AMERICA experienced a major energy crisis in 1978. Ill-conceived federal price controls and OPEC's last successful petroleum embargo combined to create an emergency. The results were disastrous, the predictable consequence of policies that disrupt the market process and favor special interests

In response to this "crisis," Congress passed the Public Utility Regulatory Policies Act, commonly referred to as PURPA. Designed to spur research into "alternative" energy sources, this law produced several unintended consequences including higher energy prices for the consumer.

Resource Data International, Inc., a Boulder, Colo., consulting firm, estimates the PURPA will cost consumers up to $200 billion between now and the turn of the century, in direct subsidies and also in "deadweight" losses from overcapacity. The PURPA fiasco provides an expensive lesson in what happens when regulators ignore the market's signals. Efficiency, innovation and conservation become casualties of politics.

PURPA's creators should have been familiar with the law of unintended consequences, for this legislation was designed to address some of the unforeseen results of the Depression-era Rural Electrification Administration (REA). Despite the merits of rural electrification - and they are numerous and significant - governmental policies imposed unanticipated costs. Specifically, subsidies for capital-intensive, coal- and oil-fired electricity inhibited research into and development of alternative energy sources. Hence, from the mid-1930s until the late 1970s there was a hiatus of research in renewable energy.

Many people are surprised to learn that serious interest in renewable energy began in the late 1800s. Before the REA, the high cost of stringing power lines to remote areas made wind, solar and small hydroelectric technologies highly attractive. The profit motive encouraged entrepreneurship. The REA and its subsidies to centrally generated power and rural electrification undermined money-making opportunities, and research into renewable energy evaporated.

Something is amiss when the government creates a problem, then 40 years later claims that government action is necessary to correct the problem, yet this is precisely what happened in 1978. Proponents of the Public Utility Regulatory Policies Act couched their rhetoric in national-security terms. PURPA was to compensate for the absence of research into renewable energy sources.

My colleague at Montana State, Richard Stroup, and I were concerned about this back in 1979. Writing about the lack of research and development in renewable energy, we wrote:

"Our current retarded position, caused largely by subsidies, has led to arguments that we should not subsidize the development of alternative energy systems. But clearly there is a problem with subsidies. Specifically, a subsidy inhibits developments in areas not subsidized. Since the future is uncertain we cannot know what the cost of our bias will be. We can only know that there will be a cost."

When governments distort market signals, problems follow. Government subsidies of the 1930s caused a sharp decline in research and development of alternative energy sources. Price controls in the 1970s produced long lines at the gas pumps and reduced incentives to find greater energy efficiency.

The cost of subsidizing renewable energy sources is at least $200 billion between now and the turn of the century, and consumers are the ones who end up paying. In addition to granting direct subsidies for renewable energy, PURPA required public utilities to purchase the power generated by these sources - solar, wind and "waste-to-energy" - at prices far above the market price. Renewable energy now sells for up to 16 cents per kilowatt hour (kwh). Even in Hawaii and Alaska, where energy prices are among the highest in the country, the Edison Electric Institute estimates that energy costs from all sources range from 7 to 9 cents per kilowatt hour, far below the break-even point for renewable energy.

Subsidies and guaranteed prices had the predictable result. We now have power plants that lie idle, built by tax-deferred municipal bonds and then abandoned because the plants can not cover their operating costs. Some operate far below capacity and are in disrepair because, as in pre-1989 Eastern Bloc energy production, the revenues from the additional capacity would not cover the repairs.

One of the sorriest examples is the Altamont Pass windfarm just east of San Francisco. Not only does its electricity cost 11 cents a kilowatt hour to produce but the unsightly windmills kill birds; in the past two years some 500 raptors - including 78 golden eagles - have been sucked into the blades. PURPA even gave rise to the world's only commercial-scale manure-fired power plant. Power from this plant cost eight times the market price to produce, and the plant operators had trouble keeping the fuel lit. Recent floods finally accomplished what the market was prevented from doing and shut down the plant.

No firm fully accountable for its costs would persist with such schemes. REA, PURPA, and energy price controls force us to pay twice for errors in political judgment. First, as taxpayers, since our taxes fund these subsidies, and second, as ratepayers, since utilities pass high-priced energy costs on to the consumer. Altamont Pass and the manure-fired power plant in El Centro, Calif., are illustrative examples of an important truth: Government efforts to direct innovation and promote particular outcomes have unintended and often pernicious consequences.

Free markets and free prices help entrepreneurs and investors sift through the cow manure. We should remember the lessons of history as we consider how to promote conservation and efficiency in our energy future.