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|ENERGY POI.ICY-PRINCIPLES AND THEIR PRACTICE Persistently, at least since the end of World War 11, governments have intervened broadly, deeply, and incoherently in major energy markets. If we take a broad definition of energy that encompasses gas distribution and electric power, we can observe regulations of even older vintage. This trend, of course, is not unique to energy. Expansion of government controls has occurred in many areas. The relevant basic question about energy regulation, therefore, is not why is energy special, but whether any general principles exist to explain the wisdom of existing regulations. This review takes place at a time, the middle 1980s, in which a massive onslaught is being undertaken against government regulation. However, the present chapter is influenced primarily by my observations of the failures of energy regulations and not by any inspiration from those ideologically opposed to government intervention. Several subquestions arise in policy appraisal. A primary need is to establish clear objectives and determine the consistency between these goals and the policies imposed. Thus, the first step is to set objectives. The next is to outline ways to attain these goals. However, it should be recognized that many apparently distinct options are economically equivalent. When the goal is to charge producers or consumers for something, it is possible to attain the same result through either government ownership or taxing private transactions. The tax can raise the price to the level the government would have charged if it were the owner. Creation of a Department of Energy is not necessarily any different from having separate energy agencies well coordinated by some small supervisory body. Thus, a distinction should be made between substance and form in policymaking. The critical substance concerns such matters as whether the government imposes financial penalties, incentives, or rules to attain a goal. Then, there can be many equivalent ways to implement the basic policy form. The second prior illustration suggests that one favorite question is how to attain proper integration of policy. At various times, voices on either (or even both) sides of the Atlantic have called for a coordinated energy policy. The U.S. Paley Commission made this a primary goal for future policy. The western European governments that were the founding members of the Coal and Steel, Economic, and Atomic Energy Communities spent much time in the middle fifties and much of the sixties trying futilely to agree on an energy policy. (See Gordon, 1970 for an annotated review). The energy price rises of the 1970s rekindled United States interest in coordination. However, astute observers of the problem such as O. C. Herfindahl of the United States and Maurice Allais (1 962) in France warned the discussions confused form with substance. The crucial issues were what were the goals and what were the best types of policies to attain such goals. Policy suffered, not from poor organization, but from discord about the goals and how to attain them. All this suggests that we need principles to guide policy appraisal. The branch of economic theory known as welfare economics concentrates on providing guidance about the problems of policymaking. The theory examines both what|