ENERGY; THE WAR BETWEEN THE STATES

Randall Benton brought his hand down in a violent slash."When they divided up North America they did it the wrong way. Instead of North-South, it should have been East-West.There's nothing the other side of the Mississippi worth saving," the Seattle CPA asserted with conviction.

In saying this, Mr. Benton voiced an attitude which, although not new, appears to be strengthening in the Western United States. It illustrates the fact that strains in the social fabric, which traditionally have been North-South, are shifting rapidly to a generally East-West orientation.

Although the development of regional consciousness is an extremely complex social phenomenon, it appears that energy issues are acting as a primary catalyst to Western regionalism and as a major source for new social stresses that will remain an underlying political reality for the foreseeable future.

"The energy issue will inevitably lead to increased friction within our federation of states," Minnesota state Rep. Ken Nelson agrees. Although energy-producing states tend to be in the West and energy-consuming states in the East, energy issues represent a complex, Balkanizing force. It has become a divisive issue in the so-called Sunbelt, setting oil- and natural gas-producing states such as Texas and Louisiana at odds with consuming states like Georgia and Alabama. Yet, in the case of coal prices, Texas has sided with other coal-consuming states, including "Frostbelt" states such as Minnesota, against coal producers like Montana and Wyoming. The importation of electricity by the Pacific rim states (Washington, Oregon, California) has also been a sore point with the Rocky Mountain states.

An indication of the potential seriousness of this situation comes from Canada. There, regional tensions are running at a pitch substantially higher than in the US. As the New York Times editorialized last September, "The bitter controversy between Canada's Federal Government and the Province of Alberta about how to divide the wealth in energy not only threatens the stability of our closest ally; it may also be a harbinger of similar strife in the United States."

A recent poll found that the majority of western Canadians feel they have more in common with the Western United States than they do the eastern Canadian establishment. About a quarter favored separation. Conversely, a small but growing number of Westerners like Mr. Benton feel they have more in common with western Canadians than with Eastern Americans.

As Newsweek colorfully overstated the Western situation recently: "From remote ranches high up in the Rockies to corporate watering holes in the valleys down below to the long coast of the Pacific, a rebellion is brewing. Suddenly the Old West has become the Angry West, a region racked by an increasingly bitter sense of isolation and political alienation."

Philip Burgess, executive director of the Western Governor's Policy Office (Westpo), has, with greater accuracy, described the Western mood as "more despair than isolation."

This was clearly illustrated last year during citizen deliberations on the future of Colorado's rapidly developing Front Range, which includes Denver, Colorado Springs, and Fort Collins. As part of this process, the public was asked to choose among preferable and most probable futures. By far the favorite future was that of decentralization with the aid of high technology: solar energy, computer communications, etc. But people saw little likelihood that this would happen. Instead, they foresaw Colorado's becoming a national sacrifice to the nation's voracious energy appetite.

Western alienation, in short, is far more complicated and less intense than that which marked the South until recently. Still, it is real. One measure of this frustration is the fact that voter participation in national elections is lower in the West than elsewhere in the country. According to Gallup, voter turnout in the last election was lower in the West than in other regions.

The West is emerging as a regional power primarily out of defensiveness. This is particularly true of the Rocky Mountain states. This area currently produces 26 percent of the nation's coal, and production is expected to climb to 40 percent or more by 1990. Thirty-six of the nation's synthetic- fuel plants are projected for this region. In the Overthrust Belt, a geological feature that runs through Montana, Wyoming, Utah, and Nevada, there are an estimated 15 billion barrels of oil and 100 trillion cubic feet of natural gas reserves which oil companies are feverishly developing.

Add to this the Pentagon's plans for the MX missile system -- the biggest construction project in the history of man -- and the result is an unprecedented degree f industrial pressure. A recent study done for Westpo estimates that the combination of the missile system construction and planned energy development alone will produce an additional demand of 2.4 million workers by 1990, two-thirds more than the region's population can provide.

"We don't want the West turned into one vast trailer town sitting in a lunar landscape," colorado Gov. Richard D. Lamm has proclaimed. While this is hyperbole, his comment accurately reflects the depth of concern that many Westerners feel.

Traditionally, this area has been actively pro-development. But recent years have seen an increase in environmental consciousness. Although environmentalism has been divisive in the past, the magnitude of imminent socioeconomic effects from energy development is forging new alliances, particularly between Western urban environmentalists and rural agricultural interests.

An example of energy issues forging new friendships comes from Wyoming. There, a considerable controversy is simmering over proposals to build pipelines to carry coal slurry to the Mississippi River.

Although the fiercest fighting has been with the railroads, which fear these pipelines will skim the cream off their newly profitable coal transportation business, Wyoming farmers and environmentalists joined forces out of concern over the amount of water that will be required to sluice large quantities of coal over such a pipeline.

State officials, as well, have expressed concern that the federal right of eminent domain sought by the pipeline developers migh override jealously held state water rights.

"Sufficient water is physically, although not necessarily legally, available in three Western coal-producing areas studied to service both existing uses at present levels and a substantial number of coal slurry pipelines as well," the latest review of this issue by the Congressional Office of Technology Assessment states. "However, pipelines do compete directly with other possible future uses."

The scarcely conceivable scale of proposed development in this area, which contains only 3 percent of the nation's population, has overshadowed the parochial differences between the states, at least temporarily, to such an extent that they have forged an unprecedented interstate alliance, Westpo. This intergovernmental innovation was established in 1977 to give the area's governors the capability to formulate policy at a regional level and respond as a unified front to federal initiatives, particularly on energy.

"Since the early 1970s, the Rocky Mountain and Northern Plains states have accumulated more multistate experience in coping with energy and natural resource development issues than any other contiguous group of states in the nation," Lynton R. Hayes, a University of West Florida political scientist, writes in his book "Energy, Economic Growth, and Regionalism in the West." "These states have replaced the South as the region with the strongest sense of identity and have undertaken one of the most significant experiments in intergovernmental relations since the Civil War."

Actually, since the Mid-'70s, Western sectionalist rhetoric has decreased. Leaders like Wyoming Gov. Ed Herschler have been stressing the possibilities of cooperation with the federal government instead.

In a recent speech, for example, Herschler stressed the necessity for such a partnership in the development of synfuels: "a partnership which will allow for intelligent and expedited decisions -- a partnership which will ensure that the health of our citizens and environment of the West will not be compromised."

Also, Western leaders hope that the Reagan administration will be more sympathetic to their concerns than Jimmy Carter was. Governor Lamm, just back from Washington, reported having constructive discussions with the President, Energy Secretary James Edwards, and other administration officials. "I got a vague hint that hey really know how big an issue [energy] is to the Rocky Mountain states," the governor reported. Balanced against this increased empathy, however, is the Reagan administration's commitment of fiscal austerity, which works against efforts to get federal assistance for energy boom areas.

Of Course, energy is not an issue only in the West. It is of particular concern in the industrial Northeast as well. Rising energy costs have frustrated Northeastern hopes to reverse their longstanding economic problems.

According to historical economist W. W. Rostow of the University of Texas at Austin, this is an unfortunate twist to an overall pattern of industrial development. Almost universally, areas that industrialize later tend to catch up with those that develop earlier. Because the South and West were later in industrializing than the Northeast, their economies have been growing more rapidly and the relative economic differences have been diminishing. This pattern was benign until 1972-73. Then, the nation experienced an upswing in the price of natural resources, including energy. It was the fifth such upswing in US economic history, according to Professor Rostow.

"The rise in food and energy prices accelerated the development of many Sunbelt states which exported energy and agricultural resources to the rest of the country while it decelerated the already slower rate of expansion in the Northeast and North Central industrial state. [This] upswing . . . hit the two northern regions hardest. They had committed themselves to enlarged public and private services at a time when their manufacturing base, with high obsolescence in certain sectors, was declining and the rate of population increase was slowing down," Professor Rostow says.

This situation led to a number of responses in the Northeast. One was the formation of several regional organizations similar to Westpo. A second was the outbreak of a controversy over purported regional inequities in federal funding and its relationship to their current economic fortunes. Beginning in 1976, a series in the New York Times, then a Business Week special and a National Journal report fanned the flames of regionalism by arguing that federal expenditures substantially favored the swiftly growing Sunbelt at the expense of the Northeast.

Based on the dubious assumption that the difference between the federal taxes a region pays and the amount of federal money expended in the area is an adequate measure of the equity of its relationship to the federal government, these articles gave the region's leaders a convenient scapegoat and led to a concentrated political attack on federal funding formulas.

Subsequently, Robert W. Rafuse Jr., in an analysis prepared for the National Governors' Conference, criticized this literature as "more intent on stirring up regional emotions than on understanding the problems, these reports failed to accurately diagnose the problems, identify the causes, or prescribe solutions, he argued.

Professor Rostow argues that "the major regional changes in the country have been determined by deep and understandable historical forces; they have only been marginally shaped by the balance of federal tax expenditure flows."

This issue was resurrected last December by the report of President Carter's Commission for a National Agenda for the '80s. This report concluded that the decline of the economy and population in the Northeast was inevitable and that the future of the nation lies in the Sunbelt. It recommended that, instead of trying to prop up older manufacturing areas financially, the federal government should use its resources more efficiently to plan for this power shift and help people adjust. Cries of dismay from the Northeast led President Carter to quickly recant his commission's conclusions.

Of all the economic factors at play, Professor Rostow considers energy the most potentially divisive. The reason for this is simple: money. As the Report of the Energy Project at the Harvard Business School states: "To put it bluntly, serious talk about energy involves a very great deal of money. There may have never been so rich a sweepstakes in American history. . . ."

There has been considerably more discussion about the flow of funds between the US and the Middle East as a result of rising energy prices than there has about the flow of funds among various regions within the country. But this issue has made an appearance in the news media and is gaining visibility.

Although not a prominent part of the debate at the time, the windfall-profits tax is an example of the problem. The US Treasury estimates that the top four oil-producing states -- Alaska, Texas, Louisiana, and California -- may reap $ 128 billion or more in taxes and royalties over the coming decade because of oil price decontrol.

Awareness of the potential drain of money from the Northeast led Sen. Edward Kennedy (D) of Massachusetts to make a substantial windfall-profits tax a condition for his support of the administration's oil decontrol proposals.

Much of this tax, in turn, was diverted by Northeast interests back into their region. A year ago in March, Congress passed the $237 billion revenue-raising profits tax. Half of the money collected will go to reduce individual and corporate income taxes, while a quarter will help pay the energy bills of those with low incomes. Northeast population centers will benefit from the tax reductions and, by tying direct assistance of the poor to the severity of the heating season, they managed to target to majority of this money to their region as well.

This, in turn, led James Nugent, a Texas railroad commissioner, to complain that Texas was being shortchanged. Texas oil producers, he asserted, will pay 55 percent of the low- income energy assistance that the tax will finance. Nugent groused, "Protection from the heat is just as necessary as protection from the cold."

Still, Texas and the other oil-producing states managed to fight off a far larger financial threat: the consuming states' efforts to tax them on their windfall in increased taxes and royalties.

Of course, oil is only part of the total picture. Many of the same states that will benefit from oil decontrol already profit from the natural gas decontrol act passed earlier. New Jersey, for instance, has estimated that its citizens will pay an extra $105 million over the next five years to Texas and Louisiana in the form of passed-on severance taxes.

A severance tax is a tax collected on nonrenewable resources "severed" from the land within a state's boundary. As Texas profits from its oil and gas severance taxes, however, it loses money to other states' coal severance taxes. This has led the city of Austin to join with 11 Mid- and Southwestern utilities and four coal companies to contest Montana's 30 percent tax on coal at the mine.

Although Montana's is the highest severance tax in the nation by percentage, in terms of total revenue generated it is small compared with the oil severance taxes of Texas and Louisiana. The reason Montana's tax is so high comes from the state's history. In times past, Montana was virtually dominated by the Anaconda Company, and this legacy left a resolution never again to be "colonized" by out-of-state interests. As a result, Montana raised its severance tax to 30 percent in 1975.

Part of this money is used for roads, buildings, schools, and utilities in coal mining areas. The rest goes into a state trust fund, which totals $30 million and is expected to grow to $4 billion by the end of the century. The precise to purpose of this trust is ill-defined, but it is generally intended to provide an economic base for the state after the coal is gone.

Montanans, such as state Sen. Thomas Towe, stoutly maintain that these revenues increase the cost of electrity to Midwest consumers less than do their own state sales tax and are essential to break the "boom and bust" cycle that has plagued Montana's economy since the turn of the century.

The Utility-coal company suit, on the other hand, argues that this tax is excessive: "an OPEC-like revenue maximization." The suit lost in state court, but the US Supreme court has agreed to hear the case. The complainants warn that, should they lose, energy-rich states will have the right to raise their severance taxes to 100, even 1,000 percent.

The issue has generated considerable interest in the coal- imporing states. "This is attack is politically profitable more than a victory would be financially profitable: It allows politicians to mobilize public anger at OPEC and rising energy prices," maintances Doug Sacaro, an energy staff member with the National Conference of State Legislatures.

The political profitability of the coal tax issue has led to a congressional attack as well. Texas congressmen have enthusiastically sponsored a bill that would limit state severance taxes to 12.5 percent despite the fact that the Southern governors have publicly opposed such a measure. And Indiana Rep. Philip Sharp (D) has proposed an even stronger measure.

So far, these bills have not gone anywhere. Should these limitation efforts fail, and other producing states begin raising their energy taxes, Minnesot's Nelson warns that the consuming states will "begin looking around for what they produce that they can raise taxes on to compensate for rising energy costs." Thus, it appears there is a possibility that a domestic trade war is in the offing, triggered by energy costs.

The severance tax fight, called by Pennsylvania Rep. Robert Edgar (D) as "the issue of the '80s," poses a serious states' rights question as well. Severance taxes are traditional revenue sources for states, and a number of state leaders see such limitations as a dangerous precedent.

Because of the pervasiveness of the need for energy and the complexity of the US economy, the future is clouded. But there is little doubt that energy-induced stresses and strains will create unprecedented tensions between the various regions. As Thomas H. Cochran, executive director of the Northeast-Midwest Institute, the research arm of the congressional Frostbelt Lobby, has observed, "Each state and every region has individual needs that must be accommodated within the structure of a national energy policy. This thing is not going to be wrapped up in a month or a year. It's going to be played out over the years in many settings. We're only now beginning to understand some of the regional implications of energy, and they are very complicated. We're in for a long haul."