580 compared to $1,257,132 by the proponents.3 
POLICYANALYSIS:OBJECTIONSTOPROPOSmONlS; FACTORS LEADING TO ITS DEFEAT 
Opponents of the initiative argued that reactor and fuel safety are reasonably assured; that nuclear power is, on balance, less harmful than fossil fuel power; and that the need for nuclear power to supplement other sources is clear and increasing. They insisted that a "yes" vote would shut down California's nuclear plants because the conditions were designed to be impossible to achieve. They attacked in particular the two-thirds requirement, which meant that fourteen state senators could tum off nuclear power in California. Finally, they argued that the issue at stake in the controversy cannot be effectively decided by a statewide popular vote influenced by simplistic arguments and catchy phrases such as "Don't Grow Nuclear Plants ..... 
One specific objection which was raised against the proposition was that the courts might find it a legal nullity, deciding that the states were intruding into a field of regulation that has been preempted by the federal govem­ment.5 
Another objection to Proposition 15 was that its requirements were so demanding that they were never meant to be satisfied. In particular, it was argued that the Congress, having just approved a ten-year extension of the Price-Anderson Act in 1975, would not repeal this measure in the near future, if ever. The "No on 15" camp further contended that wiavers of the liability ceiling by individual utilities would not be legally permissible. 
In addition, the requirement for two-thirds majority votes was held to be an invitation to antinuclear groups to try to block the necessary safety affirmations by using scare tactics to persuade at least the bare minimum of fourteen senators-one-third plus one-to withhold approval of the plants.6 
Effective arguments against Prop 15 warned of impend­ing energy rate increases and job losses from nuclear power cutbacks. These were especially responsible for the defeat of the initiative. 
The pronuclear side of the Prop 15 issue was aided by the timely passage of three bills directing the state's Energy Commission to determine the technical feasibility of safe radioactive waste disposal and of siting nuclear reactors underground. If the necessary steps could not be spelled out. the legislature would have veto power on the siting of 

new nuclear plants. Proposition 15, on the other hmd, WIS much stricter, and would haYe banned the construction of new nuclear plants until the legislature confirmed by a ·two-thirds vote that nuclear safety systems had been tested, and that waste disposal systems had been demonstrated.7 
There was opposition to the three bills from the nudear industry, most organi7.ed labor, and all but one of Califor­nia's private utilities (Southern California Edison was the exception), although the industry and the utilities appear to believe that they can live with this legislation. Howewr, in general, the bills enjoyed broad support. Leaders of the Proposition 15 campaign endorsed the bills, e~ though they recognized that their passqe might well undercut whatever chance of victory there was for the initiat:M. In fact, many felt that the initiative was a necessary catalyst to bring about passage of the bills, with which they were satisfied. 
There was -~ral public confusion over Proposision IS, stemming from two sources: 
(I) 
The initiative raised fundamental concerns about a realm of public safety which voters had not bad an opportunity to confront before. With both sides of the nuclear safety issue seemingly armed with mountains of data and supported by the testimony ofexperts in the field, it was difficult for the public to decide which side to believe. 

(2) 
The measure itself, and the publicity campaigns of those both for and against it, confused voters about the ultimate meaning of their votes. Voters who did not read the initiative word for word may have been confused by simplistic labeling. 


The comparative spending done by the pro and con nuclear groups should be recalled here as a supplementary, and possibty convincing, reason for the defeat of Proposi­tion 15. A spending limit, which had been passed in a statewide referendum in 1974, became inoperative when the California Supreme Court issued a stay in the enforce­men t of the law at the request of the leading organization of the pronuclear forces. The campaign limit had been eight cents for every member of the voting age population in California (i.e. $1.1 million).1 
01HER SfATE INll1A11VF.S 
On November 2, 1976 voters in the six additional states (Arizona, Colorado, Montana, Ohio, Oregon, and Washing­ton) defeated citizen initiatives designed to impose rigid safety requirements and other restrictions on nuclear power expansion. All of the nuclear measures were modeled after the unsuccessful California Nuclear Initiative. Howeter. in contrast to the California proposition, none of the Novein­ber initiatives contained stringent, progressive, derating schedules for operating plan1S. 

42 
State Referenda on Nuclear Power Development 

Despite minor differences, all six proposals would have required state legislative approval for the construction of nuclear power plant.s. This approval was to be contingent upon certification of findin~ establishing effective opera­tion of safety systems, and of the development of adequate methods for radioactive waste disposal prior to power plant construction. In addition, a nuclear utility would have had to assume full liability for damages resulting from a nuclear accident, unless done so by the federal government. 
All six of the state initiatives failed. Arizona, Colorado, Ohio, and Washington voters rejected the initiatives by approximately the same two-to-one margin that occurred in California four months earlier. In Montana and Oregon, the initiatives lost by smaller margins. 9 
A summary table of all seven state initiatives follows, including data for the numbers of nuclear units operating, the number of nuclear unit.s under construction or planned which would be affected by initiatives in each state, the generating capacities of the units, and the (unofficial) vote and percentage figures. 10 
With the defeat of the seven nuclear initiatives, an 

obvious interpretation of the results is that the voting 
public is neither terrified by the possibility of a disastrous nuclear accident nor seriously concerned with the problem of long-term nuclear waste disposal. Instead, citizens may lean more toward believing that nuclear power is necessary to meet future electrical energy demands. This disregard for the importance of nuclear safety, however, may not explain the voter response as adequately as does the public's desire for personal, economic security, which the pronuclear forces successfully linked with nuclear power. 
The ultimate meaning of the state initiatives is open to speculation. Both the pronuclear and antinuclear sides claim victory from the initiatives-the pronuclear forces obviously interpret the defeat of the initiatives as a vote of confidence in nuclear power. 
Those opposed to nuclear energy, however, also glean a degree of victory form the defeats. After the California initiative went down two-to-one, for example, Bruce Rosenthal, a member of Ralph Nader's Critical Mass organization in Washington, noted the initiative was the first major action against nuclear energy, which (he said) has been promoted for more than twenty-five years by industry and government. "There have been quite a few people who have been educated by it," he said. ''The defeat of Prop 15, however, will in no way halt the attack on the 
No. of nuclear units operating 
Generating capacity MS (e) 
No. of nuclear units under construction or planned which would have been affected by initiatives 
Generating capacity MW(e) 
No. of votes for initiative, thousands 
Percent of total 
No. of votes against initiative, thousands 
Percent of total 

TABLE 1 STATE INITIATIVES ON NUCLEAR POWER PLANTS California Arizona Colorado Montana Ohio Oregon Washington 
3 0 0 0 
1,406 330 1,130 800 
6 3 0 0 7 2 7 6,467 3,810 7,088 2,520 8,655 
1,924 207 292 850 1,143 414 414 33% 30% 29% 35% 32% 42% 33% 3,986 486 783 160 2,435 571 838 
67% 70% 61% 65% 68% 58% 67% 
Texas Energy Issues: 1978 
industry, which is being waged on all fronts. The criticism 
of the economics of nuclear power, waste management, 
export policies, and the like will continue," he said.11 In California, the passage of the three bills by the State legislature was seen by proinitiative forces as a substantial victory . 
Even in defeat, the supporters of Proposition l S saw considerable gains for their cause. A spokes­woman for People's Lobby in Los Angeles, a major organizer of initiative drives, said they would prob­ably begin an effort to place another initiative on the 1978 ballot. She said they were pleased with the passage of the three bills by the state legislature which will force the state to take a closer look at nuclear power. "Without the initiative, we would never have gotten those bills passed," she said. The California initiative also brought the issue of nuclear safety enough national attention to enable other organizers to place initiatives on the ballots of other states, she said. 1 2 

The supporters of the antinuclear initiatives could also claim a degree of moral victory; having come out of the campaigns with new organizations, a new public awareness of the issue; a more clearly defined constituency; and, in some cases, important new alliances. The Ohio initiative, for example, was supported by both the United Auto Workers (the largest union in the state), and by the United Mine Workers, indicating potential future labor support. 
Due to the defeats of all the major state initiatives and to the passage of the California legislation, antinuclear forces are now redirecting their efforts from initiatives toward lobbying and legislative action on the state and national levels. 
Judith Shifrin 



REFERENCES 

1 "Science and the Citizen," Scientific American, Febru­ary 1976, p. S4. 
2Ibid. 
3 "Prop l S Spending Exceeds $S .2 Million," Fair Politi­cal Practices Commission, September 13, 197 6. 
4 "Science and the Citizen," op. cit., p. 54. 
5 Luther J. Carter, "Nuclear Initiative: Impending Vote Stimulates Legislative Action," Science, June 4, 1976, 
p. 976. 6 Ibid., p. 97S. 7 Mark Swann, "Proposition l S, " The New Republic, 
June 26, 1976, p. 6-7. 
8 I. Icerman, "perspectives on the Worldwide Debate and Public Opinion on Nuclear Power," Science and Public Policy, October 1977, p. 468. 
9 Ibid., p. 470. 
10 John A. Vogel, "A Comparison of the Nuclear Initia­tives and Sponsors," (paper presented at SVA Workshop, January 27-28, 1977). 
11 "Atomic Energy: State Initiatives Fail in All States Ex­cept Missouri," Energy Users Report, November 4, 1976, 
p. A-23. 
1 2 "California Safety Initiative Defeated: Vote Seen as Bellwether for Similar Measures," Environment Reporter, June 11 , 1976, p. 228. 

44 
CHAPTER 5 

EFFECT OF GOVERNMENTAL POLICIES ON 
TEXAS OIL AND GAS PRODUCTION AND RESERYES 


BACKGROUND 

The price of crude oil ranged narrowly for many years from $2.58 per barrel in 1952 to $3.98/bbl in 1973. The OPEC price increases of 1973-1974 sent the 1974 crude oil price upward to $6.95/bbl. In 1975, the price continued to rise and was $7.64/bbl. In 1976, it was $8.07/bbl. and is still rising. 
In 1973, Texas intrastate natural gas was priced at an average of 26.5 cents per thousand cubic feet, but by 1976, the average price had risen to 68.6 cents/mcf. It must be noted that new intrastate gas in Texas was priced in excess of the regulated interstate price of $1.42/mcf. New intrastate gas by 1976 was in some cases priced at approximately $2.00/mcf. 
The oil and gas price increases have been responsible for more exploration. In 1973, 2,281 exploratory oil and gas wells were drilled, with 1,696 of them being dry holes. In 1976, the number of exploratory wells had increased to 3,487, with 2,391 being dry holes. 
Not all new wells drilled are exploratory. Many wells are drilled in areas of known reserves. In 1976, 10,397 such wells were drilled, an increase of 83 percent over the 5,687 nonexploratory wells drilled in 1972. 
Crude oil production reached a peak in 1972 of 1,301,685,000 barrels and subsequently decreased to 1,153,941,000 barrels in 1976, a decrease of 11 percent in a four-year period. 
Natural gas production also peaked in 1972 at 9,550,469 cubic feet. _Production after 1972 was down 20 percent by 1976, even though nearly all new gas found was and is marketed in the unregulated intrastate market. Decreasing production since 1972 has come from an increasing number of producing wells, however. 
The Texas percentage of total U.S. production of oil and gas is on the decline. Texas production of crude oil on a world basis has fallen even more precipitously; in 1950, Texas accounted for 22 percent of world crude oil production, 12 percent in 1960, 7.2 percent in 1970, and 
6.2 percent in 1974. 
Proved reserves are defined as estimated quantities which geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating condi· tions. Increases in proved reserves are thus a function of exploratory drilling which finds new fields or extends already producing fields. Utilization of enhanced recovery techniques also adds to proved reserves. 
Proved reserves of crude oil and natural gas in Texas have declined over recent years. Crude oil reserves reached a peak in 1953. For the next decade and a half, reserves remained fairly constant. Since 1968, oil reserves have fallen. Natural gas reserves peaked in 1967 at the level of 130 quadrillion BTU. Since the early 1950s, Texas' oil and gas reserves have each decreased by 40 percent. 
POLICY ANALYSIS 
The Council on Energy Resources of the University of Texas at Austin has dealt with price and supply relation· ships as a part of its ongoing assessment of national energy policy. The Council reached the following conclusions: 
(l) 
Wei/head price and industry expenditures. Data indicate that from 1971 to 1976, gross values of oil and gas and composite prices per barrel of oil and gas equivalent rose. Total industrial expenditure op. exploration, drilling, and production rose correspondingly. 

(2) 
Relative exploration and development efforts. Over the past 30 years, the volume of oil and gas discovered has been directly related to the amount of exploratory drilling done. 

(3) 
Size and adequacy of reserve and resource base. Nationally, a reasonably adequate reserve and resource base exists to support current rates for more than fifty years. 

(4) 
Finding rate. As reserves added per unit of total drilling and discoveries per unit of exploratory drilling diminish over time, the ability to exploit reserves and resources will also diminish. However, the national volume of existing reserves and resources indicates that such depletion is several decades away. 

(5) 
Equipment constraints. Even though there have been shortages in the past, conditions do not now suggest that problems would arise. If the situation dictated, the federal government has the statutory power to aid in alleviating equipment shortages. 



Texas Energy Issues: 1978 
The Council projected national and Texas oil and gas production. For Texas, two cases were projected: (l) most likely case assuming an average reserve addition rate of 11 bbl/ft. drilled; and (2) optimistic case based on an average reserve addition rate of 17 bbl/ft. drilled. 
Both projections indicated continued but decreasing levels of production for gas and oil through 1985. Under the most likely case, 1985 oil and gas production would be 58 and 71 percent respectively of estimated 1977 produc­tion, representing decreases of 42 and 29 percents. The projections showed that if the optimistic finding rate were to hold, production would rise slightly after 1985. Under the National Energy Plan provisions, the Council projected a rate of production decline higher for Texas than for the nation as a whole. 
POLICY ALTERNATIVES 

The Texas Energy Advisory Council (TEAC) has de­veloped a series of projections depicting what the Texas energy future may resemble. TEAC's models represent the three main schools of thought prevalent today concerning the government's role in solving the nation's energy problems. The models contain a series of policy decisions as assumptions and are titled "Business as Usual," "Maximum Government Control," and "Free Market." 
The "Business as Usual" (BAU) model assumes that no coordinated energy policy will be implemented which would change any present energy policies or statutes. It assumes that the price of imported crude will remain at $13/bbl.; that the Texas Railroad Commission's Docket 600 will be enforced; that domestic crude oil prices will be controlled as presently planned by the federal government; and that interstate gas prices will continue to be controlled as per FPC Docket 770, while intrastate gas will remain unregulated. BAU also assumes voluntary conservation (the absence of government enforcement) and continued exist­ing environmental regulations and existing federal support for developing technologies. 
The "Maximum Government Control" (MGC) model represents the school of thought that holds that even if deregulated, the nation's energy companies could not sufficiently supply the country's needs; therefore the government must strictly regulate the energy industry, must mandate and enforce conservation, and must allocate available supplies. MGC assumes a stable world price of crude oil ($13/bbl), no gas used as a boiler fuel by 1985, continued control of domestic oil prices, 1975 levels of interstate gas price controls (29.5 cents/mcf "old" gas, 52.5 cents/mcg "new" gas, adjusted annually for inflation), and an intrastate price (75 cents/met) adjusted annually for inflation. MGC also calls for enforced conservation and stricter environmental regulations, as well as maximum government incentives for development and implementa­tion of developing technologies. 
The "Free Market" (FM) model represents the school of thought which holds that the government must steer clear of intervention in the nation's energy industry. FM assumes a stable world price of oil ($13/bbl.); no restrictions on natural gas use; deregulated domestic oil prices; deregula­tion of "new" natural gas prices, both interstate and intrastate; no enforcement of conservation; government participation only in the development stage of developing technologies; and relaxed environmental regulations. 
The TEAC used the policy assumptions of the three models and existing data to project Texas' energy future for each school of thought. 
(l) 
Business as Usual. Based on past data, TEAC has projected that Texas total energy supply will decline at an annual rate of 2.5 percent/year, while oil and gas produc­tion will decline at an average rate of 3.8 percent/year. As a result of these divergent trends, Texas imports of all energy, particularly crude oil, will increase, thus driving up the price of energy and possibly dictating allocation. 

(2) 
Maximum Government Control. In Texas, TEAC has projected a 3.8 percent annual decline in total energy production; a 5.0 percent annual reduction in oil and gas production; and a reduced consumption rate of 2.2 percent per year. Under such conditions, increasing oil and gas imports would be needed. Since such imports will be expensive, the cost of energy would rise dramatically, thus placing pressure on governmental allocation procedures. Other independent analysts believe a strict government control policy would discourage oil and gas production, thus resulting in an even higher rate of production decline than the TEAC projects. The National Energy Plan repre­sents this type of policy approach, and several independent analyses have projected that it cannot meet its targets. The University of Texas Council on Energy Resources projects that the NEP will not meet its goals. The Council believes the NEP's pricing structure is not adequate to ensure a strong enough cash flow to mount and sustain the production efforts needed. 

(3) 
Free . Market. TEAC projections indicate a mark­edly slower rate of production decline in Texas. 0.9 percent/year as opposed to 2.5 and 3.8 percents for BAU and MGC. Energy consumption would grow at a rate of 2.7 percent per year, close to the BAU level. Oil and gas production would actually increase slightly (0.2 percent per year). An increased possibility of contributions from enhanced recovery and developing technologies would occur. Imports would be lowered. This policy, of the three models, would ensure the most domestic supply and the greatest amount of individual freedom. 


46 
EFFECTS OF 
SPECIFIC PRICING ALTERNATIVES 

(1) 
Price deregulation of interstate natural gas. De­regulation of interstate gas would allow the average price to rise steadily. Although "new" gas would be expensive, "old" gas prices would remain low due to fixed contract prices. With no gas used as a boiler fuel, TEAC projects the average wellhead price to be $1.53/mcf by 1985. Higher prices for "new" gas would result in increased production of oil and gas. Higher prices would also result in a decrease in Texas gas consumption, as the price functioned to allocate the supply. The average annual energy bill would increase, but would be partially offset by the economic growth resulting from increased production and supply. The University of Texas Council on Energy Resources concluded that the "earliest possible" deregulation of interstate gas prices is "essential" to meet NEP production goals. 

(2) 
Price regulation (wellhead price ceilings) of Texas intrastate natural gas. Consumer groups and other interest groups have advocated imposition of wellhead price ceilin~ on Texas intrastate natural gas as a means of ensuring lower electricity and gas bills. Using continued FPC interstate ceilin~ and a 75 cent/mcf ceiling for Texas intrastate gas, TEAC projects a decline in both oil and gas production levels in Texas relative to the BAU model. Gas production would decrease 29.5 percent by 1985 compared to BAU, and oil supply would decrease due to less drilling activity. A decrease in consumption would occur due to a slower level of economic activity and an increase in expensive imports due to lower production. The total annual energy bill would increase 6.2 percent per year by 1985 compared to BAU. 


Effects of Governmental Policies on Texas Oil and Gas 
(3) Price decontrol of domestic crude oil. Since 1973, the Federal Energy Authority has been directed by Con­gress to allow the price of domestic oil to rise gradually. However, by 1979 (the termination of the program), the price is still not expected to be a market-clearing one. Decontrol would result in a production increase by 1984 of four percent over BAU. By 2000, decontrol would result in a 51 percent increase in gas supply over BAU. This increased production would result in a reduction of oil imports of 2.2 percent by 1985 over BAU. 
RECOMMENDATIONS 
Our national and state economies must ultimately shift more of their dependence from oil and gas to coal and other energy sources. An abrupt attempt to shift cannot occur due to the lead times needed to develop coal and other energy sources. Consequently, the nation and Texas must put forth an all-out effort to produce as much oil and gas as feasible in order to ensure economic growth and an orderly transition away from increasingly expensive and constantly undependable foreign oil and gas. History indicates that although our resource base is shrinking, production is responsive to price, and given the appropriate set of government policies, the nation's energy industry can provide our economy the energy needed to sustain growth levels while that energy industry develops coal and other sources. One nonquantitative value of any energy policy which must be considered is how much individual freedom of choice that policy allows. 
J. Chris Dobbs Texas Energy Issues: 1978 

BIBLIOGRAPHY 

American Gas Association, American Petroleum Institute, Canadian Petroleum Association, Reserves of Crude Oil, Natural Gas Liquide, and Natural Gas in the United States and Canada and United State Productive Capacity as ofDec. 31, 1974, vol. 29, May 1975. 
Governor's Energy Advisory Council, An Economic Model of New Crude Oil and Natural Gas Supplies in the Lower 48 States, Report no. 77105, April 1977. 
Governor's Energy Advisory Council, Assessment of En­hanced Recovery Technology as a Means for Increasing Total Crude Oil Recovery in Texas, Project no. N/T G, January 1975. 
Governor's Energy Advisory Council, Summary of Energy Supply, Demand, and Pricing Evaluations, Report no. 77109, March 1977. 
Governor's Energy Advisory Council, Texas Energy: A Twenty-Five Year Hisotyr, Report no. 77004, August 1977. 
Governor's Energy Advisory Council, Texas Energy Out­look: The Next Quarter Century, March 1977. 
University of Texas at Austin, Council on Energy Resources, 
National Energy Policy: A Continuing Assessment, 
January 1978. 

University of Texas at Austin, Council on Energy Resources, National Energy Policy: An Interim Overview, Septem­ber 1977. 
48 
CHAPTER 6 

PRICE REDETERMINATION IN 
TEXAS PRODUCER GAS SALES CONTRACTS 

ISSUE DEFINITION 

Since 1971, the contracts under which natural gas producers in Texas sell their gas in the intrastate market have routinely come to contain redetermination clauses. These clauses provide for price adjustments at regular intervals based on the prevailing highest prices in the market. Therefore, as the price purchasers are willing to pay for new supplies of gas rises, the price of gas previously committed under contracts with redetermination clauses will also rise. 
No state agency now requires the filing of either gas purchase contracts or summaries of their provisions, so that the effect of specific price movements on other gas prices in Texas cannot be predicted with confidence. 
BACKGROUND 

Price redetermination clauses can have important conse­quences for Texas gas producers and consumers as well as for the gas transmission and utility industry that serves them. The potential problem can be seen most clearly by looking at the extreme case. Assume that all producer gas sales contracts in the intrastate market have redetermina­tion clauses that operated instantaneously, are triggered by the highest price paid for any gas in Texas, and operate irreversibly. The sale of even a small amount of gas at a very high price would then cause all of the gas in the state to rise to that price and stay there until the contracts themselves expired. The inclusion of take-or-pay provisions in the contracts would greatly exacerbate the situation. Gas purchasers and consumers could not even respond to the higher prices by reducing their purchases. 
Price redetermination clauses were banned from juris­dictional interstate gas purchase contracts by the Federal Power Commission in 196 7, so that the price of the bulk of interstate gas remains unaffected by the higher prices allowed for the more recent vintages of gas under FPC (now the Federal Energy Regulatory Commission-FERC) juris­diction, or the high prices bid for interstate gas not under direct FPC price regulation (special emergency and short­term purchases and direct purchases by industry from producers). 
The basic concept of price redetermination can be defended on the grounds that it provides a direct link between market conditions at any time and the price consumers pay and producers receive. When prices move in response to the market, both consumers and producers adjust their behavior to correspond with changes in the scarcity and relative usefulness of natural gas. Everyone benefits from an efficient use of resources. 
The problem with price redetermination clauses in practice is that they can act as an upward ratchet on prices because they lack downward flexibility and are insensitive to peculiarities in the market. The result can be an amplification of market distortions and gas prices set above their normal market level. 
Two current issues of energy policy facing the state illustrate the importance of the renegotiation clauses. The collapse of the Lo-Vaca gas system has made Lo-Vaca customers almost entirely dependent on gas purchased under recent contracts that include redetermination clauses. Thus Lo-Vaca customers have no cushion of fixed-price gas to protect them from sudden upward price movements. But Lo-Vaca's problems may spread beyond its own customers. Most renegotiation clauses are triggered only by prices paid for gas under long-term contract. Lo-Vaca has, however, some contracts with renegotiation clauses that can be triggered by the prices of short-term or emergency pur­chases of natural gas. The price increases from the resulting renegotiation of the Lo-Vaca contracts can then trigger renegotiation clauses in the contracts of other companies even though these clauses could not be triggered directly by emergency or short-term purchases. This possibility is a matter of some concern to Houston Natural Gas, for example. 
The second policy issue is the prospect of the deregula­tion of new natural gas in the interstate market. Many interstate pipelines still obtain most of their gas under long-term contracts signed when gas was much cheaper than today. These pipelines could afford to bid very high prices-perhaps $4/mcf or more-for moderate amounts of new gas without significantly raising the average price to their customers. But Texas gas consumers would find their average price skyrocketing to previously undreamed-of heights if these interstate purchases triggered a substantial 

49 

Texas Energy Issues: 1978 
amount of renegotiation in intrastate contracts. Members of thy Texas congressional delegation have attempted to limit the prices that interstate pipelines could initially bid for new gas and to limit the operation of renegotiation clauses or simply nullify them. Yet, members and staffs of the Texas delegation have only a very approximate and spotty picture of the renegotiation characteristics of the intrastate market to help them protect the interests of Texans. 
REDETERMINATION CHARACTERISTICS 
There are thousands of gas contracts in Texas and their variety is limited only by the imaginations of their authors, but there do seem to be some common patterns. l 
The clauses provide for regular redetermination of the price of gas sold under existing contracts. The interval of redetermination is often six months or a year. Redetermina­tion usually means an upward adjustment of the price to the highest price (or average of the top two or three prices) in some reference group. One type of reference group is geographic-the highest price in the particular Railroad Commission District in which the gas production is located or the highest price in the state. Another type of reference group is all of the producers selling to the same buyer. This is the basis for the favored-nation type of redetermination clause. The buyer agrees to pay the producer as high a price as the buyer pays to any other producer. A third type of reference is the price of oil. Recent Texas intrastate contracts do not usually contain price escalation mecha­nisms other than renegotiation clauses. 
Renegotiation necessitates a knowledge of market prices 
on the part of producers and purchasers. One source of 
price information is the state's General Land Office, which 
publishes a monthly compilation of the three highest prices 
paid in each Railroad Commission District for gas in which 
the state has an interest. Producers and purchasers also 
often just ask others in the business what the latest price is, 
and word seems to get around. Private information services 
may also play a part. 
Several wrinkles can be added to the "standard" 
renegotiation contract. One is the take-or-pay provision, 
which commits the buyer to pay for some minimum 
amount of gas whether or not the buyer actually takes that 
much. Another wrinkle is the kickout clause. This enables a 
buyer to terminate a purchase . contract before its term 
expires, under certain conditions. Thus, if renegotiation 
threatens to drive the price up11beyond a level available 
elsewhere in the market, the buyer has some leverage in the 
renegotiation process. Within the last year, kickout clauses 
have become more frequent in new contracts as the 
intrastate market has softened. 
The General Land Office administers a number of sales 
contracts for gas which the state takes as a royalty "in kind." These contracts seem typical. They have a tweoty­year term, with annual renegotiation based on the average of the two highest prices paid for gas under long-term contract in the particular Railroad Commission District. The contracts contain no other form of price escalation. 
A SIMPLIFIED MODEL OF REDETERMINATION 
Price distribution for natural gas published by the Comptroller and production and gas export data published by the Railroad Commission can be used in a simplified statewide model to estimate the recent effects of redeter­mination on the Texas gas market. In this simplified model, redetermination includes everything that raises the price of old gas, including fixed escalation, higher prices on contract rollovers, and increases in interstate price ceilings. 
The model distinguishes between two extremes. In the case of complete redetermination all gas sells at the highest price-that of new gas. With no redetermination, there is no change from one year to the next in the price of old gas, and the average price of gas is just the weighted average of the original contract prices of the different gas vintages. The model does not allow the price of old gas to increase beyond that of new gas. 
In time period t, let production be Xi with an average wellhead price of Pt· Under normal circumstances there will be a decline in the amount of gas produced from the completions that produced St, and there will be some new production from new completions in the next time period. Let the amount of new production be "new• then the amount of old production in time period t=l will be Xt+ 1-~ew· If there is no redetermination, the price of the old gas remains constant, and we have 
pt<Xt+ 1·Xnew) + pXnew 
(1) 
xt+I 
where p is the average price of the new gas. On the other hand, if redetermination is complete, we have 
(2) 
Between these two extremes, the price of old gas will increase somewhat, but not all the way top, so that 
P*(Xt+l-Xnew) -pXnew pt+l = (3) 
where P• is the new average price of the old gas. With rearrangement we have 

50 
Price Redetermination in Texas Producer Gas Sales Contracts 
pt+1Xt+i -PXnew p•::: (4) 
Xt+l-Xnew 

Several measures of the amount and effect of redetermina­µon can now be defined. The degree of redetermination, R, 'is 
R= (5) 
Redetermination is complete over the time period if R is 1, and the lack of any redetermination means that R is 0. If R remain9 fairly constant from one time period to the next, it can be used to estimate the effect of a particular new-gas price in the subsequent period 
(6)p•t+2::: (Pt+2-Pt+1)R +pt+1 
For a particular average price of new gas in the third time 
period, Pt+2, the new price of old gas, P* t+2, can be 
obtained by using the value of R derived from price changes 
in the first two periods. Notice that under the assumption 
of constant R, if the price of new gas stays constant over 
time, then the price of old gas will increase gradually until 
it equals the new-gas price. 
Another interesting quantity is the rise in the average 
price of all gas due to the rise in the price of old gas. This is 
DELTA 
(7) 
DELTA can also be expressed as PDELTA, the percentage of the increase in overall average price between the consecutive time periods accounted for by the rise in the price of old gas, 
DELTA x 100 
PDELTA =-----(8) 
Now this model will be used to compare the intrastate and interstate segments of the Texas gas market. 
The model requires that we know the average price of gas in the first period and four quantities in the subsequent period: the average price of all of the gas, the total amount of gas produced, the average price of new gas, and the amount of new gas. The Texas Comptroller has published the percentage distribution ofoTe,Xas wellhead natural gas prices for all four quarters of Fiscal 1976 and the first two quarters of Fiscal 1977. 2 the source of these data is the monthly price and quantity information filed by producers in conjunction with payment of the state occupation tax on oil and gas production. The Comptroller's Office also separates the total price distribution into interstate and intrastate distributions. 
Production information comes from the Railroad Com­mission. Total production less gas exported from Texas was used to estimate production in the intrastate market. The amount of gas exported was used as the production figure for the interstate market. These two figures are not entirely comparable, but the discrepancy should be small. 
Obtaining the amount of new gas and its price is more difficult. The producers' monthly report to the Railroad Commission could be used to derive the amount of new gas. Likewise, lease production information reported to the Comptroller could be used to derive the amount and price of new production. 
Instead, an approximate, but easy, method was em­ployed to estimate new production. The method uses the ratio of production to reserves to determine the amount of old gas remaining. Thus if the ratio is 0.1, then production from old reserves in any year will be 0.9(1-.1) of the previous year's total production. Several methods were used to estimate this ratio,3 and the estimate adopted was 0.10. Therefore, old production in the first quarter of the second year is nine-tenths of the production in the first quarter of the first year. The difference between the actual second year production and the estimated old production gives the estimate for new production. Intrastate and interstate reserves are assumed to produce and decline in the same way. 
The remaining piece of information is the average price of the new gas. Quantities of gas are assigned to each price increment by multiplying the percentage of gas in that price increment (from the Comptroller's published reports) by the total production for the time period and market (interstate or intrastate) in question. Although the total amount of gas produced declines from FY 1976 to FY 1977, the amounts in the high price increments increase. The new gas is assigned to the highest price increment with more gas in FY 1977 than in FY 1976 up to the amount of the increase. Then the process is repeated for the second highest increment with an increase in the second year and so on until all of the new gas is assigned to price increments. The average price of the new gas is the sum of the fraction of the new gas in each price interval times the midpoint price of the interval. Overall average prices are determined the same way (the midpoint of the last interval was set, in lieu of other information, at $2.60). 
Table 1 shows the ptoduction figures that were used in 
the model. Tables 2 and 3 illustrate how the process of 
allocating the new gas to price levels was carried out. The 
final results are shown in Table 4. 

51 
Texas Energy Issues: 1978 
The results point out similarities and differences be­tween the two gas markets in Texas. Price increases in old gas are important factors in raising the average price of both intrastate and interstate gas-the value of PDELTA is virtually the same, about 60 percent, for the two markets. But R, the degree of redetermination, is quite different for the intrastate and interstate markets; it is much greater for the intrastate market (.109 versus 0.059). 
These results tell us that, in the model, the increase in 
old gas prices affected the average price of interstate gas 
primarily by small increases in the price oflarge amounts of 
gas near the bottom of the price scale. This is consistent 
with the lack 	of redetermination clauses in interstate 
contracts. The price increases in the lower brackets of the 
interstate market can be attributed to several FPC rate 
decisions that raised price ceilings_ The upper end of the 
interstate market, consisting of direct sales to industry and 
emergency and short-term purchases, has no link with the 
price structure 	of the much larger low-priced segment of 
this market, in which prices are directly regulated. 
Intrastate price increases exhibited a much different 
pattern. A substantial amount of gas remained in the lower 
price increments of the intrastate market, and as in the case 
of the interstate market, there was an incremental shift 
upward in the price of this cheap gas. But there was a 
significant decrease in the amount of gas in both the lower 
and middle price increments whereas the upper price 
increments made large gains. In the intrastate market, old 
gas is shifting 	in large amounts into the upper price 
increments, and this produces the larger value of R for the 
Table 1. PRODUCTION AND NEW GAS 
Interstate production is estimated as pipeline exports from Texas, and intrastate production is estimated as total pro­duction less exports. Both are based on Railroad Commission data. New gas is 0.9 times the previous year's production subtracted from the current year's production. Quantities are bcf. 
QI QI FY 1976 FY 1977 
Production (Xt) 
Intrastate 	1343 1294 
Interstate 	623 584 
New gas (Xnew) 
Intrastate 86 
Interstate 23 

Source: Data from Texas Railroad Commission intrastate gas. Th.is picture is consistent with the operation of redetermination clauses that operate oo the price structure of old gas and result in redetermined prices near the top of the price structure. 
POLICY ANALYSIS 
The most direct method of obtaining information about gas contracts would be to collect them and compile their characteristics so that price responses could be predicted. 
Table 2. INTRASTATE QUANTITIES AND PRICES 
Quantities of gas sold in each price interval during the first quarter of fiscal years 1976 and 1977, Texas intrastate market. New gas is allocated to the highest price intervals in FY 1977 in amounts equal to the increase in quantity in the interval from FY 1976 to FY 1977. Allocations are made to lower price intervals until the entire estimated amount of new gas is allocated. 
Quantity sold Allocation of Price interval (bcf) new gas midpoint FY76 FY77 (cents) Qt QI (bcf) 
5 57.7 50.1 0 15 180.1 102.4 0 25 161.8 84.4 0 35 305.4 130.6 0 45 106.5 223.0 0 55 52.1 100.7 0 65 35.2 32.9 0 75 24.3 34.8 0 85 30.6 18.0 0 95 31.0 28.6 0 
105 22.7 16.8 0 115 16.5 11.0 0 125 12.9 17.6 0 135 51.0 21.1 0 145 32.5 19.2 0 155 28.1 14.8 0 165 15.3 24.7 0 175 17.3 28 .2 0 185 44.9 56.2 0 195 47.3 96.0 0 
212.5 64.9 155.4 63.0 
237.5 3.6 21.5 17.9 
260 	1.2 6.3 5.1 1343 1294 86 
Source: Based on data from Texas Comptroller of Public Accounts and Texas Railroad Commission, see texL 

52 
Each contract could be reduced to a set of standard characteristics such as: 
(1) 	
contract term; 

(2) 	
most recent contract price; 

(3) 	
volume of gas under contract; 

(4) 	
purchaser ofgas; 

(5) 	
geographic location of gas production: field or Rail­road Commission District; 

(6) 	
renegotiation clause (if one is in contract) 


Table 3. INTER.STATE QUANTITIES AND PRICES 
Quantities of gas sold in each price interval during the first quarter of fiscal years 1976 and 1977, Texas interstate market. New gas is allocated to the highest price intervals in FY 1977 in amounts equal to the increase in quantity in the interval from FY 1976 to FY 1977. Allocations are made to lower price intervals until the entire estimated amount of new gas is allocated. 
Quantity sold Allocation of Price interval (bcf) new gas midpoint FY76 FY77 (cents) Ql Ql (bcf) 
5 9.3 15.8 0 15 198.6 58.3 0 25 200.7 164.0 0 35 60.7 142.3 0 45 30.7 48.6 0 55 65.4 49.2 0 65 25.3 21.5 0 75 14.0 14.7 0 

85 6.3 8.0 0 

95 1.5 12.2 0 105 0.7 10.5 0 115 0.4 4.3 0 125 3.7 3.9 0 135 0.37 3.97 1.07 145 1.43 8.18 6.75 155 0.06 3.27 3.21 165 0.12 2.16 2.04 175 0.62 1.81 1.19 185 0.31 2.69 2.38 195 1.18 6.19 5.01 


212.5 .87 2.16 1.29 
237 .5 .06 0.12 .06 

260 	.69 0.23 0 623 584 23 



Price Redetermination in Texas Producer Gas Sales Contracts 
a) price reference: favored nation, Railroad Com­mission District, state, oil price; b) interval of renegotiation; 
(7) 	
take-or-pay clause: minimum amount; and 

(8) 	
kick out clause: penalty, if any. 


If such a list of abstracted characteristics for each gas 
purchase contract were kept in a computer data bank, then 
the effects of specific price changes could be predicted and 
followed through the system. 
Before constructing an extensive contract model , it 
would be very helpful to conduct a sample survey of 
contracts and consult with individuals in the industry to 
determine the most prevalent and important elements of 
gas contracts and how they operate in practice. 
The Gas Utilities Division of the Railroad Commission 
has begun to take a stronger interest in the characteristics 
of gas purchase contracts between gas utilities and produc· 
ers. 	The Division's object is to determine the average 
weighted cost of gas to the utilities it regulates. The 
procedure has usually been to more or less accept the 
utility's word 	on their cost of gas, but the Division has 
recently had to take a more active role in the Lo-Vaca case 
and look into some of that utility's contracts. 
Table 4. RESULTS 
Results from applying the simple model of redetermination to the interstate and intrastate segments of the Texas gas market. All prices are in cents per thousand cubic feet. R is dimensionless. DELTA is a price, and PDELTA is a percentage. 
Intrastate Interstate 
Overall average price in QI FY 1976 (P76) 70.7 32.4 
Overall average price in QI FY 1977 (P77) 95.9 45.4 
Average price of new gas in QI FY 1977 (p) 220.5 168.3 
Average price of old gas in QI FY 1977 (P*) 87.0 40.4 
Degree of redetermination (R) .109 .059 
Rise in average price due to 
old gas price rise 


Source: Based on data from Texas Comptroller of Public DELTA 15 .2 7.6 Accounts and Texas Railroad Commission, see text. PDELTA 60.3 58.8 
53 
Texas Energy limes: 1978 
In November 1977, the Railroad Commission proposed a special rule that would require all gas utilities to file copies of their gas purchase contracts with the Commission.4 A final decision on the rule will probably be made in April. Comments, so far, have been overwhelmingly negative. One major concern seems to be that these contracts might become public records available to anyone once they were in the Railroad Commission's possession. It appears that an act of the Legislature could be required to maintain the confidentiality of the contracts. 
The Railroad Commission and the Comptroller's Office have an immense wealth of data dealing with gas produc­tion and prices which could be used to construct a statistical model of the redetermination aspects of the intrastate gas market. 
Going as far back as 1970 or 1971, the Oil and Gas Division of the Railroad Commission maintains a computer file of monthly reports from producers. These reports list each well and each completion on every lease, the amount of production, the operator of the lease, and the gatherer. The Comptroller maintains a computer file of monthly tax reports from Texas gas producers back to September 1975. The file contains production and price data for each lease for each producer in each month. 
These detailed data files can be used to determine the 
price of new gas, to follow the price history of gas from 
particular leases, and to possibly provide some information 
about the purchaser of the gas through the ~ocation of the 
lease and the identity of the gatherer. One approach might 
be as follows: assume that geographical redetermination 
operates only on the basis of the Railroad Commission 
District, not any larger territory. These data bases can then 
be used to track the price movements of new gas and old 
gas priced near new gas. If new gas is always at the top of 
the price structure, then favored-nation redetermination is 
probably not important. But if old gas appears at the top of 
the price structure from time to time, then favored·nation clauses may be acting to transfer high prices from locationa outside the District to gas already being purchased by the same buyer inside the District. Particularly strong price disturbances might be identified and tracked over time to determine how they spread geographically and with respect to pipeline systems. This type of project could provide an interesting research opportunity for some individual or group in the state's universities. 

POUCY ALTERNATIVF.S 

Whether or not state agencies should become involved in an examination of private gas purchase contracts has become a moot point. The Railroad Conunimon has found itself forced to do this by the Lo-Vaca case. In fact, the Commission asked for and received one-half million dollars from the last session of the Legislature to hire more staff and conduct further investigations into the gas purchase contracts of gas utilities. The question is should the Commission confine itself to examining contracts only in particularly troublesome or apparently critical situations, or should the Commission, perhaps in cooperation with other agencies and the universities, try to develop an overall model of the Texas gas market that could be used for predictive purposes and yet would not require an undue burden of paperwork? 
The individual investigations conducted by the Commis­sion could bring problems with gas contracts to light and do it in a more direct manner than a simulation model, but the model would offer an opportunity to test various scenarios and identify problems before they become disasters. There is no reason why both approaches cannot be taken together, and they should complement each other. The Commission has started in this direction by its proposed rule calling for the filing of utility contracts. 
Daniel Rabovsky 

REFERENCES 

1 For some samples of redetermination clauses see: U.S. House of Representatives, Committee on Interstate and Foreign Commerce, Subcommittee on Energy and Power, Hearings on the National Energy Act H.R. 6831, 95th Con­gress, 1st Session, 1977, Part 2, p. 664. 
2Analysis No. 9, February 1977,and Fiscal Notes, Octo­ber 1977, Austin: Comptroller of Public Accounts. 
3 These methods were (1) obersving the production de­cline from dedicated interstate reserves~ (2) using purchase estimates for "old gas" from a Railroad Commission survey; and (3) applying a discovery-production lag model to Texas data for gas production, discoveries, and reserves. 
4 Texa.r Register, November 15, 1977, p. 4408. 

54 
Price Redetermination in Texas Producer Gas Sales Contracts 
BIBLIOGRAPHY 

Askari, H.G., T.W. Ruefli, and M.P. Kennedy, Horizontal Divestiture of Energy Companies and Alternative Poli· cie1, Austin: University of Texas Graduate School of Business, 1977. 
Capital Energy Letter, Washington, D.C.: Capital Energy Letter, Inc., various issues 1977-78. 
Coal News, Washington, D.C.: National Coal Association, various issues 1977-78. 
Coal Outlook, Washington, D.C.: Observer Publishing Com­pany, various issues 1977-78. 
Coal Week, Washington, D.C.: McGraw-Hill Publishing Com­pany, various issues 1977-78. 
The Energy Daily, Washington, D.C.: The Energy Daily, Inc., various issues 1977-78. 
Federal Trade Commission, Concentration Levell and Trends in the Energy Sector of the U.S. Economy, 
Washington, D.C.: U.S. Government Printing Office, 1974. 

Federal Trade Commission, The Structure of the Nation 's Coal Industry, staff draft, not yet officially released. 
General Accounting Office, The State of Competition in the Coal Industry, Washington, D.C.: U.S. Government Printing Office, 1977. 
"Horizontal Divestiture: A Policy That Doesn't Make Sense," National Journal, Washington, D.C.: Govern­ment Research Corporation, April 9, 197 7. 
Horizontal Divestiture and Coal Facts, Washington, D.C.: American Petroleum Institute, 1977. 
Kennedy, Senator Edward M., Statement Introducing Legis· lation S1927 to Prevent Oil Company Ownership of Coal and Uranium Resources, July 26, 1977. 
Land Use Planning Report, Silver Spring: Business Publishers, Inc., various issues 1977-78. 
Markham, J.W., A.P. Hourihan, and F.L. Sterling, Horizon­tal Divestiture and the Petroleum Industry , Cambridge : Ballinger Publishing Company, 1977. 
Pocket Data on Exxon and the Oil Industry, Houston: Exxon Company, U.S.A., 1977. 
Quenon, Robert H., President Monterey Coal Company, State of the Coal Industry 1975, address to the Techni­cal Association of the Pulp and Paper Industry, October 1, 197S. 
Slick William T., Jr., Vice Presidnet Exxon Company, U.S.A., Testimony on S1927 before the Subcommittee on Antitrust and Monopoly, Committee on Judiciary, 
U.S. Senate, August 7, 1977. 

Synthetic Fuell: Quarterly Report, Cameron Engineers, March 1977. 
Tennessee Valley Authority, The Structure of the Energy Markets: A Report of TVA 's Antitrust Investigation of the Coal and Uranium Industries, Washington, D.C. : U.S. Government Printing Office, 1977. 
Udall, Representative Morris K., Testimony on S1927 be­fore the Subcommittee on Antitrust and Monopoly, Committee on Judiciary, U.S. Senate, August 2, 1977. 
United Mine Workers Journal, Washington, D.C.: United Mine Workers, various issues. 
The Wall Street Journal, various issues April 1978. 
SS 

CHAPTER 7 

CURRENT AND ALTERNATIVE ENERGY TAXES FOR TEXAS 

ISSUE DEFINITION 
The State of Texas, in fiscal year 1977, had a $1.98 billion surplus or net cash balance. This surplus, an all-time record amount, represented a $336 million increase in the cash balance over the FY 1976 level.1 
The major components of total state revenue are tax collections (60 percent) and federal funds (25 percent). The contribution of the three major energy taxes-motor fuel, gas severance, and oil severance taxes-to total tax collec­tions was 30.4 percent.2 Because of increased revenue from oil and gas severance taxes and a dynamic growth economy, it has been unnecessary in the recent past to find new sources of tax revenue. But, depleting oil and gas fields and declining production threaten to undercut the longstanding importance of oil and gas severance taxes. As a conse­quence, serious consideration must be given in the near future to augmenting and eventually even replacing these historically important tax collections. 
BACKGROUND 
The justification for additional taxes being levied on the mining/energy industry is the nonrenewable nature of the resource; its .. natural heritage" of which all the state's citizens have an interest, and the future foregone revenue that current production entails.3 The taxing policies avail­able to a state in the area of energy production are many and varied. The impact on the energy industry of such taxes is, however, difficult to project. 
One type of tax which can be imposed on the extraction of energy resources is the severance tax. It can be assessed on either the monetary value of the resource produced or a fixed monetary fee per unit of physical volume. The former is referred to as an .. ad valorem" tax; the latter as a "specific" tax. 
There are various advantages and drawbacks to both types of severance taxes. Specific severance taxes will discourage the production of low-grade ores since all resources are taxed at the same rate. And, once a low grade ore is left behind, it would have to become a high-grade ore price-wise to warrant reopening the mining venture. The specific tax also fails to reflect changes in price levels for the resource. Unless escalator clauses are built into the tax, the state will not share in price increases for the resource. To its advantage the specific tax is easier to administer (units are easier to count than the monetary value those units justify) and is easier with which to comply. 
Ad valorem severance taxes are more flexible than specific taxes. Because the tax is tied to the monetary value of the resource, the state will share in the increased revenue that accompanies higher prices. On the other hand, when prices are falling, producers are taxed less per unit and are less apt to close down or restrict production. Marginal ores are not discriminated against with ad valorem taxes since as the value of the resource goes down, so does the tax rate. This effect also leads to the conclusion that ad valorem severance taxes result in a higher level of recovery because marginal ores are taxed at a lower rate and are more apt to be produced. 
Currently only oil, gas, cement, and sulfur arc subject to severance taxes in Texas. The oil severance, or production tax, was first enacted in 1907 by the state legislature. The current tax rate, 4.6 percent of the market value at the wellhead, was imposed in 1951. Much of the tax is passed on to final consumers through higher prices from the first purchaser of the oil who initially pays the tax. Texas' three major oil producing neighbors all have considerably higher oil severance tax rates. The situation now exists in which Texas produces more oil than any other state-40 percent of the national total-yet taxes that production at one of the lowest levels. 
Natural gas severance taxes were first imposed in Texas in 1931 at the rate of 5 percent of market value at the wellhead. In 1954 the rate was fixed at 9 percent. The prevailing rate today, established in 1969, is 7.5 percent of fair market value at the gas wellhead. 
Natural gas liquids are taxed at the 4.6 percent rate imposed on crude oil production. Revenues obtained from the severance taxation of natural gas liquids go into the total natural gas severance tax figure and historically have accounted for some 7.5-8 percent of the total. 
In contrast with oil production taxes, Texas' 7.5 percent of value rate is higher than two of its gas producing neighbor states-Oklahoma and New Mexico. Louisiana, which employs a specific severance tax for natural gas (7 

51 
Texas Energy Issues: 1978 
cents/mcf) is finding itself in serious financial straits. Namely, production of natural gas has declined severely in the past several years and as a result of the tax being based on the quantity produced rather than the value thereof, it is estimated that gas severance tax revenues will fall $25 million this year alone.4 
Texas has never seen fit to tax the production ofeither lignite or uranium. Perhaps this is a function of both the relative newness of production of both resources and, until recently, the almost insignificant amount of production. Large scale production of lignite first occurred in 1954 in conjunction with the Alcoa plant in Rockdale. Production remained fairly constant at 2.5 million tons/year until 1972 at which time its expanded use as a boiler fuel caused production to increase. In 1976, some 14.2 million tons were produced. The production of uranium oxide in Texas dates to 1954. Since then, production has increased rapidly: 836,000 pounds were produced in 1974; in 1976 the figure had risen to l .83 million pounds. In anticipation of higher future production levels, several proposals were raised in the 65th Legislature to tax the production of lignite and uranium. None of these proposals cleared the House Ways and Means Committee. 
Texas has a long history of taxing the consumption of motor fuels. The first state gasoline tax, referred to as the "Motor Fuel Tax," was imposed in 1923. The current 5 cents/gallon levy was adopted by the 54th Legislature in 1955. Taxes levied on liquefied gas and diesel fuel, labeled "Special Motor Fuel Taxes," were first imposed in 1941. Current rates of 5 cents/gallon for liquefied gas and 6.5 cents/gallon for diesel were levied in 1959. For sake of convenience, the three taxes are lumped together and referred to as "Motor Fuel Taxes." 
The gasoline tax in Texas is at least I cent/gallon cheaper than the other 49 states, and 6.5 cents lower than Hawaii which has the highest gasoline tax in the nation. Texas' rate on diesel fuel-which is the same as Okla· homa's-is lower than all states except Wyoming and Vermont, which don't tax diesel fuel at all.5 
Texas has flirted with the idea of imposing a processing tax on the refining industry for nearly thirty years. Refinery tax legislation was introduced in the Texas legislature in 1949, 1953, 1955, 1969, 1975, and in 1977. Though these proposals have varied in scope and structure, the intent has always remained to increase tax revenues, in large measure from interstate consumers who use approxi· mately 70 percent of the Texas refinery output. The base for a Texas refinery tax would encompass fifty refineries with a throughput capacity of 4.3 million barrels of crude oil daily. This represents 26 percent of the total U.S. refining capacity . 6 
There are few precedents to consider in the taxing of crude oil refining. The Louisiana Legislature enacted a refmery tax in 1933 largely at the insistence of the state's political mentor, Huey Long, but repealed it in the 1940s. Presently, New Hampshire is the only state with a refinery tax, but obtains no revenue from it since the state has no refineries. The impact of such a tax giwn this limited experience is difficult to acertain, and a might be expected, is hotly debated. 
POUCY ANALYSIS 
Historically, motor fuel taxes and oil and gas severance taxes have played a crucial role in financing state govern· ment. Recent trends in production and consumption, however, raise questions about the future revenue contribu· tions of these taxes. 
Motor Fuel Taxes 
As can be seen from Tables I and 2, the motor fuel taxes, while increasing in absolute dollar figures, have been decreasing in percentage contribution to total tax revenue collections. The decreasing growth rate of yearly collectioos has resulted in a percentage decline in total tax revenue contributions from 21 percent in 1968 to IO percent in 
'1977. 
In 1954, the price of gasoline was a little less than 20 cents/gallon including state and federal taxes. Hence, the 5 cent state levy was, assuming a 20 cents/gallon price, 25 percent of value. With the advent of 55 cents/gallon now, the tax is somewhat less than I 0 percent of value. 
Gasoline tax revenue will continue to rise to the extent 
that consumption increases. A recent GEAC analysis 
projects a 3-4 percent increase in consumption per year. If 
the tax is raised to 7 cents/gallon (roughly the national 
average) and consumption rates are unaffected, some SI 75 
million in additional revenue would accrue to the state on a 
yearly basis. 7 This would amount to a 12.6 percent tax rate 
on a 55<ent gallon of gasoline-approximately one half of 
the percentage tax rate that prevailed when the 5 cents/ 
gallon rate was imposed. 
Natural Gas SePerantt Taxes 
Production of natural gas in-Texas peaked in 1972.1 The decline in production from 1972 to 1976 was approxima· tely 19 percent. And while 1977 production was up slightly, it would appear that the long run trend for natural gas production is destined to decline. To date, revenue from gas severance taxes has not suffered from the decline in production. In fact, since 1972, revenue has increased fourfold-from SI 14 million to $474 million in FY 1977 (see Table I). This gain in tax rel'enue is attributable to the price-sensitive market vatue mode of taxation. In 1972 the 

58 
Cu"ent and A ltemative Energy Taxes for Texas 

average price of inter-and intra-state gas was 16.4 cents/ mcf. In 1976 the average price was 71.8 cents/mcf.9 Thus, increases in price have more than offset declining produc­tion. The natural gas production tax is the fastest growing tax source in the state. In 1973 the tax contributed 4.8 percent to total tax collections; 1977 saw the figure rise to 
10.7 percent (see Table 2). Eventually, however, price in­creases will be unable to offset declining production, and revenue will decrease. 
A large percentage of the increased tax revenue from natural gas severance taxes has come from intrastate users of gas. This situation has arisen because of FPC ceilings on interstate gas prices. As a result of the 7.5 percent tax rate on market value, Texas consumers who often pay up to four times the price of federally-regulated interstate gas 
were paying four times the tax on the same amount of gas as out-of-state users. The situation was somewhat mitigated in July of 1976 when the FPC raised the price of "new gas" to $1.42/mcf and "old gas" to 93 cents/mcf (in 1975 the average price of interstate natural gas was 38.3 cents/mcf; intrastate prices averaged 62.8 cents/mcf). Thus interstate consumers use 37 percent of Texas-produced natural gas yet pay only 31 cents of the total natural gas severance tax bill. Continued indications of possible higher future prices have made state policy makers understandably reluctant to .abandon or modify the tax simply to equalize the inter/ 
intrastate tax burden. 
The percentage of natural gas marketed production going into interstate markets has been on the decline for years. In 1966, approximately 50 percent was exported. In 
TABLE 1 
ENERGY TAX COLLECTIONS 

STATE ENERGY TAX REVENUES IN MILLIONS OF DOLLARS 

Fiscal Year Oil Production and Natural Gas Production Motor Fuel Taxes) 
Ending August 31 Regulation Taxes and Regulation Taxes (Gasoline, LPG, Diesel) 

1965 127 73 204 1966 133 74 217 1967 143 78 230 1968 158 82 247 1969 156 84 267 1970 173 96 286 1971 195 109 334 1972 193 114 356 1973 210 125 386 1974 347 171 390 1975 405 260 395 1976 431 365 427 1977 428 474 444 
Source: Texas Energy: A Twenty Five Year History, p. 133. 1977 figures provided by Comptroller of Public Accounts. 
TABLE2 
PERCENTAGES OF NET REVENUE BY SOURCE 1968-1977 

Tax Collections 1968 1971 1973 1974 1975 1976 1977 
Sales Tax 21.9 31.7 35.8 37.2 37.6 37.8 38.2 Oil Production and Regulation Taxes 12.4 9.8 8.1 11.5 12.0 11.01 9.7 Natural Gas Production Tax 6.4 5.4 4.8 5.6 7.7 9.3 10.7 Motor Fuel Taxes (Gasoline, LPG, Diesel) 21.3 16.7 14.9 12.9 11.7 10.9 10.0 
Source: State ofTexas 1977 Annual Financial Report (p. 12) and Special Legislative Report of the House Study Group (p. 3). 
59 
Texas Energy Issues: 1978 
1976, roughly 37 percent of Texas' marketed production was exported.10 In the absence of federal deregulation or supply allocation to other regions, this trend will in all likelihood continue. Thus, the majority of any increue in the natural gas severance tax will be borne largely by Texas consumers. 
Given current, and inevitably higher, future prices for natural gas, a small increase in the tax rate would yield Jarae revenue gains. A more preferable alternative would be to place a minimum, or alternative, tax on low-priced ps. Numerous attempts at this were made in the 65th legisla­ture, but all failed to clear the House Ways & Means Committee. 
With the advent of higher prices triggered by the Arab Oil Boycott of 1973, revenues from oil severance taxes took a corresponding jump. By way of illustration, FY 1972 revenue was $193 million; in 1974, the figure was $34 7 million (see Table l ). Table 1 shows that 'revenue from oil severance taxes fluctuated in the eight-year period from 1965 to 1973. And, even though the overall progres­sion was in the upward direction, it was the slowest-growing revenue contributor among the major tax sources, averaging an approximate 6 percent increase per year. During that eight-year period the price of crude oil increased from · $2.96/bbl to $3.98/bbl.11 
The average price of crude oil jumped to $6.95/bbl in 1974; $7.64/bbl in 1975; and $8.07/bbl in 1976.12 Production-which peaked in 1972-kept going inexorably down despite the higher price and increased incenti~ to produce. As a result, in FY 1977, the market value based tax rate could not totally offset the decline in production and revenue fell to $428 million from $431 million in FY 1976. This would appear to be the direction of future revenue yields unless alternative taxing methods are em­ployed given the continually shrinking nature of crude oil reserves. 

Once the state's oil reserves are depleted, it will be too late to recover the tax revenue that is currently being foregone. This is especially costly to the state when it is considered that approximately SO percent of the oil severance tax revenue comes from out-of-state consu­mers.1 3 California, which consumes practically all of its oil production, imposes no tax on oil production. This is not the case in Texas. 
Assuming 1977 production and prices, an increase in the oil severance tax to 6.0 percent would have resulted in $449 million in revenue; a 7 percent rate would have amounted to $652 million.14 
Refinery Ta 

The debate over refinety taxes revolves around the impact such a tax would ~Oil the refining industry in Texas. Opponents of a refinery tax argue that a 5 pen::ent levy on the processing of petroleum liquids (rouslaly 50 cents/bbl) would have detrimental effects both in the short and long run on the state's refmeries. Both opponents and advocates of the tax point out that a short run shifting of inputs from Texas refineries to refmeries in other states would occur, to the extent 1hat refineries in other states had excess capacity. 
Opponents also contend that Texas' position . in the domestic refining industry (26 percent of capacity) would be insuffici!mt to pass on the cost of the tax to coosumers. In times of excess supply and excess capacity. the tax would be internalized with refiners being forced to reduce before-tax prices to compensate for higher total costs. The reduced profitability that this action (absorption of the refinery tax by refiners) would tend to discourage future investment in the refining industry in Texas. 

It is next argued that the tax would came at · a particularly bad time since the nation •s refining industry faces huse inwsbllent costs during the next decade to meet changing inputs and more strict government regulations. Faced with the added burden ofa Texas refinery tax, giwn · thae investment costs, some refinen might find it to their long-run advantqe to simply build a new refinery elsewhere 
ra1her than to modify existing operations. 
Opponents of the tax also argue that the pe~ochemical 
industry, which is highly intenelated with the refining 
industry, would be neptively impacted with imposition of 
the tax. Rewnue projections. they argue, are also over­
blown because they fail to address short-run shifting of 
inputs, long-run losses in capacity, and reduced property 
tax revenue to localities. 
In the final analysis, those advene to the tax believe that 
it would lead to an increase in rewmue in die short-run at 
the expense of long-run losses to employment, economic 
growth. and the health of the refining industry. 
Underlying the arguments of tax opponents is the 
assumption that other states would not follow the Texas 
lead and impose a refinery tax of their own. If, however, 
o1her refining states impoaed is similar tax, the locational 
issue would become moot. 
Proponents of the tax counter the above arguments with 
the contention that Texas has such a comparative advantage 
in attracting and maintaining refineries that a state levy on 
their operations would prove insignificant. The interde· 
pendence of the vast network of refineries. transportation 
systems, oil and gas producers, petrochemical plants and 
service personnel is stressed. It is also pointed out that the 

60 

Cu"ent and A ltemative Energy Taxes for Texas 

replacement costs of the immense pipeline and port networks already serving refineries in Texas would be great. 
Also of importance are the environmental policies of a particular state or region. The threat of a long adjudicatory process blocking the construction of a refinery is often enough to render otherwise attractive locations unsuitable. Texas has had an historically favorable attitude towards energy development displayed by the legislature and various regulatory agencies. The impact of the tax would also be minimized by Texas' decided advantage in capital and operating costs. 
Proponents also point out that Texas has the number one business climate in the United States. The absence of a corporate income tax, "right to work" laws, and a myriad of other governmental policies all contribute to this rating. 
Supporters of the tax cite various studies of industry location which show taxes to be of only minor importance in siting decisions. It is also pointed out that the current federal corporate income tax structure permits the deduc­tion of state and local taxes on federal tax returns. Thus, only 48 percent of the tax (at the margin} would be borne, effectively cutting the tax rate in half. 1 5 
Supporters also point out that Louisiana-Texas' closest 
rival in attracting potential refineries-would probably 
follow Texas and enact a similar tax. In fact, Louisiana is 
now considering imposing a "first use tax" of 5 cents/mcf 
on gas extracted from federal offshore waters and processed 
in the state. 16 The next logical step would appear to be a 
tax on the refining of crude oil. 
Using objective measures, it is impossible to determine 
the consequences of imposing a refinery tax in Texas. The 
only way to tell the impact of the tax would be to impose 
it. Aft arguments aside, a 5 percent value tax-as was 
proposed in the 65th Legislature in H.B. 1200 by Represen­
tative Nugent-would probably not lead to a flight of 
refineries to other states. Texas simply has too much to 
offer the refining industry for a tax of this magnitude to 
lead to the eventual destruction of the industry. 
Revenue from a 5 percent tax on the processing of crude 
oil was estimated by the GEAC to be $797 million in 1980 
and $1.05 billion in 1985 assuming no effect on locational 
decisions. The revenue figures were $700 million and $755 
million respectively for 1980 and 1985 under the assump­
tion of no new development of the Texas refining indus­
try.11 
By 1980, 32 million short tons of lignite are projected to 
be produced. Assuming a $10/ton price for lignite, a 10 
percent severance tax would yield $12 million in revenue in 
1980.18 While the magnitude of this tax might seem trifling 
in_ light of current severance taxes from oil and gas, the 
figure will undoubtedly rise as more electric generating 
plants are built to use lignite as a boiler fuel. Any severance 
tax on lignite will be paid almost exclusively by Texans, because nearly all of the lignite is and will be consumed in the state. 
In contrast with lignite, most uranium now produce in Texas is exported for use outside the state. The current average price for uranium ore, or yellow cake, is $12/lb. On the international spot market, prices have often exceeded $40/lb. The Railroad Commission ·projects 6.6 million pounds will be produced from open pit mines in 1980. Currently, over half the uranium production comes from in situ mining operations. Assuming today's prices, a l 0 percent severance tax would yield $16 million in revenue by 1980.19 As Texas develops a nuclear power industry some of the tax would be borne by Texans. The prospects for Texas remaining a net exporter of uranium through the year 2000 are still promising, however. 
POLICY ALTERNATIVES 
Given the current surplus and political climate in Texas state government, talk of altering the tax 'structure may seem somewhat out of place. 
As the state becomes more urbanized and industrialized the state budget and expenditures will surely rise. The need for additional revenue will then be felt. As the preceding analysis shows, there are numerous alternatives available to the state to generate additi0nal revenue. 
In the long run, however, there are disturbing trends. There are finite reserves of both oil and natural gas. When they are gone so will be the revenue that these resources generated. 
The alternatives to the staie concerning oil and gas severance taxes are either to increase, decrease, or maintain present rates. Since the majority of the natural gas severance tax is paid by Texans, any action raising the rate would be hard to justify, especially when it is considered that in all likelihood, progressively more of Texas produc­tion will be consumed within the state. It could be argued on equity grounds that an alternative "specific" tax should be imposed on federally-regulated low-priced gas to equal· ize the burden of taxation between interstate and intrastate consumers. 
The crude oil severance tax is another matter. The 4.6 percent rate is Jess than nearly all oil-producing states. Revenue turned down in 1977 because of substantially lower production, ·.vhich higher prices could not offset. And, roughly 50 percent of the tax is exported. Under these conditions a good argument can be made for an increase in the tax rate. 
An increase in the motor fuel tax would seem justifiable when it is considered that the 5 cents/gallon levy is the lowest in the nation. But Texans pay most of the tax and an increase in the rate would be politically unpopular. It would similarly be difficult to convince Texans that a 

61 
Texas Energy Issues: 1978 
severance tax is needed on lignite, since virtually none is exported. Any tax on lignite would serve to raise already exorbitant utility bills. 
The effect of a severance tax on uranium would be quite different. The magnitude of the revenue would be small, but nearly all of it would be paid by out-of-state consum­ers. 
The most controversial of all of the taxes dileuw4 in. this exposition is the refinery tax. The expected revenue from such a tax would be of sufficient magnitude to replace current oil and gas severance taxes. Severance taxes on lignite and uranium fade i.pto obscurity when the magni­tude of rev~nues from a refinery tax are considered. But currently there is no need to tap the refining industry for such revenue. 
Indeed this is the case with all of the taxes discussed. There is no inunediate need to increa.w state revenue. What should be recopized is that numerous energy taxing lltomatives are available to state policy-makers when the need arises, 
Michael Tolleson 


REFERENCES 

1 Texas Comptroller of Public Accounts, State of Texa1 1977 Annual Financial Report, p. IV. 
2/bid.,p.12. 

3 "Coal Taxation in the Western States; the Need for a Regional Tax Policy," Natural Resource1 lournal, vol. 16 (April 1976), pp. 416-418. 
4 House Study Group, Special Le&islative Report, · "New and Expanded Sources for State Revenue,'' 1977, 
p. 4. 

5 Texas Comptroller of Public Accounts, Second Quarter Energy Report, April 1976, p. 1. 
6 Governor's Energy Advisory Council, Texas Energy: A Twenty-Five Year History, report no. 77004, August 1977, p. 7. 
7 House Study Group, op. cit., p. 12. 
8 Twenty·Five Year History, op. cit., p. 12. 
9lbkl .. p, 102. 1 0 Interview with Dan Janoa, Oil and Gas Division, Texas 
Railroad Commi~en. 11 Twenty·Ftv, Y•a, Hl8otry, op. cit., p. 102. 12 Ibid. 1 3 Second Quarter Energy Report, op. cit., p. 2. 14 House Study Group, op. cit., p. 20. 1 5 Texas Eneray Advisory Council, Selected Texas and 

·u.s. Refinery Data, Report no. 77030, 1977, p. 20. 
16 House Study Group, op. cit., p. 27. 
17Selected Texas and U.S. Refinery Data, op. cit., p. 22. 
18 House Study Group, op. cit., p. 21. 
19/btd.,p. 30. 

62 
Cu"ent and Alternative Energy Taxes for Texas 

BIBLIOGRAPHY 

"Coal Taxation in the Western States, the Need for a Re-. gional Tax Policy" Natural Resources Journal, vol. 16 (April 1976). 
Governor's Energy Advisory Council, "Oil and Gas Sever­ance Tax," "Refinery Tax," ••ilegulation of Uranium Production," "Surface Mining Control (Lignite)," Energy Briefings, 1971. 
Governor's Energy Advisory Council, Selected Texas and 
U.S. Refinery Data: Taxes, Operating Costs, Capacity, Prospects for Growth and Other Information Relevant to Refinery Tax Considerations, Report no. 77030, 1977. 
Governor's Energy Advisory Council, Texas Energy Out­look: The Next Quarter Century, March 1977. 
McLure, Charles E. Jr., The Economic Effects of a Texas Tax on the Processing ofPetroleum Products, 1915. 
Texas Comptroller of Public Accounts, Second Quarter Energy Report, Analysis No. 3, April 1976. 
Texas Comptroller of Public Accounts, State of Texas 19 77 Annual Financial Report, 1911. 
Texas Energy Advisory Council, Texas Energy: A Twenty­Five Year History, Report no. 77004, October 1977. 
Texas House of Representatives, House Study Group, Special Legislative Report, "New and Expanded Sources for State Revenue," 1977. 

63 

CHAPTER 8 


HORIZONTAL INTEGRATION IN THE ENERGY INDUSTRY 

ISSUE DEFINITION 
While much national attention has been focused on the National Energy Plan (NEP) debate, another serious energy issue also faces the Congress. More than a dozen proposals dealing with horizontal integration in the energy industry have been introduced in the 95th Congress. In the past, bills of similar intent have also been referred to as horizontal dismemberment or, more commonly, horizontal divestiture proposals. The impetus for such legislation is a concern that the major oil companies are too big and powerful, and that their participation in the development of alternative re­sources would adversely affect competition. 
In the context of this report, essentially all of these terms refer to legislative proposals which would limit the acquisition (i.e., horizontal integration) of alternative ener­gy resources or require the sale (i.e., horizontal divestiture) of any such current assets by "major" oil and gas producers. Majors are defined and characterized by their ''vertically" integrated structure. That is to say, they are engaged in the full cycle of exploration, development, refining, transportation, and marketing. In some respects, the oil industry's entry into alternative energy resources such as coal, oil shale, and tar sands has elements of vertical divestiture in it also, since these resources can be processed for"use as a refinery feedstock. 
BACKGROUND 
The petroleum industry most recently became the target of divestiture proposals during the early 1970s. The 1973 Arab oil embargo, the 1974 quadrupling in the world price of oil, and the posting of record 1974 profits in the petroleum industry gave new support to the divestiture proponents' cause. Several Senate divestiture proposals have been narrowly defeated in the past, but the issue has never been brought to the floor in the House. Only two of the current proposals have had hearings held and are thought to be serious prospects. These are HR 7816, the ''Public Energy Competition Act," introduced by Representative Morris Udall (D-Az.) and Sl927, the "Energy Industry Competition and Performance Act of 1977," introduced by Senator Edward Kennedy (D-Mass.). 
HR 7816 is primarily designed to restrict the eight largest majors (i.e., Exxon, Mobil, Standard Oil of Califor­nia, Standard Oil of Indiana, Texaco, Shell, British Petro­leum, and Gulf) from participating in the development and production of coal and uranium resources. This would be accomplished by excluding certain companies from pur­chasing federal leases after December 31, 1979. As intra­duced, it would affect all companies who: 
(1) 
produce, 	refine, transport, or market at a daily worldwide average at least 1,600,000 barrels of crude oil or the equivalent in natural gas; or 

(2) 	
are vertically or horizontally integrated; or 

(3) 
participate in joint ventures with other majors, unless with the prior approval of the Secretary oflnterior. 


On March 22, 1978, Congressman Udall in a "Dear Colleague" letter proposed some changes in HR 7816 which presumably he will offer as a substitute for the version of the bill which was voted out of subcommittee. The new version eliminates the section pertaining to joint ventures and adds a new section which permits existing federal leases to claims presently owned by major oil companies to be modified in the future to put together a minable block. Congressman Udall is Chairman of the House Interior and Insular Affairs Committee. 
S 1927 defines the "majors" more broadly, and would affect all companies whose total 1976 domestic production of crude oil, condensate, and natural gas liquids exceeded fifty-five million barrels or one hundred billion cubic feet of natural gas. As introduced, this bill would affect about twenty-five major oil and gas producers. Such "major petroleum producers" would be: 
(I) 	
prohibited from acquiring any future interest or control over any coal or uranium assets; and 

(2) 
required 	to divest themselves andy such current assets within three years after the law was passed. 


S 1927 was introduced on July 26, 1977, and then referred to the Judiciary's Subcommittee on Antitrust and Monopoly of which Senator Kennedy is Chairman. Hearings were subsequently held on August 2 and 4, 1977, and 

Texas Energy Issues: 1978 
additional hearings are expected to resume in 1978. Currently (June 1978) the bill is still pending before the subcommittee. Senator Kennedy is also unable to devote his full efforts due to health legislation priorities. If this bill is reported out to the full committee, it seems likely that it will be modified to allow the oil and gas companies affected to keep and develop their existing leases. 
In the Congress there has been much dispute and debate over the wisdom of horizontal divestiture proposals. At this time the only Senate floor votes have been on amendment proposals and all were voted down. No bill has ever been reported out of subcommittee, and therefore none has yet made it to the Senate floor. Majority Leader Robert Byrd (D-W. Va.) also opposes it. In the House it has never been considered in a floor vote, so it is difficult to measure its support. However, it seems most likely that the House will not take up this issue seriously without direction from the White House to do so. Therefore, the White House will play an important role in this debate. 
As a candidate, President Carter expressed some support for divestiture, and in late 1977 he publicly denounced oil companies ~ "war profiteers." Numerous high-ranking appointees have called for horizontal divestiture in the past, including John O'Leary, Deputy Secretary,.Department of Energy (DOE); Cecil Andrus, Secretary of the Interior; John Shenefield, Assistant Attorney General (Antitrust); and S. David Freeman, principal author of the Ford Foundation report, A Time to Oroose and now a member of the Tennessee Valley Authority. However, the Adminis­tration's principal energy authority, DOE Secretary James Schlesinger, opposes horizontal divestiture and during a January 1978 press conference, when questioned about the issue, responded: 
The Administration does not favor at this time hori­zontal divestiture .. . . On the one hand, we have oil companies who are generating cash flows in large de­grees....On the other hand, we have the necessity for very large investment activities in new sources of supply....These would seem to be a natural match­up. Until such time as there is clear evidence, which no one as yet has presented, of a detrimental effect on the coal market, the Administration would not en­dorse such an approach.1 

In view of the factors mentioned previously, the continuing debate on the National Energy Plan, other pressing legisla­tive matters, and the upcoming Congressional elections, it seems quite possible that no final vote on this issue will be forthcoming from the 95th Congress. 
POLICY ANALYSIS 

Before addressing the disputed issues head on, it is instructive to examine in general why the petroleum 
industry wants to participate in the development of alternative energy resources for the future. Among the most obvious reasons why oil companies have decided to enter alternative energy fields is to ensure self-perpetuation. The corporate organization is no different than an individual in this respect and this survival instinct should not surprise anyone. The petroleum industry has realized for some time that oil and gas supplies would not last forever, and during the 1960s began investing in coal and uranium development. Their interest in development ofalternative energy resources . should come as no surprise either. As they see it, horizontal integration and development of new fuels were logical ex­tensions of their existing customer service and managerial and technological expertise. Managerial characteristics of a similar nature are required in all these fields. There are 
also many technological similarities. . 
It should also be noted that according to a report by the 

Management Analysis Center (MAC) there are few other 
qualified (i.e., having capital availability and managerial 
experience with long lead-time, high risk, capital intensiw 
projects) "would-be energy resource developers" willing 
and able to make the contribution necessary to meet the 
nation's energy goals. While it is beyond the scope of this 
paper to predict the effect on energy development without 
the petroleum industry's participation, it is important to 
give that matter some consideration. This rate of develop­·ment is particularly important given that we are faced with predicted energy shortages in the 1980s and that the President has described this situation as the "moral equiva­lent of war." 
In analyzing this issue, the first a:ld most obvious general 

question that comes to mind is why is there a need for 
horizontal divestiture. According to Senate Bill 1927, 
Section 2(aX3), "existing antitrust laws have been inade­
quate to maintain and restore effective competition in the 

energy sector of the economy." Competition then would 
seem to be the issue, and lack of it in the energy (i.e., 

petroleum) industry the principal allegation. The facts do 
not seem to substantiate this charge. In recent years the 
petroleum industry has probably been the focus of more 

economic studies than any other industry in history. 1ltese 
studies have been undertaken by government agencies, 
university professors, and the petroleum industry itself, and 
while the industry's record is not totally beyond reproach, 
the general consensus of these studies is that the United 
States petroleum industry has an effectively competitive 
structure. Two of the most widely accepted measures of 
competition are profits (i.e., percent return on capital and 
concentration of production among the largest finns. 
Petroleum industry profits have generally been about 
average among the Fortune 500 companies and their 
concentration ratios below the average of all United States 
manufacturing. To illustrate this more clearly, Table I 
provides production concentration ratios for various com­

66 
Horizontal Integration in the Energy Industry 

TABLE 1 ponents of the energy industry. 
PRODUCTION RATIOS FOR. THE ENERGY INDUSTRY 
Percent of U.S. Production, 1975 Companies 
Top 1  Top4  Top8  
Production  
Oil  9  26  41  
Gas  9  24  37  
Coal  11  26  36  
Uranium (mill production)  19  60  83  
Total energy (Btu basis)  7  19  30  
Refining capacity  8  30  54  
Marketing  
Retail branded gasoline sales  8  29  50  
All petroleum products  10  32  53  
Petroleum pipelines  
(Interstate, by barrel-miles)  10  32  53  
All U.S. manufacturing  40  51  

Source: Pocket Data on Exxon and the Oil Industry, Hous­ton: Exxon Company, U.S.A., May 1977, p. 16. 

As Table 1 indicates, concentration in the energy industry does not approach the average level in any area except uranium production, which is moderately concen· trated. (This is attributed to an unstable market and concentration has been on the decline recently.) Further­more, the broader the energy indus1fY is defined, the less concentrated it becomes. The explanation for this is two-fold: (1) the broader the definition (i.e., oil, gas, coal, uranium, oil shale, etc.), the more producers are included; and (2) even more significantly, the leading firms in each sector of the "energy industry" are different. Table 2 illustrates this. Only Conoco is listed as a top producer in all three fuels. The point is that, in each section of the energy industry, and in the total industry, concentration (i.e., control) appears to be low and competition high. 
Table 3 illustrates why it would be economically irrational for petroleum-owned coal or uranium companies to withhold coal or uranium from the market in order to drive up oil prices as has been alleged by some proponents of horizontal divestiture. Unless market control can be effectively maintained in all of these industries, any production withheld would simply result in an increase in 
Crude Oil and Natural Gas 
1. 
Exxon 

2. 
Texaco 

3. 
Standard of Indiana 

4. 
Shell 

5. 
Gulf 

6. 
Mobil 

7. 
Arco 

8. 
Standard of California 

9. 
Union 

10. 
Getty /Skelly 

11. 
Phillips 

12. 
Sun 

13. 
Cities Serivce 

14. 
Conoco 

15. 
Tenneco 

16. 
Marathon 



TABLE 2 
TOP 16 COMPANIES IN EACH ENERGY SOURCE 
1974 PRODUCTION 

Coal 
Peabody 
Conoco 
Occidental 
Amax 
Pittston 


U.S. Steel Ashland/Hunt Bethlehem North American Peter Kiewit Sohio Eastern Asso. Westmoreland Gulf Utah International American Electric Power Company 
Uranium 
Anaconda Kerr-McGee Utah International Un. Nuclear Exxon Union Carbide Rio Algom Cotter Conoco Dawn Pioneer Homestake Western Nuclear Atlas Federal Resources Getty/Skelly 

Source: Submission ofExxon Company, U.S.A. Before the House Judiciary Subcommittee on Monopolies and Commercial Law, September 11, 1975. 
67 

Texas Energy Issues: 19 78 
production by other firms. Additionally, the largest oil­owned coal producer, Conoco, only produces 2.1 percent (1974) of United States petroleum and Kerr-McGee, the largest oil-owned uranium company, only produces 0.4 percent (1974). Even if reduced coal and uranium produc­tion revenues would increase the demand for oil (i.e., the price), it is obvious they would benefit only marginally at best and probably suffer a net loss due to declining coal and uranium revenues. It should be noted that this type of price fixing is a violation of existing antitrust laws. 
The proponents of both divestiture and the industry are . not the only ones to have analyzed these issues surroun,:1.ing horizontal divestiture. Numerous analyses have been under­taken by various federal agencies. In 1974, the Federal Trade Commission (FTC) issued a report which concluded, "this study does not provide any positive support for the proposal that petroleum companies be banned from acquir­ing coal or uranium companies; nor does it suggest that petroleum companies be banned from acquiring coal or uranium reserves."2 A more recent, not-yet-officially re­leased FTC staff report, "The Structure of the Nation's Coal Industry," stated "the structure of the United States Coal industry during the survey period was conducive to competition."3 However, recent news reports indicate that Alfred F. Dougherty, head of the FTC's Bureau of Compe­
tition, will propose placing a ceiling on the amount of coal 
and uranium properties that larger oil companies can own. 
Two other government studies of the structure of the coal industry have also been issued. In December 1977, the General Accounting Office (GAO) issues "The State of Competition in the Coal Industry," and in September 1977, the Tennessee Valley Authority (TVA) released "The Structure of Energy Markets: A Report of TV A's Antitrust Investigation of the Coal and Uranium Industries." The unofficial FTC report and the GAO report tend to concur . both statistically and in conclusions, with their results being 
similar to other nongovernmental analyses. 
The GAO's principal conclusion was ''under present 

circumstances and outlook a viable state of competition 
exists in the coal industry and it is unlikely that the 
industry could be dominated by any firm or group of 
firms."4 The report went on to say that market power 
could only be sustained if there were substantial barriers to 
entry. The principal barriers would be access to coal 
reserves and capital. Since long-term supply contracts are 
frequently signed prior to actual development, financing 
such development is less risky than for many other 
ventures. With regard to access to reserves, the report 
pointed out that. the largest owner of unleased recoverable 
reserves is the federal government, which owns 70 percent 
TABLE 3 
TOP 16 ENERGY COMPANIES 
AND RANKING IN INDIVIDUAL FUELS 
1974 PRODUCTION 

Energy  
(Btu Basis)  
Exxon  1  
Texaco  2  
Standard of Indiana  3  
Shell  4  
Gulf  5  
Conoco  6  
Mobil  7  
Arco  8  
Standard of California  9  
Peabody  10  
Getty /Skelly  11  
Union  12  
Phillips  13  
Sun  14  
Cities Service  15  
Kerr-McGee  16  

Crude Oil and  
Natural Gas  Coal  Uranium  
1  •  5  
2  
3  
4  
5  14  
14  1  9  
6  
7  
8  
IO  16  
9  
11  
12  
13  
•  2  

*Indicates some production, but not in top 16. Kerr-McGee ranks about 25th in oil and gas production. Exxon is 37th in coal. 
Source : Submission of Exxon Company, U.S.A. Before the House Judiciary Subcommittee on Monopolies and Commercial Law, September 11, 1975. 
68 
of such coal reserves. In other terms, of the 145 billion tons of demonstrated federal reserves, only nineteen billion tons have been leased. Only 14 percent of such reserves are controlled by oil companies according to the report. 
Although starting with most of the same data, TV A finds the recent entry of large companies into coal mining to be alarming and asserts there is a high and increasing concentration and emerging oligopolistic market power. While differences in methodology partially account for statistical discrepancies among the reports, some of TV A's conclusions are inconsistent with their own tables. 
In summary, most studies agree that the petroleum industry has much to contribute to the development of alternative energy resources (e.g., coal synthetics, oil shale, etc.) as well as existing fuel sources (e.g., coal and uranium). Disagreement primarily centers on whether the energy industry is competitive enough to bring about a realization of this potential. A secondary dispute exists over whether the large oil companies are too big to be effectively regulated under existing antitrust legislation. At this time, the balance of economic and political wisdom seems to be hanging precariously in opposition to horizontal divestiture legislation. Only if clear examples of anticompetitive 
Horizontal Integration in the Energy Industry 
behavior can be cited or it can be proven that horizontal divestiture legislation will not adversely affect the achieve­ment of the nation's energy goals is it likely that this type of legislation will be enacted. 
ALTERNATIVES 
Horizontal divestiture proposals have already taken many different shapes and forms. Over the years they have evolved from calls for total divestiture to limits on future acquisition of federal coal and uranium. Only public development of federal reserves has failed to be proposed seriously. Most of the evolution has been an attempt to build a political consensus broad enough to enact divesti­ture legislation. Thus far, proponents of divestiture have failed to convince a majority of their colleagues that it is necessary. There being no litmus test of competition, nor any way to absolutely project the effect of horizontal divestiture on future energy development, these policy­makers will have to continue to wrestle with the economic and political uncertainties within their own consciences. 
G. Scott Johnson 


REFERENCES 

1 "Administration Opposes Oil Limits to Coal," Coal News, January 27, 1978, p. 2, cols. 1-2. 
2 Federal Trade Commission, Concentration Levels and Trends in the Energy Sector of the U.S. Economy, 1974, pp. 260-61. 
3 Federal Trade Commission , The Structure of the Nation's Coal Industry , prepublication draft, p. 152. 
4 General Accounting Office, The State of Competition in the Coal Industry, 1977. 


CHAPTER 9 

BOILER FUEL CONVERSION 

ISSUE DEFINITION 
In Texas today approximately 70 percent of all natural gas marketed intrastate is conswned by industry and utilities for boiler fuel requirements. As of 1970, Texas was 99 percent dependent on natural gas for industrial and utility boiler fuel operation. 1 This dependence on natural gas is the result of historically low prices, relative abun­dance of natural gas, and its environmentally clean combus­tion characteristics. Recently, however, prices have begun to rise and supplies have begun to decline. The result has been to discourage the relatively thermally inefficient use ofnatural gas as a boiler fuel (to generate electricity) and to encourage conversion to other fuels to heat boilers. 
In order to promote conversion from natural gas to other boiler fuels, the Texas Railroad Commission issued Docket 600 in 1975 calling for a decrease in the use of natural gas for a boiler fuel. In 1977, President Carter's National Energy Plan (NEP) was introduced calling for the phasing out of natural gas as a boiler fuel. There are, however, major differences between Docket 600 and the NEP which could make major impacts on Texas industries. 
BACKGROUND 
Docket 600 
The Texas Railroad Commission (RRC) in 1975 recog­nized the importance of moving Texas industry and utilities away from a heavy reliance on natural gas as a boiler fuel. 
On December 17, 1975, the Commission issued Gas Utilities Docket 600 entitled "Elimination of Natural Gas as a Boiler Fuel in Texas" which included the following provisions: 
(I) 
The transportation or sale of more than l 00 Mcf/d (I 00,000 cubic feet per day) by a Texas RRC regulated gas utility (natural gas supplier) for use as a boiler fuel shall be illegal unless an exemption is granted. 

(2) 
Existing contracts will remain valid provided no alteration is made to extend the length or increase the supply provided for in the contract. 


(3) 
By January I, 1981 a 10 percent reduction in gas deliveries to boiler fuel users who consumed an average of 3,000 Mcf/d or more during 1974or1975 (which ever is higher) will be required. A 25 percent reduction is mandated by January I, 1985. 

(4) 
The Texas Railroad Commission has the author­ity to issue exemptions. 

(5) 
"Boiler fuel" was defined as fuel for the generation of steam or electricity, including gas turbines. 


On March 3, 1976, the Commission issued an "Amended Order on Reconsideration" to Docket No. 600. This order raised the 100 mcf/d natural gas limitation to 3,000 Mcf/d. By increasing the minimum to 3,000 mcf/d, the RRC greatly reduced its administrative workload by exempting a multitude of small users such as laundromats, and small industrial users (estimated to be about 90 percent of all users, but only 5 percent of the total demand) from RRC jurisdiction. Currently, only users of more than 3,000 mcf/d are regulated by Docket 600. 
National Energy Plan 
The United States Congress also recognized the impor­tance of moving utilities away from a heavy reliance on natural gas as a boiler fuel. In April of 1977, President Carter introduced the National Energy Plan (NEP), which attempts to address the growing problem of a gap between energy supply and demand. A major goal of the NEP is to reduce our reliance on oil and gas by increasing the production and use of coal. 
The Conference bill may be broken in to four major categories summarized as follows: (I) new electric power. plants may not be constructed with the capability to use natural gas or petroleum as their primary energy source; (2) new major fuel burning installations (MFBI) may not use natural gas or petroleum as their primary energy source; (3) existing electric power plants may not use natural gas after January 1, 1990, and also may not increase their propor­tional use of natural gas compared to petroleum, coal, and other fuels from base period 1974-1976, and (4) existing 

71 
Texas Energy Issues: 1978 
major fuel burning installations that were initially con­structed or later modified to use coal may not use natural gas or petroleum. 
The units affected are those capable of a fuel heat input rate of I 00 million Btus per hour or aggregations of units with a fuel heat input rate of 250 million Btus per hour. Each category includes numerous temporary and perman­ent exceptions for things such as inability to meet environmental requirements, site limitations where neces­sary to prevent impairment of service, certain cogeneration facilities where it would affect the quality of a product, and the umbrella exception where an exception would "further the purposes of the Act and be in the public interest." These provisions do not include proposed taxes on oil and gas users, which are being considered separately. 
POUCY ANALYSIS 

Docket 600 
Gas utilities Docket 600 is less stringent than the con­version order contained in the National Energy Plan, with the exception of Existing Major Fuel Burning Installa­tions. However, direct comparison is difficult since Docket 600's prohibitions are in terms of total gas used by a boiler, whereas the NEP prohibitions address boiler si7.e, not present fuel consumption. ~urning a content of one million Btu per mcf of gas, the NEP would regulate installations with an input of 100 mcf/hr (100,000,000 Btu/hr ~ I ,000,000 Btu/mcf = 100 mcf/hr), or a total of 2400 mcf/day assuming continuous operation. ~gan operation rate of 89 percent (the Texas yearly average for 1975),2 the NEP would be regulating boilers using 2,136 mcf/day. In terms of Btus/hr., a boiler using 3,000 mcf/day would have a fuel heat input rate of 125 million Btus/hr. Thus, the NEP would be regulating smaller boilers than Docket 600. 
In Texas, 307 gas utilities responded to the Railroad Commission's request for data from the years 1974 and 1975. Based on thtse data, requirements of the Railroad Commission's Docket 600 should result in these 245 Texas plants reducing their annual consumption of gas for boiler fuel by 234 billion cubic feet by 1981 and another 351 billion cubic feet annually by 1985, or a total of 585 billion cubic feet per year in 1985 below base period conswnp­tion.3 
Docket 600 gives the Texas Railroad Commission the authority to grant exceptions to any provision of the order if the Commission deems such exception to be in the public interest. The actual effect of the Docket will be determined largely by the exception guidelines the Commission chooses to enforce. An exception has been granted in Gas Utilities Docket 7194 which allows Valley Pipe Lines, Inc. to deliver 
boiler fuel gas to Reynolds Metals Company facilities without phasedown "because the marginal value of the production lost by imposing the cutbacks far exceeds the value of the gas sawd, so that allowing an exception will result in the least amount ofeconomic disruption and allow the free market system to operate to allocate natural gas to ·uses which produce products far in excess of the marginal value of the natural gas used as boiler fuel which would be saved by the imposition of the phase out requirements in 
GUD600." 
An analysis wa5 performed by using Reynolds Metals 

Company's estimate of the value of its production from 
1981 to 1985, both with and without the exception, and 
by the escalation of the value of natural gas at 7 percent per 
year beginning with a $2.50 per mcf value in I9n, and 
then discounting the results of both calculations to present 
value using a 7 percent factor, and indicates that 
25,055,409 mcf of gas at both plants with a present worth 
of $58,271,071 would be saved, while $284,921,216 of 
production would be lost. In addition, 360 estimated jobs 
would be lost through 1985. 
The Valley Pipe lines, Inc. decision sets a precedent 

from which the Commission may consider future excep­
tions. The procedure would be to weigh the value of the 
product produced by the applicant for an exception against 
the true economic value of the gas which would be saved by 
the imposition of cutbacks, and then determine if the value 
of the production lost exceeds the value of the gas saved by 
imposing the ordered cutbacks. 
The NEP is more stringent than Docket 600 in that: (I) 

existing electric power plants must cease using natural gas 
by 1990; (2) new electric power plants cannot use natural 
gas or petroleum as a primary energy source; (3) existing 
major fuel burning installations may be prohibited from 
using natural gas or petroleum by the Secretary of Energy if 
they were initially constructed or later modified to bum 
coal; and (4) new MFBh are prohibited from using natural 
gas or petroleum as a primary energy source. In addition, 
the NEP affects more boilers since the proht1>itions apply to 
smaller boilers than Docket 600. 
The National Energy Plan -provides for numerous per­

manent and temporary exceptions for each category of 
boilers and includes specific exceptions as well as an 
exception that would "further the purposes of the Act and 
be in the public interest." The conference bill gives the U.S. 
Department of F.nergy (DOE) much administrative discre­
tion, making it difficult to assess the effects of the NEP 
since the administrative regulations and interpretation of 
the NEP exceptions have yet to be determined. 
Prohibiting existing electric power plants from using 

72 
Boiler Fuel Conversion 
natural gas by 1990 was one of the most controversial provisions in the bill because of the direct impact on consumers' utility bills. The prohibition was of particular interest to Texas because of the large percentage of natural gas used to generate electricity. In response to this concern, a Systems Compliance Option was included in the confer­ence bill. The Systems Compliance Option will give existing electric utilities (which use natural gas) more time, if necessary, to convert to other power sources if an approved system compliance plan is filed by January 1, 1979. The plan must provide for an orderly phasing out of natural gas boilers; however, natural gas could be burned for intermedi­ate load or peakload usage. No natural gas could be used after December 31, 1999 if the utility chooses the Systems 
Compliance Option. 
The conference bill provides discretionary authority to the Secretary to prohibit the use of natural gas or petroeum by categories of existing MFBis which were initially constructed or later modified to use coal. The Secretary must find that each existing MFBI identified by rule is technically and financially capable of consuming coal or other fuel without substantial physical modification or downgrading or rated capacity. This conversion order would not significantly affect Texas, as by far the majority of boilers in the state would not come under this definition. The conference conunittee chose to address the conversion of MFBis by replacing capital equipment, rather than by requiring the conversion of all existing capital equipment. 
In the area of existing major fuel burning installations, 
Gas Utilities Docket 600 is more stringent than the NEP. If 
the conference bill as it stands is passed by the Congress, 
this will place the Texas Railroad Commission in the 
uncomfortable position of calling for a phasedown of 
natural gas usage by 25 percent in 1985, while such 
prohibitions are not required nationally except on the 
boilers which were initially constructed to burn coal and 
those already modified. Should this situation arise, the 
RRC would be faced with the possibility that gas flowing 
out of Texas would be used elsewhere for purposes which 
were prohibited in Texas. It would be in the interest of the 
state to conform to the national law rather than GUD 600. 
Since the NEP is more stringent than Docket 600 
(affecting more boilers in a shorter time frame), the 
associated conversion problems will probably be more 
severe as well. However, problems such as high conversion 
costs, increased air pollution, unavailability of alternative 
fuels, site limitations, and impairment of electric service are 
all addressed either by permanent or temporary exceptions or other provlSlons. While the NEP is more stringent, exceptions and provisions are made to address major conversion problems. Docket 600's grounds for exceptions are known only in part at this time. 
To analyze industry response to state and federal conversion orders, the electric utility industry should be differentiated from other industries in Texas. Electric utilities will probably be able to meet Docket 600, although several of the smaller rural electric co-ops may have some problems. The utilities should also be able to comply with the NEP if the Systems Compliance Option is chosen. However, at this point it is uncertain as to whether industry will be able to comply with either conversion order. Of the lignite and coal-fired plants that have currently been licensed by the Texas Air Control Board, 92.6 percent of the total generating capacity is owned by utility companies (29,487 MW).5 Texas industry currently uses approximately one-third (694,648,294 mcf in 1975) of the natural gas burned in Texas under boilers with an average use of 3,000 Mcf/d (2,039,394,935 Mcfin 1975).6 However, only 7 .4 percent of licensed coal and lignite-fired capacity is owned by Texas industries. (Based on informa­tion from American Boiler Manufacturers' Association that average industrial size boiler is 200 MW.) There are currently four nuclear plants under construction in Texas and each is owned by utilities. 7 
Assuming an average lead time of eight years (depending on permitting procedures) for an average coal-or lignite-fired plant, and ten years for a nuclear plant, Texas industry as a whole will probably have some difficulty meeting the Docket 600's phase-down order. 
CONCLUSIONS AND RECOMMENDATION 
If Texas utilities and other industries are to comply to the Railroad Commission's Docket 600 and to the proposed legislation on boiler conversion arising from the National Energy Plan, the allowance of reasonable exceptions is essential. 
The proposed national legislation is less stringent than Docket 600 with regard to existing major fuel burning installations, giving rise to the possibility that Texas gas might be exported for uses outstate that were not permis­sible instate. Modification of Docket 600 to eliminate this possibility should be given serious consideration. 
Shirley Walker 

73 
Texas Energy Issues: 1978 
REFERENCES 

1 Governor's Energy Advisory Council, "Boiler Fuel Con­version," Energy Briefings, August 26, 1977, p. 1. 
2 Railroad Commission of Texas, Computer Printout, "Boiler Fuel Ledger-3,000 Mcf and Greater-1975-1976." 
3 Railroad Commission of Texas, Gas Utilities Division, Intra-Office Memorandum, February 1, 1978, p. 2. 
4 Railroad Commission of Texas, Gas Utilities Docket 719(600), January 9, 1978, p. 3. 
5Texas Air Control Board, Intra-Office Memorandum, "Power Plants-Lignite and Coal Fired," February 1978, pp. 1-3. . 
6 Railroad Commission of Texas, Computer Printouts, "Boiler Fuel Ledger-3,000 Mcf and Greater-1975-1976" and "Boiler Fuel Ledger for Utilities-1975-1976." 
7 Joseph F. Hildenbrand, Jr. and Robert M. Lockwood, "Nuclear Power in Texas, 1954-1975," Texas Business Review, May 1975, p. 111. 

74 
CHAPTER 10 

ENERGY NEEDS OF TEXAS AGRICULTURE 

ISSUE DEFINITION 

The current energy situation facing the U.S. is of concern to all industries. The more dependent on conven­tional energy sources an industry is, the more pressing the energy situation becomes. The agriculture industry is very dependent upon conventional energy sources (i.e., fossil fuels). 
Agriculture is unique in the industrial world because of its biological nature. Due to this, "disruptions in the availability of energy in the form, time, and place needed and at a reasonable price are likely to result in adverse effects on production" and the economy "lasting far beyond the duration of the interruption." 1 Such a situation warrants a closer look at the National Energy Plan (NEP) as proposed by President Carter, in an attempt to better understand what the effects of such a national policy will be on the agriculture industry. 
Although agriculture is concerned with all phases of the NEP, the plan includes certain proposals that will most directly affect the Texas agriculture industry.2 Those proposals relate to oil and gas pricing and the creation of a single national market. The establishment of a single national market for natural gas which would impose a price limitation of $1.75/mcf on gas would change the market structure and possibly limit the current availability of natural gas to Texas agriculture.3 Other proposals such as crude oil equalization and standby gasoline taxes would also raise oil and gas prices. The effects of rising gas prices as well as the establishment of a unitary, regulated national market will be addressed in this chapter. 
The creation of a single regulated national market for natural gas constitutes a major concern for agriculture in Texas. The effects of these proposals are not unique to the agriculture industry, but rather the agriculture industry is placed in a serious position by: (1) the biological nature of the industry; (2) the dependence of the industry on these fuels; (3) the nature of agricultural marketing; and (4) the inability of the industry to immediately substitute other fuels. 4 
BACKGROUND 
Approximately 16 percent of the nation's energy usage was consumed in the production, processing, distribution and preparation of agricultural products in 1974, and Texas' agriculture industry consumed more energy than that of any other state.5 Table I, taken from Energy and 
U.S. Agriculture: 1974 Data Base, gives some idea of the amounts of various fuel types used in agriculture in the nation and Texas. 
Because of its vast size and climatic conditions, Texas agriculture is greatly dependent on technologies that consume large amounts of fuel. 6 Some of the major fuel consumption operations in crop production are: (1) machi­nery operations; (2) irrigation; (3) first-line crop processing; 
(4) transportation; and (5) fertilizer. In 1974, Texas ranked number one nationally in total Btus consumed in crop production.7 
Livestock products accounted for approximately 55 percent of the agricultural cash receipts for Texas in 1973. Of this 55 percent, 72 percent came from cattle.8 In 1974, Texas ranked third nationally in total Btus consumed in livestock production.9 
Total energy inputs in Texas agriculture for 1972-73 were 41.66 x 1013 Btus. This 41.66 x 1013 Btus of energy represents about 7 percent of the total gross energy input for Texas in 1972.1 0 In 1974, Texas ranked first nationally in total Btus consumed in both crop and livestock production: 1 1 Table 2 summarizes energy inputs in Tex­
as.• 2 
POLICY ANALYSIS 
The National Energy Plan as proposed by President Carter has energy conservation as one of its major goals. One way to encourage a cutback in the usage of a commodity is to raise its price. Proposals such as the crude oil equalization tax and the standby gasoline tax would raise the price of these commodities and thereby should reduce consumption. Setting a price ceiling of $1.75/mcf 

Texas Energy Issues: 1978 
on natural gas would also raise its price. Although these proposals would affect oil and gas prices in Texas, they would not do so to the same extent as in other parts of the nation. since the intrastate market in Texas is currently unregulated. In fact, some areas of the state are already paying more than the proposed ceiling price of SI.75/mcf for natural gas. 1 3 The High Plains region of Texas is cur­rently paying approximately $1.25/mcf for natural gas, however. 1 4 This region will experience price increases to a variable degree. 
Furthermore. the NEP proposes to establish a single regulated national market for natural gas. This would affect the Texas economy considerably. Because the intrastate market in Texas is currently unregulated, Texas consumers have had adequate fuel supplies, although at higher prices than the rest of the nation. A single regulated market would eliminate the advantage currently held by the Texas consumer. 
By raising the national price ceiling to $1.75/mcf, price increases would occur in most parts of the nation. A regulated intrastate market would reduce supplies to Texas consumers and would probably force the price up to' $1. 75/mcf in all regions of Texas. In terms of price, a ceiJ.. ing of Sl.75/mcf would be beneficial to those regions of the state currently paying more than this figure. How~r. creating a single regulated national market for natural gas would change the supply patterns, which might result in serious shortages for Texas agriculture. 
It can be seen that of all the inputs in agricultural production, irrigation uses the most energy. There are 141,000 wells in the State, but the wells requiring the most energy are in the High Plains region, where 44,000 wells use natural gas for pumping water. 15 With current energy prices, natural gas is estimated to be the most economical form of energy to use for irrigation wells. 1 6 
The increase in energy cost for irrigation per acre-inch, as natural gas prices rise, can be determined. One such study was done for the Governor's Energy Advisory Council (now the TEAC). Depending on several factors, including whether the well was used for surface application or sprinkler application, an increase in the price of natural gas from Sl.25 to Sl.75/mcf created cost increases for 
TABLE 1 
TOTAL ENERGY USED IN U.S. FOR CROP PRODUCTION 

Value of  Gallons of  Gallons of  
Product  Gallons of  Diesel  Fuel Oil  LPGas  
(1000)  gas (1000)  (1000)  (1000)  (1000)  

62,055186  2,881,276  2,286,539  
38.015,488  817,365  352,416  
100,070,673  3,698,641  2,638,955  
2.673,746(4)  169,206  175,856  
2.564,945 (2)  94,985  5,805  

295,112 1,148,657 
U.S. LiYestock Production 8,817 332,885 
Total-AD Agriculture-U.S. 303,929 1,481,542 
Texas-Crops Only-Production 10,316 56,641 Texas-1.ivestock-Procluction 
10,688 Total-AD Agriculture-Texas 
Cu.Ft.  
Notps  KWH Elec.  Total Brus  
(million)  (million)  (billion)  
159,500  22,()60  1,789,930  
4,625  10,028  224,291  
164,125  32,088  2,014,221  
66,008  -1,555  186,800 (l)  
838  537  16,416 (3)  


5.328,691 (4) 264,191 (2) 181,661 (2) 10,316 (4) 67,329 (7) 66,846 (1) 2,C'1'J2 (4) 203,216 (I) *Numbers in parentheses indicate national rank. 
76 
irrigation ranging from $0.26/acre-inc:h to $0.48/acre­inch.11 Even though this is a $0.50/mcf increase, most studies do not see $1.75/mcf as a critical factor in future crop production. In fact, without the imposition of $1.75/mcf price ceiling, prices are expected to exceed $2.00/mcf on the intrastate market in the near future. 18 One effect of increasing gas prices on agriculture is cropping pattern adjustments. Com, alfalfa and wheat would likely be the first irrigated crops to be replaced as natural gas prices increase. On the High Plains, irrigated wheat is only marginally profitable with current natural gas prices.19 As crops become less profitable as gas prices increase, agriculturai techniques tend to change in an ~ttempt to offset the decrease in profits. Because irrigated agriculture is more energy intensive than dryland agricul­ture, as gas prices rise, irrigated acres decline. When natural gas prices rise from $0.80 to $2.12/mcf, irrigated acres decline 20 percent. Because irrigation and production are positively correlated, a decrease in total acres receiving irrigation causes total production to decline. A GEAC report states that an increase in natural gas prices from 
TABLE2 
SUMMARY OF ENERGY INPUTS 

Energy Input (BTUs x 101 3 ) 
Agriculture Machinery Operations 5.04 Irrigation 16.31 ** First-Line Crop Processing .40 Transportation* 7.60 Animal production 53 Fertilizer* 5.10 
Subtotal 34.98 
Forestry* 3.18 
Food and Kindred Products 3.50 

TOTAL 41.66 
*Energy consumption may overlap in these industries. 
**In Energy and U.S. Agriculture: 1974 Data Base prepared 
by the FEA, the total BTUs used for irrigation in Texas in 
1974 was estimated to be 77,184 billion. The figure, 

16.31 x 1013 , in the table was based on a well pump efficiency of 52 percent. The FEA researchers based their energy consumption estimates on a higher pump efficiency. The difference in pump efficiency explains the difference in total energy consumption estimates for irrigation. 
Energy Needs of Texas Agriculture 
$1.25/mcf to a level of $2.50-$3.00/mcf, with manage­ment costs included in production, would cause a 23 percent decline in irrigated acreage, a 34 percent decline in net crop income, and a 36 percent decline in land values on the Texas High Plains. 2 1 
Perhaps of more concern to the agriculture industry in Texas is the possibility of a natural gas shortage that might occur in a single regulated national market. At $1.75/mcf, natural gas is relatively inexpensive compared to other fuels. In such a situation, demend will outstrip supply and mandatory reallocations of natural gas migth be required.2 2 One linear programming model that simulated a 10 percent reduction in the natural gas supply estimated a reduction in agricultural output of 5.4 percent.23 Basically for each 5 percent reduction in natural gas supply, irrigated acres decline 5 percent and producer net returns decline approxi­mately 4 percent.24 
POLICY ALTERNATNES 
Several measures could be taken to help the agriculture industry. One such measure, which is contained in President Carter's NEP, is the exemption of the fertilizer and agricultural industries from the industry conversion tax. The NEP states that "each industrial user of natural gas except fertilizer manufacturers and certain agriculture users would be taxed an amount equal to the difference between his average cost of natural gas and a price target keyed to current price of distillate oil."2 5 Such a proposal would certainly be beneficial to agriculture in the area of fertilizer inputs. However, the phrase "certain agriculture users" is vague and needs to be more clearly defined.2 6 Also, any type of mandatory reallocation of oil and gas supplies that might be required should take into consideration the seasonal usage patterns of agriculture. Agriculture also does not have the capabilities to immediately substitute other fuels in place of petroleum products now being used, and therefore should be placed high on a mandatory realloca­tion list. 
Agriculture is unique in that it has the potential to 
generate, as well as consume, energy. A prototype methane 
plant funded primarily by the Department of Energy will 
provide the Kaplan Feedlots in Bartow, Florida with 88 
percent of their energy requirements. By recycling animal 
wastes, this $938,000 plant will provide energy for Kaplan 
that will replace most of the 6,025 gallons of fuel oil used 
each week.2 7 · 
Agriculture can produce energy through the direct use of 
plant materials or biomass. Studies by the Department of 
Energy have estimated that biomass has the potential of 
producing 10 percent of the total U.S. energy needs in the 
year 2000.28 Biomass can provide energy for agriculture, 
and by so doing, it can greatly reduce agricultural depen­

Texas Energy Issues: 1978 
dence on petroleum products. 2 9 Crop residues, which are the basis for biomass energy, arc plentiful in the Texas High Plains region. Biomass could reduce the dependence on petroleum products of the highly energy-intensive agricut~ ture in this region. 
With the existing technologies, other unconventional energy sources have a rather limited potential for agricul­ture. If on-site solar irrigation operations are to be made economically feasible, an increase in the annual cost of petroleum products must exceed 12 to 15 percent per year over the lifetime of the system. Solar grain drying opera­tions could become economically feasible if the annual fuel cost increase is greater than 60 to 7 percent per year.30 Wind power has more potential in irrigation operations, but has a very high initial cost and must be located in those re­gions with persistent wind. However, if gas shortages occur, or if gas prices rise above $2.00/mcf, then wind power be­
comes much more economically worthwhile.31 
Perhaps the most prudent energy conservation move that could be made for the agriculture industry can be found within the industry itself. Raising pump efficiency, using 
minimum-tillage or no-tillage techniques, using feedlot manure, soil testing to detennine fertilizer needs, improving grain drying and ginning techniques, changing to low moisture content hybrids, recycling animal wastes, and using more rail transport could reduce overall energy usage in agriculture.3 2 Although such practices would not elimi­nate dependence on petroleum products, they would reduce production costs and improve the prospects for the industry. Table 3 shows possible energy reduction that could be attained by using conservation techniques.3 3 
Gregg R. Cannady 

TABLE3 
POTENTIAL ENERGY SAVINGS THROUGH CONSERVATION PRACTICES 

Inputs 

Machinery Operations Irrigation First-Line Crop Processing Transportation Animal Production Fertilizer 
*No estimate 

Maximum Conservation Present Usage Effort Usage Percent (BTUs x 1013 ) (BTUs x 1013 ) Reduction 
5.04 4.0 	20 
16.31 	9.63 41 .40 .28 30 
7.60 
* 	* 

.53 * 	• 
5.1 5.1 	0 
Energy Needs ofTexas Agriculture 

REFERENCES 

1Energy and U.S. Agriculture: 1974 Data Base, Com­modity Series of Energy Tables, vol. 2, p. 1. 
2 R.D. Knutson, et. al., Analysis ofthe National Energy Plan: The Effects on Texas Agriculture. Texas Agricultural Experiment Station, Texas Agricultural Extension Service, Texas Water Resources Institute, June 1977 , p. 2. 
3/bid. 4 Governor•s Energy Advisory Council, A Proposed Policy Position on Selected Energy Issues, Report no. 
761202, December 31, 1976, p. 4. 
5 Energy and U.S. Agriculture, op. cit., p. 11. 
6 Knutson, op. cit. p. 1. 
7Energy and U.S. Agriculture, op. cit., p. 18. 
8/bid. 
9 Ibid. 

10c.G. Coble, and W.A. LePori, Energy Consumption , Conservation, and Projected Needs for Texas Agriculture, 
Governor's Energy Advisory Council, Report no. 5/D-12, Special Project B, December 1974, p. 29. 11 Ibid. 12/bid.,p. 31. 13 Knutson,op. cit.,p. 5. 
14 Kenneth Young, The Impact of Rising Natural Gas Prices on Agriculture in the Texas High Plains, Governor's Energy Advisory Council, Report no. 77107, July 1977, 
p. 14. 
15 Earl Gilmore, et. al., Feasibility of Using Wind Power to Pump Irrigation Water, Governor's Energy Advisory Council, Report no. 77101, March 1977, p. 1. 
16Young, op. cit. ,p.11. 
1 7 /bid.' pp. 15-16. 
1 8Knutson, op, cit., p. 33. 
19 Young,op. cit. , p. 19. 
2°Knutson,op. cit., p. 29. 
21 Young, op. cit. , p. 32. 
22 Knutson, op. cit., p. 33. 
23/bid., p. 34. 
24/bid., p . 35. 

25 Text of an Address by the President to a Joint Session of Congress on Energy, Office of the White House Press Secretary, April 20, 1977, p. 20. 
26Ibid. 
2 7 Feedstuffs: The Weekly Newspaper for Agribusiness, 

vol. 49, no. 47, November 14, 1977. 
28 W.A. LePori, et. al., Agricultural Residues: Resources for Energy in Texas (paper presented at 1978 Southeast/ Southwest Regions Meeting, American Society of Agricul­tural Engineers, Houston, Texas, February 5-8, 1978), p. 2. 
29Ibid. 

30Governor's Energy Advisory Council, The On-Site Utilization of Solar Energy for Agricultural Operations in Texas, Report no. 77102, Marcy 1977, abstract. 
31 Gilmore, op. cit., p. 52. 
32 Coble and LePori, op. cit. , pp. 32-49. 
33/bid.,p. 51. 

Texas Energy Issues: 19 78 
BIBLIOGRAPHY 

Coble, C.G., and W.A. LePori, Energy Consumption, Con­servation, and Projected Needs for Texas Agriculture, Governor's Energy Advisory Council, Report no. S/D-12, Speical Project B, December 1974. 
Development Program for the Utilization of Rangeland Woody Plant Biomass, draft proposal, Biomass Energy Systems Inc., Fort Worth, Texas, September 15, 1977. 
Energy and U.S. Agriculture: 1974 Data Base, Commodity Series of Energy Tables, vol. 2, Economic Research Ser­vice, U.S. Department of Agriculture, FEA/D/77/140, April 1977. 
Feedstuffs, The Weekly Newspaper for Agribusiness, vol. 49, no. 47, November 14, 1977. 
Gilmore, Earl, et. al., Feasibility of Using "Wind Power to Pump J"igation Water, Governor's Energy Advisory Council, Report no. 77101, March 1977. 
Governor's Energy Advisory Council, An Analysis of President Carter's National Energy Plan, Report no. 770601, June 1977. 
Governor's Energy Advisory Council, The On-Site Utili­zation of Solar Energy for Agricultural Operations in Texas, Report no. 77102, March 1977. 
Governor's Energy Advisory Council, A Proposed Policy Position on Selected Energy Issues, Report no. 761202, December 31, 1976. 
Knutson, R.D., et. al., An Analysis of the National Energy Plan: The Effects on Texas Agriculture, Texas Agricul­tural Experiment Station, Texas Agricultural Extension Service, Texas Water Resources Institute, June 1977. 
LePori, W.A., et al., Agricultural Residues: Resources for Energy in Texas, paper presented at 1978 Southeast/ Southwest Regions Meeting, American Society of Agri­cultural Engineers, Houston, Texas, February 5-8, 1978. 
Stevens, Marla, and Ginny Cumming, Texas Energy: A Twenty-five Year History, Governor's Energy Advisory Council, Report no. 77004, August 1977. 
Text of an Address by the President to a Joint Session of Congress on Energy, Office of the White House Press Secretary, April 20, 1977. 
Young, Kenneth, The Impact of Rising Natural Gas Prices on Agriculture in the Texas High Plains, Governor's Energy Advisory Council, Report no. 77107, July 1977. 
1974 Texas Farm Fuel and Fertilizer Survey, Texas Depart­ment of Agriculture, Texas Crop and Livestock Reporting Service. 
1976 Pump Irrigation Energy Survey, Texas High Plains and Trans-Pecos Area, Texas Department of Agriculture, Texas Crop and Livestock Reporting Service. 

CHAPTER 11 

ROLE OF GOVERNMENT CREDIT ASSISTANCE 
IN FINANCING NEW ENERGY DEVELOPMENT 

ISSUE DEFINmON 

As the transition from an oil-and gas-based economy progresses toward a utilization of alternative energy re­sources, federal and state government policies will affect critically the manner in which capital is raised and distributed within the energy industry. Government policies indirectly affect capital formation by distorting capital markets through taxes and price regulation, and by provid­ing subsidies and price supports for certain types of activities. · 
Credit assistance has a potentially important role in directing capital into new energy development. Although many options can be used to enhance the goal of energy development, credit assistance has become the fastest growing option. 
Credit assistance includes direct loans, loan guarantees, and loan asset sales, with loan guarantees comprising its largest portion. The net funds advanced under federal auspices for credit programs grew 4.6 times between 1967 and 1973, and are expected to grow by another 30 percent between 1977 and 1978.1 A sharp rise in total credit funds will almost certainly accompany this increase in outlays, much of it directed toward new energy development. 
The objectives of extending federal credit into the private economy vary according to the type of activity that is desired. Credit is used in the energy industry to help enhance production of alternative resources, and to help provide greater liquidity for certain investors and lenders who are being encouraged to assume large investment risks. The intended purpose of credit assistance is to provide a special subsidy to a recipient clientele in the form of reduced interest payments and guarantees against losses.2 
Two major issues are of immediate concern as the government considers an expansion of credit assistance in the future: 
(1) 
Is any assistance to the private sector really necessary or desirable? 

(2) 
Are credit programs the most efficient and effec­tive fonn of government intervention? 


BACKGROUND 

The use of government credit assistance can be traced back to the establishment of the Reconstruction Finance Corporation (RFC) in 1932.3 Since the Depression, many other programs have been established, including those administered by the Small Business Administration and the Federal Housing Administration. Although these and many other credit programs are thriving, many have experienced complex administrative problems. The RFC, for example, was abandoned in 1953 as a result of political scandals and administrative problems that negated its usefulness. 
Certain administrative and other problems can be moni­tored to predict trends inherent in credit assistance pro­grams. It is difficult (if not impossible) to determine their effectiveness or opportunity costs. It follows that the government does not know a priori that a particular credit program for new energy development will be a successful venture. However, it is possible and useful to recognize some of the political, economic, and administrative prob­lems that are associated with credit subsidies. 
New Trends Toward the Use of Energy Subsidies 
The use of federal credit and loan guarantees for the energy industry first began after the 1973 Arab oil embargo. Energy policy has steadily increased the role of the federal government since that period, although policies designed to enhance new energy development have not been coordinated in an effective manner. 
The Energy Research and Development Administration (ERDA) was created in an attempt to provide an answer for government's role, and it was charged with formulating a plan that would "end the energy crisis" within a decade.4 One of the methods that ERDA began to advocate was the extension of federal credit to private firms. 
In 1975, President Gerald Ford proposed an expansion of credit assistance as the primary method of achieving energy independence. To accomplish that goal, he proposed a $100 billion Energy Independence Authority (EIA) which was to be a public corporation with authority to invest up 
Texas Energy Issues: 1978 
to $25 billion in public funds and guarantee another S7S billion in loans for new energy development over a time span of ten years.5 The proposal was never adopted. but three smaller programs were eventually appro\'ed (for electric and hybrid vehicles, coal development. and geother­mal development) to enhance certain energy resources 111d energy conservation concepts. 
Carter's Nationll Energy Pim 
Jimmy Carter's election in 1976 brought a mote skeptical attitude about the effectiwness and desirability of energy credit subsidies. The primary interventionist tool used under the NEP is taxation, with credit assistance primarily aimed at conservation rather than energy develop­ment. Specific tax credits were included to help enhance geothermal development. but most of the research and development was focused upon larger research grants to ERDA. 
Congress apparently iefuted to give up on the idea of credit subsidies, and authorized $300 million for the development of synthetic fuels (through loans and loan guarantees) for fiscal year 1978. This program is designed to help finance the development ofcoal, oilsbale, biomass, and other domestic resources. 
&tablishing state and regional development banb has also become popular in recent yean as a method extending credit to firms on a regiooali1.ed basis. The nortbeastem states have advanced this idea mmt extensively by forming the Energy Corporation of the Northeast (ENCONO). ENCONO is currently attempting to finance its loans with $5 billion in federal government debt (assuming congres­sional assent).6 
POLICY ANALYSIS 

This section analyus the assumptions behind credit assistance for new energy development, which usually include the following: 
(I) 	The private sector is either unwilling or unable to provide the risk capital necessary to finance alterna­tive energy resources. 
('.:!) 	The use of government credit assistance can fill this void and effectively shorten the lead-times required for post 1985 technology. 

If these assumptions are valid, then financial assistance and other incentives from the federal (or other) government(s) are rationalized as a necessary ingredient in filling an investment "gap" in energy technology. 
The first assumption is sometimes supported by studies predicting widespread "capital shortages" over the next decade. Although several studies have concluded that capital shortages may indeed occur, few appear to agree upon the magnitude of such shortages. 7 The significance of such shortages is that energy firms may be unable to obtain the investment capital required to finance new develop­ment. 
Despite these claims, the concept of "capital shortages" cannot apply to a market-oriented economy, since demand is by nature a fluctuating phenomena. Although the government can and does affect the level of capital formation (by depressing the level of private saving), capital is allocated to investors and borrowers by interest rates. If the supply of capital is not great enough to meet all of investors' and borrowers' needs, interest rates will rise (responding to a rise in demand for capital). As interest rates rise, firms and individuals will reduce their desire for capital, thus curtailing capital investment. Although this may result in slower economic growth, there is no "shortage" since the supply and demand of capital mµst be equal in the long term.8 
Government programs may artificially stimulate or depress the saving rate in the economy, thus affecting the level of capital formation. Social Security, in particular, tends to reduce -the need for private saving, distorting an individual's decision to save or consume current income. Although the magnitude of this effect is controversial, government programs and their effects on investment decisions, can and do affect capital formation required for energy development. 
There is considerable evidence suggesting that the private sector can accumulate the capital necessary to meet future production needs. Several recent projects which have resulted in huge amounts of pooled private capital include the $7 billion Alaska pipeline and the Trans.Canada natural gas pipeline, which is expected to be the largest private undertaking in American history. Although firms may be capable of raising the massive amounts of capital required to finance new energy development, uncertainty over government policy may often restrict such investment. The abandonment of the Seadock offshore terminal is a recent example of one situation whereby several large oil com­panies were willing and able to invest up to $800 million in one project. Several of these companies later withdrew from the consortium due to what they considered burden­some and inequitable regulation.9 Hence, under such conditions where governmentat restrictions increase fman­cial risk and uncertaintY to the point where private firms will be unwilling to participate in projects, it may be argued that government subsidies are desirable if the regulations are considered as important as the project itself. 
The second assumption used to justify government 

credit assistance suggests that the private sector will not be 
able to mobilize its fmancial resources fast enough to meet the rapidly growing demand. One of the most cited analogies is to the heavy subsidies used during World War II to develop synthetic rubber, among other items.1 0 The validity of this assumption depends primarily upon the ability of subsidies to stimulate such production in a manner that supersedes the economic, political, and admin­istrative disadvantages of such programs. Some of these problems are discussed below. 
ABgningaRo~toCredit.Asmtance 
Four major problem areas are associated with credit assistance programs, including (1) their budgetary impacts; 
(2) their effects on capital formation; (3) their political implications; and (4) their administrative complexities. 
Direct federal loans and loan guarantees for energy development are politically attractive because they have no observable or direct impact on the federal budget in the short term. Thus, they appear to be a "painless" solution to enhancing energy development. Credit programs do not require budgetary review because no obligations are actual­ly incurred until a borrower defaults.1 1 
Despite the fact that credit programs may not lead to 

direct allocations of funds in the short term, they do have 
substantial economic impacts. Such assistance impacts the 
economy by shifting capital from its market allocated use 
toward the subsidized activity. Credit assistance is unlikely 

to increase the total supply of capital, but it does tend to 
raise the demand for capital in economic sectors outside of 
the 	subsidized activity. To the extent that this occurs, 

interest rates will rise for those borrowers outside of the 
subsidized activity. One of the most controversial aspects of 
credit assistance is how to measure the subsidy element, if 
capital does flow into the subsidized sector. (It is possible 
that the credit program may have no effect upon the 

economy, in which case the program will have been 
unsuccessful.) 
A credit program is capable of shifting resources to the 

desired sector because it reduces the risk associated with 
that activity. It reduces risk by using the government's 

coercive taxing powers to assure repayments if borrowers 
default on their loans. Although credit assistance does tend 
to use market supply and demand mechanisms to achieve 

its 	goals, it also tends to make such mechanisms more 
inefficient in allocating resources, since credit programs 
tend to hide the true costs and risks associated with energy 
development. It follows that the subsidy can only occur 
upon the default of loans, an action which is inherently 
difficult to predict. 

Credit subsidy programs also have substantial political impacts since they transfer resource allocational decisions from the marketplace to a centrally coordinated bureau­cracy. These political consequences can be broadly classi­fied as follows: 
Role ofGovernment Credit Assistance 
(1) 
the 	temptation to extend controls and regulations over the private firms who receive the subsidies (sometimes unrelated to the nature of the subsidized activity); 

(2) 
the 	tendency to encourage favoritism, which may distort the degree of competition within the energy industry by increasing the concentration of large firms; and 

(3) 
the policy dilemma 	of choosing between equity and efficiency goals. 


The extension of controls over private firms engaging in the subsidized activity is common among current credit assistance programs. Affirmative action guidelines and ownership rights are two examples of this type of regula­tion that often serve to reduce interest in the activity. Nevertheless, such controls can be justified if they are viewed as socially worthwhile as the subsidized project. An unfortunate effect of these controls is that they often limit smaller firms from engaging in the activity being subsidized. 
Arising from the problem of greater government control over the marketplace is the problem of favoritism in the disbursement of credit. Since only a few firms are capable of meeting the capital requirements for receipt of subsidies for new energy development, the credit program may tend to assist those companies -at the expense of their smaller competitors. 
A final political effect of credit subsidies is the unscram­bling of equity and efficiency criteria necessary for credit disbursement. Although the market mechanism is often recognized as an efficient method of allocating resources, it does not consider that government intervention is often called upon to enhance equity goals. 
Credit subsidies for new energy development consist of intervention in the marketplace so that more capital will flow into new energy development. Since equity and efficiency goals contradict each other, it is important to understand the basic dilemma that policymakers will face with regard to energy credit programs: 
(1) 	
If efficiency is the goal, then the probability of low default rates and success will be high; but it will also serve to increase concentration and lessen competi­tion within the energy industry. 

(2) 	
If equity becomes the criteria in disbursing credit, then default rates will be considerably higher, and the success of the program will be in doubt; nevertheless, the socially worthwhile goal of competitive free enterprise will be strengthened. 


Finally, administrative issues must also be resolved before full implementation of energy credit assistance programs. On the federal level, this problem is relatively easy to reconcile, since the government has control over the money 

Texas Energy Issues: 1978 
supply (and hence, the amount of credit), and the Department of Energy is a major organizational unit already in place. 
On the regional and state level, however, administrative problems are critical to the effectiveness of "regional development banks." These institutions imply that a new bureaucratic apparatus will have to be fonnulated in order to implement the credit assistance programs. Regional development banks must also contend with limited finan­cial llexibility and cope with the following issues: 12 
(I) 	
Sponsorship. Should the "bank" be sponsored by the government, a consortium of private interests, or a combination of the two? If private interests are involved directly, will the "bank" operate within the nonnal realm of politics or will the decisions be made only upon economic criteria? 

(2) 	
Purpose. Should the bank devote itself to public sector research and development or private sector research and development, or both? Should it be concerned with the entire economy or just with energy development? 

(3) 	
Financing. Will the bank obtain its funds from taxation (federal, state, local) or through voluntary contributions from the private sector? Will the bank operate as a nonprofit venture, or will it attempt to earn a rate of return? 


CONCLUSIONS 

This policy analysis has focused upon four major problem areas associated with credit assistance programs, in addition to an analysis of the assumptions and rationale for credit assistance. 
Although the hastening of energy development is justi­fied as a socially worthwhile goal, there is little evidence that the private sector is inherently incapable of raising the capital needed for new energy development. Rather, the private sector may be unwilling to finance such ventures if the risks and uncertain ties are high. Ironically, these risks and uncertainties have often prevented certain types of energy investment from taking place. 
Credit subsidies do not increase the supply of capital available to the private sector. Rather, they tend to shift capital from some sectors into the subsidized sectors. As this occurs, the demand for capital in the unsubsidized sectors is artificially increased, and since the supply is not increased, these programs will tend to increase interest rates. 
Although it is difficult to suggest whether or not credit subsidies will provide a net benefit to society, it is important to recognize competing priorities of national policies. These priorities often conflict with the universally desirable goal of increased energy supply, and it is difficult to detennine whether this goal (pursued by an expansion of credit assistance) should circumvent those other goals (e.g., environment, the preservation of competitive free enter­prise, safety standards, etc.). The answer to this problem will depend primarily upon the ability of decision makers to take into account the important economic, political, and administrative issues associated with credit assistance before such programs are implemented. On a more fundamental plane, these decisions will also be influenced by certain value judgments, especially those values relating to the role of government in a market-oriented society. The attractive­ness of credit subsidies must ultimately rest upon whether policy makers desire to enhance the role of the private sector or increase the role of government intervention as the nation shifts its energy base away from oil and gas. 
POLICY ALTERNATIVES 

Few deny that the accumulation of capital resources for the development of alternative energy resources will be a difficult and important task in the years ahead. Neverthe­less, it is not clear what role the government will play in this process. 
The first issue to be resolved is whether credit assistance 

is really necessary. The answer might be negative if the 
government also refrained from distorting investment deci­
sions with other types of intervention (such as price 
controls). Credit assistance might be justified under such 
circumstances in order to offset the cost of what govern­
ment entities might consider equally worthwhile goals. Of 
course, other types of intervention could be used in lieu of 
credit assistance, such as tax policies (and tax exemptions), 
but a comparison of these types of assistance is beyond the 
scope of this paper. If credit assistance is utilized on a 
broad scale, government entities must reconcile the political 
and administrative issues in aildition to recognizing their 
economic costs. 
Jeffrey D. Dunn 

Role of Government Credit Assistance 

REFERENCES 

1 U.S. House of Representatives, Committee on Banking, Housing and Urban Affairs, Subcommittee on Economic Stabilization, Catalog of Federal Loan Guarantee Programs, 95th Congress, lst Session, September 1977, p. ix. 
2 Ibid.' p. x. 
3 Murray L. Weidenbaum and Reno Harnish, Govern­ment Credit Subsidies for Energy Development, (Washing­ton, D.C.: American Enterprise Institute for Public Policy Research, 1975), p. 15. 
4 Tom Alexander, "ERDA's Job is to Throw Money at the Energy Crisis," Fortune, vol. 94, no. 1 (July 1976), 
p. 153. 
5 Richard Corrigan, "Energy Report/Rockefeller presses his plan for $100 billion bank for fuels," National Journal, vol. 7, no. 43 (October 18, 1975), p. 1469. See also National Journal, vol. 7, no. 44, p. 1509. 
6 Wall Street Journal, October 19, 1977. See also W.W. Rostow, "Energy and the Future of Texas," address de­livered at the 1978 Business Outlook Conference, San Antonio, Texas, January 26, 1978. 
7Business Week, September 22, 197 5. See also Lawrence Gitman, A Forecast of Capital Demand and Supply in the Domestic Petroleum Industry 1975-1985, College of Busi­ness Administration, University of Tulsa, 197 6. See also 
U.S. News & World Report, May 2, 1977, p. 19. 
8 David Ignatius, "The Capital Crisis: Crying Wolf on Wall Street," The Washington Monthly, November 1975, pp. 16-21. 
9 Dallas Morning News, February 11, 1978, p. 20A. 
10w.w. Rostow, op. cit. 
11 U.S., Executive Office of the President, Office of Management and Budget, The Budget of the United States Government, Fiscal Year 1979, Special Analysis F, p. 122. 
12William Diamond, Development Banks (Baltimore, Md.: The Johns Hopkins Press, 1957). 


CHAPTER 12 

.IMPACT OF THE FEDERAL SURFACE MINING ACT 
ON TEXAS LIGNITE AND URANIUM MINING 

ISSUE DEFINITION 
A major energy policy issue facing the State of Texas today is the regulation of surface mining to recover lignite coal. Lignite mining operations in Texas are subject to the requirements of both federal and state law. Federal law regulates only coal surface mining operations while Texas law regulates both lignite and uranium mining. The purpose of this chapter is to assess the impact of the Federal Surface Mining Control and Reclamation Act of 1977 (PL 95-87) on the regulation of surface mining in Texas. Since the federal law does not apply to minerals other than coal, it will have no direct effect on uranium mining. However, the law could be amended to extend its coverage to other minerals such as uranium. 
There are a number of environmental problems which can result from surface mining. Coal surface mining, in particular, has caused serious environmental damage in some parts of the country-particularly in the East and Midwest. The major concerns are: 1 
(1) 	
disruption of the land surface which, aside from the aesthetic impact, can lead to alteration of drainage systems, damage to wildlife habitats, erosion, sedi­mentation of surface waters, and other problems; 

(2) 	
the degradation of soil quality which can adversely affect the productivity (biological) of soils and damage existing vegetation; and 

(3) 	
surface and underground water pollution problems resulting from contamination of surface runoff and leachates which percolate through the soil to under­ground aquifers; water pollution can occur as a result of the mining process itself or from the disposal of mine wastes. 


In Texas, there has been no extensive environmental damage due to surface mining.2 fu East and Central Texas, where much of the state's lignite is found, conditions are favorable for adequate reclamation of mined lands. Prob­lems vary widely in different areas depending on such factors as soil composition, hydrology, topography of the land surface, climate, and the mining technology being employed. It is generally easier to reclaim surface-mined land in East Texas, which has high rainfall, than in more arid areas. 
There are several policy issues of a regulatory or administrative nature which have been raised by the passage of the Federal Surface Mining Control and Reclamation Act: 
(1) 	
The most controversial issue has been the role of the federal government in the regulatory process. Envi­ronmental advocates and many federal officials in­volved in natural resource agencies have generally favored a strong federal role. Opposition to federal controls has come from mine operators and energy companies as well as many state officials who feel that the states are doing an adequate job of mining regulation. 

(2) 	
Another major regulatory issue is the tradeoff be­tween environmental protection and production of coal through surface mining. That is, to what extent should the environmental effects of surface mining be controlled vis-a-vis the constraints imposed on pro­duction of coal (or, in the case of Texas, lignite coal)? 

(3) 	
A number of administrative issues have arisen which are of direct concern to those involved in Texas lignite mining. The most important are : (a) the effects of federal requirements regulating coal surface mining on "prime agricultural lands"; (b) differences in the stringency of reclamation standards between the federal and state laws; (c) federal requirements for topsoil handling; and (d) federal requirements for preservation and/or restoration of hydrologic systems affected by mining operations. 


BACKGROUND 
Lignite coal has been mined as a fuel in Texas since the 
1880s. Prior to the discovery of the vast oil and natural gas 
fields of East Texas, lignite was the major energy resource 
in the state. According to the Texas Railroad Commission, 
estimated production for 1978 is 27.4 million tons. 
Projected requirements for 1985 are in the neighborhood of 
58 million tons.3 
Most of the lignite in the state occurs at various depths 


operations. The Act sets up a permitting system for such operations; requires the submission by operators of recla­·mation plans; establishes reclamation standards; provides for designation of lands unsuitable for surface mining; provides for public notice and hearings in the permit 
Impact ofFederal Surface Mining Act 
not "prime farmland." This erroneous designation jeopardizes development and production of approxi· mately 8 billion tons of coal and threatens Texas con· sumers with unnecessary increased in their electric utility bills. 8 
application process; requires the filing of performance bonds; and provides for enforcement, penalties for viola­tions and monitoring/inspection procedures. It also estab­lishes a land reclamation fund to be used for reclamation of surface-mined lands and for other purposes pursuant to the administration of the Act. (For a detailed discussion of the Texas Law and a comparison with the Federal Act, see 
Pub'/ic Po'/icies Affecting Lignite Development in Texas, 
ChapterV.) 
The most striking difference between the Federal and Texas Laws and Regulations is the degree of detail and complexity. The Federal Laws and Regulations, as men­tioned previously, are highly technical and detailed. The Texas Act and TRRC Rules, in contrast, are much more general and comprehensible. Although. the goals and poli­cies of both laws are fairly similar, the Texas statute is written in much broader terms and is much less detailed. 
In the past few months, several points have arisen which could have substantial impacts on Texas lignite mining and the regulatory program of the Railroad Commission. (The impact on uranium mining is likely to be much smaller since uranium is not specifically addressed in the Federal Act.) 
Prime Fann/ands 
The most controversial issue at present, from a Texas 
standpoint, concerns federal requirements pertaining to 
"prime agricultural lands." The statutory requirements are 
found in Sec. 515 (b}(7}(91 STAT. 487) of the Federal 
Act. The regulations promulgated by the Interior Depart­
ment which deal with prime agricultural lands are found in 
Section 716.7(FR 62693-62695). The State of Texas has 
filed suit in United States District Court challenging the 
constitutionality and validity of both the statutory and 
administrative provisions dealing with prime farmlands. 
According to the Texas suit: 
The Surface Mining Control and Reclamation Act of 1977.... subjects "prime farmland" to statutory con­trol and reclamation standards for surface mining of coal. Under the definition in the federal surface min· ing act, over 800,000 acres in Texas, covering some 70-80% of the State's near surface lignite coal re­sources, would be "prime farmland." This definition, which incorporates by reference a definition or defi­nitions made by Defendant Bergland, as Secretary of Agricluture, is erroneous. The acreage in question is 
The main controversy is over federal requirements that soil strata must be segregated during mining and replaced in a similar manner to the natural soil structure during reclamation. Texas law allows operators to mix soil strata if such a mix "can be shown to be equally suitable for revegetation requirements."9 ·The Railroad Commission contends that a mixture of soil strata is often better for revegetation purposes since nutrients have often leached down into the subsoils. Thus, a mixture of topsoil and subsoils will, in some cases, produce a more fertile overall soil. It is argued that imposing the federal requirements on Texas operators would be not only counterproductive, but would add to the cost of lignite mining and could prevent the development of 70-80 percent of the state's near-sur­face lignite (i.e., the added cost could make the recovery of some of those reserves uneconomical}. 
The prime farmlands provisions of the federal regula­tions are also being challenged, though on different grounds, in a suit filed January 31, 1978 by the National Coal Association, et al. 1 0 They are cited in this suit, along with other provisions, as being inconsistent with the intent of the Act. There are eighty-three plaintiffs involved in this suit. 
Reclamation Standards 
Another point of difference between the federal and state laws which could affect the approval of the Texas regulatory program by DOI is the language used to describe reclamation standards. The Texas law requires operators to "restore the land affected to the same or a substantially beneficial condition considering the present and past uses of the land .... " 11 The federal law, in contrast, requires operators to 
... restore the land affected to a condition capable 
of supporting the uses which it was capable of sup­
porting prior to any mining, or higher or better uses 
of which there is reasonable likelihood ...." 12 
There has been some concern about the interpretation of this difference for some time. The language of the Federal Act appears to be more stringent than that in the State law. It remains unclear how the Interior Department will interpret and apply the federal standard. The Railroad Commission is prepared to amend its rules, if necessary, to adopt the federal standard. Section 7 of the Texas Act gives the agency the authority to do so. 

Texas Energy Issues: 1978 
Topsoil Handling 
There has been some confusion about whether Texas' provisions for topsoil handling will be considered adequate by the DOI. The federal statutory requirement is that topsoil be segregated and replaced unless other strata can be shown to be superior for. revegetation. The Texas law, as mentioned in the discussion on prime farmlands, allows mixing of strata in some cases. Thus, it appears from the statutes that even on non-prime farmlands, the Texas requirement may not be sufficiently stringent. 
A close examination of the federal interim regulations, however, reveals that the DOI has interpreted the topsoil handling requirements for non-prime farmlands liberally. The regulations state: 
Selected overburden materials may be used instead of, or as a supplement to, topsoil where the resulting soil medium is equal to or more suitable for vegeta­tion, and if all the following requirements are met: 
(i) The permittee demonstrates that the selected over­burden materials or an overburden-topsoil mixture is more suitable for restoring land capability and pro­ductivity by the results of chemical and physical analyses (emphasis added).1 3 

Thus it appears from the regulations that the topsilhandling requirements for mined lands other than prime farmlands will not be a problem for the Texas program. 
Restoration of Hydrologic Balance 
Section 515 (b)(10) of the Federal Act lists seven requirements for preservation or restoration of the "prevail­ing hydrologic balance." These requirements are further developed in Section 715.17 of the interim regulations. Concern has been expressed by a number of state officials around the country (including Texas) that some of these requirements may be very difficult to achieve. lri particular, there is concern that the requirement for restoration of recharge capacity may be impractical or overly costly in some instances. Mr. J: Randel Hill of the Texas Railroad Commission's Surface Mining and Reclamation Division has expressed concern about how this requirement might affect Texas operations. There is also a feeling of uncertainty over some of the definitions used in the federal regulations. 
Other Administrative Issues 
There are at least three additional points of difference which may require amendment to either the Texas statute or regulations. The three mentioned here were recognized in Chapter Five of Public Policies Affecting Lignite Devel­opment in Texas. They are repeated here because they may still prove to be significant. Briefly, the three considerations are : 
(a) 	
Public Hearings. To date, public hearings have been cond~cted on all pennit applications considered by the TRRC. Such hearings are not required under Texas law. The Federal Act provides that any person opposed to the issuance of a permit is entitled to an "informal conference" with the regulatory authority. The Texas statute does not have such a requirement. It appears, however, that the TRRC could correct this discrepancy by rule amendment if it became neces­sary. 

(b) 
Citizen Suits. The Texas law has no requirement for citizen suits. The Federal statute provides that any citizen can being suit in Federal District Court to determine compliance with the law. The Chief Coun­sel of the TRRC, J. Randel Hill, has argued that such a provision in the state law would be redundant and unnecessary. 

(c) 	
Term of Permits. The Federal law requires, subject to certfiln exceptions, that a surface mining permit be terminated after three years from the date of issuance if actual operations have not begun by that time. The Texas law has no similar requirement. Again, it seeins that this difference could be resolved by rule amend­ment if necessary. The TRRC can, however, issue permits for three years under the existing rules. 


Most of these administrative issues undoubtedly can be resolved by rule amendment under existing Texas law. The DOI, however, has the authority to require legislative amendment to resolve inconsistencies in state and federal law. There could be a problem in obtaining legislative action on some of these points.14 
CONCLUSIONS AND RECOMMENDATIONS 
It appears that further interpretation by the Interior Department (OSMRE) is necessary before these issues can be resolved. The fact that at least thirteen lawsuits have been filed against the federal law and regulations is an indication of some serious administrative problems. Like other environmental regulatory legislation, the Federal Surface Mining Act is essentially dependent on the states for its implementation. The federal government has neither the resources nor the expertise to effectively administer the Act without a high level of state cooperation. 
In the case of Texas, the "prime farmlands" issue presents a major obstacle to establishing a productive federal/state partnership. Ifthe OSMRE were to take a hard line on this issue , it could pose a serious problem for approval of the state regulatory program. What is needed is a flexible approach to the application of the law's require­ments in different states. In many cases, solutions to particular surface mining problems will be site-specific in nature. Attempts to impose uniform requirements on 

Impact ofFederal Surface Mining Act 

nonuniform situations are likely to be costly and even counterproductive. In light of these conclusions, the author makes the following recommendations for federal and state policies: 
(1) 	The federal law should be administered in a flexible 
· manner with · the emphasis ·on achieving the goals of the Act rather than issuing overly detailed regula­tions. The Interior Department should take into account regional and local variations in approving or disapproving state programs. Recognition should be given to the fact that the impacts of surface mining are often site-specific and not statewide or nation­wide in nature. 
(2) In Texas, there 	is a particular need for coordination of the activities of the Railroad Commission and other state agencies having an interest in or jurisdic­tion over surface mining. The Texas Surface Mining and Reclamation Act provides for such coordination in Sec. 8(J). The Railroad Commission should act as the central coordinating agency in this process. 
(3) The Railroad Commission should develop more easily accessible and complete information on the environ­mental impacts of surface mining of coal and uranium in the state. Information on the effects of uranium mining is particularly scarce at this time. This information should be compiled in a form which can be used by state and federal decision makers and the public. 
Mark Sayers 

REFERENCES 

1 Thomas R. Detwyler, Man's Impact on Envornment (New York: McGraw-Hill, 1971), Chapters 18, 26, and 29. 
2 Charles G. Groat, Inventory and Environmental Ef­fects on Surface Mining in Texas: Preliminary Report (Austin, Texas: Bureau of Economic Geology, 1973). 
3 Data obtained from Surface Mining and Reclamation Division, Texas Railroad Commission, 1978. 
4 W.L. Fisher, and W.R. Kaiser, "Lignite: The Other Fuel of Texas," Texas Business Review, April 1974, p. 86. 
5 Groat,op. cit.,pp.10-15. 
6 U.S. Senate Committee on Energy and Natural Re­sources, Congressional Research Service, State Surface Mining Laws: A Survey; A Comparison With the Proposed Federal Legislation, and Background Information, (Washing­ton, D.C.: U.S. Government Printing Office, 1977). 
7 Bureau of National Affairs, Inc., Environment Report­er, vol. 8, no. 13 (July 29, 1977). 
8 State of Texas v. Cecil D. Andrus, "Complaint for Pre­liminary and Permanent Injunction and for Declaratory Relief," filed in U.S. District Court for the Western District of Texas, January 31, 1978, pp. 2-3. 
9 Texas Surface Mining and Reclamation Act of 197 5, Sec. l l(B)(5). 
10National Coal Association, et al. v. Andrus, et al., "Complaint for Declaratory Judgement and Injunction and Petition for Review of Action by the Secretary," filed in 
U.S. District Court for the District of Columbia, January 31, 1978. 
11 Texas Surface Mining and Reclamation Act of 1975, Sec. l l(BX2). 
1 2 Federal Surface Mining Control and Reclamation Act of 1977 (P.L. 95-87), 91Stat.486, Sec. 515(b)(2). 
13Federal Register, "Surface Mining Reclamation and Enforcement Provisions,'' vol. 42, no. 239 (December 13, 1977), p. 62684. 
14Interview with Mr. J. Randel Hill, Chief Counsel, Surface Mining and Reclamation Division, Railroad Com­mission of Texas, February 7, 1978. 


CHAPTER 13 

IMPACT OF PREVENTION OF SIGNIFICANT DETERIORATION 

REQUIREMENTS UPON TEXAS ENERGY DEVELOPMENT 

ISSUE DEFINITION 

One of the most significant issues affecting both the development or utilization of energy resources and electric generating facilities in Texas is the impact of the air pollution control provisions of the Clean Air Act Amend­ments of 1977.1 Perhaps the most important and contro­versial provisions of these Amendments are those concern­ing the Prevention ofSignificant Deterioration (PSD) of the ambient air quality. These requirements2 seek to limit the extent to which existing air quality which is better than the required national ambient air quality standards can be degraded. 
The significance of the PSD requirements for energy production and use in Texas results from a combination of factors. First, while the PSD requirements presently cover only sulfur dioxide and particulate emissions, these are two of the major pollutants produced by electric generating facilities. Second, most new construction of electric gener­ating plants and surface mining oflignite will be in clean air areas where PSD provisions are applicable. At present, the entire state is "attainment" for sulfur dioxide, and only some scattered small areas are "nonattainment" because of excess particulates. Finally, the PSD emissions ceilings are stringent and the pollutant emissions from a single large facility, such as a power plant, could easily approach or exceed these ceilings. 
Although PSD is a complex and controversial issue with many uncertainties, it is one that both the public and private sectors of Texas must face. The Texas Air Control Board (TACB) must revise the State Implementation Plan to incorporate PSD requirements by December l, 1978, and will . likely become the administrator of the PSD program. Texas utilities and industries will be responsible for compliance with the PSD requirements. But, while it appears that the PSD requirements will be important for energy development in Texas, the precise extent and nature of their impacts are uncertain. Thus, the issues to be addressed in this chapter are: How and in what form the PSD requirements will be implemented in Texas, and what impact this will have upon the development and utilization of energy resources and generating facilities within the state. 
BACKGROUND 

The extensive new PSD provisions in the Clear Air Act Amendments of 1977 give increased scope and a statutory foundation for the administratively developed PSD pro­gram.3 
The Amendments establish three classifications for areas that are in compliance with the primary and secondary standards for sulfur dioxide or particulates. Class I areas, which include national park and wilderness areas, have stringent pollutant ceilings which allow for only very slight emissions increases. Class IT areas permit moderate increases in the pollutant increment level, and include initially all areas of the country not designated as Class I. Class III areas allow for the maximum increases of sulfur dioxide and particulate pollution levels. All attainment areas in Texas are currently Class II except Big Bend and Guadalupe Mountains National Parks, which are Class I areas. 
The primary mechanism developed by the amendments to assure the maintenance of the PSD increment ceilings is the preconstruction review and permitting process.4 This process requires most proposed new facilities whose con­struction or operation would cause the emission of signifi­cant amounts of sulfur dioxide or particulates to meet certain permit requirements prior to their being built. The most important of these requirements are that the source will not cause air quality standards to be violated or the PSD increment ceilings to be exceeded, that it meets the new source performance standards, and that it employs the best available control technology. 
POLICY ANALYSIS 
Implementation mues 
Because the PSD statutory provisions are ambiguous or vague in some important areas, there remain several unresolved policy issues concerning the definition and implementation of the PSD requirements. It is expected that many of these issues will be addressed and answered in PSD regulations promulgated by the Environmental Protec­tion Agency (EPA), but some probably will not be resolved until they are litigated. The final resolution of these issues 

Texas J::nergy Issues: 1978 
will determine the scope of the PSD requirements, and, to a large degree. how the requirements will affect energy development and use in Texas. 
One important issue concerns the applicability of PSD provisions to other than stationary emitting facilities. The statute makes the PSD requirements applicable to twenty­eight specified categories of stationary emitting sources, as well as "any other source with the potential to emit 250 tons per year or more of any air pollutant."5 This latter phase apparently means that coal and lignite strip mining operations will be subject to the PSD requirements. Accord­ing to Ray Lozano, Director of the Air and Hazardous Materials Division in EPA Region VJ, strip mining opera­tions. including both the actual mining and related activi­ties such as storage and transportation of the coal or lig­nite, will have to comply with the PSD requirements.6 Coal and lignite strip mine operators believe that the time­consuming PSD review will at the very least cause delay and increase the costs of their mining. Furthermore, they could possibly preclude mining altogether in some areas because of inability to meet the PSD particulate incre­ment ceilings due to naturally occurring airborne dust.7 to naturally occurring airborne dust. 7 
Another important issue concerns which emissions sources will be counted against the PSD increment. EPA's proposed regulations require new sources subject to the PSD review process to be analyzed for their impacts on distant areas. For example, the construction of a proposed power plant in a Oass III area might be prohibited if its emissions were found, through air quality modeling tech­niques. to violate the increments of a Oass II area several miles away.8 EPA apparently intends to count against an increment in distant areas only those sources whose emissions are deemed to have a "significant" impact. 
A related question is whether emissions increases from sources which are not subject to the PSD requirements should be added to the increments. EPA in its proposed regulations states that "general commercial, residential, industrial, and other sources of emissions growth which have occurred since January 6, 1975" must be considered in detem1ining whether the increment has been exceeded.9 There is. however, considerable support for the position that the increment determination should be limited to sources subject to direct PSD review. 
Another potentially important issue is whether the PSD inaements are absolute statutory standards which must be protected by any means, including measures other than the PSD preconstruction review process. Some environmental groups hold this view, and they point to language in § 161, whkh says that each state implementation plan "shall contain emissions limitations and such other measures as may be necessary" to prevent significant deterioration, and also to §16J(a). which states that: 
each applicable implementation plan shall contain measures assuring that the maximum allowable in­creases over baseline concentrations of, and maxi­mum allowable concentrations of, such pollutant shall not be exceeded.1 0 

EPA states that it is possible for increments to be violated despite good-faith efforts to carry out the preconstruction review process for two reasons. First, emissions from sources which are not subject to preconstruction review could eventually lead to violations. Also, actual monitoring data may show violations from sources which passed earlier review stages. If, in fact, the increments are determined tQ be absolute statutory limits, and measures other than preconstruction review become a part of the PSD process, the scope and effect of PSD would be greatly increased. 
The backbone of the PSD program is the preconstruc­tion review and permitting process for new and modified sources. One of the most important aspects of this process may well be the monitoring requirement. After August 7, 1978, permit applicants must provide one year's continuous emissions monitoring data from the proposed site (or its equivalent).11 The purpose of these data is to better assess how a new source would impact the existing air quality and its effect on the applicable increments. And, since many places are believed to be attainment areas for certain pollutants merely because of a lack of monitoring, it is expected that the one-year preconstruction monitoring requirement will force many areas to be redesignated as nonattainment areas. 
Another PSD requirement directs a proposed new source to provide "an analysis of any air quality impacts projected for the area as a result of growth associated with such facility." 12 'There is uncertainty about whether such ''associated growth" should include only the growth of the source itself, or secondary growth caused by the new source. EPA's proposed regulations take the latter ap­proach, saying that where a new source will cause immedi­ate "specific and well-defined indirect or secondary emis­sions which can be accurately quantified," such secondary emissions should be considered in the PSD increments review.1 3 This approach is seen by many to be a backdoor attempt to conduct legislative\y prohibited indirect source review and to implement limited federal land use control. 
Institutional and Acbninfitrative lsmes 
Deleption ofPSD Audlority to Texas 
Texas is one of many states which has thus far chosen to let EPA handle the PSD program. It appears, however, that once Texas revises its state implementation plan in accord­ance with the requirements of the 1977 Amendments, it 

Impact ofPSD Requirements on Texas Energy Development 
will assume control of the program.14' It is possible, however, that the state will take over the PSD program prior to this plan revision. The Texas Air Control Board (TACB) in November 1977 directed its staff to examine the situation and pursue arrangements for receiving delegation of the program from EPA.15 
EPA is eager for Texas to assume PSD, particularly since the scope of review, both in number of sources and requirements, will greatly increase unckr the statute.16 The TACB also appears anxious to take over PSD review, and may do so within a few months. 1 7 
~aRedesigullion 
The statutory PSD provisions include a section which gives the states authority, under certain conditions and following a specified procedures, to redesignate PSD areas from one class to another. 18' There are uncertainties with the statutory language, such as what is meant by the required "consultation" of the Governor with the state legislature prior to a redesignation and how the necessary concurrence of the affected local governments will be determined. One environmentally attuned source foresees "big fights" in Texas over some reclassification efforts.19 At the very least, redesignations promise to produce some interesting political battles. This might be particularly true in situations which might develop in the Texas lignite belt where utility companies would be forced to obtain local governmental support in order to qualify for a redesigna· ti.on that would be necessary to build or expand a 
·generating facility. 
Sipificance of the PSD 
Requirements for Tex. 
The PSD requirements will have significant impacts on energy development and utilization in Texas in several important areas: 
Petroleum Refineries and Fossil-Fuel Generating Plants 
Proposed construction of new refineries or generating plants or substantial modifications of existing ones would first have to meet the PSD preconstruction requirements and increment ceilings. Because of their size and their particular problems with particulate and sulfur dioxide emissions, the siting of these plants will become all-impor­tant under PSD. Since emissions from a single large generating plant or refmery could easily approach an increment ceiling, such plants will by necessity be restricted as to where they may locate. 
Westem Coal Utilization 
Many Texas utilities have made, or are making, arrange­ments to use western coal in their boilers. As was mentioned previously, PSD requirements will have to be met by western strip mining operations. It appears likely that PSD requirements will, at the least, delay the develop­ment of the western coal resource, and might possibly preclude much of its development.20 · This latter conse· quence would arise if the strip mining operations could not meet the particulate increment ceiling. 
Texas Lignite Development 
PSD requirements may have important consequences for the development and use of Texas lignite. 2 1 For one thing, as with western coal, the actual lignite surface mining operation will be subject to PSD. This could well cause substantial problems in meeting the particulate increment ceilings. Another aspect of the PSD requirements that might be of importance (depending to a large degree on the final EPA regulations) is whether the secondary growth which could be expected to follow a mine·mouth lignite generating plant is to be counted against the increment. If such growth must be considered against the increment, it could alter or delay the development of the lignite resource in some areas. 
The most important lignite impact would likely be on the sulfur dioxide emissions from the generating facility. Several areas in the "lignite belt" may be approaching or already have reached the sulfur dioxide increment.22 'this will necessitate that future mine-mouth generating plants be intelligently sited. It may also lead to some interesting reclassification disputes as discussed above. 
Fuel Conversion 
Certain governmentally-directed fuel conversions are exempt from PSD increment consideration.23 · However, most voluntary conversions occurring after January 6, 1975 must be counted against the increment. This is a potentially serious problem in Texas with Railroad Commission Docket 600 mandating boiler conversion from natural gas to coal, and the pending federal energy legislation also pushing conversion to coal. It already is a problem in certain areas where the TACB has issued permits for conversion, but where such conversion has not yet taken place; in these areas, the book-value of the increment may nearly be used up when in actuality no additional emissions have occur­red.24 · 
If the federal energy legislation which eventually passes Congress does not address this fuel conversion/air quality 

Texas h'nergy Issues: 1978 
issue, there appears to be an unavoidable and unsolvable conflict. The fuel conversion issue will be a very important one to watch in the next months, and its resolution will have important consequences for the eventual effectiveness of the PSD program in many areas. 
Relationship of PSD To Nonattainment Areas 
While the PSD requirements apply primarily in attain­ment areas, and emissions offset is applicable mainly in nonattainment areas, there are substantial gray areas where PSD and offset overlap. According to EPA's proposed PSD regulations, PSD sources in nonattainment areas whose emissions might cause significant deterioration in clean air areas would be subject to all PSD requirements.25 ·Simi­larly, sources locating near nonattainmerit areas are re­quired to achieve applicable emissions offsets for their impacts on the nonattainment areas. This means that new sources locating within undetermined distances of the boundary line between attainment and nonattairiment areas will have to meet both the PSD and "offset" requir~hftts. 
Another aspect of relationship involves the PSD require­ment for one year of monitoring data prior to the permit application. It is widely believed that such monitoring will establish that what was thought to be an attainment area is really nonattainment, and that, therefore, "offset" will apply.26' 
POUCY AL1ERNA11VES AND RECOMMENDATIONS 

The PSD requirements have the potential to have significant adverse impacts upon the energy situation in Texas. However, with the proper foresight, planning, and coordination of effort, PSD should not be a bar to most necessary energy development and use within the state. It is important for Texas energy producers and consumers to become aware of the implications of the PSD requirements. It is also desirable that the TACB and EPA coordinate their PSD efforts and work closely with those industries which will be affected by the requirements. 
To facilitate the permit process for new sources, the TACB should take over the PSD program administration from EPA as quickly as possible. This consolidation of the existing state new source permitting process with the PSD program could decrease the time needed for PSD considera­tion. This, coupled with the expertise of the TACB staff in reviewing · permits for construction in Texas, would be beneficial to the PSD permit applicants. 
If it is approached intelligently and handled correctly, the PSD process may cause some minor delays and increase costs slightly, but it should assure Texas better air quality in the future. 
John Gooding 

REFERENCES 

1Clean Air Act Amendments of 1977, Pub. L. No. 95-95, 91 Stat. 685 . 
2Ibid. , "PART C-Prevention of Significant Deteriora­tion of Air Quality," Sections 160-169 A. 
3 For a comprehensive examination of the development of the PSD policy, see N. William Hines, "A Decade of Non­degradation Policy in Congress and the Courts: The Erratic Pursuit of Clear Air and Clear Water," Iowa Law Review, vol. 62, no. 3 (February 1977), p. 643. 
4 Clean Air Act Amendments of 1977, Section 165. 
5 Ibid., Section 169. 

6 lnterview with EPA Region VI officials Roy Lozano, Director of Air and Hazardous Materials Division (AHMD); Richard Hill, Deputy Director of AHMD; Oscar Cahra, Chief of Technical Support in AHMD; and Henry Korp, Senior Science Advisor, on February 2, 1978 (Hereinafter EPA Interview). 
7 Written comments to EPA on Proposed PSD Regula­tions submitted by the law firm of Holland & Hart, Denver, Colorad, January 28, 1978, pp. 5-21 (hereinafter Holland & Hart Comments). 
8 42 Fed. Reg. 57472 (1977). 9 42 Fed. Reg. 57477 (1977). 10 Written comments to EPA on Proposed PSD Regula­tions submitted by the Environmental Defense Fund and 
Friends of the Earth, January Ji, 1978, pp . 5-6. 
11 Cleari Air Act Amendments of 1977, Section 165. 
12 Jbid., Section 165(a)(6). 
13 42 Fed. Reg. 57482 (1977). 
14 Clean Air Act Amendments of 1977, Section 406 

(d)(2). 
15 Interview with Dr. Pete Roberts, TACB Permits Sec­tion, January 27, 1978 (hereinafter Roberts Interview). 
16 EPA Interview. 

1 7 Interview with Andy Wheatley, TACB Control and Abatement Section, March 3, 1978 (hereinafter Wheatley Interview). 
18 Clean Air Act Amendments of 1977, Section 164. 

19Interview with Rick Loweree, Texas Office of the Attorney General, Environmental Division, February 28, 1978 (hereinafter Loweree Interview). 
2 0 Holland & Hart Comments. 

Impact ofPSD Requirements 011 Texas Energy Development 
21 For more background on this issue, see Public Policies Affecting Lignite Development in Texas (Austin: Lyndon 
B. Johnson School of Public Affairs, The University of Texas at Austin, 1977). 2 2 Roberts Interview. 23 Clean Air Act Amendments of 1977, Section 163(c) (1). 24Wheatley Interview. 25 52 Fed. Reg. 57480 (1977). 
26 EPA Interview, Loweree Interview, and Wheatley Interview. 


CHAPTER 14 

THE OFFSET POLICY IN NONATIAINMENT AREAS: 
IMPLICATIONS FOR TEXAS 

ISSUE DEFINITION 
On August 7, 1977, the Clean Air Act Amendments of 1977 were signed into law. This new act embodied, and was consistent with, the evolution of nondegradation policy in the air laws since 1970. The Environmental Protection Agency (EPA) is trying to be as consistent as possible in its formulation of regulations to implement the law. The EPA is moving cautiously, and is considering a range of alternatives and definitions. 

The primary responsibility of the EPA is to protect and enhance air quality, not to promote energy supply. But it is hard to imagine that the EPA could totally insulate itself from the current domestic problems of energy shortages and energy related inflation. The EPA is under pressure from many circles to temper its regulations to allow more, and less expensive, energy production arid use. Many believe that, through the use of a flexible approach, energy development can be enhanced without any permanent degradation of air quality. The EPA has its mandate, but the United States is in the midst of an energy crisis. Certain trade-offs must occur. 
If energy and environmental trade-offs are important nationally, they are even more important in Texas. The concept of nondegradation in Texas may prove especially hard to meet for two reasons: the necessity for boiler conversion from gas to coal, and rapid growth in Texas' economy. This chapter will be limited to a discussion of the offset policy in nonattainment areas, and to a limited degree, the relationship between offsets and areas which are in attainment and subject to prevention of significant deterioration (PSD) requirements. An offset is the reduc­tion of pollution from existing sources at the same time that an equal or lesser amount of pollution from new sources is permitted. Implications of increased air quality control in Texas will be identified, and from this an assessment of how industrial development and coal conver­sion may be affected. 
BACKGROUND 

Selected nonattainment provisions of the Clean Air Act Amendments of 1977 (PL 95-95) should be noted. 
Section 129. Nonattairunent Areas 

This section gives the force of law to the EPA's interpretive regulation of December 21, 1976 (41 F.R. 55524-30), thus creating the offset policy in nonattainment areas. The policy shall apply until July 1, 1979 (when it should be replaced by the State Implementation Plan [SIP]). The Administrator may grant a waiver to any state which adopts a program at least as stringent (in terms of emissions reductions) as would result from the use of offsets. 
Section 171. Definitions 

Reasonable further progress-annual incremental reduc­tions in emissions such that the applicable National Ambient Air Quality Standards (NAAQS) will be attained by 1982. 
Nonattainment area (N-A)-area which exceeds the NAAQS for any pollutant. 
Offset policy-not defined by statute, but rather left to administrative discretion. In its predominant usage, the offset policy dictates that before a new facility can emit a given amount of a particular nonattainment area pollutant, local emission for the same pollutant must be reduced by a slightly greater amount. Greater reductions are not pre· eluded and may be mandated on a case by case basis. 
Section 172. Nonattainment Plan Provisions 

After July 1, 1979, the Applicable SIP must provide for attainment of each NAAQS as "expeditiously as practi­cable" but in the case of all primary NAAQS, not later than December 31, 1982. Some of the plan revisions required shall: 
(1) 	
provide for the use of reasonably available control technology (RACT) as expeditiously as practicable; 

(2) 	
provide a demonstration during the interim of reason­able further progress in reducing emissions; and 

(3) 
evidence public, local government, and state legisla­tive involvement in the formulation and analysis of the plan. 


Texas Energy Issues: 1978 
If it appears that the SIP will not provide attainment by December 1982, then new plans must be drawn up at that time to show attainment by December 31, 1987. At this time, the new plan must provide for alternative siting analysis and a vehicle emissions inspection program. 
At least two factors are currently working against the state's future attainment of air quality standards. First, Texas is rapidly growing in terms of population, industry, and energy use . Secondly, due to the phasing out of natural gas as a boiler fuel (Docket 600, National Energy Plan), the fuel mix in Texas will increasingly move toward the use of coal and lignite. Even with the use of best available control technology (BACT), and meeting all required standards, the levels of ambient S02 , TSP and NOx will increase.1 Due to the high background dust level in Texas, all regions of the state violate the secondary standards for total suspended particulates (TSP). Several areas where air quality will be most strongly impacted by coal and lignite use have been identified.2 
Impacts from power plants will be most significant in the Dallas-Ft. Worth and Tyler-Marshall regions. The secondary standards will be approached by increased pollutant levels for sulfate aerosol, TSP, and NOx. 
Perhaps the region most adversely affected by coal conversion will be the Gulf Coast area surrounding and including the Houston-Galveston region. 
As described in a recent analysis by Cooper and Kaiser: 3 
The potential adverse impacts of conversion to coal on human health will probably be of greatest significance from combustion in industrial boilers along the Texas Gulf Coast, especially in the Houston metropolitan area. The industrial boilers which would be converted from gas or oil to coal would be located in industrial complexes such as in Texas City or along the Houston ship channel generally upwind of large population centers. The coal conversion would reduce the photochemical oxidant problem and minimize sulfur dioxide accumulation. It would result in the formation of secondary sulfate and nitrate aerosols in the respirable size range by rapid reactions in the highly humid atmosphere. 
The nitrogen oxide emissions from western coal combustion may pose a more serious health effects hazard than the sulfur oxides, particularly because of their ability to react photochemically with hydrocar­bons from refineries and auto exhausts to produce a variety of toxic components such as peroxyacyl nitrates. 

The waiver to the offset policy contained in Sec. 129 of the Clean Air Act proved to be a source of great controversy between the EPA and the Texas Air Control Board (T ACB). The T ACB was opposed to the concept of an offset policy ever since it was issued as an EPA interpretive ruling on December 21, 1976. The TACB delayed implemen ta tion of the policy in hopes that it would not ~e included in the new air act. When the new act passed, the offset policy was included, but also included were provisions which, if met, could provide the basis for a waiver from the policy. 
The T ACB decided to apply for the waiver in September 1977. The T ACB proposal did not fare well at EPA, and on October 26, 1977, the EPA requested that the TACB supply more information. The T ACB supplied the addition­al information, but the EPA did not feel the arguments to be persuasive, and thus denied the waiver on December 4, 1977. The. T ACB held hearings and maintained that it would not apply the offset in Texas, but on January 9, 1978 the T ACB reversed its position and decided to adopt the offset policy. 
POLICY ANALYSIS AND ALTERNATIVES 

There are certain points concerning the use of the offset policy which need to be clarified. The EPA feels that nonattainment designations are primarily for planning purposes. The designation merely means that an area is over the NAAQS for a particular pollutant and that the levels for this pollutant must be reduced over time (by offsets). The nonattainment designation is not the overriding factor; rather, it is the applicable standard that is important. To quote an EPA spokesman:4 
Offsets are totally divorced from the fact of whether you're attainment or nonattainment. Just because I declare this area as an attainment area does not mean that a source in the area won't require offsets. Offsets are required whenever you violate the standards, no matter where you're located. Designa­tions (for nonattainment) are a totally changing situation and will change as monitoring warrants or modelling predicts. The continual overriding consid­eration is the sta11dard. 

It follows that a source located outside of a nonattainment area, but whose emissions will affect the nonattainment area, must obtain offsets. 
There are probably many more nonattainment areas in Texas than are currently designated. They simply have not been detected yet, because there are not enough monitors to cover the entire state. Most.of these when found will be nonattainment for photochemical oxidants. This problem is not only found in Texas. Various sources at EPA predict that only 10 to 20 percent of the entire United States is not nonattainment for photochemical oxidants.5 A great part of this is due to the widespread presence of automobile emissions. Parts of the new preconstruction reviews for new sources stipulate that they must provide one year's data before construction may begin. It is inevitable that a new source will try to locate in an area which it believes to be under PSD rules (attainment) only to find out (after a 
The Offset Policy in Nonattainment Areas 
year's monitoring) that the area is nonattainment for a particular pollutant. 
The EPA views the offset policy as a means of allowing growth in nonattairunent areas. In effect, growth that results in a net decrease in air pollution levels is good, and conforms to the intent of the Clean Air Act. 
At the present time, industries are not allowed to bank their emission reductions. This may have strong implica· tions for air quality in that it encourages industry to hold back on cleaning up sources until the time comes when they need to offset in order to construct in that same area. Also, banking may allow a more cost-effective approach to securing an offset. A plant that must provide an offset of 1,000 tons within its own facilities may find that in the retrofitting required, it is much easier to reduce emissions by 2,000 tons at once than to reduce only 1,000 tons now, and then reduce another 1,000 tons when needed at some later date. However, without banking, there is no clear incentive to do this. There are indications that the EPA may lift its restrictions on banking.6 
Texas must submit its revised SIP to the EPA before 
January 1, 1979. If approved, it will take effect in July 
1979. The use of the offset policy (in its present form) is an 
interim measure to be superseded by the state's SIP. The 
TACB will try to minimize the use of the offset policy, and 
instead apply reasonably available control technology 
(RACT) to existing sources. As long as the state continues 
to demonstrate "reasonable further progress" in reducing 
pollutant levels in nonattairunent areas, the use of offsets 
for new sources is not required. The offset policy will 
probably be included in some modified form, to allow its 
use at some later point. 

It is still unclear to what extent future energy develop· ment will be impeded by the presence of the offset policy in nonattainment areas. Ifnonattainment areas are found to be widespread, then one can expect that their impacts will be greater. Given the present list of nonattairunent areas, the impact appears limited. It is the belief of the EPA that it will not be much more difficult to locate a plant in a nonattainment area than in a PSD area, since offsets will also be required in PSD areas when the increment is threatened. Offsets in nonattairunent areas will strongly affect petrochemical plants and refineries, since their emissions are often the same pollutants that exceed the NAAQS. Coal usage will be affected most strongly by PSD rules, not the applicable nonattainment procedures. It is not expected that Texas will reach attainment for photo­chemical oxidants by 1982. Thus the extra sanctions of the law, which come into effect from 1982 to 1987, will become a reality in Texas. These will include some type of industrial siting authority, alternative site analysis, lJlld transportation planning. 
RECOMMENDATIONS 

As a means of ensuring a more cost-effective and timely approach to cleaning up nonattainment areas, the EPA should allow the banking of emissions on a case-by-case basis. If allowed by the EPA, and adopted by the TACB, emissions banking would introduce needed flexibility to the offset policy. 
Eugene Barta 
:REFERENCES 

1 Bill Stewart, Impact on Air Quality of Alternate Strategies for the Production, Distribution, and Utilization ofEnergy in Texas, 1975-2000, Governor's Energy Advisory Council, January 197 5, p. 144. 
2 Hal B. Cooper and William R. Kaiser, "The Impact of Coal Utilization in Texas Under the National Energy Plan," National Energy Policy: A Continuing Assessment, Council on Energy Resources, The University of Texas at Austin, January 1978, pp. A-3, A-6, A-7. 
3 Ibid., p. 149. 

4 Interviews at Environmental Protection Agency, Re· gional Office (VI), Dallas. General discussion on non­attainment with Ray Lozano, Oscar Cabra, Richard Hill and Henry Korp, February 2, 1978. 
sIbid. 

6 Bureau of National Affairs, Inc., "Current Develop­ments," Environment Reporter, March 31, 1978, p. 1859. 

CHAPTER 15 

ASSISTANCE PROGRAMS FOR ENERGY IMPACTED AREAS 

ISSUE DEFINITION 

Many communities are experiencing a rapid growth rate due to energy-related industries. The community impacts which are often associated with energy development have led to much discussion as to the role local, state, and federal governments and industry should assume in miti­gating the negative community impacts of energy develop­ment. 
BACKGROUND 

Energy-impacted communities often have unique growth problems. First, alternative locations for development are often not feasible. Second, much of this development is occurring in rural communities. Third, the populations of these communities were stable or declining before the energy development was undertaken. John Gilmore in a recent article entitled "Boom Town Development" des­cribed this very real situation in the imaginary town of Pistol Shot: 1 
Pistol Shot is l 00 miles from a town of as many as 10,000 or 15,000 people; it is more than 200 miles from a metropolitan area. It is the county seat in sparsely settled ranching country. 

These factors tend to magnify the problems associated with rapid growth in a community. 
POLICY ANALYSIS 

Before the energy development project was begun, the hypothetical community's economy was probably in equili­brium. In this economy, local public services are generally those services desired and judged to be affordable by the existing populations. Whether or not the local services are adequate is largely a matter of taste and values. In any event, these are the services which the people of the community are willing to pay for. 
In a boom town situation the conventional economic 

assumptions work in the long run, but the interim 
adjustments of the economy cause serious problems for the impacted community in the short run. Many variables affect a community's ability to respond to boom condi­tions. Such factors as initial city size, type of public management, type of energy development, social attitudes of community toward growth, and the population growth rate influence a community's ability to respond to the energy development. 
A boom town situation can result in a degraded quality of life for the community residents. As the population grows quickly, labor shortages occur and existing local services fall short of need. Public revenues are inadequate. For example, government cannot meet local water, sewer, health needs, etc. Goods and services are inadequately provided. Subsequently, the quality of life in the com­munity drops. 
Several communities which are experiencing boom con­ditions due to energy development, have developed institu­tional breakdowns in the labor market, the housing market, and the provision of public services. For example, in Titus County, Texas the development by Texas Utilities Generat­ing Company (fUGCO) of the Monticello Plant in Mount Pleasant, Texas resulted in increased housing demands. The shortage of local building contractors resulted in a delay of housing construction until six to nine months after financ­ing was approved.2 In Sweetwater County, Wyoming the housing market completely broke down. Newcomers were forced to live in tents through November because local housing was unavailable.3 
Provision of public services, especially those which involve capital investment, lag behind the growth of the population. Boom town communities face at least a temporary cash flow problem, a period when tax revenues fall short of expenditure needs because the tax base has not yet reflected the new growth. The communities are often unable to sell general obligation bonds because these bonds are based on property values or on excess revenues which the community may not have. The oil-impacted community of Dully, Texas finds itself short of operating funds even though sales tax revenues have increased 68 percent.4 In Colorado it is estimated that communities may need up to $30 million in assistance to meet the problems of yet to be developed revenues and the need for increased services. The problems are similar iii other energy-impacted states. The 
Texas Energy Issues: 1978 
major problem in financing these projects is having the funds available in a timely fashion for development. Nu­merous studies all point out the inability of local govern­ments to adequately expand services and finance these ser­vices through traditional means (e.g., taxes and bond mar­ket).5 
POLICY ALTERNATIVES 

One possible response to energy-impacted areas would be to let development occur without any intervention on the part of government. This can be a conscious policy decision, but more likely than not it would occur because of a lack of any policy. This pattern of development was evident in the early years of energy development and boom towns. This policy has advantages and disadvantages : 
Advantages 
(I) Least trouble for government in the short run. It requires no bureaucracy. 
Disadvantages 
(I) 
Disintegration of community services. 

(2) 
Degraded quality oflife. 

(3) 
Loss of community spirit. 



Another possible response involves the development of programs by industry and government to mitigate the possible negative community impacts which may result because of energy development. This policy also has its points: 
Advantages 
(I) 
Maintain quality oflife. 

(2) 
Retain sense of community . 

(3) 
Maintain worker morale and thus productivity. 


Disadvantages 
(I) Cooperation among different interests sometimes difficult to maintain. 

Industry Responses 
A good quality oflife in a community is desirable to the community residents and the energy company which is inducing the growth in the area. "Industrial history proves that undesirable working conditions result in less than optimal productivity . Conversely history indicates that a good living environment will affect workers' attitudes favorably and, consequently, result in greater producti­vity ." 6 
There are many opportunities for company-community cooperation in mitigating energy impacts. Industry can provide technical assistance to understaffed local govern­ments. Industry has also contributed "front end" money to initiate caP,ital projects and will probably continue doing so. Examples of industry involvement can be found in such energy boom communities as Titus County, Texas; Colstrip, Montana; Gillette and Wheatland, Wyoming; and Skagit County Washington. 7 However, such financial involve­ment, as with any private enterprise investment, must be based upon profit and loss. To the extent that such financial commitments can be incorporated into the recov­erable price of the product, as a cost of doing business, they can be justified. 
Federal Legislation 
The federal government has developed and implemented several impact assistance programs to mitigate the second­ary effects similar to those caused as a result of energy development. Two such programs are: 
(I) 
Trident Community Impact Assistance Plan; 

(2) 
Eonomic Adjustment Program for Defense Impacted 



Communities. The arguments used to advocate these programs are often similar to those used for energy impact assistance. In one way or another; these programs try to correct economic hardship or lessen social disruptions caused by federal activity. 
In 1976, the Coastal Zone Management Act was amen­ded to create the Coastal Energy Impact Program (CEIP).8 Congress has authorized $1.2 billion for grants and loans to impacted areas over a ten-year period. Impacted areas are defined as those in which the siting, construction, expan­sion, or operation of facilities required by energy develop­ment will cause population influxes, changes in employ­ment patterns, or necessitate new or improved public facilities and services.9 
The CEIP offers inducements to state and local govern­ment to undertake coastal energy development; attempts to address capital market failures, such as front-end financing problems; and involves the federal government in sharing the risks of potential environmental and recreational losses with local governments. However, some of the restrictions imposed on the administration of the funds appear unneces­sary. For example, the National Governors Conference requested the deletion of several criteria including the requirement that the state submit to OCZM a justification whenever its intrastate allocation of funds differs from OCZM's calculations. OCZM rejected this suggestion. 10 
As the program gets under way, its effectiveness will be scrutinized. However, it appears that too many impedi­ments exist between needy local governments and available loan and grant funds. The states may be unable to respond to unanticipated situations in a timely manner because of the strict federal guidelines for grant dispersal. 

On November 11, 1977 House-Senate conferees ap­proved a program of assistance to communities affected by expanded coal and uranium development. The program is to be administered by Farmers Home Administration (FmHA) and has been authorized $180 million over a two-year period beginning in 1979.11 
The aid program is triggered by the gubernatorial designation of an energy-impacted region in the state. The designation is subject to the approval of the Secretary of Energy based on a demonstration that energy-related employment in the area expanded by 8 percent annually or is projected to grow at 8 percent for a three-year period. 
POLICY ANALYSIS 

This program has some unique features which should help ease some of the problem areas as a boom town. Once approved as an impacted region an area is eligible for 100 percent federally funded planning grants. Second, subject to the Governor's approval, FmHA could acquire land for housing and public facilities. Finally, the governor is given the authority to require energy-related companies in the area to report on projected employment and population trends. 
In summary, restrictions on the use of federal assistance 

for impacted areas are undesirable unless there is a 
tendency for state or local government to use the revenues 

for unrelated purposes. The objectives of a program may 
well be thwarted if too many strin~ are attached. The key 

concern is to avoid construing state and local discretion or 
flexibility to the point that the necessary adjustments to 

local conditions cannot be met. 
Texas has not developed any program specifically aimed 
at mitigating the adverse social and economic impacts of 
energy development. Other energy-impacted states have 
often taken innovative actions in dealing with the problems 
associated with energy development. Such states as Colo­
rado, Montana, North Dakota, and Wyoming have provided 
Assistance Programs for Energy Impacted Areas 

for state funding of front-end costs through an impact assistance fund which provides either grants or Joans or both to the affected communities. 1 2 
For example, in 1975, the Wyoming Legislature enacted such a bonding authority. The primary purpose of the program was the creation of a state-level agency with the power to issue up to $I 00 million in tax exempt, revenue bonds. 1 3 The proceeds of these bonds would then be made available to impacted communities in the form of loans. This agency operates on the same basic principles as the Texas Water Development Board. Both agencies issue state revenue bonds which are then repaid by the communities. 
Funding problems aside, energy-impacted communities are many times still unprepared for energy development. If proper planning has not preceded the funding allocation, many of the communities' problems will have worsened and the money will not have as great an impact on the community. Both Colorado and Wyoming have tried to develop better planning procedures. 
Colorado has approached the planning phase from a unique angle. That state has developed a program entitled "Colorado Energy Impact Assistance Plan" to monitor and mitigate the problems encountered in rapid growth boom towns. 1 4 The program was developed around an existing organizational structure and around resources that are available to the state. Potential boom towns are monitored. Their growth is closely watched. State agencies have been assigned lead responsibility for assisting communities. The Colorado Plan recognized that without proper coordina­tion, the efforts to help the impacted communities would be severely limited. 
In summary, many states are developing programs aimed at mitigating the negative community impacts which may result due to increased energy development. These pro· grams are examples which may serve as references and guides for future action in Texas. 
Robert Palmer Texas Energy Issues: 1978 

REFERENCES 

1 John S. Gilmore, "Boom Towns May Hinder Energy Resource Development," Science, February 1976, p. 535. 
2 Research and Planning Consultants, Austin, Texas, An Impact and Evaluation Report, City ofMount Pleasant and Titus _County, Texas, draft report, May 1976,p.17. 
3 Denver Research Institute, Denver, Colorado, Factors Influencing an Area's Ability to Absorb a Large Scale Com­mercial Coal Processing Complex, prepared for the Energy Research and Development Administration, 1975, p. 103. 
4 Debra Stinson, State Responses to Adverse Impacts of Energy Development in Texas, Department of Urban Studies and Planning, Massachusetts Institute of Technology, pre­pared for the Energy Research and Development Adminis­tration, June 1977, p. 10. 
5 See Colorado Department of Local Affairs, Boom Town Financing Study, November 1976; the Energy Re­search and Development Administration,Factors Influencing an Area's Ability to Absorb a Large Scale Commercial Coal Processing Complex, 1975. 
6 Susan Brody, Federal Aid to Energy Impacted Com­munities-A Review of Related Programs and Legislative Proposals, Department of Urban Studies and Planning, Massachusetts Institute of Technology, prepared for the Energy Research and Development Administration, May 1977,p. 61. 
7 Company involvement is described in the following studies: Stanley West, Opportunities for Company-Commu­nity Cooperation in Mitigating Energy Facility Impacts, De­partment of Urban Studies and Planning, Massachusetts Institute of Technology, prepared for the Energy Research and Development Administration, April 1977; David Myhra, "Dealing with the Social and Economic Impacts is the Hard Job Often Left to Rural or County Planners," Practicing Planner, September 1976, pp. 15-18; Research and Planning Consultants, Austin, Texas, An Impact and Evaluation Re­port, City of Mount Pleasant and Titus County, Texas, 
draft report, May 1976. 
8 Coastal Zone Management Act of 1972, P.L. 92-583, and Amendments of 1976, P.L. 94-370. 
9 U.S., Department of Agriculture, Rural Development Service, Facts on Rural D.evelopment Sources, 1976, p. 1. 
1 0 U.S., Department of Commerce, NOAA, Office of Coastal Zone Management, Coastal Energy Impact Program, Interior-Final Regulations, Federal Register, vol. 4i, no. 3 (January 5, 1977), p. 1177. 
11 National Governors Association, Energy Brief, Novem­ber 11, 1977,p. l. 
12Western Governors Regional Energy Policy Office, 
financial Strategies For Alleviation of Socioeconomic Im­pacts in Seven Western States, May 1977 ,.p. 551. 
1 3 Wyoming Community Development Authority Act, Enrolled Act No. 49, 1476. 
14 Ross Bolt and Lynda Watkins, Colorado Energy Im­pact Assistance Plan, Colorado Department of Local Af­fairs, January 1977, p. III. 

CHAPTER 16 

THE SOUTH TEXAS PROJECT: A CASE STUDY 

ISSUE DEFINffiON 

The South Texas Project (STP) is a nuclear-powered electric generating facility owned jointly by public utilities in the cities of Austin and San Antonio and two privately­owned utilities, Central Power and Light (CP&L) and Houston Lighting and Power (HL&P). The plant, which is still under construction, is situated in Matagorda County, and will consist of two 1250-megawatt reactc?r units. Unit I is scheduled for completion in 1980 and Unit II in 1982. 
As construction progresses, the value of the land on which the facility sits increases and the property taxes rise. The City of Austin (COA) and City Public Service Board of San Antonio (CPS), owners of 16 percent and 28 percent, respectively, of the project, have refused to pay their share of the property taxes. They claim exemption due to their public nature; both the Texas constitution and judicial decisions prohibit the taxation of public entities. 
The impact of a large project such as the STP on a rural, sparsely populated county can be massive. The population of Bay City, the county seat and largest city in Matagorda County, was 11, 733 in 1970. As construction progresses, more than 2,500 workers have poured into the Bay City area, many seeking local housing for their families. It is apparent that the addition of 4,000-5,000 residents could have a pow~rful impact on the community. According to some sources, tax revenues from the private utilities alone will be insufficient to pay for the additional services and other community impacts of the STP. This is one of the reasons that Matagorda County seeks tax revenue from the publicly-owned 44 percent of the project. 
BACKGROUND 
Matagorda County lies in the "middle coast" region of the Texas Gulf Coast, midway between Houston and Corpus Christi. Despite the trend of the "Golden Coast" region toward industrialization since World War II, and despite the fifty-five oil and gas fields and seven petro­chemical-related industries in Matagorda County, agricul­ture remains the most apparent economic activity in the county. Rice is the major crop, and Matagorda is the third largest rice producing county in Texas. The beef cattle industry is the second most important agricultural enter­prise. Other crops are soybeans, grain sorghum and cotton. The value of agricultural commodities in 1974 was $52.8 million. 1 In 1969 fourteen percent of the land was har­vested crop land, but many acres lie fallow each year. One of every eight people was directly engaged in agricultural production.2 

The total population of Matagorda County was 27,913 in 1970, of which 55 percent was classified as urban . The population density was 24.l per square mile. 

According to the Texas constitution, the Legislature is empowered to exempt from taxation "public property used for public purposes." This provision has been the crux of judicial decisions rendered since 1945. Four criteria of "public purposes" have evolved in decisional law in Texas. They are as follows: 
(1) 	
The facility must be used primarily for the health, welfare, and comfort of the public; 

{2) 	the property must be available for use by all the public under the proper regulations; 

(3) 
it must return the proceeds received for its use to the benefit of the political subdivision; and 

(4) 
it need not be used for governmental purposes. 3 


Attorneys for COA and CPS argue that the Austin and San Antonio shares of the STP fulfill the requirements of "public purposes." They cite the desire as stated by the Legislature for larger electric plants, to derive economies of scale, and provide cheaper electricity. Partnership with private utilities does not alter the tax-exempt status of the public utilities. Article 143 Sa, passed in 1973 by the Texas Legislature, states that publicly-owned utilities in joint ventures with private companies are entitled to the same privileges and exemptions as if they were the sole owners. In 1975, Attorney General John Hill issued his opinion that Austin and San Antonio are entitled to tax-exempt status under Art. 1435a.4 
Matagorda County disagrees and contends that a partner­ship with a privately-owned utility is indeed a business and should be taxed as one. Moreover, county spokesmen distinguish between the proprietary and governmental functions of municipalities. There are legal precedents which establish that proprietary functions are not entitled to tax exemption. In Matagorda County attorney Fred 

Texas Energy Issues: 1978 
Holub's view, electrical generating facilities constitute a proprietary function . 
Finally, Matagorda County questions the constitution· ality of Art. l 435a, on the ground that it is a special law passed to benefit a targeted portion of the population, rather than a general law applicable to the people of the whole state.5 
COMMUNITY IMPACTS 

The construction phase of a nuclear plant poses the same general problems for a rural community as outlined in the previous chapter; the relative impact of the population influx varying inversely with the previous population size. However, the effects in Matagorda County have been mitigated by two factors which can be expected for nuclear plan ts in general: 
(1) 
About 25 percent 	of construction workers commute from nearby counties; and 

(2) 
the influx has not occurred all at once. Employment data for nuclear power plants suggest that the curve of hiring over the eight-year construction phase is parabola-shaped with peak employment occurring midway through. 



The tax base can be expected to increase in both the long and short runs, but not enough in the short run to offset the costs incurred by the community to service immigrants. The plant is not assessed at full value until it is completed, eight or ten years later. Under Texas law, only independent school districts and unincorporated areas of counties may benefit from additional tax revenues. Cities like Bay City do not receive tax revenue but must extend municipal services to immigrants who choose to live there. 
As the construction phase ends, the community may lose as many as 1,000 families. Probably no more than 150 employees will be hired at the plant on a permanent basis. 
By mid-1977, the population of Bay City had risen by more than 50 percent from its 1970 figure to around 18,000. The projected population for 1985 is 40-50,000. Three shopping centers are under construction. New indus· try is moving into the area, and resident firms are expanding. The oil and gas industry has been reactivated; off-shore drilling has commenced, and old fields have been reopened. Assessed valuations on the tax rolls have quad­rupled from the 1960 figure of $57 million to $225 million in the 1979 budget. 6 
In short, Matagorda County is experiencing a boom. Isoh1ting the effects of the STP from the overall growth is not possible in most instances. However, the impacts of the STP will be examined as far as possible in eight categories: Agriculture. Employment, Housing, Taxes, Traffic and Roads. Land Values, Crime, and Schools. 
Agriculture 
The feeling in Matagorda County is that the STP took some of the most fertile farmland in the county out of production. This was the only major bone of contention raised in the public hearing conducted by the Nuclear Regulatory Commission in 1975. It was estimated that 3,800 acres of crop land and 3,600 acres of pasture land would be removed from production in the siting of the STP. The estimation of lost agricultural production to­talled $2.4 million annually (including lost wages), or $243 million (discounted at 9 percent) over the anticipated thirty­year life of the plant. 7 Power transmission lines were not exj>ected to constitute a major disturbance to agricultural activity, since landowners will be permitted to use the land within the right-of-way .8 
Employment 
Although the trend in employment on the construction of the STP has followed the expected parabola shape, the number of workers has been higher than anticipated. Some 3,134 workers were employed on site in August 1977;9 2,108 had been the projected peak figure. 10 
Brown and Root, the prime contractor, has estimated that 25 percent of the construction workers were hired locally, 50 percent moved in from other localities, and 25 percent commute.11 Hiring for the STP has raised the standard of living for local lower-income workers hired; but it has hurt the local middle class by usurping its labor supply. · 
An indirect benefit of the STP is the secondary employment resulting from it. The Environmental Report (ER) filed by Hl.&P estimated that eighty jobs would be created to service the workers employed on the site. Projected annual wages were $737,000, with a lifetime income of $7.6 million.12 According to the Bay City Chamber of Commerce, "easily" that many jobs have been created. 1 3 
Housing 
Between January and September 1975, construction permits in Bay City ran over $3 million, compared to $1.5 million for the same period in 1974.1 4 With construction employment rising above the predicted level, and immi· grants settling mostly in Bay City rather than in Palacios, a severe housing shortage occurred in Bay City. Some 300 apartments have been built there in the past two years, and an additional I 00 are now being built. Fifty new homes are expected to be completed by June 1978. Nevertheless, a housing shortage remains. 1 5 
Taxes 
The STP will affect the local tax base significantly. The Environmental Report estimated the net present value of the lifetime benefit of taxes at $62 million, with the Palacios Independent School District receiving 67 percent of the revenue and 30 percent going to the county .16 Even without revenue from taxes on the Austin and San Antonio shares of the STP, the county realizes greater income from the land than previously. Austin City Manager Dan David­son has been quoted as estimating the pre-STP revenue at $12,700 per annum.1 7 Tax revenue in 1977 totalled $161,487 from the privately owned utilities alone.1 8 
County taxes were cut by 1 cent in 1977, and the Palacios ISD has reduced its taxes by 3 cents. However, the tax assessor-collectors in both taxing districts attribute this to the revenue from offshore oil drilling rather than the STP. About 80 percent of county tax revenue comes from the oil and gas industry; however, if COA and CPS paid taxes on their shares of the STP, it would be the largest single taxpayer in the county .1 9 
Traffic and Roads 
In 1972 the average daily traffic count on the highways leading to the STP was forty-eight vehicles. The anticipated flow for peak construction periods was 1,200-1,500 ve­hicles per day.20 These trucks are massive, carrying heavy loads of backfill, pipe, and other grading and construction materials. Everything brought to the site must be trucked in, since the planned railroad spur to the STP has not been built. Items like the reactor, which cannot be transported in pieces and assembled on site, are floated in by barge on the abutting Colorado River. 
The movement of heavy equipment has resulted in severe damage to local roads, as well as traffic congestion behind slow-moving vehicles on two-lane rural highways. Project owners will repair FM 521, leading to the site, and the state maintains state highways damaged by the traffic. The county must purchase the right-of-way to widen the existing narrow highways and accommodate the increased traffic. 
Land Values 
Land values have "at least" doubled since construction of the STP began. Land which used to sell for $350 per acre now goes for $1,000-$2,000, with some commercial prop­erty in Bay City selling for $5,000.21 However, local officials feel that rising land values reflect the general growth of the community, which parallels the growth of the "Golden Coast," and do not attribute it specifically to the STP. The County Auditor feels the STP has contributed 
The South Texas Project: A Case Study 

"slightly" to the escalation of property values.22 
Crime 
An unanticipated side effect of the STP is the "alarm­ing" increase in the local crime rate. The Bay City Police Chief has been quoted as estimating a 300 percent rise in crime, primarily hot checks and burglary.2 3 There are several measures of the higher crime rate. Fines paid to the county in 1977 doubled those paid in 1976 and were four times greater than five years ago. The average daily jail population has risen frotQ twelve in 1974 to twenty-eight to fifty in 1977. The County Sheriff's budget has increased almost threefold in the past five years. This is partly due to the addition of six deputies.24 
Schools 
The STP is located mostly in the Palacios Independent School District and partly in the Tidehaven ISD. However, most immigrants settle in Bay City and send their children to the Bay City ISD schools. This has led local officials to fear that Bay City schools are overburdened without compensating tax revenue. But although this is perceived as a problem, the addition of about 200 pupils (about two-thirds of whom the Superintendent of Schools attri­butes to the STP) has not necessitated additional hiring or building. The teacher-pupil ratio has risen only slightly, from I: 18 to 1: 20. The district could support 400-500 more students without additional hiring or expansion. 2 5 
POLICY ANALYSIS 
The controversy over the tax-exempt status of the Austin and San Antonio shares of the STP can be examined from three perspectives: community impacts, ethical con­siderations, and legal issues. As already noted, community impacts of the STP are difficult to isolate from the overall growth of the region. Thus, they c\Q. not constitute an adequate rationale in this particular case for justifying maximum tax revenue as compensation. Also, impacts which may be traced directly to the STP do not appear to be excessively costly. The county is receiving aid in repairing damaged roads, and the anticipated overcrowding of the schools has not occurred. Although spokesmen are reluctant to attribute it solely to the STP, the increased crime rate seems linked to the transient population working on the project. To the extent that that cost of crime to the community can be measured in dollars, this too is offset by additional tax revenue, a higher standard of living, and other benefits associated, at least in part, with the STP. The general attitude expressed toward the STP is overwhelm­ingly positive. 

Texas Energy Issues: 1978 
Several questions are raised by citizens of Matagorda County regarding the tax-exempt status of COA and CPS. First, they voice objection to the manner in which Article 1435a was legislated. The tenn "dirty pool" is used, referring to the fact that the legislation was carried by Representatives from San Antonio when the STP was in the planning stages. This is viewed as an attempt to create an exemption which otherwise would not exist, as inducement for Austin and San Antonio to join the project. The equity issue also concerns Matagorda County officials. Although residents of Austin and San Antonio will benefit from the nuclear facility, they will not bear the full costs. The burden will fall on citizens of Matagorda County and the private customers of HL&P and CP&L to provide the missing revenue, if necessary, to cover the costs of the STP to the community. It has been estimated that the additional cost to the average CPS customer would be four dollars per year if CPS paid its share of property taxes. 
Finally, there is the consideration of the risk involved in living near a nuclear power plant. Safety has not been a concern in Matagorda County, but perhaps this issue should not be ignored. This bears on the question of the tax-exempt status of the public participants to the extent that is felt that some financial compensation for risk is desirable. 
Several legal issues are raised by this controversy. First, Matagorda County contends that electricity generation is a profitable business and should be taxed as one. This raises the issue of the distinction between governmental and proprietary functions of municipalities. The ER provides evidence of the expected profitability of the plant. It estimated that 14 percent of CPS's revenues would be transferred to the San Antonio General Fund-$10.4 million per year, or $107.4 million over the life of the plant. Based on past practices, 20 percent of COA's revenues would be transferred, augmenting the Austin General Fund by $87.6 million over the plant life.26 Although decisional law has held that functions need not be governmental to meet the test of "public purposes," a more appropriate . measure might be the profitability of the activity. 
In highlighting the dependence of municipalities on the property tax, this controversy raises the larger issue of tax refonn. Some officials feel that a sales tax is more equitable. 
POLICY ALTERNATIVES 
There are several alternative ways of dealing with the situation: 

(I) 
Austin and San Antonio could be required to pay property taxes on their shares of the STP. Since Art. 1435a expressly exempts them from taxation, this would necessitate declaring the law unconstitutional or amending the constitution. The same would be required if the STP were defined as a single entity, responsible for paying taxes on the whole project rather than by ownership shares. It is not easy to amend the constitution, and that is not likely to happen. It may be possible to declare the law unconstitutional, however, by proving Art. 1435a is a special rather than general law. 

(2) 
The alternative 	of Austin and San Antonio making in lieu payments to Matagorda County seems precluded by legal precedent. 

(3) 
The state can make restitution to Matagorda County and the Palacios ISD for the unpaid taxes of Austin and San Antonio. This would take the fonn of in lieu payments from the state and would circumvent the situation of one municipality taxing another. 


(4) 
The status quo can be maintained. It is unlikely that Matagorda County will suffer financially, due to the other economic resources available to it. However, Matagorda County should not be used as a model to generalize the tax-exempt status of the public com­ponent in joint public-private ventures in the future. In its diversified economic base, it is atypical of many rural communities. If the status quo is maintained, a thorough study should be made of the potential effects of Art. 1435a when applied to similar ven-. tures. Similar projects in other states (for example, the Navajo Project in Arizona) should be examined. 


Carol Tombari 

The South Texas Project: A Case Study 

REFERENCES 

1 Houston Lighting and Power, South Texas Project: Environmental Report, vol. 1, January 20, 1975. 
2 lbid. 

3W.L. Matthews and Jon C. Wood, Brief, Attorney General's File no. H-729. 
4 Texas Attorney General, Opinion No. H-729, October 30, 1975. 
5 Matagorda County position articulated in personal interviews, Matagorda County Attorney Fred Holub and Matagorda County Judge Bert Huebner, Bay City, Texas, February 7, 1978. 
6 J .W. Sanders, Matagorda County Auditor, telephone interview, February 15, 1978. 
7 Barney Davis, letter to Harley Savage, File no. H-729 (source for figures quoted in this letter was probably Environmental Report, op. cit.). 
8 lbid. 

9T.M. McCormack, ed., Update, vol. 7, September 22, 1977. 
10Environmental Report, op. cit., p. 8.1-6. 

11 Graham Painter, representative of Houston Lighting and Power, personal interview, February 6, 1978, Bay City, Texas. 
12Environmental Report, op. cit., p. 8.1-7. 

13 James Sumpter, Executive Vice President, Bay City Chamber of Commerce, telephone interview, February 24, 1978. 
14 Dick Merkel, September l, 1.975 (from newspaper clipping obtained in interview with Don Larick, February 6, 1978; newspaper identity not known). 
1 5 Sumpter, op. cit. 
16Environmental Report, op. cit., p. 8.l-6. 
17Bruce Hight, Austin American-Statesman, October 23, 


1977. 1 8 James Humphries, Matagorda County Tax Assessor­
Collector, telephone interview, February 16, 1978. 1 9 J .W. Sanders, February 16, 1978. 2 0 Environmental Report, op. cit. , p. 4.1-10. 2 1 Sanders, op. cit. 
2 3 Bert Huebner, Matagorda County Judge, personal interview, Bay City, February 7, 1978. 24 Sanders, op. cit. 25 Sam Maglitto, Bay City Superintendent of Schools, telephone interview, March 3, 1978. 26EnvironmentalReport, op. cit., p. 8.1-6. 

CHAPTER 17 

UNIT COAL TRAIN MOVEMENTS TO TEXAS 

ISSUE DEFINITTON 1985 will be the Powder River Basin area served by the 
Unit coal train movements to supply Texas with western coal will be increasing in the near future; only the magnitude of these shipments is in doubt. Coal train movements could generate questions of public safety and energy conservation, and inflict economic hardships on specific communities if land-use conflicts with rail ship­ments become severe. A complete forecast of community impacts from coal train movements will require a substan­tial investment in research and data collection. The focus of this chapter is to illuminate to some degree the effects these coal shipments will have on public safety at coal train impacted street and highway crossings by 1985. 
BACKGROUND 
Western Coal Demand 
Estimates of Texas demand for western coal by 1985 range from 40 to 85 million tons, depending upon the scenario used and the sectors included in the estimate. 1 The electric utility industry alone will require 40 million tons of western coal to supply western coal-fired power plants scheduled to be on line prior to 1985 (table I). The high estimate of 85 million tons assumes a growth rate in utility consumption near that of 1977 (12.2 percent) and no diversion from the Texas Railroad Commission's Docket 600 goals for industrial users. 
Transportation Alternatives 
Through 1985 and possibly beyond, the only available method to move western coal economically to Texas is the unit train. Unit trains consist of 100-110, 100-ton capacity cars hauled by five to seven locomotives at an average speed of23 mph.2 
POLICY ANALYSIS 

Coal Train Routes 
Railroad routes from the western coal fields to Texas are not numerous. The major producing field now and through Burlington Northern (BN) Railroad.3 
Electric Utility Demand for Western Coal 
Of the estimated 40 million tons of western coal required for electric utilities by 1985, roughly 20 million tons will be carried by the BN to supply the power plants at the Harrington, Deely, Parish, and Fayette sites (Table 1). This 20 million tons of coal will require approximately ten trains per day along the most heavily traveled zone of the BN between the Texas border and Amarillo. South of Amarillo, the number of trains will decrease by the number required to supply the Harrington plants. 
Community Impacts 
Although train shipments are a sign of healthy economic activity they also produce negative impacts in communities where they operate. One major negative impact of train movements on communities occurs when congestion causes accidents at grade crossings. The 1976 costs of railroad accidents at grade crossings in Texas have been estimated (Table 2). 
In total, sixty people were killed in grade crossing accidents during 1976 in Texas: twenty at crossings with gates and/or flashing lights; twenty-seven at sites with only cross bucks, stop signs, or no protective devices; eleven at sites with undetermined protective devices; and only two at sites with fully-automated gates.4 Any prospect that these costs could escalate as a result of coal importation should be considered of primary importance when a computation of social costs generated by coal train movements is prepared. This chapter concentrates on the issue of public safety at grade crossings as this is the most pressing issue, and because consideration of social and economic impacts would require a complete inventory of land-use patterns adjacent to rail corridors. 
Assessing Public Safety 
Estimates of the danger of a particular grade crossing are made available by the Department of Highways and Public Transportation. The Department operates a rating system 

Texas Energy Issues: 1978 
for crossings which takes into account the average daily placed on a list for consideration of safety device installa­traffic of vehicles and trains, the speed of trains, the tion. These sites are ranked according to their number. particular type of safety device at the crossing, and the Funds are expended on the installation of safety devices number of accidents incurred at the site. This "priority until exhausted.5 Although the PI rating does not predict index" (PI) fonnula generates data which are used to direct accidents it does function as an objective scale by which to the Department's attention to potentially dangerous· cross­measure the public danger associated with a particular ings. Any crossing with aPI number greater than 500 is crossing. 
TABLE 1 
WESTERN COAL PLANTS OPERATING OR PLANNED BY 1985 
Number of  Predicted  Common  
Station  Units  Location  Owner  Start-up  Coal Consumption•  Carriert  
(million tons/year)  
Harrington  3  Amarillo  SWPS  1976, 77,80  4.35  BN  
Potter County  
South Plains  2  Sudan  SWPS  1982, 84  3.60  
Lamb County  
Welsh  3  Cason  
Morris County  SWEP  1977,80,82  6.75  BN  
Deely  2  Elmendorf  CPSB  1977' 77  3.80  BN  
Bexar  
Parish  3  Richmond  HLP  1978,79,80  7.50  BN  
Ft. Bend  
Fayette  2  Fayette LCRA,C of A  1979 , 90  4.25  BN  
Fayette County  
Coleto Creek  Fannin  CPL  1979  1.75  
Goliad County  
UNSITED PLANTS  
2  HLP  1983,84  
2  WTU  1982,85  

POSSIBLE CONVERSIONS 

Morgan County 1 	Colorado County TU 1983 l.75 ATSF Mitchell County 
Trading Creek 	Waco TU 1983-85 ATSF McLennan County 
Permian Basin 	Monahans TU 1983-85 ATSF Ward County 
2.70 ATSF

De Cordova 	Granbury TU 1985 Hood County 
*National Energy Plan-Continuing Assessment, Center for Energy Studies, the University of Texas at Austin. t Governor's Energy Advisory Council, Technical Report 77-003. 
Source: Electric Reliability Council of Texas. 

Selected Local Impacts 
lbis inquiry considers the impact of the estimated shipments of coal along the BN route on several communi­ties in order to provide information regarding the expected change in PI ratings which will occur as unit coal train shipments increase. 
The city of Dalhart lies on the most heavily impacted zone of the BN route. It has two grade crossings on the state highway system with PI numbers of 211 and 105. The addition of ten unit coal trains generates a PI number of 737 for the crossing with a 211 rating at present, thus moving this crossing into the danger zone. The city of Amarillo has three crossings on the state system and eleven on the city /county system. The addition of the coal trains raises their PI numbers, but not sufficiently to consider them as priority crossings. In Wichita Falls there are five state system crossings and nineteen city /county crossings. Adding the expected minimum number of trains to the computation for these sites moves several of them into the danger zone. These computations merely allow one to conclude that local communities will experience increased danger from coal train movements, even at the minimum projected imports associated with electric utility genera­tion. A complete picture of the impacts will require a more detailed and comprehensive assessment of the communities affected. 
Facts Affecting Impact Abatement 
Presently there are 15,193 crossings in the state with only five percent having full protection of automated lights and gates. Of these, 2,350 are on the state or federal system 
TABLE 2 

COST OF RAILROAD ACCIDENTS 
AT TEXAS GRADE CROSSINGS 


Injuries to persons ................... $23 ,3 82 ,000 Costs of clearing tracks. . . . . . . . . . . . . . . . 4,526,000 Damage to property. . . . . . . . . . . . . . . . . . 2 ,059 ,000 Damage to livestock. . . . . . . . . . . . . . . . . . 189 ,000 
Source: State Senator Schwartz Office from data supplied by Department of Public Safety. 
Unit Coal Train Movements to Texas 

and the rest on the city/county system.6 This presents a problem because the present funding for installation of safety devices is limited for city/county crossings. Railroad grade crossing safety device installations are funded under the following programs: 
(1) 
State 	Funded: $250,000 per year of state general revenue money in the proportion of 80 percent state funds, 10 percent railroad, and 10 percent local municipality. Based on current cost, this appropria­tion provided for only five flashing signal projects per year for off-state system highway crossings. 

(2) 
State Funded: $1.5 million per year of state highway 

· funds in the proportion of 90 percent state funds and 10 percent railroad participation. Based on current cost, approximately twenty-five to thirty projects per year are funded at on-state highway crossings. 

(3) 
Federally 	Funded: Section 203(b) of the Federal Highway Safety Act of 1976 provided Texas $3.5 million per year for federal fiscal years 1977-78. Of this, $2.5 inillion is used for active or flashing signal projects, and the remainder for passive or signing and marking at crossings. This fund provided about forty to fifty active device projects per year on the Federal Aid highway system only. This fund is administered with 90 percent Federal participation and IO percent state highway funds. 

(4) 
Federally 	Funded: Section 203(c) of the Federal Highway Safety Act of 1976 provides $4.2 million per year for fiscal 1977-78 with $3 million for active devices and the remainder for passive devices. lbis fund is administered with 90 percent federal partici­pation, 5 percent local municipality and 5 percent state highway funds. Approximately sixty projects per year are funded on off-federal system crossings. 

(5) 
Miscellaneous signal projects are funded from federal, state, and urban roadway construction funds when a crossing is involved in a highway construction pro­ject. 7 



The above descriptions reveal that the vast majority of funding for safety projects is directed at crossings on state or federal highway systems. This presents a problem since the vast majority of crossings are on the city/county system. Some additional revenue is needed to alleviate the shortfall of available resources for city/county crossings. 
J.R. Prestidge 

Texas Energy Issues: 19 78 

REFERENCES 

1 David M. White, Coordinator of Coal and Geothermal Program, Texas Energy Advisory Council, State of Texas, personal interview, January 1978.  4 Data collected from ways and Public Transpo.Senator A.R. Schwartz, Oc the State Department of High rtation by the Office of State tober 12, 1977.  
2 Ibid.  5 Ibid.  
3 David M. White and Olin B. Clemons, Coal and Lig­nite: Mining, Transportation, and Utilization Needs for Texas , Governor's Energy Advisory Council, Report no. 77003, June 1977, p. lOl.  6Ibid. 7/bid.  

BIBLIOGRAPHY 
Coal Train Assessment: Final Report. Denver, Colorado: Rail Transportation Requirements for Coal Movement in URS Company, December 15, 1976. 1980, U.S. Department of Transportation, April 1976. 
Harvey, Curtis E., Financing Public Expenditures for Energy-Impacted Roads, Lexington, Kentucky: Institute for Mining and Minerals Research, University of Ken­tucky at Lexington, 1977.