THE ENERGY POLICY ACT OF 2005

HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 10 and FEBRUARY 16, 2005

Serial No. 109–1

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

THE ENERGY POLICY ACT OF 2005

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THE ENERGY POLICY ACT OF 2005

HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 10 and FEBRUARY 16, 2005

Serial No. 109–1

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

Vice Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

SUE MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, Deputy Staff Director and General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

RALPH M. HALL, Texas, Chairman

MICHAEL BILIRAKIS, Florida

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

GEORGE RADANOVICH, California

MARY BONO, California

GREG WALDEN, Oregon

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

JOE BARTON, Texas,

(Ex Officio)

RICK BOUCHER, Virginia

Ranking Member

MIKE ROSS, Arkansas

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

TED STRICKLAND, Ohio

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

TOM ALLEN, Maine

JIM DAVIS, Florida

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Hearings held:

February 10, 2005 ............................................................................................ 1

February 16, 2005 ............................................................................................ 307

Testimony of:

Callahan, Kateri, President, Alliance to Save Energy .................................. 160

Carrillo, Hon. Victor, Chairman, Railroad Commission of Texas ................. 111

Caruso, Guy F., Administrator, Energy Information Administration .......... 70

Cavaney, Red, President, American Petroleum Institute ............................. 308

Church, Lynne H., President, Electric Power Supply Association ............... 137

Cooper, Mark N., Research Director, Consumer Federation of America ..... 169

Dinneen, Bob, President and Chief Executive Officer, Renewable Fuels

Association ..................................................................................................... 314

Downes, Laurence M., Chairman, American Gas Association ...................... 393

English, Glenn, Chief Executive Officer, National Rural Electric Cooperative Association ............................................................................................. 157

Fahlund, Andrew, Vice President for Restoration and Protection of American Rivers ..................................................................................................... 470

Fuller, Lee, Vice President of Government Relations, Independent Petroleum Association of America ........................................................................ 380

Garman, Hon. David, Assistant Secretary for Energy Efficiency and Renewable Energy, U.S. Department of Energy ............................................. 22

Hamilton, David, Director, Global Warming and Energy Programs ............ 407

Hancock, James H., Jr., Chair, Legislative Affairs Committee, National

Hydropower Association ............................................................................... 463

Hansen, Ed, General Manager, Snohomish County Public Utility District 151

Kane, John E., Senior Vice President, Government Affairs, Nuclear Energy Institute ................................................................................................. 448

Kuhn, Thomas R., President, Edison Electric Institute ................................ 130

Marlette, Cynthia A., General Counsel, Federal Energy Regulatory Commission ........................................................................................................... 25

Murkowski, Hon. Frank H., Governor, State of Alaska, on behalf of

the National Governors Association ............................................................ 101

Nadel, Steven, Executive Director, American Council for an Energy-Efficient Economy ............................................................................................... 173

Nayak, Navin, Environmental Advocate, U.S. Public Interest Research

Group ............................................................................................................. 454

Nogee, Alan, Director, Clean Energy Program, Union of Concerned Scientists ............................................................................................................ 487

Norlander, Gerald A., Executive Director, Public Utility Law Project ........ 401

Olson, Erik D., Senior Attorney, Natural Resources Defense Council ......... 336

Resch, Rhone, President, Solar Energy Industries Association .................... 496

Reyes, Luis A., Executive Director for Operations, Nuclear Regulatory

Commission ................................................................................................... 32

Richardson, Alan H., President and Chief Executive Officer, American

Public Power Association .............................................................................. 142

Santa, Donald F., Jr., President, Interstate Natural Gas Association ......... 417

Shelk, John E., Senior Vice President, Government Affairs, National Mining Association .............................................................................................. 480

Showwalter, Hon. Marilyn, President, National Association of Regulatory

Utility Commissioners .................................................................................. 106

Slaughter, Bob, President, National Petrochemical and Refiners Association ................................................................................................................. 318

(III)

Page

4

Additional material submitted for the record:

American Public Power Association, response for the record ....................... 210

Callahan, Kateri, President, Alliance to Save Energy, letter dated March

14, 2005, enclosing response for the record ................................................ 241

Caruso, Guy F., Administrator, Energy Information Administration, response for the record ..................................................................................... 236

Cavaney, Red, President, American Petroleum Institute, letter dated

March 21, 2005, enclosing response for the record .................................... 233

Cooper, Mark N., Research Director, Consumer Federation of America,

letter dated May 9, 2005, enclosing response for the record ..................... 239

Fahlund, Andrew, Vice President for Restoration and Protection of American Rivers, response for the record ............................................................ 514

Garman, Hon. David, Assistant Secretary for Energy Efficiency and Renewable Energy, U.S. Department of Energy, response for the record .... 237

Hancock, James H., Jr., Chair, Legislative Affairs Committee, National

Hydropower Association, letter dated March 16, 2005, enclosing response for the record ..................................................................................... 241

Hansen, Ed, General Manager, Snohomish County Public Utility District,

response for the record ................................................................................. 216

Kane, John E., Senior Vice President, Government Affairs, Nuclear Energy Institute, response for the record ........................................................ 533

Kanner, Marty, prepared statement on behalf of Consumers for Fair

Competition ................................................................................................... 198

Kuhn, Thomas R., President, Edison Electric Institute, letter dated

March 14, 2005, enclosing response for the record .................................... 204

Marlette, Cynthia A., General Counsel, Federal Energy Regulatory Commission, letter dated March 15, 2005, enclosing response for the record 217

Murkowski, Hon. Frank H., Governor, State of Alaska, letter dated

March 23, 2005, enclosing response for the record, on behalf of the

National Governors Association ................................................................... 226

Nadel, Steven, Executive Director, American Council for an Energy-Efficient Economy, response for the record ....................................................... 201

National Association of Regulatory Utility Commissioners, letter dated

March 14, 2005, enclosing response for the record .................................... 203

Nayak, Navin, Environmental Advocate, U.S. Public Interest Research

Group, response for the record .................................................................... 515

Reyes, Luis A., Executive Director for Operations, Nuclear Regulatory

Commission, letter dated March 14, 2005, enclosing response for the

record ............................................................................................................. 250

Slaughter, Bob, President, National Petrochemical and Refiners Association, letter to Hon. Ralph Hall, enclosing response for the record ........... 516

Welsh, Margaret A., Senior Vice President, Consumer Energy Council

of America, letter dated March 22, 2005, enclosing response for the

record ............................................................................................................. 529

(IV)

(1)

THE ENERGY POLICY ACT OF 2005

THURSDAY, FEBRUARY 10, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON ENERGY AND AIR QUALITY,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:38 a.m., in room

2123 of the Rayburn House Office Building, Hon. Ralph M. Hall

(chairman) presiding.

Members present: Representatives Hall, Bilirakis, Whitfield,

Shimkus, Wilson, Radanovich, Walden, Otter, Murphy, Burgess,

Barton (ex officio), Boucher, Ross, Markey, Engel, Wynn, Green,

Capps, Allen, Davis, Solis, Gonzalez, and Dingell (ex officio).

Also present: Representatives Inslee and Pitts.

Staff present: Mark Menezes, chief counsel for energy and environment; Kurt Bilas, majority counsel; Margaret Caravelli, majority counsel; Maryam Sabbaghian, majority counsel; Tom

Hassboehler, majority counsel; Sue Sheridan, senior minority counsel; Bruce Harris, minority professional staff; and Michael Goo, minority counsel.

Mr. HALL. The subcommittee will come to order, and without objection, the subcommittee will proceed pursuant to Committee Rule

4(e), which allows members the opportunity to defer opening statements for extra questioning time. I think we all most of us know

the rules.

The Chair recognizes himself for an opening statement. Today,

the subcommittee holds a hearing on energy legislation that will

help ensure jobs and national economic security through wise energy policy, we hope. I want to start off by welcoming and thanking

all of our esteemed panelists for being with us here today. I know

it takes your time to prepare, to get here, and the time you give

us today, and we want to be considerate of your time, in shortening

our opening statements as much as we can, and getting on with

hearing the panelists. I want to especially welcome some of our

out-of-town guests, Governor Murkowski. Where is the Governor?

Yeah, I am going to get him in a minute. Yes.

Governor Frank Murkowski, from the great State of Alaska, will

be testifying on behalf of the National Governors Association. Governor Murkowski has served with distinction as the chairman of

the Senate Energy Committee, and has played an integral role in

our efforts to bring comprehensive energy reform to the people of

this country, and as chairman of this subcommittee, I want to

thank you for that, Governor, and thank you for the time, and

thank you for your appearance here today.

2

I want to also welcome Victor Carrillo from the Texas Railroad

Commission, one of our very own. One of the energy regulatory

agencies for the State of Texas. He is here on behalf of the Interstate Oil and Gas Compact Commission. It is a pleasure to have

you join us here today in our Nation’s capitol, and thank you very

much.

Our Nation and our way of life have been built on a foundation

of affordable and reliable energy. From this foundation comes national and economic security, comes jobs, personal freedom, and

comfort. Americans have been blessed throughout history with secure and reliable energy. To secure this foundation of the future,

we must do, as our President said last week in his State of the

Union Address to Congress, ‘‘what Americans have always done,

and build a better world for our children and our grandchildren.’’

To this end, we distributed draft legislation for discussion earlier

this week that reflects several years, and no less than hundreds of

hours of hard work, and what we have before us is comprehensive

energy legislation that will reduce our Nation’s energy demand by

promoting conservation through new energy efficiency. We have

comprehensive energy legislation that will increase our Nation’s

energy supply by making smart use of our resources through clean

coal technology, and by promoting the use of renewable energy

sources such as water, wind, solar, and geothermal. Comprehensive

energy legislation will improve our Nation’s energy supply by promoting reliability and investment in the electric sector.

Our Nation’s energy supply would also be increased by developing new technologies for the domestic production of oil and gas.

For example, ultradeep water research will make many unavailable

reserves in the Gulf of Mexico a reality, thereby decreasing our

need for foreign sources of oil and gas.

These are just some of the positive features of this energy legislation. No one piece of legislation alone will secure our future. Only

a comprehensive approach creates a structure for the diverse use

of our own domestic resources, so that we need to depend less on

foreign sources of oil. Nowhere is this concept truer than the area

of energy. A rich wealth of natural gas in Alaska and the Gulf of

Mexico serve the entire Nation through a natural gas pipeline network, not just the States where it was produced. Electricity transmission grids are linked from State to State, and region to region.

Coal mined in the East and the West can supply feedstock to power

plants all over the country. Hydroelectricity from the Colorado

River can supply power to most parts of the West. By diverse use

of all of these energy resources, we will ensure national and economic security, jobs, personal freedom, and once again, comfort.

We certainly know that the regional crises we have had, like in

California, that crisis diminished the California economy. It was a

great State, the largest State in the Union, a State that we absolutely could not allow to continue to suffer as they had suffered

through certain stages. And I think all the States came together.

Constriction on energy for the U.S. means, of course, not just for

States that are hit, like California was hit, and others, but means

a loss of jobs, a weaker economy, a greater dependence on unstable

foreign regimes, a weaker national defense, and a lower quality of

3

life. So we have to do now what it takes to control our jobs, to control our quality of life, and our national and economic security.

Today, we are going to hear from a series of individuals representing agencies of the U.S. Government and various industry

groups, all with expertise in their respective areas. We thank you

for your time, and we welcome your views and guidance on this legislation, especially with respect to issues facing your industry as

they relate to our Nation and our people’s energy security.

I will now recognize Ranking Member Boucher, the gentleman

from Virginia, for 5 minutes.

[The prepared statement of Hon. Ralph M. Hall follows:]

PREPARED STATEMENT OF STATEMENT HON. RALPH HALL, CHAIRMAN, SUBCOMMITTEE

ON ENERGY AND AIR QUALITY

The Subcommittee will come to order. Without objection, the Subcommittee will

proceed pursuant to Committee Rule 4(e), which allows Members the opportunity

to defer opening statements for extra questioning time.

The Chair recognizes himself for an opening statement. Today, the Subcommittee

holds a hearing on the energy legislation that will help ensure jobs and national

and economic security through wise energy policy.

I wanted to start off by welcoming and thanking all of our esteemed panelists for

being with us today. I want to especially welcome some of our our-of-town guests.

Governor Frank Murkowski from the State of Alaska will be testifying on behalf of

the National Governor’s Association. Governor Murkowski served with distinction as

the Chairman of the Senate Energy Committee and has played an integral role in

our efforts to bring comprehensive energy reform to the people of this country and

as Chairman of this Subcommittee, I want to thank you for that.

I also want to welcome Mr. Victor Carrillo from the Texas Railroad Commission,

one of the energy regulatory agencies for the State of Texas. Mr. Carillo is here on

behalf of the Interstate Oil and Gas Compact Commission. It is a pleasure to have

you join us here today in our nation’s capitol.

I favor a practical policy of putting first things first. Our nation and our way of

life have been built on a foundation of affordable and reliable energy. From this

foundation comes national and economic security, jobs, personal freedom, and comfort. Americans have been blessed throughout history with secure and reliable energy. To secure this foundation of our future, we must DO, as our President said

last week in his State of the Union address to Congress, ‘‘what Americans have ALWAYS DONE, and build a better world for our children and our grandchildren.’’

To this end, we distributed draft legislation for discussion earlier this week that

reflects several years and no less than hundreds of hours of hard work to produce:

• comprehensive energy legislation that will reduce our nation’s energy demand by

promoting conservation through new energy efficiency;

• comprehensive energy legislation that will increase our nation’s energy supply by

making smart use of the resources our nation has in blessed abundance through

clean coal technologies and by promoting the use of renewable energy sources

such water, wind, solar and geothermal renewables; and

• comprehensive energy legislation that will improve our nation’s energy supply by

promoting reliability and investment in the electric sector.

Our nation’s energy supply would also be increased by developing new technologies for the domestic production of oil and gas. For example, ultradeep research

will make many unavailable reserves in the Gulf of Mexico a reality, thereby decreasing our need for foreign sources of oil.

These are just some of the positive features of this energy legislation. No one

piece of legislation alone will secure our future. Only a comprehensive approach creates a structure for the diverse use of our OWN domestic resources so that we need

to depend less on foreign sources of oil. Nowhere is this concept more true than in

the area of energy. A rich wealth of natural gas in Alaska and the Gulf of Mexico

serves the nation through a natural gas pipeline network—not just the states it was

produced from. Electricity transmission grids are linked from state to state and region to region. Coal mined in the east and the west can supply feedstock to power

plants all over this nation. Hydroelectricity from the Colorado River can supply

power to most parts of the West. By diverse use of all of these energy resources,

we will ensure national and economic security, jobs, personal freedom, and comfort.

4

I’d like to take a moment to talk about our differences in this room when it comes

to energy policy. As our President said in his State of the Union address to the Congress last week, ‘‘four years of debate is enough.’’ In recent months we have seen

the spot market for oil reach above $55 a barrel. Just three weeks ago the spot price

for natural gas in the Northeast went as high as $45 per MCF. We do not want

to move from energy crisis to energy crisis. Through comprehensive energy legislation, we will take the steps to make sure America does not face energy rationing

as we did in the late 70’s. That crisis drove down jobs, transportation and quality

of life. We will take the steps to protect against regional energy crises like those

faced recently in California. That crisis diminished the California economy. Constriction on energy for the U.S. means loss of jobs, a weaker economy, greater dependence on unstable regimes, a weaker National defense and a lower quality of

life. We must take the steps now to control our jobs, quality of life, and our National

and economic security.

Today we are going to hear from a series of individuals representing agencies of

the United States Government and various industry groups. I thank you all for your

time. I know we have several panels of witnesses, all with expertise in your respective areas. We welcome all of your views with respect to this legislation and especially your guidance with respect to issues facing your industry as they relate to our

nation and our people’s energy security.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I appreciate

your organization today’s hearing, and assembling 3 excellent panels of witnesses to inform the subcommittee during the course of

this day.

Chairman Barton earlier this week circulated a discussion draft

of comprehensive energy legislation, which is largely identical to

the conference agreement that was achieved during the 108th Congress. Given the passage of time since the consideration of the bill

last year, and the formation of that conference agreement, it is appropriate that we conduct these hearings to examine the need for

legislation through the lens of the current energy market, and I appreciate the indication by the chairman that this will be the first

of two hearings on the energy measure.

I supported passage of comprehensive energy legislation during

the last two Congresses, and I continue to believe that the adoption

of legislation is desirable. While I don’t support all of the provisions

of the conference report, there are a number of sections of the report that I think will, in fact, improve significantly our Nation’s energy policy. The conference report from last year contains a number

of non-controversial items, such as improvements to energy conservation, permanent authorization of the Strategic Petroleum Reserve, and the Northeast Home Heating Oil Reserve, and a number

of research and development provisions. Of particular interest to

me are sections which promote the use of clean coal technologies.

With natural gas prices at unprecedented highs, homeowners

who heat with natural gas and a broad range of American industries, from agriculture to aluminum manufacturing, are feeling the

effects. In my view, one of our most urgent items of business is taking the legislative steps required to incent electric utilities to lessen

their reliance on gas in the new generating units they will be constructing.

And there is an obvious answer. Coal is the Nation’s most abundant fuel, with reserves sufficient for the next 250 years. Coal generates electricity at less than one half the cost of the fuel alternatives, and consumers get the best prices when they consume

electricity that is generated through the combustion of coal. New

technologies such as integrated gasification combined cycle enable

coal to be used for electricity generation in a manner that is as

5

clean as the combustion of natural gas. I commend the provisions

and the draft legislation that would accomplish the goal of

incenting coal use, and thereby relieving, to some extent, the pressure on natural gas prices.

With regard to the electricity title of the conference agreement

and the draft legislation, I remain concerned about the total repeal

of the Public Utility Holding Company Act without ensuring that

adequate consumer safeguards, with strong Federal oversight remain in place. In addition, I have not been convinced that there is

a need to give the Federal Energy Regulatory Commission authority to cite transmission lines. I am pleased, however, that during

the last Congress, we were able to reach a compromise regarding

the application of PURPA, and the legislation contains the non-controversial and much-needed section that would make transmission

reliability standards both mandatory and enforceable. I think we

need to learn more about the practical effect of the change to that

section that is made in the discussion draft, which would cap the

spending allowed for implementation of the reliability standards.

Today, we are hearing from 3 distinguished panels. They will be

covering a wide variety of topics related to national energy policy.

I welcome them, and thank you, Mr. Chairman, for assembling

them.

Mr. HALL. Thank you. At this time, we recognize Chairman Barton, Energy and Commerce Committee, for as much time as he consumes.

Chairman BARTON. Well, thank you, Chairman Hall. I appreciate

you holding this hearing. Today and next week, a fair number of

the audience will have testified by the time we get through with

it. We are really reaching out to get a lot of perspective on the bill.

I see my good friend, the former Senator from Alaska, now the

Governor, Mr. Murkowski, in the audience. I remember sitting in

his office 4 years ago with former Chairman Tauzin, trying to figure out how to get that energy conference bill out of the conference.

So we are starting the process today, and especially my friends on

the Democratic side of the aisle, I want to encourage them to listen. I am strongly, strongly, strongly thinking about doing a very

open markup. I would love to improve this bill and take it to the

floor, with strong bipartisan support, and a lot of what we hear in

the next two—this hearing and the next hearing—is going to make

a determination whether we do a markup, and how we structure

it. But this is like the Energizer Bunny commercial. This is the bill

that will not die, and this is the year, and this is the Congress that

we are going to pass comprehensive energy legislation, so I would

strongly encourage all my friends on both sides of the aisle, not

just the Democratic side, to really participate in these hearings, because you know, I think an open process is the better process, and

I would love to have a markup where we can improve last year’s

work product, and then take that product to the floor.

With that, Mr. Chairman, I appreciate your leadership, and look

forward to the hearings today and next week.

[The prepared statement of Hon. Joe Barton follows:]

6

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

I want to thank Chairman Hall for holding this hearing today on the Energy Policy Act of 2005. I also want to welcome Governor Murkowski of Alaska, Chairman

Carrillo of the Texas Railroad Commission, Chairwoman Showalter of the Washington Utilities and Transportation Commission and Assistant Secretary Garman.

Chairman Hall has been able to assemble some very distinguished panels today.

This is the second of our scheduled hearings to address this important legislation.

Yesterday we heard from Secretary Bodman on the energy bill. Beginning today, we

will hear from elected officials and stakeholder groups. As I stated yesterday, many

of us in this room, Republicans and Democrats alike, have worked very hard on the

provisions contained in the conference report on which we will take testimony today.

The bill before us is not perfect, but it’s balanced. It has been open to the public

since November 2003, has been passed by the House with large majorities twice and

received 58 votes in the Senate. So there must be a lot of good policy in it.

Today we will hear testimony on the electricity and energy efficiency provisions.

Both titles received a large amount of support from policy-makers and experts. Our

investor-owned utilities, public power, the power generators, and the co-ops—all

those who provide electricity to our nation’s industrial, commercial and residential

users—supported the electricity title. In fact, it’s the first electricity title supported

by all those groups.

The energy efficiency provisions likewise received wide support from policy-makers, experts, and those in the business of making more effective and efficient use

of energy. Few people disagree with the need to conserve and save energy where

appropriate.

So today, we invite your comments and suggestions on these provisions. All

changes will be considered carefully and fairly. We must recognize that any changes

made must improve the chances of the bill becoming law. I agree with our President, four years is long enough for an energy bill.

One additional comment on our effort to control costs of the bill. As everyone in

this room knows, we rely on CBO scores to determine the cost of the bill—whether

we agree with the score or not. In fact, we wrote a letter to the CBO protesting the

score of both the reliability provisions in the electricity title and the Energy Savings

Performance Contracts in the energy efficiency title. We tried to cap the score at

$500 million each to address the score only—not because we think we need a less

reliable electricity grid or that savings to our government from lower energy costs

should be limited.

Finally, we need to recognize access to energy supplies is a critical concern around

the world. China, India, and Brazil are all using greater and greater amounts of

coal, oil and gas. Dependence on foreign sources of these fuels is becoming riskier

and more dangerous to America’s dynamic economy. This energy bill is vital to the

continued prosperity of the United States. It will allow America to take control of

its energy future and ensure that all Americans have access to abundant supplies

of clean, affordable energy to power their homes and jobs. I look forward to the comments of those testifying today.

Mr. HALL. Thank you, Chairman Barton. At this time, I recognize the Dean of the House, the longtime, venerable Chairman of

this Committee, Dean of the House, but not the oldest Member in

the House, John Dingell, for as much time as he consumes.

Mr. DINGELL. Thank you, Mr. Chairman. I will respect the limits

of the time of the committee. First of all, thank you for recognition.

Second of all, I am pleased to see we are moving toward developing

a comprehensive energy policy for the committee and for the country.

We are faced with pressing energy issues. It is very appropriate

that this committee, with its expertise in these matters, should be

the starting point for all discussions. Unfortunately, by starting

with last year’s failed conference report, we are sending the signal

that the Congress is not serious about developing a sensible energy

plan, but rather intent upon peddling the same tired special interest laden bill that the Senate rightly rejected last year.

7

I feel a little like I am being forced to watch a rerun of a television show that was never popular in the first place. I must register my concerns with the process to date. My regard with regard

to due process is well established. I believe this committee has a

duty to understand the consequences of legislation which it may

pass, and that the hearings which are part of the process are the

best mechanism through which to gain such understandings. While

I am encouraged that Mr. Barton has agreed to hold an additional

day of hearings, I believe that 2 days is not adequate when we are

dealing with topics of this complex and important character, and

could be an embarrassment for this committee, if we brought a

comprehensive energy bill to the floor without a markup.

My friends on the other side of the aisle will say that we have

held numerous hearings on this bill, and they are correct in that,

but the last hearings we held were nearly 2 years ago. The world

has changed much since that time, and we have many new members. For example, the natural gas, crude oil, and gasoline prices

have reached all time highs in the last couple of years. Revelations

continue to appear regarding the conduct of Enron and other corporations in the energy business, and the devastating effect of—in

that industry, and what it has done to the western electricity markets and their consumers.

And difficult questions have arisen regarding the siting and security of liquefied natural gas facilities. These are just a few of the

many examples of the policy questions facing this country. Any bill

we consider should reflect our current realities as we look to our

future needs. With regard to the discussion draft released by my

good friend Chairman Barton earlier this week, I still have the

same concerns with this bill I did the last time we considered it:

repealing the consumer and investor protections contained in the

Public Utility Holding Company Act, the absence of reform to prevent another Enron fiasco, the weakening of fish and wildlife conservation standards contained in the hydroelectric relicensing process which were put in after careful negotiations with the industry

on this very point, and the numerous special interest goodies that

have been inserted into the conference report in the dead of night

without careful public scrutiny. These are hardly the kind of policies and behavior that give the public comfort that we are about

our business in a serious and bipartisan fashion.

While I understand that the discussion draft is largely similar to

the conference report on H.R. 6, there are some differences, and I

would point out they are not inconsequential. The price tag for last

year’s bill, at $31 billion, raised legitimate concerns. In an attempt

to lower this cost, the draft places a cap on the activities of the

electric reliability organization, a curious thing when we consider

the cost of a failure of the electrical distribution system of this

country, and what it means to consumers, industry jobs, and opportunity. This is, I think, a foolhardy and nearsighted approach. Can

we assume that the Nation will have less reliability because the

Congress is trying to engineer its way out of a morass, which has

been made by the processes of the Congress? Will the enforcement

activities of this reliability organization be constrained by a budget

gimmick? Surely, when blackouts are estimated to cost the Nation

nearly $80 billion annually, we can agree that the integrity of the

8

transmission system is too important to tamper with in this manner.

In closing, Mr. Chairman, I believe that there is still opportunity

to reach a bipartisan consensus, as we did in this committee in the

107th Congress. I stand ready to roll up my sleeves and to do the

work required. I fear, however, that on our present course, we will

have another 2 years of partisan gridlock. That is a matter which

I greatly regret, and I thank you for your kindness.

Mr. SHIMKUS [presiding]. We thank the ranking member, and

now, the Chair recognizes the gentleman from Florida, Mr. Bilirakis.

Mr. BILIRAKIS. No opening statement.

Mr. SHIMKUS. No opening statement. The gentleman from Kentucky, Mr. Whitfield. The gentleman from Pennsylvania, Mr. Murphy. The gentleman from Texas, Mr. Burgess. Would you like to

make an opening statement?

Mr. BURGESS. At this time, I will submit one for the record.

Mr. SHIMKUS. The gentleman from California. Opening statement? The gentleman from Illinois.

I wasn’t going to, but after listening to the ranking member, I

will. But I will be brief. The failed energy bill that he speaks of

only failed at the final end. It was due to a minority of Senators

using the filibuster; had the Senate put it on the floor, it would

have passed. It was a very deliberative process and we worked

very, very hard. Chairman Barton is contemplating going through

the entire process again, and we will probably do that. But I just

want to let my colleagues know that I am strongly lobbying for him

to take H.R. 6 straight to the floor because of all the great benefits

it does for this nation, for coal generation, for clean coal technology,

for a hydrogen economy, renewable fuels, exploration, the transmission grid. It is just like all of the tough debates that we have

here in Washington, D.C., the longer you wait, the more difficult

it is, and you put off problems that should be reconciled earlier

rather than later.

I will probably be in the minority on that, and we will probably

move on marking up, but I am on record saying that H.R. 6 ought

to be on the floor next week. Actually, it should have been on the

floor this week. It should have been the first order of business, so

that we can move into tough negotiations with the Senate to get

the bill passed. And with that, I yield back the balance of my time.

The Chair recognizes the gentlewoman from California.

Ms. CAPPS. Thank you, Mr. Chairman. I am pleased we are beginning what I hope is a comprehensive process to produce an energy bill we can all support, and I believe that requires the committee to follow regular order, with comprehensive hearings and

markups, and I commend our chairman for his remarks earlier to

this effect.

Clearly, addressing our energy problems is critically important

for our country, and clearly, this committee, all members, should

be fully engaged in that effort, and not get sidelined by the leadership of the House. And we shouldn’t just let a conference committee

write the bill in secret. In addition, Mr. Chairman, I read with interest your statement yesterday about perhaps moving smaller bills

individually, since the approach of one giant bill has failed repeatVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
9

edly. That is a suggestion worth considering, especially if we could

start with the electricity reliability provisions contained in H.R. 6,

and introduce the standalone legislation by Mr. Dingell. These provisions have wide bipartisan support, and should have been passed

years ago, to protect consumers from more blackouts.

Mr. Chairman, I opposed H.R. 6 when the committee considered

it, and voted against the conference report as well. The discussion

draft has been noted—as has been noted, is essentially the conference report, and I think that is a shame. Clearly, H.R. 6 fell

short of votes last Congress, and I would expect and hope a bill of

substantially the same markup would meet the same fate this time

around. There—that is one reason we need to revisit the bill in a

comprehensive fashion. Obviously, the bill needs to change for it to

pass.

We need also to change it into something resembling a rational

energy policy. Energy efficiency and conservation must be a more

central part of our energy strategy. We will never be energy independent, never, so long as we rely upon fossil fuels as our major

source of energy, which we will do for some time. We simply don’t

have the natural resources to be energy independent, and China

and India’s demands for energy mean increasing our reliance on

foreign or—sources of energy, like H.R. 6 would do, and that is a

path fraught with peril. H.R. takes some steps toward efficiency,

but it still omits the most important steps we can take right now:

increasing fuel efficiency of our cars and truck. This single step

would result in benefiting consumers and our economy, and reduce

our dependence on foreign oil. And we can do so much more to

make our buildings and appliances more efficient. We could also do

more to expand our use of renewables, like enacting the Federal

Renewable Portfolio Standard. Instead of this proven step, the bill

creates a complicated mandate for one renewable, ethanol. The provisions granting retroactive liability protection for the producers of

the gas additive and groundwater pollutant MTBE leave hundreds

of communities with billions of dollars of cleanup costs. MTBE provisions are widely credited with sinking the bill last year and

should be jettisoned.

The bill also reduces States’ ability to enforce their coastal zone

management plans for the controversial LNG facilities and pipelines. This is bad for the environment, bad for long-term economic

interests of coastal States like mine. I don’t dispute the need for

new sources of natural gas, but we need to explore this issue further before enacting legislative ideas, and the discussion of drafts

and other bills.

We certainly must not run roughshod over the localities’ desire

to have a voice in the construction of these projects. I am sorry for

going over my time, but I hope the committee can improve the discussion draft over the coming weeks and months.

I yield back.

Mr. SHIMKUS. The gentlewoman yields back her time. Let me remind my colleagues that we are going to try to hold regular member statements down to 1 minute, as per the agreement with the

committee, and that is the same rules as for the subcommittees.

Ms. CAPPS. Could I——

Mr. BOUCHER. Will the gentleman yield?

10

Mr. SHIMKUS. The gentleman will yield.

Mr. BOUCHER. As I understand it, there are no rules governing

opening statements at the subcommittee level. Am I correct about

that?

Mr. SHIMKUS. I think you are correct, but we assume the rules

that were passed and negotiated with the minority on opening

statements for the full committee, out of respect to 2 days worth

of panelists, would apply. And I didn’t want to interrupt. I didn’t

want to take away from your time, but I think the whole idea with

the discussion on opening statements was to have respect for the

people that we bring here on a daily basis, to get our statements

through, so that we could move to the hearings.

Mr. ENGEL. Mr. Chairman, may I have a point of inquiry?

Mr. SHIMKUS. The gentleman from New York is recognized.

Mr. ENGEL. I respectfully believe, I could be wrong, that while

we—the new rules restricted opening statements at full committee

to 1 minute, that on subcommittee, it restricted it to 3 minutes. I

believe that—those were the rules that we passed. I don’t think I

am wrong——

Mr. SHIMKUS. Let us, for the sake of time, if I may, for today’s

hearing, since all of the Republicans have yielded back their time,

we will go with 3 minutes. We will take this up with the chairman

and the subcommittee chairman, but the intent is not to stifle discussion or debate. The intent is to have respect for our visitors,

who sometimes have to sit through 2 hours of opening statements.

And that is the intent. With that, if can agree upon that right now,

we will discuss this and try to come to some agreement with the

ranking member and the committee chairman.

The gentleman from California.

Mr. RADANOVICH. I just want to voice my support for short opening statements, because you know, I spend a lot of time with everybody on this panel, and I really all know where you are coming

from. What really interests me is the guests that are here with,

perhaps, new information, because a lot of this begins to sound like

broken records. So if we can get onto the panelists as fast as possible, I would really appreciate it.

Mr. SHIMKUS. Thank you, and the chairman would like to reclaim his time, and now recognize the gentleman from New York

for 3 minutes.

Mr. ENGEL. Thank you, Mr. Chairman, and let me just say that

opening statements are very important to the minority. It is sometimes the only chance we get to speak, because the Democrats have

been repeatedly shut out of one process after another.

Mr. SHIMKUS. Thank you. If the gentleman would yield.

Mr. ENGEL. Certainly.

Mr. SHIMKUS. I stand corrected. As far as I have just been informed, the subcommittee time is 3 minutes for members still.

Mr. ENGEL. Thank you.

Mr. SHIMKUS. My apologies to my colleague from California.

Mr. ENGEL. Thank you, Mr. Chairman.

Mr. SHIMKUS. And my colleagues on the other side.

Mr. ENGEL. I appreciate that. I am glad that we are continuing

the dialog on our Nation’s energy policy. I am hopeful that these

hearings will result in a markup of any energy legislation that

11

comes to full floor for consideration. I am hearted by Chairman

Barton’s mentioning, both yesterday and today, that he hopes we

can have an open markup, and I would hope that the bill that we

eventually pass is a more middle of the road bill than H.R. 6.

If we really want to move forward on energy policy in this country, we really need a true bipartisan consensus. And while there

were a lot of good things in H.R. 6, there were a lot of things that

trouble many of us, particularly on this side of the aisle, and I

would that the majority would listen to what we have to say. We

don’t want to be obstructionist, but we have very strong feelings,

and I do think there is a middle road, and I hope we can pursue

that middle ground.

American energy policy is at the crossroads, and our national security is being compromised daily by our dependence on foreign energy supplies. Today, oil is at nearly $50 per barrel, and we still

have not passed reliability standards to address the electricity

blackout that assaulted the Northeast and Midwest in 2003. Partisan politics have paralyzed this Congress into deadlock, and our

Nation’s energy has suffered the consequences. That is why I hope

we can have a middle of the road bill. Rather than stay mired in

the same tired gridlock of partisan politics, we must make the hard

choice to move forward, even if it involves some hard choices.

As I noted yesterday at the hearing with Secretary Bodman, I

am intrigued by the bipartisan National Commission on Energy

Policy’s report entitled ‘‘Ending the Energy Stalemate.’’ Their report, released in December 2004, is the product of 16 members with

diverse expertise and affiliations, representing business, government, academia, and the nonprofit community. The Commission’s

work is designed to ensure affordable and reliable supplies of energy, while responding to growing concerns about energy security.

Not every member of the Commission supported every idea, but the

ideas as a package won broad consensus over the group. With substantive debate over 3 years, the Commission attempted to break

the deadlock by compromising on issues, including enhancing oil

security, increasing energy efficiency, and developing energy technologies for the future. We can learn from their example. So therefore, I plan to introduce legislation implementing the National

Commission on Energy Policy’s recommendation, so if Congress can

consider a more comprehensive and balanced approach to providing

reliable, secure, affordable, and environmentally responsible supplies of energy for our growing economy. I don’t personally agree

with everything that the Commission came up with, but I do understand that in order to get a policy that makes sense for the

United States, it involves compromise, it involves bipartisan, and

it involves a middle of the road bill, and therefore, I would support

the bill that the bipartisan Commission came up with, and I hope

we can have active consideration of this bill in this committee and

subcommittee.

I thank you, Mr. Chairman.

Mr. SHIMKUS. I thank the gentleman from New York. Now, the

Chair recognizes the gentleman from Texas.

Mr. GONZALEZ. Thank you very much, Mr. Chairman, and I will

be brief. I guess it is just an observation, to commend the chairman

of the full committee and the ranking member for starting off on

12

the right foot, and I think the first thing to learn in any democratic

legislative process, is the majority rules only when it respects and

values the opinions of the minority, for the simple reason that we

all know we kind of switch positions once in a while. One way, you

are drinking the wine, and the next day, you are squeezing the

grapes.

And process is important, and I think that is what this is all

about. It will lead to a healthy debate, and sometimes, the debate

really does take place in opening statements, as my colleague from

New York observed. Sometimes, that is our only opportunity. So

again, I think it is a positive step. Democrats and Republicans

want an energy bill. We require and need an energy bill, and I look

forward, as we develop this particular bill, and do what we have

to do to get it passed.

I yield back the balance of my time.

Mr. SHIMKUS. The gentleman yields back his time. Now, the

Chair recognizes the gentleman from Washington State, Mr. Inslee.

Mr. INSLEE. Thank you, Mr. Chair. I want to thank the majority

for allowing me to participate. Just very briefly——

Mr. SHIMKUS. My pleasure.

Mr. INSLEE. Thank you. Mr. Engel referred to the Commission,

and he will not be the only one looking for a more visionary policy

here that really does move us forward on a basis that many people

from many parts of the political spectrum can support. And I would

just say that I would hope that our work this year would be guided

by the spirit that was exhibited on May 9, 1961, when a young

President went before the House and the Senate and said that

America was capable of going to the Moon in 10 years, and bringing a person back safely.

And a lot of people think that that was sort of a crazy idea at

the time. We hadn’t even invented Tang at the moment, but here

we understood the creative genius of Americans, and I think our

committee ought to understand that as well, and embrace a technologically oriented bill that can get us out of the energy insecurity

that we now have, the global warming problems that we have, and

the fact that jobs are going to other countries, like Japan, Denmark, and Germany, when they ought to be right here.

So we will be introducing a bill called the New Apollo Energy

Project, that will embrace many of these ideas, and look forward

to putting them into the mix. Thank you, Mr. Chair.

Mr. SHIMKUS. The Chair thanks the gentleman from Washington

State. Now, the Chair recognizes the gentleman from Texas, Mr.

Green.

Mr. GREEN. Thank you, Mr. Chairman, and I would just like to

place a full statement in the record, but I think for our guests,

they—the concern is, is we want to have a real markup on the bill,

and there has been discussion, although I think, I hope our full

committee and the subcommittee will do a real markup on this bill,

and that is why you have to listen to us, encourage that. And—but

unlike a lot of my Democratic colleagues, I voted for H.R. 6, and

the reason I want a markup is I want to improve on H.R. 6, because I think there are some things we have learned in the last 2

years that would expand our energy resources, particularly for the

next 30 years. And I know I will work with my colleagues to plan

13

for 50 years later, but I also want to make sure we can turn the

lights on in the next 30 years.

So thank you, Mr. Chairman, and I look forward to the hearings.

Mr. SHIMKUS. I thank the gentleman from Texas. Now, the Chair

recognizes the gentlewoman from California, Ms. Solis.

Ms. SOLIS. Thank you very much, Mr. Chairman. I am also

pleased to be here to enter into this discussion, which I think is

very important. I am very concerned that we have an opportunity

in our subcommittee to begin the discussion regarding the leaking

underground storage tank provisions. I am very concerned that—

we have sent a letter over to Mr. Gillmor, and have not heard anything back yet regarding that. But it is a very important issue for

many of us throughout the country. Every single one of us has an

issue regarding the LUST program, and that should be a priority

for us, so I would ask for unanimous consent that the letter that

we have sent as a subcommittee be entered into the record.

Mr. SHIMKUS. Is there any objection? Hearing no objection, it is

so ordered.

[The letter referred to follows:]

14

15

16

Ms. SOLIS. We would like to hear more about what opportunities

we have to address some of the quality of life issues that people

in California, particularly in my district, are faced with, with respect to programs that are most notably going to be, I think, on the

chopping block—weatherization, LIHEAP program, and different

issue areas that many in my district, poor, low income, elderly, are

faced with right now. Thank you.

[The prepared statement of Hon. Hilda L. Solis follows:]

PREPARED STATEMENT OF HON. HILDA L. SOLIS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Chairman Hall and Ranking Member Boucher thank you for holding this hearing

today. I am pleased to have the opportunity to join these discussions as a member

of this subcommittee.

I would like to begin by submitting to the record a letter from my Subcommittee

which requests an opportunity to consider and vote on language regarding the leaking underground storage tank provisions.

I have some very real concerns about this legislation. Energy policy should be an

investment in our families, our children and our nation. But once again we are left

discussing a proposal which threatens our health, our economic stability and our energy future.

I would like to focus on the issue of leaking underground storage tanks. I understand this issue does not fall under the jurisdiction of this subcommittee, but I am

not convinced I will have another opportunity to address these provisions. 136,000

tanks are leaking as we speak—more than 36,000 in California, 75% of which risk

MTBE impacting groundwater supplies. The EPA estimates 120,000 more tanks

could leak over the next 10 years, contaminating 120,000 more communities—polluting the soil and water, harming health and incurring unnecessary costs.

Cleanup of MTBE alone—from leaking tanks—is estimated to cost at least $28

billion. Yet the language in this bill—language which was never considered in either

the House or Senate last session—restricts the ability of our own Environmental

Protection Agency to recover costs from polluters, fails to require additional safety

measures for new tanks, and further delays inspections on these tanks. We owe it

to our constituents and communities who deal with these leaking tanks to not shove

random provisions into legislation.

I am also concerned about the failure of this legislation to deal with electricity

reliability and consumer costs. In 2003, more than 20,000 families in California depended on public services to keep their power from being shut off. The Southern

California Association of Governments recently gave quality of life in southern California a ‘‘D plus’’ partly because of bad air quality and the cost of energy. I have

not been shown, however, how this legislation will do anything to help these families keep their lights on.

I would hope that our witnesses today, and any future witnesses, could provide

us with new ideas to bring us to a better place than we are now. I hope this hearing

is not the end of the discussion about a responsible long-term energy policy for

America, but the beginning of a process that will involve opportunities to amend

language to get the best possible policy.

Mr. SHIMKUS. The gentlewoman yields back her time. The Chair

recognizes the gentleman from Oregon, Mr. Walden.

Mr. WALDEN. Thank you very much, Mr. Chairman. I appreciate

your having this hearing today. I think it is extraordinarily important that we move forward on an energy bill.

This country needs an energy policy. As one of the vice chairs of

the Renewable Energy Caucus in the Congress, the bipartisan organization, I am especially enthused about what we need to do to

add to our renewable portfolio.

In my district, we are seeing the construction of some 400

megawatts of wind energy, which works well, as you shape the

power curve with hydro, which is also one of America’s most renewable energy sources, and in the Northwest, is certainly our bread

and butter power. This legislation helps in those regards, as well

17

as expanding efforts on solar and geothermal research and ,I am

hopeful, biomass as well, to use the waste that comes out of forests,

so we try to make them more healthy, to create a renewable market. And so that is certainly important, and while I realize we can’t

conserve our way out of the energy crisis we face, nor can we drill

our way out of it, we have to have a balanced energy program for

this country.

I am tired of paying $2 gas or $2.20 gas or whatever it is to fill

my car, and I see what is happening, and the pressures on natural

gas, and it is a supply issue, and I don’t want to be held hostage

for my energy and our country’s energy to countries that aren’t always exactly friendly toward us, and yet can pull our chain and our

economy and cause severe problems.

We have had a lot of debates in this committee over the last 3

years that I have been on the panel, or 4 years, I guess, on energy

policy. We need a comprehensive energy program. I commend the

administration for the work they have done, and while I have some

disagreements with them at the present time over power marketing authorities and some issues related to transmission and all,

we need to move forward.

So, Mr. Chairman, thank you for holding this hearing, and I look

forward to working with you on the issues that are of unique importance to the Northwest, as well as those that are critical to our

country’s future.

Mr. SHIMKUS. The gentleman yields back the time. The Chair

recognizes the gentleman from Massachusetts, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman.

In the world of nuclear physics, there is a theory known as the

Heisenberg Uncertainty Principle, which states that the more precisely the position is known, the less precisely the momentum is

known.

Scientists tell me that this uncertainty principle has profound

implications for understanding the behavior of subatomic particles,

such as electrons. There appears to be a similar theory at work in

the Congress these days, a theory known as the Republican Uncertainty Principle. Here, too, the more precisely a position is known,

the less precisely we know what the momentum is. The Republican

party’s position on national energy policy are known with great

precision, while we can never quite determine at any given time exactly what the momentum of their legislative efforts is, or whether

there is any momentum at all.

For example, will the House wait to move an energy bill until the

Senate acts? Maybe, maybe not. Is the committee only going to

have one hearing on an energy bill? Maybe, maybe not. Are the

members going to be able to deliver opening statements at any

hearings or markups? Maybe, maybe not. Are we going to have a

subcommittee markup? Maybe, maybe not. Are we going to have a

full committee markup? Maybe, maybe not. Is the energy bill going

to the House floor in February, or will we wait until March?

Maybe, maybe not. Will the bill, when it goes to the floor, allow

Democrats to make amendments on the floor? Maybe, maybe not.

Will those Democrats from the Democratic side who are appointed

to any future conference with the Senate on this bill, will they be

18

invited to participate in the meetings of the conferees? Maybe,

maybe not.

Under the Republican Uncertainty Principle, you know exactly at

all times what their positions are on this bill. You know that they

want to drill in the Arctic Refuge. They want to weaken environmental laws in the name of energy production. They want to provide generous tax breaks and other favors to large oil, natural gas,

coal, nuclear, and electric companies. They want energy consumers

to pay higher rates and big energy companies to grow even bigger.

All of this is certain. But you can never quite determine what the

forward momentum of the bill really is, what their process is, or

if there is any process at all.

That is the Republican Uncertainty Principle at work, and I welcome all of our witnesses back once again to this wonderful world

of Republican political quantum mechanics. I look forward to your

testimony this morning, but I am uncertain whether it will lead to

the enactment of any legislation at all.

I yield back the balance, Mr. Chairman.

[The prepared statement of Hon. Edward J. Markey follows:]

PREPARED STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MASSACHUSETTS

Thank you, Mr. Chairman.

In the world of nuclear physics, there is a theory known as the Heisenberg Uncertainty Principle, which states that ‘‘the more precisely the position in known, the

less precisely the momentum is known.’’ Scientists tell me that this Uncertainty

Principle has profound implications for understanding the behavior of subatomic

particles, such as electrons.

There appears to be a similar theory at work in the Congress these days, a theory

known as the Republican Uncertainty Principle. Here too, the more precisely a position is known, the less precisely we know what the momentum is. The Republican

Party’s positions on national energy policy are known with great precision, but we

can never quite determine at any given time exactly what the momentum of their

legislative efforts is, or whether there is any momentum at all. For example:

Will the House wait to move an energy bill until the Senate acts? Maybe. Maybe

not.

Is the Committee only going to have one hearing on an energy bill? Maybe. Maybe

not.

Are the Members going to be able to deliver opening statements any hearings or

markups? Maybe. Maybe not.

Are we going to have a Subcommittee markup? Maybe. Maybe not.

Are we going to have a full Committee markup? Maybe. Maybe not.

Is the energy bill going to the House floor in February or will we wait until

March? Maybe. Maybe not.

When the bill does go to the floor, are we going to be able to offer our amendments? Maybe. Maybe not.

Will those of us from the Democratic side who are appointed to any future conference with the Senate on this bill be invited to participate in the meetings of the

conferees? Maybe. Maybe not.

Under the Republican Uncertainty Principle, you know exactly at all times what

their positions are on this bill. You know that they want to drill in the Arctic Refuge, they want to weaken environmental laws in the name of energy production,

they want to provide generous tax breaks and other favors to large oil, natural gas,

coal, nuclear, and electric companies, they want energy consumers to pay higher

rates and big energy companies to grow even bigger. All of this is very certain. But

you can never quite determine what the forward momentum of their bill really is,

what their process is, or if there is any process at all.

That’s the Republican Uncertainty Principle at work, and I welcome all of our witnesses back once again to the wonderful world of Republican Political Quantum Mechanics. I look forward to hearing your testimony this morning, but I am uncertain

whether it will lead to the enactment of any legislation.

19

Mr. SHIMKUS. The gentleman should be applauded for use of the

time. I want to thank him for that, and the only certainty about

this is that it makes more sense of why we are pushing for 1

minute opening statements.

Now, the Chair would like to recognize my colleague from Maine,

Mr. Allen.

Mr. ALLEN. Thank you, Mr. Chairman, and I welcome the panelists. America needs energy legislation that will make our Nation

more secure in the world, more competitive in global markets, and

encourage economic growth here at home. We want an energy policy that reduces our dependence on foreign sources, increases conservation, encourages innovative use of renewable energy sources,

and protects our environment. I don’t think this energy legislation

before us does that very well.

I have 3 concerns. First, we need to prioritize. It will take a substantial length of time to get a good bill through the Senate. I

think it is time to break out the electricity reliability standards.

Second, this energy bill is already outdated. For example, if you

take the hydro power title, which is designed to streamline dam relicensing by excluding States, Native American tribes, and other

Federal agencies, from the appeals process, just yesterday, the Penobscot Indian tribe visited me to tell me about the Penobscot

River Restoration Project in Maine. That project will remove two

dams, alter a third to maintain power production near historic levels, and restore 500 miles of vital habitat to the Atlantic salmon,

the American shad, and other native fish. In the words of Secretary

of the Interior Gail Norton, this restoration is, and I quote, ‘‘a win

for everybody involved.’’ But the hydro power title, as it is written

today, excludes the kind of public participation that we got in the

course of this process. The Penobscot tribal chief told me yesterday

in no uncertain terms that this project never could have happened

if the hydro power title had been law.

Finally, I want to mention the provision known as bump up. I

certainly hope the chairman will call witnesses so we can have a

hearing on the impact of this provision. We have never had a legislative hearing on bump up. By the EPA’s own analysis, 98 percent

of the emissions leading to unhealthy air days in Maine originate

outside of our State borders, so I care a lot about cities that have

the same experience. But any bump up policy should be written to

apply only where transport is the problem. If a city would be in attainment but for the pollution blowing in from other regions, then

it is only fair that they not be punished with a bump up. However,

the provision in this bill does not include a but for provision. It

would prevent higher standards from applying to any area which

has pollution blowing in from elsewhere, even if the local pollution

is itself unhealthy. So for these and many other reasons, I view the

energy bill conference report that passed the House in November

2003 as outdated, inadequate, and I believe that open discussion,

debate, and opportunity for amendments is essential to improve

this already outdated bill.

And I, Mr. Chairman, I yield back.

Mr. SHIMKUS. The gentleman yields back his time. Just referring

to the gentleman from Maine, I am familiar with the ‘‘bump-up’’

policy. We did have a hearing on June 22, 2003, on the ‘‘bump-up’’

20

provision, so does the gentleman from Idaho wish to make an opening statement?

[Additional statements received for the record follow:]

PREPARED STATEMENT OF HON. CHARLIE NORWOOD, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF GEORGIA

Thank you Mr. Chairman for holding this important hearing today.

I have said it before and will say it again. Energy is the lifeline of our economy

and it is of paramount importance to our constituents back home that we once and

for all pass into law a national energy policy. Electricity disruption and unreliability

on a national scale could be catastrophic.

I have long been a supporter of nuclear energy. Nuclear power generation enjoys

significant environmental advantages. It encompasses the largest source of emission-free generation of electricity in the United States.

The United States cannot afford to allow politics to continue to get in the way

of sound science and good public policy. Mr. Chairman, for fear of sounding like a

broken record, let me just reiterate my appreciation that you are holding this hearing today, and encourage my colleague to help me once and for all pass this very

comprehensive national energy policy into law.

I yield back.

PREPARED STATEMENT OF HON. C.L. ‘‘BUTCH’’ OTTER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF IDAHO

Thank you, Mr. Chairman, for holding this hearing today and for continuing the

effort to pass an energy bill.

America needs a National Energy Policy like never before. U.S. energy consumption is at an all-time high and rising even while domestic energy production is declining. Our economy and security are at extreme risk. A comprehensive national

energy policy is long overdue.

The Energy Policy Act considered by the 108th Congress contained provisions

strengthening our national security by reducing dependence on foreign energy

sources through increased domestic exploration and production. It promoted a clean

environment by encouraging use of more renewable energy and alternative-fuel vehicles. It ensured a steady flow of electricity by requiring enforceable, mandatory

electric reliability standards. And it provided private-sector incentives for improving

efficiency standards on electric products, as well as improved regulation of nuclear

and hydroelectric power.

I am hopeful that we can soon move forward with similar legislation for the 109th

Congress, and that the Senate can find the votes to bring our nation’s outdated energy policies into the 21st century. The result will ensure all Americans have access

to reliable, affordable and cleaner energy for decades to come. A more independent

America with greater economic security will encourage investment and creation of

jobs.

I look forward to hearing from our witnesses.

PREPARED STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Mr. Chairman, thank you for holding hearings on this important topic. Over the

past four years, Congress has attempted to craft a comprehensive national energy

policy and it is my hope that the 109th Congress will achieve this important goal.

In fact, I believe that this is one of the most important things that we can do to

protect the American public and our economy.

Access to affordable energy is extremely important to our economy because highenergy prices force businesses to lay off workers. Small business owners around the

country have said that they are afraid that rising future energy costs threaten their

ability to stay in business. Fearful business owners will not hire new workers and

create new jobs. A comprehensive energy policy will help contain rising energy

prices and encourage businesses to hire more workers.

This week we will discuss the electricity title of the energy bill. I want to touch

on this very briefly because electricity plays such an important part in our society.

We rely on electricity to power our homes, hospitals, schools, businesses, and even

our government institutions.

21

In Texas, we are fortunate that the grid operation and reliability is managed by

ERCOT, the Electricity Reliability Council of Texas. ERCOT has put tough, enforceable, reliability standards in place, which has ensured that Texans have ample access to electricity. As Congress considers a national energy policy, I believe that

electricity reliability standards are an extremely important component of a comprehensive measure.

Panelists testifying next week will discuss, among other things, issues involving

oil, gas, and renewable energy, and I look forward to their testimony.

As we are all aware, today the United States imports nearly 60 percent of its oil

and this number is expected to increase to 75 percent by 2010. Most of this oil

comes from the Middle East and politically unstable nations such as Algeria, Nigeria and Venezuela. I believe it is a matter of national security for the United States

to achieve self-sufficiency when it comes to our energy needs.

That is why I support energy exploration in Alaska’s Arctic National Wildlife Reserve (ANWR). I believe that is prudent, in today’s geopolitical climate, to explore

domestic energy resources like those in ANWR and other federal lands. New technology has drastically shrunk the ‘‘footprint’’ needed for exploration and drilling,

which reduces the impact on the environment and wildlife. While I believe that we

must seek to minimize the impact of these activities on the environment, I do not

believe that our national security should be sacrificed.

In recent years, we have turned to natural gas as a clean burning fuel to help

diversify our fuel mix and reduce air pollution. To keep pace with demand, we must

ensure that we have ample supply to meet our future needs. The Barnett Shale, a

major natural gas shale formation located in my district in North Texas, is currently

a major source of natural gas and promises to help assuage future energy needs.

I believe that comprehensive energy policy should seek to encourage the development and production of non-conventional sources, like the Barnett Shale.

In addition to encouraging conventional energy production, I believe that it is important that a comprehensive energy policy encourages renewable energy development and energy conservation.

I strongly support the use of renewable energy, like wind, solar, hydrogen, biomass, etc, when it is practicable. The State of Texas’ renewable energy mandate is

one of the most aggressive in the nation, requiring 3% of electricity generation to

come from renewable resources by 2009. While a number of the renewable provisions from the Conference Report on H.R. 6 from the 108th Congress were signed

into law by the President as part of the American Jobs Creation Act in October

2004, there are still a number of important renewable energy provisions contained

in this year’s energy bill.

In 2003, President Bush announced his Hydrogen and FreedomCAR initiatives

during his State of the Union Address. I believe that investment in alternative energy sources, like hydrogen, are an important part of comprehensive energy policy.

While I am new to the Energy and Commerce Committee this Congress, I am familiar with the President’s Hydrogen Initiative due to my service on the House Science

Committee during the 108th Congress. There are many benefits to developing hydrogen fuel cell technology, including a cleaner environment, the possibility that research can spur further technological innovation, and especially greater energy independence.

In closing, Mr. Chairman, I would like to reiterate my support for a comprehensive national energy policy and thank you again for this series of hearings.

Mr. SHIMKUS. Seeing no other members. I would like to welcome

our panelists.

First, a brief introduction. Mr. David Garman, who is Assistant

Secretary, and confirmed unanimously by the U.S. Senate on May

25, 2001. He previously served in a variety of positions on the staff

of two U.S. Senators, and two Senate committees during a career

spanning 21 years. Most recently, Mr. Garman served as chief of

staff to some Senator from Alaska, who is now Governor, who is

in the audience, Senator Frank Murkowski. And Mr. Garman also

served on the professional staff of the Senate Energy and Natural

Resources Committee, and on the Senate Select Committee on Intelligence. Mr. Garman also served as U.S. Senate observer in virtually all the major negotiations under the United Nations Framework Convention on Climate Change from 1995 to 2000. Welcome.

22

Also joining him is Cynthia Marlette. And Pat Wood, Chairman

of FERC named Cynthia Marlette as general counsel. Ms. Marlette,

who joined the Commission in 1979, has served as deputy counsel.

Earlier, she was associate general counsel for hydroelectric and

electric.

Also joining us is Mr. Luis Reyes. Mr. Reyes joined the NRC in

February 1978 as a reactor inspector in the Region 3 office located

in Glen Ellen, Illinois. That is in Illinois, and welcome. He held

progressively more responsible position, in Region 3, and subsequently, in the Region 2 office, located in Atlanta, Georgia. He

served as section chief in Region 3 from August 2001 through February 2002. Mr. Reyes completed a special assignment as a special

assistant to the Under Secretary Office of Energy, Science, and Environment, Department of Energy. In May 2004, he was selected to

his current position as executive director for operations.

Your full statements are already submitted for the record, and

we will be generous with time, but we have a long day ahead of

us, and you are recognized for 5 minutes for an opening statement.

STATEMENTS OF HON. DAVID GARMAN, ASSISTANT SECRETARY FOR ENERGY EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY; CYNTHIA A.

MARLETTE, GENERAL COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION; AND LUIS A. REYES, EXECUTIVE DIRECTOR FOR OPERATIONS, NUCLEAR REGULATORY COMMISSION

Mr. GARMAN. Thank you, Mr. Chairman, and members of the

subcommittee. I will be very brief, in order to allow more time for

questions and answers, and out of respect for the witnesses waiting

to appear.

As you mentioned, I am the Assistant Secretary for Energy Efficiency and Renewable Energy. The Department is currently without a Deputy Secretary or an Under Secretary, but I will nevertheless attempt to be responsive to the broader energy policy questions

outside my immediate area of responsibility.

A comprehensive energy policy should address 6 general objectives. First, we should encourage conservation of our energy resources by promoting energy efficiency in the production and use

of energy.

Second, we must increase our overall energy supply, with an emphasis on domestic supply. Too often, the energy debate pits energy

conservation and efficiency against the need for increased supply.

The fact is, we need both.

Third, to ensure energy security, we must maintain a diversity

of fuels from a multiplicity of sources. There is not, and will not

be, a silver bullet that meets our energy needs, so we must look

at oil, gas, coal, solar, wind, hydro, nuclear, biomass, just as we

should look to better exploit hydrogen as well as electricity as energy carriers for the future.

Fourth, we must encourage the modernization of our energy infrastructure, so as to more efficiently and reliably deliver energy

from its source to the consumer.

23

Fifth, these energy production, consumption, and conservation

goals must be accomplished while building on our successful record

of environmental protection.

Sixth, realizing our energy challenges will extend beyond the

next 2 decades, we should also provide a vision of the future in

which solutions to these energy challenges will lead to a transformed energy future. This is why provisions in the legislation related to hydrogen, next generation nuclear, fuel cell vehicles, carbon dioxide sequestration, and other breakthrough technologies are

so important. These long-term technologies may not all come into

commercial viability in the next week, month, or year, but it is very

important that we work on them now.

There are literally hundreds of individual provisions in this bill.

Candidly, there are provisions that we like, and provisions that we

are less enthusiastic about. For that reason, I would prefer not to

make specific comments on individual provisions beyond those

prior statements of the administration and the policies articulated

in the President’s 2006 budget, because we recognize that a bill

such as this is inevitably a compromise, and I wouldn’t want any

negative comment that I might make about a specific single provision during the course of this hearing to be taken as contrary to

the spirit of achieving an eventual consensus through a process of

thoughtful compromise.

As Secretary Bodman assured you yesterday in the full committee, we will actively work with you and your staff to achieve

passage of an energy bill, and stand ready to assist you in any way

possible.

Thank you, Mr. Chairman.

[The prepared statement of Hon. David Garman follows:]

PREPARED STATEMENT OF HON. DAVID GARMAN, ASSISTANT SECRETARY FOR ENERGY

EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY

I am pleased to appear today before the Subcommittee as it considers comprehensive and balanced energy legislation. As you know, President Bush’s National Energy Policy (NEP), issued in May 2001, contained 106 energy policy recommendations to modernize America’s energy production and distribution systems, promote

energy efficiency and conservation, strengthen our economy and create new jobs,

and reduce our dependence on foreign sources of energy.

While the Administration has implemented nearly all of the NEP recommendations that could be addressed through administrative action, some of the most significant NEP recommendations require Congressional action. Despite the serious

and significant efforts of many on this Committee and elsewhere in the Congress,

the passage of energy legislation has thus far eluded us. The President, in his 2005

State of the Union Address, repeated his call for Congress to pass energy legislation,

and we are pleased to see the Subcommittee moving ahead quickly.

General Principles

The Administration believes that a comprehensive energy policy must address six

general objectives to ensure the Nation’s continued growth and prosperity:

• First, we should encourage conservation of our energy resources by promoting

greater energy efficiency in the production and use of energy.

• Second, we must increase our overall energy supply, with an emphasis on domestic supply. Too often, the energy debate pits energy conservation and efficiency

against the need for increased supply. The fact is, we need both.

• Third, to ensure energy security, we must maintain a diversity of fuels from a

multiplicity of sources. There is not, and will not be, a ‘‘silver bullet’’ that meets

our energy needs.

• Fourth, we must encourage the modernizatio n of our energy infrastructure so as

to more efficiently and reliably deliver energy from the source to the consumer.

24

• Fifth, these energy production, consumption and conservation goals must be accomplished while building on our successful record of environmentalprotection. • Sixth, realizing that our energy challenges will extend beyond the next two decades, we should also provide a vision of the future in which solutions to these

challenges will transform our energy future.

With those general principles in mind, let me now outline a few of the specific

provisions that energy legislation should contain.

Energy Efficiency

To promote energy efficiency and the conservation of our energy resources, we

support many of the provisions in the energy efficiency titles of the bills considered

by both the House and the Senate during the last Congress. For example, we share

the view that the Federal Government, the largest single user of energy in the nation, should ‘‘lead by example’’ in using energy more efficiently, and the Federal

Government should be encouraged to do so. Energy efficiency programs such as the

Low Income Weatherization Assistance Program, the Energy Star program, and the

appliance efficiency standards program have demonstrated their value, and should

be continued and, where appropriate and cost-effective, expanded. In addition, the

President’s 2006 Budget includes $4.8 billion over 10 years in tax incentives for renewable energy and energy efficient technologies, such as hybrid and fuel cell vehicles.

Energy Supply from a Variety of Sources

To promote increased energy supply, we believe a multifaceted approach is warranted. For example, we support provisions to open the coastal plain of the Arctic

National Wildlife Refuge to exploration and, if oil is determined to be present, environmentally responsible development and production. Had we opened the coastal

plain to development nearly ten years ago as Congress had sought, it is conceivable

that new Alaskan oil reserves could be moving into the market today.

We also support the increased production of renewable energy, and were gratified

to see that Congress last year provided an extension of the renewable energy production tax credit as the President had sought. We do not, however, support efforts

to impose a national ‘‘one size fits all’’ renewable portfolio standard. We believe individual states are best suited to craft an RPS that meets their needs taking into account the renewable energy resource available in that state, and at least 18 states

have already adopted an RPS in some form.

The Administration does support a renewable fuels standard to increase the use

of clean, domestically-produced renewable fuels such as ethanol and biodiesel to reduce dependence on imported oil.

We also support the increased production of emission-free nuclear power, and

would welcome many of the provisions in the legislation considered last Congress

designed to revitalize nuclear power production. These include the provisions that

would reauthorize the Price Anderson Act permanently or at least long-term, and

clarify the tax status of nuclear decommissioning funds.

Upgraded Energy Infrastructure

Investment in our electricity grid has been hampered by, among other things, uncertainty in the regulatory realm. To provide the greater regulatory certainty that

is needed to generate additional investment, we support provisions to provide open

access to the transmission grid, repeal the Public Utility Holding Company Act and

reform PURPA.

We also support mandatory reliability standards to reduce the likelihood of widespread power outages such as the one we experienced two years ago. My colleague

from the Federal Energy Regulatory Commission will elaborate on these proposals

in greater detail, but let me stress the importance to grid reliability of continued

research and development by the Department of Energy and its research partners

in the labs, universities, and the private sector on new technologies, such as superconductivity, grid management and visualization tools, and distributed generation,

just to name a few.

Environmental Protection and a Transformed Energy Future

President Bush believes that we can continue to improve the environment while

expanding our energy use through the development and adoption of new technology.

Thus, we strongly support research and development, demonstration and deployment of advanced clean energy technologies, such as hydrogen, clean coal, and fusion energy, in a manner consistent with the President’s FY 2006 Budget proposals.

The President’s FY 2006 Budget includes $260 million for the Hydrogen Fuel Initiative to develop the technologies to produce, store, and distribute hydrogen for use

in fuel-cell vehicles, electricity generation, and other applications. With complemenVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
25

tary work ongoing under the FreedomCAR partnership, these efforts keep the Hydrogen Fuel Initiative on track for a 2015 commercialization decision by industry

that could revolutionize personal transportation, provide consumers better performance and more choice, and significantly reduce environmental and energy security

concerns.

The President’s 2006 Budget also provides $286 million for the President’s Coal

Research Initiative to improve the environmental performance of coal-fired power

plants by reducing emissions and improving efficiency. This includes funding to continue development of the FutureGen coal-fueled, near zero-emissions electricity and

hydrogen generation project announced by the President in February 2003.

FutureGen involves an industry and international partnership that will work cooperatively on research, development, and deployment of technologies that will dramatically reduce air pollution from coal-fueled electricity generation plants, generate

hydrogen, and capture and store greenhouse gas emissions.

In January 2003, President Bush committed the United States to participate in

negotiations on the largest and most technologically sophisticated energy research

project in the world—the International Thermonuclear Experimental Reactor

(ITER). The United States and its international partners—the European Union,

Japan, Russia, China, and South Korea—continue to work toward a consensus decision on the site for ITER early in 2005. If successful, this cost-shared $5 billion research project will advance progress towards developing fusion’s potential as a commercially viable and clean source of energy near the middle of this century. Assuming that international partners reach a timely site decision, the $50 million provided

in the FY 2006 Budget funds the first year of equipment fabrication for the United

States’ in-kind contributions to this important partnership.

Conclusion

In his 2005 State of the Union Address, President Bush once again highlighted

the need for reliable, affordable, and clean supplies of energy to keep our economy

growing and to create new jobs. As the President said, ‘‘(f)our years of debate is

enough: I urge Congress to pass legislation that makes America more secure and

less dependent on foreign energy.’’

Mr. Chairman, you have our commitment to work with you to enact energy legislation this year that is consistent with the President’s policy.

I appreciate the opportunity to testify before you today, and I will be glad to answer any questions the Committee might have.

Mr. HALL. Ms. Marlette, general counsel of FERC. We recognize

you for as much time as you consume, and we thank you.

STATEMENT OF CYNTHIA A. MARLETTE

Ms. MARLETTE. Thank you, Mr. Chairman and members of the

subcommittee. I appear here today as a staff witness, but Chairman Wood has authorized me to say that he fully supports the recommendations I make in my testimony.

The Congress needs to enact comprehensive legislation on energy, including amendments to the Federal Power Act and the Natural Gas Act, amendments which will help our Commission better

fulfill its responsibilities under those statutes. Any legislation considered by the Congress should do four things with respect to the

matters within FERC’s jurisdiction.

First, it should support the competitive wholesale electric markets that were envisioned by the Energy Policy Act of 1992.

Second, it should help ensure the development of electric and

natural gas infrastructure to meet our Nation’s energy needs.

Third, it should provide a system of mandatory enforceable rules

to govern the reliability of the Nation’s electric transmission grid,

and fourth, it should provide additional regulatory tools to help

deter market power abuse in electric and natural gas energy markets.

I recommend modifications to four existing provisions in the discussion draft. First is the provision that establishes a framework

26

for mandatory enforceable electric reliability rules, subject to Federal oversight. This type of provision is long overdue, particularly

in light of the August 2003 blackout, in which some 50 million people lost electricity. However, we have one recommendation for

changes to the provision. We believe Congress could improve the

provision by giving the electricity reliability organization a role in

directing utilities to build transmission facilities that are needed

for reliability purposes in areas of the country where a formal Commission-recognized regional planning process does not exist. This

authority should be subject to siting review by States or other governmental entities with jurisdiction, and also subject to the Federal

backstop siting provision that is contained in the discussion draft.

Second, with respect to the provisions in the discussion draft

which give the Commission increased criminal and civil penalty authority under the Power Act and the Gas Act, these are extremely

helpful to the Commission’s enforcement program and protection of

customers. However, I recommend that the Commission’s civil penalty authority be further strengthened to apply to any violation of

part III of the Power Act, as well as part II. I further recommend

that the Congress give the Commission civil penalty authority for

violations of the Natural Gas Act. Currently, the Commission has

no civil penalty authority at all under that Act.

Third, with respect to the sections that address electric and gas

price transparency, I recommend that the Congress harmonize

those two provisions, and use the template of the electric transparency provision for both. That template, however, should be

modified to permit, but not require, that the Commission establish

an electronic price reporting system to give it the ability to obtain

price and availability information.

The Commission should also have the authority under that provision to obtain information from all market participants. It should

also be able to rely on a nongovernmental entity to compile this information and make it publicly available if appropriate. And finally, we believe that any language on transparency should not inadvertently interfere with the Commission’s existing investigatory

authority to obtain information.

In addition to these recommendations for changes to the existing

provisions, I recommend that Congress consider 3 new provisions,

which would do the following. They would clarify the Commission’s

authority under section 3 of the Natural Gas Act; provide the Commission with emergency authority under the Federal Power Act to

temporarily suspend or change filed tariff provisions if necessary to

protect reliability, or to ensure that there is not market power

abuse; and I also recommend that the Commission be given authority to require multi-state electric public utilities to use economic

dispatch, if it would reduce the costs incurred in supplying power

to the utilities’ customers.

I would be happy to provide the committee with specific legislative language for each of these recommendations. Thank you again

for the opportunity to be here. Our agency stands ready to answer

questions, and to work with the committee, and the subcommittee,

as you consider legislation.

[The prepared statement of Cynthia A. Marlette follows:]

27

PREPARED STATEMENT OF CYNTHIA A. MARLETTE, GENERAL COUNSEL, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Good morning. My name is

Cynthia A. Marlette, and I am General Counsel of the Federal Energy Regulatory

Commission (FERC or Commission). Thank you for the invitation to appear here

today to testify on the provisions of the Energy Policy Act of 2005. My testimony

will focus on issues affecting the responsibilities of the FERC, including wholesale

electricity and natural gas markets and the siting of liquefied natural gas (LNG)

facilities. I appear today as a Commission staff witness and do not speak on behalf

of any Commissioner.

The Congress needs to enact comprehensive energy legislation, including amendments to the Federal Power Act (FPA) and the Natural Gas Act (NGA). Since the

Congress last enacted major energy legislation in 1992, significant changes have occurred in energy markets and in the electric industry in particular. The Commission, state commissioners and the industries we regulate continue to face new challenges following the 2000-01 energy crisis in California and the Western United

States, the collapse of Enron and the financial problems facing other utilities as a

result of that crisis, and the August 2003 blackout that left some 50 million people

with no electricity. These events and others underscore the need for Federal legislation. Congress should enact legislation to support the competitive wholesale electric

markets envisioned in the Energy Policy Act of 1992, help ensure the development

of electric and natural gas infrastructure, provide enforceable oversight of the electric grid’s reliability, and provide additional regulatory tools to deter market power

abuse.

The FERC-related provisions of the conference report on H.R. 6 address the most

pressing issues in the areas regulated by the FERC. The discussion below updates

the Subcommittee on progress made by the Commission in the key FPA and NGA

areas addressed by the conference report on H.R. 6, recommends changes to certain

provisions in the conference report on H.R. 6, and recommends the addition of some

new provisions. Since the Energy Policy Act of 2005 had not been introduced at the

time this testimony was prepared and may contain provisions that differ from those

in the conference report on H.R. 6, this testimony does not include specific recommended legislative text. I would be happy to provide such text once Commission

staff has reviewed any newly introduced bill.

Key Provisions in the Conference Report on H.R. 6

The provisions in the conference report on H.R. 6 address the major areas in

which FPA and NGA legislation is needed. My testimony identifies possible improvements to the bill.

Reliability

In the past year, in the wake of the Task Force Report on the Blackout of August

2003, the Commission has taken certain actions to enhance the reliability of the

electricity grid. On April 19, 2004, the Commission issued a policy statement clarifying that it interprets the term ‘‘Good Utility Practice’’—which is a requirement

currently contained in all public utility open access transmission tariffs—to include

compliance with North American Electric Reliability Council (NERC) reliability

standards or more stringent regional reliability council standards. Accordingly, public utilities that own, control or operate transmission systems subject to FERC jurisdiction are required to operate their systems in compliance with NERC reliability

standards.

In addition, concurrent with the issuance of the policy statement, the Commission

issued an order directing transmission providers to report on their vegetation management practices related to certain overhead interstate transmission lines. The

Commission later submitted a report to the Congress summarizing the responses it

received from transmission owners, and making certain recommendations on vegetation management practices.

Most recently, in December 2004, the Commission directed certain control area

operators and transmission providers to complete a survey on their operator training practices to help determine best operator training practices for the industry. Responses were due on January 31, 2005 and the Commission will report the results

to the Congress.

These actions, however, clearly are not a substitute for much-needed reliability

legislation. Federal legislation is necessary to provide a clear, enforceable framework for reliability rules. Specifically, a system of mandatory reliability rules, with

penalties for violations of these rules, is needed to maintain the reliability of our

nation’s transmission system. The reliability provisions in the conference report on

H.R. 6 generally are adequate. However, the Congress also should consider improvVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
28

ing the reliability provisions by giving the Electricity Reliability Organization (ERO)

a role in directing utilities to build transmission facilities needed for reliability purposes. Specifically, the ERO should be allowed to direct the expansion of transmission facilities for reliability purposes in areas of the country where a formal,

Commission-recognized, regional planning process does not exist. Any expansion directed by the ERO should be subject to siting authorization by states or other governmental entities with jurisdiction. If such governmental entities do not have authority to approve siting or do not act timely on a request for siting, the matter

should be subject to the Federal backstop siting procedures contained in section

1221 of the conference report on H.R. 6.

Federal Backstop Electric Transmission Siting Authority

Unlike its authority under the NGA, the Commission currently has no authority

to site electric transmission. The conference report on H.R. 6 would provide the

Commission with backstop interstate transmission siting authority for certain backbone electric transmission corridors identified by the Secretary of Energy, in the

event a state or local entity does not have authority to act or does not act in a timely manner. These provisions would help facilitate the development of important

transmission expansions and thus enhance the reliability of the grid, reduce the

total cost to customers, or both.

Criminal and Civil Penalties under the FPA and the NGA

The conference report on H.R. 6 would provide the Commission with greater penalty authority under the FPA and the NGA. Specifically, sections 1283 and 332 of

the conference report on H.R. 6 propose to increase criminal penalties for violations

of the NGA and the FPA and to expand civil penalty authority for violations of Part

II of the FPA.

Expanded criminal and civil penalty authority remains a high priority of the Commission. The Commission’s current civil penalty authority is extremely limited; for

example, civil penalties are available only in very limited circumstances under Part

II of the FPA and not at all for violations of the NGA. For violations not subject

to civil penalties, the only available civil remedies are refunds, the disgorgement of

unjust profits, or revocation of market-based rate authority. While such remedies

are significant, they do not serve the same deterrent function that civil penalties

could.

Section 1283 of the conference report on H.R. 6 addresses the major gaps under

the FPA in civil penalty authority by increasing civil penalty amounts and applying

civil penalties to any violation of Part II of the FPA. However, I recommend that

this provision be modified to also apply to any violation of Part III of the FPA. In

addition, a similar provision should be enacted to provide for civil penalties for any

violation of the NGA.

Price Transparency in Natural Gas and Electric Markets

The Commission has made significant progress on price discovery and price transparency issues, and effective monitoring of natural gas and electric markets. Technical conferences and workshops in the spring of 2003 led the Commission to issue

a policy statement on natural gas and electric price indices on July 24, 2003. The

Commission then conducted two broad surveys of industry price reporting practices

in September 2003 and March 2004; held a public workshop on liquidity issues in

November 2003; issued market behavior rules for both electric and natural gas market-based rate jurisdictional sellers in November 2003; issued a comprehensive staff

report on price formation issues in May 2004; held a further technical conference

on progress to date and the use of price indices in jurisdictional tariffs in June 2004;

and, most recently, issued an order on November 19, 2004, outlining plans for further monitoring and adopting requirements for price indices used in jurisdictional

tariffs.

With respect to jurisdictional electric sellers, the Commission in April 2002 also

finalized new requirements for the electronic filing of quarterly transactions reports.

These reports summarize the contractual terms and conditions in public utilities’

agreements for all jurisdictional services (including market-based power sales, costbased power sales, and transmission service) and transaction information for shortterm and long-term power sales during the most recent calendar quarter.

Legislation on price transparency would reinforce and help ensure continued

progress on these issues. It would be helpful if the Congress clarified the Commission’s authority to require the development of an electronic price reporting system,

and if the Congress gave the Commission the ability to require all electric market

participants to participate in such a reporting system. If the quality of price discovery continues to improve, continued monitoring may be sufficient, and continued

reliance on commercial vendors would be appropriate. If not, the Commission should

29

have the tools to step in and require market participants to provide price information. The Congress also should consider allowing the Commission to rely on a nongovernmental entity to compile this information and make it publicly available.

The general framework of section 1281 of the conference report on H.R. 6, which

applies to electric market transparency, should also be used for gas transparency

legislation. However, several modifications are recommended. First, the provisions

should be drafted to permit, but not require, the Commission to adopt an electronic

reporting system. Second, the Commission should be able to obtain information from

all market participants, subject to appropriate confidentiality protections. While the

electric provision permits the Commission to collect market information from all

market participants, the gas provision does not. The Commission cannot adequately

monitor markets if it is able to obtain information from only a subset of market participants. Third, the Commission should be able to rely on external commercial vendors to collect and publish information, if appropriate. Finally, the savings clause

referring to the CFTC should be modified so that it does not inadvertently limit the

FERC’s existing information collection authority in the context of specific investigations.

Repeal of PUHCA

The conference report on H.R. 6 would repeal the Public Utility Holding Company

Act of 1935 (PUHCA), but give the Commission and State regulatory commissions

broader access to the books and records of holding companies and their affiliates.

This is appropriate. PUHCA was enacted primarily to undo the harms caused by

certain holding company structures that no longer exist. In the almost 70 years

since PUHCA was enacted, utility regulation has increased substantially under the

FPA (including more rigorous oversight of corporate restructurings such as electric

utility mergers), federal securities law and state laws, all of which ensure that customers are protected. The existing integration requirement of PUHCA may actually

encourage market structures that impede competition. In particular, under PUHCA

acquisitions by registered holding companies generally must tend toward the development of an ‘‘integrated public-utility system.’’ To meet this requirement, the holding company’s system must be ‘‘physically interconnected or capable of physical

interconnection’’ and ‘‘confined in its operations to a single area or region.’’ This requirement tends to create greater geographic concentrations of generation ownership, which may increase market power. Further, PUHCA may impede investment

in transmission companies in more than one region because it could subject any

owner of ten percent or more of a company to becoming a holding company and possibly being required to register under PUHCA.

Repeal of PURPA ‘‘Must Purchase’’ Obligation

The Congress should repeal the Public Utility Regulatory Policies Act of 1978

(PURPA) must purchase obligation where there is a competitive market, but ‘‘grandfather’’ existing PURPA contracts. Section 1253 of the conference report on H.R. 6

limits prospective PURPA repeal to those states where all generation entities have

the ability to sell their output to the widest possible range of customers. The provision in the conference report on H.R. 6 on PURPA is adequate.

Electric Utility Mergers

Section 1292 of the conference report on H.R. 6 would amend section 203 of the

FPA to increase to over $10 million the value of Commission-jurisdictional facilities

that would trigger the need for Commission approval of jurisdictional mergers, dispositions or acquisitions of securities. The current value is $50,000. It would also

amend section 203 to require Commission approval of mergers of holding companies

that have public utilities in their holding company systems. Further, it would add

specific public interest criteria that the Commission must consider in reviewing section 203 transactions, including whether the proposed transaction would protect

consumer interests, would be consistent with competitive wholesale markets, or

would impair the financial integrity of any public utility that is a party to the transaction. These criteria are generally consistent with the criteria applied by the Commission under existing law to determine whether a transaction is consistent with

the public interest.

Regional Transmission Organizations

Major portions of the country are now served by Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs). The areas covered are the

Northeast (ISO New England and the New York Independent System Operator), the

mid-Atlantic (PJM Interconnection), the Midwest (Midwest Independent Transmission System Operator (MISO) and Southwest Power Pool (SPP)), California

(California Independent System Operator) and most of the state of Texas (ERCOT).

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This means that electricity customers over a large part of the nation now enjoy the

benefits of coordinated regional planning, operation and reliability oversight as well

as independent grid decision-making that RTOs and ISOs deliver.

Of recent note are new RTO developments in the Southwest. As a result of efforts

in the SPP region, the Commission was able to issue a series of orders resulting

in SPP becoming one of four RTOs in the nation. Many of the state commissions

in the SPP region (Arkansas, Kansas, Missouri, Oklahoma, and Texas) formed a regional state committee that is already addressing such key issues as transmission

cost responsibility and transmission pricing. The Commission has also approved a

joint operating agreement between SPP and MISO that will facilitate trade and reliability oversight between these regions and we have staffed a regional office in Little Rock, Arkansas, to support the SPP and the regional state committee in RTO

development and operations.

The Commission also has worked to improve the design and operations of the existing regional transmission organizations. For example, it has devoted extensive resources to working with the MISO staff, participants, and the Organization of Midwest ISO States (the state regulators in the region) to design and establish a single

regional dispatch and organized electricity market that will stretch from Ohio to

Manitoba to Missouri. This effort has required extensive discussions among market

participants and a number of Commission orders addressing regional approaches to

a host of market design and operational factors, including protection of existing

transmission rights and market monitoring and mitigation. Through these efforts,

the MISO market is now scheduled to begin operation on April 1, 2005. The Commission has also approved a joint operating agreement between MISO and PJM that

will facilitate trade and reliability oversight between these regions.

The Commission’s policy is to encourage membership in RTOs, since RTOs enhance the reliability and economic efficiencies of a region’s transmission grid and

power supply. The conference report on H.R. 6 endorses voluntary participation in

RTOs in section 1232’s ‘‘Sense of the Congress’’ statement. This provision is beneficial in light of the major benefits that RTOs can bring to electric markets. In addition, increased membership in FERC-approved RTOs or ISOs by governmental

transmitting utilities would provide even further benefits to electric customers, and

section 1232 of the conference report on H.R. 6 would facilitate this result for federal power marketing agencies and the Tennessee Valley Authority.

Electric Transmission Rate Incentives

Electric transmission rate incentives can help address the need for transmission

in areas where the system has not kept pace with market needs, can increase reliability, and can foster new entry by additional generation options.

The Commission has addressed the issue of transmission rate incentives in a

number of recent orders. In 2003, the Commission issued a proposed policy statement to provide rate incentives to transmission owners to promote transmission

independence and to provide for efficient expansion of the transmission grid. Specifically, the proposed policy statement would allow a higher return on equity when a

utility participates in an RTO or independent transmission company (ITC), sells its

RTO-operated transmission assets to an independent company, or pursues additional measures that promote efficient operation and expansion of the transmission

grid. The Commission is evaluating the comments received in response to this proposal.

On a case-by-case basis, the Commission also has authorized transmission rate incentives for a number of entities that have proposed to expand transmission infrastructure or taken steps to make their transmission facilities independent from activities of other market participants, such as becoming members of RTOs or forming

ITCs. For example, in 2002, it allowed a 50 basis point adder for utilities joining

the Midwest ISO, and in 2004, it permitted an independent transmission company

alternative incentives for building of transmission infrastructure.

The Commission currently has adequate authority to provide transmission incentives. However, action by the Congress on transmission incentives could provide

greater certainty to investors and thus encourage quicker, appropriate investments

in grid improvements. The provisions in the conference report on H.R. 6 would lay

to rest any potential legal arguments that the Commission lacks authority to provide transmission rate incentives.

Sanctity of Contracts

The enactment of section 1286 in the conference report on H.R. 6 would help resolve disputes about the standard of review to be applied to contracts that do not

clearly provide the standard of review. Under the ‘‘public interest’’ standard of review, as opposed to the ‘‘just and reasonable’’ standard of review, a contract may

31

be modified only if it would be contrary to the public interest to allow the contract

to remain, e.g., where the financial integrity of the selling utility might be impaired,

the rate is unduly discriminatory, or the rate would cast an excessive burden on

other customers. Section 1286 of the conference report on H.R. 6 addresses the sanctity of contracts and requires a ‘‘public interest’’ standard of review for new contracts unless a contract expressly provides otherwise. This section would clarify an

unclear body of judicial and administrative precedent in an appropriate way that

ensures greater preservation of the terms of contracts.

Alaska Natural Gas Pipeline

Last year, the Congress enacted the Alaska Natural Gas Pipeline Act, which clarified issues regarding proposed Alaska transportation projects, and established a

framework for the Commission’s consideration of applications for such projects.

Emergency Supplemental Appropriations for Hurricane Disasters Assistance Act,

2005, Pub. L. No. 108-324, ch. 12, sec. 1201, § 101-116, 118 Stat. 1220, 1255-67

(2005). That Act and the pre-existing NGA and Alaska Natural Gas Transportation

Act provide the Commission with sufficient authority to address such matters.

An Alaska natural gas pipeline is one of the Commission’s highest regulatory priorities. As required by the Alaska Natural Gas Pipeline Act, the Commission is in

the process of drafting regulations governing open seasons for the allocation of capacity on Alaska pipeline projects, and is scheduled to issue those regulations this

week. The Commission stands ready to work with potential pipeline proponents,

shippers, the State of Alaska, other government agencies, Canada and the public to

do everything possible to ensure prompt consideration of proposals to move Alaska

natural gas to markets in the lower 48 states.

Alternative Conditions and Fishways for Hydroelectric Projects

Section 231 of the conference report on H.R. 6 would require federal resource

agencies that have authority under the FPA to prescribe fishways and establish

mandatory conditions in hydroelectric licenses to consider alternative prescriptions

and conditions proposed by license applicants. It would also allow alternatives to be

proposed by other interested entities.

FPA Refund Effective Date

Section 1284 of the conference report on H.R. 6 would allow refunds from the date

a complaint is filed or from publication of a notice that the Commission has instituted a proceeding under its own motion under section 206 of the FPA. This provision appropriately would protect customers by providing an additional 60 days of

refund protection.

Additional Legislation

The conference report on H.R. 6 adequately addresses the urgent need for energy

legislation. However, there are three additional areas the Congress might want to

consider addressing, as described below.

Siting of LNG Facilities

With regard to liquefied natural gas (LNG), in order to effectively and efficiently

site infrastructure that is in the public interest, the Congress should consider clarifying the Commission’s jurisdiction to site LNG facilities onshore or in state waters,

and provide for a single federal record and for direct appeal of LNG-related decisions to a United States court of appeals. The Commission currently is involved in

litigation in the U.S. Court of Appeals for the 9th Circuit with respect to the scope

of its authority to site LNG terminal facilities. Legislation could end regulatory uncertainty by clarifying the Commission’s authority in this area. A single federal

agency should have the statutory authority to determine whether a specific proposal

for LNG infrastructure development is in the public interest. While no federal or

state agency acting under federal law should lose its existing statutory authority,

for example, Coastal Zone Management Act determinations and Clean Water Act

certifications, a single agency should be responsible for the final public interest determination and be held accountable for that determination. In addition, the creation of one federal record would allow a single agency to serve as the lead agency

for National Environmental Policy Act purposes. All federal and state agencies

should work with the lead agency as it develops the record, and provide their decisions under their respective laws to the lead agency, within a timeframe set by that

agency. Such a requirement would avoid sequential permitting. Finally, direct appeal to a United States court of appeals would avoid the long delays as individual

permit appeal processes wend their way through state and federal administrative

appeals, state court and finally federal court appeals over several years. Economic

Dispatch of Electric Facilities

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The Congress should consider expanding the provision on ‘‘economic dispatch’’

contained in section 1237 of the conference report on H.R. 6. Economic dispatch refers to a public utility meeting the power needs of its customers by using the most

economical facilities available, including those owned or operated by independent

power producers. Specifically, the Congress should consider allowing the Commission to require a multi-state public utility to use economic dispatch if it will reduce

the costs incurred in supplying power to the utility’s customers. Economic dispatch

also could reduce the amount of natural gas used to generate electricity and help

alleviate the demand pressures on today’s natural gas prices.

Authority to Require Emergency Revisions to FPA Tariffs

It would be helpful if the Congress gave the Commission emergency authority to

approve temporary changes to, or temporarily suspend, tariff provisions on file with

the Commission, if necessary to ensure reliability or prevent market power abuse.

Today’s markets are much more dynamic than traditional cost-based arrangements

and can need corrective action much more quickly than the procedures historically

used under the FPA. Legislation providing temporary authority to change or suspend tariff provisions without notice and comment, for a period up to 30 days, would

allow the Commission to better protect customers in emergency circumstances.

Conclusion

Thank you again for the opportunity to address legislative recommendations to

the Congress. The conference report on H.R. 6 would resolve appropriately the most

important issues raised by the need to ensure an adequate supply of energy at reasonable prices. My testimony offers some additional improvements that the Congress should consider. With or without these improvements, the Congress needs to

pass an energy bill. Our Nation’s energy customers deserve no less. I would be

happy to provide additional information or assistance as the Subcommittee reconsiders this legislation.

Mr. HALL. And we thank you. Mr. Reyes.

STATEMENT OF LUIS A. REYES

Mr. REYES. Mr. Chairman and members of the committee, it is

a pleasure to appear before you to discuss the views of the United

States Nuclear Regulatory Commission on the Energy Policy Act of

2005. My discussion will focus on those provisions that will directly

affect the work of the Commission and the operations of its licensees.

The Commission is dedicated to ensuring adequate protection of

public health and safety, the common defense and security, and the

environment in the application of nuclear technology for civilian

use. It is of the view that, overall, enactment of the nuclear-related

provisions of H.R. 6, as reported by the conference committee,

would be a significant step forward for the protection of public

health and safety and the common defense and security. Indeed, it

considers some of the provisions in the bill to be the most important nuclear security proposals relating to commercial nuclear activities that have been placed before the Congress. This legislation

will also assist NRC in evaluating license applications for new nuclear facilities.

As your committee is aware, the Commission has taken many actions since September 11, 2001, to improve security at NRC-regulated facilities. Major actions we have taken include: ordering owners of nuclear power plants to increase physical security to defend

against a more challenging threat; requiring strict site access controls for personnel; requiring utilities to conduct vehicle checks at

greater stand-off distances; improving liaison with Federal, State,

and local agencies responsible for protection of the national critical

infrastructure; enhancing communications and liaison with the intelligence community; improving communication between military

33

surveillance authorities, NRC, and its licensees in the event of an

emergency; ordering plant owners to improve their capability to respond to events involving large explosions or fires; enhancing readiness of security organizations by strengthening training and qualification programs for plant security forces; enhancing force-on-force

exercises to provide a more realistic test of plant capabilities to defend against an adversarial force; and reorganizing the NRC to better manage nuclear security and emergency response.

We have also worked with national experts to assess the consequences of terrorist attacks on nuclear facilities, including an attack from a large commercial aircraft. For the facilities analyzed,

the results confirm that the likelihood of both damaging the reactor

core and releasing radioactivity that could affect the public health

and safety is low. Even in the unlikely event of a radiological release in these circumstances, the studies indicate that there would

be time to implement onsite and offsite mitigating actions. These

results have also validated the offsite emergency planning basis.

We continue to add realism to our analyses while ensuring adequate protection of the public.

Over the years, the Nuclear Regulatory Commission has repeatedly expressed its support of enactment of legislation needing to

strengthen the security of facilities regulated by the Commission.

H.R. 6, as approved by the conference committee, contains provisions that will provide the authority for additional steps that

should be taken to protect the country’s nuclear infrastructure from

terrorism attack and other criminal activities, and to prevent malevolent use of radioactive material.

Most important, it contains a provision that will allow the Commission to authorize armed security officers of NRC-regulated facilities, to use more powerful weapons against violent attacks

against a nuclear facility, and against attempts to steal nuclear

material that could cause significant harm in the wrong hands. It

would also expand the current requirement for fingerprinting, for

criminal history checks, of individuals with unescorted access to a

utilization facility or access to safeguards information. This expansion of requirements also includes other NRC licensees and their

employees, who either have access to radioactive material that

could be used for malevolent purposes or access to safeguards information. It will criminalize the unauthorized introductions of dangerous weapons into nuclear facilities. In addition, it will criminalize sabotage of construction of nuclear facilities, and will cover

a wider range of facility and activities in the provisions that are

presently covered.

Other provisions of H.R. 6 that are important to nuclear safety

and enhancement of NRC effectiveness and efficiency are delineated in my written testimony. Some provisions of H.R. 6 are not

necessary to perform our mission, because the Commission has already addressed them, or is in the process of doing so, or because

they do not necessarily improve security beyond what the NRC is

already achieving through its activities, and because implementing

them will divert NRC’s limited security resources from higher priority activities.

Mr. Chairman, in the interests of time, I will not list those provisions which the Commission believes are not necessary to perform

34

their mission, but they are included in my written testimony submitted to the committee.

The Commission would welcome the proper enactment of many

H.R. 6 provisions that relate to commercial use of radioactive material, since they will assist the NRC in its effort to further ensure

the adequate protection of public health and safety, and the common defense and security.

This complete my prepared remarks, and I will be happy to answer any questions.

[The prepared statement of Luis A. Reyes follows:]

PREPARED STATEMENT OF LUIS A. REYES, EXECUTIVE DIRECTOR FOR OPERATIONS,

UNITED STATES NUCLEAR REGULATORY COMMISSION

INTRODUCTION

Mr. Chairman and members of the Committee, it is a pleasure to appear before

you to discuss the views of the United States Nuclear Regulatory Commission on

the Energy Policy Act of 2005. My discussion will focus on those provisions that

would directly affect the work of the Commission and the operations of its licensees.

The Commission is dedicated to ensuring adequate protection of public health and

safety, the common defense and security, and the environment in the application

of nuclear technology for civilian use. It is of the view that, overall, enactment of

the nuclear-related provisions of H.R. 6, as reported by the conference committee,

would be a significant step forward for the protection of public health and safety

and the common defense and security. Indeed, it considers some of the provisions

in the bill to be the most important nuclear security proposals relating to commercial nuclear activities that have been placed before the Congress. This legislation

would also assist NRC in evaluating license applications for new nuclear facilities.

As your Committee is aware, the Commission has taken many actions since September 11, 2001, to improve security at NRC-regulated facilities. Major actions we

have taken include:

• Ordering owners of nuclear power plants to increase physical security to defend

against a more challenging adversarial threat;

• Requiring strict site access controls for personnel;

• Requiring utilities to conduct vehicle checks at greater stand-off distances;

• Improving liaison with Federal, State, and local agencies responsible for protection of the national critical infrastructure;

• Enhancing communication and liaison with the intelligence community;

• Improving communication between military surveillance authorities, NRC, and its

licensees in the event of emergency;

• Ordering plant owners to improve their capability to respond to events involving

large explosions or fires;

• Enhancing readiness of security organizations by strengthening training and qualification programs for plant security forces;

• Enhancing force-on-force exercises to provide a more realistic test of plant capabilities to defend against an adversarial force;

• Requiring security improvements for high-risk radioactive sources; and

• Reorganizing the NRC to better manage nuclear security and emergency response.

We have also worked with national experts to assess the consequences of terrorist

attacks on nuclear facilities, including an attack from a large commercial aircraft.

For the facilities analyzed, the results confirm that the likelihood of both damaging

the reactor core and releasing radioactivity that could affect the public health and

safety is low. Even in the unlikely event of a radiological release in these circumstances, the studies indicate that there would be time to implement on-site and

off-site mitigating actions. These results have also validated the off-site emergency

planning basis. We continue to add realism to our analyses while ensuring adequate

protection of the public.

LEGISLATIVE NEEDS

Over the years, the Nuclear Regulatory Commission has repeatedly expressed its

support of enactment of legislation needed to strengthen the security of facilities

regulated by the Commission. H.R. 6, as approved by the conference committee—

hereafter, I will simply refer to that version as ‘‘H.R. 6’’ or ‘‘the bill’’—contains provisions that would provide the statutory authority for additional steps that should be

35

taken to protect the country’s nuclear infrastructure from terrorist attack and other

criminal activities, and to prevent malevolent use of radioactive material.

Most important, it contains a provision that would allow the Commission to authorize guards at NRC-regulated facilities and activities to receive and possess, and,

in appropriate circumstances, to use more powerful weapons against violent attacks

against a nuclear facility and to thwart attempts to steal nuclear material that

could cause significant harm in the wrong hands. (Section 663 of the bill.) It would

also expand the current requirement for fingerprinting, for criminal history checks,

of individuals with unescorted access to a utilization facility or access to safeguards

information, including in the provision other NRC licensees and their employees

who either have access to radioactive material that could be used for malevolent

purposes or access to safeguards information. (Section 662 of the bill.) It would criminalize the unauthorized introduction of dangerous weapons into nuclear facilities.

(Section 664 of the bill.) In addition, it would criminalize sabotage of construction

of nuclear facilities and would cover a wider range of facilities and activities in the

provision than are presently covered—for example, it would add primary and

backup facilities from which radiological emergency preparedness alert and warning

systems are activated. (Section 665 of the bill.)

Other provisions important to nuclear safety and enhancement of NRC’s effectiveness and efficiency that are included in the bill are:——(1) authorization for homeland security-related activities to be covered from the General Fund, with the exception of fingerprinting, criminal background checks, and security inspections (Section

668 of the bill); (2) clarification that NRC’s jurisdiction extends to former licensees

of production or utilization facilities to the extent that they own or control decommissioning funds (Section 626 of the bill); (3) clarification of the length of combined

construction permits and operating licenses for new reactors (Section 621 of the

bill); (4) authorization for NRC to charge Federal agencies fees for licensing and inspections (Section 623 of the bill); (5) elimination of NRC’s antitrust review authority over power reactor licensee applications—such reviews duplicate the work of

other Federal agencies, such as the Federal Energy Regulatory Commission and the

Department of Justice, and would allow NRC’s limited resources to be better used

(Section 625 of the bill); and (6) human resources provisions that would contribute

to maintaining the NRC’s necessary regulatory expertise (Sections 622 and 624 of

the bill). We were also pleased to see an extension of the Price-Anderson Act provisions applicable to NRC licensees in the bill (Section 602 of the bill).

Some provisions in H.R. 6 are not necessary to perform our mission, because the

Commission has already addressed them, or is in the process of doing so, or because

they do not necessarily improve security beyond what the NRC is already achieving

through its activities, and because implementing them would divert NRC’s limited

security resources from higher priority activities. One such provision is section 661

of the bill, requiring a study of nuclear facility threats that pose a risk to the security of various classes of NRC-licensed facilities. Section 661 would authorize revision of the Design Basis Threat by rulemaking, which raises important questions

about protection of classified and safeguards information. The section would also require the Commission to establish an operational safeguards response evaluation

program that ensures that the physical protection capability and operational safeguards response for sensitive nuclear facilities will be tested periodically through

force-on-force exercises. The NRC has established such a program. Another such

provision is section 666, which would require the NRC to establish a system to ensure that export and import of radioactive materials are accompanied by a manifest,

and that each individual receiving or accompanying the transfer of the materials in

the United States shall be subject to a security background check. We have already

taken the appropriate actions to protect the public from high risk sources.

SUMMARY

The Commission would welcome the prompt enactment of many H.R. 6 provisions

that relate to commercial use of radioactive material since they would assist the

NRC in its efforts to further ensure the adequate protection of the public health and

safety and the common defense and security.

I appreciate the opportunity to appear before you today. The Commission would

welcome the opportunity to work with your Committee, and the Committee’s staff,

on achieving the goal of passing this important legislation.

Mr. HALL. All right. We thank you very much. We will get underway with some of the questioning now. I yield myself 5 minutes.

I will start with Mrs. Marlette, if I might, and I thank you for appearing, and I think it is a credit to you and to your background

36

ability that Pat Wood says that, by letter, that you are authorized

to speak on policy, and we thank you for your time.

Ms. MARLETTE. You are welcome.

Mr. HALL. Actually, FERC has siting authority for international

natural gas pipelines under section 7, as you know, of the NGA.

Regarding FERC backstop authority in the bill to order new transmission, would you please describe how FERC typically treats pipeline certificates, and how that might compare to the exercise of

backstop transmission siting authority if the bill is enacted, and

ask you a further question that might be easier for you to knock

out of the park. We would want you to be fair with the States and

local landowners, and you can and would do that.

Mr. MARLETTE. Yes, sir. As you said, the Commission does have

authority under section 7 to certificate interstate natural gas pipelines. It has had, what, over 40—let us see, 70 years experience almost, in licensing projects. The Commission undertakes a thorough

environmental analysis. It works very closely with State and local

entities to ensure that local, including homeowner concerns are

taken into account. I think if the Commission were given the backstop siting authority, which would only be for major transmission

corridors identified by the Secretary of Energy, it would begin that

pipeline experience to balancing all the interests that need to be

taken into account in appropriate siting.

Mr. HALL. I thank you. And I will go to Mr. Garman, and ask

you what are your top 3, or maybe 5, legislative priorities for the

Department, and whether or not these legislative priorities are addressed in the Energy Policy Act that we are talking about. Also,

in your opinion, if the Energy Policy Act policy of 2005 is enacted

into law, and with steps taken at DOE, will the President’s national energy policy be completed?

Mr. GARMAN. The top activity, or the top important priority, we

think, that is critically important, and the testimony from FERC

pointed to this, is to enhance electricity reliability and modernization through providing the regulatory certainty that has dissuaded

investment in the transmission system for so long. We think it is

critically important that—irrespective of what Congress does with

certain individual aspects—the investment community needs to

have the regulatory certainty to invest in the transmission and distribution network. That will do more to increase the reliability of

the grid than a great many things that we could be working on.

We also believe that the provisions in the bill that look to that

next generation of energy resources are very important. Hydrogen,

next generation nuclear, clean burning coal plants, IGCC with coal

sequestration, are all technologies that need to be brought across

that finish line, so that we will not be having a debate similar to

this one 20 years from now. In the near term, however, we can’t

wait for these new technologies for 20 or 30 years.

We need to take action now. That is why the provisions, to

produce more energy on public lands today are so important, including the coastal plain of the Arctic National Wildlife Refuge. It

might seem unusual for me, the Department’s chief renewable energy advocate, if you will, to express support for oil production from

the Arctic National Wildlife Refuge, but that is clearly energy the

Nation needs, and it is important that we move ahead with it. The

37

last time I checked, the Trans-Alaska Gas Pipeline, or the TransAlaska Oil Pipeline was down to about 875,000 barrels a day, and

it has got capacity for at least a million more, and that is energy

that we need to bring to market.

Similarly, the provisions for energy conservation and efficiency

that are in the bill are very, very important to us. We think that

is fundamental, and we applaud the work that the committee has

done, and the Congress has done in this area as well. So I think

that sums it up very generally, Mr. Chairman.

Mr. HALL. I thank you. At this time, I recognize for 5 minutes,

Ranking Member Dingell. Thank you, Mr. Dingell.

Mr. DINGELL. [continuing] are these questions to Ms. Marlette.

Chairman Wood indicates that he does not support the provisions

on standard market design, or SMD, rule. He does not support the

native load service obligation, the SMD, or the voluntary transmission pricing plans which are often referred to as participant

funding. Have I correctly summarized the position of the chairman?

Ms. MARLETTE. I believe the chairman’s position is that he does

not think those provisions are needed. With regard to the SMD

provision, the Commission has made tremendous progress with voluntary RTOs and ISOs since the time that provision first appeared.

Mr. DINGELL. Thank you.

Ms. MARLETTE. So in ways, it is outdated. With regard to the native load——

Mr. DINGELL. Thank you. My time is very limited. On the other

hand, the chairman has suggested that 3 entirely new legislative

provisions should be included in the energy bill that would do as

follows: authorize FERC to order expansion of transmission facilities for reliability purposes; two, authorize FERC to mandate the

use of economic dispatch of generation; and three, grant FERC

emergency authority to temporarily suspend or modify, file tariff

provisions to ensure the reliability or prevent market power abuse.

Am I correct in that?

Ms. MARLETTE. On the first provision, we are not recommending,

and the chairman is not recommending, that FERC be given the

authority to direct reliability transmission expansions, but rather,

that the electric reliability organization that would be created in

the new reliability provision be able to——

Mr. DINGELL. So he is urging that that be a power given to the

reliability organization——

Ms. MARLETTE. But——

Mr. DINGELL. [continuing] as opposed to FERC.

Ms. MARLETTE. Correct, but it would only be in circumstances

where there is not a regional planning process in place, and also,

it would be subject to State and local siting authority.

Mr. DINGELL. All right.

Ms. MARLETTE. With the backstop siting for Federal authority

kicking in if the State could not act, or did not act on a timely

basis.

Mr. DINGELL. Now, am I correct on my appreciation on the other

two points?

Ms. MARLETTE. You are correct that he is proposing that the

Commission be allowed to order economic dispatch where it would

reduce costs to customers, in a multi-state——

38

Mr. DINGELL. Would you please see to it that prior to Monday,

February 14, that we receive legislative language suggested by the

Commission?

Ms. MARLETTE. Yes, sir. You will have a Valentine——

Mr. DINGELL. By that date.

Ms. MARLETTE. [continuing] present.

Mr. DINGELL. Now——

Ms. MARLETTE. Yes, sir.

Mr. DINGELL. Because we will need to have the consideration,

that is the appropriate time and fashion. Now, I note the reliability

section caps spending for transmission reliability at the rate of $50

million a year for a period of 10 years. Can you explain to us why

this level of funding is necessary, why it is adequate, or whether

it is adequate, to provide the—rather, to accomplish the task of

making currently voluntary rules mandatory and enforceable? Does

FERC have any estimates as to how much it would cost to properly

implement this title?

Ms. MARLETTE. Mr. Dingell, I can’t explain that to you, those

provisions were a surprise to us. We are still analyzing them. We

have not estimated, at this time, what it would cost the Commission to implement its part of the bill. There is also a cap there on

the expenditures of the ERO itself, so we are still looking at that.

Mr. DINGELL. Most of the expenditures to be made to comply

with the reliability sections will be expenditures that will be required to be made by the licensees. Those numbers may be very

large, but they are not Federal funds, unless they might be, perhaps, imposed on Bonneville, or perhaps some Federal generating

entity. Is that correct?

Ms. MARLETTE. The ERO would collect fees and charges from

members, because the rules would be mandatory for both private

as well as public utility organizations, there would be fees collected

to sustain the organization. That is correct. But that is a separate

issue from what the Commission would have to spend to implement

its oversight of that organization.

Mr. DINGELL. Could you submit to us, as some information which

would assist us, first what would be required in the way of expenditures by the Commission, and second, what would be the level of

those expenditures, so we can find out whether this cap is necessary, whether it is too large, whether it is too small, or whether

the committee ought to arrive at some different judgment with regard to the expenditures that will be imposed upon the Commission by reason of the legislation.

Ms. MARLETTE. Yes, sir. We will.

[The following was submitted for the record:]

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45

46

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Mr. DINGELL. Again, could you do that by the 14th? I hate to ask

these time limits, but you understand that the—our chairman has

indicated he is going to proceed very rapidly on this bill, and if we

fail to be ready, we may not know what we are doing with regard

to important questions on which we need the advice of the Commission.

Mr. Chairman, I thank you for your courtesy to me.

Mr. HALL. Thank you, Mr. Dingell. I think I want to ask at this

time unanimous consent to put in the record a letter dated today,

from the Federal Energy Regulatory Commission signed by Pat

Wood, the Chairman, setting out the description of the authority,

scope, and testimony, and ability of Commission staff to speak for

the Commission. I ask this to be made a part of the record.

[The letter referred to follows:]

53

54

Mr. HALL. At this time, I recognize Ranking Member Boucher,

the gentleman from Virginia, for 5 minutes.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman.

Ms. Marlette, I have a series of questions for you, and I also

want to thank you for your presence here this morning, and your

provision of testimony to us. I understand that the FERC is recommending to us that authority be given to the agency with respect

to liquefied natural gas facilities. Answer for me several questions

concerning those facilities, if you would, please.

First of all, what authority do you currently have over the siting

or other aspects of the construction of LNG facilities? Second, exactly what authority do you seek? And third, describe, if you would,

what the effect would be on the role of the States in enforcing State

environmental laws in the event that your request for authority is

honored, and you are given the authority that you seek?

Ms. MARLETTE. I will try, sir. What we are seeking is clarification of authority that the Commission thinks it already has under

section 3 of the Natural Gas Act with regard to foreign commerce,

imports of LNG, and the siting of terminals, either onshore or in

State waters, to accommodate that LNG. We are currently in a dispute in the Ninth Circuit with the California Public Utilities Commission over that authority. Now, I would make very clear that

that authority, which is siting, is very separate from State authority under the Coastal Zone Management Act, section 401 Water

Quality Act certifications, or other Federal laws which States are

tasked with implementing. We are not recommending changing any

of that. So in the Commission’s view, this would be a clarification

of authority.

We are also recommending, and I will be providing specific legislative text, a mechanism or a legislative approach that would bring

together the records of all the Federal agencies that have a role in

getting LNG terminals sited, so that we have one Federal record,

and also, that the Commission be the lead agency, and be able to

establish timelines, not to interfere with timelines that are set

forth in other Federal statutes, but to try to get the agencies to

work at the same time, rather than in a sequential process, so that

we can expedite and harmonize all those processes.

The third piece of what we are recommending would be to have

the records of all the agencies go to the same court, to a United

States Court of Appeals, at the same time, so that they can be reviewed at the same time. And again, the attempt is to harmonize,

to clarify the FERC’s siting authority, but not intrude on other

Federal statutes.

Mr. BOUCHER. Well, what about the role of the States? Suppose

you are given the authority that you seek. Would the role of the

States at enforcing environmental statutes, for example, be diminished at all?

Ms. MARLETTE. They should not be diminished, in my opinion.

Mr. BOUCHER. So the States still would have the authority to say

no to the siting of an LNG facility if it deemed that such a siting

was contrary to local environmental requirements.

Ms. MARLETTE. Right. Or if there were a coastal zone management conflict, they would be able to say no as well.

55

Mr. BOUCHER. So you are not seeking the authority to have a

preemptive Federal permit that, once issued, would enable the facility to be sited, notwithstanding State objection?

Ms. MARLETTE. Correct.

Mr. BOUCHER. Okay. Let me ask you about another subject. I

don’t think you have addressed this in your testimony, but in the

course of drafting the legislation last year, and in negotiating the

conference agreement, we were very careful to preserve the authority of the FERC to review mergers within the electricity industry.

You do not, as I understand it, currently however have authority

to review mergers that are generation to generation only. In other

words, if the sole business of the entities that would be merging

would be the generation of electricity without regard to transmission or distribution, I am told you do not have authority to review those. Is that correct, and if it is, would you be—what would

your reaction be to the grant of authority for you to review those

mergers?

Ms. MARLETTE. It is partially correct. Let me clarify. If there is

an actual merger of two utilities, and there is some piece of transmission attached, a wire, perhaps, or a transformer, which is often

how the Commission’s jurisdiction is triggered, or if there is a

transfer of a wholesale contract along with that generation, the

Commission does have jurisdiction under existing law. The gap, in

my view, is only where you solely have an acquisition of generation, and there is nothing else.

Mr. BOUCHER. But——

Ms. MARLETTE. That is the gap.

Mr. BOUCHER. And I am trespassing on others’ time here, but

momentarily, let me just ask, let us suppose you have the situation

where you don’t have the connecting wire, you don’t have the transfer of the wholesale power contract, where it really is just the acquisition of one generator by another. Should you have authority

to review those?

Ms. MARLETTE. I think that someone should have authority.

Chairman Wood’s view, as expressed to me yesterday, is that he

does not like the notion of duplicative authority, that to the extent

another agency, such as the Justice Department or the FTC in

their antitrust review have authority, then the Commission

shouldn’t have overlapping, duplicative authority.

Mr. BOUCHER. Well, we could carry on a discussion about the

theory of that answer at some length. I don’t agree with what you

are saying. However, Mr. Chairman, my time has expired. Thank

you very much.

Mr. HALL. Thank you. The Chair now recognizes Mr. Whitfield,

the gentleman from Kentucky, who did not wave, recognize your

for—did wave—recognize you for 8 minutes.

Mr. WHITFIELD. Mr. Chairman, thank you very much. Ms.

Marlette, several municipalities within the TVA’s service authority

have served notice to TVA that they are going to terminate their

contracts. They have been told that once they stop buying power

from TVA, that they will no longer have access to the TVA transmission lines, and at a time when we have a capacity problem with

transmission lines, siting is difficult. It is very costly. We are very

much concerned about that, and then, I noticed in the President’s

56

budget for fiscal year 2006, that there was funding for FERC to assert, I suppose, additional jurisdiction over TVA. I was really not

aware that FERC had very much jurisdictional authority over TVA,

and I was wondering if you might elaborate on what the authority

is, and whether or not FERC may need additional legislative assistance to become more involved in issues like that.

Ms. MARLETTE. Yes, sir. Mr. Whitfield, FERC does have some existing authority over TVA, not a lot. Its authority is limited to

being able to order transmission access under section 211 of the

Federal Power Act. There are certain provisions regarding TVA,

TVA-specific provisions, and the Commission has to make certain

findings, but the Commission can, and actually has, in certain circumstances, ordered TVA to provide service. Now, there are some

restrictions, because of the ring fence around TVA, in allowing customers to basically shop outside the region, so there are specific restrictions in that regard. In fact, I think we may have some actual

pending cases involving a 211 request for TVA service.

Mr. WHITFIELD. Well, now, I had understood that American Electric Power, perhaps, had filed a complaint against TVA on an issue

similar to that. Is that correct?

Ms. MARLETTE. I am not aware——

Mr. WHITFIELD. East Kentucky.

Ms. MARLETTE. [continuing] of a complaint.

Mr. WHITFIELD. East Kentucky.

Ms. MARLETTE. Oh, East Kentucky, yes. Yes. We have a pending

case.

Mr. WHITFIELD. And could you elaborate a little bit more on—

municipalities along the dividing line have much easier access to

other power lines. Within the TVA access area, it is certainly more

difficult there. Would you elaborate on what additional authority

FERC would need to get into some of those issues, as well?

Ms. MARLETTE. I may need to provide it for you after the hearing, if I could, for the record.

Mr. WHITFIELD. Okay.

Ms. MARLETTE. I would need to take a look at the statute, to tell

you exactly what one would need to do to give the Commission that

authority. My recollection is that other than the city of Bristol, Virginia, customers within that region cannot—the Commission cannot order access, so that they can reach suppliers outside of the

area.

Mr. WHITFIELD. Other——

Ms. MARLETTE. That is pursuant to the TVA Act, and then, the

restrictions are carried over into the Power Act.

Mr. WHITFIELD. Now, there was a lawsuit regarding the Bristol,

Virginia area, wasn’t there?

Ms. MARLETTE. I believe they did get service, is my——

Mr. BOUCHER. Would the gentleman——

Mr. WHITFIELD. Yes.

Mr. BOUCHER. As the representative of Bristol, Virginia, I have

a certain history with this subject. In the 1992 Energy Power Act,

we—or the amendments thereto, we adopted a provision that directed that Wheeling be provided across the TVA system for the

city of Bristol, Virginia, should it purchase power from an indeVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
57

pendent supplier. That was never contested in court, and it has

worked very efficiently.

Mr. WHITFIELD. Okay. Thank you, Mr. Boucher. Thank you very

much, and Mr. Reyes, I would like to ask you one question as well.

I noticed in the President’s budget request, there was a substantial

request for additional funding for safety security measures at the

uranium enrichment plant in Paducah, and I was wondering if you

might elaborate on needs that were identified there.

Mr. REYES. In this forum, it is hard to go into details of security,

but the licensee and the NRC has required a significant increase

on the security at all the facilities.

Mr. WHITFIELD. Okay.

Mr. REYES. And the funding is just to support those initiatives.

Mr. WHITFIELD. Okay. Now, these security guards at the plant

have been making arguments that with cleanup as well, that there

needs to be additional security at the cleanup sites. Do you have

a position on that, or an opinion on that?

Mr. REYES. Well, if it is under the jurisdiction of the Commission, the specific case you are talking about, the Paducah facility,

they are colocated facilities, where some of them are under the jurisdiction of the Nuclear Regulatory Commission, and others are

under the Department of Energy. So specific—speaking only for the

Nuclear Regulatory Commission, once certain activities are just

limited to waste, the security level is decreased.

Mr. WHITFIELD. Okay.

Mr. REYES. And we don’t publicly explain what that is detailed,

but the security requirements significantly decrease.

Mr. WHITFIELD. Okay. Thank you. Mr. Chairman, I will yield

back the balance of my time.

Mr. HALL. Thank you. I recognize the lady from California, Ms.

Capps, for 5 minutes.

Ms. CAPPS. Thank you, Mr. Chairman. Thank you to each of our

witnesses today, and I want to continue the line of questioning that

our ranking member started with you, Ms. Marlette, if I may. You

are an important witness. Some of the LNG-related provisions in

H.R. 6 and what FERC has said it wants in new energy legislation

are controversial, and strike many of us here as usurping a State’s

ability to be involved in the decisionmaking process of these giant

LNG facilities.

For example, section 330 of H.R. 6 would reduce a State’s ability

to weigh in on LNG proposals by allowing FERC to control the

record of appeal. This seems, despite your reassurances, to undermine critical protections in the Coastal Zone Management Act.

FERC has also indicated it wants legislation giving it unambiguous

controlling Federal authority, including the power of eminent domain, an exclusive jurisdiction over the siting of onshore LNG facilities nationwide. The concern with all of these provisions is what

we—is that we are centralizing a huge amount of decisionmaking

authority over these very controversial and complicated projects in

one agency, namely FERC.

So my question to you is, what assurances can you give a State

like mine, California, Massachusetts, Alabama, Virginia, that

have—that their concerns about LNG siting will be addressed durVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
58

ing the review process? How do they know that FERC wouldn’t just

ignore their concerns?

Ms. MARLETTE. To the extent it would be helpful, we are working

on proposed language which we will submit to you, we will try to

make it as clear as we possibly can that, as I stated earlier, State

actions under the CZMA and other Federal statutes will not be impaired. And we will try our best to do that. With respect to the

issue of eminent domain authority, at least the chairman’s position,

and our technical staff’s position so far, has been that these

projects have a national interest with respect to energy supply in

the country. We do need to respect States’ concerns. But if there

is not eminent domain authority, you can have one homeowner basically holding up a project that would benefit a region or a State.

Ms. CAPPS. I understand what you are saying, but there are

other ways of ensuring that that will not happen. I understand,

also, that we need energy. But these are, as you know, very incredibly complicated projects, many of them involving a variety of subjects, most of which FERC has very little expertise in. For example,

FERC is not an expert on local land use and zoning, public health

and safety, environmental protection, wildlife management, or

homeland security. FERC’s expertise is in energy, not in this myriad of other subjects, which must be addressed if—before any siting

decisions are made. And I know that you have signed an interagency agreement with a number of Federal agencies, and that

gives FERC the final word. I know FERC is actually fighting California, as you have referred to, to keep the State out of this decisionmaking process, and the way I read these legislative proposals,

FERC wouldn’t have to pay attention to any other legislative agencies or States if you decided that it was not in our national energy

interests or whatever. And the bottom line is FERC has the ultimate power on these decisions. Am I correct?

Ms. MARLETTE. No. I don’t think that is correct, because the argument in court is between the Commission and the California

Public Utilities Commission. It is not between the Commission and

other State agencies who have the responsibility under the Clean

Water Act or the Coastal Zone Management Act. Those remain intact.

Ms. CAPPS. Well, that is what I am worried about, because here

is a public utility commission also wanting to site an LNG facility

that is having to take you to court, and for reasons that you are

saying are to clarify the process, but it appears to us that you are

fearful you might lose this case, and that you want to go another

way, that is, by our energy policy, to do that. I mean, I think the

agency is attempting to cut out the Public Utilities Commission of

California, out of this decision involving the largest port in the

country, and the safety features that would be implicit in allowing

FERC—you have one goal in mind. That is to create energy, and

the community has a myriad of other very important issues at

stake for its constituencies, and you know, here, the fact that you

are in a lawsuit with the California Public Utilities Commission, I

think is an example of that.

We have a history in California, also, with FERC. We remember

when the agency sat by while power companies manipulated Western energy markets. Prices all across the West went through the

59

roof. So you can understand that we are a little bit jaundiced about

this process in which we are engaged now. Two facilities wanting

to be sited in my Congressional district off the coastline, incredibly

complex decisionmaking possibilities, this proposal is a very huge

threat to many of my constituents. So I want you to be aware that

we have big concerns about FERC’s assurances, when you say you

are going to try to work with everyone.

And thank you, Mr. Chairman. I yield back.

Mr. HALL. Thank you very much. The Chair recognizes Mr. Murphy, the gentleman from Pennsylvania, for 8 minutes.

Mr. MURPHY. Thank you, Mr. Chairman. I thank the panel, too.

Mr. Secretary, a quick question about nuclear issues, and particularly, Yucca Mountain. When it was announced it was not going

to be ready until 2012, instead of 2010. I know the license application has been delayed about a year, but what caused the additional

delays?

Mr. GARMAN. The court case that remanded the radiation release

standard back to the Environmental Protection Agency for rulemaking is one of the variables over which we have no control, and

it will be very difficult, in fact, it will be impossible, I believe, for

the Nuclear Regulatory Commission to provide a license for a repository, absent the EPA rulemaking that has to precede. We are

working with EPA. It is their hope that they can promulgate such

a rule this year. We have sought funding in the budget able to

cover the work that we anticipate being able to responsibly spend

toward the repository. The administration is focused and supportive of the repository, and we want to move ahead, but in the

court case that ensued, we won two thirds of the case, and in terms

of the question over the siting of the repository, Yucca Mountain,

Nevada is the place, but the court said the EPA has to do a little

bit more work on the radiation protection standard, and that creates the delay.

Mr. MURPHY. Okay. Thank you. Now, Mr. Reyes, I have a question about—another nuclear question. The bill included a comprehensive 20 year reauthorization of the Price-Anderson Act, and

as you know, no nuclear plants have been constructed, or may be

constructed unless the Act is reauthorized. Do you have any comments on Price-Anderson, as drafted, and will it really help us

move toward construction of nuclear plants?

Mr. REYES. The information we have from our licensees, that incentives or provisions such as Price-Anderson will assure that they

make a decision. You are talking about a financial decision that we

are not involved in, but the information we have is that the PriceAnderson is one of the provisions that will make companies make

the decision to move forward with applications.

Mr. MURPHY. Well, given that, and the other context of the environment on nuclear energy, we haven’t had a new plant in 20

years. What is your opinion on when we might actually see the

next nuclear plant develop? I mean, it is a way of having clean air

energy, and it is one that is oftentimes used in Europe, and why

they have an easier way of meeting treaties to deal with clean air.

But we haven’t built them in a while, and I would like to know if

you have some sense of when we might be ready.

60

Mr. REYES. We are—we have been told by the industry that in

the year 2007, they will be forthcoming with applications to—for

siting and construction of power plants.

Mr. MURPHY. All right. Thank you. Mr. Chairman. That is all I

have. I will yield back the balance of my time to you. Thank you.

Mr. HALL. All right. We thank you. At this time, the Chair recognizes Mrs. Solis, the gentlelady from California, for 5 minutes.

Ms. SOLIS. Thank you very much. This is a question for Ms.

Marlette. Ms. Marlette, back in 1979, the Congress passed a law

that established standards for the siting of new LNG terminals.

Could you please respond if the FERC will follow those standards

that were actually passed by this Congress?

Ms. MARLETTE. I am not sure I know which standards you are

referring to.

Ms. SOLIS. The siting.

Ms. MARLETTE. Just—or——

Ms. SOLIS. The siting of LNG facilities.

Ms. MARLETTE. Our siting authority is under section 3 of the Gas

Act, and that, as I testified earlier, in the Commission’s view, is

transportation of gas in foreign commerce into the United States.

We site the terminal facilities.

Ms. SOLIS. One of the questions or concerns that I have is, as

was mentioned by Congresswoman Capps, is the current problem

that we are having in Long Beach—the siting of that particular facility there. The locals there are not in agreement with having it

placed there. How is the Federal Government going to secure adequate safety protection around that facility, in terms of firefighters,

police, given that the height of terrorism is abound in our country?

What kind of assurance is the Federal Government going to apply?

Ms. MARLETTE. The Commission works very closely with, and as

Ms. Capps referred to earlier, has an interagency agreement with

the Coast Guard and the Department of Transportation, which regulates pipeline safety, and all 3 of the agencies have a role in getting the liquefied natural gas from the tanker, actually, into the

terminal, and into the pipeline. Our agency has been working very

closely with local fire marshals, and State and local officials, with

regard to——

Ms. SOLIS. To do what? Are there plans in place? Are there ongoing plans that we could look at that we could actually see, potential

plans that are set already, because that has always been a concern.

I know that in many instances, we don’t get that information, and

the accurate kind of relationships and funding mechanisms that

need to be put in place, so that there is security. And it goes beyond just people.

Ms. MARLETTE. Right.

Ms. SOLIS. I am talking about if there are real hazards that could

come about, even by accident, accidental hazards that could occur,

who is going to incur the costs? Is the Federal Government going

to then provide the kind of resources necessary in case something

does happen? Because that is a very heavily urban area.

Ms. MARLETTE. I realize your concerns, and what you were talking about is the terminal safety, rather than the tanker safety, it

sounds like. I am not the technical expert on the issue, but when

the Commission certificates a terminal, there are, I think they are

61

called 3 exclusion zones, and before the Commission certificates, it

ensures that the owner/operator of the terminal facility has control

of that area, these 3 zones, and has in place safety protections in

case anything goes wrong.

Ms. SOLIS. I guess my question is, you know, port security is one

thing, but first responders is another, and I would like to see any

information that you could provide, then, to this committee, with

respect to that.

Ms. MARLETTE. I will see what we have that we can provide to

you.

Ms. SOLIS. Okay. My question is for the Assistant Secretary, Mr.

Garman. It has to deal with the weatherization programs. Weatherization, as you know, has provided a substantial number of jobs

nationwide, and has provided a tremendous amount of savings for

many households, particularly in California, and I would like to

know, under President Bush’s budget, what is going to happen,

then, with many of these families that are relying on this particular help with the reduction of almost $11 million? How are we

going to provide incentives for low income families to meet any energy-efficient policies that you are setting forth, and I mean immediate, not 5 years down the line. What is happening? What can

happen there?

Mr. GARMAN. Thank you, Congresswoman, for the opportunity to

make a clarification on the subject. The President’s request for the

weatherization assistance program is actually up over that level

Congress provided last year. The reason for the confusion is that

the weatherization assistance program is lumped with other programs, under an appropriations line called weatherization and

intergovernmental activities. Some of the intergovernmental activities, which even include some international activities, are down,

but the weatherization assistance program, we are seeking to increase modestly from what Congress provided last year, from the

level of $228 million to a level of $230 million this year.

Ms. SOLIS. One of the concerns I have is some of the approaches

that you might be taking, for example, for low income households

to start purchasing appliances that may, you know, require less energy and have more efficient uses, how quickly will support come

for those families that are on limited incomes? I mean, you think

about it, market rates for the purchase of those appliances are very

high, and not very, how could I say, attainable by many of these

households. So how realistic are your goals?

Mr. SHIMKUS [presiding]. The gentlewoman’s time is far in excess. If you could finish, I would appreciate it.

Ms. SOLIS. I would just like a response.

Mr. GARMAN. Certainly, and you have touched again on a very

important thing that we are doing in partnership with the Department of Housing and Urban Development and the Environmental

Protection Agency to actually provide incentives and mechanisms

for Energy Star appliances in low income households. We think

that is very important. We have done some bulk purchasing, so

that the low income households can acquire these appliances and

put them into use, and start saving energy and money immediately.

Ms. SOLIS. Just provide information on that. Thank you.

62

Mr. GARMAN. Yes, ma’am.

[The following was received for the record:]

Since 2002, the Department of Energy (DOE) has developed bulk purchasing tools

for use by the administrators of low-income housing programs and worked with the

Department of Housing and Urban Development (HUD) and the Environmental Protection Agency (EPA) to deliver these tools through DOE’s Weatherization Assistance Program, HUD’s public assisted housing programs, and through the ENERGY

STAR network of partners. The initial phase focused on refrigerators, identified as

the technology that could benefit most from a bulk purchasing system. Three refrigerator providers—General Electric, Sears, and Whirlpool—have signed up so far to

offer special discounts on refrigerators through the bulk purchase system. Together,

these partners account for more than 50 percent of refrigerator sales in the United

States.

To date, over 28,000 ENERGY STAR qualified refrigerators have been sold

through the bulk purchasing system. Initial feedback indicates participants save

about five percent on each refrigerator purchased through the system. Thus, since

2002, weatherization and low-income housing providers have saved more than

$750,000 through of this bulk purchasing system. This does not account for additional savings to the administrating agencies from the reductions in overhead cost

from refrigerator delivery, removal, and decommissioning, which is included in the

purchase cost.

Equallly important are the energy savings to low-income residents. DOE estimates that each ENERGY STAR qualified refrigerator reduces energy use by over

962 kilowatt hours over the life of the refrigerator, which equates to approximately

$83 in energy savings to the resident. Overall, the refrigerators sold in the first few

years of the program have cumulatively saved residents over $2.3 million in energy

costs.

To date, weatherization agencies in Colorado, Ohio, Texas, Washington, West Virginia, Indiana, and Michigan have contracted with the participating vendors for refrigerator bulk purchases. Texas weatherization providers alone have purchased

over 7000 refrigerators since 2002. In addition, HUD pilots have been conducted in

Colorado, Kentucky, and Illinois. DOE is working to expand this effort to include

other products, such as compact fluorescent lamps. In addition,, It will soon make

a system available online to make the process easier for many end users and participating vendors.

Mr. SHIMKUS. The Chair now recognizes the chairman of the full

committee, Mr. Barton, for 5 minutes.

Chairman BARTON. Thank you, Mr. Chairman. But I have been

out. I am going to yield to Dr. Burgess, who has been waiting patiently all morning, and I will ask my questions a little bit later.

Mr. SHIMKUS. The Chair recognizes the gentleman, the other

gentleman, from Texas for 5 minutes.

Mr. BURGESS. I thank the chairman for yielding. Mr. Garman, in

answer to a question imposed by the subcommittee chairman, Mr.

Hall, you suggested that the Trans-Alaska Pipeline is currently

pumping at, I believe it was 875,000 gallons per day, and yet had

a capacity of about a million—I am sorry, barrels a day, and had

a capacity of a million barrels in excess of that? Do you have—if

my information is correct, do you have an opinion as to where that

other million barrels might come from?

Mr. GARMAN. Yes, sir. At its peak production, if memory serves,

and of course, the real expert is in the audience and will correct

me if I am not—if I am mistaken about this. But I believe peak

production of the Trans-Alaska Pipeline was around 2.1 million

barrels a day. The last time I looked, it was down to about 875,000

barrels a day. That leaves throughput capability in excess of a million barrels a day, and of course, that could be supplied by resources, if they are found, but evidence suggests that there are substantial resources there on the coastal plain of the Arctic National

Wildlife Refuge. So it would be oil from the Arctic National Wildlife

63

Refuge coastal plain that could fill that unused capacity in the

Trans-Alaska Pipeline.

Mr. BURGESS. Are you satisfied that the energy bill, as proposed,

allows for the adequate development of that as an energy source

to fill that capacity, that throughput capacity on the pipeline?

Mr. GARMAN. It is very important that we get into the coastal

plain, and I say yes, without the full understanding of what the

geologic resource actually is, because we have not been able to even

look on the coastal plain with modern 3D or 4D seismic techniques,

to understand the extent of the resource that may be there. We

don’t know if it is—if the resource is located in single, large reservoirs, or whether they are distributed throughout the plain, and

more knowledge is needed, but the ability to get in and look and

understand what the resource is, whether or not it is found, and

whether or not production actually ensues is something we are not

allowed to even do today. And I have always found it remarkable

that Congress has been asked to make this decision without that

information, and I think it is very important that we move ahead,

and find out what is there, and if there is a resource there, we

have infrastructure, in the form of the Trans-Alaska Pipeline, that

is in place and ready to bring it to market.

Mr. BURGESS. Well, I thank you for that observation. Now, Ms.

Solis, in her line of questioning, suggested that there was a good

deal of resistance from local officials about the liquefied natural gas

facilities in her port. Are you getting that same type of local resistance, say, from the residents of Kaktovik, Alaska, about that type

of research being done on the coastal plain?

Mr. GARMAN. The residents of Kaktovik, Alaska, and I have been

there, and spoken to them firsthand on several occasions, are very

enthusiastic about the prospect of having that resource moved to

market.

Mr. BURGESS. And I thank you for that observation as well, and

I agree with you. I hope this committee will do the right thing by

the citizens of Kaktovik, Alaska when we consider that part of this

bill. In fact, I just don’t think we can put enough windmills up off

of Nantucket Island to get the same type of energy that we could

get out of the Alaska National Wildlife Refuge. But we at least

need to do the research. Finally, Mr. Garman, just to ask you,

and—acknowledging that I am just a simple country doctor, and

relatively new at the energy bill, what would you say, of the 106

proposals that the President put forth in 2001, what are, say, the

top 3 things that if we could do those, if we could do those 3 things,

what are going to have the greatest impact upon the citizens of this

country?

Mr. GARMAN. I am going to try to point not to the single recommendation, but to a group of recommendations, and it closely

dovetails with the question that I gave the subcommittee chairman

earlier. I think restoring confidence, investor confidence in the electricity infrastructure is extremely important. And the provisions

that have been outlined by our FERC witness this morning are extremely important in doing precisely that. PURPA repeal, mandatory enforceability, reliability rules, new technology for the grid,

last resort Federal siting authority for high priority transmission

lines, open access, PURPA reform as, again, provisions are in the

64

bill. These are all very, very important to help us reduce the impact of American consumers on the loss of electricity and the cost

to the economy from blackouts, small regional ones and larger ones

as we experienced two summers ago.

Mr. BURGESS. Thank you.

Mr. SHIMKUS. Dr. Burgess, if you would yield. I am going to try

to jump on your final 2 minutes, if that was your last question.

Mr. BURGESS. I had one followup for Mr. Reyes on Mr. Murphy’s

line of questioning about the completion of a new nuclear power

plant in this country. Realistically, what would you feel would be

the timeline for that, remembering how long it took Comanche

Peak to get built down in my district, and how much it went over

cost. Have we learned anything in the 20 years since we built the

last nuclear power plant? Is there new technology available to us?

Mr. REYES. Yes. Significant changes. First, the regulations were

changed to provide for a mechanism that will alleviate the process

that you have to go through for approval for the Nuclear Regulatory Commission. And second, on the technical side, the construction now can be done in modules that get assembled onsite. So you

have two ingredients to significantly reduce the length of time from

decision to actual production of electricity.

Mr. BURGESS. Thank you, and I will yield back, Mr. Chairman.

Mr. SHIMKUS. The gentleman yields back, and assuming the final

minute 30 seconds of Dr. Burgess’ questions, one quick question for

Mr. Garman. Can you just briefly talk about the difficulties DOE

has when we do Congressional earmarks that might affect some of

your accounts?

Mr. GARMAN. I always answer this question with some trepidation, Mr. Chairman. The energy efficiency and renewable energy

account, just to name one account in the Department, has been earmarked last year by about $90 million. The administration has

been criticized for reducing that energy efficiency and renewable

energy account by some $48 million, but in fact, what we are doing

is not asking for those earmarks, and we are asking, actually, for

more money for renewable and energy efficiency programs than—

money that is actionable against our R&D goals than that—than

we received last year from Congress.

Similarly, in the electricity and transmission distribution program, that is another account in the Department that has been

heavily earmarked, and as a consequence, they have not been able

to undertake some of the electricity reliability R&D and the work

on superconductivity that we think is very important for reliability

and dependability on the electricity grid.

Mr. SHIMKUS. Thank you. And I want to move expeditiously. I

want to recognize Mr. Markey for 5 minutes. I want to mention to

the panel that when we go to vote, the plan is to finally adjourn

this panel, because we have to reassemble upstairs after lunch, because the Health Subcommittee is going to meet here doing some

teleconference on theirs. So if we move expeditiously, Mr. Markey,

you are recognized.

Mr. MARKEY. Mr. Garman, yesterday, I asked the Secretary

about the DOE’s laxity in the promulgation of efficiency standards.

There are 22 rulemakings that are still not completed. There is a

13 year delay in one of the 22 rulemakings. It is the simplest,

65

smartest way for America to save energy. It is what we are greatest at. It is ensuring that our appliances, our furnaces, our air conditioners, are the state-of-the-art, using less and less energy, and

that is how we are going to put a chill in OPEC. But yet, the Department of Energy isn’t doing its job in promulgating these efficiency standards, and we are becoming more and more dependent

upon the wrong kinds of energy sources. So what is the problem,

Mr. Garman? Why can’t your agency do its job and promulgate

these regulations to help protect America?

Mr. GARMAN. I will be happy to respond to that, Congressman.

Essentially, and a little history is in order, and you know this history very well, in the Energy Policy Act and other acts, Congress

set out a timetable for when it wanted to see certain standards promulgated from the Department. After the Department started

doing that, there were some complaints from a variety of parties

that this process was not very transparent, and this was during the

Clinton Administration, when the Congress actually instructed the

Department of Energy to stop work on its rulemaking, and imposed

a moratorium on further rulemaking, until such time a new process

was developed. Again, during the Clinton Administration, that new

process was developed, a process called the process improvement

rule, and it was adopted by rulemaking. It was a consensus process, involving the energy efficiency advocates and the manufacturers. That process improvement rule set into place, and again, this

is the prior administration, a very, very complicated, rigorous, analytical process that is also very, very transparent, with lots of opportunities for public input, public hearings, at every stage——

Mr. MARKEY. All right. I got it. So here is the thing, Mr.

Garman, okay? The President has been able to assemble a coalition

to surround Iraq, invade Iraq, have elections in Iraq, all in the last

4 years, but you and the Department of Energy, and President

Bush, even though he gives these speeches about how much he

cares about energy and our independence, he can’t figure out in 4

years, President Bush, how to have one new rulemaking on energy

efficiency, to reduce our dependence. So how long is it going to

take, Mr. Garman, 4 years already? Are you going to drag it out

for the whole 8 years, just go into a complete stall, and then hand

it over at the end of your term, and say look, we did our best, but

our hands were tied?

Mr. GARMAN. Actually——

Mr. MARKEY. Because if that is our policy at the Department of

Energy on this, I am afraid for our security of our country, knowing

that the projection is dramatically increased energy consumption in

the years ahead.

Mr. GARMAN. Again, Congressman, we have instituted 3 new

rulemakings during my tenure at the Department. We

instituted——

Mr. MARKEY. You have not completed. You have not completed

a single new rulemaking in the entire time that the Bush Administration has been in office. We are now in the fifth year.

Mr. GARMAN. Actually, we have completed a number of different

items. Let me remind the Congressman that a rulemaking is a two

part process. We must first, again, under the provisions that were

adopted in the prior administration, come through with a test deVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
66

termination. We must first, through a public process, determine

how——

Mr. MARKEY. The only thing the Bush Administration did was

after the Clinton Administration finished a rulemaking on air conditioning, was for the Bush Administration to try to roll back the

rulemaking on air conditioning, which was——

Mr. GARMAN. No, sir. We——

Mr. MARKEY. [continuing] a 20 to 25 percent improvement on the

efficiency of air conditioners in America.

Mr. GARMAN. We have——

Mr. MARKEY. That is the—that is where all the energy of this

administration——

Mr. GARMAN. We have instituted new——

Mr. MARKEY. [continuing] went to.

Mr. GARMAN. [continuing] rulemaking and commercial air conditioning standards. In fact, yesterday, I signed a Federal Register

notice——

Mr. MARKEY. Have you completed any new rulemaking since the

Bush Administration took over? Have you commenced and finished

any new rulemakings on energy efficiency, on anything, Mr.

Garman? Anything?

Mr. GARMAN. I would say that in the first term of the Clinton

Administration, they did not complete any, either.

Mr. MARKEY. I am not asking about—I am asking about you, Mr.

Garman, the job you are doing, the job that President Bush is

doing, to make our country less dependent upon imported oil. Have

you completed anything that you started? Anything?

Mr. GARMAN. We have not gone to a final rule.

Mr. MARKEY. A final rule.

Mr. GARMAN. A final rule. And under, again, the process improvement rule, Congressman, a rule takes a minimum of 3 years.

A test determination and a rule takes more than 3 years.

Mr. MARKEY. The statute established——

Mr. GARMAN. A term of a President is 4 years. So it is very——

Mr. MARKEY. The statute——

Mr. GARMAN. [continuing] difficult in the first term.

Mr. MARKEY. Mr. Garman, this whole Bush Administration energy policy is a fraud. It is just an attempt to drill in the most pristine area of our country.

Mr. SHIMKUS. The gentleman’s time——

Mr. MARKEY. It is nothing more than that.

Mr. SHIMKUS. [continuing] from Massachusetts has expired.

Mr. MARKEY. It is not an energy policy. It is——

Mr. SHIMKUS. I think we understand his——

Mr. MARKEY. [continuing] a fraud.

Mr. SHIMKUS. [continuing] position, and we know that the new

Secretary has really addressed this issue of being more expeditious.

The Chair recognizes the gentleman from Maryland for 5 minutes.

Mr. WYNN. Thank you, Mr. Chairman. Mr. Reyes, it is my understanding that DOE submitted a construction licensing permit request for Yucca Mountain, and it was rejected by your agency. Is

that correct?

Mr. REYES. Not quite. They submitted licensing documents that

we reviewed, and we found out that it was—they were not comVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
67

plete. So the application is not scheduled to come in until December of this year.

Mr. WYNN. So we are going to be literally another year before we

even get the application process in? Is that what you are saying?

Mr. REYES. That is the information we have from the Department. December 2005.

Mr. WYNN. What—you say they were incomplete. What did they

lack? What was lacking in the application?

Mr. REYES. Not all the documents that we require were available.

Mr. WYNN. I pretty much got that. That is what incomplete

means. What documents were lacking?

Mr. REYES. Oh, I—we are going to have to provide that for the

record, because——

[The following was received for the record:]

During the hearing, I committed to provide the Subcommittee with additional information regarding a ruling by the Commission’s Atomic Safety and Licensing

Board (Board) on August 31, 2004, with respect to the Department of Energy’s

(DOE) certification concerning compliance with the so-called ‘‘LSN’’ rule. A copy of

that decision is enclosed for your information. This web-based system can be

accessed at: http://www.lsnnet.gov. LSN NUMBER: NRC000026709. In particular,

the Board determined that DOE failed to provide all relevant documents on the proposed Yucca Mountain repository site in electronic form through the publicly available, web-based Licensing Support Network (LSN). While this ruling affects the

timetable for DOE’s submission of its application, it does not reflect a substantive

resolution of any matter that may ultimately need to be evaluated in such application.

The LSN was created by the Commission to better enable it to issue a licensing

decision on DOE’s application for a construction authorization for Yucca Mountain

in the timeframe provided by the Nuclear Waste Policy Act—three years, with a

possible extension to four. To this end, the Commission’s regulations regarding the

conduct of any hearing on this application establish the LSN as a means to facilitate

the discovery of relevant documents by all potential participants in advance of the

submission of the application. Accordingly, the regulations require that DOE certify

its compliance with the LSN provisions six months before it submits an application,

with following dates for the NRC staff and others.

DOE’s certification that its documents were available, made on June 30, 2004,

was challenged by the State of Nevada, and others. After hearing argument from

DOE, the State and the NRC staff, the Board ruled that DOE failed to provide all

relevant documents on the LSN. Specifically, the Licensing Board found that the

June 30 certification failed to make publically available substantial quantities of

documentary material in DOE’s possession at the time of certification, and that the

manner in which DOE made the material publicly available on its own internet web

site failed to satisfy the regulations. To date, DOE has not submitted its recertification. I would note that the certification made by the NRC staff on July 30, 2004—

30 days after DOE’s certification—was not disputed.

Mr. WYNN. Okay. That would be fine. That would be fine. Let me

ask you, in a lot of countries, they extend the life of their fuel supply by reprocessing or enriching their uranium. This extends the

life of the fuel supply and reduces nuclear waste. What is the administration’s position on reprocessing uranium?

Mr. REYES. In this country, from previous administrations, there

is no authority to do reprocessing commercially.

Mr. WYNN. What is this administration’s position?

Mr. REYES. There has been no change in that area.

Mr. WYNN. Okay, so this administration is opposed to reprocessing?

Mr. REYES. They just haven’t changed the previous

administration’s——

68

Mr. WYNN. Okay.

Mr. REYES. [continuing] decision.

Mr. WYNN. All right. Thank you. Mr. Garman, some time ago, a

couple decades ago, President Kennedy said we are going to get to

the Moon in one decade, 10 years. I am very pleased with the increase in hydrogen funding from 9.8 percent. What I think the public needs to know to kind of get on board with the hydrogen economy is what is the timetable for implementing a hydrogen economy, the commercial utilization of hydrogen fuel cell vehicles? I

would like you to also answer the same question with respect to

wind and solar energy.

Mr. GARMAN. The President, as he outlined in his State of the

Union, expressed the hope that a child born today would be able

to purchase and drive a fuel cell vehicle when he was able to be

licensed to drive. Our hope is that, and our expectation, and our

R&D program is built on the notion of a commercialization decision

by industry in 2015 that could lead to vehicles, affordable vehicles,

in the market, in showrooms, by 2020.

Mr. WYNN. 2020 is the goal.

Mr. GARMAN. That is the timeframe that we anticipate. If we are

meeting our technical targets.

Mr. WYNN. Okay. Thank you.

Mr. GARMAN. And thus far, we have done so.

Mr. WYNN. Okay. You ought to get that out a little bit more. I

think the public would buy in a little more. What about wind and

solar?

Mr. GARMAN. Today, solar powered photovoltaic electricity comes

in at about $0.20 to $0.25 per kilowatt-hour. That is the bad news.

The average retail residential rate is closer to $0.07 or $0.08 a kilowatt-hour, so it is not yet competitive. However, the good news is

that in 1980, that price was $2.00 per kilowatt-hour, so our R&D

program has brought the cost curves of solar down. We anticipate

being able to deliver solar photovoltaic at $0.06 a kilowatt-hour in

the year 2020. That is our R&D goal, and that would make it very

cost competitive to grid-delivered electricity.

Mr. WYNN. Is there anything we could do to accelerate that?

Mr. GARMAN. The President has asked, again, for a very robust

budget in the solar energy program of—$83 million. We believe we

have an R&D plan that delivers—it may be possible to accelerate

that a bit, but it will take some time. With respect to wind, wind

is being increasingly competitive in certain areas of the country.

The difficulty is often transmission, to bring that resource to marketplace. Wind, at its——

Mr. WYNN. Can I interject? In terms of transmission, are you

supportive of changes in tax policy to encourage increased transmission?

Mr. GARMAN. At the present time, the administration supports

the $6.6 billion in tax incentives contained in the President’s budget for 2003, and that does not include tax incentives for transmission. We believe that a stable and predictable regulatory regime

will bring investment that is needed into the transmission system.

Mr. WYNN. Thank you, sir.

69

Mr. SHIMKUS. The gentleman’s time has expired. We are going

to dismiss this panel, thank you for your patience, and reconvene

in 10 minutes up in room 2322, on the third floor.

[Whereupon, at 11:33 a.m., the subcommittee recessed, to reconvene at 11:57 a.m., the same day, in room 2322 of the Rayburn

House Office Building.]

Mr. HALL. Okay. We will come to order. We have an excellent

panel two, and you have sat through the agony of hearing all of our

opening statements and questions and answers, and thank you for

staying.

And we have on this panel Guy Caruso, who in February, President Bush nominated him to the position of Administrator for the

EIA. He has acquired over 30 years of energy experience, with a

particular emphasis on topics relating to energy markets, policy,

and security. Just what we need. Mr. Caruso was Director of the

Office of Oil and Natural Gas, and many other things, and we are

honored to have him here today.

And we are also happy to have Marilyn Showalter, who Governor

Locke appointed as Chairwoman of the Washington UTC in February 1999, and she was elected President of the National Association of Regulatory Utility Commissioners, and she is also a past

President of the Western Conference of Public Service Commissioners, and what I am impressed is, she has State work, too, State

background. She worked for a State House of Representatives for

5 years as a budget counsel, chief clerk in 1994, deputy prosecuting

attorney in King County. She has just—she has been there, too,

and we are happy to have you here today.

I don’t know how much time I can allot myself to recognize

Frank Murkowski, and I can talk all day on him, but he is Governor. Thank you for your time on the committee, and for all you

have done for energy and chairing the major committees over

there, and for helping to push this thing for the last several years.

We are going to try to get it through this time.

Of course, my own fellow Texan, Vic, we are happy to have you

here. He joined the Texas Railroad Commission, which is a major

entity that governs energy and oil and gas, and he is elected by his

colleagues as Chairman of the Agency in September. He is Chairman of the Texas Energy Planning Council, and whose mission is

to create a comprehensive energy plan for the State of Texas. All

of your background is very useful, needed rights now, and you may

just be the one guy who can help us push it over and get those last

2 votes in the Senate that we have to have. New blood is always

needed up here.

And we recognize you at this time, Mr. Caruso. I would be glad

to recognize you for—I hope you will stay fairly close to 5 minutes

in presentation, if you can, but if you can’t, you don’t have to. We

want to hear from you. Thank you.

70

STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION; HON. FRANK H. MURKOWSKI, GOVERNOR, STATE OF ALASKA, ON BEHALF OF

THE NATIONAL GOVERNORS ASSOCIATION; HON. MARILYN

SHOWALTER, PRESIDENT, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS; AND HON. VICTOR

CARRILLO, CHAIRMAN, RAILROAD COMMISSION OF TEXAS

Mr. CARUSO. I will try, Mr. Chairman, and thank you very much.

We appreciate the opportunity to present the Energy Information

Administration’s long-term outlook for energy markets as are depicted in the charts that we have for you.

As always, our long-term outlook is based on current policies,

rules, and regulations, and EIA, as you know, is a policy neutral

organization, so that what I will be describing today is where our

energy outlook is headed if we continue on the path that we are

on now. These are the outcomes we can expect if we don’t change

rules, regulations, and policies that were in place as of late last

year.

The path we are on is toward increased U.S. energy import dependency, because total primary energy consumption is expected to

grow by one third over the next 20 years to 2025, and, because demand increases more rapidly than domestic supply, imports will

supply a growing share of that demand. We expect net imports to

account for about 38 percent of total energy by 2025. That is up

from 27 percent in 2003, as shown in this chart. Of course, we all

know about oil imports. That is a subject that we talk about a lot,

but in this outlook, we also show rapidly increasing natural gas imports, mainly in the form of LNG, but we are using energy more

efficiently. It isn’t all bad news. Energy demand is growing at

about one half the rate of GDP, so technology and structural

change are making a difference. Most of that growth in the next

20 years, or at least a leading growth, will be in the commercial

and transportation sectors. Electricity, particularly for computers,

electronic equipment, and appliances, is an important component

in the residential and commercial area. But for transportation, of

course, the growth is predominantly in petroleum, with the largest

growth in the light duty vehicles and heavy trucks, but also aircraft.

In turning to oil, this next chart shows how our import dependency will grow over the next 20 years. We think it will reach 68

percent net import dependency by 2025, and that is up from about

56 percent in 2003. Our projections on oil assume prices will come

down from where they are now, to about $25 by 2010, as new production becomes available, although prices will rise again to about

$30 under this assumption by 2025. And we recognize that there

is a great deal of uncertainty with respect to oil prices in particular. The resource and the investment decisions that need to be

made, that Mr. Garman referred to this morning, and the geopolitical trends that we have been living with now, really since

1973, continue to increase this uncertainty.

So we do, in the full report, have four other oil price cases, as

well as the reference case, including one lower one and three higher ones. So we do show what the implications might be if, indeed,

we keep on the very high oil price level that we are at today. Now,

71

domestic supply of petroleum will actually be lower in 2025 than

it is today, if we keep on the path we are on, even though we will

get some increase in supplies over the next several years from the

deep water finds in the Gulf of Mexico; the decline rates will then

set in, and we expect to have production lower by 2025.

At the same time, demand is growing for petroleum, from about

20 million barrels a day today to about 28 million barrels a day in

2025, and transportation accounts for about two thirds of the demand, with the industrial sector accounting for much of the remainder. Therefore, there are very limited opportunities to switch

out of oil because of that pattern of use.

Now, if we turn to natural gas, I mentioned that net imports will

grow, and this next chart shows that we are on track to increase

our imports sharply during the next 20 years, mainly in the form

of LNG, because, if our projections are correct, Canadian gas,

which has been our main supplier of imports, is going to decline.

We will be increasing demand for natural gas by about 40 percent over the next 20 years. That means we are going to need more

than 8 trillion cubic feet of new gas supply. And during that time,

we only see domestic gas supplies going from about 19 to 22 tcf,

therefore, there is a gap that will have to be filled by imports, as

well as the expectation that unconventional domestic supplies and

the natural gas from Canada will be produced. Even with that, we

will need substantial imports of LNG. As shown in the chart inset,

we expect LNG to go from only 400 billion cubic feet on a net basis

in 2003, to 6.4 trillion cubic feet in 2025. Just an enormous increase, which will require new siting facilities that were talked

about in the first panel, for LNG regasification, not only in the Gulf

of Mexico, but elsewhere in the United States, and even some offshore sites like the Bahamas and Baja, California, and Mexico. We

think that with this rapid increase in LNG, it will put some downward pressure on natural gas prices, so our projections are that gas

prices will come down from about $6 per thousand cubic feet today,

to below $4 by 2010. But then, because of the increased demand,

we will see prices start rising again by 2025.

Turning to electricity, we expect generation from both gas and

coal to increase. Coal will be the primary source, about 50 percent,

but gas will grow very fast as well. And nuclear capacity, generating capacity, will increase slightly, but we don’t, in our long-term

forecast, expect any new nuclear plants to be built, given present

economics and rules and regulations.

So, Mr. Chairman, with that, I would just conclude by saying, to

put this in a broader context, not only will the United States be

more dependent on oil and natural gas imports over the next 20

years, but we see that occurring particularly in the developing

countries of Asia as well, so that we see increasing energy import

dependency, not only in the United States, but in increasingly rapidly growing economies like China, India, and other parts of developing Asia, which again, have a number of important geopolitical

implications for us in this country and globally.

Thank you very much, once again, for inviting EIA to testify.

[The prepared statement of Guy Caruso follows:]

72

1World oil prices in AEO2005 are defined based on the average refiner acquisition cost of imported oil to the United States (IRAC). The IRAC price tends to be a few dollars less than the

widely-cited West Texas Intermediate (WTI) spot price and has been as much as six dollars per

barrel lower than the WTI in recent months. For the first 11 months of 2004, WTI averaged

$41.31 per barrel ($7.12 per million Btu), while IRAC averaged $36.28 per barrel (nominal dollars) ($6.26 per million Btu).

PREPARED STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss the long-term outlook for energy markets in the

United States and for the world.

The Energy Information Administration (EIA) is an independent statistical and

analytical agency within the Department of Energy. We are charged with providing

objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress, and the public.

We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers in their energy policy deliberations. Because we have an element of statutory independence with respect to the analyses,

our views are strictly those of EIA and should not be construed as representing

those of the Department, the Administration, or any other organization. However,

EIA’s baseline projections on energy trends are widely used by government agencies,

the private sector, and academia for their own energy analyses.

The Annual Energy Outlook provides projections and analysis of domestic energy

consumption, supply, prices, and energy-related carbon dioxide emissions through

2025. Annual Energy Outlook 2005 (AEO2005) is based on Federal and State laws

and regulations in effect on October 31, 2004. The potential impacts of pending or

proposed legislation, regulations, and standards’ or of sections of legislation that

have been enacted but that require funds or implementing regulations that have not

been provided or specified—are not reflected in the projections. AEO2005 explicitly

includes the impact of the recently enacted American Jobs Creation Act of 2004, the

Military Construction Appropriations Act for Fiscal Year 2005, and the Working

Families Tax Relief Act of 2004. AEO2005 does not include the potential impact of

proposed regulations such as the Environmental Protection Agency’s (EPA) Clean

Air Interstate and Clean Air Mercury rules.

The U.S. projections in this testimony are based on the AEO2005, which will be

published later this week. In addition to the long-term U.S. forecast of energy markets, EIA also prepares a longterm outlook for world energy markets, which is published annually in the International Energy Outlook (IEO). The latest edition of this

report, the IEO2004, was published in April 2004. These projections are not meant

to be an exact prediction of the future, but represent a likely energy future, given

technological and demographic trends, current laws and regulations, and consumer

behavior as derived from known data. EIA recognizes that projections of energy

markets are highly uncertain and subject to many random events that cannot be

foreseen such as weather, political disruptions, and technological breakthroughs. In

addition to these phenomena, long-term trends in technology development, demographics, economic growth, and energy resources may evolve along a different path

than expected in the projections. Both the AEO2005 and the IEO2004 include a

large number of alternative cases intended to examine these uncertainties.

AEO2005 and IEO2004 provide integrated projections of U.S. and world energy

market trends for roughly the next two decades. The following discussion summarizes the highlights from AEO2005 for the major categories of U.S. energy prices,

demand, and supply. The AEO2005 discussion also includes the findings from some

alternative cases. The AEO2005 discussion is followed by a discussion of the key

trends in world energy markets projected in IEO2004. U.S.

ENERGY PRICES

In the AEO2005 reference case, the annual average world oil price 1 increases

from $27.73 per barrel (2003 dollars) in 2003 ($4.64 per million Btu) to $35.00 per

barrel in 2004 ($5.86 per million Btu) and then declines to $25.00 per barrel in 2010

($4.18 per million Btu) as new supplies enter the market. It then rises slowly to

$30.31 per barrel in 2025 ($5.07 per million Btu) [Figure 1]. In nominal dollars, the

average world oil price is about $52 per barrel in 2025 ($8.70 per million Btu).

There is a great deal of uncertainty about the size and availability of crude oil

resources, particularly conventional resources, the adequacy of investment capital,

and geopolitical trends. For example, the AEO2005 reference case assumes that

world crude oil prices will decline as growth in consumption slows and producers

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increase their productive capacity and output in response to current high prices;

however, the October 2004 oil futures prices for West Texas Intermediate crude oil

(WTI) on the New York Mercantile Exchange (NYMEX) implies that the average annual oil price in 2005 will exceed its 2004 level before falling back somewhat, to levels that still would be above those projected in the reference case. To evaluate this

uncertainty about world crude oil prices, the AEO2005 includes other cases based

on alternative world crude oil price paths. The world oil price cases in AEO2005 are designed to address the uncertainty about the market behavior of OPEC. They are

not intended to span the full range of possible outcomes.

The alternative world oil price cases examined include:

• High A world oil price case. Prices are projected to remain at about $34 per barrel

(2003 dollars) through 2015 and then increase on average by 0.9 percent per

year, to more than $39 per barrel in 2025.

• High B world oil price case. Projected prices continue to increase through 2005

to $44 dollars per barrel (2003 dollars), fall to $37 in 2010, and rise to $48 dollars per barrel by 2025.

• Low world oil price case. Prices are projected to decline from their high in 2004

to $21 per barrel (2003 dollars) in 2009 and to remain at that level out to 2025.

Figure 2 provides a comparison of the reference case and the high B world oil

price case. The implications of these alternative cases will be discussed in later in

the testimony.

In the AEO2005, average wellhead prices for natural gas in the United States are

projected to decrease from $4.98 per thousand cubic feet (2003 dollars) in 2003

($4.84 per million Btu) to $3.64 per thousand cubic feet in 2010 ($3.54 per million

Btu) as the availability of new import sources and increased drilling expands available supply. After 2010, wellhead prices are projected to increase gradually, reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu) (about $8.20 per

thousand cubic feet or $7.95 per million Btu in nominal dollars). Growth in liquefied

natural gas (LNG) imports, Alaska production, and lower-48 production from nonconventional sources is not expected to increase sufficiently to offset the impacts of

resource depletion and increased demand in the lower 48 states.

In AEO2005, the combination of more moderate increases in coal production, expected improvements in mine productivity, and a continuing shift to low-cost coal

from the Powder River Basin in Wyoming leads to a gradual decline in the average

minemouth price, to approximately $17 per ton (2003 dollars) shortly after 2010

($0.86 per million Btu). The price is projected to remain nearly constant between

2010 and 2020, increasing after 2020 as rising natural gas prices and the need for

baseload generating capacity lead to the construction of many new coal-fired generating plants. By 2025, the average minemouth price is projected to be $18.26 per

ton ($0.91 per million Btu). The AEO2005 projection is equivalent to an average

minemouth coal price of $31.25 per ton in nominal dollars in 2025 ($1.56 per million

Btu).

Average delivered electricity prices are projected to decline from 7.4 cents per

kilowatthour (2003 dollars) in 2003 ($21.68 per million Btu) to a low of 6.6 cents

per kilowatthour in 2011 ($19.34 per million Btu) as a result of an increasingly competitive generation market and a decline in natural gas prices. After 2011, average

real electricity prices are projected to increase, reaching 7.3 cents per kilowatthour

in 2025 ($21.38 per million Btu) (equivalent to 12.5 cents per kilowatthour or $36.61

per million Btu in nominal dollars).

U.S. ENERGY CONSUMPTION

Total energy consumption is projected to grow at about one-half the rate (1.4 percent per year) of gross domestic product (GDP) with the strongest growth in energy

consumption for electricity generation and commercial and transportation uses. Delivered residential energy consumption is projected to grow from 11.6 quadrillion

British thermal units (Btu) in 2003 to 14.3 quadrillion Btu in 2025 (0.9 percent per

year) [Figure 3]. This growth is consistent with population growth and household

formation. The most rapid growth in residential energy demand in AEO2005 is projected to be in the demand for electricity used to power computers, electronic equipment, and appliances. Delivered commercial energy consumption is projected to

grow at a more rapid average annual rate of 1.9 percent between 2003 and 2025,

reaching 12.5 quadrillion Btu in 2025, consistent with growth in commercial

floorspace. The most rapid increase in commercial energy demand is projected for

electricity used for computers, office equipment, telecommunications, and miscellaneous small appliances.

Delivered industrial energy consumption in AEO2005 is projected to reach 30.8

quadrillion Btu in 2025, growing at an average rate of 1.0 percent per year between

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2003 and 2025, as efficiency improvements in the use of energy only partially offset

the impact of growth in manufacturing output. Transportation energy demand is expected to increase from 27.1 quadrillion Btu in 2003 to 40.0 quadrillion Btu in 2025,

a growth rate of 1.8 percent per year. The largest demand growth occurs in lightduty vehicles and accounts for about 60 percent of the total increase in transportation energy demand by 2025, followed by heavy truck travel (12 percent of total

growth) and air travel (12 percent of total growth).

The reference case includes the effects of several policies aimed at increasing energy efficiency in both end-use technologies and supply technologies, including minimum efficiency standards and voluntary energy savings programs. However, as

noted previously, the projections in the AEO are based on existing Federal and

State laws and regulations in effect on October 31, 2004. The impact on energy consumption of efficiency improvement could be greater than what is shown in the reference case. Figure 4 compares energy consumption in three cases to illustrate this

point. The frozen technology case assumes no increase in efficiency beyond that

available in 2005. By 2025, 5 percent more energy (7.6 quads) is required than in

the reference case. The high technology case assumes that the most-energy efficiency technologies are available earlier with lower costs and higher efficiencies. By

2025, total energy consumption is 7 quads lower in the high efficiency case when

compared with the reference case.

Total petroleum demand is projected to grow at an average annual rate of 1.5 percent in the AEO2005 reference case forecast, from 20.0 million barrels per day in

2003 to 27.9 million barrels per day in 2025 [Figure 5] led by growth in transportation uses, which account for 67 percent of total petroleum demand in 2003, increasing to 71 percent in 2025. Improvements in the efficiency of vehicles, planes,

and ships are more than offset by growth in travel.

Total demand for natural gas is also projected to increase at an average annual

rate of 1.5 percent from 2003 to 2025. About 75 percent of the growth in gas demand

from 2003 to 2025 results from increased use in power generation and in industrial

applications.

Total coal consumption is projected to increase from 1,095 million short tons in

2003 to 1,508 million short tons in 2025, growing by 1.5 percent per year. About

90 percent of the coal is currently used for electricity generation. Coal remains the

primary fuel for generation and its share of generation is expected to remain about

50 percent between 2003 and 2025.

Total electricity consumption, including both purchases from electric power producers and onsite generation, is projected to grow from 3,657 billion kilowatthours

in 2003 to 5,467 billion kilowatthours in 2025, increasing at an average rate of 1.8

percent per year. Rapid growth in electricity use for computers, office equipment,

and a variety of electrical appliances in the enduse sectors is partially offset in the

AEO2005 forecast by improved efficiency in these and other, more traditional electrical applications and by slower growth in electricity demand in the industrial sector.

Total marketed renewable fuel consumption, including ethanol for gasoline blending, is projected to grow by 1.5 percent per year in AEO2005, from 6.1 quadrillion

Btu in 2003 to 8.5 quadrillion Btu in 2025, as a result of State mandates for renewable electricity generation and the effect of production tax credits. About 60 percent

of the projected demand for renewables in 2025 is for grid-related electricity generation (including combined heat and power), and the rest is for dispersed heating and

cooling, industrial uses, and fuel blending.

U.S. ENERGY INTENSITY

Energy intensity, as measured by primary energy use per dollar of GDP (2000 dollars), is projected to decline at an average annual rate of 1.6 percent in the

AEO2005, with efficiency gains and structural shifts in the economy offsetting

growth in demand for energy services [Figure 6]. The projected rate of energy intensity decline in AEO2005 falls between the historical averages of 2.3 percent per year

from 1970 to 1986, when energy prices increased in real terms, and 0.7 percent per

year from 1986 to 1992, when energy prices were generally falling. Between 1992

and 2003, energy intensity has declined on average by 1.9 percent per year. During

this period, the role of energy-intensive industries in the U.S. economy fell sharply.

Energy-intensive industries’ share of industrial output declined 1.3 percent per year

from 1992 to 2003. In the AEO2005 forecast, the energy-intensive industries share

of total industrial output is projected to continue declining but at a slower rate of

0.8 percent per year, which leads to the projected slower annual rate of reduction

in energy intensity.

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Historically, energy use per person has varied over time with the level of economic

growth, weather conditions, and energy prices, among many other factors. During

the late 1970s and early 1980s, energy consumption per capita fell in response to

high energy prices and weak economic growth. Starting in the late 1980s and lasting through the mid-1990s, energy consumption per capita increased with declining

energy prices and strong economic growth. Per capita energy use is projected to increase in AEO2005, with growth in demand for energy services only partially offset

by efficiency gains. Per capita energy use is expected to increase by an average of

0.5 percent per year between 2003 and 2025 in AEO2005.

U.S. ENERGY PRODUCTION AND IMPORTS

Total energy consumption is expected to increase more rapidly than domestic energy supply through 2025. As a result, net imports of energy are projected to meet

a growing share of energy demand. Net imports are expected to constitute 38 percent of total U.S. energy consumption in 2025, up from 27 percent in 2003 [Figure

7].

Petroleum. Projected U.S. crude oil production increases from 5.7 million barrels

per day in 2003 to a peak of 6.2 million barrels per day in 2009 as a result of increased production offshore, predominantly in the deep waters of the Gulf of Mexico.

Beginning in 2010, U.S. crude oil production is expected to start declining, falling

to 4.7 million barrels per day in 2025. Total domestic petroleum supply (crude oil,

natural gas plant liquids, refinery processing gains, and other refinery inputs) follows the same pattern as crude oil production in the AEO2005 forecast, increasing

from 9.1 million barrels per day in 2003 to a peak of 9.8 million barrels per day

in 2009, then declining to 8.8 million barrels per day in 2025 [Figure 8].

In 2025, net petroleum imports, including both crude oil and refined products (on

the basis of barrels per day), are expected to account for 68 percent of demand, up

from 56 percent in 2003. Despite an expected increase in domestic refinery distillation capacity, net refined petroleum product imports account for a growing proportion of total net imports, increasing from 14 percent in 2003 to 16 percent in 2025.

In the U.S. energy markets, the transportation section consumes about two-thirds

of all petroleum products and the industrial section about one-quarter. The remaining 10 percent is divided among the residential, commercial, and electric power sectors. With limited opportunities for fuel switching in the transportation and industrial sectors, large price-induced changes in U.S. petroleum consumption are unlikely, unless changes in petroleum prices are very large or there are significant

changes in the efficiencies of petroleum-using equipment. Figure 9 compares the impact of the AEO2005 reference and high B world oil price cases on U.S. oil production, consumption, and imports.

Higher crude oil prices spur greater exploration and development of domestic oil

supplies, reduce demand for petroleum, and slow the growth of oil imports in the

high B world oil price case compared to the reference case. Total domestic petroleum

supply in 2025 is projected to increase by 2.2 million barrels a day (25 percent)

higher in the high B case than in the reference case. Production in the high B case

includes 1.2 million barrels per day in 2025 of synthetic petroleum fuel produced

from coal and natural gas (Figure 10). Total net imports in 2025, including crude

oil and refined products, are reduced from 19.1 million barrels a day in the reference case to 15.2 million barrels per day in the high B case. As a result, the projected import share of total U.S. petroleum demand in 2025 is 58 percent in the high

B world oil price case, compared with 68 percent in the reference case. In 2003, the

import share of U.S. petroleum demand was 56 percent.

Natural Gas. Domestic natural gas production is projected to increase from 19.1

trillion cubic feet in 2003 to 21.8 trillion cubic feet in 2025 in AEO2005 [Figure 11].

Lower 48 onshore natural gas production is projected to increase from 13.9 trillion

cubic feet in 2003 to a peak of 15.7 trillion cubic feet in 2012 before falling to 14.7

trillion cubic feet in 2025. Lower 48 offshore production, which was 4.7 trillion cubic

feet in 2003, is projected to increase in the near term (to 5.3 trillion cubic feet by

2014) because of the expected development of some large deepwater fields, including

Mad Dog, Entrada, and Thunder Horse. After 2014, offshore production is projected

to decline to about 4.9 trillion cubic feet in 2025.

Growth in U.S. natural gas supplies will depend on unconventional domestic production, natural gas from Alaska, and imports of LNG. Total nonassociated unconventional natural gas production is projected to grow from 6.6 trillion cubic feet in

2003 to 8.6 trillion cubic feet in 2025. With completion of an Alaskan natural gas

pipeline in 2016, total Alaskan production is projected to increase from 0.4 trillion

cubic feet in 2003 to 2.2 trillion cubic feet in 2025.

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Three of the four existing U.S. LNG terminals (Cove Point, Maryland; Elba Island, Georgia; and Lake Charles, Louisiana) are all expected to expand by 2007, and

additional facilities are expected to be built in the lower-48 States, serving the Gulf,

Mid-Atlantic, and South Atlantic States, including a new facility in the Bahamas

serving Florida via a pipeline. Another facility is projected to be built in Baja California, Mexico, serving a portion of the California market. Total net LNG imports

in the United States and the Bahamas are projected to increase from 0.4 trillion

cubic feet in 2003 to 6.4 trillion cubic feet in 2025.

Net Canadian imports are expected to decline from 2003 levels of 3.1 trillion cubic

feet to about 2.5 trillion cubic feet by 2009. After 2010, Canadian natural gas imports in AEO2005 increase to 3.0 trillion cubic feet in 2015 as a result of rising natural gas prices, the introduction of gas from the Mackenzie Delta, and increased

production from coalbeds. After 2015, because of reserve depletion effects and growing domestic demand in Canada, net U.S. imports are projected to decline to 2.6 trillion cubic feet in 2025.

Coal. As domestic coal demand grows in AEO2005, U.S. coal production is projected to increase at an average rate of 1.5 percent per year, from 1,083 million

short tons in 2003 to 1,488 million short tons in 2025. Production from mines west

of the Mississippi River is expected toprovide the largest share of the incremental

coal production. In 2025, nearly two-thirds of coal production is projected to originate from the western States [Figure 12].

U.S. ELECTRICITY GENERATION

In AEO2005, generation from both natural gas and coal is projected to increase

through 2025 to meet growing demand for electricity. AEO2005 projects that 1,406

billion kilowatthours of electricity (including generation in the end-use sectors) will

be generated from natural gas in 2025, more than twice the 2003 level of about 630

billion kilowatthours [Figure 13]. The natural gas share of electricity generation is

projected to increase from 16 percent in 2003 to 24 percent in 2025. Generation from

coal is projected to grow from about 1,970 billion kilowatthours in 2003 to 2,890 billion kilowatthours in 2025, with the share decreasing slightly from 51 percent in

2003 to 50 percent in 2025. Between 2004 and 2025, AEO2005 projects that 87

gigawatts of new coal-fired generating capacity will be constructed.

Nuclear generating capacity in the AEO2005 is projected to increase from 99.2

gigawatts in 2003 to 102.7 gigawatts in 2025 as a result of uprates of existing plants

between 2003 and 2025. All existing nuclear plants are projected to continue to operate, but EIA projects that no new plants will become operational between 2003

and 2025. Total nuclear generation is projected to grow from 764 billion

kilowatthours in 2003 to 830 billion kilowatthours in 2025 in AEO2005. The share

of electricity generated from nuclear is projected to decline from 20 percent in 2003

to 14 percent in 2025.

The AEO2005 reference case assumptions for the cost and performance characteristics of new nuclear technologies are based on cost estimates by government and

industry analysts, allowing for uncertainties about new, unproven designs. Two advanced nuclear cost cases analyze the sensitivity of the projections to lower costs

for new nuclear power plants. The advanced nuclear cost case assumes capital and

operating costs 20 percent below the reference case in 2025, reflecting a 28-percent

reduction in overnight capital costs from 2005 to 2025. The vendor estimate case

assumes reductions relative to the reference case of 18 percent initially and 38 percent by 2025. These costs are consistent with estimates from British Nuclear Fuels

Limited for the manufacture of its advanced pressurized-water reactor (AP1000).

Cost and performance characteristics for all other technologies are assumed to be

the same as those in the reference case.

Projected nuclear generating costs in the advanced nuclear cost cases are competitive with the generating costs projected for new coal- and natural-gas-fired units toward the end of the projection period (Figure 14). In the advanced nuclear case, 7

gigawatts of new nuclear capacity is added by 2025, while the greater reductions

in the vendor estimate case bring on 25 gigawatts by 2025. The additional nuclear

capacity displaces primarily new coal capacity.

Renewable technologies are projected to grow slowly because they are relatively

capital intensive and they do not compete broadly with traditional fossil-fired generation. Where enacted, State renewable portfolio standards, which specify a minimum share of generation or sales from renewable sources, are included in the forecast. AEO2005 includes the extension of the Federal production tax credit (PTC) for

wind and biomass through December 31, 2005, as indicated in H.R. 1308, the Working Families Tax Relief Act of 2004. Total renewable generation in AEO2005, including combined heat and power generation, is projected to increase from 359 bilVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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lion kilowatthours in 2003 to 489 billion kilowatthours in 2025, increasing 1.4 percent per year.

Current law has the PTC expiring at the end of 2005; however, since the enactment of the PTC in 1992, several previously established sunset dates have come and

gone. In each instance, the credit has been extended, generally several months after

expiration, with retroactive application. Thus, extension beyond the current 2005 expiration seems well within the realm of possibility. Given the uncertainty regarding

the long-term fate of the PTC, EIA examined one possible outcome for an extension

of the PTC. This case is not meant to represent any expectation about future policy

decisions regarding the PTC, but rather to provide a useful indication of the impacts

of the PTC program on future energy markets relative to the reference forecast,

which assumes no extension of the PTC beyond 2005. This case is based on an ‘‘asis’’ extension to 2015 of the expanded renewable electricity PTC program, as expanded by American Jobs Creation Act of 2004 to facilities placed in service by the

end of 2015.

Figure 15 summarizes the impact of the extension of the PTC to 2015 in this alternative case. Wind power sees the largest projected gains, although landfill gas,

geothermal, and dedicated, open-loop biomass resources all are projected to see some

capacity expansion. Installed wind capacity in 2015 is almost 63 gigawatts in the

PTC extension case, compared to 9.3 gigawatts in the reference case. This 580 percent increase in capacity results in a 650 percent increase in generation from the

reference case projection for 2015 (206 billion kilowatthours in the PTC extension

case compared to 27 billion kilowatthours in the reference case).

U.S. CARBON DIOXIDE EMISSIONS

Carbon dioxide emissions from energy use are projected to increase from 5,789

million metric tons in 2003 to 8,062 million metric tons in 2025 in AEO2005, an

average annual increase of 1.5 percent [Figure 16]. The carbon dioxide emissions intensity of the U.S. economy is projected to fall from 558 metric tons per million dollars of GDP in 2003 to 397 metric tons per million dollars of GDP in 2025, an average decline of 1.5 percent per year. Projected increases in carbon dioxide emissions

primarily result from continued reliance on coal for electricity generation and on petroleum fuels in the transportation sector.

THE INTERNATIONAL OUTLOOK TO 2025

IEO2004 includes projections of regional energy consumption, energy consumption

by primary fuel, electricity consumption, carbon dioxide emissions, nuclear generating capacity, and international coal trade flows. World oil production and natural

gas production forecasts are also included in the report. The IEO2004 projects

strong growth for worldwide energy demand over the projection period ending in

2025. Total world consumption of marketed energy is expected to expand by 54 percent, from 404 quadrillion Btu in 2001 to 623 quadrillion Btu in 2025 [Figure 17].

World Energy Consumption by Region. The IEO2004 reference case outlook

shows strongest growth in energy consumption among the developing nations of the

world [Figure 18]. The fastest growth is projected for the nations of developing Asia,

including China and India, where robust economic growth accompanies the increase

in energy consumption over the forecast period. GDP in developing Asia is expected

to expand at an average annual rate of 5.1 percent, compared with 3.0 percent per

year for the world as a whole. With such strong growth in GDP, demand for energy

in developing Asia is projected to double over the forecast, accounting for 40 percent

of the total projected increment in world energy consumption and 70 percent of the

increment for the developing world alone. Energy demand increases by 3.0 percent

per year in developing Asia as a whole and by 3.5 percent per year in China and

3.2 percent per year in India.

Developing world energy demand is projected to rise strongly outside of Asia, as

well. In the Middle East, energy use increases by an average of 2.1 percent per year

between 2001 and 2025; 2.3 percent per year in Africa, and 2.4 percent per year

in Central and South America.

In contrast to the developing world, slower growth in energy demand is projected

for the industrialized world, averaging 1.2 percent per year over the forecast period.

Generally, the nations of the industrialized world can be characterized as mature

energy consumers with comparatively slow population growth. Gains in energy efficiency and movement away from energy-intensive manufacturing to service industries result in the lower growth in energy consumption. In the transitional economies of Eastern Europe and the former Soviet Union (EE/FSU) energy demand is

projected to grow by 1.5 percent per year in the IEO2004 reference case. Slow or

declining population growth in this region, combined with strong projected gains in

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energy efficiency as old, inefficient equipment is replaced, leads to the projection of

more modest growth in energy use than in the developing world.

World Energy Consumption by Energy Source. Oil continues to be the

world’s dominant energy source. Oil’s share of world energy remains unchanged at

39 percent over the forecast period. China and the other countries of developing

Asia account for much of the increase in oil use in the developing world and, indeed,

in the world as a whole [Figure 19]. Developing Asia oil consumption is expected

to grow from 14.8 million barrels per day in 2001 to 31.6 million barrels per day

in 2025, an increase of 16.9 million barrels per day, representing 63 percent of the

increment in oil use in the developing world and 39 percent of the total world increment in oil use over the forecast period. In the industrialized world, increases in

oil use are projected primarily in the transportation sector. In the developing world,

demand for oil increases for all end uses, as countries replace non-marketed fuels

used for home heating and cooking with diesel generators and for industrial petroleum feedstocks.

Natural gas demand is projected to show an average annual growth of 2.2 percent

over the forecast period [Figure 20]. Gas is seen as a desirable option for electricity,

given its efficiency relative to other energy sources and the fact that it burns more

cleanly than either coal or oil. The most robust growth in gas demand is expected

among the nations of the developing world, where overall demand is expected to

grow by 2.9 percent per year from 2001 to 2025 in the reference case. In the industrialized world, where natural gas markets are more mature, consumption of natural gas is expected to increase by an average of 1.8 percent per year over that same

time period, with the largest increment projected for North America at 12.9 trillion

cubic feet. China and the other nations of developing Asia are expected to see among

the fastest growth in gas use worldwide, increasing by 3.5 percent per year between

2001 and 2025.

Coal remains an important fuel in the world’s electricity markets and is expected

to continue to dominate fuel markets in developing Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5 percent per year between 2001 and 2025 [Figure 21]. In the developing world, coal increases by 2.5 percent per year and will surpass coal use in the rest of the world (the industrialized world and the EE/FSU combined) by 2015. Coal continues to dominate energy markets in China and India,

owing to the countries’ large coal reserves and limited access to other sources of energy. China and India account for 67 percent of the total expected increase in coal

use worldwide (on a Btu basis). Coal use is projected to increase in all regions of

the world except for Western Europe and the EE/FSU (excluding Russia), where

coal is projected to be displaced by natural gas and, in the case of France, nuclear

power for electric power generation.

The highest growth in nuclear generation is expected for the developing world,

where consumption of electricity from nuclear power is projected to increase by 4.1

percent per year between 2001 and 2025. Developing Asia, in particular, is expected

to see the largest increment in installed nuclear generating capacity over the forecast, accounting for 96 percent of the total increase in nuclear power capacity for

the developing world as a whole.

Consumption of electricity from hydropower and other renewable energy sources is

expected to grow by 1.9 percent per year over the projection period. Much of the

growth in renewable energy use is expected to result from large-scale hydroelectric

power projects in the developing world, particularly among the nations of developing

Asia.

World Carbon Dioxide Emissions. In the IEO2004 reference case, world carbon

dioxide emissions are projected to rise from 23.9 billion metric tons in 2001 to 27.7

billion metric tons in 2010 and 37.1 billion metric tons in 2025 [Figure 22].

Much of the projected increase in carbon dioxide emissions is expected in the developing world, accompanying the large increases in energy use projected for the region’s emerging economies. Developing countries account for 61 percent of the projected increment in carbon dioxide emissions between 2001 and 2025. Continued

heavy reliance on coal and other fossil fuels, as projected for the developing countries, would ensure that even if the industrialized world undertook efforts to reduce

carbon dioxide emissions, there still would be substantial increases in worldwide

carbon dioxide emissions over the forecast horizon.

CONCLUSIONS

Continuing economic growth in populous countries of the world, such as China,

India, and the United States, is expected to stimulate more energy demand, with

fossil fuels remaining the dominant source of energy. Dependence on foreign sources

of oil is expected to increase significantly for China, India, and the United States.

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These three countries alone account for 45 percent of the world increase in projected

oil demand over the 2001 to 2025 time frame. A key source of this oil is expected

to be the Middle East.

Furthermore, although natural gas production is expected to increase, natural gas

imports in these three countries are expected to grow faster. In 2001, India and

China produced sufficient natural gas to meet domestic demand, but by 2025, gas

production in these two countries will only account for around 60 percent of demand. In the United States, reliance on domestic gas supply to meet demand falls

from 86 percent to 72 percent over the projection period. The growing dependence

on imports in these three countries occurs despite efficiency improvements in both

the consumption and the production of natural gas.

This concludes my testimony, Mr. Chairman and members of the Committee. I

will be happy to answer any questions you may have.

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Mr. HALL. Thank you. And I apologize to you for not having all

the members here. This is the second panel, most of you are veterans at that. I could be egotistical, and say that the main one is

here, but that wouldn’t be true, either. But Mrs. Showalter, the

Governor has about 15 or 20 people waiting for him across there,

and one thing, if you could yield to him now, we would hear him

less, and it would be an accommodation to him. We have all of your

statements, and will go into the hearing record, will be read by everybody here, and the most important people of all are here, these

staffers that are sitting behind us usually do most of the work, and

you have got a couple of trillion dollars worth of taxpayers directly

behind you back there.

Governor, we recognize you for as much time as you take.

STATEMENT OF HON. FRANK MURKOWSKI

Governor MURKOWSKI. Thank you very much, Mr. Chairman,

and I apologize to Madam Showalter. Let me indicate my appreciation, Mr. Chairman. I have brought 5 copies of caribou activity at

the airport in Barrow that I personally saw last week, and I would

appreciate it if Mr. Markey could get a copy delivered, my good

friend. I don’t believe he has been up there, and those caribou may

be there today. They might not be there tomorrow, but they were

there when I was there last Thursday.

Mr. HALL. I am not sure I want him up there, but I will deliver

anything you want to him.

Governor MURKOWSKI. All right.

Mr. HALL. Go ahead.

Governor MURKOWSKI. The National Governors Association supports an energy policy that balances energy production, efficiency,

conservation, environment, quantity, and health of the economy,

and our policy maintains that energy issues must be addressed nationally, and we commend you for that, Mr. Chairman, while still

recognizing very strongly the role of our State and local authorities

over environmental and land issues, and that was discussed at the

first panel.

We believe that the solution to the need for energy will require

increased conservation, energy efficiency, as well as exploration of

new energy supplies, particularly in those areas where States support the development and production of energy sources. The exploration should include environmentally responsible areas, development of national and traditional fossil fuel sources, and greater reliance on alternative and renewable sources, and that comes as no

surprise, because when I left my chairmanship in 2002, you were

debating basically the same issues, and I commend you for your insistence on getting on a bill at this time.

And particularly, we think, in the National Governors Association, the titles of the conference agreement dealing with energy efficiency, renewable energy, are very positive. We support provisions

of the oil and gas title that will promote new domestic production

through exploration and development of additional petroleum reserves, and encourage effective, market-based measures that will

support production of natural gas supplies and development of infrastructure in an environmentally sound manner.

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We would also like to see a reduction in the impediments that

limit natural gas production. However, we are mindful that many

States support drilling moratoria off their shores, and we respect

that. But on the other hand, those that want to have exploration,

we think that the country and the committee should stand behind

those States, if the prospects are indeed there. We believe that the

Federal land management agencies should have the resources

available to participate and coordinate with States regarding Federal decisions about energy exploration and production on Federal

lands, and of course, we continue to support the resources in Alaska and the Alaska Natural Gas Pipeline. With regard to coal, we

believe that the conference report will encourage technologies to

utilize coal more cleanly and more efficiently with new clean coal

technology. The development and use of hydrogen as a fuel source

will be encouraged by the conference report, and we support the

Federal assistance for research, development, as well as demonstration projects.

Some provisions of the electricity title continue to cause concerns

to the Governors. While we strongly support the development of

mandatory rules to ensure transmission grid reliability, we continue our longstanding opposition to Federal preemption of State

authority to choose the location of interstate transmission lines.

FERC should not be granted the power to override State law, even

as a backup to a State’s decision to disapprove a project. We have

yet to see credible evidence that States have abused their responsibility to balance electric transmission needs with other important

public consideration. We were encouraged that the conference report recognized the importance of regional solutions by preventing

the FERC from overriding a decision by a regional transmission

siting agency established by interstate compact, but we think that

there is still work to do on this provision, and we hope to have the

opportunity to offer our suggestions, Mr. Chairman.

Finally, we would like to extend our support for the many conservation initiatives in the conference committee report. We believe

that the Federal Government should promote energy conservation

education programs, and fund research into conservation technologies. Federal funding of energy conservation programs, including grants to States should be enhanced. The development of energy-efficient technologies, including fuel efficient engines, and vehicle technology should be actively promoted, and the U.S. Department of Energy should be provided with adequate authority, funding, and staffing to undertake and coordinate conservation activities.

I want to thank you for this opportunity, Mr. Chairman. I would

like to just conclude with a couple of other references with regard

to the coastal plain, which has been discussed this morning. The

U.S. Geological Survey has estimated that in ANWR, there is a recovery of somewhere between 5.7 and 15.9 billion barrels of oil, and

as noted in the discussion this morning, why, we have already

heard that the pipeline has a capacity for another million barrels

a day.

I would also like to point out to the committee that the State of

Alaska has the jurisdiction 3 miles off ANWR, so the entire coastline 3 miles out. We have waited patiently for the Congress to adVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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dress the development of ANWR, and would encourage that the energy bill include ANWR, because there is no question in our minds,

based on our production experience in the Prudhoe Bay area that

the area can be opened safely.

I would remind the committee of one other thing, and I think

this is oftentimes lost. We have lots of sources of energy. We have

got nuclear. We have got hydro. We have got solar. We have got

wind. But the world still moves on oil, Mr. Chairman, and the national security interests of our Nation rest with, I think, a declining security in the sense that we are becoming more and more dependent on sources overseas, which certainly affects the national

energy, and we look at our world here pretty much consisting of

the United States, but as we see China, where they are getting off

their black bicycles and into their automobiles, there is just a reality there is going to be more and more pressure on the world’s

supply of oil, and if we can reduce that by producing more here at

home, addressing the balance of payments, creating jobs here in

America, and do it safely, why, then we should do it with dispatch,

Mr. Chairman. And certainly my State happens to be blessed with

a huge amount of resources, particularly in the area of oil and gas,

and as you know, Mr. Chairman, I will conclude that the Congress

has done the initial authorization on the gas line, and the State of

Alaska is in the process of negotiating with various companies that

are making proposals, including the State contemplating taking an

equity interest, putting up a billion dollars or thereabouts of equity

to assure that this project comes to reality, and that would provide

this Nation with about a 30 year supply of gas, at nearly 4 to 6

billion cubic feet a day.

So, Mr. Chairman, I think that, this is an old saying, whether

it is in Alaska or Texas, charity begins at home. Thank you, Mr.

Chairman.

[The prepared statement of Hon. Frank Murkowski follows:]

PREPARED STATEMENT OF GOVERNOR FRANK MURKOWSKI, ON BEHALF OF THE

NATIONAL GOVERNORS ASSOCIATION

Mr. Chairman and members of the Committee on Energy and Commerce, I am

Frank Murkowski, Governor of the State of Alaska, and Chairman of the National

Governors Association Natural Resources Committee. The bulk of my comments will

be on behalf of NGA, however, I will have some Alaska-specific comments at the

conclusion of my statement.

I appreciate the opportunity to provide comments to this committee as you consider legislation to create a comprehensive energy policy for the United States. NGA

supports an energy policy that balances energy production, efficiency and conservation, environmental quality, and a healthy economy. Our policy maintains that energy issues must be addressed nationally, while still recognizing state and local authority over environmental and land use issues.

We believe that the solution to the need for energy will require increased conservation and energy efficiency as well as exploration of new energy supplies. That

exploration should include environmentally responsible development of traditional

fossil fuel sources and greater reliance on alternative and renewable sources.

In particular, we think the titles of the Conference agreement dealing with energy

efficiency and renewable energy are very positive and will provide incentives for programs that help encourage new techniques and technologies. We support provisions

of the oil and gas title that will promote new domestic production through exploration and development of additional petroleum reserves and encourage effective

market-based measures that will support production of natural gas supplies and development of infrastructure in an environmentally sound manner.

We also would like to see a reduction in the impediments that limit natural gas

production, however, we are mindful that many states support drilling moratoria off

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their shores. We believe that federal land management agencies should have the resources available to participate and coordinate with states regarding federal decisions about energy exploration and production on federal lands. And of course, we

continue our support for the Alaska natural gas pipeline.

With regard to coal, we believe that the conference report will encourage technologies to utilize coal more cleanly and efficiently. The development and use of hydrogen as a fuel source will be encouraged by the conference report, and we support

federal assistance for research and development, as well as demonstration projects.

Some provisions of the electricity title continue to cause to concern to Governors.

While we strongly support the development of mandatory rules to ensure transmission grid reliability, we continue our long-standing opposition to federal preemption of state authority to choose the location of interstate transmission lines. The

Federal Energy Regulatory Commission (FERC) should not be granted the power to

override state law, even as a backstop to a state decision to disapprove a project.

We have yet to see credible evidence that states have abused their responsibility to

balance electricity transmission needs with other important public considerations.

We were encouraged that the conference report recognized the importance of regional solutions by preventing the FERC from overriding a decision by a regional

transmission siting agency established by interstate compact, but we think that

there is still work to do on this provision, and we hope to have the opportunity to

offer our suggestions.

Finally, we would like to extend our support for the many conservation incentives

in the conference committee report. We believe that the federal government should

promote energy conservation education programs and fund research into conservation technologies. Federal funding of energy conservation programs, including grants

to states, should be enhanced. The development of energy efficient technologies, including fuel-efficient engine and vehicle technologies, should be actively promoted.

The U.S. Department of Energy should be provided with adequate authority, staffing, and funding to undertake and coordinate conservation activities.

Thank you very much for this opportunity to share NGA’s policies with you.

I recognize that certain aspects of oil and gas development are not within the jurisdiction of this Committee. However, I want to make some brief comments concerning three oil and gas issues of interest to Alaska and the Nation:

ANWR

The Coastal Plain of ANWR has been determined to be the most promising unexplored petroleum province in North America, the only area with the potential to discover an ‘‘elephant’’ field like Prudhoe Bay. Thus, the US Geological Survey has estimated that the amount of technically recoverable oil beneath the Coastal Plain

ranges between 5.7 billion (95% probability) and 15.9 billion barrels (5% probability)

at $25 per barrel. At $50 per barrel, all of the known physical reserves would be

economic, thereby increasing these estimates significantly. The Coastal Plain may

also contain significant deposits of natural gas.

Oil from ANWR represents a secure domestic supply, which could help fulfill US

demand for twenty five years or more. Government studies suggest that the Coastal

Plain could produce a ten year sustained rate of one million barrels per day.

The development of ANWR would reduce US dependence on unstable foreign

sources of crude oil, such as oil from the Middle East and OPEC countries

ANWR oil would reduce the US trade deficit, a large percentage of which is directly attributable to the importation of crude oil, now totaling approximately 60%

of daily consumption and rising

Incremental production from the Coastal Plain of ANWR should help reduce price

volatility in the US. In this regard, recent supply disruptions affecting Nigeria, Iraq,

Norway, and the Gulf of Mexico illustrate how even relatively low levels of production can influence the world price of oil

ANWR development would create hundreds of thousands of American jobs affecting virtually every state by providing a secure supply of petroleum and by creating

a demand for goods and services

Oil and gas development in ANWR is not a panacea. Such development should

be part of an energy policy which includes the development of alternative fuels, fuel

efficiency, conservation, and other measures. However, gasoline and other products

refined from crude oil will continue to fuel our transportation system for the foreseeable future

Experience on the North Slope demonstrates that ANWR can be developed in a

manner that protects the environment and which provides greater safeguards than

exist in other parts of the world:

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• Advanced technology such as horizontal drilling, multiple well completions, and

smaller drilling pads, ensures that the footprint of development would be less

than 2,000 acres (approximately the size of an average farm in South Carolina

or the equivalent of one letter on the front page of the New York Times) • The Coastal Plain of ANWR comprises approximately 1.5 million acres in a National Wildlife Refuge that includes over 19 million acres (the size of South

Carolina) of which 8 million acres has been designated by Congress as wilderness and hence would be off limits to any commercial activity • Oil development is compatible with the protection of wildlife and their habitat.

For example, North Slope caribou herds have remained healthy throughout previous oil development. In fact, the Central Arctic caribou herd, which is located

in and around Prudhoe Bay, has increased 10 fold in the last 20 years • For most of the year, the Coastal Plain of ANWR is a frozen, desolate area. Experience demonstrates that seasonal restrictions and other environmental stipulations can be utilized to protect caribou calving (6 weeks in the summer), migratory birds, and fish

Recognizing the employment and economic benefits that would accrue to them,

the Inupiat Eskimos of the North Slope generally support oil development in the

Coastal Plain. In this regard, most residents of the village of Kaktovik, which is located on the Coastal Plain, have expressed their support for development

For the past 5 years, the administration of President George W. Bush has strongly supported responsible oil development in the Coastal Plain of ANWR in recognition of the economic and national security benefits that would accrue to the nation.

The Bush administration has estimated for budgetary purposes that the initial

phase of ANWR development would generate $1.2 billion to the Federal treasury in

Fiscal Year 2007.

Responsible oil and gas development in the Coastal Plain is supported by a broad

spectrum of groups and organizations, including businesses, labor unions, petroleum

users and others. ANWR has become a symbol in the philosophical debate over development versus protection. However, as the preceding indicates, the facts demonstrate that ANWR, with its concomitant benefits, can be developed without significantly impacting the North Slope environment

NATURAL GAS HYDRATES

Methane gas hydrates are a highly concentrated crystalline form of natural gas

that occurs in deep ocean basins and in arctic regions. The United States Geologic

Survey estimates Alaska’s North Slope methane hydrates at 590 trillion cubic feet,

with an additional 32,375 trillion cubic feet in the Beaufort and Chukchi Seas.

The location of methane hydrates near proven conventional gas reserves makes

the North Slope the premier area for methane hydrate research and future production.

Analysis shows that North Slope gas hydrates should produce at commercial

rates. This analysis must be tested through a government-sponsored research program and possibly followed by royalty or tax relief for hydrate development. If successful these tests could substantially extend the life of an Alaska natural gas pipeline project.

ALASKA NATURAL GAS PIPELINE

Last October Congress enacted and the President signed into law the Alaska Natural Gas Pipeline Act. This essential legislation cleared the way at the Federal level

for processing applications for an Alaska Gas Pipeline and also provided loan guarantees that will reduce the risk of this essential national interest project.

As required by the Act, the Federal Energy Regulatory Commission has moved

quickly to put out for public comment proposed open season regulations that will

govern access to the Alaska gas pipeline. Yesterday, the FERC issued its final regulations. We welcome that swift action and are reviewing the regulations to ensure

that they satisfy the Congressional mandate on access.

As part of the open season rulemaking, the four FERC Commissioners traveled

to Anchorage and held a public hearing on the regulations in early December. For

the Commission itself to hold a hearing out of Washington DC was unprecedented.

The commitment of the Commission to hear Alaskans on this vital issue was well

received and I applaud the Commission for doing so.The Department of Energy is

also beginning to organize its process for hearing interested parties and working out

the details of the federal loan guarantees authorized by October’s law.

The State of Alaska has been busy doing its part to foster an Alaska Natural Gas

Pipeline. A recent state law enables Alaska to provide fiscal certainty on taxes and

royalties to a qualifying Alaska gas pipeline. A number of parties have submitted

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qualified projects. As we speak, the State is engaged in very active fiscal contract

negotiations with the three major North Slope producers—Exxon Mobil, BP, and

ConocoPhillips—and also with TransCanada. In addition, the State is analyzing the

merits of the Alaska Port Authority proposal to transport liquefied natural gas from

Alaska to the US West Coast. The State’s objective is clear—do what it can to bring

a pipeline to fruition at the earliest feasible date. My objective is to submit one or

more Stranded Gas Act contracts to the State legislature this session.

As part of these negotiations, the State is prepared to put its money where its

mouth is. I have announced that the State is willing to invest its own capital to

take a risk position in the pipeline. One way we could do this is to invest in the

pipeline itself—take a multi-billion dollar stake. This is an active part of the negotiations.

Mr. HALL. I thank you, and you are exactly right. And thank you

for your time, and not just today, but from here back and here forward. We need you, and we do excuse you at this time. And thank

you. I express our appreciation to Mrs. Showalter for conceding to

the Governor, and recognize you now for as much time as you use.

STATEMENT OF HON. MARILYN SHOWALTER

Ms. SHOWALTER. Thank you, Mr. Chair. I am Marilyn Showalter.

I am the President of the National Association of Regulatory Utility

Commissioners, and as State regulators, we are the ones who see

that utilities fulfill their obligations to provide their customers with

reliable and safe electricity. And we are also the ones who pass the

bills on to the customers, and who face them directly when they

have a concern.

I have submitted written testimony, but I want to emphasize two

points here. First is our very strong support for the reliability provisions in the bill, and I am referring to last year’s conference report. And second is our very strong concern over the siting provisions in the conference report, namely, the Federal backup authority.

With respect to reliability, NARUC has long supported mandatory reliability standards, and we support the current language. I

want to emphasize that we do support the current language, and

are somewhat concerned if that would be changed. Notably, the

current language reserves to the States their appropriate roles regarding resource adequacy and safety and planning. I would caution against injecting into the reliability provisions language that

actually deals with economic regulation. When you think about

what reliability is, it is the physical integrity of the system. It deals

with the physical operation and standards, and these standards

can and must obtain, regardless of what form of economic regulation you have, and the current language does that.

With respect to siting, we oppose the current language. We feel,

as I think Governor Murkowski said, that the States are the appropriate place to make siting decisions, and have done so. For a

minute, think again physically what transmission is, is part of an

integrated physical system, the other parts being generation and

demand. So the first thing that States do is decide, along with the

utilities serving their customers, what is the appropriate alternative.

To give an example, one of my utilities, Puget Power recently

needed to provide more resources for the customers, and the lowest

hanging fruit was conservation. That doesn’t take any transmission

or generation. The second thing they did was buy a natural gas

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plant that was conveniently located, and did not require a transmission. But the third and fourth resources they are planning to

acquire are wind, which is on the other side of the mountains, and

does entail transmission. But these are important decisions for a

utility and the State to make in a sound fashion, and it becomes

difficult if the transmission is isolated.

The second aspect of this is that it may not be the case that providing Federal backup authority solves any problem. Again, I can

cite to a utility in our State, Avista, which serves Spokane. It has

recently completed, or sited, 3 different transmission facilities. One

involves two States, Idaho and Washington, involved 15 miles of

new right of way, 45 miles of existing right of way, and it was able

to site and resolve, get all the necessary permits in 8 months,

which is quite fast. Two other transmission projects that they recently completed took 2 years and two and a half years, from the

very beginning, of design, all the way through environmental review, public process, permitting, and construction, took 2 years and

two and a half years. When you introduce a new decisionmaker,

namely, the Federal Government, I think it changes the dynamic.

In the cases I mentioned, the utility was quite adept at forming a

collaborative process with local governments and other stakeholders, and was able to achieve what it did. But I think it points

out that States are capable of siting, and it may change the successful sitings to introduce the possibility of a second bite at the

apple.

Thank you very much.

[The prepared statement of Hon. Marilyn Showalter follows:]

PREPARED STATEMENT OF HON. MARILYN SHOWALTER, NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS

Mr. Chairman and members of the Committee, I am Marilyn Showalter, Chairwoman of the Washington Utilities and Transportation Commission and President

of the National Association of Regulatory Utility Commissioners (NARUC). On behalf of NARUC, thank you for this opportunity to share our views with you today.

NARUC is a quasi-governmental, nonprofit organization founded in 1889. Its

membership includes the State public utility commissions for all States and territories. NARUC’s mission is to serve the public interest by improving the quality and

effectiveness of public utility regulation. NARUC’s members regulate the retail rates

and services of electric, gas, water and telephone utilities. We have the obligation

under State law to ensure the establishment and maintenance of such energy utility

services as may be required by the public convenience and necessity, and to ensure

that these services are provided at rates and conditions that are just, reasonable

and nondiscriminatory for all consumers.

NARUC has commented many times on the various energy proposals and drafts

that have been reviewed by the members of this Committee during the preceding

Congresses. The positions expressed in this testimony are consistent with the positions expressed by NARUC during the energy deliberations that occurred in the

108th Congress.

Conference Report 108-375 (to accompany H.R. 6), which was passed by the House

of Representatives in the 108th Congress, includes many positive provisions which

NARUC strongly supports including, the reliability section, LIHEAP and weatherization authorization of appropriations, Price—Anderson reauthorization, support

for clean coal technologies, renewable energy production incentives, efficiency programs, and enhanced penalties under the FPA, to name but a few. However, our

comments today will be focused on the electricity title (Title XII) of the Report language.

RELIABILITY STANDARDS

NARUC has consistently held that reliability should be addressed in any Federal

energy legislation. NARUC has been a strong and consistent supporter of legislation

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that establishes a more robust, mandatory model for the enforcement of compliance

with mandatory technical reliability standards, provided, however, that States are

not preempted on resource adequacy, safety, security, and planning issues and can

form voluntary regional bodies to advise FERC on implementation of the standards

within their regions. Therefore, NARUC believes that Congress should mandate

compliance with industry-developed reliability standards on the transmission system and preserve the authority of the States to set more rigorous standards when

in the public interest.

To that end, Congress should include in any reliability legislation a savings clause

to protect existing State authority to ensure reliable power delivery service, and a

regional advisory role for the States. Additionally, Congress should ensure that

States continue to have the authority to establish effective price signals that allow

consumers to choose alternative levels of reliability and power quality. Accordingly,

NARUC supports the electric reliability provision found in Subtitle A of the Conference Report passed by the House last Congress.

TRANSMISSION SITING

We appreciate the efforts that have been made in an attempt to alleviate the concerns raised by NARUC and other State and local government organizations with

regard to the siting proposals floated during the last Congress. However, NARUC

must respectfully oppose Sec. 1221 of the Conference report due to the FERC backstop provision that is included. Although efforts have been made to produce a more

moderate backstop proposal, the result is the same: FERC will have authority to

override State decisions on transmission siting.

NARUC opposes this FERC-override provision. States should retain authority to

site electric transmission, generation, and distribution facilities. Congress should

support the States’ authority to negotiate and enter into cooperative agreements or

compacts with Federal agencies and other States, in order to facilitate the siting

and construction of electric transmission facilities. And Congress should support the

State’s authority to consider alternative solutions to such facilities, such as distributed generation and energy efficiency. NARUC is strongly opposed to any role (direct or backstop) for FERC in authorizing or siting transmission lines.

Building additional transmission, distribution and generation can be difficult. A

major impediment to siting energy infrastructure in general, and electric transmission in particular, is the great difficulty in getting public acceptance for needed

facilities. Few examples have been documented however, beyond anecdotal accounts,

that a State action (or inaction) is solely responsible for unreasonably preventing

a needed transmission project. Further, the limited examples that may exist do not

warrant Federal pre-emption. Shifting siting responsibility from State government

to the Federal government will not necessarily make siting energy delivery infrastructure any easier. There is no ‘‘quick fix’’ to a difficult siting issue, but States

are better positioned to identify and evaluate alternatives to a specific project. For

example, a State may determine that a transmission line is not necessary if distributed generation is used instead, saving valuable resources and protecting citizens

from unnecessary effects of the transmission project. Additionally, States are better

positioned to hear and consider comments from affected citizens and businesses.

TRANSMISSION OPERATION

NARUC is pleased that section 1232 takes a voluntary approach to Regional

Transmission Organizations (RTOs). Section 1232 of the Report language allows for

more latitude in the development of wholesale power markets than a generic ‘‘onesize-fits-all’’ approach.

Regarding section 1236, NARUC believes that native load customers should be

held harmless with respect to such issues as their priority of service, quality of service, and allocation of joint and common costs. These customers have borne the vast

majority of the costs of their utility’s transmission facilities. Because the utility’s obligation under State law or FERC-approved contract is to provide these consumers

reliable and affordable service, they should not bear any burden due to an open access transmission regime. Further, NARUC supports Federal transmission policies

that assist in the evolution to economically and environmentally efficient regional

power markets that provide benefits to all customers.

TRANSMISSION RATE REFORM

NARUC members are aware of the need for adequate investment in energy sector

infrastructure. However, section 1241, which would provide rate incentives for RTO

participation, fails to recognize that currently, under State laws, utilities are generally required to obtain State commission approval to participate in RTOs, if RTO

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membership requires the utility to relinquish control or divest the transmission facilities held in the retail rate base.

With regard to section 1242, NARUC is supportive of transmission cost allocation

proposals. NARUC supports a pricing policy which allocates transmission costs in

two ways. First, those costs needed to maintain the reliability of the existing transmission system, should be recoverable through rates paid by all transmission customers. Second, the cost of upgrades and expansions that are necessary to support

incremental new loads or demands on the transmission system should be borne by

those causing the upgrade or expansion. Additionally, any cost allocation proposal

should not preclude the assignment of interconnection cost to the general body of

ratepayers within a State when that State’s regulatory body determines that such

allocation is in the public interest.

PURPA/NET METERING/REAL-TIME PRICING/TIME OF USE METERING

NARUC opposes language in section 1253, which would pre-empt State jurisdiction by granting FERC authority to order the recovery of costs in retail rates or to

otherwise limit State authority to require mitigation of PURPA contract costs. Regarding sections 1251 and 1252, NARUC regards Net Metering, Real-Time Pricing

and Time of Use Metering as retail issues that ought to be subject to State jurisdiction rather than Federal legislation. We are pleased that the legislation provides

that each State has the ability to determine if the services in sections 1251 and

1252 are appropriate for State implementation. The long-standing NARUC position

is that implementation of these programs should be of the States’ own choosing, in

the States’ own time, and not forced on States under timelines and minimum standards of FERC’s choosing.

PUHCA

Congress should reform the Public Utility Holding Company Act (PUHCA), but in

doing so, should allow the States to protect the public through maintaining effective

oversight of holding company practices and expanding State access to holding company books and records, independent of any similar authorities granted to the Federal regulatory bodies. NARUC believes that Subtitle F fits within our criteria for

support.

MARKET TRANSPARENCY, ENFORCEMENT, AND CONSUMER PROTECTION

There is an increased need for oversight of the energy markets in order to protect

against market abuse. Electricity price volatility has raised concerns about the integrity of wholesale markets, suggesting a much greater need for monitoring of

these markets by regulatory bodies. The legislation does not address a critical concern, the State regulatory role in market monitoring. States can provide a ‘‘first responders’’ view of energy markets.

However, in order to be an effective market monitor, the State regulators must

have access to all necessary data, including but not limited to generating plant production, fuel sources, heat rates, and both scheduled and actual transmission path

flows. State regulators must have the ability to review this type of data in order

to be able to detect market gaming and attempts to obtain and exercise unlawful

market power. The electric industry restructuring efforts of the federal government

and the various States are based on an assumption that wholesale markets are

workably competitive. To that end, policy makers must have the ability to provide

confidence to an already skeptical and uneasy public that the market is not being

‘‘gamed.’’ This confidence can be provided only if regulators are able to access the

data necessary to ensure that the market is functioning in a truly competitive fashion. To the extent that data is currently shared among market participants for purposes of reliability, Congress should ensure that it is also available to regulators and

the public.

There is a real concern that the energy markets are vulnerable to manipulation,

and there needs to be an improvement in the reliability of the indices used. A minimum set of standards should be established for how price reporting occurs. Regulatory oversight of price reporting and the ability to impose penalties on traders that

don’t comply with the rules should help ensure that energy companies follow the

rules.

The energy industry must adopt a set of practices and benchmarks to increase

market transparency and to help restore public confidence in the US energy markets. If the goal of legislation is to ensure that the market participants do not manipulate the market, the policies ought to provide for more transparency, not less.

Claims that data-reporting to State regulators will result in competitive disadvantages to those reporting are spurious. To the extent the necessary data are commerVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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cially sensitive, State regulators can provide appropriate protections. States routinely and frequently handle such information without compromising parties’ interests.

NARUC is pleased that the Conference Report included a State authority provision in section 1287 to complement Federal consumer protection procedures.

NARUC’s members have a long-standing commitment to consumer protection. Indeed, State utility commissions were established to ensure that consumers receive

essential services without fear of predatory practices and pricing.

The States are capable in dealing with abuses that occur at the retail level. In

fact many of the States that have moved to restructure and unbundle their retail

electric markets have in place laws and regulations that address the consumer

issues found in section 1287.

MERGER REFORM

The economic efficiencies associated with free and substantial competition may

not be realized if mergers have an adverse impact on competition in the generation

market. In most instances, State commissions have a responsibility to ensure that

mergers do not adversely affect the availability of electricity at just and reasonable

rates.

A clear regulatory policy on mergers has several benefits, including (a) giving prospective merger partners more certainty on how regulators will treat their proposals, (b) increasing the likelihood that the actions of the merging parties will be

consistent with the public interest, (c) assisting regulators in distinguishing efficient

from inefficient mergers and mergers which increase competition from mergers

which impede competition, and making the review process more efficient by reducing the need to relitigate generic policy issues in each case. Federal and State regulators should thoroughly evaluate electric utility mergers to assess their impact on

competition in the generation market, access to transmission facilities and ultimately on electric rates. Proposed mergers that adversely affect generation competition or create situations in the relevant electric markets that are inconsistent with

antitrust laws should be disapproved. FERC should be required to establish a process for review of a merger application that provides for effective State participation.

NUCLEAR WASTE FUND REFORM

NARUC believes that any comprehensive energy legislation should include, at

minimum, a section that addresses the issue of the Nuclear Waste Fund. In 1982

the Nuclear Waste Policy Act established policy that the Federal government is responsible for safe, permanent disposal of all high-level radioactive waste, including

spent nuclear fuel from commercial power reactors.

Since 1983 ratepayers in States using nuclear-generated electricity have paid over

$23 billion in fees and interest, via their electric utility bills, to the Nuclear Waste

Fund (NWF) in the U.S. Treasury in what was to have been a self-financed waste

disposal program. Unfortunately, Congress historically has only appropriated a

small fraction of the amount of revenue going into the NWF to develop the waste

repository... resulting in a balance in the Fund, now over $16 billion. Previous attempts to address the gap between NWF revenue and annual appropriations have

been either embroiled in nuclear waste politics or faced other obstacles.

Comprehensive energy legislation should include a section to reclassify fees paid

by utilities to the Nuclear Waste Fund as discretionary offsetting collections equal

to the annual appropriations from the Fund or by other means that achieves the

result of having appropriations match Fund revenue. A good starting point would

be the language found in H.R. 3981 or HR 3429, both introduced in the 108th Congress.

Thank you for your attention and the opportunity to comment today. I look forward to your questions.

Mr. HALL. Well, thank you very much. At this time, Vic, we recognize you. I am proud to have my fellow Texan here, a guy with

a history of success. Our Governor Perry appointed him to fill the

unexpired term of Tony Garza, who went to Mexico as Ambassador,

and your abilities were immediately recognized by the other two

members, made you Chairman, I think, after about 4 months you

had been there. And you ride herd on the most important entity

for the State of Texas. You were appointed by the Secretary of Interior to serve as our representative to the Outer Continental Shelf

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Advisory Committee, and we thank you for that, and recognize you

at this time for as much time as you take.

STATEMENT OF HON. VICTOR CARRILLO

Mr. CARRILLO. Thank you, Mr. Chairman, and it is always good

to see you, and members, thank you for the opportunity to appear

before you here today. For the record, my name is Victor Carrillo.

I am Chairman of the Texas Railroad Commission, and in spite of

our name, we primarily oversee the oil and gas industry, the pipeline sector, and surface mining in my home State. My background

is also, in the energy sector, as a former exploration geologist and

geophysicist and oil and gas attorney, and now, as a statewide

elected official.

I am here today representing the Interstate Oil and Gas Compact Commission, or IOGCC. IOGCC member States produce over

99 percent of the oil and natural gas produced onshore in the U.S.

Formed in 1935, the IOGCC is a Congressionally ratified interstate

compact that include 30 member and 7 associate States, and our

2005 Chairman is Governor Murkowski of Alaska. The IOGCC’s

mission is twofold. It is to promote conservation and efficient recovery of domestic oil and natural gas resources, while protecting

human health and the environment. And though many would have

you believe that those dual goals are mutually exclusive, let me assure you that they are not. Responsible oil and gas development

and stewardship of our land and water resources can both be accomplished simultaneously. We see it done daily, in Texas, and I

am sure Governor Murkowski sees it daily in Alaska.

We hear a lot about imported oil and our dependence on foreign

oil. It may come as a surprise, however, that our country is still

our own single biggest supplier of oil produced domestically either

onshore or offshore, larger than the individual contributions from

Saudi Arabia or Mexico or Canada. This is production from our

States, from Texas, from Alaska, from the other IOGCC States. In

Texas, for example, we produce about 6 trillion cubic feet of natural

gas per year, which represents over 25 percent of the total U.S. demand for that clean burning fuel. Together, the IOGCC States still

produce a great deal of the energy we all critically need to fuel our

cars, heat our homes, and power our economy.

It seems at times that with this misunderstanding of the U.S.

role in supplying our own oil and gas comes acceptance that importing more oil is our best or only option. It is not. With proper

policies in place, the domestic oil and gas industry will continue to

help to supply that demand for the foreseeable future.

And while Texas and the other IOGCC member States are oil

and gas producing States, we are also consuming States that share

all of the concerns of States without oil and gas production. In fact,

while Texas is the top oil and gas producing State, Texas also

ranks first in overall energy consumption. We all need a steady

source of energy at reasonable and stable prices. A secure source

of domestically produced oil and gas is in everyone’s best interest,

producing and consuming States alike.

The IOGCC has produced an energy policy document entitled ‘‘A

Dependent Nation.’’ You should have this in your packets. And in

Texas, we recently completed a yearlong effort to craft our own

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Texas energy plan. I chaired that effort, and we developed 10 key

recommendations that we believe form the foundation for a safe,

stable, and secure energy future for Texas. Our plan, much like

what you are focusing on here today, recognizes the importance of

domestic oil and gas industry, highlights the need for funding to

encourage R&D in emerging technologies, recognizes the need for

additional energy education, recognizes the need for efficiency and

conservation measures, and encourages diversification of our energy sources to include liquefied natural gas, clean coal technologies, gasification, and renewable energy, such as wind, solar,

and biomass.

These are many of the same issues that you are dealing with on

a national level. The U.S. indeed needs comprehensive energy policy, from the top, that recognizes the possibilities and moves us toward solutions. And based in part on my experience in Texas, I can

say that the bill before this committee, the Energy Policy Act of

2005, is a very positive step forward. The bill’s oil and gas provisions would significantly advance the cause of helping the U.S. to

maintain, or maximize, rather, the production of its domestic oil

and natural gas resource. In particular, the IOGCC is highly supportive of the bill provisions dealing with access to public lands,

production tax incentives, marginal wells, orphaned and abandoned

wells, hydraulic fracturing, and stormwater runoff.

In wrapping up, let me briefly address two other issues, energy

education and research and development. Many of the problems we

face would be greatly eased with better public understanding of energy and its important role in our economy. The public’s relative

lack of understanding of the energy industry poses a real barrier

to ongoing development of our natural resources. We urge the Federal Government to join the Governors of the IOGCC in contributing to the development of and funding for national energy education.

Finally, I muse voice concern regarding the administration’s proposal in this week’s budget to terminate the Fossil Energy Oil and

Natural Gas Program at DOE. The IOGCC believes strongly that

this R&D program is essential for domestic producers to keep pace

technologically. Small and medium-sized oil and gas producers in

particular, who incidentally drill most of the onshore wells in the

U.S., simply do not have the budgets to conduct their own R&D,

and technological advancements allow industry to find and produce

more domestic oil and gas more efficiently, and even where we already know it to exist.

So let me say that technology should be fostered and encouraged.

I commend you on proposing a comprehensive, balanced energy

plan. I thank you for the opportunity to present before you today,

and I stand ready to work with you, and to attempt to answer any

questions you may have.

[The prepared statement of Hon. Victor Carrillo follows:]

PREPARED STATEMENT OF VICTOR CARRILLO, CHAIRMAN, TEXAS RAILROAD

COMMISSION

Good afternoon. My name is Victor Carrillo. I am the Chairman of the Railroad

Commission of Texas. I am here today representing the Interstate Oil and Gas Compact Commission (IOGCC). With the permission of the committee, I’d like to submit

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a statement and the attached publications for the record. My statement today will

highlight those comments.

The member states of the IOGCC produce more than 99% of the oil and natural

gas produced onshore in the United States. Formed in 1935, the IOGCC is a congressionally ratified interstate compact. As an organization, the IOGCC is the nation’s leading advocate for conservation and wise development of domestic petroleum

resources. The organization includes 30 member and 7 associate states. The mission

of the IOGCC is two-fold: to conserve our nation’s oil and gas resources and to protect human health and the environment. Always chaired by a Governor, our Chairman in 2005 is Governor Murkowski of Alaska.

We hear a lot about imported oil—about our dependence in this country on upon

foreign oil. It may come as a surprise, however, to most Americans to learn that

we Americans are still our own biggest supplier of oil—produced domestically either

onshore or offshore. This is by and large production from our states, like my state,

the state of Texas or the 29 other member states of the IOGCC. Together we still

produce most of the energy we so critically need—to fuel our cars, heat our homes,

and power this country’s economy.

It seems at times that with this ignorance of the role of America in supplying its

own oil and natural gas, comes acceptance that importing more oil is our best or

only option. It isn’t. With the right policies in place it most certainly doesn’t have

to be. Plus, no country in the world produces its oil and natural gas to higher environmental standards. The states are proud of these environmental standards—and

yes it is largely state standards, not federal standards, which dictate how our oil

and natural gas is produced here at home.

Much of the oil we import is produced with lower environmental standards, risking ground and surface waters, and often with rampant flaring of natural gas that

is produced along with the oil but where no market for that gas exists. Every barrel

of oil imported must also ply the high seas in tankers risking the world’s shorelines.

Yet here at home we often wring our hands and bemoan the harm to the environment that will be done when we produce here at home—never really getting the

facts but willing to accept most of our information from the soundbite-sized wails

of the most vocal nay-sayers. I am here to report, however, that the sky isn’t really

falling.

I’d also like to point out that while my state of Texas and the other member

states of the IOGCC are oil and natural gas producing states, we are also consuming states and therefore share all of the concerns of states without oil and natural gas production. We all need a steady source of supply at reasonable and steady

prices. A secure source of domestically produced oil and natural gas is in all of our

interests—producing and consuming state alike.

Thus one message I would like to convey here today is that with the right policies

in place there is nothing that should stop America in the years ahead from remaining its own biggest supplier of oil and natural gas—to the benefit of all of America.

But America does need a policy from the top that recognizes the possibilities and

moves us toward solutions. Several years ago the IOGCC produced an energy policy

document entitled ‘‘A Dependent Nation: How Federal Oil & Natural Gas Policy is

Eroding America’s Economic Independence.’’ A copy of this document is attached for

the record. In this document the governors from oil and natural gas producing

states, through the IOGCC, offer their views of what our national energy policy

should be. This document defines the true cost of imported oil, promotes the expansion of research and development efforts, urges a re-examination of oil and natural

gas development policies and encourages the conservation of the nation’s petroleum

resources.

My own state of Texas has recently undertaken a process to produce a Texas Energy Plan 2005. Created by the Texas Energy Planning Council, the Texas Energy

Plan 2005 contains 10 recommendations—forming a blueprint of energy issues and

actions for the state’s lawmakers to take under consideration this year. As Chairman of the council, I worked with 21 energy production legislative and industry

leaders to come up with these recommendations. While I don’t have the ability to

detail these actions today, I feel strongly that we have addressed the key energy

issues facing Texas. The plan’s recommendations address many of the same issues

dealt with in the Energy Policy Act of 2005 and which I will highlight today. These

include Tax Incentives, Marginal Well Incentives, Energy Education and Research

and Development.

Based on my experience in Texas, I can say that the bill before this committee

today, the Energy Policy Act of 2005, is a very positive step forward. The oil and

natural gas provisions of this bill do advance the cause of helping America to maximize the production of its domestic oil and natural gas resource.

I will address some of these provisions directly.

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First, however, I would like to voice a grave concern of the oil and natural gas

producing states concerning the Administration’s proposal in this week’s budget submission to Congress to terminate the Fossil Energy Oil and Natural Gas Program

at the U.S. Department of Energy (DOE). The IOGCC believes strongly that DOE’s

Fossil Energy Oil and Natural Gas R&D Program is absolutely necessary in order

for United States domestic producers to keep pace technologically. Our small and

medium-sized oil and natural gas producers—who drill most of the wells onshore

in the U.S.—do not have the budgets to conduct their own R&D. The modest DOE

Fossil Energy oil and natural gas budget (just under $80 million last year) provides

our domestic producers with the technological edge to keep producing and to keep

domestically produced oil and natural gas flowing into our economy.

R&D spending can help lower finding costs, improve drilling efficiency and recovery rates, prolong production from marginally economic wells, minimize losses to the

atmosphere, improve transportation efficiency and the updating of infrastructure.

The U.S. Department of Energy has done a remarkable job with a tiny research

budget over the years. Not only do we not recommend terminating this valuable program but would recommend yearly increases in research dollars directed toward oil

and natural gas research and development. We encourage this committee to voice

its concerns with the Administration’s proposals in this area.

I have attached a copy of the IOGCC publication entitled ‘‘Who Will Fund America’s Energy Future.’’ IOGCC Resolution 03.102 concerning R&D is also attached.

The following are some specific comments on the oil and natural gas provisions

contained in the Energy Policy Act of 2005:

Access to Public Lands. One of the ways we can expand our domestic oil and

natural gas supply—to bring more domestically produced oil and natural gas to

market—is to more fully appreciate the crucial role public lands and access to those

public lands play in assuring adequate supplies of domestically-produced oil and

natural gas. The states of the IOGCC do not believe that the role public lands play

in ensuring heat for our homes and power for our economy is adequately appreciated by energy-consuming America.

We also need public lands on which to build the pipelines and other infrastructure

necessary to bring oil and natural gas into our cities and into our homes. Restricted

access to public lands also impacts the ability to build the pipelines necessary to

transport that resource, particularly natural gas, to markets.

Access restrictions come in a myriad of forms, some more obvious and some more

onerous than others. They range from outright prohibition on activities to new processes and requirements which slow and increase the cost of drilling or building necessary pipeline or other infrastructure.

Examples of outright prohibitions on public access include Monument designations and the U.S. Forest Service’s Roadless Plan. This Roadless Plan as initially

proposed would have prohibited road building in 58.5 million acres of public lands

where no roads presently exist. Reports in the press indicated that this plan could

lock up more than 20 TCF of natural gas. This is equivalent to approximately one

year of present U.S. natural gas demand.

We applaud those provisions of the Energy Policy Act of 2005 which attempt to

address this complex issue. IOGCC Resolution 02.123 is attached. Resolution 02.123

urges ‘‘the Need the a National Energy Policy and Increased Access to Public Lands

for Environmentally Sound Natural Gas and Oil Production.’’

Tax Incentives. Tax incentives are a powerful tool to help increase the supply

of natural gas. The states have proven this with their own tax incentives and

IOGCC studies have documented the success of state tax incentives. Reference is

made in particular to two IOGCC publications: ‘‘Making a Wise Investment: The

Economic Impact of Oil and Gas Incentives’’ and ‘‘Investments in Energy Security:

State Incentives to Maximize Oil and Gas Recovery.’’ Copies of both IOGCC publications are attached.

The incentive programs to assist the oil and natural gas industry, documented in

these publications, have proven to be a valuable countermeasure against global

price volatility. In 1999, when Investments in Energy Security was first published,

28 states reported some type of oil and natural gas incentive program. Basically

these incentives fell into two categories: those providing some type of tax benefit

(monetary) and those that are beneficial while providing no direct state monetary

relief.

The combined impact of the incentives was a net $113.2 billion in economic effects. States invested $2.8 billion to generate these economic effects through tax reductions. This $2.8 billion helped ensure more than 30 times that much for state

economies. In turn, states investing the $2.5 billion received more than $9 billion

in state and local taxes, yielding an additional $2 for every dollar invested.

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Additionally, a principal beneficiary of state efforts was the federal government, which realized approximately $2.5 billion in additional tax revenue while the states

shouldered the risk.

Had these incentives not been in place, many wells, particularly marginal oil and

natural gas wells (defined as wells producing 10 barrels or less per day of oil or 60

Mcf or less of natural gas) would have been abandoned during the 1997-1998 price

collapse. This would have meant valuable oil and natural gas lost forever. Had these

wells been abandoned during the price collapse, the state and local economies would

have lost almost $400 million in revenue. More importantly, the collective economies

would have lost $3.5 billion.

While difficult to enact in tough economic times, the incentive programs adopted

by the states represented a fortress standing alone against global vicissitudes, protecting both the domestic oil and natural gas industry and all state economies.

Reference is also made to the attached IOGCC Resolution 02-122 ‘‘Pertaining to

a Heightening National Crisis in Natural Gas Production and Supply Stability’’.

Among other things the resolution calls for the President and Congress, in consultation with the states, to adopt without delay measures which will create long-term

incentives for the development of conventional and unconventional sources of domestic natural gas and oil through the extension of existing programs and the development of new initiatives including, but not limited to, the extension of Tax Code Section 29 credit for production from unconventional sources.

Marginal Wells. Another important issue is marginal wells. I am attaching a

copy of the 2004 edition of the IOGCC’s publication entitled ‘‘Marginal Oil and Gas:

Fuel for Economic Growth.’’ This report represents the only place where one can obtain statistics on marginal oil and natural gas wells in the United States. Marginal

wells are wells that produce miniscule quantities of oil and natural gas daily. (Marginal oil wells are defined as wells producing 10 barrels of oil per day or less. Marginal gas wells are defined as producing 60 thousand cubic feet (Mcf) per day or

less.) In most parts of the world, these wells would have been shut in years ago.

In America, they are a significant energy resource. Marginal oil wells in America

produce about 15% of our domestic oil production and over 7% of our natural gas

production. There are almost 400,000 marginal oil wells that produced more than

313 million barrels of oil in 2003.

The reason they exist is largely because of tax incentives from the states that allowed them to remain economic in years when oil prices were low. Now that they

are high again, these wells remain to contribute to our country’s energy needs.

The energy bill has several provisions dealing with marginal wells and we applaud Congress’ recognition of this important national resource.

Orphaned and Abandoned Wells. There exist in the United States approximately 57,000 ‘‘orphan’’ oil and natural gas wells. These are wells that are no longer

being produced, are idle without approval of the state, and for which the operator

(who drilled and/or operated the wells) is unknown or insolvent. The wells were usually drilled and operated before states began rigorous regulation of oil and natural

gas production. The wells often pose a significant environmental risk—of contamination of ground and surface waters—unless and until they are properly plugged and

abandoned under supervision of the state. While most states have resources directed

to solving this problem, it is never enough to take care of the problem. I have attached the IOGCC publication entitled ‘‘Produce or Plug?: The Dilemma over the

Nation’s Idle Oil and Natural Gas Wells.’’

The Energy Policy Act of 2005contains important provisions which addresses the

orphaned and abandoned well issue in three respects: 1) assessing and addressing

the problem on Federal land, 2) authorizing a program of technical assistance to the

states through the IOGCC, and 3) creating an Orphaned Well Reclamation Pilot

Program. The IOGCC strongly supports these provisions.

Hydraulic Fracturing Regulation. Another issue that has the potential to limit

natural gas development in the future is the impact of the LEAF v EPA decision

on hydraulic fracturing in the United States. Hydraulic fracturing is a decade’s old

process for completing over 90% of the oil and natural gas wells drilled in the

United States. In the past, the states have been responsible for regulating this process. In 1994, an environmental group in Alabama sued the Environmental Protection Agency contending that natural gas wells should be regulated as underground

injection wells under the Safe Drinking Water Act (SDWA). Based on the definition

of ‘‘injection’’ contained in the SDWA, the 11th Circuit Court of Appeals ruled that

the EPA should regulate hydraulic fracturing even though the fluids used in this

process are immediately sucked out of the well after pathways have been created

in the rock to free the natural gas.

Not only have the states traditionally regulated hydraulic fracturing, an IOGCC

survey concluded that not a single instance of harm to drinking water was found

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in over one million hydraulic fracturing operations. Thus, state regulation has

proved effective in protecting drinking water from all drilling activities, including

hydraulic fracturing. In these circumstances, another layer of regulations at the

Federal level would not result in cleaner water but only in adding significant cost.

Such unnecessary regulation and the concomitant cost can only serve to retard the

development of much needed natural gas in this country.

The IOGCC has a resolution, No. 03.101, attached, addressing this issue. The

IOGCC applauds the provisions of the Energy Policy Act of 2005 in this respect.

Stormwater Runoff. The Environmental Protection Agency has proposed a regulation extending the requirement for a pre-construction Federal permit under the

Clean Water Act (CWA) to encompass building sites of one acre. In doing so, EPA

has interpreted the oil and gas exemption in the CWA as not including the construction period for the well site and any needed road to the site. However, the EPA has

opined that, as soon as drilling begins, the exemption does apply. Thus, EPA’s proposed rule would only apply to the short construction period (days or a week) for

most sites in the lower-48 states. It is estimated that this new permitting requirement could delay drilling operations by months.

The IOGCC supports the provisions of the Energy Policy Act of 2005 which address this critical problem.

I would like to also mention one other area of great concern to the states and the

IOGCC. It is the critical need in this country for energy education.

Energy Education. Many of the problems we face would be greatly eased with

a better public understanding of energy and its important role in our economy. The

public’s relative lack of understanding of the energy industry poses a real barrier

to oil and natural gas production in this country. Too often, under the banner of

environmentalism, natural gas development projects are held up and delayed based

on misinformation and lack of understanding. The lack of energy education in this

country can be viewed as an important barrier to natural gas development. IOGCC

Resolution 03.105 ‘‘Urging the Need for a National Energy Education Program’’ is

attached.

The IOGCC urges the federal government join the governors of the IOGCC in contributing to the development of a national educational program. The IOGCC has

also proposed a publicly funded energy education program. Managed by the Energy

Education Coordinating Council, this wide-ranging program would seek to reach all

Americans with the facts, risks, benefits, and costs associated with our energy supplies and choices.

Thank you for the opportunity to appear here today. If we can provide any additional information, please do not hesitate to ask.

Mr. HALL. And I thank you for that, and I thank you for your

leadership in that Gas Compact Commission, and your testimony

kind of parallels Mrs. Showalter’s testimony on page 4, about the

difficulty of public approval, and I will ask her some questions

about that. But first, let me just get you to expand a little. You

touched on it at the end of your comments, but in your testimony,

you state that your organization strongly believes that DOE’s Fossil Energy Oil and Natural Gas Program is absolutely necessary in

order to keep the United States, domestic producers to keep pace

technologically.

Tell us once again why such research can’t be shifted, maybe, to

private industry, as the DOE has suggested, or how we might better work out of the dilemma?

Mr. CARRILLO. Certainly, Mr. Chairman, and we have seen over

the years a lot of that R&D development that had been going on

in the private sector, that has gone away. So it is incredibly important to maintain such a program at the DOE. I believe the budget

is roughly $80 million or so, which is a lot of money, but in the

grand scheme of things, not all that much. And it is these technological advancements that allow industry, again, to find and

produce more domestic oil and gas. It is technological advancements like horizontal drilling, enhanced fracture techniques, for example, that have allowed, back in Texas, the Barnett Shale Gas

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play, near Dallas/Fort Worth, to develop into the largest producing

gas field in Texas, and one of the hottest gas plays, really, in the

Nation.

The USGS estimates that almost 30 tcf, 30 trillion cubic feet of

gas, can be found in that one play. Technology should be fostered

and encouraged, and we encourage this group, in fact, to voice concerns over that one provision in the budget, also.

Mr. HALL. Thank you. Mr. Caruso, how much of a contribution

do you see additives such as ethanol making in the domestic supply

of gasoline with and without the Energy Policy Act of 2005’s renewable fuel standard? Where are we that, and expound on that a little

bit for the record, please.

Mr. CARUSO. In our base case, or the reference case, that I presented this morning, ethanol would account for about 4.5 billion

gallons by 2025, and in the Energy Policy Act that was proposed

last year, was the requirement to go to 5 billion gallons by 2012.

So clearly, if the energy bill were passed, it would be substantially

higher. I believe the number we had in the analysis we did of the

bill was that it would be—exceed 6 billion gallons by 2025, compared with 4.5 under our business as usual outlook. So it would

add more than 1.5 billion gallons.

Mr. HALL. I thank you for that. Ms. Showalter, I alluded to a

page of your testimony. You oppose any FERC role in siting transmission, even a backup or a backstop role. You also state that one

reason for the difficulty is public approval, and your colleague has

concurred with you there, basically. But doesn’t this argument for

some form of FERC backup jurisdiction, to look at overall national

needs when local interests might prevent needed transmission

work into your theory? Give us the benefit of your feelings on that.

Ms. SHOWALTER. Well, the fact that siting can be difficult, and

I should say, I don’t think it always is, but the fact that it can be

I don’t think means that the Federal Government is the best place

to resolve it. Siting decisions are difficult. And that is what we are

paid to do. Everything we do is difficult. Our rate cases are difficult. They involve competing principles, competing parties, and a

lot of money, and siting is like that. I think that the issue is what

level is best able to resolve these things, in the main. It would be

very unfortunate if, because of a single siting problem somewhere,

the whole country went to a Federal oversight, and that had the

effect of bogging down a lot of siting that does get accomplished,

and that was the point I was trying to make. If State officials know

that they are the ones who are going to have to make this decision,

and be held accountable for it, they do take their job very seriously.

If you know that you don’t have to make that hard decision, because maybe somebody else will make it for you, or if all the parties know that, you introduce kind of a two step process, it seems

to me in many cases that will slow down the siting process, rather

than speed it up.

Mr. HALL. Well, I guess, you know, I read one time where a professor asked a student did he know the difference in ignorance and

apathy, and he said he didn’t know and he didn’t care. I am not

citing that as your position on it, but are you saying that there

would be times when local authorities just won’t take the time and

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trouble and the knowledge to participate, or I think you have indicated that in some States, they prevent it?

Ms. SHOWALTER. Well, I have to say, in my experience from the

West, I don’t know of a single transmission facility that has not

been sited and completed.

Mr. HALL. Okay.

Ms. SHOWALTER. That is the evidence, and I am aware that there

may be a problem in New England.

Mr. HALL. That is good testimony, and I thank you for it. Mr.

Boucher, I recognize you at this time for as much time as you

would like.

Mr. BOUCHER. How generous. Thank you, Mr. Chairman.

Mr. HALL. Up to 8 or 10 minutes.

Mr. BOUCHER. There is always a limit in life. Ms. Showalter, let

me congratulate you and NARUC for taking the position you have

with regard to Federal authority concerning transmission siting. I

agree with you. I think the record is devoid of any real example

of instances where the States have unreasonably delayed or inappropriately refused to issue the required permits for the siting of

needed transmission. So transferring this level of authority to the

FERC is, in my view, not justified, and I commend you for that.

I suppose the provision in the conference agreement that we

achieved last year, and the draft legislation now circulating that is

the most universally applauded, is the provision that would make

the transmission reliability standards both mandatory and enforceable.

Unlike last year’s conference agreement, however, the draft legislation now circulating would impose a spending cap of $500 million

over a 10 year period—I guess you can translate that as $50 million per year—on the ability of the agency that would enforce these

standards to carry out that work. Are you aware of that, and if you

are, are you concerned about it? Is it something we should be concerned about?

Ms. SHOWALTER. I have to say I haven’t thought about that. I can

answer just in more general terms, which is in my view, there is

not, and should not be, an abstract approach to transmission. It is

a real thing that may or may not be needed, and needs to be reviewed in conjunction with the partial substitutes, which are generation and demand response. And when you look at this issue, nationwide, in the abstract, it may obscure individual decisions that

individual utilities and States need to make, and should make, and

they should be made on a needs basis. So I think that it is difficult

to generalize.

Mr. BOUCHER. Let me ask you if you would do this for us. Go

back and take a look at the effect of this budget cap.

Ms. SHOWALTER. Okay.

Mr. BOUCHER. You might ask others at NARUC, maybe your professional staff, to focus on it, and if you have any concerns about

it, if you think that this should raise a red flag for us, send us a

letter. Let us know. Would you?

Ms. SHOWALTER. We will do that. Thank you.

Mr. BOUCHER. That is great. Mr. Caruso, let me talk a bit with

you about projections for natural gas usage going forward. About

2 years ago, you testified, or your agency did, I am not sure it was

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in your person, individually. But your agency presented information to us, indicating that over the course of the next 20 years, approximately 80 percent of the new electricity generating plants

would be fueled with natural gas. In the intervening 2 year period,

the price of natural gas has escalated even further, there is a projection, I suppose, that it is going to, that price is going to remain

where it is, or perhaps even increase over time. And in view of

that, those changes, have your projections changed? Do you think

that we are still looking at 80 percent of the new plants over the

next 2 decades being fueled with gas, or is that some lesser number?

Mr. CARUSO. We have actually revised that number down a bit

in the last 2 years, but it is still substantial. I don’t have the precise number which I can provide, but it is about two thirds of the

new electric power generation that will be gas-fired under our latest outlook; about 65 percent.

[The following was received for the record:]

From 2004 through 2005, approximately 281 gigawatts of new electricity generating capacity are projected to be added in the reference case of the 2005 Annual

Energy Outlook. Approximately 178 gigawatts (63 percent) of the total added are

natural gas-fired.

However, it is important to note that a large number of the new natural gas

plants are not expected to operate intensively and many will be replacing older, less

efficient natural gas and oil plants. Nearly half (81 gigawatts) of the new natural

gas fired plants added are expected to be simple combustion turbines or small distributed generators. These types of facilities are generally only used during the

highest demand periods and, as a result, their natural gas use is limited. Furthermore, nearly 40 gigawatts of newer, more efficient, natural gas-fired power plants

will replace older less efficient natural gas-fired and oil-fired plants, reducing the

increase in natural gas that might otherwise be expected.

Mr. CARUSO. And the second largest, of course, would be coal.

And then, there would be about 10 percent renewable, to make up

the complete 100 percent of the new generation capacity. One of

the interesting things we discovered in the last year, when we took

a hard look at the combined cycle gas turbine technology and had

experts come in and examine what we have in our model with respect to the economics of combined cycle gas, they said, oh, you are

much too pessimistic. We are doing better than that in the industry. So even with a higher gas price in the 2005 outlook than we

had in the 2004 outlook, we actually bumped up the gas going into

electric power generation.

Mr. BOUCHER. Because of the efficiency produced——

Mr. CARUSO. Yes.

Mr. BOUCHER. [continuing] by combined cycle.

Mr. CARUSO. Improved technological efficiency using gas, even at

a higher price, more efficiently than other fuels and technologies of

choice.

Mr. BOUCHER. Anecdotally, I would just observe to you that in

the conversations I have been having with electric utilities lately,

there is a dramatically renewed interest in coal and in the potential for coal to fuel many of the new electricity generating plants

that will be constructed. And in view of what I am hearing just

anecdotally in these conversations, I was a little bit surprised to

see your projection that from the year 2003 until the year 2025, the

amount of electricity generated by coal would decrease from 51 perVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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cent in 2003 to 50 percent in 2025. How confident are you in that

projection?

Mr. CARUSO. Reasonably confident. Even though the percentage

declines very slightly, 1 percent, as you point out, the amount of

coal utilized grows substantially. In fact, after 2015, when gas

prices are rising as projected in this outlook, coal actually does

quite well in terms of the period 2015 to 2025—there is a substantial amount of new coal generation capacity added.

Mr. BOUCHER. Okay.

Mr. CARUSO. One of the issues is that there is so much gas in

the pipeline, combined cycle projects, and I am sure the next panel

will get more precise about this, certainly up to 2010 and even a

little beyond that there is not going to be much non-gas generating

capacity added, but it does get much more competitive, as I say,

after 2015.

Mr. BOUCHER. After that.

Mr. CARUSO. Yes.

Mr. BOUCHER. And what about natural gas prices? How do you

see those performing——

Mr. CARUSO. Well——

Mr. BOUCHER. [continuing] over the next 20 years?

Mr. CARUSO. That is a critical issue. As you know, it is about $6

per thousand cubic feet today on the spot market. Our model indicates that if we get the amount of liquefied natural gas that we

project in this outlook, it comes in at a very reasonable cost, in fact

about $3.60 or so into the Middle Atlantic States. We think that

it would put some downward pressure on the price of natural gas.

In this outlook, we have it going below $4 an mcf by 2010.

Mr. BOUCHER. And how many terminals have to be built to

achieve your projection?

Mr. CARUSO. It depends on, of course, the individual sizes of the

terminals, but we expect it will be in the neighborhood of about 10

needed to be built to meet that 6.4 trillion cubic feet of LNG that

we have projected by 2025.

Mr. BOUCHER. And given the challenges of building even one terminal, how realistic do you think it is that we will be able to build

10?

Mr. CARUSO. I think it will be a challenge, and we do see some

progress. There are about 5 of those projects that have now received some level of approval at FERC, or the Coast Guard, but

there are certainly challenges——

Mr. BOUCHER. The big challenge is at the——

Mr. CARUSO. [continuing] at the State and local——

Mr. BOUCHER. [continuing] State and local level.

Mr. CARUSO. There are a number going forward offshore-Bahamas, that will serve Florida; Baja, California, that will serve California, and so there are some positive signs, also, the Cheniere

project in Freeport, and there is a Sempra project in Louisiana,

as——

Mr. BOUCHER. One additional question. We have, in the draft

legislation, a series of tax credits that would be awarded to electric

utilities that use a new generation of clean coal technology, and we

have some very promising technology: integrated gasification, combined cycle, results in 0 SO2 emissions, 0 mercury emissions, the

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ability to capture CO2 and sequester it, potentially solving the global warming concerns that we have, insofar as fossil fuel generation

contributes to it, and also, getting a major reduction in NOX, about

a 50 percent NOX reduction. This is really a good technology, and

it would enable coal to be burned at least as cleanly as natural gas,

maybe even more cleanly. American Electric Power has decided to

adopt this technology and a build a full scale commercial plant. It

is the first utility in the country to publicly commit to do that. And

I suspect others may, as well.

We think that the movement toward that technology and other

promising clean coal technologies can be accelerated rather substantially, if the tax credits and—investment tax credits and production tax credits—contained in the bill, in fact, become law. Have

you looked at the effect those tax credits would have on the projections you have for the comparison between gas and coal use, and

new electricity generation?

Mr. CARUSO. We actually did an analysis last year of the Conference Energy Bill, so that if that those tax credit provisions were

in that Conference Energy Bill, we did do that analysis. I would

certainly be happy to make that available to you.

[The following was received for the record:]

In response to a request received from Senator John Sununu on February 2, 2004,

EIA performed an assessment of the Conference Energy Bill (CEB) of 2003. The full

analysis is available at the following link: http://www.eia.doe.gov/oiaf/servicerpt/

pceb/pdf/sroiaf(2004)02.pdf

This report summarizes the CEB provisions that can be modeled using the National Energy Modeling System (NEMS) and that have the potential to affect energy

consumption, supply, and prices. The impacts are estimated by comparing the projections based on CEB provisions with the Annual Energy Outlook 2004 (AEO2004)

reference case.

With respect to electric generating technologies, the CEB contained provisions to

stimulate the development of clean coal technologies, advanced nuclear plants and

renewable generators. In our analysis, by 2005 the provisions of the CEB resulted

in the addition of 22 gigawatts of advanced coal capacity, and 2 gigawatts of nonhydroelectric renewable capacity. The impact on non-hydroelectric renewable capacity is actually larger in the near term because the renewable production tax credit

(PTC) is extended for two years and then sunsets. The CEB was found to stimulate

7 gigawatts of additional non-hydroelectric renewable capacity by 2010; however, by

2025, the differences between the reference and CEB cases are small.

Overall, EIA found that the impacts on electricity sector coal and natural gas use

to be small. The 22 gigawatts of new advanced clean coal capacity generally displaced conventional coal capacity. These advanced coal plants are more efficient

than conventional coal plants so they can generate the same amount of electricity

while consuming less coal. The 6 gigawatts of new advanced nuclear plants also generally displaced coal capacity that was expected in the reference case. Relative to

the reference case, the net effect of these two changes was 2 percent lower coal use

in the power sector in 2010 and 3 percent lower coal use in 2025. Natural gas use

in the power sector was projected to be nearly 4 percent lower in 2010, primarily

because of the increased renewable generation. However, by 2025, the difference

was less than 1 percent.

Mr. BOUCHER. I would appreciate your sharing with me any

analysis you have done, and if you have not done one on that specific issue, if you would do one and share the information with us,

that would be very helpful.

Mr. CARUSO. I would be pleased to do that, sir.

Mr. BOUCHER. Thank you very much. Thank you, Mr. Chairman.

I appreciate your patience.

Mr. HALL. The Chair recognizes Mr. Shimkus for 5 minutes.

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Mr. SHIMKUS. I thank you, Mr. Chairman. I always enjoy following my colleague, Mr. Boucher, where in some parts of the

country, coal is still king, and a great resource, and I think his

highlighting on the research and development and the clean coal

tax credits will really help revive and establish a benefit for all the

country. But if we site new generating facilities around mine

mouth plants, using the new clean coal technologies, and we can’t

get that to the distribution grid, then it is all for naught.

So before I go to our State regulator, I have a couple questions

for you, Mr. Caruso. If—when the public finds out that we are excited about an LNG facility in the Bahamas, that is going to pipe

natural gas into the continental United States, thus losing the jobs,

thus losing the tax base, I think they are going to be very disappointed in us. And you mentioned it. I have been following this

project, and this is not the only one, that is going to be popping

up all over this country, and there is a jobs issue here, and there

is an efficiency issue here that we need to keep before the public,

because I find that unacceptable. So thank you for mentioning that.

The—how many petroleum based refineries have we built in the

past 20 years?

Mr. CARUSO. Zero.

Mr. SHIMKUS. How many——

Mr. CARUSO. Grassroots refineries.

Mr. SHIMKUS. Yeah. How many ethanol refineries that have been

built, do you know a number for that?

Mr. CARUSO. I don’t have that number, but I would be happy

to——

[The following was supplied for the record:]

Although EIA does not collect data on ethanol refineries, some information is

available from the Renewable Fuels Association (RFA). According to RFA, current

ethanol production capacity (as of February 2005) is 3739 million gallons per year

(mmgy), with another 689 mmgy of capacity under construction. In congressional

testimony, RFA has stated that during the 25 years preceding 2004, 76 ethanol refineries were built, In 1980, the industry had capacity of about 175 mmgy.

Mr. SHIMKUS. I think it is in the mid-20’s, and——

Mr. CARUSO. Yes.

Mr. SHIMKUS. [continuing] projected to grow. Soy-based processing fuel plants, still numerous on the board. Of course, I am

from the breadbasket in the Midwest, and we applaud that. But we

still need to accept the basic premise that we need to build new refineries in this country. Anything that we did in the last energy

bill, or I knew we had—well, actually, we had followup legislation

that Chairman Barton, we voted on the floor to help expedite the

siting of refineries—wasn’t in the conference report. We added it to

the conference report.

Mr. CARUSO. But no new refineries.

Mr. SHIMKUS. Would you all think that if we are going to open

up the H.R. 6 and have a debate, the refinery portion might be a

very helpful provision in addressing, you know, fuel needs in this

country?

Mr. CARUSO. Well, our forecast shows that we are going to need

8 million barrels a day more of either refinery capacity in this

country or abroad. So one way or the other, right. We have had

some reasonable refinery capacity growth at existing sites. We have

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probably added somewhere in the neighborhood of 150,000 barrels

a day——

Mr. SHIMKUS. Right.

Mr. CARUSO. [continuing] over the last——

Mr. SHIMKUS. Yeah, let me tell another story. I have said this—

on the hearing. We have got great excitement, people coming in to

me. They want to pipe down heavy crude from the eastern slope

of the Canadian Rockies all the way down to the Gulf to find a refinery that can crack the heavy crude instead of siting a refinery

in closer proximity. It is just ridiculous, until we move on this. So

obviously, that is what I will be looking at also, is some of the

major issues.

Ms. Showalter, I would invite you to come to Chicago, Illinois,

where we have a large transmission line, which we have been unable to, for I am going to say generations, to get sited into Wisconsin. There are examples of this all over the country. And all we

are asking for in this transmission debate, is the same provisions

we have on natural gas. We want to give the public utility commissioners the opportunity to reconcile these differences, but I think

there is no debate that this is an interstate commerce issue, and

that failure to act by the State commissioners demands that we

have a Federal step-in, at least a date certain, to push decisions

on this. And I will be very shocked if, in a new energy bill, we don’t

have the same provisions we have in the current bill.

You took exception with the economic dispatch language, which

was my language, so—and I would like to know why, and my colleague yesterday, Mr. Green from Texas, good friend, talked about

efficient dispatch. So I think this is an issue that continues, we will

probably have even more interest in, and if you would, could you

explain the problems with the economic dispatch language?

Ms. SHOWALTER. I want to be clear, because I am not certain we

are talking about the same thing. The first point was that I don’t

think that economic rules should be injected to the reliability provisions. In other words, the physical reliability and the physical

standards for operation of the physical system, I think, do not depend on what form of economic regulation you impose.

On economic dispatch itself, I have to say, you know, I don’t believe NARUC has a position on economic dispatch, but I will say

what I think the considerations would be. If you require economic

dispatch, it amounts to saying, if it is cheaper that day to operate

the system using one plant versus another, that is how it should

be done. That is an oversimplification——

Mr. SHIMKUS. Well, I think, as the author, I think it is—it was

more the intent that if it is more cost-effective for the local system,

to—and then to block an economic model that competes, there

should be analysis of that cost.

Ms. SHOWALTER. Okay. And so the question then is what do you

mean by cost-effective, and if you are looking at, say, spot-market

prices that day, or running the system that day, that is a very

short-term approach to cost-effectiveness. The way that big plants

get built, if you are asking Wall Street to invest in a $500 million

plant that is going to last 20 or 30 years, the investor is going to

say, well, how am I going to get my money back, my fixed costs

plus a profit, and part of that depends on that system running. I

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will give you an example of—Puget Power has a facility, and it isn’t

used all that often, so one of the questions would be should they

just use it when they can buy gas that day, that is economic. But

forcing them, or going toward a system whereby they just look at

the gas price that day may, in fact, cause them not to buy gas in

the most economic way possible, which would be diversify over

time, some short-term, some medium-term, some long-term. But

once they have embarked on those contracts, then they need to pay

that amount of money. So what I am trying to pose here is the

problem of looking at what is economic on a given day or time, and

how that affects the longer-term economic use of the system.

Mr. SHIMKUS. See, and that is the difference between the two

worlds, a regulated world versus the competitive world. The competitive marketplace does this every day for every industry and

every major manufacturing and investment. They have to take that

risk.

Ms. SHOWALTER. Right.

Mr. SHIMKUS. They got to look out and say, you know, I am not

sure. What if they—what if we have a new technology. So I think

we will agree to disagree. I just think that that is why we want—

those of us who believe in a competitive market believe that the

competitive market gives the best services at the lowest price, and

it demands efficiency and reliability, and it pushes the envelope to

the betterment of all, versus the regulated market that is going to

try to baby the system. So with that, I am a little biased. Mr.

Chairman, I will yield back.

Mr. HALL. The Chair recognizes Mr. Murphy from Pennsylvania

for 5 minutes.

Mr. MURPHY. Thank you, Mr. Chairman, and I would like to

thank the panel. I was reading some of your testimony. I am sorry

I couldn’t be here for all of it, as I was off in another meeting, but

I wanted to follow up on some of the issues involving natural gas,

Mr. Caruso, because it is an issue in a coal and gas State like

Pennsylvania, where we consume a lot and have a lot, it is a concern to me to make sure we are finding ways—and actually, this

is probably open to the whole panel—of how we can really expand

production and exploration of this.

I want to ask in a general way with regard to how we are doing

this, by the U.S. natural gas supplies, and bringing in or establishing more—bring in foreign sources on this. First of all, are we

establishing, are we strengthening foreign resources on this at the

expense of being behind in strengthening our own research, development, exploration here, the way things are going with expanding

imports?

Mr. CARUSO. Well, certainly, the upward pressure on price has

provided a lot of opportunity for private sector R&D but the main

problem is really just the decline rate in our existing conventional

sources of natural gas, particularly in those States surrounding the

Gulf of Mexico. We see most of the new growth coming from unconventional gas, in the Rocky Mountain region in particular, tight

sands, oil—gas shale and coal bed methane, which is also in other

regions, and the coming on stream of the Alaska natural gas transmission system in 2016 in our outlook. Even with that substantial

growth, we will need more than 6 trillion cubic feet of LNG to meet

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the gap between what we think demand will be in 2025, and what

we think domestic supply will be.

Mr. MURPHY. And then, that all points toward rising prices in

natural gas.

Mr. CARUSO. We think that if there is a global market for gas

developing, which means LNG serving not only the Pacific, which

is the situation today, but development of an Atlantic Basin market, the price for natural gas actually can come down, because Middle Eastern gas from Qatar could be delivered to the Middle Atlantic States at about $3.60 an mcf. Today, we have Trinidad and Tobago gas delivered to Lake Charles, Louisiana, at about $2.50.

Mr. MURPHY. And what level does it need to be to spur private

sector America to explore more here?

Mr. CARUSO. Well, you know, I think at $6 an mcf, there is enormous incentive, and our drilling rates and rigs in operation are as

high a number today as they have ever been. The problem is we

are drilling more and finding less, and the decline rates are steep.

Mr. MURPHY. So we will continue to be in this bind until—we actually have it high enough to drill here and explore here, but at

those levels, our chemical industry, for example, can’t compete

worldwide, but we continue to bring it in. It——

Mr. CARUSO. The chemical industry——

Mr. MURPHY. [continuing] affects our domestic production.

Mr. CARUSO. The chemical industry has been one of the most

hard hit. Obviously, there is also the issue of access to areas that

are under moratoria. That is another key factor here.

Mr. MURPHY. Well, given this, and mentioned some of your analysis, then, of what is anticipated as we move toward the clean coal

technology, which I think is critically important. I think I have

heard the ranking member, at times refer to that we are standing

on the answer, and it is coal. Will—is there hope that expansion

of clean coal resources and clean—and scrubbing our current coal

plants to make them more efficient and cleaner, will also have that

impact upon lowering the demand for natural gas, and then, of

course, the price as well?

Mr. CARUSO. Yes. In our model, the main difference, when you

look at different technologies, Congressman Boucher just mentioned the IGCC coal plants. Indeed, if the technology improves, or

if there are investment tax credits, as were proposed—I just found

the reference here—an additional 22 gigawatts of IGCC would be

added to our outlook if the investment tax credit that was proposed

in last year’s bill were to be made law.

Mr. MURPHY. Okay.

Mr. CARUSO. So there is definitely competitiveness on the coal

side, if technology improves, and the economics move in that direction, or other laws are enacted that would change the current situation.

Mr. MURPHY. I have one—I don’t know much time I have left.

My—oh, there it is. Well, since I have 10 seconds left, I would like

to thank you very much, and I will yield back the remaining balance of my time.

Mr. HALL. The ranking member has one question he wants to

ask one of the members.

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Mr. BOUCHER. Mr. Inslee, your time is coming, I can assure you.

Let me just ask one followup question. Mr. Caruso, thank you for

identifying the part of your analysis that relates to the effect of the

tax credits we are proposing. I note you indicate that if the credits

are approved, that would add 22 gigawatts of coal-fired capacity.

Over what period of time is that, and does your analysis further

suggest the adjustment in the balance between gas and coal as a

percent each would occupy of the total for the new generation that

these credits would create?

Mr. CARUSO. Yes. That reference that I mentioned, from our

analysis of the conference energy bill, was for the year 2025. So if

the ITC, investment tax credit, were approved, and this was assuming, of course, in 2005, by 2025 there would be 22 gigawatts

of IGCC capacity added, and all other things being equal, it would

shift that, most likely, away from natural gas.

Mr. BOUCHER. Do you know the—can you talk about the percentage that gas would occupy of the total market, as compared to coal,

based on these credits being adopted?

Mr. CARUSO. I could, but I don’t have that right in front of me.

I would certainly be happy to supply that for the record.

EIA’s analysis of the impacts of the Conference Energy Bill (CEB) found relatively

small impacts on the share of electricity generation market captured by natural gas

and coal. For example, in 2010 in the Annual Energy Outlook 2004 reference case,

coal generation accounted for 50.0 percent of total electricity generation while natural gas generation accounted for 20.5 percent. In 2010, in the CEB analysis, coal

generation accounted for 49.3 percent of total electricity generation and natural gas

accounted for 19.8 percent. By 2025, coal generation was expected to account for

52.3 percent of generation in the reference case and 51.3 percent of generation in

the CEB case, while natural gas generation accounted for 22.5 percent of generation

in the reference case and 22.6 percent of generation in the CEB case.

Mr. BOUCHER. Would you go back and put that together, and

send it to us? That would be very helpful.

Mr. CARUSO. Yes, sir.

Mr. BOUCHER. Thank you. Thank you, Mr. Chairman.

Mr. HALL. Yes, sir. The ranking member and I have agreed to

recognize Mr. Inslee, who is not on the subcommittee, but is a very

valuable Member of the Congress, and a hard working Member for

5, 6, 7, or 8, 2 of them already gone.

Mr. INSLEE. Mr. Chair, I do appreciate the opportunity to participate. Thank you very much for your courtesy, and I want to welcome Marilyn, who has been an absolute stalwart for the State of

Washington, now, we appreciate you spreading your wisdom to

the—Washington here. I really appreciate your comment, I was

reading your written testimony, about the need to really act as a

first responder on monitoring the market conditions and the like.

And I want to—I wanted you to expand on that, because we had

this really horrendous situation in the State of Washington up and

down the West Coast, where Enron and their ilk took out, according to the FERC staffers, a week ago, about $1.5 billion out of the

West Coast. That was just Enron, for what they did. And as you

know, that went on for some period of time, I think starting in mid,

late 2000, we started—we saw these horrendous ramp-ups from

100 to 500 to 1,000 percent increases. We in the State of Washington were just banging on the drum for FERC to do something,

letter after letter, meeting after meeting, met with all kinds of

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folks, including the Vice President, trying to ask for assistance

from the Federal Government, really just didn’t get any. Just sort

of got the go fish type of attitude from the Federal regulator.

And I have never seen a situation in my life where a public agency was—acted with such ineffectiveness and futility, and just refused to act on this horrendous crisis that was obvious. Because I

remember having one discussion that—on the day there were

brownouts in California, 32 percent of all the generating capacity

was turned off in the Western United States. It was obviously

someone was gaming the system, and yet, we really didn’t FERC

to recognize that until last week, when their staffer testified that

Enron had illicit profits of about $1.5 billion alone in the West

Coast. Of course, now, it is too late to get meaningful refunds, because the money has all been dissipated, and they are bankrupt.

So I guess I would like you to expand, if you can, on what could

be done in this bill, either one, to allow or motivate FERC to be

more effective, or No. 2, how do we assure that the States can be

a watchdog, and guarding our precious bodily resources, when the

Federal Government is not? Just if you can expand any ideas in

that regard.

Ms. SHOWALTER. Well, I think first, the core responsibility for the

wholesale market does lie with FERC, and they have got to do the

job, but you are quite right that we in the States are the ones who

see problems first, and we need the tools to see it, meaning get

records, and be able to engage with the FERC on those issues.

I was thinking about, as these revelations have come out, where

we were, where I was when all this was occurring, and in late 2000

and early 2001, we were actually having hearings on Saturday

until midnight, because a big—some large, industrial customers

were having to pay very, very high rates—10 to 100 times normal—because they had agreed to pay market rates. At the time, of

course, we didn’t really know what was going on, but we were the

first, we being the State regulators, were the first ones to hear, and

try to get involved in that information. I think that had we been

able to control and get more involved in what the issue was, we

would have resolved it more quickly. In fact, we as an agency, had

requested price caps in 2000 which we finally got much later.

So the issue here, to me, is not whether the States should take

over monitoring or running the wholesale market. They don’t. But

they do have a very important role to play in having their antennae up, and being alert to that information, and being able to do

something with it.

Mr. INSLEE. Thank you. I have just a very brief time, Mr. Caruso. I want to ask you about the commitment to deal with global

warming, and I ask a question, and this may be in a different pay

grade, but if you can take a stab it. I really sense a schizophrenic

approach from the administration, and to some smaller degree,

from the Department about global warming. On one hand, I sense

a statement that, well, we just don’t know enough about global

warming to really decide to do something significant about it, so we

really should just be in the research mode. But when that position

is criticized, then, the administration will turn around and say

well, we have—we actually are doing something about it.

128

Which horse is really the Department on? Is it on the—is it recognizing global warming as a problem we have to deal with, and

that the science is there to base policy decisions on it? Or is it in

the mode saying no, we should just bide our time and do more research. Which side are you on in that regard?

Mr. CARUSO. Well, as you know, EIA is not a policymaking organization, and Dave Garman is more appropriate to answer this, but

I will take a stab at it. I think the Clear Skies Initiative is one

thing that the President has announced, and is doing something.

At the same time, technology, R&D is going forward. So I think

both things are happening. That is my sort of policy neutral attempt to answer that question.

Mr. INSLEE. Well, thanks for taking a stab, and thank you, Mr.

Chair.

Mr. HALL. We thank you. Mr. Pitts, do you have any questions

you want to ask? If so, we recognize you for 5 minutes, or as much

as you want to use.

Mr. PITTS. I will pass until I can——

Mr. HALL. All right, sir.

Mr. PITTS. [continuing] papers.

Mr. HALL. We thank this panel, and thank you for the time it

took to get here, the time to prepare, the time to deliver your testimony, and the time to get back to wherever you are going. We really appreciate you. You have been of great help and great assistance. Vic, thank you, and come by and see me when you can.

Panel 2 is dismissed, and panel 3 is in the process of settling in

now. We are kind of under the gun for time here, because we only

have this room for another few minutes, so let me get under way

by saying a word or so about each one of you.

Tom Kuhn is a major player in the energy industry. He is President of Edison Electric Institute. Prior to joining EEI, he was

President of the American Nuclear Energy Council, which subsequently merged with the Nuclear Energy Institute, and NEI represents virtually all of the companies in the commercial nuclear

power industry, so he is a real player here.

Lynne Church is EPSA President, responsible for overall management of the Association, and prior to joining EPSA, a partner

in a Washington, DC energy law firm, and served in executive positions with Baltimore Gas and Electric Company, including treasurer and assistant secretary, chief auditor, and handled almost everything there. Earlier in her career she served as associate general counsel for rulemaking and policy coordination at the Federal

Energy Regulatory Commission, and Director of the Office of Natural Gas. Quite a background and history.

Alan Richardson, President and Chief Executive Officer of the

American Public Power Association, APPA, and they are in town

this week in numbers. They are the service organization for the

Nation’s more than 2,000 community-owned electric utilities, that

serve over 45 million Americans. That covers quite an area. They

serve large cities and also serve the small cities.

Glenn English, very proud to see Glenn here. He is always welcome here. He has varied background. He has worked from the

ground up, or maybe you would say from the ground down in the

oil and gas business, and leasing realtor. He was the Executive DiVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00136 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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rector of the Oklahoma State Democratic Party when I was a Democrat, from 1969 to 1973, and elected as a Democrat to the 94th

and to nine succeeding Congresses. He, with his associate, Monty

Wynn, are very active in energy solutions. They are welcome in

every office on the Hill. Glenn English doesn’t have any people that

have anything other than admiration for him. He was known all

the time he was in Congress, and I think he might have put this

in his, some of his campaign literature, he was a workhorse and

not a show horse. But we need both here.

Marty Kanner, thank you, is founder and President of Kanner &

Associates. Prior to forming that organization, served on the Government Relations Staff of the American Public Power Association,

including 3 years as Director of Government Relations, and is no

stranger to the Hill. He has high marks with consumers, and led

a successful effort to amend the Federal Power Act to provide

wholesale electric customers with refunds during rate reduction

proceedings. He also worked with Congressman Jim Bates, and

Congressman Jim McNulty here, in the past.

Steve Nadel, Executive Director of the American Council for an

Energy-Efficient Economy. They work on programs and policies to

advance energy-efficient technologies and services, and also with

the Energy Efficiency Program for New England Electric. He coordinated energy programs for the Massachusetts Audubon Society,

and worked on a variety of energy conservation programs.

Ed Hansen has an usual background. He was appointed to the

position of General Manager of Snohomish County PUD on July

2002. But he serves a great purpose for this committee and for this

Congress, because of his local government abilities. He was mayor

of Everett, Washington, and he served under U.S. Senator Henry

‘‘Scoop’’ Jackson, one of the real leaders of legislation here, and

from the State of Washington. He practiced law in the Everett area

and brings a special local government ability to this, and that is

something that we really need, and I thank you for that.

Kateri Callahan has served for 11 years as President of the Electric Drive Transportation Association. She worked for the enactment of the Significant Federal Tax, and other incentives for electric drive transportation technology. She conducted a host of internationally acclaimed conferences, and is known for that. Kateri

also worked on cooperative projects with the Departments of Energy and Transportation, the adoption of policies to support energy

drive transportation technologies by 39 States. She also served 4

years on the staff of a U.S. Senator and 2 years as Director of Federal and Government Relations for a nonprofit advocating for reform of U.S. immigration laws. So she has been around the town

here for quite a while, and thank you for your service here.

Mark Cooper, Director of Research for Consumer Federation of

America, holds a Ph.D. from Yale and is a former Yale University

and Fulbright fellow. Mr. Cooper has written several books and

provided expert testimony in over 250 cases for public interest clients, including Attorneys General, people’s councils, and things like

that.

We have an unusual panel, and we certainly thank all of you for

your patience. You have waited, and you have listened, and you

have heard the opening statements. You have heard questions and

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answers, and you ought to really be in a position to get this thing

underway, and get the testimony into the record, and built into legislation for the future.

Tom, we will start out with you, sir.

STATEMENTS OF THOMAS R. KUHN, PRESIDENT, EDISON

ELECTRIC INSTITUTE; LYNNE H. CHURCH, PRESIDENT,

ELECTRIC POWER SUPPLY ASSOCIATION; ALAN H. RICHARDSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN PUBLIC POWER ASSOCIATION; ED HANSEN, GENERAL

MANAGER, SNOHOMISH COUNTY PUBLIC UTILITY DISTRICT;

GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL

RURAL ELECTRIC COOPERATIVE ASSOCIATION; KATERI

CALLAHAN, PRESIDENT, ALLIANCE TO SAVE ENERGY; MARK

N. COOPER, RESEARCH DIRECTOR, CONSUMER FEDERATION

OF AMERICA; AND STEVEN NADEL, EXECUTIVE DIRECTOR,

AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY

Mr. KUHN. Mr. Chairman, thank you very much, and members

of the subcommittee. My name is Tom Kuhn. I am President of the

Edison Electric Institute, which is the association of shareholderowned electric utilities and industry affiliates and associates worldwide. I very much appreciate the opportunity to testify today on

the comprehensive energy bill. Mr. Chairman, you and the committee deserve a great deal of credit for your years of effort in trying to produce legislation to address this Nation’s long-term energy

needs.

EEI supported the energy bill conference report in the 108th

Congress, which was the basis for the draft bill. We urge the House

to approve a bill as soon as possible this year. I got into my car

this morning, and turned on the radio and the news, and the first

story I heard was gasoline prices again above $2 a gallon, and natural gas prices impacting people’s home heating bills. While we

continue to talk about energy issues, high energy prices, volatility,

and disruptions provide a heavy burden on American consumers

and businesses.

The fuel diversity should be a cornerstone of our national energy

policy as an important hedge against supply disruptions and price

volatility. The discussion draft promotes the full range of electricity

generation options, including coal, nuclear, natural gas, hydro, and

renewables. Reliable electric service and reasonable electricity markets also depend on strong transmission systems to move power instantaneously to where it is needed. We support the discussion

draft’s provisions to ensure reliability, and to eliminate disincentives to investment in critical transmission infrastructure, including mandatory and enforceable reliability standards, granting

FERC backstop siting authority, improving coordination of the Federal permitting process, removing FERC transmission rate policies,

reforming FERC transmission rate policies, and repeal of PUHCA.

The discussion draft includes other important electricity reforms

that we also support, including PURPA reform, FERC light provisions, FERC refund authority, FERC merger authority, and native

load protection. The discussion draft includes many valuable provisions to promote energy efficiency and wise energy use, particularly

improvements in Federal agency energy efficiency programs.

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While not within this committee’s jurisdiction, EEI also supports

inclusion of several important tax provisions in an energy bill that

will help increase investment in and strengthen our energy infrastructure, and promote the development of new technologies, including renewables.

We do have concerns with a couple of budget-related limitations

that appear in the reliability and energy efficiency sections of the

discussion draft, which were not included in last year’s conference

report. We look forward to working with you and your staff to resolve those issues. And in conclusion, we commend you for getting

the ball rolling again on energy legislation. The need for a bill is

greater now than ever, and we certainly look forward to working

with the committee on this important issue.

[The prepared statement of Thomas R. Kuhn follows:]

PREPARED STATEMENT OF THOMAS R. KUHN ON BEHALF OF THE EDISON ELECTRIC

INSTITUTE

Mr. Chairman and Members of the Subcommittee: My name is Tom Kuhn, and

I am President of the Edison Electric Institute (EEI). EEI is the association of U.S.

shareholder-owned electric utilities and industry affiliates and associates worldwide.

We appreciate the opportunity to testify on energy policy legislation. The House Energy and Commerce Committee deserves a great deal of credit for its years of effort

to produce legislation to address this nation’s long-term energy needs.

EEI supported the energy bill conference report approved by the House of Representatives in the 108th Congress, and we urge the House to approve a similar bill

again as soon as possible this year.

We recognize that every stakeholder would probably change something in last

year’s H.R. 6 conference report, which we understand will serve as the basis for the

House bill this year. However, the conference report is the product of years of hearings, debate and negotiations. While we continue to talk about energy issues, high

energy prices continue to be a heavy burden on American consumers and businesses. We need an energy bill now more than ever. The most important thing now

is for Congress to move forward and finish the job as soon as possible.

PROMOTE FUEL DIVERSITY

Fuel diversity should be a cornerstone of our national energy policy. Having a

broad array of fuel resource options available—including coal, nuclear, natural gas,

hydro, and renewables—is an important hedge against supply disruptions and price

volatility, thus benefiting consumers, the economy and the environment. It is critically important to our industry to have all of our fuel resources as viable, affordable

options. The H.R. 6 conference report will promote the full range of energy supply

options, so it should be supported.

Coal is a fuel source for more than 50 percent of the electricity generated in the

United States. It is abundant, affordable, and increasingly clean, with significant

improvements in pre- and post-combustion emission reduction technology. Clean

coal technology development and maintaining coal’s ability to compete on costs are

key drivers to our future ability to use coal, and the bill includes important provisions to help achieve these goals.

Nuclear energy provides 20 percent of this nation’s electricity and offers the environmental advantage of being emission free. The conference report’s provisions on

Price-Anderson reauthorization and advanced reactor development are among those

that will help maintain the viability of the nuclear power option for decades to come.

The electric utility industry shares the concerns that many have about the cost

and availability of natural gas. Roughly 18 percent of total current electricity generation is gas-fired, and in the past decade 88 percent of new plants have been gasfired. Gas offers several advantages for generation, including lower emissions than

other fossil fuels, and lower capital costs and regulatory barriers for plant siting and

construction. The H.R. 6 conference report included several important incentives for

increased domestic gas exploration and production, and we understand this year’s

bill will be updated with additional measures to promote adequate supply.

Renewables, where available, can also play an important role in fuel diversity.

Their most attractive feature is their obvious environmental benefits. While capital

costs are currently high, electricity generation from renewables typically depends on

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‘‘fuels’’ that tend to be low-cost and abundant in certain regions. Generation from

non-hydro renewables in 2002 was 2.2 percent, and it is expected to increase to 3.7

percent by 2025. The conference report includes several incentives for the increased

development and use of clean and renewable energy.

In particular I want to focus on the hydro licensing reform provisions in the conference report. Hydro provides roughly 9 percent of our electric generation, but we

are concerned about the federal relicensing process, a difficult system that often results in generating capacity reductions and loss of flexibility to operate hydro facilities for electric reliability purposes.

The conference report’s provisions will provide a process for achieving a federal

land agency’s environmental protection goals while at the same time maintaining

cost-competitive power production from existing hydropower facilities. Specifically,

these provisions would allow an applicant for a hydro license to propose an alternative to the mandatory condition imposed by a resource agency if that alternative

would cost less or improve the operational efficiency of the project. Among other

things, it would also require the resource agencies to give ‘‘equal’’ consideration to

specified factors, such as energy impacts, when developing mandatory conditions

and allow an applicant to receive a trial-type hearing on the record to resolve disputed issues of material fact.

ENSURE RELIABILITY AND ENCOURAGE TRANSMISSION INVESTMENT

Reliable electric service and regional electricity markets depend on strong transmission systems to move power instantaneously to where it is needed.

While investment in transmission systems has increased recently, with billions of

dollars being spent annually, the bulk of the new transmission being built is to help

serve local load and connect new generation to the grid. The level of investment in

the long-distance, high-voltage wires has not kept pace with the growing demands

being imposed on the system.

For a number of years until 1999, investments by shareholder-owned electric utilities in transmission facilities were steadily declining. This could be attributed to a

number of factors, including regulatory and financial uncertainties, as well as difficulties in permitting new transmission lines. Since 1999, however, investment in

transmission facilities began increasing by about 12 percent annually.

In 2003, total investment was about $4 billion. Much of the investment growth

has targeted local reliability issues and is designed to serve growing population centers around the nation by connecting new power plants to burgeoning electricity demand. Significantly, however, the number of circuit miles of high-voltage and extrahigh-voltage transmission lines (188kV and above) owned or operated by shareholder-owned utilities has grown by only 2.5 percent annually since 1999. These are

the so-called ‘‘trunkline’’ facilities that move electricity around and between regions

of the country.

According to the Energy Information Administration (EIA), consumer demand for

electricity is going to increase by roughly 50 percent over the next two decades. To

meet this increase in demand, and to assure system reliability and help accommodate wholesale electricity markets, capital investments in upgrades and new transmission lines—especially high-voltage, long-distance lines—must increase from the

current level of roughly $4 billion annually to about $5 billion.

A number of critical factors actually discourage investment in transmission, including:

• Local opposition to siting new facilities,

• Inability to recover planning and related costs if facilities are delayed or ultimately rejected by siting authorities,

• State retail rate caps that may prevent utilities from recovering their new investments in transmission,

• Uncertainty over transmission ownership and control policies, and

• Uncertainty as to whether beneficiaries will pay for new transmission.

The conference report provides significant help in removing these disincentives to

help strengthen the transmission infrastructure and enhance the benefits of competition for consumers.

Mandatory and Enforceable Reliability Standards

Today’s electricity market requires a mandatory reliability system, with enforcement mechanisms. The August 2003 blackout was a dramatic reminder of the need

for mandatory reliability rules.

The electric industry and the North American Electric Reliability Council (NERC)

are addressing the immediate problems that led to the August 2003 blackout. These

include:

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• Adding new audit programs; • Creating guidelines for disclosure of reliability violations; • Strengthening existing reliability standards and enhancing compliance with reliability rules; • Improving operator training; and, • Enhancing vegetation management practices around power lines.

The industry’s actions are consistent with the recommendations of the U.S.-Canada Power System Outage Task Force, which studied the blackout and released its

final report in April 2004.

All participants in wholesale electricity markets should be subject to mandatory,

enforceable reliability standards that are developed or approved by an electric reliability organization, with oversight and enforcement by FERC. Since early 1999, a

broad group of stakeholders, including EEI and many of its individual member companies, have supported legislation to achieve this goal. The version of the language

that we support is in the H.R. 6 conference report. We strongly urge the inclusion

of these provisions in an energy bill.

Grant FERC Backstop Siting Authority

Limited FERC backstop siting authority to help site new transmission lines in

interstate congested areas would be a critical aid in developing the more significant

transmission infrastructure needed to support regional wholesale electricity markets.

Regional electricity markets require a siting process that has the ability to consider regional and even national needs. FERC has jurisdiction over wholesale electricity markets, but, unlike its authority to site natural gas pipelines, it currently

does not have any authority over transmission siting to help ensure that there is

sufficient transmission capacity to support those markets.

The H.R. 6 conference report would give FERC very limited backstop transmission

siting authority. This authority extends only to helping site transmission lines in

‘‘interstate congestion areas’’ designated by the Department of Energy (DOE) and

only if states have been unable to agree or act within a year. We strongly urge its

inclusion in the energy bill again this year.

FERC has decades of experience in siting energy facilities. Since 1948, interstate

natural gas pipelines have gone to FERC for certificates that grant them eminent

domain authority. FERC has permitted hydroelectric facilities since 1920.

Protection of the environment is a top consideration in FERC’s processing of natural gas pipeline certificates. Under the National Environmental Policy Act (NEPA),

FERC is required to perform a comprehensive environmental analysis of all gas

pipeline construction proposals. The conference report’s transmission siting provision would require the same environmental protection process for any transmission

line construction proposal.

We are confident that with this authority in place, states will find it in their interest to become more effective and efficient in siting needed facilities.

Improve Coordination of the Federal Permitting Process

The unnecessarily complicated, time-consuming and difficult multi-jurisdictional

federal permitting process to site energy facilities, including authorizations for siting

transmission lines across federal lands, is another major impediment to building

new transmission. In some areas of the country, this is the principal impediment.

Problems with the federal permitting process include (1) a severely fragmented

process, where each federal agency with potential jurisdiction has its own set of

rules, timelines for action and processes for permitting; (2) the tendency by federal

agencies to require multiple and duplicative environmental reviews; (3) a failure to

coordinate with any state siting process; and (4) a lack of harmonized permit terms

from one agency to the next.

The federal transmission permitting process needs to be coordinated, simplified

and made to work with any state siting process. The H.R. 6 conference report accomplishes this objective by designating DOE as the lead agency to coordinate and

set deadlines for the federal environmental and permitting process. In addition,

DOE would be responsible for coordinating the federal process with any state and

tribal process. A state where a transmission facility would be located could appeal

to DOE when a federal decision deadline has been missed or a federal authorization

has been denied. To further facilitate siting, the bill sets deadlines for the designation of transmission corridors across federal lands. We strongly support these provisions.

Reform FERC Transmission Rate Policies

We believe that FERC and the states should utilize innovative transmission pricing incentives, including performance-based rates and higher rates of return, to atVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00141 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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tract the capital necessary to fund needed investment in transmission. Transmission

pricing should (1) allow for cost recovery of fixed and variable costs and a reasonable

return on transmission investment; (2) eliminate the pancaking of rates within a regional transmission organization (RTO) region; (3) ensure that cost responsibility

follows cost causation; (4) minimize the potential for cost shifting; (5) permit the recovery of all prudently incurred transition costs, and (6) promote efficient siting of

new transmission and generation facilities.

We support the FERC pricing and transmission technologies provisions in the

H.R. 6 conference report, particularly incentives to expand transmission infrastructure, such as the recovery of costs for planning and pre-certification of transmission

facilities and the recovery of costs through construction work in progress for transmission facilities. Likewise, we encourage the states to assure that utilities can recover their costs for investments for transmission under state regulation, with a reasonable rate of return.

According to a December 2001 FERC ‘‘Electric Transmission Constraint Study,’’

transmission costs make up only 6 percent of the current average monthly electric

bill for retail consumers. On the other hand, generation costs make up 74 percent

of the average bill. By reducing transmission congestion, investments in new transmission will allow greater economic dispatch of lower cost generation.

FERC estimates that a $12.6 billion increase in transmission investment would

add only 87 cents to an electric customer’s average monthly bill. But, since increased transmission investment will help reduce congestion and enable lower cost

power to reach consumers more easily, FERC anticipates that the net benefits to

overall electric bills could be potentially quite large.

For example, FERC estimates that if the reduced transmission congestion resulted in just a 5 percent savings in generation costs, consumers would see more

than a $1.50 decrease in their average monthly bills. If the generation savings from

reduced congestion were 10 percent, the average monthly bill for consumers would

drop by $4.00. So, a small increase in transmission investment can reap a much

more significant benefit in lower generation costs.

In addition to investments to relieve congestion, investments in new technology

to help improve the control and use of existing transmission lines are critically important to promote reliability.

Repeal the Public Utility Holding Company Act (PUHCA)

We also believe that repealing PUHCA will help attract significant amounts of

new investment capital to the industry. By imposing limitations on investments in

the regulated energy industry, PUHCA acts as a substantial impediment to new investment in energy infrastructure, keeping billions of dollars of new capital out of

the industry. As a result, we believe that this outdated statute has contributed to

the failure of the electricity infrastructure to keep pace with growing electricity demand and the development of regional wholesale markets.

PUHCA imposes outmoded restrictions on the business activities of electric and

gas utility holding companies and acts as a barrier to efficient competition. Furthermore, it prevents consumers from reaping the economic and efficiency benefits that

can accrue from having access to products and services offered by companies of national scope and scale.

For instance, under PUHCA, a registered holding company must confine its operations to a ‘‘single integrated public utility system’’ (with certain exceptions) located

in a ‘‘single area or region’’ of the country. This outdated ‘‘physical integration’’ requirement prevents utility companies from investing capital outside their geographic

region, shutting off a valuable potential source of domestic capital investment in

needed energy facilities and, ironically, fostering the very kind of concentration in

regional energy markets that FERC is trying to reduce.

Even without PUHCA, utility customers and investors are protected. Retail customers are protected fully by state regulation or oversight of retail electric service,

and wholesale customers are protected by FERC oversight and regulation. Utility

companies have long been, and will continue to be, among the most heavily regulated businesses there are.

The H.R. 6 conference report contains provisions that would repeal PUHCA and

transfer consumer protections to FERC and the states. These provisions are similar

to PUHCA repeal language that has been included in every major electricity bill

considered by Congress over the last decade, and which have been endorsed by

every Administration—Republican and Democratic—since 1982. They should be included in the energy bill again this year.

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OTHER ELECTRICITY REFORMS

PURPA Reform

The mandatory purchase obligation of the Public Utility Regulatory Policies Act

(PURPA) should be reformed. Most significantly, PURPA has subjected consumers

to higher electricity prices. Utilities are required to purchase power produced from

PURPA qualifying facilities, regardless of whether that power is needed or whether

it is more expensive than alternative power supplies. PURPA’s mandated, long-term

contracts are costing electricity consumers nationally nearly $8 billion a year in

higher electricity prices.

PURPA also has failed to achieve its objective to promote the use of renewable

energy. Today, approximately 80 percent of all power produced by PURPA facilities

is generated using natural gas, coal or oil. Fossil fuels, not renewable energy resources, have been PURPA’s primary beneficiaries.

In addition, significant abuses have occurred under PURPA, particularly with respect to cogeneration facilities. There is no requirement under FERC’s regulations

that a cogeneration facility’s thermal output be useful or economic. As a result, what

are essentially exempt wholesale generators have been allowed to masquerade as

PURPA qualifying facilities in order to have a guaranteed market for their power

at government-set prices.

The PURPA reform provisions in the H.R. 6 conference report represent a delicate

compromise that is the result of long, difficult negotiations among the major PURPA

stakeholders. EEI continues to support these provisions, as it expects other stakeholders to do.

FERC Lite

EEI believes that all transmission-owning utilities, no matter what their ownership type, should be subject to the same level of FERC regulation to assure fair,

open access for all market participants to the transmission grid. After all, electrons

move on the grid according to the laws of physics, without recognizing changes in

ownership type. Thus, we believe FERC rules should apply to all users of the grid.

While they are weaker than we would prefer, the ‘‘FERC lite’’ provisions of the

H.R. 6 conference report represent a step toward this ultimate policy goal and

should be included in any energy bill.

FERC Refund Authority

The California energy crisis clearly demonstrated that retail electricity consumers

would be much better protected by making all electricity suppliers, not just shareholder-owned utilities, subject to FERC refund authority. This would ensure that

prices charged for wholesale electric power sales, regardless of the seller, must meet

FERC’s ‘‘just and reasonable’’ standard. EEI supports language in the H.R. 6 conference report authorizing FERC to order refunds from the largest governmentowned utilities for short-term sales.

FERC Merger Authority

Mergers among electric utilities and with other energy companies can lower operating costs, diversify the products and services companies are able to offer to consumers, and increase efficiencies. However, electric utility mergers are among the

most heavily regulated of all industries, and the federal merger review process is

costly, time-consuming and duplicative. EEI supports measures to streamline

FERC’s current merger review process to eliminate duplicative federal review and

bring it more in line with the process used for other industries. The H.R. 6 conference report’s provisions clarifying FERC merger authority, expediting the Commission’s review process, and directing DOE to study additional ways to eliminate

duplication and improve the process are consistent with this goal.

Native Load Protection

Under the Federal Power Act (FPA), FERC is responsible for preventing the exercise of market power in competitive wholesale markets and developing the rules for

such markets. However, any FERC analysis of market power in wholesale markets

should take into account existing commitments and obligations under state law and

state policies relating to service obligations, resource procurement, resource adequacy, fuel supply choices and environmental aspects of generation.

Federal regulators should recognize the retail service obligations of utilities and

promote policies consistent with those state-imposed obligations. The native load

service obligation provision in the H.R. 6 conference report assures transmitting

utilities holding firm transmission rights that giving priority to serving this ‘‘native

load’’ does not constitute undue discrimination under the FPA.

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ENERGY EFFICIENCY

A balanced national energy policy should also promote the efficient use of energy

resources. Using energy wisely is good for the environment, saves money, and helps

support energy security. We must continue to seek improvements in energy efficiency, in addition to developing new supplies and infrastructure, in order to achieve

our energy and environmental goals.

The H.R. 6 conference report includes many provisions to promote energy efficiency and wise energy use, including higher efficiency standards for a wide range

of products that use large amounts of energy, such as commercial refrigerators and

freezers, increased LIHEAP funding for low-income households and funding for lowincome weatherization programs, and new efficiency performance standards for public buildings. We support these provisions.

Federal Agency Energy Efficiency Programs

In particular, EEI supports language in the H.R. 6 conference report to extend

and improve programs under which private sector companies help federal agencies

achieve their energy efficiency goals. The federal government is the world’s largest

single consumer of electricity, and utility energy service contracts and Energy Savings Performance Contracts (ESPCs) are two means by which EEI member companies help federal agencies conserve energy and save taxpayer dollars.

The ESPC program, which received a two-year extension last year after lapsing

in 2003, would be permanently reauthorized under the H.R. 6 conference report, finally giving it the long-term stability it needs. However, we are concerned about

new limitations, which were not included in the conference report, that we understand might be placed on the program in this year’s bill—largely, we understand,

because of questionable CBO scoring assumptions. We believe the limitations under

discussion would have a chilling effect on the energy services contracting market,

which is critical to the federal government’s efforts to achieve energy and cost savings. As members of a broad pro-ESPC coalition led by the Alliance to Save Energy,

we will work with Chairman Barton and others in Congress to resolve this problem

in a way that maintains the viability of this successful program.

ENERGY TAXES

While we appreciate that the tax provisions in the energy bill are under the jurisdiction of another committee, we want to call your attention to critical tax provisions in the H.R. 6 conference report that will help increase investment in, and

strengthen, our energy infrastructure.

The U.S. tax code should be amended to provide enhanced accelerated depreciation (from 20 to 15 years) for electric transmission assets, similar to the tax treatment governing other major capital assets. Currently, transmission assets receive

less favorable tax treatment than other critical infrastructure and technologies.

The conference agreement also included a provision that would provide rapid amortization (from 20 to 5 years) for pollution control equipment to electric generating

units built after 1975. Under current law, this tax treatment is available only for

equipment added to generating plants placed in service before 1976. This tax treatment will be a significant economic incentive for utilities to deploy new environmental technologies on electric generating plants. This would result in emission reductions that would provide real environmental benefits that may not be realized

without tax relief.

The tax credit for electricity produced from wind, open-loop and closed loop biomass and other renewable resources should be extended. Currently, electricity must

be produced at a facility placed in service before January 1, 2006. At a minimum,

the credit should be extended to electricity produced at facilities placed in service

before January 1, 2008. This tax credit helps make electricity produced from these

renewable sources competitive with other forms of electricity, which will be an important part of the nation’s long-term energy supply.

Finally, it is necessary to update the tax treatment of nuclear decommissioning

laws to reflect a deregulated environment. The conference agreement included needed reforms to provide greater assurance of adequate funding, and allow faster

growth in the monies set aside in decommissioning trust funds.

EEI supports inclusion of these tax provisions in the energy bill.

RENEWABLE PORTFOLIO STANDARD

While the H.R. 6 conference report does not include a mandatory nationwide renewable portfolio standard (RPS), we want to reiterate the strong opposition of the

majority of our member companies to a federal RPS. A federal mandatory RPS

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would raise electricity prices for consumers; create inequities among states, electricity generators and electricity suppliers; and threaten electric reliability.

The lack of available renewable energy resources in certain regions, their intermittent nature and the NIMBY problems facing both renewable energy facilities and

new transmission lines are significant barriers to increasing significantly the

amount of electricity produced from renewable energy resources. These challenges

have serious ramifications for electric utilities and their consumers in the context

of a federal RPS requirement.

The reality is that many utilities will be forced to purchase renewable energy

credits from either the federal government or renewable energy generators to meet

an RPS mandate. And, they would still need to generate sufficient power to meet

their consumers’ demands. In essence, the RPS requirement ends up being a new

federal energy tax on traditional energy resources that utilities must pay in addition

to the costs of building sufficient reliable and dispatchable generation.

Because renewable energy resources are not uniformly available throughout the

country, a federal RPS requirement would create inter-regional ‘‘winners and losers’’

among electricity suppliers and their consumers. Utilities and their consumers in

regions lacking in renewable energy resources would end up sending their dollars

to renewable energy suppliers in regions with renewable energy resources.

Promoting renewable energy resources, through tax credits and increased funding

for research and development, in addition to existing renewable programs in the

states, is a better approach to help maintain our nation’s diverse fuel mix and reliable electricity supply.

CONCLUSION

Congress needs to finish the job and pass an energy bill as soon as possible to

help promote fuel diversity, improve energy efficiency and conservation, provide regulatory certainty in energy markets, and encourage investment in critical energy infrastructure. We urge Congress to adopt an energy bill similar to the H.R. 6 conference report in 2005.

Mr. HALL. Thank you, sir. Ms. Church.

Ms. CHURCH. Good afternoon, Mr. Chairman, Mr. Boucher, and

all members of the subcommittee.

Mr. HALL. Good afternoon.

STATEMENT OF LYNNE H. CHURCH

Ms. CHURCH. I am Lynne Church, President of the Electric

Power Supply.

We are the trade association representing competitive power suppliers who own and operate approximately 40 percent of the Nation’s generation capacity, and we burn a diverse mix of fuels. In

2003, 36 percent of the power produced competitively was coalfired, 30 percent was from natural gas, and 24 percent was nuclear.

We build and operate power plants without regulatory guarantees or a captive customer base. Our members prosper only if they

succeed in meeting the needs of electricity customers.

We appreciate this opportunity to comment on the electricity provisions in the Energy Policy Act of 2005. As our past testimony and

correspondence makes clear, we support and will continue to support the passage of this legislation. We do not view the legislation

as a panacea for all of the energy issues facing the Nation. However, it includes many legislative changes that are long overdue

and will greatly benefit the country. The mandatory reliability language, the transmission siting provisions, the repeal of PUHCA,

the Congressional resolution supporting development of better regional markets, and the limited expansion of FERC oversight over

the transmission capacity operated by public power are positive aspects.

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Let us encourage you to act swiftly. Regulatory uncertainty has

a devastating impact on power plant development, which has a

long lead time and very high capital costs. While many areas of the

country have experienced a relative surplus of available generation

capacity, we know this doesn’t last. As the economy picks up

steam, so does the demand for electricity. Over the next 5 years,

these surpluses will shrink, and new capacity will need to be built.

Our companies are recovering well from the ill effects of the past

recession. Stock values are up, debt has been reduced, and in large

parts of country, broader regional wholesale markets are beginning

to take hold and thrive. EPSA companies have invested over $100

billion in new plants, at no risk to their customers. We have built

the most efficient, cleanest, and best-run coal, natural gas, and renewable power generation, and we are ready and willing to do

more. We also have companies that, for the first time in a generation, are seriously considering new nuclear development. Do not

put this critical investment at risk.

On the other side of the ledger, we have consistently expressed

our concern that the ‘‘SMD delay’’ language, a Senate addition, and

the so-called native load provisions represent poor policy that do

little to protect consumers and are more to encourage discriminatory behavior and high societal costs. In addition, we join many

other groups in opposing statutory language which prescriptively

allocates transmission costs, the so-called participant funding provisions.

As you consider this legislation and further changes, we ask you

to keep in mind three basic principles.

First, electricity is a fundamental driver of our free market economy, and any legislation should ensure that our customers and

businesses have access to the most efficient and innovative suppliers on the grid.

Second, electricity is, by its very nature, an interstate and increasingly international commerce. Large and seamless regional

markets that reward efficiency and cost control will best enhance

America’s overall ability to successfully compete.

Third, the basic concept of first, do no harm should apply. The

collateral effects from incomplete or poorly thought out policy

changes could have a negative effect on all electricity users, and

certainly, in regions of the country where there are no problems occurring.

We have seen the savings to consumers which competitive regional power markets can deliver. For example, adjusted wholesale

power prices dropped 16 percent in the East between the fourth

quarters of 2003 and 2004, after the PJM footprint was expanded

into the Midwest. The addition of AEP’s transmission system allowed previously underutilized capacity to be sold into a larger

market, and decreasing prices. It has also been shown that competitive electric markets can conserve natural gas in the short

term. In ERCOT, for example, natural gas consumption in electricity production has decreased by 3 percent over the last 4 years,

while the electricity produced from this gas increased by almost 8

percent. This was due to the fact that older, inefficient gas plants

were displaced by newer combined cycle gas plants, meaning that

more generation was able to be produced using far less gas.

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Before closing, I would like to comment on a related phenomenon

that should concern the committee. A number of States are returning to the use of regulatory guarantees and the creation of a regulatory rate-base to build new generation power. This approach

guarantees that local consumers will, once again, bear the risks associated with bad, mismanaged, or unnecessary utility investment.

Consumers have been required to absorb some $200 billion in

stranded costs from exactly this kind of investment in the 1970’s

and 1980’s. History should be a cautionary tale for all of us. We

have no objection to new rate-based generation investment, provided that it is tested and proven to be more beneficial to the consumer than a competitive alternative.

We stand ready to build the next generation of plants, much of

which will probably be coal, if given a fair opportunity to compete.

In conclusion, we urge the subcommittee to move the Energy Policy

Act of 2005 swiftly.

Thank you.

[The prepared statement of Lynne H. Church follows:]

PREPARED STATEMENT OF LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUPPLY

ASSOCIATION

Chairman Hall and Members of the Subcommittee: I am Lynne H. Church, President of the Electric Power Supply Association (EPSA) and am here today representing EPSA’s member companies. EPSA is the national trade association representing competitive power suppliers, including generators and marketers. Our

competitive power industry operates 40% of the installed electric generation capacity in the United States. In 2003, 36% of the power we produced competitively was

coal-fired, 30% was from natural gas, and 24% was nuclear. The rest was hydroelectric, other renewables and miscellaneous fuels.

We build and operate power plants without regulatory guarantees or a captive

customer base. Our members prosper only if they succeed in meeting the needs of

electricity consumers. EPSA member companies have an established track record of

providing reliable, competitively priced electricity from environmentally responsible

power facilities in the U.S. and global markets.

We appreciate this opportunity to comment on the electricity provisions in the Energy Policy Act of 2005, which in large part are identical to the House-Senate Conference Report from the last Congress. As our past testimony and correspondence

makes clear, EPSA supports the passage of this legislation. We do not view the legislation as a panacea for all of the energy issues facing the nation. However, it includes many legislative changes that are long overdue and will greatly benefit our

country. The reliability language, the transmission siting provisions, the repeal of

PUHCA, the Congressional resolution supporting the development of better regional

power markets, and the limited expansion of FERC oversight to some of the transmission capacity operated by public power are examples of positive public policy embodied in this legislation.

Let us encourage you to act swiftly. Regulatory uncertainty has a devastating impact on long-lead time, high capital cost projects—power plants. While many areas

of the country have experienced a relative surplus of available generation capacity,

we know this doesn’t last. As the economy picks up steam, so does the demand for

electric energy. Over the next five years, these surpluses will shrink and new capacity will need to be built.

Our companies are recovering well from the ill effects of the economic recession.

Stock values are up. Debt has been reduced. And, in large parts of the country,

broader regional wholesale markets are beginning to take hold and thrive. EPSA

companies have invested over $100 billion in new plants—at no risk to their customers—over the past five years and are poised to bring new capital to meet emerging needs. We’ve built the most efficient, cleanest and best-run coal, natural gas and

renewable power generation in the past, and we’re ready and able to build more.

We have companies that, for the first time in a generation, are seriously considering

new nuclear development. Do not put this critical investment at risk through endless deliberation or ill-advised legislative proposals.

On the other side of the ledger, we have consistently expressed our concern that

the ‘‘SMD delay’’ language—a Senate addition—and the so-called ‘‘native load proviVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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sions’’ represent poor policy that do little to protect consumers and are more likely

to encourage discriminatory behavior, less efficiency and higher societal costs. In addition, we join many other groups in opposing statutory language which prescriptively allocates transmission costs—the ‘‘participant funding’’ provisions.

As you consider this legislation, and any further changes to it, we ask you to keep

in mind three basic principles:

First, electricity is a fundamental driver of our free market economy, and any legislation should ensure that our customers and businesses alike have access to the

most efficient and innovative suppliers on the grid;

Second, electricity is by its very nature part of an interstate and, increasingly,

international commerce. Large and seamless regional markets that reward efficiency

and cost control will best enhance America’s overall ability to compete successfully

in the global economy;

Third, the basic concept of ‘‘first do no harm’’ should apply—the collateral effects

from incomplete or poorly thought out policy changes could have a negative impact

on all electricity users.

We have seen the savings to consumers which competitive wholesale power markets and regional power markets can deliver. For instance, wholesale power prices

dropped 16% in the East, when adjusted for fuel-price and demand variations, between the fourth quarter of 2003 and the fourth quarter of 2004. When the PJM

footprint expanded into the Midwest, it allowed previously underutilized capacity to

be sold into a larger market, increasing efficiency and decreasing prices. For your

information, we have attached a chart detailing some of the cost savings from competitive wholesale power markets. It has also been shown that competitive electric

markets can conserve natural gas. Competition rewards efficiency and forces the retirement of inefficient, obsolete facilities. In ERCOT, for instance, natural gas consumption in electricity production decreased by 3% from 1999 to 2003, while the

electricity produced from this gas increased by almost 8%.

Before closing, we’d like to comment on a related phenomenon that should concern

you. A number of states are returning to the use of regulatory guarantees and the

creation of a regulatory rate-base to build new electric power generation. This approach guarantees that local consumers bear the risks associated with bad, mismanaged or unnecessary utility investment. Our recent history which required consumers to absorb some $200 billion in ‘‘stranded costs’’ from exactly this kind of investment in the 1970s and 1980s should be a cautionary tale for all of us. We have

no objection to new rate-based generation investment, provided that it is tested and

proved to be more beneficial to the consumer than a competitive alternative.

In conclusion, we urge this subcommittee to move the Energy Policy Act of 2005

forward swiftly. We have raised several issues that we hope will be favorably considered and resolved during action by the House and in conference. We strongly urge

you to reject any dramatic new proposals which inject crippling regulatory uncertainty into an industry that is ready to commit the hundreds of billions in new investment needed by U.S. consumers.

141

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Mr. HALL. Thank you. And Mr. Richardson, we recognize you at

this time. I must tell you there is a vote pending for any minute,

and the votes will probably take about 50 minutes, so as brief as

you can be will help. But we are going to hear every one of you,

because all of your testimony, despite the fact that it is not before

a full panel here, is just the same as before a full panel. It goes

into the record. Everybody reads the record, and everybody, all the

staffers are here, the main ones are here, the staffers. And thank

you for your patience with us. I am sorry that they are going to

have a vote; bell could ring any time. When it does, I think I will

recess for an hour, and for those of you who can’t wait, who can’t

stay, who have airlines you have to catch, I ask unanimous consent

of the ranking member that they be excused from the panel. Your

opening statements will go into the record in their entirety.

I recognize you, Al, Mr. Richardson, right now.

STATEMENT OF ALAN RICHARDSON

Mr. RICHARDSON. Thank you, Mr. Chairman. All the members

will read the statements, and all of us are happy to be here.

It is a pleasure to be here. My name is Alan Richardson. I am

the CEO of the American Public Power Association, and I am

pleased to testify today on behalf of the Nation’s nearly 2,000 publicly owned electric utilities. APPA continues to support comprehensive energy legislation, for many of the reasons that have

been given by others that have testified earlier. I would like to

focus my comments on the electricity title of H.R. 6. I address other

issues, or the conference report on H.R. 6, I address other issues

in my prepared, my testimony, which I know will be printed in full

in the record.

With respect to electricity, the goal, from our perspective, at

least, should be to promote effective competition in wholesale electricity markets where it is possible to do so for the benefit of consumers, and the wellbeing of our society. While recognizing the regional diversity of these markets and the very unique characteristics of electricity itself, characteristics that make the restructuring

of this industry an extremely difficult task. Those characteristics,

among other things, have produced rather dramatic changes in industry structure and public and shareholder attitudes in the last

couple of years. The events that have produced these changes include the Western energy crisis, the revelation of a broad range of

practices to manipulate the energy markets, the financial meltdown of some generators and private power companies, credit rating agency downgrades for utilities with significant merchant generation exposure, and the list goes on.

In view of these changes, private utilities today are pursuing a

back to the basics strategy, producing an infrastructure that bears

little resemblance to the structure envisioned by proponents of restructuring just a decade ago. These facts, from our perspective,

strongly suggest that a fresh start with respect to the electricity

title would be appropriate. The legislation that is the focus of this

hearing, the conference report on H.R. 6, with some minor modifications, passed the House on November 18, 2003. Behind that

event were hearings, the legislation actually dates back prior to

2003, some parts of it back a couple of Congresses. Fifteen months

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since that vote was taken, there have been yet additional events

that have shaped public opinion, and these should be taken into account in formulating energy—public policy. In other words, much

of the electricity title’s language may, indeed, be past its shelf life

and in need of retooling.

You have asked us for our views on the conference report on H.R.

6. Let me set forth some of the specifics, provision that we like, and

provisions that we are concerned about. We very strongly support

the mandatory reliability legislation, enforceable reliability provisions. If it becomes apparent that comprehensive energy legislation

is going to stall out in the 109th Congress, as it has in the last 3

Congresses, then we believe that legislation should move forward

on a standalone basis. We are as confused, I think, as everyone

else, as to why the dollar limits are included in that legislation. We

look forward to clarification from those you have asked to explain

why that provision is there.

We support the service obligation provision but suggest certain

modifications to ensure long-term physical and transmission rights

for both existing and new transmission facilities at predictable

prices. Load serving entities such as public power systems are hindered in meeting their service obligation without long-term certainty in transmission. Further, the lack of such certainty is an obstacle in the construction of large base load generation and renewable generation. And if the problem isn’t addressed, we place in

jeopardy initiatives to expand renewable energy and coal-fired generation, both of which generally must be located far from load.

Transmission siting is an extremely difficult task, and for this

reason, we support the Federal Energy Regulatory Commission

backstop authority that was proposed in the legislation. Financial

incentives for new construction, if addressed in legislation, should

be tailored in a way that, for new transmission construction,

matches the risk of the investment and the reward provided.

Allocation of costs for new transmission is a very difficult problem, and it is best left to the Commission to resolve on a case-bycase basis. Congress should not dictate how to allocate costs for

new transmission. FERC’s flexibility in the area should be preserved, so it can fashion cost recovery policies that reflect and respect the needs and goals and the grid characteristics of specific regions.

We do not oppose, but continue to question the need of expanded

FERC jurisdiction over transmission facilities owned by publicly

owned utilities.

We continue to oppose the repeal of the Public Utility Holding

Company Act of 1935, unless accompanied by provisions that ensure FERC has the ability to protect consumers and investors from

the probable consequences of such repeal.

Indeed, we believe the evidence is quite strong that the partial

repeal of the Holding Company Act in 1992 opened the door to diversification and risky investments that contributed to the financial meltdown of many private utilities, to the disadvantage of consumers and investors, the very people that were presumed to be

protected by the Holding Company Act. Wall Street financial analysts now agree, and they have entered into this debate in opposiVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00151 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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tion to repeal. We also strongly oppose limitations placed on the exercise of FERC’s merchant review authority.

Finally, instead of Congressional directive identifying and prohibiting a specific electric trading practice, as is contained in the

conference report on H.R. 6, we believe the Commission should be

authorized to undertake a rulemaking proceeding to identify all

practices intended to manipulate the wholesale market, and Congress should then authorize the Commission to levy significant

penalties, including the withdrawal of the privilege of selling power

at market-based rates for entities that are engaged in these practices.

That concludes my summary, Mr. Chairman. Thank you very

much.

[The prepared statement of Alan H. Richardson follows:]

PREPARED STATEMENT OF ALAN H. RICHARDSON, PRESIDENT AND CEO, AMERICAN

PUBLIC POWER ASSOCIATION

Chairman Hall, Ranking Member Boucher, and members of the Subcommittee,

my name is Alan Richardson, and I am the President and Chief Executive Officer

of the American Public Power Association (APPA). Thank you for the opportunity

to appear before you today to discuss APPA’s views on comprehensive energy legislation.

APPA is the service organization for the nation’s more than 2,000 communityowned electric utilities that serve over 43 million Americans. The utilities include

state public power agencies, municipal electric utilities, and special utility districts

that provide electricity and other services to some of the nation’s largest cities such

as Los Angeles, Phoenix, Seattle, San Antonio and Jacksonville, as well as some of

its smallest towns. Indeed, the vast majority of these utilities serve small and medium-sized communities in 49 states, all but Hawaii. In fact, 75 percent of publicly

owned electric utilities are located in communities with populations of 10,000 people

or less.

Public power systems were created by state or local governments to serve the public interest. More than 500 public power systems have, or by the end of this year

will have, celebrated their 100th anniversary. One of the most fundamental values

that all APPA members share is local control. Like public schools, police and fire

departments, and publicly owned water and waste water utilities, public power systems are locally created governmental institutions that address a basic community

need: the provision of an essential public service at a reasonable price. Public power

systems share the core mission and obligation to provide reliable and low-cost electric power to their retail and wholesale requirements customers, consistent with

good environmental stewardship, and to do so year in and year out. Because they

are locally controlled, the interests of public power systems are aligned with the

long-term interests of their respective customers and communities.

Publicly owned utilities also have an obligation to serve the electricity needs of

all their customers. They have maintained this ‘‘obligation to serve,’’ even in states

that have introduced retail competition. Public power’s ongoing commitment to its

service obligation in those local communities requires it to pay attention to longterm infrastructure needs. Because infrastructure is so critical to the future of the

electric industry in general, and public power systems specifically, APPA can only

support legislative initiatives that bolster our members’ commitment to maintain existing infrastructure and to enhance their ability to develop needed new infrastructure. Without adequate transmission and generation infrastructure, public power

cannot meet its service obligations.

APPA has consistently supported a comprehensive approach to energy policy.

APPA has continually asserted that there are a number of areas where the Administration and Congress should act to enhance the viability of traditional fuels used

to generate electricity, promote the commercialization of new, alternative sources of

electricity, increase energy conservation, and provide adequate energy assistance to

low-income households.

The 109th Congress is now underway and the debate on comprehensive energy

legislation is set to be renewed. The Conference Report for H.R. 6, 108th Congress,

will serve as the foundation for the upcoming debate on energy legislation in the

House of Representatives, while the other body is taking a step back from legislation previously considered to determine whether the proposals advanced in the last

145

few years still meet the needs of our country in 2005 and beyond. While some aspects of H.R. 6 still reflect sound public policy, others are dated and should be reconsidered.

Much of my testimony will focus on those provisions contained in the conference

report that are directly related to electricity. However, I would first like to comment

on other aspects of H.R. 6 that continue to be of great interest to APPA. The following is a brief summary of major issues APPA supports, outside of the scope of

the electricity title:

Comparable Incentives for Renewable Energy Facilities

Many APPA members are extremely interested in expanding their portfolio of renewable generation facilities and contracts. The Conference Report for H.R. 6 originally contained a substantial energy tax title, which included production tax incentives for renewable generation by private entities, but contained no comparable incentive for public power systems and cooperatively owned utilities. Comparable incentive language had been included in the Senate-passed version of comprehensive

energy legislation, but was stripped out of the final bill in conference.

These incentives are intended to stimulate investments that advance our overall

national energy policy—specifically greater investment in renewable energy. However, they do not work for the nearly 3,000 publicly and cooperatively owned electric

utilities that provide electricity to over 25% of the nation’s consumers. If the goal

is to promote these socially beneficial investments, it is imperative that a comparable incentive be available to this sector of the electric utility industry for renewable energy facilities. This is particularly important now that several states have

passed, or are considering, renewable portfolio standards. APPA strongly supports

the inclusion of a comparable incentive plan in comprehensive energy legislation.

Hydroelectric Relicensing

Over the next 15 years, two-thirds of all non-federal hydroelectric capacity—which

totals nearly 29,000 megawatts of power and can provide enough electricity to serve

six million retail customers—must undergo the Federal Energy Regulatory Commission (FERC) relicensing process. The relicensing of each hydro project may potentially result in a significant loss of existing capacity due to the operational changes

that relicensing requires at specific projects. Such lost capacity must be replaced by

less efficient generation sources that are likely to impose additional costs on consumers and produce greenhouse gas emissions. Therefore, APPA believes that improvements to FERC’s hydroelectric licensing and relicensing processes are a necessity. APPA supports the hydro language contained in the House-passed Conference

Report, and would urge the Subcommittee to retain it.

Renewable Energy Production Incentive

APPA strongly supports the reauthorization of and changes to the Renewable Energy Production Incentive (REPI) program contained in the Conference Report for

H.R. 6. REPI was established by the Energy Policy Act of 1992, and authorizes the

Department of Energy (DOE) to make direct payments to publicly- and cooperatively-owned electric utilities for electricity generated from solar, wind, landfill-gas,

and certain geothermal and biomass projects. It was intended to provide incentives

to public power for investment in renewable energy that were comparable to those

provided to for profit utilities through the tax code. Because this program has been

grossly under-funded, it has never fulfilled its primary mission. While we strongly

believe REPI should be updated and preserved, we also believe, as noted above, that

Congress should create a program that provides comparable financial incentives to

those offered to for-profit companies to encourage investment in renewable and

clean energy facilities. Since 1995, REPI has funded more than 36 renewable energy

projects in 17 states. REPI’s authorization expired in 2003.

The renewable energy title in the Conference Report includes the language APPA

advocates to reauthorize and reform REPI. It extends REPI for another ten years

and directs DOE to allocate funds during funding shortfall years to all projects on

a more equitable basis than is the case under the current process. The language also

clarifies that landfill gas-to-energy projects and Indian tribal governments are eligible for funding under REPI. The reauthorization of REPI is a high priority for APPA

in any comprehensive energy measure that Congress may consider.

Price-Anderson Act Reauthorization

The Price-Anderson Act, a law that indemnifies DOE contractors and Nuclear

Regulatory Commission (NRC) licensees for damages resulting from nuclear incidents, expired in 2003. A two-year extension of Price-Anderson coverage for DOE

contractors was included in the FY 2005 defense authorization bill (H.R. 4200),

which was approved by Congress on October 9, 2004.

146

The Conference Report for H.R. 6 sought to extend Price-Anderson coverage for

new commercial reactors and new DOE nuclear contracts through the end of 2023.

The legislation raised the maximum reactor assessment from $88 million to $95.8

million and the limit on per-reactor annual payments from $10 million to $15 million, while at the same time limiting DOE contractor indemnification to $10 billion.

APPA supports the long term reauthorization of the Price-Anderson Act.

Clean Coal Technology

The Conference Report for H.R. 6 contains a 15% investment tax credit for retrofits or re-powering of existing coal units with qualifying ‘‘basic’’ clean coal technologies (including advanced pulverized coal or atmospheric fluidized bed combustion, pressurized fluidized bed combustion and integrated gasification combined

cycle). Such technologies must meet certain pollution control requirements and comply with a design net heat rate of at least 500 BTU/KWh less than the heat rate

of the existing coal-based unit prior to conversion. Up to 4000 megawatts of capacity

nationwide would be eligible.

A 17.5% investment tax credit is provided in the Conference Report for H.R. 6 for

a new advanced clean coal technology unit meeting certain carbon and heat rate requirements, which vary among eligible technologies. These technologies include advanced pulverized coal, atmospheric fluidized bed combustion technology, pressurized fluidized bed combustion, integrated gasification combined cycle, and others. Up

to 6000 megawatts of capacity nationwide would be eligible. APPA supports clean

coal technology research and development, as well as incentives for such development, so long as they are linked to comparable investment incentives that are available for public power systems and rural electric cooperatives.

Energy Conservation

The H.R. 6 Conference Report would have established a program for developing

plans for increasing energy and water conservation in congressional buildings. It

sets targets and timetables for energy consumption reductions in federal buildings

nationwide and permanently extends existing authority provided to federal agencies

to contract with energy service companies to assume the capital costs of installing

conservation equipment and renewable energy systems in federal facilities or buildings. The legislation expands the use of these contracts to cover the replacement of

existing federal buildings with new, more energy-efficient buildings and expands the

definition of energy savings to include a reduction in water costs. The language also

directs federal agencies to procure Energy Star or Federal Energy Management Program designated-energy efficient products. Furthermore, the language authorizes

$20 million annually through FY2006 for grants to local governments, community

development corporations, and Indian tribes for efficiency and renewable energy

projects in low-income communities and authorizes $3.4 billion annually from

FY2004 through FY2006 for the Low-Income Home Energy Assistance Program

(LIHEAP). APPA remains very supportive of the energy efficiency and conservation

goals set forth in the Conference Report.

ELECTRICITY

The House first passed the H.R. 6 Conference report on November 18, 2003. In

the fifteen months since that vote, there has been a great deal of change in the electric utility industry. Much of the electricity title’s language may indeed be past its

shelf life and in need of retooling. While APPA supports the goal of ultimately passing comprehensive energy policy legislation, we urge the Subcommittee to exercise

caution when addressing a number of the provisions contained in the Conference

Report’s electricity title.

The goals of federal electricity restructuring policies should be to promote effective

competition in wholesale electricity markets where it is possible to do so for the benefit of consumers and the well-being of our economy, while recognizing the regional

diversity of those markets and the very unique characteristics of electricity. APPA

believes that the number of electricity policy issues requiring congressional action

has decreased since the passage of H.R. 6. To achieve a more robust marketplace,

APPA believes that the Federal Energy Regulatory Commission (FERC) must use

its existing authorities under the Federal Power Act to, among other things: allow

market-based rate sales only by sellers that cannot exercise market power, through

use of mitigation measures if needed; ensure transparent market information; remedy market power abuses in a timely manner; ensure that existing Regional Transmission Organizations (RTOs) put the interests of consumers first and foremost; and

clarify and enforce open access transmission rules in non-RTO regions. In addition,

the market power protections contained in the Public Utility Holding Company Act

(PUHCA) should be enforced by the Securities and Exchange Commission (SEC),

and the Act must not be repealed by Congress outright.

147

I will now discuss specifically a number of the electricity related provisions contained in the Conference Report for H.R. 6.

Electric Reliability Standards (Sec. 1221)

The Conference Report for H.R. 6 creates mandatory reliability standards promulgated by an electric reliability organization with regional stakeholder input. The

language comports with that agreed to previously by APPA and other industry

stakeholders. APPA strongly supports the reliability language contained in the Conference Report. Should comprehensive energy legislation stall once again, we believe

Congress should move the reliability provisions on a stand alone basis.

Siting of Interstate Electric Transmission Facilities (Sec. 1221)

The language included in the H.R. 6 Conference Report grants FERC ‘‘backstop’’

transmission facilities siting authority (through the use of eminent domain) in areas

identified by DOE as critical transmission congestion pathways, if a state has delayed or denied a permit. The provision authorizes interstate siting ‘‘compacts’’ to

help identify regional siting priorities. The siting authority applies to both existing

and new transmission facilities. There is an ERCOT (Electric Reliability Council of

Texas) exemption.

APPA is generally supportive of this approach to the transmission siting issue.

The need for new transmission infrastructure is one of the most pressing issues facing the industry and the public it serves. APPA does urge the Subcommittee to look

carefully at provisions dealing with state ‘‘compacts’’ that could undermine the effectiveness of this section in siting new transmission.

Third Party Finance (Sec. 1222)

This provision authorizes WAPA and SWPA to engage in certain financing and

operation arrangements for existing and new transmission lines with a cap of $100

million for 10 years from third-party contributions. APPA is concerned that this provision addresses a problem that does not now exist (if, indeed, it ever did). Thirdparty arrangements have been entered into absent any federal statute, as demonstrated by WAPA’s partnerships for the construction of the Path 15 transmission

line in California. APPA is concerned that this language could actually slow down

the process by which WAPA and SWPA undertake to build new transmission facilities. We recommend this portion of the electricity title be deleted.

Open Nondiscriminatory Access (Sec. 1231)

Known as ‘‘FERC-lite,’’ this provision requires an ‘‘unregulated transmitting utility’’ (certain public power systems and rural electric cooperatives, the Tennessee

Valley Authority and the Power Marketing Administrations) to provide open access

to their transmission facilities at rates comparable to what they charge themselves

and under terms and conditions comparable to those they apply to themselves. Systems that do not sell more than 4 million MWh of electricity annually or that do

not own or operate transmission facilities necessary for operating an interconnected

grid are exempted. The provision clarifies that nothing in this section authorizes

FERC to order an unregulated transmitting utility to join an RTO. The provision

also includes the comparability language sought by APPA, as well as a limitation

on FERC’s ability to require an action under the section which would result in a

violation of private use restrictions on municipal bonds. While APPA is still not convinced that this provision is necessary, we are not seeking any changes to the language at this time.

Regional Transmission Organizations (Secs. 1232-1234)

In light of many changes since the passage of the H.R. 6 Conference Report in

November of 2003, the Committee should reconsider the need for sections 1232-

1234. APPA members, once strong supporters of Regional Transmission Organizations (RTOs) in theory, now find serious problems with the functional RTOs in practice. Our concerns are set forth in a publication entitled, Restructuring at the Crossroads: FERC Electric Policy Reconsidered. This report is available on the APPA

website, www.appanet.org.

If the Committee retains section 1233 regarding RTO progress reports, we would

recommend that FERC be directed to report on its progress in addressing specific

RTO problems we identified in our report. These problems include: increasing RTO

administrative costs; unaccountable governance and lack of responsiveness to customer needs; and implementation of new markets that are not clearly shown to benefit end use consumers. Another serious problem in RTO regions is the lack of available long-term physical or financial transmission rights. In an industry with long

lead times for construction and long life span of generation facilities, the absence

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lic power systems in RTO regions need both assured long-term access and predictable transmission rates. Their absence is hampering public power’s ability to enter

into the long-term generation commitments that are critical to fulfilling their service

obligations. FERC has begun to focus on RTO administrative costs, governance

problems and the need for assured long-term transmission access at reasonable

rates. We believe that periodic reports from FERC to Congress on its progress in

addressing these problems would be appropriate. Congressional attention to these

matters might well promote the ‘‘mid-course corrections’’ with respect to RTO policies that APPA has recommended.

Standard Market Design (Sec. 1235)

This provision states that no final rule mandating a standard electricity market

design pursuant to the Standard Market Design Notice of Proposed Rulemaking

(SMD NOPR), including any rule or order of general applicability within the scope

of the NOPR, may be issued before October 31, 2006, or take effect before December

31, 2006. Due to shifts in policy direction at FERC, APPA believes that this provision represents a legacy from the past and is likely now unnecessary within the context of a Federal electricity title.

Native Load Service Obligation (Sec. 1236)

This language was drafted to protect the ability of load-serving entities (LSEs) to

access transmission to serve their native loads under any kind of transmission pricing and allocation regime, unless an RTO or ISO has determined its transmission

pricing methodology prior to September 15, 2003. When this provision was originally

crafted, FERC’s Standard Market Design NOPR was seen by many as a looming

threat to the ability of LSEs to maintain access to the transmission rights necessary

to serve their native load. Because SMD does not pose the same threat that it did

at the time this legislation was originally passed, it would be appropriate to review

this section once again, to ensure that it accomplishes its intended purpose.

The counterpart to this language as it emerged from the Senate in 2003 specifically provided that transmission rights of transmission owners or holders of transmission rights as a result of contracts or service agreements would be protected and

further, that the holders of such rights could elect whether to accept firm transmission rights or equivalent tradable or financial rights. This option was not included in the conference report for H.R. 6. Yesterday, February 9, APPA’s policy

committee reaffirmed this position as follows: ‘‘That APPA supports appropriate legislative language confirming that transmission owners and other load-serving entities (including public power transmission dependent utilities) are eligible for service

obligation protection under any comprehensive energy legislation to be passed, and

should have the unequivocal right to elect to use their physical transmission rights

to meet their service obligation, and only on a voluntary basis exchange these physical rights for tradable or financial transmission rights.’’

While the section addresses the preservation of existing transmission rights in

order for utilities to meet their service obligations, it is silent on their ability to obtain new, long-term transmission rights. Yet future long-term rights and predictable

transmission rates are critical to meeting future long-term obligations. They are

equally critical to the development of new renewable generation resources, particularly wind, and new base load generation, which generally must be built far from

load. APPA believes this section should be modified to address this issue.

Transmission Infrastructure Investment (Sec. 1241)

The legislation requires a FERC rulemaking on transmission rate incentives, with

some incentives applicable to all transmission owners (TOs), and significant incentives applicable to TOs that participate in RTOs or ISOs (including accelerated depreciation of new transmission facilities over a maximum of 15 years).

APPA believes that this language should be redrafted so that the ‘‘reward’’

matches the risk for the siting, construction, and utilization of new transmission facilities. This means that incentives should not be awarded through excessive rates

of return after transmission has been built and placed in service. At that point, the

investor’s risk is relatively low and the return on investment should reflect that

fact. Instead, higher reward in the form of greater assurance of cost recovery should

be given to entities willing to take the risk of building transmission facilities in

areas in great need of infrastructure while they are in the process of obtaining the

necessary permits and constructing the facilities.

The industry badly needs new transmission infrastructure, and public power represents an untapped resource for the development of such new facilities. Public

power systems serve approximately 15% of the nation’s retail load. They have maintained high credit ratings during recent years, when many investor-owned utilities

have experienced difficult financial situations due to their aggressive diversification

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and growth strategies. Public power systems are willing and able to invest in transmission facilities provided they receive the concomitant long-term transmission

rights. APPA would urge Congress to explore avenues to encourage joint ownership

of new transmission facilities by all load-serving entities in a region, be they public

or private.

Voluntary Transmission Pricing Plans (Sec. 1242)

Commonly known as the ‘‘participant funding’’ provision, this section of the H.R.

6 Conference Report enables investor-owned transmission owners, RTOs and ISOs

to propose transmission pricing plans for transmission upgrades that FERC must

approve. While the section is very convoluted (which is in itself a problem), the practical effect is that virtually all transmission facilities deemed to be needed for ‘‘economic’’ purposes (rather than ‘‘reliability’’ purposes) would be funded by the party

requesting transmission service, even if many other transmission customers would

benefit from those same facilities.

APPA remains strongly opposed to this provision of the Conference Report. APPA

believes that this pricing scheme should not be mandated and that Congress should

respect the diversity and flexibility of each region to address this issue as it sees

fit. FERC is allowing each RTO to develop, through a regional collaborative process,

the pricing plan for new transmission facilities applicable in that region. A form of

participant funding is, for example, being used in PJM, while the New England ISO

has adopted a very different method, and the Southwest Power Pool RTO is developing yet a third approach. Hence, this mandate is both unnecessary and potentially

counterproductive. It could also stall the development of new transmission facilities,

thus potentially impacting the overall reliability of the bulk electric power system.

Amendments to PURPA (Subtitle E)

This subtitle contains language that addresses the termination of mandatory purchase and sales requirements. The provisions direct FERC to issue a rulemaking,

within 180 days from enactment, revising the criteria for new qualifying cogeneration facilities seeking to sell electric energy. They mandate that this rulemaking

shall insure the thermal energy output is used in a productive and beneficial manner, as well as meeting other criteria, and direct state regulatory authorities and

electric utilities to make available, upon request, real-time pricing and net-metering

services. APPA believes these provisions have been carefully crafted and support

their inclusion in future legislation.

Repeal of PUHCA (Subtitle F)

The Public Utility Holding Company Act of 1935 (PUHCA) is repealed twelve

months after the date of enactment of the bill. APPA strongly opposes repeal of

PUHCA unless FERC is simultaneously given the authority to address the probable

consequences of repeal.

Opponents of the Holding Company Act have been calling for its repeal ultimately

since its enactment 70 year ago. Today, PUHCA repeal is advanced, in part, to address the perceived needs of a disaggregated and restructured industry that was envisioned in the almost euphoric deregulation climate of the late 1990s. PUHCA was

enacted to protect investors and consumers from abusive and market manipulative

activities and to ensure effective regulation of utility holding companies controlling

vertically integrated utilities. A few years ago it was believed that the vertically integrated utility model of the past would soon be displaced by a multitude of participants, each with a different focus—transmission, generation, distribution, marketers, etc. As a result, the need for PUHCA would disappear. However, the envisioned

industry transformation has not occurred and indeed public utilities are now pursuing a ‘‘back to the basics’’ strategy, which includes a return to the vertically integrated structure of past decades. In other words, the industry structure is precisely

the structure PUHCA was created to regulate in order to protect the interests of

investors and consumers.

Advocates of PUHCA repeal also characterize the Act as an impediment to investment in the industry. A report a year ago from Standard & Poor’s noted that this

argument ‘‘does not seem to hold much water after the power generation market imploded.’’ S&P went on to note that investors have a solid appetite for companies

with stable, regulated revenues.

A point on which almost all agree is that PUHCA repeal will promote further consolidation within the industry. Consolidation and a reduction in the number of industry participants will not promote a more competitive market.

Among the provisions that should be considered to accompany PUHCA repeal, if

repeal is still deemed good public policy, are: explicit authority for FERC to review

transfers of generation assets, utility holding company mergers and consolidation of

natural gas and electric utilities; enhancement of FERC’s existing merger review auVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00157 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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thority, with a higher threshold for merger approval; expanded FERC authority to

identify market manipulative and anti-competitive behavior; authority to impose

substantial penalties for violations; and truly meaningful access to holding company

books and records.

Market Transparency, Enforcement, and Consumer Protection (Subtitle G)

This subtitle includes a ban on round-trip trades and the filing of false information, instructs FERC to establish market transparency rules within 180 days of enactment of the bill, and imposes penalties for violations. The positive changes that

APPA and others had advocated for and won in the House and Senate bills are

minimized by the addition of a new ‘‘savings clause’’ that prevents FERC from regulating other providers of market information (e.g. trade publications) or from competing with them. In addition, language preserving exclusive Commodity Futures

Trade Commission (CFTC) jurisdiction was added, enhancing the potential for significant jurisdictional confusion between FERC and CFTC.

APPA would like to see a stronger and clearer market transparency and consumer

protection provision contained in the electricity title. The legislation identifies and

prohibits one market manipulative practice utilized by certain market participants—round trip trades. But there were many more, including the very recent discovery of Enron traders colluding to withhold generation capacity from the market

(with callous disregard for the effects on the economy and the public of rolling blackouts). FERC should have the authority to identify abusive practices by rule, and the

ability to impose substantial penalties for violations. There are many important consumer protection issues facing FERC today, including the issue of what standards

it will use to grant authority to public utility sellers to charge market-based rates.

FERC should be encouraged to deal with such market power issues, to protect electric consumers from the payment of unjust and unreasonable rates.

Refund Authority (Sec. 1285)

Also known as the ‘‘uniform refund authority’’ provision, this language asserts

FERC’s authority to order refunds if certain non-jurisdictional entities violate FERC

rules. The language applies to public power systems with sales above eight million

MWh of electricity annually. It applies to ‘‘short-term’’ sales—meaning sales agreements in effect for 31 days or less. Rural electric cooperatives are explicitly exempt.

TVA, SWPA, SEPA and WAPA are subject to FERC’s authority in this regard only

insofar as FERC can order refunds of these federal entities to achieve a just and

reasonable rate. FERC’s authority to order refunds of BPA sales under this section

is even more limited than for the other federal utilities.

This provision originated from allegations of market manipulation by non-jurisdictional public power systems during the Western energy crisis. Subsequent investigations and settlements, however, have not shown such an extraordinary remedy to

be merited. In the absence of any demonstrated need for this provision, we do not

believe it is necessary.

Sanctity of Contract (Sec. 1286)

This provision requires FERC, before abrogating certain contracts, to find that

such action would meet a ‘‘public interest’’ standard (known as the Mobile-Sierra

standard of review), unless the contract expressly provides for a different standard

to apply. The provision would be applied prospectively. In the absence of express

language, any future contracts could only be abrogated if a party of the contract

could prove that abrogation of the contract is ‘‘in the public interest’’—a higher

threshold than demonstrating that the contract rate or terms are unjust and unreasonable (the standard contained in Sections 205 and 206 of the Federal Power

Act)—and thus more difficult to prove.

We are very concerned about the consequences of this provision. Where two parties to a contract do not have equal bargaining power, the stronger party could insist that the contract be silent on the terms of review, resulting in the application

of the Mobile Sierra ‘‘public interest’’ standard by default. Public power systems are

frequently the weaker of two parties in such bargaining situations. Because they

have an absolute obligation to meet the needs of their customers, and often have

only a limited number of contractual options, they may have little choice but to accept a contract that is contrary to their interest, not through legitimate negotiations

with the other party, but by Congressional fiat. Through this provision, they could

well be deprived of the protection of the ‘‘just and reasonable’’ standard to which

they should and otherwise would be entitled under the Federal Power Act. In essence, this provision substantially undermines the ‘‘just and reasonable’’ standard

itself—one of the most fundamental consumer protection provisions of the Act. We

recommend that this provision be deleted.

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Merger Reform (Subtitle H)

The Conference Report would modify FERC’s merger review authority to provide

the Commission with authority to review holding company mergers. This subtitle requires a DOE study to determine whether or not FERC’s merger review authority

under the Federal Power Act is redundant of other federal and state authorities.

FERC must also report to Congress annually on the actions it took on mergers in

the previous year. In addition, these provisions raise the threshold of asset dispositions reviewable under Section 203 of the Federal Power Act to those valued at $10

million or more, and also limit the total time that the Commission has to review

a merger to 360 days. Finally, the bill also eliminates the review of convergence

mergers.

While we find the increase in the dollar threshold for FERC review of mergers

reasonable, we oppose the balance of this section. We find these provisions particularly inappropriate when combined with the repeal of PUHCA, which is also included in the Conference Report and is noted in greater detail above, which will

likely trigger a large number of mergers and consolidations within the electric utility industry. It is unlikely the new time limits set forth by this provision for FERC

review will allow the Commission the adequate amount of time to review all of the

potential mergers in a thorough fashion. If anything, APPA believes FERC’s authority to review public utility’s mergers and property acquisitions should be strengthened. For example, FERC should be given authority to review the disposition of generation assets by public utilities.

Studies (Title XVII)

Section 1611 requires FERC to assess the ‘‘reliability and consumer’’ effects of the

exemption for public power systems and rural electric cooperatives set out in Section

201(f) of the Federal Power Act. This study is to be completed no later than five

years after the date of enactment of the bill and every five years thereafter.

There seems little reason for this provision. While there were allegations of bad

behavior by some western public power systems, there has generally been no evidence or judgments to support those claims. Despite the absence of evidence that

the lack of FERC jurisdiction over transmitting publicly owned utilities has caused

problems that have not and cannot be addressed through FERC’s ‘‘comparability’’

requirements, the bill expands FERC’s authority over some publicly owned transmitting utilities. In view of these facts, it would seem that the additional study requirement called for in this title is totally irrelevant and unneeded.

Thank you, once again, for allowing me to appear here today to testify on this

important matter. APPA hopes to work with members of this Subcommittee as the

debate on comprehensive energy legislation continues. I would be happy to answer

any of your questions.

Mr. HALL. Thank you very much. Mr. Hansen has to catch a

plane, I think, at 3, and I am going to stay here with you to hear

your presentation, and I have asked the staff to tell me when I had

4 minutes to get over there. It is only about a mile, and I am a

jogger, and I want to hear your presentation, and honor you as a

former employee of ‘‘Scoop’’ Jackson. He was a special friend of

mine, with Sterling Monroe and all that group out there. A great,

great organization, and a great Senator. You have a great background.

STATEMENT OF ED HANSEN

Mr. HANSEN. And it was an honor working for Sterling as well.

Thank you, Mr. Chairman, and I would also like to thank Congressman Inslee, who represents the south half of Snohomish

County. My name is Ed Hansen. I am the General Manager of Snohomish County Public Utility District, headquartered Everett,

Washington. That is about 25 miles north of Seattle. I am testifying today on behalf of the Large Public Power Council.

LPPC members directly or indirectly provide reliable, affordably

priced electricity to almost 22 million homes and businesses. Member companies are publicly owned and locally controlled. Member

companies own almost 33,000 miles of transmission, and control

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over 61,500 megawatts of generation. LPPC members are located

in States and territories representing every region of the country,

including several States represented by members of this subcommittee, including Georgia, Florida, Texas, California, New

York, and Arizona. Snohomish PUD serves approximately a population of 670,000 people, and approximately 295,000 customers. We

are also a member of the American Public Power Association, and

I join in the comments and remarks of Alan Richardson.

The subcommittee has worked hard to craft energy legislation

over the years. It is our understanding that this year, you will once

again proceed down that road. However, we urge caution as you get

behind the wheel. The road is uncertain, and the path is not clear.

It may be necessary to go slow and exercise caution, so that the

Nation does not have a collision like the one that occurred in the

West. The California energy crisis has left scars in the West, and

has made those of us in the Pacific Northwest very nervous about

more changes in the electricity market and the transmission system.

Many of the provisions in the legislation considered in the 106th,

107th, and 108th Congresses were based on policies which have

been overtaken by events, including the California blackouts of

2001, and the failure of that market, the manipulation of the Western energy markets and transmission grid by Enron, and the increasing costs associated with ISOs and RTOs. As a result, some

of the policies advocated in the energy legislation from the last

Congress, the H.R. 6 conference report, should be reconsidered and

retooled to address the latest information available.

Our fundamental position is this. We are first and foremost concerned about our customers. Many of the electricity customers in

this country are paying far too much for basic electric service, a

critical necessity for our Nation. This is due to many factors: the

high price of natural gas, droughts in the West, and instability in

the market, to name a few. At my first PUD commission meeting

as General Manger, in July 2002, a mother of 3 young children appeared before our commission. Her power had been disconnected

because she was unable to pay her power bill. She explained that

the increased power bill had made it impossible to feed her children and pay her power bill. She asked who will speak for the ratepayer. As you mentioned, Mr. Chairman, I also was a local elected

official for a number of years, and I feel that I am here today also

speaking for the ratepayer.

Our utility is experiencing a record level of disconnects and

uncollectible accounts, because more of our customers are unable to

pay their power bills, but the higher power bills affect all classes

of customers, including our largest industrial customers, and in

Snohomish County, that is Boeing and Kimberly Clark. Just last

week, I met with Kimberly Clark executives, who explained that

their Everett mill, with 1,000 employees, 1,000 important jobs in

our community, could not continue to operate in Everett, in the

competitive business environment, because of our current power

rates. They explained that in less than 4 years, the power costs at

their Everett mill had risen so much that they were now second

highest among 31 Kimberly Clark plants in North America. Trying

to run——

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Mr. HALL. If you can begin to conclude. I think I have 3 minutes

left.

Mr. HANSEN. Thank you. Well, I will conclude. I would be happy

to answer any questions.

[The prepared statement of Ed Hansen follows:]

PREPARED STATEMENT OF ED HANSEN, GENERAL MANAGER, SNOHOMISH PUBLIC

UTILITY DISTRICT ON BEHALF OF THE LARGE PUBLIC POWER COUNCIL

My name is Ed Hansen and I am the General Manager of Snohomish Public Utility District, located in Everett, Washington, located 25 miles north of Seattle. I am

testifying today on behalf of the Large Public Power Council (LPPC), an association

of 24 of the largest public power systems in the United States. LPPC members directly or indirectly provide reliable, affordably priced electricity to almost 22 million

homes and businesses. Our members own almost 33,000 miles of transmission and

control over 61,500 MW of generation. LPPC members are located in states and territories representing every region of the country, including several states represented by members of this Subcommittee—such as Georgia, Florida, Texas, California, New York, and Arizona.

LPPC has testified before the Subcommittee on energy policy and we have worked

closely with members of the Subcommittee and full Committee and their staff members. We appreciate the opportunity to continue our substantive involvement. Thank

you for this opportunity to express the views of LPPC. Public Power is Unique

Public power systems are owned by the communities we serve, not by investors.

We are not-for-profit entities, which makes us different. Public power systems have

been a part of the nation’s electric system since the late 1800s. Most LPPC members

own and operate generation, transmission and distribution facilities, and several

members purchase energy from TVA or BPA. LPPC members provide highly reliable, low cost electric service to their citizen-customers, who also often elect the public power boards.

Electricity is a vital component of our lives and, as vividly illustrated in the State

of Washington, a cornerstone of the economy. There are dire consequences if electricity is not reliable and affordable. As the electric supply of the country has been

‘‘deregulated,’’ many providers of electricity have sold off their generation or transmission assets or have severed their direct relationship with electric customers. But

public power systems still have an obligation to serve the customers for which the

systems are built. This service obligation is generally imposed by state law or local

ordinance, sometimes by the statute creating the public entity. As a result, all available resources go first to serving customers. Power is sold only if it is surplus to

our customer’s needs.

Our rates do not include profits; and include only the costs of producing or purchasing and delivering power to our customers and, in some cases, payments to our

governing boards or municipal entities as a component of the local budget. Since

public power systems are locally controlled, decisions about policies such as rates

are made by people who are in touch with local concerns. Elected councils and

boards set policies for many LPPC members. Local control ensures that we respond

to community needs. In addition, since public power systems are community based,

our revenues stay close to home. This helps keep the local economy strong.

The Need for Market Reforms

The House Energy & Commerce Committee and this Subcommittee have held

over 30 hearings in the last seven years on the issues of energy policy and electric

restructuring. LPPC has testified before this Subcommittee and the full Committee

on numerous occasions. LPPC was the first organization to provide a public letter

of support for H.R. 6 to then-Subcommittee Chairman Joe Barton and then-Committee Chairman Billy Tauzin.

This Subcommittee has undertaken tremendous efforts to become well educated

about the electricity industry. However, this industry has undergone fundamental

changes since the early consideration of H.R. 6. The California meltdown, the evidence of Enron’s manipulation and proposed one-size fits all regulatory policies have

contributed to dramatic instability in the industry for all participants and for consumers. The capital market for utility infrastructure has been shaky, constraining

investment in infrastructure. Many LPPC members and our customers have serious

concerns about legislating major changes to electric power markets at this time, concerns which are shared by our city and state governments. Any legislative action

must be cautious and carefully considered especially in light of recent events.

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Expansion of FERC Jurisdiction (Open Access)

One issue of primary concern for LPPC, one that affects our ability to continue

to support legislative action is the issue of expanded FERC jurisdiction. LPPC member companies provide open access transmission service. In 1999, LPPC worked with

Congressman Joe Barton, then chairman of this Subcommittee, to guarantee open

access transmission service by non-jurisdictional entities. Public power agreed that

extremely limited FERC jurisdiction could be extended to public power systems and

cooperatives in order to ensure that open access transmission service would be provided to all market participants.

LPPC looks forward to working with the Subcommittee to refine the language so

that it will preserve the original intent and respect the compromise that was made

five years ago. We hope that the provision can clearly indicate to all that public

power, cooperatives, TVA and the PMAs are to provide open access transmission

services—that is, service to others that is comparable to the service they provide

themselves. This is in keeping with FERC’s current policy and the requirements of

Order 888. Native Load Service Obligation

The ability of public power systems to serve our local communities is an issue of

paramount concern to LPPC member systems. Although we support open access

transmission policies, we do not want to risk the reliable, reasonably-priced power

that our customers expect and are entitled to receive. We want to thank the Committee, and Congressman Norwood, for addressing this issue in H.R. 6, because, for

us, it is about protecting our customers. LPPC supports the continued inclusion of

provisions on service obligation, such as those contained in Section 1236 of the H.R.

6 Conference Report.

Public power systems are established by state law and are obligated, generally by

state law, to provide electric service to their customers. We need to maintain and

preserve the ability to fulfill this obligation. Some LPPC member systems have built

their transmission system specifically to serve their customer base. This transmission has been and is being paid for by our customers/owners. Our customers

want to be assured that the transmission system which they paid for and which provides them their electric power at reasonable rates, will continue to be available to

them first—with any excess to be made available to others who are not customers.

The native load—service obligation provisions contained in the H.R. 6 Conference

Report allows us to continue to fulfill our obligations to our customers.

LPPC members have also entered into long-term bilateral contracts in making our

long-term generation and transmission decisions. These firm commitments allow for

stable and secure electric rates and reliability. They provide for certainty in the

market and allow the parties to make operational and investment decisions over the

long-term, decisions that are necessary for the continued expansion of a functioning

electric generation and transmission system. Without this kind of certainty as to the

future, obtaining approval from public governing bodies for generation and transmission investments would be difficult, if not impossible.

In summary, the key point for us is that our customers should not have to pay

twice for their transmission system—first to build it and then to use it when someone else outbids our customers. Our customers have paid for the critical transmission lines necessary to move power from our own or distant generation sources

to meet our service obligation to our communities. If we are required to pay congestion charges whenever our use and the demands of others exceed the capacity of

the line, our customers would, in effect, be ‘‘double billed’’ for the same transmission

capacity. Therefore, the continued inclusion of these provisions is important to

LPPC and we appreciate all of the efforts to address this issue.

Grid Security

Ensuring the security and reliability of the grid is a critical issue for LPPC, Congress, DOE and FERC. All responsible steps must be taken to protect the grid from

physical disruption. LPPC has supported mandatory reliability standards prescribed

and enforced by an Electric Reliability Organization (ERO) or by an interconnectionwide regional reliability authority, under FERC supervision (the ‘‘NERC compromise’’). Until this new system is in place, LPPC members will continue to comply

with current voluntary standards. FERC’s authority under the new system, once it

is in place, should not provide a basis to micromanage utility operations or to expand FERC authority beyond what is necessary to ensure reliability.

More than regulatory enforcement of reliability standards is needed to ensure reliability and continuity of electric service. Assurance of reliability requires upgrading

the grid and deploying new technology that permits the grid to be managed more

effectively. LPPC members have been leaders in both of these areas. NYPA has been

one of the first transmitting utilities to place the advanced FACTS (Flexible AC

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Transmission System) transmission technology in service and LCRA has undertaken

major transmission expansion responsibilities throughout the state of Texas.

Finally, particular attention should be given to the question of whether centralized operation by an RTO of a region’s transmission grid may or impair grid security.

‘‘Refund Authority’’

LPPC opposes the continued inclusion of Section 1285 in energy legislation. During consideration of H.R. 6 by the House Energy Committee, there was debate over

the manipulation of the western power markets. Allegations made against a few

public power and cooperative entities resulted in the inclusion of a provision that

expanded FERC jurisdiction over public power and cooperative utility ‘‘spot market’’

wholesale sales. The Senate energy bill did not include anything comparable. However, the H.R. 6 Conference Report did include a provision—one that gave FERC

even broader authority to order refunds than was included in the House version of

the bill. Unlike the earlier provision, Section 1285 (‘‘Refund Authority’’) would only

subject the largest municipal and other public power entities to FERC refund authority and it would apply to ‘‘short term sales’’—wholesale power sales in interstate

commerce for 31 days or less—that occur in violation of commission rules in effect

at the time of the sale.

All but the largest public power systems (those selling more than 8 million MWH

a year) and all cooperative utilities are exempt. TVA, BPA and the PMAs are subject to a lesser degree of regulation. As a result, the major burden of the provision

would fall on 19 public power systems in the continental U.S. None of those systems

has been found to have manipulated the wholesale power markets.

LPPC is opposed to the continued inclusion of this or any similar provision in energy legislation. The provision is unnecessary, unwarranted, and unfairly applied.

FERC generally requires market participants to adhere to the rules of the wholesale

market when making sales into such market—and that can include a contractual

requirement to provide refunds in appropriate cases. We would urge Congress to

take a hard look at both the underlying policy need for such a provision and at how

FERC is exercising its current refund authority prior to granting additional authority.

Standard Market Design

During the consideration of energy legislation in the last Congress, FERC was

considering a significant rulemaking initiative denominated as ‘‘Standard Market

Design’’. The LPPC and many of its members filed comments on this proposal. Many

of our members believe that SMD or similar concepts are unworkable, especially in

the Western Interconnect and that such will merely impose significant new costs

upon electric consumers without any corresponding benefit.

Transmission investment

Many LPPC members have built transmission systems to accommodate load

growth. To the extent permissible under Federal tax laws (the ‘‘private use’’ rules),

any excess is made available to the market. It is in our members’ best interest to

both build for load growth and to make excess transmission capacity available to

the market place. Load-serving entities and their customers who prudently built

transmission to accommodate future load growth should not be deprived of the benefit of that investment by having their future right to use that transmission taken

away.

This Subcommittee has expressed an interest in encouraging investment in transmission facilities. Public power is part of the solution. LPPC member systems, such

as Sacramento Municipal District (SMUD), the Lower Colorado River Authority

(LCRA), Long Island Power Authority (LIPA), JEA, and the Salt River Project

(SRP), have continued to invest in transmission upgrades and expansions. In some

cases, we are building transmission for others. We will be happy to work with the

Subcommittee to help develop a mechanism that makes sense, allows for planning,

and facilitates reliable expansion.

Energy Conservation

LPPC supports increased funding for energy efficiency and conservation programs.

In addition, low-income families spend a significant portion of their income on energy costs. Snohomish PUD and the other LPPC members are committed to providing our eligible low-income customers with the assistance they need and continue

to strive for rates as low as possible so that our customers can have an easier time

paying their utility bills.

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BPA Authority

Mr. Chairman, I’d now like to address one other section of H.R. 6, speaking only

on behalf of Snohomish County PUD and not on behalf of the Large Public Power

Council. The general subject is the current Congressional authority that has been

given to the federal power marketing agencies to operate the electric transmission

grids in their regions of the country. As you may know, in some parts of the country,

these federal power marketing agencies are the largest operator of electric transmission facilities in that region. That is certainly the case in the Pacific Northwest,

where the Bonneville Power Administration owns and operates about 75 percent of

the transmission facilities, or the grid as it is often called, in the entire region. My

utility, Snohomish County PUD, is the largest purchaser of power from BPA and

we are dependent on the BPA grid to get that power to our 300,000 homes and businesses we serve, including Boeing, Kimberly-Clark and Naval Station Everett,

which is the homeport for the aircraft carrier Abraham Lincoln.

At the present time, the Bonneville Power Administration—and as far as I know,

this applies to all the other power marketing agencies—has not been given Congressional authority to subdelegate its authority to run the grid to some other entity,

and in particular to a Regional Transmission Organization.

Section 1234 of the H.R. 6 Conference Report, however, provides Congressional

authorization for the Secretary of Energy or the heads of any of the federal power

marketing agencies to subdelegate the existing authority of those power marketing

administrations to operate the regional transmission grids as well as the control and

use of all or part of its transmission system to Regional Transmission Organizations.

At least in the Pacific Northwest, this is very controversial and this subdelegation

of authority to run the transmission grid is not supported by the large majority of

BPA’s customers. In fact, two weeks ago the regional trade association that represents the 115 publicly owned utilities that buy power and transmission services

from BPA voted by a strong majority to oppose section 1234 or any similar provision

in subsequent federal legislation. In the Pacific Northwest, the publicly owned utilities that serve approximately half the population of the region, are not convinced

that a Regional Transmission Organization is in the best interests of the citizens.

They may reach that view at some time in the future, but it will not be soon. So

if Congress at this time grants this subdelegation of authority to control use and

operate the transmission grid, it will be doing so against the wishes of most people

in the Pacific Northwest.

Conclusion

In conclusion, I want to thank you for this opportunity to participate in the ongoing discussion on energy policy. LPPC and Snohomish PUD will continue to work

with this Subcommittee and its members on these issues and appreciate your continued efforts on our behalf.

Mr. HALL. I would really like to talk to you a long time about

those days when we tried to build a facility on Guaymas Island,

and a young lawyer named John Ehrlichman filed an injunction

from Seattle, there, and started a long friendship with him, up

until his death. You are from a great part of the country.

Mr. HANSEN. Thank you.

Mr. HALL. We will recess until 2:45. I may be back before then,

if I can.

[Brief recess.]

Mr. HALL. All right. We have all of the participants here, and the

same group here from Congress. We have Mr. Kanner successfully

strapped to an airplane out there headed West, and Glenn English,

I think you are up next. I recognize you for as long as you want,

as long as you don’t want over 4 or 5 minutes, something like that.

But if you do, we will make an exception.

Mr. ENGLISH. Well, thank you.

Mr. HALL. Go ahead, sir.

Mr. ENGLISH. Thank you very much, Mr. Chairman. I appreciate

that, and also, I want to thank you for the very fine editorial you

gave me at the beginning of this panel, and I want you to know

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it is already being printed up and sent out to all my membership.

So that is very kind of you.

Mr. HALL. Are you going to run again?

STATEMENT OF GLENN ENGLISH

Mr. ENGLISH. I might run again. That is exactly right. Thank

you very much. Mr. Chairman, I want to thank you for inviting me

to testify. As you know, and for the record, I am Glenn English.

I am the Chief Executive Officer of the National Rural Electric Cooperative Association.

We are a national service organization. We have over 900 consumer-owned electric cooperatives across this country, and we

serve 37 million consumers in 47 States. The National Rural Electric Cooperative Association believes that the bulk electric transmission system is inadequate to handle the number of transactions

that are occurring on it today. NRECA views the Energy Policy Act

conference report as a compromise solution that should result in

additions to the transmission system and increased grid reliability.

It is NRECA’s understanding that except for the date and a few

other changes, Mr. Boucher mentioned the cap, that this year’s

electricity provision of the energy bill is pretty much identical to

that that was included in the H.R. 6 conference report, and

NRECA supports and did support that conference report. And as

long as there are no significant changes, NRECA will continue to

support it, and will work toward its passage on the House floor,

Mr. Chairman.

Mr. Chairman, the bulk of our testimony, however, discusses two

issues in the bill that, should the committee decide it wanted to

make some changes, would certainly support, and NRECA believes

that that is consistent with the invitation that we received from

the committee to make note of those.

The changes, if in fact the committee is going to make any

changes in committee, are twofold. First, the Federal Energy Regulatory Commission should not be mandated to impose participant

funding, as designated in section 1242. At the very least, the

project costs should be assigned in a way that reflects all of those

who are the beneficiaries. Now, FERC currently has the flexibility

to do that, and we believe that that authority should be maintained.

No. 2, FERC should not be mandated to assign incentive rates

for transmission. FERC currently has the flexibility to use incentive rates, as well as other choices, to tailor the proper rewards,

and we believe that FERC should maintain that flexibility. However, Mr. Chairman, I do want to make it very clear that NRECA

will support the H.R. 6 conference report as it came out of the conference, with no significant changes, and we continue to—in that

position.

Mr. Chairman, in the interest of time, I think I will conclude my

statement, and be prepared to answer any questions you might

have for us. Thank you very much.

[The prepared statement of Glenn English follows:]

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PREPARED STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL

RURAL ELECTRIC COOPERATIVE ASSOCIATION

INTRODUCTION

Mr. Chairman, and Members of the Committee, thank you for inviting me to testify. I am Glenn English, CEO of the National Rural Electric Cooperative Association, the national service organization of the nation’s nearly 900 consumer-owned

and operated electric cooperatives serving 37 million people in 47 states.

The National Rural Electric Cooperative Association (NRECA) believes the existing bulk electric transmission system is inadequate to handle the number of transactions that are occurring on it. NRECA views the Energy Policy Act Conference Report (H.R. 6) as a compromise solution that should result in additions to the transmission system and increased grid reliability.

It is NRECA’s understanding that except for date and other minor changes, this

year’s energy bill will adopt the electricity title that was included in the H.R.6 Conference Report. NRECA supports the Conference Report. As long as there are no significant changes, NRECA continues to support it and will work towards its passage

on the House floor.

Mr. Chairman, the bulk of our testimony discusses two issues in the bill that

NRECA would support changes to if changes are to be made in the bill. NRECA

believes that is consistent with the Committee’s invitation to testify here today.

However, I want to make it clear that NRECA will also support the H.R. 6 Conference Report with no changes.

If changes are made to the bill, NRECA supports two changes:

1. The Federal Energy Regulatory Commission (FERC) should not be mandated to

impose participant funding as designed in Section 1242. At the very least,

project costs should be assigned in a way that reflects who all of the beneficiaries are. FERC currently has the flexibility to do that, and that authority

should be maintained.

2. FERC should not be mandated to assign incentive rates for transmission. FERC

currently has the flexibility to use incentive rates as well as other choices to

tailor the proper rewards. FERC should maintain that flexibility.

PARTICIPANT FUNDING; INCENTIVE RATES

Section 1242: Participant Funding

Section 1242 would require FERC to approve a transmission pricing plan based

on one version of participant funding that is troubling to electric cooperatives.

NRECA believes that this specific provision would allow public utilities that own

transmission to single-out one electric utility, including a cooperative, to pay the significant costs associated with an upgrade of the transmission infrastructure even

though all of the electric utilities as part of the regional network would share the

benefits of such an upgrade.

This version of participant funding will very likely result in the assignment of

project costs for competitive advantage and without connecting the costs to all of the

beneficiaries and benefits. It will also provide an economic development advantage

to high population density urban areas over low density rural areas. Except for extraordinary cases, transmission will not get built.

There is another version of participant funding that NRECA supports. Like many

others, NRECA supports participant funding that allocates transmission costs consistent with all who benefit. Under this version of participant funding, those transmission facilities that would be required only for the operation of new generating

facilities built to export power outside of the region where they are sited, those participants would bear the costs of the transmission required. That approach protects

native load consumers in one region from paying for additional transmission facilities that provide them no benefit. If the new transmission facilities benefit a generator, or consumers in another region, the generator or the consumers in the other

region should pay the costs of the transmission facilities.

Currently, FERC has the flexibility to determine the cost allocation approach that

should be used. As a result, the cost allocation is generally aligned with the benefits

that accrue from the transmission system upgrades. Where all of the electric utilities in a network benefit, FERC has approved cost allocation plans requiring all of

the utilities to share in the costs associated with the particular upgrade. Conversely,

where it is clear only one or two electric utilities benefit, FERC has approved cost

allocation plans requiring only those utilities pay the costs associated with the particular upgrade. FERC should be allowed to continue to balance the costs with the

benefits.

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The participant funding mandate in Section 1242 will discourage the construction

of much needed transmission facilities because it can allocate costs unfairly, and

makes cost recovery extremely uncertain. Under a participant funding approach, investors receive no direct income from the use of their facilities. Instead, they receive

‘‘congestion revenue rights,’’ or CRRs. CRRs, however, only entitle their holders to

revenue in the event of congestion, which may be substantially reduced or even

eliminated due to the construction of the expansion. An allocation of CRRs alone

thus discourages investment in new facilities, or at the least creates a perverse incentive to undersize upgrades to maintain congestion on the system, since that is

the only way they get paid.

Our approach is that the cost of any new transmission facilities required in a region to serve consumers in that region reliably or economically should be rolled into

the cost of transmission in that region.

This is the best approach to encourage investment in needed transmission facilities. Rolling the costs of new transmission facilities determined by a regional plan

to provide reliability or economic benefits to consumers in the region into the regional revenue requirement gives investors precisely the assurance they need that

they will recover the costs of their investment as well as a reasonable rate of return.

Section 1241: Incentive Rates

NRECA believes FERC should continue to have the flexibility to either use or

deny the use of incentive rates for transmission. NRECA believes higher rates of

return should be a last resort, not a first resort. While the rate of return is important, the level of return required to attract capital investment is a product of the

level of risk faced by investors: the lower the risk of ownership, the lower the rate

of return required to attract investment. As noted previously, NRECA believes that

FERC can best encourage the construction of new transmission facilities by providing investors with certainty that they will recover their costs. At the very least,

FERC should be able to choose between higher rates of return or reduced risk of

ownership or some combination of both as an incentive package for construction of

new transmission.

Section 1236: Native Load

Mr. Chairman, within the last two years since you marked up H.R. 6, the electricity market has continued to evolve. Another transmission issue has emerged affecting many aspects of industry operations, including the diversity of fuel sources

used for electric generation. Up until recently, the long-term transmission rights required to support new generation were a standard feature of all FERC tariffs. On

the basis of those long-term rights, load-serving entities could and did make and finance long-term generation commitments with reasonable long-term delivered price

certainty. Now in the transition to Regional Transmission Organizations (RTOs), no

such rights are available because all of the focus at RTOs is on short-term spot markets. Simply put, spot markets will not get high fixed cost, power plants, with long

construction lead times, built, particularly if no long-term transmission service is

available.

None of the FERC-approved Regional Transmission Organizations (RTOs) today

have any mechanism in place to allow utilities to secure long-term transmission

rights for new power plants or power contracts. As a result, there is no way to obtain reasonable delivered price certainty. This is making construction of clean coal

plants and wind generation by load-serving entities very risky, since the fixed costs

of these plants are high and the savings is in lower energy costs over the life of

the plant. What matters is the delivered energy cost to consumers. Without a longterm transmission right at reasonably certain rates, our consumer-owners face high

risk that the delivered cost may be much higher than expected.

Long-term transmission rights assuring deliverability to load with reasonable

price certainty is an essential ingredient to achieving fuel diversification. Like coalfired generation, the other major fuel diversification alternatives—wind power and,

potentially, new nuclear plants—need long-term transmission rights because they

also are high fixed cost, low energy cost resources and will likely have to be located

at a distance from population centers and so are very dependent on transmission.

Mr. Chairman, NRECA stands willing to join with you and others in the industry

to find a vehicle to deal with this problem.

Mr. Chairman, thank you for this opportunity to present our views.

Mr. HALL. I do thank you, sir. Ms. Callahan.

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STATEMENT OF KATERI CALLAHAN

Ms. CALLAHAN. Thank you, Mr. Chairman. My name is Kateri

Callahan, and I serve as the President of the Alliance to Save Energy.

The Alliance to Save Energy is a nonprofit and bipartisan coalition of leaders from business, government, and industry, and Mr.

Chairman, on behalf of our organization, we want to thank you for

the leadership that you are providing as our new board member,

and the leadership that we are getting from your colleague on the

committee, Congressman Markey, in helping us to meet our mission, which is to promote energy efficiency worldwide for a cleaner

environment, a more robust economy, and healthier energy security.

Energy efficiency is our country’s greatest indigenous resource.

Over the past 30 years, our studies show that energy efficiency and

conservation are now displacing the need for 40 quads of energy

each year. This means that energy efficiency is actually contributing more than coal, more than nuclear, and even more than petroleum to meeting this country’s thirst for energy. Yet, it remains

a resource that can deliver even more, and it can do so more quickly and more cheaply and more cleanly than any other supply, if we

give it appropriate and meaningful public policy support. And it is

for this reason that the Alliance strongly supports the energy efficiency provisions that are in H.R. 6, but at the same time, we urge

you, Mr. Chairman, and your colleagues, to expand and enhance

these provisions, so that the full potential of energy efficiency can

be unleashed to lower demand and to extend our energy supplies.

The Federal programs and policies that were established by the

Congress, like the appliance and motor vehicle standards, research

and development, and the Energy Star program, have helped to

make energy efficiency a key contributor to our Nation’s economy.

For example, every single Federal dollar that is invested in the Energy Star program is now returning $75 in consumer energy savings, and also, sparking $15 of private sector investment.

Over the past year, our organization has been exploring public

policies that would deploy energy efficiency into every end use sector of the economy, as well as electricity and natural gas, to have

a significant impact on the projected growth in energy demand between now and 2010. We have examined nearly 100 different policies and programs, and we have chosen those that are the most

critical, but also, the ones we believe are the most politically saleable.

The Energy Information Administration is just now completing

its analysis of these policies, and the findings suggest that taken

together and if enacted, we might reduce the anticipated growth in

energy demand between now and 2010 by up to 10 percent. The

savings from our recommended package are even more impressive

in the out years. By 2025, we estimate that the policies we are recommending could reduce the anticipated growth by 15 percent or

more. Our policy recommendations are set out in detail in my written testimony, and they cover, I think this is very important, the

energy efficiency provisions that are already in H.R. 6, but under

our plan, those provisions would be enhanced and expanded.

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For example, and very importantly, the committee’s discussion

draft would place crippling limitations on a very effective program.

It is something called the ESPC, or the Energy Savings Performance Contract program, which facilitates energy efficiency upgrades

to Federal buildings. This program is helping taxpayers to save a

billion dollars each year in reduced Federal energy costs. It is a

program that should be expanded, not constrained, as it is in the

committee’s current draft.

Our policy package also goes beyond the provisions in H.R. 6,

and particularly, I would note that we would look to reform the

current CAFE program, to assure that the fuel economy requirements that are in current law are being met by the automotive industry. We address the building sector through an innovative program that would assist States in putting in place the most aggressive and current energy efficiency standards, and finally, building

code standards.

And finally, the gains in energy efficiency come largely from new

technologies and improvement to existing technologies. Therefore,

continuing and enhancing Federal programs, and supporting research, development, and deployment of energy-efficient technologies and practices, is a key component of our package.

Mr. Chairman, we believe we need to shed the cardigan sweater

images of yesteryear, and get focused and serious about marketfriendly ways to save energy. We need to no longer treat energy efficiency as the forgettable stepchild in the energy debate. Nearterm and long-term energy efficiency has a proven track record as

the most abundant, the least costly, and the most domestically secure way to address our energy needs. The Alliance believes we

need to expand the use of this national resource through meaningful public policy, so that we can reap the full potential of its benefits.

Thank you.

[The prepared statement of Kateri Callahan follows:]

PREPARED STATEMENT OF KATERI CALLHAN, PRESIDENT, ALLIANCE TO SAVE ENERGY

Introduction

My name is Kateri Callahan and I serve as the President of the Alliance to Save

Energy, a bipartisan, nonprofit coalition of more than 90 business, government, environmental and consumer leaders. The Alliance’s mission is to promote energy efficiency worldwide to achieve a healthier economy, a cleaner environment, and greater energy security. The Alliance, founded in 1977 by Senators Charles Percy and

Hubert Humphrey, currently enjoys the leadership of Senator Byron Dorgan as

Chairman; Washington Gas Chairman and CEO James DeGraffenreidt, Jr. as CoChairman; and Representatives Ralph Hall, Zach Wamp and Ed Markey and Senators Bingaman, Collins and Jeffords as its Vice-Chairs. Attached are a list of the

Alliance’s Board of Directors and its Associate members, which I respectfully request be included in the record as part of this testimony.

Energy Efficiency: A Key Resource for a Sound National Energy Future

The Alliance to Save Energy believes that policies and programs to advance energy efficiency must be a central focus of any sound comprehensive national energy

legislation. Energy efficiency now contributes more than any single energy resource

to meeting the country’s energy needs, and is the quickest, cheapest, and cleanest

way to meet the anticipated growth in energy demand in the U.S.

The Alliance is developing a package of policy initiatives intended to assist the

Nation in achieving significant energy savings through pursuit of widespread and

aggressive energy efficiency programs. The proposed policy initiatives will be described in an upcoming Alliance report, ‘‘Vision 2010: An Energy Efficiency Policy

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1The October 2004 survey was developed by Robert Half Management Resources and conducted by an independent research firm. The survey includes responses from 1,400 CFOs from

a stratified random sample of U.S. companies with more than 20 employees.

Prescription’’. The Alliance will quantify, to the greatest extent possible, the energy

savings impacts of the various suggested policies.

Why an energy efficiency vision?

Both natural gas and oil prices have more than doubled in the last few years. In 1999, natural gas prices were $3.10 per thousand cubic feel (mcf); today they are

averaging $6.40 per mcf. The latest numbers indicate that gasoline prices are approximately 17 percent higher than this time last year. High prices have caused

plant closings, loss of manufacturing jobs, and a variety of other direct and negative

impacts to the U.S. economy. In a recent survey, business leaders placed energy

costs as their second greatest concern after rising healthcare costs.1

Energy efficiency and conservation measures taken since 1973 now displace the

need for 40 Quads of energy each year, exceeding the nation’s consumption of petroleum. Federal policies and programs such as appliance and motor vehicle standards,

research and development, and Energy Star made major contributions to these savings.

Energy efficiency must play a central role in the nation’s energy future. With only

2 percent of known world oil reserves within domestic borders, public opposition to

increasing the generation of electricity from nuclear energy and coal, an electricity

grid that is under significant and growing stress in many regions of the country,

and only a modest though growing contribution from renewable energy resources,

there is simply no choice. Even the National Petroleum Council has concluded that

natural gas supplies from traditional North American production will not be able

to meet projected demand, and that ‘‘greater energy efficiency and conservation are

vital near-term and long-term mechanisms for moderating price levels and reducing

volatility.’’

The potential to increase energy efficiency’s contribution to meeting America’s energy needs is significant. And for this reason, the Alliance to Save Energy strongly

supports the energy efficiency provisions included in the conference report to H.R.

6, The Energy Policy Act of 2003 in recognition of the fact that these provisions will

help our nation lessen its dependence on imported oil, protect the environment, and

boost the economy. The Alliance does, however, believe that the energy efficiency

provisions in H.R. 6 must be expanded and enhanced if we are to realize all of the

potential gains that can accrue from widespread adoption of energy efficiency measures across many sectors of the economy.

Last year, the Alliance to Save Energy, in consultation with experts from industry, universities, government, and other public interest groups, initiated an examination of a wide array of energy efficiency policies directed at all energy end use

sectors as well as electricity and natural gas. A priority purpose of the initiative was

to identify a set of policies that would significantly reduce growth in US energy consumption by all sectors if enacted into law.

To guide our efforts, the Alliance established an achievable, but extremely aggressive energy growth reduction goal, and we also established a very short timeframe—

five years—in which to achieve the reduction goal. The Energy Information Administration (EIA) has projected that energy use in the year 2010 will rise to 112 quadrillion Btus (‘‘Quads’’). The goal established by the Alliance was to reduce the projected level by 7 Quads, which represents a 50% reduction in anticipated growth

over the five year period. In culling policies to those most critical and saleable, the

energy savings of the package now being formulated under Vision 2010 likely will

not meet the aggressive goal, though the savings will be significant. We recognize

that 2010 is a very short time frame for policies to take effect—we expect that the

policy package would have a much more robust impact on energy use in subsequent

years.

To reach the target goal, we considered policies that could reduce energy use by

approximately 5 percent in each end-use sector—residential and commercial buildings, industry, and transportation—and to reduce energy losses by 5 percent in electricity and natural gas transmission. Of the policies considered, some of the most

significant savings are projected to result from cross-cutting policies that affect multiple sectors simultaneously.

Comparison of Energy Efficiency Policies in H.R. 6 Conference Report and

Vision 2010

As stated above, the Alliance to Save Energy strongly supports the energy efficiency provisions in the conference report to H.R. 6, but believes that more can be

163

done to improve energy efficiency in each of the following sectors: buildings, transportation, the electric and natural gas utilities, and the industrial sector. Listed

below is a discussion of the specific energy efficiency provisions included in the H.R.

6 conference report, and actions the Alliance to Save Energy believes the federal

government should take to further the efficiency gains in these sectors.

I. RESIDENTIAL AND COMMERCIAL BUILDINGS

Appliance and equipment standards

National appliance and equipment standards are an important and effective policy

tool. They provide an efficiency baseline that American consumers can trust, provide

uniform national rules for manufacturers, and slash wasteful energy consumption

with one broad and effective stroke.

The federal appliance energy efficiency standards program began in 1987 and has

been among the most effective of all efficiency measures. The program already has

saved an estimated 2.5 percent of all U.S. electricity use representing billions of dollars of savings to America’s consumers.

The conference report to H.R. 6 includes a package of new energy efficiency standards that were negotiated between energy efficiency interest groups, including the

Alliance to Save Energy, and the manufacturers of products proposed for regulation.

These provisions would establish standards in law for exit signs, torchiere lamps,

dry-type transformers, traffic signal modules, unit heaters, and compact florescent

lamps. They also require DOE to establish standards through rulemakings for ceiling fans, commercial refrigerators and freezers, vending machines, unit-heaters and

batteries.

The Alliance to Save Energy believes these standards should be established, and

broadened to include new agreements on commercial air conditioners, dehumidifiers,

pre-rinse spray valves, ceiling fans, and commercial refrigerators and freezers.

In addition, the Alliance to Save Energy believes the U.S. Department of Energy

should be encouraged to accelerate rulemakings that are years behind schedule. For

example, the standard for residential furnaces was due in 1994. The most recent

delay, announced in December, means that DOE will not set these standards until

late 2007 at the earliest, and that the standards will not go into effect until at least

2010—fully 16 years beyond the statutory deadline. According to a September 2004

report published by the American Council for an Energy Efficient Economy, each

year of delay in just three of these national standards—residential furnaces and

boilers, distribution transformers, and commercial air conditioners and heat

pumps—locks in $7.1 billion in higher energy costs for consumers and businesses.

In recognition of the fact that establishing standards requires a rigorous, time

consuming, and costly rulemaking process, the Alliance also believes increased funding to the DOE standards program is critical to ensuring that the backlog in standards’ rulemakings is placed on a fast track.

Energy Star

The Energy Star program represents one of the government’s most successful efforts to date in advancing energy efficiency through market transformation. The Energy Star program is an entirely voluntary program that is yielding significant economic returns to our nation’s consumers and significant environmental benefits to

our nation as a whole. Studies estimate that every federal dollar spent on the Energy Star program results in an average savings of $75 or more in consumer energy

bills; the reduction of about 3.7 tons of carbon dioxide emissions; and an investment

of $15 in private sector capital in development of energy-efficient technologies and

products.

The H.R. 6 conference report authorizes a voluntary Energy Star program at EPA

and DOE and directs the Administrator and Energy Secretary to solicit comments

of interested parties in establishing or revising an Energy Star product category; the

provision requires a 9-month lead time before the implementation of any changes

to the program.

The Alliance to Save Energy believes the eligibility requirements for becoming an

Energy Star product should be updated to ensure that the market is encouraged toward the most efficient buildings and products. And, drawing on the success of the

program, the Alliance believes that it should be expanded to cover more products

and services. While not the jurisdiction of this Committee, the Alliance also believes

that consumer tax incentives should be provided for products that go well beyond

Energy Star levels and that funding for Energy Star is increased.

Building Codes

In a typical year, the United States builds about 1.7 million new housing units

including single-family, multi-family and manufactured dwelling units. Building enVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00171 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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ergy codes are a means by which states and municipalities can assure that minimum levels of energy efficiency are achieved in these new buildings. The H.R. 6

conference report does not address the issue of building codes. The Alliance to Save

Energy encourages the creation of a $25 million federal fund to support states in

assuring adoption and compliance with the most current and aggressive building energy codes.

Manufactured housing (‘‘mobile homes’’) represents one out of 7.5 new single-family housing starts and is not subject to local building codes. Manufacturers argue

that they cross state lines and shouldn’t be controlled by state and local building

codes; thus they are instead regulated by the Department of Housing and Urban

Development (HUD). Current HUD standards have been in place since 1996 and

have not been updated since then. New proposed standards negotiated with industry

through the National Fire Protection Association (NFPA-501), providing modest improvements, may be adopted by HUD in the next year or two. However, recent DOE

research shows that it is cost effective to build manufactured housing to current

IECC model energy code specifications, adapted to the three HUD climate zones.

The Alliance to Save Energy recommends that manufactured housing be required

to meet the current IECC model energy code, particularly as the market segment

for this product tends to be modest-to-low income consumers who can ill-afford high

energy bills. The Alliance encourages Congress to update the HUD manufactured

housing standards to current IECC levels. These updates would reduce energy bills

of mobile home owners by 9% and reduce overall energy use in mobile homes by

3 trillion btus in 2010, increasing to 8 trillion btus by 2025.

Federal Energy Management Program

America’s largest, single energy consumer is the federal government. According to

the 1998 Alliance to Save Energy report, Leading by Example: Improving Energy

Productivity in Federal Government Facilities, the federal government wastes $1 billion in taxpayer dollars each year on its buildings that use energy inefficiently.

Few federal programs have been as cost-effective as the U.S. Department of Energy’s Federal Energy Management Program (FEMP). At an average cost of $20 million per year, FEMP has helped cut federal building energy waste by nearly 21 percent from 1985-1999—a reduction that now saves federal taxpayers roughly $1 billion each year in reduced energy costs. However, much more can be done, and the

Alliance supports the Federal Energy Management provisions of the H.R. 6 conference report to require further energy saving by the federal government.

A vital tool for upgrading the efficiency of the federal government is the use of

Energy Savings Performance Contracts (ESPCs). This unique program allows federal agencies to contract with the private sector to upgrade the efficiency of federal

buildings and pay-off the contract with the utility savings. The agency saves energy

at no additional cost, the companies build their business and create jobs, and the

government saves money and pollution. Unfortunately, this program sunset in 2003,

and it must be permanently reauthorized immediately.

The Alliance to Save Energy is pleased that Congress provided an extension of

the Energy Savings Performance Contract (ESPC) program until October 1, 2006 as

part of the Defense Authorization bill (Public Law 108-375). And we support the

permanent extension located in the Energy Policy Act of 2005. However, we are very

concerned about the limitations placed on this program in the legislation. Capping

this program at 60 projects and $300 million for DOD, VA, and DOE only will further harm the program that is just re-emerging from a costly delay in reauthorization. Due to this lapse in authority, nearly $500 million worth of energy savings

projects were stalled—harming business around the country and wasting taxpayer

dollars. This is a program that should be authorized permanently to assure stability

in the industry and to give federal agencies the ability to continue to upgrade facilities to the benefit of taxpayers, our nation’s environment and energy security.

Once reauthorized, the Alliance believes that the program should be expanded to

allow for efficiency upgrades in the federal government’s mobile assets—from

planes, to tanks, to passenger vehicles. For example, expansion of the program could

afford the military the ability to retrofit the B-52 Bomber (which currently relies

on a 1960’s-era engine) or the Abrams tank (which has a 1970’s-era engine). In fact,

a 2002 Defense Science Board report listed over 16 weapons systems that are candidates for such upgrades, covering every service and virtually every major defense

contractor. While this expansion would save oil and advance national security goals,

the first step is permanently reauthorizing the ESPC program.

Tax Incentives

Providing incentives to consumers and businesses is an important policy option

that can help transform markets to embrace energy-efficient technologies and pracVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00172 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
165

tices. The Alliance to Save Energy believes tax incentives are an important piece

of any balanced energy plan, and we support the energy efficiency tax incentives

that are part of the conference report to H.R. 6. This package of efficiency tax incentives represents a bipartisan compromise that would benefit businesses and consumers across the country, and we recommend passage of these important incentives as quickly as possible.

Tax incentives for highly efficient new homes will show home builders across the

nation that incorporating energy-efficient technologies into homes is neither as difficult nor as expensive as they now contend. Tax credits for highly efficient refrigerators and clothes washers will encourage the manufacture and purchase of energy

and water-saving appliances. The tax deduction for commercial buildings will give

business owners the incentive to outfit their commercial space with energy-efficient

equipment.

In addition, tax credits to upgrade the efficiency of existing homes will help everyday Americans cope with volatile natural gas and heating oil prices. These incentives, in addition to the incentives for highly efficient fuel cells, combined heat and

power systems, and advanced electricity metering, can play an important role in

helping this nation transition to energy efficient appliances and technologies.

II. ELECTRIC AND NATURAL GAS UTILITIES

Over the last two decades, states worked with regulated utilities using ‘‘Integrated Resource Planning’’ and demand-side management programs to avoid the

need for about 100 300-Megawatt (MW) power plants. However, utility spending on

public benefit programs nationwide was cut in half as states and the electricity industry prepared for expected deregulation. Two national policy strategies that could

increase energy efficiency in the utility sector are: (1) a federal public benefits funds

(PBFs); and, (2) a federal Energy Efficiency Performance Standards (EEPS). Neither

of these two energy efficiency measures is included in the conference report to H.R.

6.

Energy Efficiency Performance Standards

Energy efficiency performance standards (EEPS) require retail electricity suppliers to meet customer needs in part through energy efficiency and load reduction

programs rather than by constructing new generation and transmission facilities.

EEPS can be instituted in conjunction with, or independent of, a national Public

Benefits Fund (PBF).

While several states are considering creating EEPS, only two states—Texas and

Pennsylvania—have instituted them in some form. If one were to follow the model

signed by then-Governor Bush in Texas, electric and natural gas suppliers would

be required to take measures to help their customers reduce consumption by a set

amount each year. Utilities also could meet the requirement, in part, by reducing

supply-side losses, could trade credits with other utilities, or could buy credits (the

funds would be added to a public benefits fund). Savings due to lower energy use

and lower prices should more than pay for the cost of the measures. For example,

according to estimates by ACEEE, by 2020 a 1 percent federal EEPS would:

• Save over 340 billion kWh a year; • Save consumers over $12 billion a year; and, • Reduce peak electricity demand by about 68,000 MW (avoiding about 225 power

plants).

Through Vision 2010, the Alliance has begun a dialogue between utilities that

would be subject to any national policies on PBF or EEPs, government, academia

and other stakeholders. Our goal is to develop, and present to the Congress in the

coming weeks, recommendations for a workable, cost-effective program that recognizes and addresses the differences in the political and business circumstances of

states.

Public Benefits Fund

Twenty-three states and the District of Columbia have created a guaranteed

stream of funds for energy efficiency and other public goods via public benefit funds

(PBFs). The funds are built typically from a small surcharge on electricity and natural gas bills. The programs may be administered by utilities, states, or independent

organizations. Of the states that have passed restructuring laws and rules, all but

two (Oklahoma, and Virginia) also have passed some form of PBF; in addition, three

states (Minnesota, Vermont, and Wisconsin) have created PBFs without restructuring. Creation of a federal PBF that would provide matching funds to any state

in which a PBF exists and/or would be accessible to any state with an EEPS in

place could serve to encourage states to deploy such innovative techniques to advancing energy efficiency. A federal PBF could help stabilize electricity prices

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through reduced demand, reduce air pollution and greenhouse gas emissions, and

ease the need for massive infrastructure replacement. By 2020, ACEEE estimates

that a federal PBF would:

• Save 1.3 trillion kilowatt hours (kWh) a year;

• Reduce peak electricity demand by 160,000 MW (equivalent to about 500 power

plants);

• Save consumers $68 billion (net after investments); and,

• Prevent greenhouse gas emissions equivalent to 96 million metric tons of carbon

each year.

Transformers Tax Incentive

The energy bill conference report would provide accelerated, three-year depreciation for time-of-use meters. Time-of-use meters allow customers to shift their electricity use away from peak periods of the day when power is most expensive, which

also can increase the efficiency of the power plant. In addition, the Alliance to Save

Energy believes it is important to support accelerated depreciation for distribution

transformers and new generation units that significantly exceed the efficiency of

new transformer standards.

Voluntary Agreements

While the conference report to H.R. 6 authorizes DOE to enter into voluntary

agreements with industrial companies for significant reductions in energy intensity,

and to publicize the corresponding achievements, the conference report does not include a similar provision for the electric and natural gas utilities. The Alliance to

Save Energy would encourage DOE and EPA to seek agreements from the entire

industry to reduce fossil fuel heat rates and natural gas losses.

III. TRANSPORTATION

Today, more than two-thirds of the oil consumed in the United States is used for

transportation. This sector accounts for the majority of CO and NOX emissions in

the U.S., and it is responsible for approximately 33% of U.S. greenhouse gas emissions. These realities, coupled with the fact that U.S. vehicle miles traveled are

growing at a faster rate than vehicles and at more than twice the rate of the population, underscore the criticality of improving the efficiency of today’s passenger cars

and trucks immediately.

While the automotive industry has begun to introduce energy efficient transportation options, like hybrid electric vehicles, much, much more needs to be done to

ensure that larger numbers of hybrids are introduced into the marketplace, and that

consumers make the choice to purchase these and other energy efficient transportation technologies. Hybrids represent an immediate and more fuel efficient option

for consumers of today and tomorrow, and they also can serve as a bridge to fuel

cell electric vehicles of tomorrow that hold the promise of clean, sustainable mobility. Unfortunately, there are only five hybrid electric vehicle offerings to choose from

in the marketplace and, while they are receiving growing attention by the media

and the public, hybrids still represent less than one percent of the 17 million vehicles sold in the United States each year.

Furthermore, Corporate Average Fuel Economy (CAFE) standards have remained

static for almost two decades due to political gridlock. The current standard of 27.5

miles per gallon for automobiles first applied in 1985, and the 21 mpg standard for

light trucks is only 0.5 mpg above the 1987 standard (but is now set to rise to 22.2

mpg by 2007). In fact, lack of federal action, coupled with the dramatic expansion

in sales of SUVs, has led to a significant drop in overall fuel economy. America’s

average gas mileage peaked in 1987-1988, declined for more than ten years, and is

now flat.

Furthermore, and alarmingly, EIA estimates that on-road fuel economy is about

20% lower than test results used for CAFE standards. This means that consumers

are receiving inaccurate information about what they might expect to realize in

terms of the vehicle they purchase, and more importantly, the standards that have

been set nationally—and not updated for 20 years—are not being met.

Close CAFE Loophole

Efforts in Congress to increase Corporate Average Fuel Economy (CAFE) standards for passenger vehicles have been unsuccessful since the mid-1980’s. And, it appears unlikely that the 109th Congress will be the one to increase these standards.

Notwithstanding this assumption, it is imperative to continue—and increase—efforts to improve the fuel economy of the vehicle fleet by reforming the current CAFE

regulations through legislative and/or federal rulemakings. The fuel economy tests

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should be revised to better reflect real-world driving and to bring the estimates of

fuel economy in line with EIA and other authoritative sources.

Second, passenger cars should be redefined to include SUVs and minivans, which

are used for the same purposes, i.e. transporting people. Today, about half of all

light-duty vehicles sold in America are light trucks, and most of these are SUVs and

minivans. Including SUVs and minivans as passenger vehicles could increase fuel

economy by 1 mpg, and save 5 billion gallons a year.

Third, the CAFE credit for ‘‘dual-fuel’’ vehicles, which can run on ethanol or on

gasoline, should be ended or revised to require actual use of the alternative fuel.

Today, dual fuel vehicles are being fueled almost exclusively—99% of the time—with

gasoline. With only 188 ethanol fueling stations in 27 states, the infrastructure does

not exist to supply these vehicles with alternative fuel. This credit has encouraged

manufacturers to put millions of dual fuel vehicles on the road, but is also has allowed them to put more gas guzzlers on the road, and thus increase gasoline use.

The credit should be terminated or modified to require actual use of the alternative

fuel.

Finally, vehicles up to 10,000 pounds should be included in CAFE. CAFE standards only apply to vehicles up to 8,500 pounds (gross vehicle weight). In fact, EPA

does not even test or report the fuel economy of larger vehicles, but their mileage

is generally much lower. Manufacturers are selling more and more of these superlarge SUVs and pickup trucks, such as GM Hummers and Ford Excursions. The

weight limit should be raised to include these heavier vehicles.

Vehicle Fuel Use Feebate

The Alliance to Save Energy encourages the Congress to consider a new, innovative approach to efficiency of light-duty cars and trucks by promoting a national

‘‘feebate’’ system. Such a system could impose a national security surcharge, or ‘‘fee’’

on inefficient vehicles, and then use the funds collected to provide a ‘‘rebate’’ to the

most fuel efficient vehicles. The fee or rebate on new vehicles could be based upon

the expected lifetime fuel use of the vehicle. Rates could be set to be revenue neutral, but the public would know that when it makes a vehicle purchasing decision,

a higher price premium will be realized for the less efficient vehicle options. Such

a system would reward consumers who make the choice to purchase fuel efficient

vehicles; individuals who purchase gas guzzlers will pay a premium for making this

purchasing decision.

Tax Incentives

Hybrid electric vehicles still carry a price premium ranging from $3,000-$4,000

per vehicle. (Further, new models coming into the market could carry an even steeper price premium.) In order to assist consumers in making the choice to purchase

these energy efficient transportation options, which represent less than 1 percent

of the 17 million vehicles sold per year, the Alliance to Save Energy encourages the

Congress to support consumer-based tax incentives for these energy efficient technologies. Such an incentive would ‘‘level the playing field’’ in the market place for

hybrids, and allow consumers to make the choice to purchase a vehicle that will

save them money over its lifetime without having to factor in purchase price differentials. The conference report to H.R. 6 provides a tax credit ranging from $250-

$3400 for hybrid and lean burn diesel vehicles based on fuel economy and gas savings, and a larger credit for heavy-duty vehicles, capped for each manufacturer. The

Alliance supports this approach and hopes that the Congress will devise a meaningful package of tax incentives that will support the building of a long-term and sustainable market for hybrid electric and other fuel-efficient vehicles.

In addition, Congress also should eliminate the business deduction for SUVs

(which was reduced to $25,000 last year). A federal incentive for fuel-inefficient vehicles is counter-intuitive to our Nation’s energy security and environmental goals,

and also negates current positive purchase signals in the marketplace, including the

so-called ‘‘gas guzzler’s tax’’ and the tax deduction for hybrid and other alternative

fuel vehicles.

Fleet Requirements

The conference report to H.R. 6 includes a variety of flexibility options to assist

fleets in complying with the Alternative Fuel Vehicle (AFV) acquisition requirements of the Energy Policy Act of 1992 (P.L. 102-486 aka ‘‘EPAct’’). In recognition

of the fact that some fleets have had a difficult time meeting these requirements,

and/or they would like to comply with technologies that currently are not an eligible

compliance option (e.g., hybrid electric vehicles), the Alliance to Save Energy strongly supports the provisions that would allow hybrid electric vehicles and other energy

efficient transportation technologies to be an eligible compliance option.

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Industry

Industry accounts for one-third of all energy use in the U.S. Energy-intensive industrial plants typically have enormous energy bills, sometimes running into the

millions of dollars annually. Energy efficiency improvements offer the potential for

a significant return on investment for the industrial energy consumer in the form

of lower utility bills. The energy bill conference report (H.R. 6) provided a 10% investment tax credit for combined heat and power systems up to 15 MW. The Alliance to Save Energy supports this tax credit, but would seek to include projects up

to 50 MW.

The conference report also authorized DOE to enter into voluntary agreements

with industrial companies for significant reductions in energy intensity. The Alliance supports this concept, but would broaden the program to include EPA involvement, and further, would define the program such that the voluntary agreements

would seek to reduce energy intensity 2.5 percent each year from 2007-2016. Furthermore, the program should require independent verification of all reductions

below ‘‘business-as-usual’’, as well as a report to Congress on assistance needed to

help achieve the reductions.

Finally, the Alliance to Save Energy believes that medium and large businesses

that emit at least 100,000 tons of CO2 in a year should be required to begin reporting these emissions to the government. This would allow the U.S. to establish a

baseline for the sector, and to benchmark progress toward reducing CO2.

V. CROSS-CUTTING POLICY RECOMMENDATIONS

Funding Energy Efficiency

Funding for energy efficiency R&D and deployment programs of the Department

of Energy and Environmental Protection Agency should be doubled from levels provided in 2004 in recognition of not only the enormous potential that energy efficiency offers in helping to meet the anticipated growth in energy use, but also the

demonstrated return on investment that such funding has yielded the government

and consumers alike.

The President’s overall fiscal year 2006 budget request for DOE efficiency programs is $847 million, down $21 million from the FY 2005 appropriation, and $29

million from the Administration’s FY 2005 request. This continues a gradual downward trend from $913 million appropriated in FY 2002. In addition to the overall

decline, there were some major changes in priorities. The President has requested

significant increases for fuel cell vehicles and for biorefineries. The money for these

increases was taken from other energy efficiency programs—thus there are major

cuts in core research, development and deployment programs in industrial energy

efficiency, buildings efficiency, and other areas. Particularly distressing is a 19% cut

to the appliance standards program despite worsening delays in meeting statutory

deadlines, and a 21% cut in work to improve state building energy codes

CONCLUSION

American consumers need a balanced energy policy that takes aggressive steps to

save energy wherever, and whenever, it is cost-effective and feasible. Energy efficiency is our largest energy resource, and it should be our first energy priority.

The policy options identified by the Alliance, such as standards, tax credits, and

federal energy management, have been proven effective on the national level. Others, such as energy efficiency performance standards and public benefits funds, have

been tested in the states and we believe are ready for replication at the national

level. And finally, gains in energy efficiency come largely from new technologies and

improvement to existing technologies; therefore, continuing and enhancing federal

programs that support research, development and deployment of energy efficient

technologies and practices is imperative.

The Alliance to Save Energy applauds the fact that this Committee is taking the

first steps necessary to enacting meaningful and comprehensive energy legislation

in the 109th Congress. With respect to energy efficiency provisions, which must be

a cornerstone of any such energy legislation, we hope that last year’s energy bill

conference report, H.R. 6, represents only the starting point, and that the energy

efficiency provisions will be expanded and enhanced to assure that we give the

American people immediate, cost-effective and sustainable assistance in addressing

spiraling energy costs and an ever-less secure energy future.

Mr. HALL. Thank you. You make a good case. Mr. Cooper, we recognize you, sir, for 5 minutes.

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STATEMENT OF MARK N. COOPER

Mr. COOPER. Thank you, Mr. Chairman.

Energy security, reliability, price stability, environmental impacts, are all externalities of energy markets. It is difficult for individuals to reflect these considerations in their private actions, and

difficult for their value to be captured in market transactions. In

this sense, these characteristics of energy markets are public goods.

Moreover, much of the infrastructure of the energy industry,

pipelines, transmission systems, and distribution networks, also

have strong elements of natural monopolies. That is, there are not

likely to be a sufficient quantity of redundant capacity to allow

market forces to restrict or restrain the abuse of market power.

For these two reasons, the public requires policies to protect its

interests. They cannot do so as individuals in these markets. Unfortunately, the legislation that has been bouncing around the Congress for the past couple of years fails to recognize these fundamentals of the energy industry. The legislation proposes to subsidize

and encourage the wrong actors and actions, it proposes to relax

the wrong regulations, or repeal the wrong statutes.

We look on the failure to pass energy legislation as a good thing

for consumers and the nation, because it was bad legislation that

would have made matters worse, by prolonging our dependence on

fossil fuels, by delaying the start of a vigorous efficiency drive, and

by failing to restore confidence in energy markets, which is critical

for public consensus around some hard policy choices.

But time is wasting. It is very important for Congress to get its

act together and pass good legislation that promotes and protects

the public interest. So in the brief time I have allotted, let me focus

on the specifics of what I think should be done in two general

areas.

First, as I have suggested, markets must be free from manipulation. We believe that strong measures to ensure confidence in markets are critical to establishing the credibility of arguments for

harder choices that must be made. Ensuring market transparency,

promoting greater storage of petroleum products, could lower

prices, reduce volatility, and above all, restore a consensus that we

need to take more aggressive policies. In this vein, you should not

repeal PUHCA. You should not allow the FERC to force utilities

into spot markets in their transmission system. You should require

every energy supplier to report audited price and storage data. You

should pass a reliability bill.

Second, energy efficiency must be the central pillar of our energy

policy in the years ahead. The domestic resource base is mature

and declining. Increases in production cannot significantly reduce

our dependence on imports, or affect world oil prices, and world energy prices. It cannot shift the international balance of power in

energy power markets. Only by dramatically increasing the fuel efficiency of our vehicle fleet, buildings, equipment alliances, can we

significantly affect the supply/demand balance at home and abroad.

By establishing America as a focal point for an efficiency oriented

industry, for our vehicles and appliances, we can drive the entire

global industry onto a more efficient basis.

Let me keep it simple. Let us talk about a 20/20 program. In the

next 2 decades, 20 years, we can easily double the fuel efficiency

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of our fleet, increasing its average by 20 miles per gallon. We can

reduce expected natural gas consumption by another 20 percent.

We can achieve a 20 percent share of renewables for our electricity

generation. These three 20’s, accomplished in 20 years, would have

an immense impact on the supply/demand balance. It would reduce

our consumption of petroleum by 4 million barrels a day. That is

far more than we can get in the Alaska National Wildlife Reserve.

It would save more than 6 trillion cubic feet of natural gas a day,

more than we are going to get in the environmentally sensitive

areas.

But we cannot get these if we do not start now and stay on this

course. Nor does my emphasis on these first steps preclude a supply side solution. It is these first steps restoring confidence in markets, making a real commitment to effective conservation policy, efficiency policy, that should set the context for then having what we

need to have, which is a good, hard, rational debate about which

supply side options need to be pursued.

These two steps are the down payment, I believe, toward a consensus for a balanced national energy policy.

Thank you.

[The prepared statement of Mark N. Cooper follows:]

PREPARED STATEMENT OF MARK N. COOPER, ON BEHALF OF THE CONSUMER

FEDERATION OF AMERICA AND CONSUMERS UNION

Mr. Chairman and Members of the Committee, my name is Dr. Mark Cooper. I

am Director of Research for the Consumer Federation of America. I appreciate the

opportunity to share the views of CFA and Consumers Union on energy policy. Over

the past half-decade we have analyzed each of the major components of the consumer energy bill—gasoline, electricity and natural gas. I have attached copies of

four major analyses.

A COMPREHENSIVE APPROACH TO POLICY EVALUATION

Our approach reflects a comprehensive evaluation of energy policies on both the

supply and demand sides of the market and takes into account three broad areas

of policy concern—economics, environment and security.

For the consumer, the primary considerations are economic, but environmental

and security considerations must be taken into account. Economics includes both the

basic benefit/cost of each option and the impact of the option on the market structure. We prefer policies that meet the need for energy at the lowest cost. We prefer

policies that increase the supply and demand elasticities in the market or bring new

sources and actors to the market to promote competition, since this not only lowers

price but also dampens price volatility. While minimizing costs is a goal, it is paramount that policy choices produce outcomes that are economically acceptable. In

choosing between economically acceptable outcomes, policies that lower environmental costs and/or security concerns should be preferred.

Environmental concerns are extremely important because energy production and

consumption involve major externalities—costs that are not easily reflected in market transactions. Production, transportation and distribution have environmental

impacts, as does consumption. An alternative that saves on this infrastructure

should be preferred.Security of supply has traditionally focused on the operation of

facilities to prevent accidents. Operating pipelines or transmission systems, terminals, drilling rigs and distribution systems are complex and difficult activities. They

are subject to accidents and disruptions from weather and other problems. Under

current conditions, however, vulnerability to intentional acts of sabotage must be

considered. Moreover, because international energy markets are dominated by cartels and producers with market power, any policy that relies on foreign resources

must also be assessed in terms of the dependability of supply.

CRITICAL STEPS FOR AN EFFECTIVE POLICY

We conclude that there are two critical first steps to establishing a balanced energy policy.

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First, markets must be free of manipulation. We believe that strong measures to

ensure confidence in markets are critical to establish the credibility of arguments

for other policies. Ensuring market transparency and promoting greater storage

could lower prices and reduce volatility, but, above all, they would establish a prerequisite necessary for other policies—confidence that there is a ‘‘hard’’ problem in

the imbalance of supply and demand.

Second, improvement in energy efficiency must be the central pillar of our energy

policy. The domestic resource base is mature and declining. Increases in production

cannot significantly reduce our dependence on imports or affect world markets. Only

by dramatically increasing the fuel efficiency or our vehicle fleet, buildings, equipment and appliances, can we significantly affect the supply-demand balance and alleviate pressures on markets. Efficiency has a positive impact on every one of the

evaluation criteria. Its potential to lower prices has been noted. Efficiency has obvious environmental benefits by reducing the need for facilities and the consumption

of fossil fuels. To the extent that it reduces the need for resources, it improves security. It could have market structural benefits, if demand is reduced sufficiently to

shift the market equilibrium to a more elastic region of the supply curve.

PETROLEUM PRODUCTS

If the U.S. is to both reduce the market power of energy producers and stem the

flow of imports, public policy must start immediately and aggressively on an efficiency path to lower energy consumption. It is time for public policy to seek permanent institutional changes that both reduce the chances that markets will be tight

and reduce the exposure of consumers to the opportunistic exploitation of markets

when they become tight. To achieve this reduction of risk, public policy should be

focused on achieving four primary goals:

• Restore reserve margins by developing both efficiency (demand-side) and expanding refinery capacity (supply-side).

• Increase market flexibility through stock and storage policy.

• Discourage private actions that make markets tight and/or exploit market disruptions by countering the tendency to profiteer by withholding of supply.

• Promote a more competitive industry.

Demand Side

A goal of achieving an improvement of vehicle efficiency (increase in fleet average

miles per gallon) equal to economy-wide productivity over the past decade (when the

fleet failed to progress) would have a major impact on demand. It would require the

fleet average to improve at the same rate it did in the 1980s. It would raise average

fuel efficiency by five miles per gallon, or 20 percent. This is a mid-term target. This

rate of improvement should be sustainable for several decades. This would reduce

demand by 1.5 million barrels per day within a decade. This would return consumption to the level of the mid-1980s.

Expanding refinery capacity by 10 percent equals approximately 1.5 million barrels per day. This would require 15 refineries, if the average size equals the refineries currently in use. This is less than one-third the number shut down in the past

ten years and less than onequarter of the number shut down in the past fifteen

years. Alternatively, a ten percent increase in the size of existing refineries, which

is the rate at which they increased over the 1990s, would do the trick, as long as

no additional refineries were shut down. Placed in the context of redevelopment of

recently abandoned facilities or expansion of existing facilities, the task of adding

refinery capacity does not appear daunting. Such an expansion of capacity has not

been in the interest of the businesses making the capacity decisions. Therefore, public policies to identify sites, study why so many facilities have been shut down, and

establish programs to expand capacity should be pursued.

Reducing demand for natural gas by about one quarter of the base level projection

could be achieved with the implementations of three broad categories of policies—

building codes, appliance standards, and industrial use—that essentially accelerate

the adoption of currently available best practices or readily achievable savings with

off-the-shelf technologies. The potential savings over a longer period are higher. The

key challenge is to move higher efficiency products and practices into widespread

use. Standards, incentives and education programs are the vehicles to do so. These

discussions do not include the impact of a renewable portfolio standard, which could

have a large effect on the electric utility sector. Although several states have recently adopted significant renewable standards, 10 to 20 percent, the federal government has not.

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Stock Policy

It has become more and more evident that private decisions on the holding of

stocks will maximize short-term private profits to the detriment of the public. Increasing concentration and inadequate competition allow stocks to be drawn down

to levels that send markets into price spirals. Companies will not willingly hold excess capacity for the express purpose of preventing price increases. They will only

do so if they fear that a lack of supply or an increase in brand price would cause

them to lose business to competitors who have available stocks. Regional gasoline

markets appear to lack sufficient competition to discipline anti-consumer private

stock policies.

Public policy must expand stocks. Participants in the distribution of petroleum

products could be required to hold stocks at a percentage of retail sales. Public policy could also either directly support or give incentives for private parties to keep

storage. It could lower the cost of storage through tax incentives by drawing down

stocks during seasonal peaks. Finally, public policy could directly underwrite stockpiles.

Market Manipulation

In the short term, government must turn the spotlight on business decisions that

make markets tight or exploit them.

Withholding of supply should draw immediate and intense public scrutiny, backed

up with investigations. Since the federal government is likely to be subject to political pressures not to take action, state governments should be authorized and supported in market monitoring efforts. An ongoing joint task force of federal and state

attorneys general could be established. The task force should develop databases and

information to analyze the structure, conduct and performance of gasoline markets.

As long as huge windfall profits can be made, private sector market participants

will have a strong incentive to keep markets tight. Market manipulation could and

should be made illegal. The pattern of repeated price spikes and volatility has now

become an enduring problem. Because the elasticity of demand is so low—because

gasoline is so important to economic and social life—this type of profiteering should

be discouraged. A windfall profits tax that kicks in under specific circumstances will

take the fun and profit out of market manipulation.

Further concentration of these industries is quite problematic. The Department of

Justice Merger Guidelines should be rigorously enforced. Moreover, the efficiency defense of consolidation should be looked on skeptically, since inadequate capacity is

a market problem.

ELECTRICITY

Policy makers could have eased the transition to competitive generation markets

by recognizing the physical and institutional infrastructure that would be needed

to support greater competition, but they did not. Perhaps they realized that presenting a true picture of the difficulty of electricity deregulation would have made

it impossible to sell it to the public. Whatever the reason behind the underestimation of the difficulties of deregulation, the buildup of problems now makes the

implementation of competition a much riskier proposition. Not only has the inadequacy of institutions and facilities grown, but also public confidence in the process

has been eroded.

The nation is now deeply divided between about one-third of the states—primarily

in the Midwest, Northeast and Mid-Atlantic—that have deregulated and restructured their electric utility sectors, and two-thirds that have not. Although there are

a host of complex reasons behind this division, one cannot help but observe that,

on average, those areas of the nation that remain fully regulated have substantially

lower prices and more reliable service. Effective management of the grid does not

require deregulation of either generation or transmission; on the contrary it is made

more difficult by deregulation.

For the past decade, policy makers and regulators in Washington, D.C., and the

Northeast have spent a lot of time trying to make the new electricity markets work.

At the same time, they have neglected to upgrade and maintain a reliable electricity

transport system. Congress and the FERC should devote all of their energy to

studying, strengthening and managing the interstate transmission system—to promoting the public interest, not the profits of merchant generators and transmission

owners.

Congress should pare back electricity legislation to a reliability-only title. Both

the physical and institutional infrastructure of the industry needs careful study and

consideration. It should not repeal the Public Utility Holding Company Act and require the FERC to abandon its Standard Market Design.

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The Public Utility Holding Company Act (PUHCA) once was one of the main lines

of defense against abuse of electricity and natural gas ratepayers. PUHCA was designed to simplify the ownership structure of electric utilities by ensuring a direct

operational or functional relationship between subsidiaries of a holding company,

and reduce conflicts of interest between the subsidiaries of vertically integrated

multi-state utilities by examining accounting practices and reviewing affiliate transactions. Unfortunately, in recent years regulatory authorities have ceased to implement the law vigorously. Many consumer advocates believe that if the protections

in PUHCA had been effectively enforced, the horrendous abuses in the Western

power markets could have been avoided and Standard and Poor’s recently concluded

that PUHCA protects investors as well. Ironically, long after the Western electricity

scandal broke, Enron’s PUHCA exemption was revoked. Rather than repeal

PUHCA, as contemplated in recent legislation, Congress should demand effective

implementation of its provisions.

Congress should require a comprehensive survey of the national grid, since such

a survey has not been conducted in forty years. It should identify the upgrades that

are necessary for reliability and those whose primary purpose is to expand transactions. It should study the question of how best to establish standards and regulatory oversight over privately owned transmission lines. Voluntary self-regulation

has been uneven and inadequate. Mandatory self-regulation is little better. More

public oversight is necessary.

Congress should examine new institutions that can reconcile the interests of the

states and include representation of consumer interests. FERC’s proposal for regional, quasivoluntary institutions of nebulous authority and ill-defined rights and

responsibilities is not a solution.

Congress should require a framework for comprehensive planning that considers

all alternatives. It should get serious about energy efficiency, like mandating higher

minimum standards for air conditioners, which would reduce the demands on the

grid at its most vulnerable times, hot summer days. It could also give a boost to

local (distributed) generation, which has the double benefit of adding generation resources to the system while not using the long distance transmission lines, whose

failure triggered the recent black out.

Mr. HALL. Thank you, sir. Mr. Nadel.

STATEMENT OF STEVEN NADEL

Mr. NADEL. Okay. Thank you very much, Mr. Chairman. Mr.

Boucher. I appreciate the opportunity to testify here today.

My name is Steven Nadel, and I am the Executive Director of the

American Council for an Energy-Efficient Economy. We are a locally based think tank that has conducted research over the past

25 years on programs and policies to improve energy efficiency.

As several witnesses have noted before, energy efficiency is an

important cornerstone for America’s energy policy. The U.S. has

greatly increased energy efficiency in the past 3 decades, but much

more is possible and needed. The draft Energy Policy Act of 2005

contains a number of useful provisions to promote energy efficiency, and we support these provisions, but these sections should

also be expanded. Efficiency sections in the bill should be expanded

for at least 5 reasons.

First, energy efficiency saves consumers and businesses money.

Using EIA data, we estimate that past efficiency actions saved U.S.

consumers and businesses about $650 billion in 2003. That is a billion. Our analysis indicates that these savings can be increased by

at least an additional $100 to $200 billion annually by 2020, even

if energy prices remain unchanged.

Second, energy efficiency can change the energy supply and demand balance, and put downward pressure on energy prices. As

you are all too aware, natural gas prices in particular have been

quite high. The markets are quite tight. The markets are so tight,

though, that if we can moderate demand a little bit, our analysis,

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using the same computer models that DOE uses, indicates that

with 4 to 5 percent energy savings, we can reduce these prices over

the next decade by 20 percent or more. It is just very tight markets.

Third, energy efficiency can reduce reliance on imported oil. As

EIA pointed out earlier, we now import about 60 percent of our oil,

and they project it will increase to about 70 percent by 2020. While

some new oil is available in hard to reach areas of the U.S., even

more oil is available by promoting energy efficiency. Some forthcoming analyses we are working on estimate that we can reduce

U.S. oil use by more than 2.5 million barrels per day in 2020

through energy efficiency. And this means improvements in the

transportation sector, but also in industry, homes, and commercial

buildings.

Fourth, energy efficiency can help our economy. Since investments in efficiency generates jobs, and also energy bill savings free

up money for more productive uses.

And fifth, energy efficiency is a highly cost-effective way to reduce carbon dioxide emissions. While there is debate about how

quickly we should do this, I think everyone agrees that whatever

we can do would be useful. Efficiency can be a frontline in that

fight.

The provisions in the draft Energy Policy Act of 2005 do take

some useful steps to address natural gas and electricity use, and

we applaud you for that. Unfortunately, they don’t do very much

to stem oil use, and we think that is an area that particularly

needs attention.

Among the notable provisions in the bill are the consensus efficiency standards that this committee has been working on since

2001, and we very much thank you for your help with that. There

are also some very useful sections enhancing the Federal appliance

labeling program, the Federal energy management program, and

also programs to get voluntary efficiency improvements from industrial firms. All of these are good provisions. But we recommend

that additional provisions be considered, either as part of a markup, or as part of a conference, depending on how you proceed.

I have 5 specific recommendations. One, there are additional energy efficiency standards that we have consensus with industry on,

and we recommend that those be added to the bill. These are consensus agreements that were reached since the conference committee met in 2003.

Two, we recommend that the bill clarify that DOE, as part of its

efficiency standards program, can set separate furnace efficiency

standards for cold and warm States. Presently, they use a one size

fits all, the same standard in Florida and Alaska, which really limits their ability to save gas. We think by considering two standards,

there will be much more opportunity for gas savings, but also for

proper economics in different regions of the country, rather than a

one size fits all. We are not recommending you set two standards,

but give DOE the right to set those standards, and they can carefully balance the different factors involved.

Three, we recommend that you include an energy efficiency resource standard to set energy saving targets for gas and electric

utilities, modeled after legislation in Texas that was signed by then

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Governor Bush. Texas has been a leader in this, and we think the

U.S. Congress should follow suit.

Fourth, we think something should be done about oil. We recognize this is a contentious issue. We recommend setting a fuel savings goal of 1 million barrels of oil per day savings by 2013, and

leave it to the administration to develop a plan to meet that. There

are many tools available in industry, in buildings, in transportation. As part of this, we recommend that you authorize some additional tools, things like feebates, which are revenue-neutral fees

and rebates based on fuel economy, also allowing the Department

of Transportation to adjust the test procedures for vehicles, to better reflect real world performance, and instituting test procedures

for heavy vehicles, so we can start measuring their fuel economy.

These are the kinds of the arrows that should be in their quiver

as they try to develop a plan to achieve that 1 million barrels per

day savings.

Fifth, we recommend that the bill address barriers to combined

heat and power systems, by directing FERC and EPA to complete

current proceedings on interconnection and output-based emissions

standards. And then, we also recommend some tax incentive improvements which I recommend. I understand they are not in the

jurisdiction of this committee.

Our analysis indicates that the provisions now in the Energy Policy Act of 2005 would reduce U.S. energy use by about 3 percent

in 2020. That is useful and helpful. But if you adopt these 5 other

additional recommendations we have, we think the savings in 2020

would increase to about 12 percent, in other words, a fourfold increase. These are highly cost-effective savings. So we strongly urge

you to consider these changes, and hopefully include many of them

in the bill.

Thank you very much.

[The prepared statement of Steven Nadel follows:]

PREPARED STATEMENT OF STEVEN NADEL, EXECUTIVE DIRECTOR, AMERICAN COUNCIL

FOR AN ENERGY-EFFICIENT ECONOMY (ACEEE)

INTRODUCTION

ACEEE is a nonprofit organization dedicated to increasing energy efficiency as a

means for promoting both economic prosperity and environmental protection. We

were founded in 1980 and have contributed in key ways to energy legislation adopted during the past 20 years, including the Energy Policy Act of 1992 and the National Appliance Energy Conservation Act of 1987. I appreciate the opportunity to

appear again before this Committee.

Energy efficiency improvement has contributed a great deal to our nation’s economic growth and increased standard of living over the past 30 years. Energy efficiency improvements since 1973 accounted for approximately 50 quadrillion Btu’s in

2003, which is more than half of U.S. energy use and nearly as much energy as we

now get annually from domestic coal, natural gas, and oil sources combined. Thus,

energy efficiency ran rightfully be called our country’s largest energy source. Consider these facts which are based primarily on data published by the federal Energy

Information Administration (EIA):

• Total primary energy use per capita in the United States in 2003 was down

slightly relative to 1973. Over the same 30-year period, economic output (GDP)

per capita increased 74 percent.

• National energy intensity (energy use per unit of GDP) fell 46 percent between

1973 and 2003. About 60% of this decline is attributable to real energy effiVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00183 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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1Murtishaw and Schipper, 2001, Untangling Recent Trends in U.S. Energy Use. Washington,

D.C.: U.S. Environmental Protection Agency. 2 Interlaboratory Working Group, 2000, Scenarios for a Clean Energy Future. Washington,

D.C.: Interlaboratory Working Group on Energy-Efficient and Clean-Energy Technologies, U.S.

Department of Energy, Office of Energy Efficiency and Renewable Energy. 3 Nadel and Geller, 2001, Smart Energy Policies: Saving Money and Reducing Pollutant Emissions Through Greater Energy Efficiency, www.aceee.org/energy/reports.htm. Washington, DC:

American Council for an Energy-Efficient Economy. 4DeCicco, An and Ross, 2001, Technical Options for Improving the Fuel Economy of U.S. Cars

and Light Trucks by 2010-2015. Washington, DC: American Council for an Energy-Efficient

Economy. 5Geller and Kubo, 2000, National and State Energy Use and Carbon Emissions Trends. Washington, DC: American Council for an Energy-Efficient Economy. 6 California Energy Commission, 2001, Emergency Conservation and Supply Response 2001.

Report P700-01-005F. Sacramento, CA. 7Global Energy Partners, 2003, California Summary Study of 2001 Energy Efficiency Programs, Final Report. Lafayette, CA.

ciency improvements and about 40% is due to structural changes in the economy and fuel switching.1

• If the United States had not dramatically reduced its energy intensity over the

past 30 years, consumers and businesses would have spent about $650 billion

more on energy purchases in 2003. • Between 1996 and 2003, GDP increased 25 percent while primary energy use increased just 5 percent. Imagine how much worse our energy problems would be

today if energy use had increased 10 or 20 percent during 1996-2003.

Even though the United States is much more energy-efficient today than it was

30 years ago, there is still enormous potential for additional cost-effective energy

savings. Some newer energy efficiency measures have barely begun to be adopted.

Other efficiency measures could be developed and commercialized in coming years,

with proper support:

• The Department of Energy’s national laboratories estimate that increasing energy

efficiency throughout the economy could cut national energy use by 10 percent

or more in 2010 and about 20 percent in 2020, with net economic benefits for

consumers and businesses.2

• ACEEE, in our Smart Energy Policies report, estimates that adopting a comprehensive set of policies for advancing energy efficiency could lower national

energy use from EIA projections by as much as 11 percent in 2010 and 26 percent in 2020.3

• ACEEE and others estimate that passenger vehicle fuel economy could be raised

by two-thirds with existing cost-effective technologies. Yet the fuel economy of

U.S. vehicles today is the same as it was in 1982.4

• The opportunity for saving energy is also illustrated by experience in California

in 2001. Prior to 2001 California was already one of the most-efficient states

in terms of energy use per unit gross state product (ranking 5th in 1997 out

of 50 states 5). But in response to pressing electricity problems, California homeowners and businesses reduced energy use by 6.7% in summer 2001 relative to

the year before (after adjusting for economic growth and weather) 6, with savings costing an average of 3 cents per kWh,7 far less than the typical retail or

even wholesale price of electricity.

Unfortunately, a variety of market barriers keep these savings from being implemented. These barriers are many-fold and include such factors as (split incentives—

(landlords and builders often do not make efficiency investments because the benefits of lower energy bills are received by tenants and homebuyers); panic purchases

(when a product such as a refrigerator needs replacement, there often isn’t time to

research energy-saving options); and bundling of energy-saving features with highcost extra (bells and whistles.)

Furthermore, recent developments indicate that the U.S. needs to accelerate efforts to implement energy efficiency improvements:

• Oil, gasoline and natural gas prices have risen substantially in the past couple

of years. Energy efficiency can reduce demand for these fuels, reducing upward

price pressure and also reducing fuel-price volatility, making it easier for businesses to plan their investments. Prices are determined by the interaction of

supply and demand—if we seek to address supply and not demand, it’s like entering a boxing match with one hand tied behind our back.

• A recent ACEEE analysis found that gas markets are so tight that if we can reduce gas demand by as little as 4% over the next five years, we can reduce

wholesale natural gas prices more than 20%. This analysis was conducted by

Energy and Economic Analysis, the same analysis firm and computer model

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8 Energy Information Administration, 2004, Annual Energy Review 2004 and Annual Energy

Review 2005, Early Release. Washington, DC: U.S. Dept. of Energy. 9 Alliance to Save Energy et al., 1997, Energy Innovations: A Prosperous Path to a Clean Envi- ronment. Washington, DC: American Council for an Energy-Efficient Economy.

that was employed by DOE and the National Petroleum Council for their 2003

study on U.S. natural gas markets. Results of this analysis are shown in the

figure below. These savings would put over $100 billion back into the U.S. economy. Moreover, this investment would help bring back U.S. manufacturing jobs

that have been lost to high gas prices, and would help relieve the crushing burden of natural gas costs experienced by many households, including low-income

households. Importantly, much of the gas savings in this analysis comes from

electricity efficiency measures, because so much electricity is generated by natural gas, often inefficiently.

• The U.S. is growing increasingly dependent on imported oil, with imports accounting for more than 60% of U.S. oil consumption in 2003, of which nearly half

came from OPEC countries and more than 20% came from the Persian Gulf.8

The U.S. Energy Information Administration estimates that imports will account for 72% of U.S. oil use in 2020 unless current trends are changed. While

moderate amounts of new oil are available in hard-to-reach areas of the U.S.,

much greater amounts of oil are available by increasing the efficiency with

which we use oil. Forthcoming analyses by ACEEE and others estimate we can

reduce U.S. oil use by more than 2.5 million barrels per day by 2020 through

improvements in the residential, commercial, industrial and transportation sectors (the latter including passenger cars, light and heavy trucks, and planes).

Energy efficiency can slow the growth in oil use, allowing a larger portion of

our needs to be met from sources in the U.S. and neighboring friendly countries. • The U.S. economy has had sub-par performance for several years. While the economy is improving, additional boosts will help. Energy efficiency investments

often have financial returns of 30% or more, helping to reduce operating costs

and improve profitability. In addition, by reducing operating costs, efficiency investments free up funds to spend on other goods and services, creating what

economists call the (multiplier effect), and helping the economy broadly. A 1997

study found that due to this effect, an aggressive set of efficiency policies could

add about 770,000 jobs to the U.S. economy by 2010.9

• Emissions of gases contributing to global climate change continue to increase.

Early signs of the impact of these changes are becoming apparent in Alaska.

Energy efficiency is the most cost-effective way to reduce these emissions, as efficiency investments generally pay for themselves with energy savings, providing no-cost emissions reductions.

Energy efficiency also draws broad popular support. For example, in a May 2001

Gallop Poll, 47% of respondents said the U.S. should emphasize ‘‘more conservation’’

versus only 35% who said we should emphasize production ‘‘an additional 14% volunteered ‘both’ ’’. In this same poll, when read a list of 11 actions to deal with the

energy situation, the top four actions ‘‘supported by 85-91% of respondents’’ were

‘‘invest in new sources of energy,’’ ‘‘mandate more energy-efficient appliances,’’

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10Moore, David, 2001, ‘‘Energy Crisis: Americans Lean toward Conservation over Production.’’

Princeton, N.J.: The Gallup Organization. 11Kubo and Nadel, 2001, Opportunities for New Appliance and Equipment Efficiency Standards: Energy and Economic Savings Beyond Current Standards Programs. Washington, DC:

American Council for an Energy-Efficient Economy.

‘‘mandate more energy-efficient new buildings,’’ and ‘‘mandate more energy-efficient

cars.’’ Options for increasing energy supply and delivery generally received significantly less support.10

Furthermore, increasing energy efficiency does not present a trade-off between enhancing national security and energy reliability on the one hand and protecting the

environment on the other, as do a number of energy supply options. Increasing energy efficiency is a ‘‘win-win’’ strategy from the perspective of economic growth, national security, reliability, and environmental protection.

We are not saying that energy efficiency alone will solve our energy problems.

Even with aggressive actions to promote energy efficiency, U.S. energy consumption

is likely to rise for more than a decade, and this growth, combined with retirements

of some aging facilities, will mean that some new energy supplies and energy infrastructure will be needed. But aggressive steps to promote energy efficiency will substantially cut our energy supply and energy infrastructure problems, reducing the

economic cost, political controversy, and environmental impact of energy supply enhancements.

COMMENTS ON THE ENERGY POLICY ACT OF 2005

The provisions in the draft Energy Policy Act of 2005 (which we assume are virtually identical to the H.R. 6 Conference Language from 2003) take moderate steps

to address natural gas and electricity use but do very little to stem oil use. Notable

efficiency provisions in this Act include:

1. Enactment of Consensus Equipment Efficiency Standards on Six Products plus DOE Rulemakings to set Efficiency Standards on Six More

Products

These standards were negotiated by ACEEE and industry over the 2001-2003 period and draw broad support. In cases where there was clear consensus on what the

new standard should be, the specific standard is included in the bill. Placing these

standards in the bill speeds up implementation (saving the three or more years for

a typical DOE rulemaking) and also provides clear direction for manufacturers on

the products they need to produce (with a rulemaking, manufacturers face uncertainty until a final rule is published). In cases where such consensus was lacking,

the bill directs DOE to set standards by rule. In a few cases the standards established by H.R. 6 were due to take effect in 2005. These dates need to be pushed

back to January 1, 2006. Overall, we estimate that these standards will have a benefit-cost ratio of about six to one (energy bill savings will be about six times greater

than the incremental cost of the more efficient equipment).11

2. Tax Incentives for Advanced Energy-Saving Products and Buildings

The H.R. 6 Conference agreement includes tax incentives for combined heat and

power systems, advanced appliances, hybrid, fuel cell and advanced diesel vehicles,

and efficient new and existing homes and commercial buildings. These provisions

will expand use of these energy-saving technologies and building practices, helping

these technologies and practices to become more established in the market so they

can better prosper when the tax incentives end. We see these as a temporary ‘‘shot

in the arm’’ for these technologies, and not a permanent entitlement. In 2003 we

estimated that these tax incentives will save about 19 quadrillion Btu’s of energy

over the 2004-2020 period, about 1% of U.S. energy use. By our estimates, the tax

incentives account for about two-thirds of the energy savings achieved under the

bill. We are now preparing updated estimates and expect to have these available

in about a month.

3. Enhancements to the Appliance Labeling Program, Federal Energy Management Program and Programs that Seek Voluntary Efficiency Commitments from Industrial Firms

This bill also includes several other useful efficiency provisions. For example, Section 134 directs the Federal Trade Commission to review and improve the Energy

Guide label that now is displayed on many types of appliances. The current label

is ineffective at educating and motivating consumers and needs updating. ACEEE

focus group and survey research has found that an improved label would be easier

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to understand and would motivate more consumers to purchase high-efficiency appliances.

Subtitle A addresses Federal Leadership in Energy Conservation. It is important

for the federal government to continue to lead the nation in energy efficiency by setting an example of energy use in its own buildings. Few federal programs have been

as cost-effective as DOE’s Federal Energy Management Program (FEMP). At an average cost of only $20 million per year, FEMP has cut federal building energy use

by more than 20% over the past two decades—a reduction that now saves federal

taxpayers roughly $1 billion each year in reduced energy costs. Subtitle A updates

and strengthens FEMP efforts by: (1) updating agency energy reduction targets; (2)

extending and expanding Energy Savings Performance Contract (ESPC) authority;

(3) requiring cost-effective metering; (4) increasing performance standards for new

federal buildings; (5) strengthening federal procurement requirements; and (6) increasing federal fleet fuel-economy requirements.

Section 107 authorizes the Secretary of Energy to establish a voluntary commitment program to reduce industrial energy intensity. Such programs have proven effective in Europe and are now being implemented in Canada. We recommend that

this provision be strengthened by establishing specific goals, authorizing DOE to

provide technical assistance and other services and providing that DOE report to

Congress on the success of the program. Language along these lines was included

in the original bill that passed the House in 2003 but unfortunately this was weakened in conference. The earlier language should be restored.

4. Updated Authorizations for Advanced Energy Research Including Energy Efficiency

Title IX authorizes DOE energy efficiency programs for the next five years. By

and large this title contains a variety of useful ideas (we particularly support the

work on lighting and distributed energy systems). However, the impact of this title

will primarily depend on future appropriations.

Title VIII includes specific authorization for the Freedom Car and Hydrogen Fuel

programs. We think these are useful programs, and the draft bill improves upon

DOE’s formulation of the program by setting real-world goals for the introduction

and performance of fuel cell vehicles. However, it will be at least 2030 before these

vehicles have any significant impact. For example, Title VIII sets a goal of 2015 for

production decisions and 2020 for selling vehicles that will be accepted by consumers. Since new vehicle technologies take close to a decade to penetrate the market, it will be at least 2030 before these vehicles have a significant presence on the

road. In the interim, increased efforts will be needed to improve the efficiency of

gasoline-powered vehicles. Also, it is far from certain that efforts to develop a hydrogen economy will be successful, so that rather than putting all of our ‘‘eggs’’ in the

hydrogen basket, we recommend that a diverse range of advanced high-efficiency

technologies be pursued.

In summary, we support the provisions discussed above, although, as discussed

later, we believe some of the tax incentive provisions should be refined to produce

more energy savings per dollar of tax incentive provided. Taken together, in 2003

we estimated that these provisions will reduce U.S. energy use by about 1.5% cumulatively over the 2004-2020 period, including approximately a 3% reduction in 2020.

By 2020 we estimated that these provisions will also displace the need for nearly

300 new power plants of 300 MW each. These are substantial positive impacts and

well worth pursuing. We are now in the process of revising our savings estimates

and expect to have updated figures about a month.

ADDITIONAL PROVISIONS CONGRESS SHOULD CONSIDER

While the provisions discussed above are a reasonable start, much more can and

should be done to improve U.S. energy efficiency. We recommend that the following

changes be made to the bill, either before it passes the House or in conference:

1. Adding New Consensus Efficiency Standards Negotiated with Industry

ACEEE and industry have a long history of negotiating consensus agreements on

new efficiency standards. The H.R. 6 Conference Agreement included all of the consensus agreements negotiated as of November 2003. Since then we have negotiated

five additional agreements with industry and recommend they be added to the bill.

These agreements cover:

• Commercial packaged air conditioners. Agreement with the Air Conditioning and

Refrigeration Institute and manufacturers to establish specific new efficiency

standards effective in 2010 based on levels in current voluntary programs and

state efficiency standards.

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12Subsequently adopted as the National Appliance Energy Conservation Act of 1987. 13 Congressional Record, March 3, 1987, p. H 892.

• Commercial refrigeration. Agreement with the Air Conditioning and Refrigeration

Institute and manufacturers to establish specific new efficiency standards effective 2010 and for DOE to set additional standards via rule. The new standards

are based on levels in current voluntary programs and state efficiency standards.

• Residential dehumidifiers. Agreement with the Association of Home Appliance

Manufacturers and their members to establish specific new efficiency standards

effective 2007 based on the current Energy Star specification.

• Ceiling fans. Agreement with Home Depot (who represents about half of the U.S.

market) and manufacturers to establish specific standards effective 2007 based

on portions of the Energy Star specification.

• Pre-rinse spray valves. Agreement with Plumbing Manufacturers Institute to

adopt specific standards effective 2006 based on state efficiency standards and

levels promoted in voluntary incentive programs.

In addition, ACEEE is talking to manufacturers of four additional products and

expects to have a few additional consensus agreements that should be considered

by the Senate and by House-Senate conferees.

2. Clarifying that DOE Can Set Separate Furnace Efficiency Standards for

Cold and Warm States

When the federal standards law was passed in 1987, it established uniform national standards for all products, including heating and cooling equipment. However, climate in the U.S. varies enormously from Alaska to Florida, and a one-size

fits all approach may not make sense for the entire country. For example, DOE is

currently conducting a rulemaking on new standards for residential furnaces, a

major consumer of natural gas. Condensing furnaces (e.g., those meeting the Energy

Star specification) are generally cost-effective in Northern states but not cost-effective in Southern states. An ACEEE analysis estimates that a condensing furnace

standard in cold states would reduce national natural gas use by more than 150 billion cubic feet and will save consumers $3.5 billion (discounted net present value)

for equipment sold by 2030. DOE’s Office of General Counsel says they lack authority to set separate standards for different regions. Manufacturers claim that imposing separate standards for the North and South would create difficulties for them.

However, manufacturers often have separate models for Northern and Southern climates (e.g. furnaces in the south often have larger fans in order to handle larger

cooling loads) and thus we think manufacturers are overstating the difficulties.

When the federal law was first passed in 1987, Rep. Barton objected to setting the

same standard for cold and warm states stating on the House floor:

The establishment of national appliance efficiency standards also ignores

sharp climate variations in different regions of the country. To insist that airconditioners in Minnesota and Indiana have the same energy efficiency rates as

air-conditioners in Mississippi and Texas ignores the fact that an air-conditioner may be operated four or five times as much in warmer climates. For example, a comparison of hours of air-conditioner operation in different cities

demonstrates that annual usage in Detroit is 265 hours, while usage in New

Orleans is 1,370 hours. Annual heating hours in these two cities is 2,533 hours

and 1.099 hours, respectively. H.R. 87 12 makes no allowance for variation.13

To address this problem and the large energy and economic savings that are possible with regional standards, we recommend that current law be amended to grant

DOE authority to consider separate standards for the North and South for residential heating and cooling systems. This amendment should require DOE to consider

the advantages and disadvantages of regional differentiation based on criteria in the

underlying law, and decide whether regionally differentiated standards make sense

for a particular product. To limit the impact on manufacturers, we recommend that

the amendment permit only two zones and require zones to follow state boundaries

and be fully contiguous (except Alaska and Hawaii). We also recommend that current law be amended to authorize (but not require) DOE to regulate combined space

and water heating systems, an increasingly common equipment type that may become a ‘‘loophole’’ around separate furnace and water heater standards.

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14See http://texas.efficiencylink.net/ for additional information. 15 ACEEE calculations based on data in Greene et al., 2003, Feebates, Rebates and Gas-Guzzler Taxes: A Study of Incentives for Increased Fuel Economy. Oak Ridge, TN: Oak Ridge National Laboratory. 16More information on energy-saving opportunities in trucks can be found in Langer, 2004,

Energy Savings Through Increased Fuel Economy for Heavy-Duty Trucks. Washington, DC: National Commission on Energy Policy.1Therefore, we recommend that a provision be added to direct the Administration to set policies to achieve savings of one million barrels per day by 2013.

A provision along these lines was developed by Senator Landreau in the 108th Congress and

received almost unanimous support in the Senate. That provision lacked an enforcement mechanism, however, which should be added this time around. In addition, as part of this provision,

authority should be granted to revise the gas-guzzler tax, establish feebates, establish testing

and fuel economy standards for heavy vehicles, and modify passenger vehicle test procedures

to better match real-world performance. We are not at this point advocating establishment of

Continued

3. Including an Energy Efficiency Resource Standard to Set Energy Saving

Targets for Gas and Electric Utilities, Modeled after a Program Now

Operating in Texas

Texas’s electricity restructuring law (SB-7 1999) 14 created a requirement for electric utilities to offset 10% of their demand growth through end-use energy efficiency.

Pennsylvania’s new Advanced Energy Portfolio Standard includes end-use efficiency

among other clean energy resources. Other states have set targets for energy savings from utility programs. Congress should set electric and gas end-user savings

targets for utilities, with flexibility to achieve them through a market-based trading

system. With trading, utilities that save more than their target can sell savings

credits to utilities that fall short of their savings targets. Trading would also permit

the market to find the lowest-cost savings nationwide. We recommend that these

targets start at modest levels (e.g. 0.25% of sales annually) and ramp-up over several years to savings levels currently achieved by the most successful states (e.g.

0.75% of sales annually). Peak demand savings should also be included, building on

a proposal in H.R. 3406 (section 103) introduced by Rep. Barton in the 107th Congress. To ensure that costs will be moderate, in addition to permitting trading, we

recommend that electric and gas utilities be permitted to buy credits for 3 cents per

kWh of electricity or 30 cents per therm of gas, which is less than half of the current

retail cost of these energy sources. States should also be encouraged to reform their

utility regulations, so that utility revenues and profits are sustained regardless of

fluctuations in sales—several states have already taken this step.

We estimate that a program like this would save more energy and money than

all of the efficiency provisions presently in the bill and thus inclusion of a provision

along these lines should be a high priority.

4. Setting a Fuel-Savings Goal of 1 Million Barrels per Day of Oil Savings

by 2013 and Authorizing Additional Tools for Achieving These Savings

There are multiple opportunities to save oil in all sectors of the U.S. economy, and

we believe a reduction of 1 million barrels per day, relative to EIA projections, is

eminently achievable and a good start towards the much deeper cuts needed over

the next 15-20 years. One million barrels represents two-thirds of our oil imports

from Saudi Arabia today. Both buildings and industry can make substantial contributions to this goal through measures such as updating building codes and efficiency standards for residential heaters, and enhancing the efficiency of industrial

boilers.

The greatest opportunity to save oil lies in the transportation sector, however. We

cannot afford to pass up this chance to make our passenger vehicles more efficient,

and there are a number of approaches to accomplishing this. Simply requiring new

vehicles to meet current fuel economy standards in their real-world performance (i.e.

with a more accurate test procedure) could save over three-quarters of a million barrels per day by 2013. Strengthening the market for efficiency by extending the gas

guzzler tax to the heavier passenger vehicles or by adopting a ‘‘feebate’’ system

would also be effective measures. For example, a revenue-neutral feebate system

that grants a rebate or charges a fee on vehicle purchases at the rate of $1000 for

each one-hundredth of a gallon per mile above or below the average would result

in fees and rebates in the hundreds of dollars for most vehicles and could save over

three-quarters of a million barrels per day by 2013.15

There are good opportunities to save oil by boosting heavy truck efficiency as well,

which would help the freight industry save on fuel costs. We estimate that freight

trucks could save over 200,000 barrels of oil daily by 2013 and recommend, at a

minimum, establishment of fuel economy test procedures for these vehicles in the

bill.16

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these specific policies, but instead recommend that they be available to the Administration as

it develops its compliance plan. 17 Nadel and Geller, 2001, Smart Energy Policies: Saving Money and Reducing Pollutant Emissions Through Greater Energy Efficiency, Www.aceee.org/ energy/reports.htm. Washington, DC:

American Council for an Energy-Efficient Economy.

In addition, the current bill expands the list of considerations that DOT must use

in determining ‘‘maximum feasible’’ fuel economy when updating CAFE ́ standards.

The additional items are matters that DOT has consistently taken into account in

its past fuel economy determinations, and we believe that the only consequence of

altering the list would be to make the process of revising the standards more cumbersome. This provision should be eliminated

5. Addressing Barriers to Combined Heat And Power Systems by Directing

FERC and EPA to Complete Current Proceedings

In times of increasing energy costs, combined heat and power (CHP; sometimes

also called cogeneration) represents one of the most important opportunities available for improving efficiency, the environment and economic competitiveness. With

fair rules, 50,000 MW of CHP capacity can be added by 2010 and an additional

95,000 MW added by 2020, reducing the fuel needed to generate electricity by up

to 50%.17 Major barriers to the expansion of CHP are uneven and sometimes onerous interconnection requirements imposed by some utilities and states and emissions regulations that penalize and do not reward efficient CHP systems. FERC and

EPA have recognized these problems and started proceedings to address them. In

the case of interconnection, FERC has opened a docket on interconnection rules for

generators of 20 MW or less. We recommend that the energy bill direct FERC to

complete this rulemaking within one year after the energy bill is enacted. We also

recommend that the energy bill direct FERC to develop guidelines for backup power

rates charged to CHP and distributed energy systems that are within FERC’s jurisdiction (e.g. for electric providers with open-access tariffs on file at FERC). Such

rates should be fair, reasonable and non-discriminatory. Likewise, EPA has begun

to investigate how CHP systems are treated in emissions regulations. Current regulations limit emissions per unit of fuel input, regardless of how inefficient or efficient a plant is. A better approach is to limit emissions per unit of energy output,

which rewards plants that can produce more electricity and useful heat per unit of

energy input. We recommend that the energy bill direct EPA to develop outputbased emissions requirements for CHP systems within two years of bill enactment.

6. Refining Proposed Energy Efficiency Tax Incentives

Revisions to the tax incentives provisions in the bill are under the jurisdiction of

the Ways and Means Committee and not this Committee. However, in the interest

of completeness, we provide the following specific recommendations on how these

provisions can be improved to increase the energy savings achieved at little if any

additional cost to the Treasury.

• Combined heat and power (CHP). Schools, hospitals, and businesses can use CHP

to cut their energy bills while reducing strain on power grids. High-efficiency

CHP systems are also more efficient in their use of natural gas than most central station power plants. Due to these benefits, CHP is a priority in the President’s National Energy Policy plan. A CHP investment tax credit similar to the

one included in the H.R. 6 Conference Report should be included in new legislation with two modifications. First, the 15 MW eligibility cap on the provision

should be raised to 50 MW. Second, provisions in the original Senate language

inadvertently lost in conference that made recycled energy (e.g. waste heat recovery, heat engines and back-pressure turbines) eligible should be restored.

The 15 MW cap originally was intended to limit tax expenditures, but the last

Joint Tax scoring indicated that the CHP tax credit actually stimulated sufficient economic activity that it provided net tax revenues rather than expenditures at least up to a 50 MW unit. For larger sizes, many systems are likely

to be installed without tax credits and costs to the Treasury increase significantly.

• Commercial buildings. This provision creates a deduction for businesses that

make major efficiency improvements. Since commercial lighting and air conditioning are among the biggest components of peak electricity loads, this incentive will help prevent blackouts and will also save lots of natural gas. This provision was in both the H.R. 6 Conference Report and Senator Domenici’s S.

2095 in the 108th Congress. We prefer the S. 2095 version as the incentives and

savings are somewhat higher. Based on input from DOE and others, the latest

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18 Joint Committee on Taxation. May 2, 2004. Estimated Revenue Effects of S. 1637, the

‘‘Jumpstart Our Business Strength (‘‘JOBS’’) Act,’’ As Passed by the Senate. JCX-36-04. 19 92% is preferred because there are many more units available at 92% than at 95%. 20See http://www.cee1.org/gas/gs-ht/gas—heat—specs.pdf. 21For condensing furnaces, the 92% AFUE and fan requirements should be combined in order

to keep costs down. If an incentive is offered for 92% AFUE without an efficient fan, many more

systems will qualify, raising costs.

Joint Committee on Taxation analysis shows this provision will cost significantly less than earlier estimates.18

• New and existing homes. We build almost two million new homes each year; to

keep them from straining power grids and raising energy prices, it is vital that

they be as efficient as possible. Efficiency also makes homes more affordable to

more families. To get maximum benefit from the credits, we ask that credits be

offered for homes both 30% and 50% better than model codes. We recommend

the S. 2095 incentive amounts as providing more energy savings per federal dollar, and the Senate language on reference codes and certification as more balanced and complete.

One small refinement that is badly needed is to clarify that heating and cooling air distribution duct sealing and thermal envelope air sealing are both eligible for new and existing home credits. These measures reduce loss of heated air

to the outside and unheated basements and attics. These are two of the largest

opportunities to reduce natural gas use in homes but the H.R. 6 and S. 2095

language is ambiguous on whether they are eligible for tax incentives. Clarifying that these measures are eligible will not affect the cost caps per home but

will expand the measures that can be used to achieve savings within the cost

caps.

• Home heating and cooling equipment. The largest direct natural gas use in homes

is for furnaces and water heaters. And central air conditioners and heat pumps

are a large indirect user of gas since a substantial portion of peak electricity

comes from natural gas. S. 2095 contains modest provisions for tax incentives

for furnaces and water heaters but air conditioner and heat pump incentives

were dropped due to a lack of consensus in 2003. In light of our pressing natural gas problems, and an emerging consensus on air conditioner and heat

pump incentives, we recommend that the S. 2095 provision for water heaters

be retained, the provision for furnaces be strengthened, and a central air conditioner and heat pump provision be added.

For furnaces, S. 2095 provides a $125 incentive for 95% efficient furnaces and

boilers plus an additional $50 for an advanced air circulation fan. We believe

this can be simplified and provide more gas savings if a single incentive is provided for a furnace or boiler with 92% efficiency 19 and an efficient air circulation fan that meets a new consensus efficiency specification developed by the

Consortium for Energy Efficiency (CEE) and the Gas Appliance Manufacturers

Association (GAMA).20 We recommend an incentive of about $200 in the first

year when the program begins, declining to $150 in the second year and $100

in the third year as this equipment becomes more popular. To further limit

costs, incentives could be limited to replacement of furnaces in existing homes

since condensing furnace retrofits are more expensive and more in need of incentives than condensing furnaces in new construction applications. We also

recommend that the $50 credit be offered for non-condensing furnaces that meet

the CEE/GAMA specification. Such an incentive will be useful in the South

where condensing furnaces often are not cost-effective.21

For central air conditioners and heat pumps, we have agreed with the Air

Conditioning and Refrigeration Institute (ARI) on a consensus recommendation.

We recommend that a consumer tax credit be provided for units meeting the

Energy Star specification in 2006-2008. This specification is scheduled to be finalized by EPA in March 2005 and will call for significant energy savings relative to the new 2006 federal efficiency standard for these products. We recommend a credit of $250 for the first two years and $100 for the third year for

this technology. The credit ramps down in the third year, both to reduce cost

to the Treasury and to ease the transition to a post-incentive market.

• Home appliances. H.R. 6 and S. 2095 both contain credits for clothes washers and

refrigerators. These appliances are two of the largest energy users in the home

and the credits could help millions of families control their utility bills while

saving substantial energy for the nation. This provision was updated in 2003

to reflect changes in the appliance market and should be updated again. Specifically, we recommend that the clothes washer credit reference the 2007 Energy

Star specification (due to be finalized by DOE in spring 2005) and that the reVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00191 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
184

frigerator credit be refined to provide a $50 credit for 15% savings relative to

the current federal standard, a $100 credit for 20% savings, and a $150 credit

for 25% savings. These changes will better promote advanced equipment and

will significantly increase the energy savings per federal dollar. These refinements are needed because the market share of 2004 Energy Star clothes washers and refrigerators has grown substantially in the past two years and the

credit needs to be restructured to better emphasize advanced equipment. We

also recommend that credits for more efficient dishwashers in Senator Smith’s

S. 2655 from the last Congress be included. We are now discussing changes

along these lines with the Association of Home Appliance Manufacturers

(AHAM) and hope to have consensus recommendations ready later this month.

This consensus may differ in some particulars from what we discuss above. • Cars and trucks. The credits proposed for advanced technology vehicles in H.R.

6 are generally sound. We are particularly supportive of the credits for advanced technology buses and heavy trucks as advanced vehicles in these categories have received less attention than advanced passenger vehicles. The H.R.

6 credits have been trimmed substantially from their original formulation; any

further adjustments should tighten the energy and environmental thresholds

for receipt of credit rather than reducing the per-vehicle credit for the best performers. Also, an explicit statement should be added to the diesel language

clarifying that fuel economy credits should be computed on a miles-per-gallon

gasoline-equivalent basis.

Energy Savings from an Enhanced Bill

In 2003, we estimated that the efficiency provisions in the H.R. 6 Conference Report will reduce U.S. energy use by about 1.5% over the 2004-2020 period, including

approximately a 3% reduction in 2020 (i.e., savings will gradually ramp up from 0%

in 2004 to 3% in 2020, making for an average of 1.5% over the full 17-year period).

By 2020 we estimated that these provisions will also displace the need for nearly

300 new power plants of 300 MW each.

This same analysis found that inclusion of modifications along the lines suggested

above will increase total savings to about 6% of total energy use over the 2004-2020

period, including approximately 12% savings in 2020. With these modifications,

peak power needs will also drop, displacing the near for more than 700 new power

plants of 300 MW each. Thus, taken together, the additional provisions and refinements we recommend would increase energy savings under the bill by about a factor

of four.

We are now in the process of revising our savings estimates and expect to have

updated figures in about a month.

Conclusion

Energy efficiency is an important cornerstone for America’s energy policy. Energy

efficiency has saved consumers and businesses billions of dollars in the past two

decades, but these efforts should be accelerated in order to:

• save consumers and businesses even more money;

• change the energy supply and demand balance and put downward pressure on energy prices;

• decrease reliance on imported oil;

• help with economic development (since savings from energy efficiency generates

jobs); and

• reduce carbon emissions, helping to moderate growth in the gases that contribute

to global climate change.

The provisions in the draft Energy Policy Act of 2005 take modest steps in this

direction, particularly the sections establishing new appliance and equipment efficiency standards and tax incentives for advanced energy-saving equipment, vehicles

and buildings. Overall, we estimate that this bill will reduce U.S. energy use by

about 3% by 2020.

But much more can and should be done. We recommend that Congress include

the following provisions:

• Adding new consensus efficiency standards on commercial air conditioning and refrigeration systems, ceiling fans, dehumidifiers, and restaurant spray valves

based on consensus agreements we have negotiated with industry.

• Adding additional consensus efficiency standards if negotiations now underway

for several products can be successfully completed.

• Clarifying that DOE can set separate furnace efficiency standards for cold and

warm states.

• Including an Energy Efficiency Resource Standard to set energy saving targets for

gas and electric utilities, modeled after a program now operating in Texas.

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• Setting a fuel-savings goal of 1 million barrels per day of oil savings by 2013 and

authorizing additional tools for achieving these savings such as fuel-economy

testing for heavy vehicles, ‘‘feebates’’ for passenger vehicles (a revenue-neutral

system of fees and rebates based on fuel economy), and modification of passenger vehicle test procedures to better match real-world performance.

• Addressing barriers to combined heat and power systems by directing FERC and

EPA to complete current proceedings on interconnection and output-based emissions permitting.

• Refining proposed energy efficiency tax incentives in order to better promote advanced equipment and practices, increasing savings while having little or no impact on costs.

These provisions would increase the savings under the bill by about a factor of

four, reducing U.S. energy use by about 12% in 2020. Failure to take these steps

now will make it more likely that Congress will again have to address energy problems in the not very distant future.

This concludes my testimony. Thank you for the opportunity to present these

views.

Mr. HALL. Thank you. Good testimony. I thank you for it. Okay.

I am going to be as brief as I can. I will begin over here, Mr. Kuhn,

with you. In your testimony, you make no mention of the standard

market design or the voluntary transmission pricing plans provisions. Does EEI have a position on these, and if so, what is it?

Mr. KUHN. Mr. Chairman, I think that as Mr. English and other

people have testified here, the electricity provisions are a delicately

balanced compromise, that I think a lot of people have supported

in the past, and continue to support, and we really think these provisions need to remain in the bill. With respect to the participant

funding that you mentioned, you know, we strongly believe in the

principle that cost causation must follow the cost responsibility.

The cost must follow the cost causation. The provisions in the

whole electricity title, I think, are if you start tinkering, somebody

wants to start tinkering with some of them. Other people are going

to want to start tinkering with them the opposite direction, and I

think you have got a provision in there that is supported by a lot

of different organizations, and we believe that, as the Department

of Energy testified, it is probably the most important provision in

the energy bill, the electricity provisions overall, and it should

move forward.

Mr. HALL. All right, and I thank you. And I thank you for being

almost as brief with your answer as I was with my question. We

are getting somewhere. Ms. Church, if States do return to the utility bill programs, and you know what I am talking about, don’t

you?

Ms. CHURCH. Yes.

Mr. HALL. Are there any measures like competitive bidding,

something like that, that could lessen the impact on consumers?

Ms. CHURCH. Yes. We are trying to work with State commissioners to help them, and they understand the benefits of competitive bidding for new supplies. We believe that the States ought to

adopt provisions that set up a good, competitive bidding program,

with an independent referee, if the utility or its affiliates are in the

bidding. And the FERC has, in some recent cases, said that they

believe that this competitive bidding is also a very good factor in

keeping market power abated.

Mr. HALL. Okay. And I thank you. Alan, I thank you first, for

you and your organization being so nice to me yesterday, when I

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spoke to you at noon. And I tried to outline all the things you all

because you supported the bill in the final analysis.

Mr. RICHARDSON. Yes, we did.

Mr. HALL. And I tried to be honest with you on the things that

we have included in there that we knew you didn’t like.

Mr. RICHARDSON. And you have always been honest with us. We

appreciate that.

Mr. HALL. You were generous with me. You let me get out—safely.

Mr. RICHARDSON. Without any questions.

Mr. HALL. Yeah.

Mr. RICHARDSON. Are you going to do the same for me, Mr.

Chairman?

Mr. HALL. I am. I sure am. I am just going to let you kind of

set the tone just of which way we ought to go, and how we can

have any of our provisions ameliorated to the extent that they are

not damaging to you or anybody else that is a big player in this.

I would like to hear that, and I would like to have it on the record.

Mr. RICHARDSON. Thank you, Mr. Chairman, and I will try to be

very brief.

You have heard uniform agreement on the reliability language,

so it seems to me that is in the pile of something everyone can

agree to.

Mr. HALL. Yes.

Mr. RICHARDSON. Now, Mr. Kuhn and I disagree on a couple

things, participant funding, which is the question you just addressed to him. Mr. English and I are on the same page on that.

Participant funding is bad for a number of reasons, including its

very prescriptive nature, and I think if we have learned one thing

recently, it is that we need more flexibility, not less flexibility, and

we have also learned that FERC needs to pay attention to the regional characteristics of the industry, and a one size fits all proposition, whether its standard market design or participant funding

really doesn’t make any sense. In fact, the Commission is pursuing

participant funding in some areas, because it works for those areas,

and not in others. And so we would like to preserve the flexibility.

We have a stake in this debate, because we are transmission dependent utilities. Frequently, in load pockets, if a transmission is

needed to continue to serve our loads, we might be accused of being

responsible for that new transmission, and therefore, all the costs

put on a small group of customers, when in fact, what we are doing

is expanding a grid to meet grid-wide needs.

I have mentioned the Holding Company Act. We remain concerned about the repeal of the Holding Company Act. You and I

have talked about that in the past, and I go into some detail on

that in my statement.

Mr. HALL. I thank you very much.

Mr. RICHARDSON. Thank you, Mr. Chairman.

Mr. HALL. Mr. English, define for us, if you will, what it means

to have a reciprocal tariff, and are these the same terms and conditions that IOUs have to operate under, and whether or not you believe that NRC standards, procedures, and practices are enforceable and binding on your coop?

187

Mr. ENGLISH. Well, I think that what we are really looking at is

a situation in which everyone recognizes that we need NRC standards. The electric cooperatives have participated, and have been an

active part of NRC, and we have been, we will continue to do so

in the future.

The other point that I would make is that I think you will find

as you examine the record, that electric cooperatives have been in

the forefront of making improvements in the system, and have not

been those who have been reluctant to make changes in the system. The whole issue of incentive rates, in our opinion, is one that

is extremely important, simply due to the fact that we have got to

decide as to whether or not we are truly going to make improvements, and whether we are going to do it in the cheapest manner

possible.

And I think it is also a critical force to recognize that if it is

found, in the end, and it should be in the end, that incentive rates

are necessary, that those additional costs being placed upon consumers are used to actually improve the transmission system, and

that has not always been the case. But as Mr. Kuhn pointed out,

and I would agree, and Alan Richardson, I think, is saying exactly

the same thing, that in conference, there were some agreements

made, and a bill that was produced, that we felt that we could support. Does it contain everything we would like to see? No. And are

there changes we would like to see made? Yes. But we also understand the very delicate nature of this, and I think the committee

is going to have to make a decision as to whether the committee

wants to move forward with what you have, in the form of a compromise, or whether, indeed, we are going to go back and rewrite

this. And that is what my testimony tried to reflect.

If you are going to do it, we have got a number of changes that

we would like to advocate, but notwithstanding that, we will support the bill as it came out of conference, as it pertains to the electric utility industry.

Mr. HALL. And you know that is where we are now.

Mr. ENGLISH. That is exactly where you are now, and that is the

reason I say, you have got to decide whether you are going to open

it up, or whether you are going to move forward with what you got.

Mr. HALL. If I had a lot more time, I would let you tell me what

you are going to do if we don’t, but we don’t have that much time

right now. But thank you very much.

Mr. ENGLISH. Thank you, Mr. Chairman.

Mr. HALL. Is it true that the coop was born in Mr. Rayburn’s

bed—his breakfast room there?

Mr. ENGLISH. And I also want you to know that over at NREC,

we have got a huge picture of Sam Rayburn that is still on the

wall.

Mr. HALL. Good.

Mr. ENGLISH. And I look at it every day, and I say what would

Mr. Sam say about this.

Mr. HALL. He was my Congressman.

Mr. ENGLISH. I know that.

Mr. HALL. I wish he had got more bridges across that Red River.

That is what they are asking me about every year.

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Mr. ENGLISH. Well, we try to keep the number of bridges coming

from Texas in Oklahoma down, Mr. Chairman. We are a little concerned about the kind of traffic you get on that one.

Mr. HALL. I understand that.

Mr. ENGLISH. From the North.

Mr. HALL. If we keep that Oklahoma football up there in Norman, we would be a little happier.

Mr. ENGLISH. Well, that is the one bridge we are keeping open.

Thank you very much.

Mr. HALL. Ms. Callahan, we recognize you at this time.

Ms. CALLAHAN. Chairman Hall, I have a letter that has been

signed by 27 organizations in support of the ESPC program that

I mentioned in my testimony, and I would like to have that submitted for the record if I could, please.

Mr. HALL. Without objection.

Ms. CALLAHAN. Thank you.

Mr. HALL. It is submitted.

You suggest in your testimony that one of the ways to reduce our

reliance on foreign sources of energy, which is just one of the major

pushes and thrusts in this whole bill, would be to improve energy

efficiency in the transportation sector, specifically by altering the

CAFE standards. And I am particularly interested in your approach of closing the CAFE loophole, and terminating the credit for

dual fuel vehicles. Wouldn’t reducing incentive for alternative fuelburning technology be counterproductive in the overall effort of

achieving greater dependence on domestic sources of energy, or

would it? I will give you the opportunity to put something in the

record that suits you.

Ms. CALLAHAN. Thank you, sir. I appreciate that, and I do think

closing the loopholes is very important, because if we do it, we can

get to meaningful increases and improvements in CAFE, and the

EIA estimates, for example, that on-road, real world driving is

about 20 percent, uses 20 percent more gasoline than is estimated

now on the testing that EPA uses for CAFE, so that is a loophole,

we believe. Those tests need to be reformed, and I will submit for

the record the entire list of loopholes, but you mentioned dual fuel,

so let me just say that we are a fuel-neutral organization, but the

dual fuel credit, which allows vehicles to either burn on an alternative fuel, or burn on gasoline, is being used in an unintended

way. The vehicles run about 99 percent of the time on gasoline, so

they are getting a credit for doing something that in the real world

isn’t happening. Let me just say, there are only 188 ethanol stations in this country in 27 States, so it is a loophole that we think

it is. There is an unintended action that is not what the Congress

intended when they put it in place.

Mr. HALL. I thank you. I have just been told my time is up. Mr.

Boucher told me. And I recognize him for whatever time he consumes. I think he has a plane to catch.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I

would never presume to suggest to you that your time has expired.

It has, however.

Mr. HALL. All right.

Mr. BOUCHER. Mr. Richardson, let me just ask a question of you,

and I am going to be very brief, in view of the time that—we have

189

been here a long time today. You have described in your testimony

the problems that you have, associated with the difficulty in obtaining firm, long-term transmission rights, which presumably creates a real difficulty in getting long-term generation contracts. And

I guess that leads to an incentive on the part of the generators to

build gas plants rather than the more expensive coal plants or nuclear plants, that would require long-term contracts in order to get

financing, none of which really serves the public interest very well,

in my opinion. So I think we would acknowledge there is a problem. The question I have for you is what is the solution? What do

you recommend to us, in terms of a way to make sure that the

transmission contracts can be both firm and long-term?

Mr. RICHARDSON. Well, you are correct. We do have a problem

with long-term transmission. It does have those consequences, and

as a result, a lot of my members are pursuing what they were calling a Robinson Crusoe strategy, which is to do it themselves, and

do it close to home, because they don’t want to depend, and they

can’t depend on the transmission grid.

There are a number of things that can be done. The service obligation language, which assures that load serving entities have the

ability and the right to use the transmission that they either own,

or they have arranged for under contract or service agreements, is

one step in that direction.

I do mention in my testimony the need for new transmission.

There are things that can be done that I also address in my testimony, including opening the door to public and cooperative investment in transmission. The transmission-dependent utilities, by and

large in this country, are publicly owned or cooperatively owned. A

great source of capital. We are in wonderful financial shape. We

are very stable, and able to help build out the transmission grid.

We also recommend a change in the service obligation language to

not only look at the arrangements as they exist today, but to ensure that there are long-term arrangements in place in the future.

We have also offered very specific recommendations to the Federal Energy Regulatory Commission, with how they deal with

transmission, long-term arrangements in the RTO context.

Mr. BOUCHER. I notice that the FERC has recommended to us

that the electricity reliability organization be given the authority to

order that new transmission be built in appropriate circumstances.

Would that, if put into practice, address this problem at all? Is it

based on the lack of transmission capacity in certain places, or does

this inability to get firm transmission rights arise from other problems?

Mr. RICHARDSON. Well, it arises, I think, from many, many other

problems, in part, lack of infrastructure. I haven’t looked at what

the Commission has recommended, in terms of their authority to

the ERO, but as I heard it described this morning, I heard it described as the authority to order transmission for reliability purposes, and therein lies a problem, as far as far as I can see. It is

the problem we have with participant funding as well: trying to

identify transmission solely in terms of reliability or solely in terms

of economics. In other words, what do you need to keep the lights

on, regardless of the cost, is reliability, and then anything else beyond that is for economic purposes.

190

I am not sure how far the Commission’s recommendation would

go in addressing the transmission infrastructure problem that we

have.

Mr. BOUCHER. All right. Ms. Church, would you care to comment

on this set of matters? I think it would——

Ms. CHURCH. Yes, thank you.

Mr. BOUCHER. [continuing] concern you equally from the generator side.

Ms. CHURCH. Yes, and let me assure you that my members do

want to sign long-term contracts, both for existing facilities, and

certainly, in terms of building new facilities. It would be very difficult to build new facilities, for many of those companies, without

long-term contracts. And firm transmission capacity is certainly a

perceived problem by many of our customers, including Mr. Alan

Richardson’s members. We would like to try to work around that.

It has been said that we want to sell into the spot market. I can

assure you that we didn’t build these plants, in most cases, to sell

into the spot market. We want to sell in a portfolio of long, medium-term, and short contracts. And so, we would like to work with

our customers to try and, with the FERC, to try to work around

this issue.

Mr. BOUCHER. Do you have some suggestions for us, in terms of

statutory provisions that would help address the problem?

Ms. CHURCH. We will get you something, sir, if I may. I don’t

have anything right with me today.

Mr. BOUCHER. All right. Well, if you choose to do so.

Ms. CHURCH. Thank you.

Mr. BOUCHER. All right. Mr. Chairman, my time has expired.

Thank you very much.

Mr. HALL. Thank you. The Chair recognizes Mr. Dingell.

Mr. DINGELL. I would like to welcome the panel, particularly Mr.

Kuhn and our old friend, Mr. English. Mr. Kuhn, I find myself interested. You are familiar, in the discussion draft, line 15, page 5,

and following down through 18. All fees, dues, other charges collected by the ERO in each of the fiscal years, and allocated under

subsection—under subparagraph (b) shall not exceed $50 million.

What does it mean?

Mr. KUHN. Mr. Dingell, I am not sure I know exactly what it

means either, but I know I am concerned by it.

Mr. DINGELL. What does it mean, in terms of the amount which

could be collected, the amount which can be spent? How would that

contrast with the amount that would have to be done to address

the problem of rulemaking in all of the different regions? Remember, this is going to cover rulemaking. It is going to cover proceedings, travel. It is going to cover the membership fees and dues.

It is going to cover witness fees and things of that kind, expert testimony, recordkeeping, computers, computer studies. Is that too low

a number to address the problem of reliability?

Mr. KUHN. Mr. Dingell, we are very concerned, I think, with that

language, as you are mentioning, and want to work with the committee to address the questions you are answering. Reliability is

the No. 1 priority in our industry. We all agree on the establishment of an electric reliability organization. This organization, inciVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00198 Fmt 6633 Sfmt 6602 99906 HCOM1 PsN: HCOM1
191

dentally, is going to be self-funded. It is going to be funded by industry.

Mr. DINGELL. But we are saying that you can’t collect more than

that much for the self-funding.

And we are saying, and this is not Federal money. This is money

where you are carrying out a Federal requirement, but it is also

money which is necessary to avoid something like $100 billion in

the cost of shutdowns over the course of a year.

Mr. KUHN. Yes, sir. We disagree with the CBO that it should be

a budget item in any case. Much like the ERO is patterned much

like on the Institute for Nuclear Power Operations.

Mr. DINGELL. Do you have any idea——

Mr. KUHN. Or the NASD, in which they fund themselves. They

are self-funded, and it does not have budgetary implications.

Mr. DINGELL. Do you have any idea whether you could effectively

do the job that you have to do to address the problem of reliability?

Remember, you have got to have—the reliability council is going to

cover how many utilities?

Mr. KUHN. You have the NRC, you have the——

Mr. DINGELL. And how many——

Mr. KUHN. [continuing] greatest reliability regions, and the funding for all of them right now could add up somewhere in the neighborhood of $50 million, and it could be——

Mr. DINGELL. And it is going to cover every utility in the country.

It is going to cover every one of the reliability areas, which are—

supposed to 7 or 8, won’t it? It is going to cover Canada. It will

cover, perhaps, Alaska. And it may even cover relationships with

Mexico. Now, can we do what has to be done with this $50 million

limitation on it?

Mr. KUHN. We are definitely interested in working with the committee to address this issue.

Mr. DINGELL. Now, would this cap apply only to funds, rather,

only to fines, which are assessed for violations of reliability rules?

Or would it apply to that, in addition to other things?

Mr. KUHN. I don’t think we have done a sufficient enough analysis to say all the things that it wouldn’t apply to.

Mr. DINGELL. All right. Well, I think we need a little help on this

issue. Now, Mr. Richardson, you made some excellent comments,

which I appreciated. You caution against PUHCA repeal, but you

argue that the—that if Congress takes this step, it should enact

compensating consumer protections. Does the discussion draft satisfy this requirement, in your view?

Mr. RICHARDSON. We would like to see more protections.

Mr. DINGELL. You would like to see more?

Mr. RICHARDSON. We would like to see more.

Mr. DINGELL. What would you like to see more of?

Mr. RICHARDSON. As I mentioned earlier, we would like to see

FERC authority over generation only.

Mr. DINGELL. That is the testimony——

Mr. RICHARDSON. Consolidation.

Mr. DINGELL. [continuing] on page 18?

Mr. RICHARDSON. Pardon me?

Mr. DINGELL. That is your testimony on page 18?

192

Mr. RICHARDSON. I don’t recall the page, sir, but yes, that is my

testimony.

Mr. DINGELL. And you specifically said expanded FERC authority

to identify market-manipulative and anticompetitive behavior.

Mr. RICHARDSON. Yes, sir.

Mr. DINGELL. Is that in the discussion draft?

Mr. RICHARDSON. The discussion draft, as I recall, addresses only

one specific trading practice, which is round trip trades.

Mr. DINGELL. And it needs to cover more, is that right?

Mr. RICHARDSON. I believe so. Yes, sir.

Mr. DINGELL. Now, in this, you also said they need explicit authority for FERC to review transfers of generation assets, utility

holding company mergers, and consolidation of natural gas and

electrical utilities. That is—is that in there?

Mr. RICHARDSON. Yes. Is it in the draft? Is it in my

testimony——

Mr. DINGELL. Is it in the draft?

Mr. RICHARDSON. [continuing] or the draft? It is in my testimony,

not in the draft.

Mr. DINGELL. But is it not—is it in the draft? Okay.

Mr. RICHARDSON. No.

Mr. DINGELL. Your testimony.

Mr. RICHARDSON. No, it is not.

Mr. DINGELL. I am reading your testimony.

Mr. RICHARDSON. Yes. Thank you.

Mr. DINGELL. All right. Then, you say enhancement of FERC’s

existing review, or merger review authority, with higher threshold

for merger approval. Is that in there?

Mr. RICHARDSON. In the draft? No, sir, it is not.

Mr. DINGELL. It is not. Expanded FERC authority to identify

market-manipulative and anticompetitive behavior. We have already decided that is not in there, is that right?

Mr. RICHARDSON. That is correct.

Mr. DINGELL. Then, the fourth item you cover is authority to impose substantial penalties for violations. Is that in there?

Mr. RICHARDSON. There are——

Mr. DINGELL. In the draft?

Mr. RICHARDSON. The penalties, I believe, have been

increased——

Mr. DINGELL. Now, dear friend, just tell me. It is in the draft——

Mr. RICHARDSON. It is in the draft.

Mr. DINGELL. [continuing] or it isn’t in the draft.

Mr. RICHARDSON. The draft. There are provisions in the draft for

higher penalties.

Mr. DINGELL. Are they adequate?

Mr. RICHARDSON. I am sorry, Mr. Dingell. I don’t recall the dollar

amount of the——

Mr. DINGELL. Would you submit to us——

Mr. RICHARDSON. [continuing] increased penalty?

Mr. DINGELL. [continuing] whether, in your view, they——

Mr. RICHARDSON. Yes, sir.

Mr. DINGELL. [continuing] are adequate or inadequate, or why

not, or why? Please? For that. And I will let you do that at——

Mr. RICHARDSON. Certainly. Thank you.

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Mr. DINGELL. [continuing] the time of your own choosing. Now,

true, you say, then, truthfully, a truly meaningful access to holding

company books and records. Is that in the draft?

Mr. RICHARDSON. No, sir. Not in my opinion.

Mr. DINGELL. Okay. So those things need to be in there for the

protection of who now? The consuming public?

Mr. RICHARDSON. For the protection of the people that were intended to protected by the Holding Company Act in the first instance, which are consumers and investors.

Mr. DINGELL. Now, I gather you don’t feel that the bill’s ban on

round trip trades covers all the bases that needed to be covered?

Do you support enactment of broad FERC authority to bar and

punish a broad spectrum of fraudulent or manipulative behavior,

along the lines of H.R. 1272, which a number of Democratic members of this committee, including myself, introduced in the last

Congress?

Mr. RICHARDSON. Yes, sir.

Mr. DINGELL. You do? All right. Mr. Chairman, you have been

gracious. Thank you. Thank the gentleman and ladies.

Mr. HALL. Thank you, Mr. Chairman, and I think that concludes

the hearing with a very patient group, and I apologize for you having to stand by for that hour, and I thank you for what you have

done for the energy thrust, and I thank the chairman for coming

back, the former chairman, Mr. Dingell. He always has something

worthwhile to say, and he is worth listening to. I have learned a

lot from him the 24 years, 3 months, and 6 days I was a Democrat,

and I am still learning from him.

I appreciate him, and thank you, Mr. Boucher. We are adjourned.

[Whereupon, at 3:33 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

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PREPARED STATEMENT OF MARTY KANNER ON BEHALF OF CONSUMERS FOR FAIR

COMPETITION

Mr. Chairman, members of the Subcommittee, my name is Marty Kanner; I am

testifying today on behalf of the Consumers for Fair Competition (CFC), an ad hoc

coalition of small and large electric consumer representatives, small business contractors, public interest groups, consumer owned utilities and others. Consumers for

Fair Competition was formed to advance policies necessary to promote effective

wholesale competition and has been active in the restructuring debate and efforts

to block repeal of the Public Utility Holding Company Act (PUHCA) absent sufficient replacement provisions designed to protect consumers and investors.

Much has transpired since this Committee last discussed electricity legislation.

CFC believes it is important to reflect on the turmoil that has occurred in the utility

industry over the past few years, revisit the assumptions that underlie last year’s

energy bill conference report and proceed cautiously.

At previous hearings, CFC testified about the difficulties associated with

transitioning the wholesale market from cost-of-service rate regulation to reliance

on competitive market pressures. Today we are no closer to the goal of market efficiency and the legislation before you, regrettably, will likely make the situation

worse. To highlight the current disfunctionality of the market, let me share with you an

excerpt from a recent filing at the Federal Energy Regulatory Commission (FERC)

by various industrial customer groups located in the Midwest. As you recall, it was

largely industry that led the charge for greater reliance on markets in the electric

industry, and the Midwest is the region that is frequently cited as the poster child

of success. Given that background, the picture painted by Midwest industrial customers is a stark warning:

‘‘While market-based rate authority may produce minor benefits in the form

of administrative convenience, the results for customers, many of which are

struggling to compete in our global economy, evidence a trend line that is dramatically different than the lower price, better service, and innovation expectations that were created by the Commission and others as a predicate for reform.’’

Mr. Chairman, I believe that this cutting indictment should cause each of us to

pause.

The members of CFC share your desire to craft a comprehensive energy bill. However, as the bill moves through Congress, it is our hope that many of the assumptions—I would argue false assumptions—of the legislation will be reconsidered and

a sound, coherent policy advanced that provides the lower prices, better service and

innovation that we all envision.

In the remainder of my testimony, I’d like to explore some of these false assumptions, focusing on three topics: the Public Utility Holding Company Act (PUHCA),

market manipulation and abuse, and transmission.

THE FALSE ASSUMPTIONS OF PUHCA

The bill before the Committee—like bills in each of the last few Congresses—includes repeal of the Public Utility Holding Company Act (PUHCA). Congress enacted PUHCA as a companion statute to the Federal Power Act. PUHCA establishes

passive restraints on the structure of the electric utility industry in order to mitigate market power, preclude practices abusive to captive consumers, protect investors from deceptive securities practices, promote the financial integrity of utilities,

and facilitate effective regulation. Under the Act:

• Multi-state utility holding companies must be physically and operationally integrated in order to ensure economic benefits and facilitate effective regulation;

• Holding company acquisitions are limited in order to promote economic and operational efficiencies and prevent undue concentration;

• Multi-state utility holding company diversification activities are restricted in

order to maintain a focus on the core business of utility service to captive consumers, limit financial risks to ratepayers, and protect businesses in unregulated industries from anti-competitive cross-subsidies;

• Inter-affiliate transactions are limited in order to prevent undue favoritism and

self-dealing; and

• Capital structures and holding company investments are regulated in order to

protect captive ratepayers and investors from unwarranted financial risk.

So what are the false assumptions underlying PUHCA repeal?

1. PUHCA inhibits investment. If by investment we mean building new infrastructure, this assertion is false. Under PUHCA, utilities can build new generaVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00206 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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tion, transmission and distribution within their service territory. Moreover, they

can build merchant generation anywhere in the country. PUHCA does limit acquisitions of existing utilities, but I question whether this is properly labeled

as ‘‘investment’’—much less beneficial.

2. PUHCA is unnecessary. Repeal proponents claim that financial regulation and

investor sophistication have matured since PUHCA was enacted, and that effective state and federal oversight is adequate. However, a comparison of the financial health of those utilities that are and aren’t subject to PUHCA paints

a different picture. As you may be aware, several rating agencies have issued

reports on the beneficial impact of PUHCA and the potential erosion of credit

quality that could result from the Act’s repeal. In a February 2004 report,

Standard & Poor’s concluded that ‘‘existing utility credit would be best served

from enforcement of PUHCA’s provisions and restriction of utility investment

in outside businesses’’ and that repeal could precipitate a ‘‘deterioration in credit quality for utilities whose corporate parents have an appetite for great risk

if PUHCA is repealed.’’ Similarly, a September 2003 review by FitchRatings determined that, as a result of diversification restrictions, PUHCA-registered companies were less likely to suffer ‘‘multicategory’’ credit downgrades.

3. PUHCA is only a financial statute. Many repeal proponents claim that

PUHCA is not a consumer protection statute. We need look no closer than the

impact of utility diversification on consumers. An analyst with Williams Capital

recently noted that ‘‘utility investment rarely goes terribly wrong; non-utility investment rarely goes right.’’ But, unlike other industries, it’s not just the utility

and its investors that suffer from bad investment decisions. As detailed in a December 26, 2002 Wall St. Journal front-page article, utility customers suffer the

consequences—with utility assets pledged for nonutility ventures, debts from

bad investments transferred to utility ratepayers, and utility capital costs rising

as a result of failed diversifications.

4. PUHCA repeal won’t harm competition. The utility industry is growing increasingly concentrated. Industry experts predict that the failure of recent diversifications and foreign investments are likely to push utilities to look closer

to home for their next acquisition. A new wave of utility mergers, coupled with

likely consolidation and acquisitions within the merchant generator sector, is on

the horizon. Fewer market players will exist to provide competitive power supply alternatives.

5. PUHCA is irrelevant. It is frequently asserted that PUHCA is an outdated and

antiquated law, but that is hardly the case—and evidence is to the contrary.

Indeed, the ongoing CSW-AEP case at the SEC, efforts by the Texas Pacific

Group to buy Portland General Electric, and the latest mega-merger where

Exelon proposes to buy PSEG seems to indicate that PUHCA is still relevant—

and, we would argue, necessary.

Mr. Chairman, as you know, Congress has previously enacted amendments to

PUHCA, allowing utility investment in merchant generation and telecommunications services. As I have previously testified, CFC is willing to consider targeted

amendments to PUHCA if a clear and discernable problem can be identified and an

appropriate solution negotiated.

THE FALSE ASSUMPTIONS OF MARKET MANIPULATION AND ABUSE

We are all by now familiar with the callous manipulation, complex schemes and

misleading names unleashed by Enron on consumers throughout the West. Some

wish to believe that this was merely a growing pain or the actions of a ‘‘bad apple’’.

Yet the quote I shared with you at the beginning of my testimony notes that the

stated benefits of competitive markets have proved illusive. I believe the assessment

is much worse.

So what are the false assumptions about market manipulation and abuse?

1. Markets discipline rates and behavior. Economic theory tells us that competitive pressures will drive down prices and check anti-competitive behavior. In

electricity markets, the theory is not working. In every region, wholesale prices

are going up and there are fewer—not more—competitive choices.

2. It was only Enron. Clearly, this statement is false. For months and months,

new stories rolled out about various market participants inflating and reporting

false price and volume data, intentionally shutting down plants to drive up

prices, creating complex schemes to evade price caps, self dealing, and discriminating against competitors. This is not an isolated incident.

3. Market rules and monitors are adequate. Time and again we’ve seen that

clever traders cannot only evade market rules (and, frequently, detection), but

that these very rules often create new opportunities for manipulation and

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abuse. A strong, structural solution is needed to prevent and correct market

manipulation and abuse.

4. We’re creating a free market in electricity. Recent policies and decisions suggest that wholesale power sales—made at market rates—still receive the protection against anti-trust claims that existed under a regulated system. Utilities

can have it both ways: the absence of both regulatory scrutiny of costs and rates

and insulation from anti-trust laws. No other industry has this hybrid ‘‘best of

both worlds’’.

FALSE ASSUMPTIONS ABOUT TRANSMISSION

Mr. Chairman, there is no doubt that there is a need for substantial investment

in transmission to support wholesale transactions, relieve congestion, and ensure reliability. The bill before the subcommittee includes numerous transmission-related

provisions.

However, CFC believes that some of these provisions are based on false assumptions.

1. The return on transmission is too low to promote investment. Utilities and

others argue that investment in transmission is low because the rate of return

is inadequate to attract capital. On its face this is absurd: guaranteed rates of

return of 10 ‘‘15 percent, for what are usually low-risk investments, are obviously adequate to attract capital. Moreover, stand-alone transmission companies—like ATC and ITC—have been able to attract capital and build transmission without inflated rates of return. This suggests that there are other economic factors at work. First, transmission investment is often dictated by the

economics of generation. Second, a constrained transmission system serves the

economic interest of large generators that can extract higher prices for power

sales and shut out competitors. So-called incentive rates for transmission merely raise transmission rates without fostering any new construction that wouldn’t

occur anyway.

2. Price signals—like locational marginal pricing (LMP)—will encourage investment. LMP does highlight where transmission congestion and constraints

exist. But this is information we already know, and LMP does nothing to relieve

the problem or to encourage new investment. Since any new investment (of generation or transmission) could remove the congestion—and the extra profits that

LMP creates—economics encourages the incumbent parties to leave the constraint untouched.

3. The party requesting new transmission should pay for it. It sounds simple:

the party that causes the transmission to be built should pay the cost of the

investment. But this overly simplistic standard ignores the fact that most transmission investments produce broadly distributed benefits in reliability and market liquidity, and that these benefits shift over time as the system and use develop. Moreover, directly assigning new transmission to a small pool of participants creates economic inequity (since there’s no assignment of costs for vintage

facilities) and creates a barrier for new investment.

CFC RECOMMENDATIONS FOR ELECTRICITY LEGISLATION

Mr. Chairman, we have highlighted the false assumption that are the

underpinnings of several significant provisions in the legislation before you. It is our

hope that the Committee will revise the legislation in a number of significant ways.

In particular, CFC urges you to:

• Broadly bar fraudulent and manipulative practices. Rather than attempting

to list specific, abusive transactions that are banned—like round-trip trades—

the legislation should recognize that market complexity and participant ingenuity creates an endless series of attempts to evade rules, manipulate operations and prices, and create additional profits. Congress must establish a

broad, enforceable ban on fraudulent and manipulative practices.

• Remove the regulatory shield against anti-trust actions from sales at

market rates. In the absence of active rate regulation, there is no reason for

wholesale power sales to be immune from anti-trust action. Removing this

shield will treat utility sales like all other provide states and consumers with

an enforcement and remedial tool and serve as a powerful deterrent against manipulative practices.

• Retain PUHCA. As outlined above, CFC sees no compelling reason to repeal

PUHCA. Financial experts conclude that PUHCA serves both utilities and bondholders; consumers realize that PUHCA prevents costly mistakes; and, I submit, many small and medium-sized private utilities welcome the fact that

PUHCA keeps them from becoming takeover targets. As noted, above, we are

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willing to engage in a thoughtful discussion of targeted amendments to PUHCA

designed to simultaneously meet legitimate problems and protect consumers

and investors. It is noteworthy that no bona fide consumer group supports

PUHCA repeal.

• Review All PUHCA Exemptions. Enron, after its acquisition of Portland General Electric, self-certified that it qualified for an intrastate exemption under

Section 3 of PUHCA. Interestingly, an SEC judge recently ruled that Enron did

not qualify for the intrastate exemption based on the percent of revenues Portland General Electric earned from interstate sales. A mandated review of all

outstanding Section 3 PUHCA exemptions is needed to ensure that those exemptions are still appropriate and in the public interest.

• Gaps in the review of utility mergers must be closed. The weakened financial condition of the merchant generation industry may translate into a significant increase in mergers and acquisitions. Such activities may be economically

beneficial—but that can be determined only after careful review. Disposition of

generation-only assets may not be subject to review by FERC. Congress must

close this gap—not weaken federal review of utility mergers.

• Congress should resist dictating transmission rate policies. Establishing

rigid, statutory rules will raise consumer rates, stifle competition and inhibit

construction of new transmission.

CONCLUSION

The bill before the Committee is the conference report from last year. While that

may suggest to some that it represents broad consensus, it must also be remembered that it did not become law—in part because of controversy surrounding the

electricity title. In an effort to reach consensus, we are hopeful that significant revisions can be adopted as the process goes forward. As always, Mr. Chairman, we are

committed to working with you, your staff and the members of the Committee. However, we are skeptical that appropriate and beneficial electricity legislation can be

negotiated and crafted at this time. If Congress cannot include the provisions needed to protect consumers, then CFC would urge deferral of action on electricity legislation until those provisions can be included.

On behalf of Consumers for Fair Competition, I thank you for this opportunity

to testify.

RESPONSE FOR THE RECORD BY STEVEN M. NADEL, EXECUTIVE DIRECTOR, AMERICAN

COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY

Question 1. What is the status of negotiations on four additional consensus efficiency standards?

Response: As of this writing, discussions on all four products are proceeding. Since

discussions are underway, I prefer not to mention products by name. In all four

cases specific proposals for consensus standards have been exchanged. In two cases,

some manufacturers are agreeable but we are waiting to hear from other manufacturers. In one case, all manufacturers are agreeable but we are waiting to hear from

a key state government. In one case manufacturers have made an offer which is not

acceptable to efficiency supporters and we have made suggestions on ways to improve the offer. We are waiting to hear from the manufacturers. At this point my

best guess is that two or three of the products will proceed to a consensus agreement, but that we will not be able to reach consensus on one or two products.

Question 2. Would a collaborative process under the auspices of DOE be useful

for setting consensus efficiency standards?

Response: For most of our negotiations we have found that more progress can be

made in private than under the glare of a public process. Therefore, for most products, a collaborative process under the auspices of DOE would probably not be helpful. However, in some cases, such a process could be useful (e.g. just such a process

was used to successfully negotiate ballast efficiency standards a few years ago).

Therefore, we would recommend that DOE be open to leading collaborative processes in some cases, but that DOE not insist on leading processes when more private discussions can make more rapid progress. We also recommend that DOE review its rulemaking processes, so that when agreements are reached, DOE can expeditiously move to a final rule (assuming no objections from parties not involved

in the consensus).

Question 3. Can I provide more information about a fuel savings goal of 1 million

barrels per day including modifications of passenger vehicle test procedures?

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Response: A goal of 1 million barrels per day savings relative to EIA projections

could be reached by various combinations of oil-saving measures, some but not all

of which apply to the transportation sector, which is responsible for over 2⁄3 of US

oil consumption. In my testimony I mentioned three transportation measures that

could contribute substantially to achieving that goal and also put us on a path toward far greater savings in later years. Our estimates of the savings of each, in an

aggressive implementation timeframe, are shown below.

Oil Savings from Three Transportation Measures (million barrels per day)

2013 2020

Make official fuel economy value equal test value (phase-in 2006-2010) ................................................... 0.75 1.45

Establish feebates for cars and trucks (phase-in 2006-2013) ..................................................................... 0.81 1.84

Establish fuel economy standards for heavy-duty truck engines and components (phase-in 2006-2015) 0.16 0.36

NB: Feebates and fixing test procedures and reporting are complementary; their benefits are not additive.

The recommendation concerning fuel economy testing and reporting requirements

stems from the current discrepancy between the fuel economy values reported by

manufacturers to determine compliance with standards, on the one hand, and realworld fuel economy performance, on the other. This discrepancy is already evident

from the EPA fuel economy sticker displayed on new vehicles, which shows fuel

economies roughly 15% lower than the official fuel economies for regulatory purposes. It is generally believed that this adjusted fuel economy is still too high, and

that actual fuel economies are on average at least 20% below the official values. The

savings shown in the table above would result from the phase-in, over the period

2006-2010, of a change to test procedures and reporting requirements that reflect

real-world values. EPA is expected to initiate a rulemaking this year to address the

need for accurate testing and labeling procedures. The discrepancy between test values and official fuel economy values would have to be addressed legislatively, however.

Question 4. Should Congress require the establishment of particular policies to

meet an 1 million barrels per day savings goal? What is the role of the states?

Response: We suggest that Congress require and grant authority to the appropriate federal agencies to analyze and adopt a package of policies they have demonstrated will meet the target of 1 MBD in oil savings by 2013. The policies above

would be good candidates for inclusion in that package, as would building code updates, efficiency standards for residential heaters, and efficiency improvements to

industrial boilers, among other measures. At this point we are not recommending

that Congress establish specific policies, but instead that Congress authorize these

policies so that the Administration can pick the best mix of policies for reaching the

stated goal.

A number of states are apparently interested in adopting measures to save oil

and/or reduce greenhouse gas emissions absent sufficiently ambitious action at the

federal level. In our experience, states are often the best places to test policies for

later adoption nationally. We believe the merits of the measures discussed here are

already evident, however, and in such cases implementation at the federal level is

most effective and efficient. On the other hand, should Congress not be prepared

to adopt policies of sufficient strength to bring meaningful oil savings, they should

leave these measures for the states to implement as they see fit.

Question 5. How will efficiency provisions in the draft bill aid in reducing natural

gas prices? How did we derive our savings estimates?

Response: To achieve the dramatic natural gas cost reductions noted in my testimony, the U.S. will need to reduce electricity and natural gas use by about 4-5%

over the next five years. The provisions in the draft bill only bring us about onethird the way towards this goal, and therefore the impacts of these policies on natural gas prices will be more limited (while we have not explicitly analyzed the impacts of an economy-wide reduction of about 1.5% energy savings, we speculate that

this savings might reduce prices on the order of about 10%). In order to reach the

4-5% savings threshold, we recommend that the provisions in the draft bill be augmented. Policies with particularly large savings include the following:

• Adding additional energy efficiency standards

• Establishing an Energy Efficiency Resource Standard

• Improving the energy efficiency tax credits from those in H.R. 6 along the lines

outlined in my testimony

• Undertaking a major public information campaign on the benefits of energy efficiency and specific steps consumers and businesses can take.

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Our savings estimates are based on computer spreadsheet calculations that use

current data on energy use by end-use (primarily from EIA) and estimate how these

patterns will change if specific policies are adopted. ACEEE is now preparing a

paper that will provide revised estimates, and will document the key assumptions

that underlie these estimates.

NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

March 14, 2005

The Honorable RALPH M. HALL

Chairman

Subcommittee on Energy and Air Quality

House of Representatives

Washington, D.C., 20515

DEAR MR. CHAIRMAN: Thank you for giving the National Association of Regulatory

Utility Commissioners (NARUC) an opportunity to present our views at the hearing

you held on February 10, 2005.

Per your letter dated February 28, 2005, please find below NARUC’s responses

to your questions. Unfortunately, President Marilyn Showalter is unable to provide

you with her responses directly, due to the expiration of her term as a Commissioner on the Washington Utilities and Transportation Commission, which occurs tomorrow. Therefore, I will be replying on behalf of NARUC.

Question 1. NARUC says it supports FERC’s policies leading to economically and

environmentally efficient regional power markets. What are ‘‘environmentally efficient’’ markets?

Response: NARUC is supporting policies that promote markets that provide an

opportunity for renewable resources, energy efficiency, and other demand response

programs to compete with other resource options in a fair, equitable, and efficient

manner. Question 2. NARUC states data that is shared for reliability should also be shared

with the States and the public to monitor for market abuse. Is the data that is currently shared for reliability purposes useful in a review for market power? What additional data, if any, would be needed for market power monitoring?

Response: In the past, many regional electric markets throughout the country experienced price spikes of unusual and unexpected proportions. These price spikes

have led to curtailment or shutdown of operations of some large industrial customers and lead to increased prices for smaller commercial and residential customers. The high market price volatility has raised concerns about the integrity of

the markets, leading to calls from numerous participants, consumers and policy

makers for investigation and heightened monitoring of these markets by regulatory

bodies.

Monitoring is necessary to either confirm that markets are functioning well or to

determine whether or not there are flaws or market power abuse which could raise

prices above competitive levels. In order to identify corrective policy options to assure the public of the competitiveness and efficiency of the developing wholesale

electricity market and its prices, regulatory bodies need access to data such as production for generating plants, transmission path schedules and actual flows

State access to reliability data would be a necessary, but not a sufficient, way for

States to begin monitoring wholesale markets. Reliability data displays how the grid

is being operated and used. The other piece that is necessary is State access to

wholesale transaction data. This information is reported quarterly to FERC causing

a delay of 30 to 120 days. Additionally, the information being reported is not uniform and often hides ‘‘confidential’’ information. This situation should be rectified.

Congress should consider requiring FERC to post all transmission and wholesale

transaction data on bulletin boards State regulators can access.

To the extent data is already shared among market participants for purposes of

reliability, delaying or withholding access to the data by regulators cannot be justified on the grounds it is commercially sensitive.

Question 3. NARUC states FERC should establish a merger review process that

allows for effective State participation. How are States prevented today from effectively participating at FERC in merger review proceedings? Do States review

change in control of generation assets located within their States?

Response: State commissions can be impaired, in some instances, in their ability

to participate in FERC merger review proceedings as a result of the combination

of State rules prohibiting prejudgment of State cases and the fact that State approval is also needed for utility mergers or similar proceedings. For example, in

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some States that have not restructured, applications for merger or joining an RTO

are reviewed in proceedings on their own dockets. However, there may be situations,

particularly in restructured States, where the same isn’t true. Many States do review changes in the control of generation assets located within those States. If a

utility wishes to transfer control over one or more of its generating units to another

entity, State approval must be obtained before such a transfer can be effectuated.

Question 4. What is NARUC’s position on ‘‘economic dispatch’’? Should a State require a public utility meeting the power needs of its customers to use the most economical facilities available?

Response: NARUC is not aware of any traditionally-regulated State that doesn’t

require economic dispatch currently. For example, States generally require their

utilities (at the risk of a cost disallowance) to dispatch their generating facilities in

merit order, subject only to any transmission-related limitations. Moreover, the

States expect utilities to purchase power if they can do so more cheaply than they

can generate it. Any customer or generator that believes that a utility is not making

the most efficient dispatch or power purchase decisions has the right to challenge

the inclusion of the utility’s costs in retail rates or to bring a complaint action alleging imprudence on the part of the utility.

Additionally, there are legitimate reasons why some States might choose not to

require their utilities to purchase the power needed to serve native load in an organized market priced on the basis of generator bids, as is the case in some RTO operated markets. For example, a State may make the determination that the cost of

this type of resource procurement plan might exceed the costs of procuring power

using traditional economic dispatch methods. Therefore, this is an issue that ought

to be resolved on a State by State basis allowing each State to determine the method in which retail electric service is provided within the borders of that State.

Question 5. Should States require competitive bidding before the acquisition or

construction of additional generation by the local utility?

Response: Most States do, in fact, require utilities to conduct some sort of RFP

process before constructing additional generation, although the rules under which

such procurement processes are conducted vary from State to State. There are a

wide variety of factors that a State might reasonably consider appropriate for use

in evaluating a utility construction decision, with those factors varying from State

to State. For example, one State might have concerns about the market risk associated with reliance on purchased power arrangements (particularly relatively short

term ones) rather than self-build options. Similarly, a particular State might want

to encourage the use of certain types of renewable generation and feel that a utility

self-build option might better effectuate that State’s policies that procurement on

the open market. Finally, State economic development considerations can reasonably play a role in the resource procurement process as well. As a result, given the

wide variety of policies that a State might reasonably attempt to implement, the imposition of federal resource procurement rules would be inappropriate.

Thank you for the opportunity to clarify some of the NARUC positions included

in our testimony. We would be pleased to provide you and your staff with any additional information you may require.

Sincerely Yours,

CHARLES D. GRAY

Executive Director

cc: The Honorable Rick Boucher, Ranking Member,

Subcommittee on Energy and Air Quality

EDISON ELECTRIC INSTITUTE

March 14, 2005

The Honorable RALPH M. HALL

Chairman

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

U.S. House of Representatives

Washington DC, 20515-6115

DEAR CHAIRMAN HALL: Thank you for the opportunity to respond to additional

questions for the record of the Subcommittee’s hearing on the ‘‘Energy Policy Act

of 2005: Ensuring Jobs for Our Future with Secure and Reliable Energy.’’

As I testified at the hearing on February 10, the Edison Electric Institute strongly

supports enactment of comprehensive energy legislation substantially similar to the

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H.R. 6 conference report from the 108th Congress, especially the electricity provisions, without substantive change. Enactment of the House discussion draft version

of the Energy Policy Act of 2005 would certainly be consistent with that goal.

Thank you again for the opportunity to provide additional input for the committee

hearing record. We look forward to working with you and your colleagues to promptly enact comprehensive energy legislation in the 109th Congress.

Sincerely,

THOMAS R. KUHN

Enclosure

cc: The Honorable Rick Boucher, Ranking Member

Subcommittee on Energy and Air Quality

EEI RESPONSES TO ADDITIONAL SUBCOMMITTEE QUESTIONS

Question 1. What role does hydropower serve in the Western electricity grid and,

specifically, how the current hydro licensing process currently hinders, or might

hinder, the ability to provide consumers with a reliable, reasonably-priced, supply

of electricity?

Response: Hydropower is a critical resource for the western electricity grid.

Throughout the West, total installed generating capacity is approximately 177,000

MW, of which a little less than 30 percent, or approximately 53,000 MW, is hydropower. In Washington, Oregon, and California, the role of hydropower is even greater, with approximately 42,500 MW of the total—102,000 MW installed generating

capacity being hydropower. [U.S. Department of Energy (DOE) Energy Information

Administration (EIA) Annual Electric Generator Report (EIA-860) 2003 data] The

actual share of power generated from hydropower facilities may vary in any given

year, however, as license conditions or the availability of water in drought years affect power production. Nevertheless, hydropower generation is a significant component of the generating mix by any calculation.

Beyond the numbers, hydropower plays an important role in the reliability and

affordability of electricity. Because electricity is generated by the flow of water

through turbines and without the thermal constraints of other generating technologies, hydropower possesses a quick start capability that enables power to be

brought on line quickly, even following an outage. Absent license constraints, the

ability to adjust flow levels quickly to increase or decrease power production also

makes hydropower especially valuable and well-suited for peaking generation. Hydropower is also a renewable resource with significant air emissions benefits.

Pumped storage and hydro facilities with reservoirs also provide a storage capacity

that provides flexibility throughout the year and over the course of the day in power

production.

The current hydro licensing process hinders the ability to use hydropower’s

unique characteristics to help provide reliable, reasonably-priced electricity. The

Federal Power Act (FPA) requires the Federal Energy Regulatory Commission

(FERC) to balance a variety of interests in making a license or license renewal decision. Over time, however, the interpretation of the mandatory conditioning authority

provided to the federal resource and state water quality agencies has resulted in

subjugation, rather than a harmonization, of these other interests to the dictates of

those agencies. These agencies need not consider the power production impacts of

their conditions or prescriptions, and they are not required to achieve their environmental protection goals in a way that reduces the impact to power production, flood

control, or other values.

Minimum flow requirements, restrictions on ramping rates, a proliferation of onsite and off-site mitigation requirements and a host of other license conditions—

some valid and necessary for environmental protection and some not—can reduce

the amount of power any facility can generate or render projects uneconomical. In

such a situation, when the owner of the facility decides to surrender the license or

agrees to shut down a project in the face of pressure to remove some dam facilities,

that renewable generating capacity can be permanently lost to the nation and must

be replaced through power generated elsewhere. Recent replacement power has

come from gas-fired generation.

The hydro licensing reform provisions of the House discussion draft energy bill

will help hydropower to continue to serve its unique role by providing a process for

requiring the federal resource agencies to consider alternative approaches to meeting their environmental objectives that will have fewer operational impacts on the

facility. It does not change the numerous opportunities for stakeholder, state and

tribal involvement in the licensing process, nor does it make any change in the environmental standards that FERC and the federal resource agencies are required to

meet.

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Question 2. Can you explain to the committee how the conference report provides

significant help in removing disincentives that discourage investment in transmission and helps to strengthen the transmission infrastructure and enhance the

benefits of competition for consumers?

Response: Provisions to enhance the transmission infrastructure that are contained in the H.R. 6 conference report are among the primary reasons for EEI’s support for the conference report. These provisions are extremely critical to our industry to help ensure that the transmission grid remains reliable and capable of meeting the demands of competitive electricity markets. We strongly support their inclusion in any energy bill considered by the 109th Congress. While investment in transmission systems has increased recently, with about $4

billion being spent annually, the bulk of the new transmission being built is to help

serve local load and connect new generation facilities to the grid. The level of investment in long-distance, high-voltage wires, particularly to interconnect regions, has

not kept pace with the growing demands being imposed on the system. Significantly,

the number of circuit miles of high-voltage and extra-high-voltage transmission lines

(188kV and above) owned or operated by shareholder-owned utilities has grown by

only 2.5 percent annually since 1999. These are the so-called ‘‘trunkline’’ facilities

that are so critical for moving electricity around and between regions of the country.

While there are many provisions in the energy bill that are designed to improve

the transmission system, I want to focus on those of particular interest to EEI and

its member companies:

First, the mandatory reliability provisions are essential to help strengthen transmission infrastructure and improve its operation. The reliability provision in the

H.R. 6 conference report would establish a self-regulating reliability organization

that would develop and enforce mandatory reliability rules on all market participants, with FERC oversight.

The H.R. 6 conference report also contains provisions to help facilitate the siting

of needed transmission facilities. The siting provisions would grant FERC backstop

siting authority for transmission projects in DOE-designated ‘‘national interest electric transmission corridors’’ if a state could not or would not grant the necessary

permits within one year. The conference report also authorizes DOE to act as lead

agency to coordinate all authorizations and environmental reviews required under

federal laws to site facilities.

Even though transmission lines and natural gas pipelines serve essentially the

same purpose—to move large amounts of energy across long distances—their siting

processes are very different. Congress has granted interstate natural gas pipelines

the authority to go to FERC for their siting permits and to exercise federal eminent

domain. This authority was modeled after similar authority that Congress granted

to hydroelectric power developers.

However, individual states currently have jurisdiction over whether and where to

build new transmission lines. Each state may have different, even conflicting, requirements to site a line. When siting a new transmission line that crosses state

borders, utilities must seek multiple state, county and local permits and approvals,

often resulting in lengthy building delays. In the case of some transmission lines,

it has taken literally a decade or more to gain these approvals.

Most state siting laws do not recognize the role new entities such as regional

transmission organizations (RTOs) will play in transmission planning, nor do they

specifically allow for the consideration of broader regional benefits of new transmission lines. By their very nature, RTOs will take a regional approach toward

transmission expansion planning. But, if states consider only intrastate benefits and

not regional benefits, they may have little choice under state law but to reject a proposed line, even if the benefits to the region are significant. In many cases, old state

siting laws also fail to allow independent transmission companies—relatively new

entities in electricity markets—to get the necessary permits to build transmission

lines.

Transmission expansion also is highly vulnerable to public sentiment against

building any infrastructure projects, expressed in the colorful acronyms NIMBY (not

in my backyard), NOPE (not on planet Earth) and BANANA (build absolutely nothing anywhere near anyone). This sentiment is especially strong when a transmission

line must be built through an area that believes the benefits of the new line will

accrue to another area and not theirs.

If these trends continue, they will inevitably threaten the reliability of the bulk

power system and undermine the consumer benefits of wholesale competition.

The transmission system is being asked to meet the same type of demands and

obligations as natural gas pipelines. Natural gas pipeline expansion has been under

the oversight of FERC for decades because it is composed of an interstate network.

The transmission grid also has evolved into an interstate network, and our industry

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needs, at a minimum, the transmission siting reforms contained in the H.R. 6 conference report.

The provisions in the H.R. 6 conference report related to coordination of federal

authorizations also are critical to our industry. The unnecessarily complicated, timeconsuming and difficult multi-jurisdictional federal permitting process to site energy

facilities, including authorizations for siting transmission lines across federal lands,

is another major impediment to building new transmission. In some areas of the

country, this is the principal impediment.

Problems with the federal permitting process include (1) a severely fragmented

process, where each federal agency with potential jurisdiction has its own set of

rules, timelines for action and processes for permitting; (2) the tendency by federal

agencies to require multiple and duplicative environmental reviews; (3) a failure to

coordinate with any state siting process; and (4) a lack of harmonized permit terms

from one agency to the next.

The open non-discriminatory access provisions (‘‘FERC lite’’) in the H.R. 6 conference report, while not as strong as we would prefer, also are essential to

strengthen the transmission grid and enhance the benefits of competition for consumers. Government-owned utilities and electric cooperatives collectively own and

operate about 32 percent of the nation’s transmission system, but in some regions

that figure is much higher. In the Pacific Northwest, the federal Bonneville Power

Administration (BPA) alone owns and controls nearly three-quarters of the region’s

high-voltage transmission capacity. The entire state of Nebraska and most of Tennessee are served by non-jurisdictional utilities, yet they are integrated into a multistate transmission grid.

These transmission owners are not subject to the same level of FERC jurisdiction

over transmission that applies to shareholder-owned utilities. Under FERC’s Order

No. 888, FERC requires all shareholder-owned utilities to provide open transmission

access to any third-party wholesale power seller.

According to a December 2002 GAO report, ‘‘Lessons Learned From Electricity Restructuring,’’ because of FERC’s lack of jurisdiction over government-owned utilities

and electric cooperatives

FERC has not been able to prescribe the same standards of open access to

the transmission system. This situation, by limiting the degree to which market

participants can make electricity transactions across these jurisdictions, will

limit the ability of restructuring efforts to achieve a truly national competitive

electricity system and, ultimately will reduce the potential benefits expected

from restructuring.

Without the ‘‘FERC lite’’ open access transmission provisions in the energy bill,

government-owned utilities and electric cooperatives that own significant portions of

the transmission grid can refuse to provide open, non-discriminatory access to their

transmission systems to other market participants. If this provision is not retained

in an energy bill, the only ways to require these utilities to provide open access

would be to request FERC to order them to do so on a case-by-case basis or to rely

on very limited FERC reciprocity requirements. The case-by-case approach is timeconsuming and cumbersome, resulting in only one market participant at a time

gaining access to one particular nonjurisdictional utility’s transmission system.

Another important transmission provision is the one authorizing federal utilities

to join voluntarily an RTO or independent system operator (ISO). Because many of

the federal utilities own significant amounts of transmission, their participation in

regional transmission groups is critical to the success of those organizations and to

regional transmission planning.

In addition, the native load service obligation provision is critical to ensure that

load-serving entities have sufficient access to the transmission system to meet their

service obligations to consumers. This assurance helps reduce uncertainty in electricity markets, and uncertainty in a highly capital-intensive industry is not conducive to investment.

Another critical transmission provision in the H.R. 6 conference report is the

transmission infrastructure investment provision, requiring FERC to issue a rule reforming transmission rates to benefit consumers by reducing transmission congestion. This provision also helps to assure the recovery of all prudent costs of complying with mandatory reliability standards and provides additional incentives for

RTO participation.

We believe opposition to the transmission infrastructure investment provision by

other stakeholders is short-sighted. As we mentioned in our written testimony, according to a December 2001 FERC ‘‘Electric Transmission Constraint Study,’’ transmission costs make up only 6 percent of the current average monthly electric bill

for retail consumers. On the other hand, generation costs make up 74 percent of the

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average bill. By reducing transmission congestion, investments in new transmission

will allow consumers easier access to lower cost generation. FERC estimates that a $12.6 billion increase in transmission investment would

add only 87 cents to an electric customer’s average monthly bill. But, since increased transmission investment will help reduce congestion and enable lower cost

power to reach consumers more easily, FERC anticipates that the net benefits to

overall electric bills could be potentially quite large.

The voluntary transmission pricing plan language in the H.R. 6 conference report

is an extremely important provision. This provision addresses the important principle of cost causation and ensures that transmission providers who are not currently members of RTOs or ISOs have the same pricing flexibility that FERC allows

transmission providers in those organized markets. We address this provision more

extensively in question #4.

We also believe that repealing PUHCA will help attract significant amounts of

new investment capital to the industry. We strongly support the PUHCA provisions

in the H.R. 6 conference report. By imposing limitations on investments in the regulated energy industry, PUHCA acts as a substantial impediment to new investment

in energy infrastructure, keeping billions of dollars of new capital out of the industry. As a result, we believe that this outdated statute has contributed to the failure

of the electricity infrastructure to keep pace with growing electricity demand and

the development of regional wholesale markets.

Under PUHCA, a registered holding company must confine its operations to a

‘‘single integrated public utility system’’ (with certain exceptions) located in a ‘‘single

area or region’’ of the country. This outdated ‘‘physical integration’’ requirement prevents utility companies from investing capital outside their geographic region, shutting off a valuable potential source of domestic capital investment in needed energy

facilities and, ironically, fostering the very kind of concentration in regional energy

markets that FERC is trying to reduce.

The H.R. 6 conference report contains provisions that would repeal PUHCA and

transfer consumer protections to FERC and the states. These provisions are similar

to PUHCA repeal language that has been included in every major electricity bill

considered by Congress over the last decade, and which have been endorsed by

every Administration—Republican and Democratic—since 1982. They should be included in the energy bill again this year.

Finally, the provision in the tax title of the H.R. 6 conference that provides for

enhanced accelerated depreciation for electric transmission assets is an essential

provision for our industry. While we appreciate that the tax provisions in the energy

bill are under the jurisdiction of another committee, we believe strongly that the

U.S. tax code should be amended to reduce the depreciable life for electric transmission assets from 20 to 15 years, similar to the tax treatment governing other

major capital assets. Currently, transmission assets receive less favorable tax treatment than other critical infrastructure and technologies. This provision will be extremely valuable in encouraging greater investment in the transmission infrastructure.

Question 3. What is EEI’s position on the Standard Market Design provision in

the discussion draft? Should Congress be concerned about FERC’s current SMA or

market power policies? If so, why?

Response:

Standard Market Design

The Standard Market Design (SMD) provision (Section 1235) in the discussion

draft is part of the overall compromise comprising the electricity title, which we support. While EEI has sought constructive solutions to the issues raised by FERC’s

SMD proposal in 2003, the sweeping proposal has caused significant concern for a

number of EEI member companies and other stakeholders, especially in certain regions of the country. FERC’s proposal is still pending, so those concerns remain unresolved.

EEI supports pursuing more effective wholesale markets throughout the United

States because properly structured competitive wholesale markets benefit consumers. The SMD proposal does not provide sufficient emphasis on addressing the

considerable differences which exist in regions around the nation, particularly in the

Southeast and West, in the areas of planning, siting and resource adequacy.

For instance, the SMD proposal would confine current transmission owners to

being the builders of last resort when it comes to transmission planning. EEI believes all options for building new transmission facilities, including current owners,

should be preserved. We encouraged FERC to support all cost-effective options for

getting transmission built, including integrated utilities, independent transmission

companies, and merchant transmission entities.

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The proposed SMD rule would affect important state interests, but it would provide an inadequate framework to foster essential state cooperation and input needed

for regional institutions to work effectively. It is especially important to work closely

with the states in the areas of regional planning and resource adequacy. The responsibilities imposed on utilities and state regulators by state law with regard to

planning, adequacy of service and siting must be respected and state cooperation

must be achieved.

SMA/Market Power

While the situation may not require legislation at this time, Congress should be

concerned about FERC’s current SMA and market power policies, and we urge Congress to exercise its oversight role to monitor these policies.

First, there is a growing conflict between FERC and state regulatory commission

jurisdiction over the approval of generation resource procurement decisions made by

jurisdictional utilities.

In many states, approval for a utility to buy a generation plant or purchase power

depends on whether the state regulatory commission deems that the acquisition or

purchase is consistent with a broad range of state public policy goals, including such

areas as reliability, fuel diversity, economic development, risk management and environmental impacts.

However, where such a state-approved purchase is from a company not affiliated

with the utility, FERC may reject the acquisition on the basis that the acquisition

raises wholesale market power concerns under FPA Section 203, without taking into

account important state considerations for approving the transaction. Similarly,

where such a state-approved purchase is from an affiliate of the utility, FERC may

reject the acquisition if the utility does not comply completely with new competitive

solicitation guidelines that FERC established in 2004 in the Ameren case, even

though some of the guidelines might clearly conflict with the resource procurement

processes approved by state regulatory commissions. FERC’s case-by-case approach

for developing policy on resource procurement issues is creating substantial regulatory uncertainty and is affecting important investment decisions on infrastructure

expansion.

Congress should therefore be concerned that this jurisdictional conflict, if not resolved, has the potential to negatively impact the reliability of electric service by

disrupting the generation resource procurement process.

Second, last year FERC established an interim market-based rate approval process under Section 205 of the FPA that includes a new test for assessing the presence

of generation market power. EEI is concerned that this new test does not adequately take into account the native load obligations of vertically integrated utilities

serving retail customers. We are also concerned that it does not take into account

actual market conditions. So we have proposed an additional test to the Commission

that we believe accomplishes these goals.

Congress should be concerned that if FERC’s new test is not modified significantly, there is the potential that the majority of non-RTO vertically integrated utilities that do not have market power will be excluded from participating through

market-based rates in the competitive wholesale market. This could unnecessarily

limit the liquidity of wholesale markets to the detriment of other market participants and their customers.

Question 4. What is EEI’s position on the Voluntary Transmission Pricing Plans

provisions in the discussion draft? How does this provision compare to FERC’s current policy on transmission pricing plans to fairly allocate costs caused by the need

to upgrade or construct transmission facilities? What changes, if any, would EEI

suggest to these provisions?

Response: EEI supports the Voluntary Transmission Pricing Plans provisions

(Section 1242) of the discussion draft and believes they are an integral part of the

package of transmission investment incentives in the energy bill.

We believe that Section 1242 provides transmission providers the flexibility to

propose various approaches to fund transmission construction; the provision expressly states that any pricing plan may contain a number of different methodologies, including direct assignment of costs, participant funding or rolled-in pricing.

FERC has to find the pricing plan results in rates that are just and reasonable and

not unduly discriminatory or preferential and that the transmission costs are assigned in a fair manner. And, the provision does not affect cost methodologies employed by an RTO or ISO authorized prior to the date of enactment of the provision.

We believe this essentially grandfathers transmission pricing plans adopted by the

RTOs in the Northeast, the Midwest ISO (MISO) and Southwest Power Pool (SPP).

With respect to the participant funding option, the provision assures that entities

that cause transmission costs to be incurred will help bear their fair share of those

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costs. This principle is embodied in the ‘‘Framework for the Continuing Development of a Competitive Wholesale Market for the Benefit of Consumers’’ released at

the January 2005 EEI Board of Directors meeting. That document contains several

principles regarding transmission pricing and recognizes that pricing should ‘‘ensure

that cost responsibility follows cost causation, minimize the potential for cost shifting and promote efficient siting of new transmission and generation facilities.’’ We

believe participant funding is, in appropriate situations, consistent with these principles. Obviously, the principles also assert that transmission pricing should assure

full cost recovery by the transmitting utility.

As noted in our response to question #2 and also in our testimony, EEI supports

many incentives for transmission investment in the energy bill, including accelerated depreciation for transmission, incentive pricing, FERC backstop siting authority, and reforms to the federal permitting process. Participant funding is an extremely important transmission incentive. We also recognize that other areas of the

country may choose different approaches to fund transmission, and Section 1242

recognizes alternative funding proposals as well.

The Voluntary Transmission Pricing Plan provisions allow transmission providers

outside of organized markets the same pricing flexibility currently allowed to RTOs

and ISOs.

When a transmission provider must construct network upgrades to meet a request

for transmission service or interconnection, FERC’s policy has been to allow the

transmission provider to charge customers the higher of embedded costs of transmission (with the cost of the network upgrades rolled in) or the incremental cost

of the network upgrades, but not the sum of the two.

FERC, however, does allow RTOs and ISOs to directly assign the cost of new network facilities to a transmission customer that would not be in its transmission expansion plan ‘‘but for’’ the request for new transmission service by that transmission

customer, provided that the transmission customer receives well-defined rights to

use the transmission network in return.

Where a customer receives rights in exchange for direct cost assignment, and at

the same time obtains access to the network in exchange for an embedded cost access fee, FERC has found that the customer is paying separate charges for separate

services and that this does not constitute ‘‘and’’ pricing.

Section 1242 of the discussion draft extends this pricing flexibility that is currently only offered to RTOs and ISOs to all transmission providers. It protects native load customers from being assigned costs that would not be incurred ‘‘but for’’

a request for new transmission service. At the same time, it upholds the Commission’s prohibition of ‘‘and’’ pricing by explicitly not requiring a party requesting new

transmission service to pay both the incremental upgrade cost and a rolled-in price

for transmission that includes the cost of the network upgrade. It also provides

transmission rights, monetary credit, or other Commission-approved compensation.

EEI does not suggest any changes to Section 1242 or any other provision in the

electricity title. As we have stated before, while we recognize that every stakeholder

would probably change something in the electricity title, that title represents many

years of negotiations and is a balanced compromise that should be included in any

energy bill.

Section 1242 is well designed to provide pricing flexibility to all FERC jurisdictional transmission providers outside of RTOs and ISOs. It closely mirrors current

Commission pricing policy applied to RTO and ISO transmission providers, and it

upholds the Commission’s prohibition on ‘‘and’’ pricing.

AMERICAN PUBLIC POWER ASSOCIATION RESPONSE FOR THE RECORD

Question 1: PUHCA encourages regionalization of markets by requiring the interconnection and integration of utility assets. FERC, the SEC, and all market experts

support its repeal. Why should the PUHCA of 1935 not be repealed and replaced

with a modernized law?

How does the proposed increased access to books and records by Federal and

State regulators not offset the effect of PUHCA repeal?

With regard to PUHCA repeal, can you explain how consumers are better off

keeping willing investors out of an industry that desperately needs new investment

and infrastructure?

APPA Response: 1) The requirements that the Public Utility Holding Company

Act imposes on registered holding companies, including that they operate in a discrete geographic region and that the operating utilities are integrated and interconnected, were intended to ensure effective regulation of multi-state utility holding

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1 Edward H. Fleischman, Commissioner of the Securities and Exchange Commission, Oral and

Written Statements, testimony before the Senate Committee on Energy and Natural Resources,

March 14, 1991, published in the Hearing Record for S. 341, National Energy Security Act of

1991, by the U.S. Government Printing Office, 1991.

companies. Despite the attention paid to utility restructuring and deregulation over

the last decade, the fact remains that many utilities are regulated monopolies and

most are able to exercise considerable market power. Effective regulation, therefore,

continues to be necessary to protect consumers and investors.

PUHCA repeal debates have an argument du jour quality. Two decades ago,

PUHCA repeal arguments were based on the need to allow utilities to diversify into

non-utility businesses. A decade ago, partial repeal through the ‘‘exempt wholesale

generator’’ (EWG) provision included in 1992’s Energy Policy Act was based on the

proposition that it would promote competition. Today, repeal is advocated based on

the perceived need to enhance capital formation and support the creation of transmission companies. There has been as well a common thread running through these

debates—that PUHCA is no longer required to protect investors or consumers.

Consider how support for the EWG exemption was characterized by SEC Commissioner Fleischman in testimony before the Senate Energy Committee on March 14,

1991.

[T]he SEC can advise you, this morning, of its belief that adequate safeguards

are provided, in the disclosure requirements under the securities laws administered by the SEC and in the market itself, for the protection of the interest of

investors in the securities of every type of generating company and generating

system... And the SEC can also advise you of its belief that the interest of consumers, generally, can be protected by other regulatory entities... Exempting wholesale power generators from the 1935 Act would remove unnecessary regulation and encourage competition in order to reduce the cost of

electric power for consumers, and ultimately, reduce our dependence on foreign

sources of energy.1

According to Commissioner Fleischman, nothing would go wrong if Congress were

to exempt wholesale generators from PUHCA. In the intervening years, the litany

of things that have gone wrong is startling. Over the past decade, utility holding

companies have been able to issue misleading financial statements, manipulate affiliate transactions, and expand with no regard for consumer costs or welfare. As a

result, investors have suffered substantial losses. Today, many troubled utility holding companies with failed or faltering EWG investments are facing a debt crisis of

staggering proportions, and consumers of these holding companies’ electric utility

subsidiaries stand in line to pay the price.

PUHCA oversight, while designed to eliminate these very abuses and thereby protect investors and consumers, failed in the 1990s because PUHCA’s protections had

been significantly undermined by the EWG exemption. Further, what remained of

PUHCA was bent, twisted, or simply ignored by the SEC.

The consequences of total PUHCA repeal are no longer a matter of speculation.

To see what a world without PUHCA looks like, one needs to look only at the serious, adverse consequences of the partial PUHCA repeal in 1992. Congress must insist that consumers of monopolistic utility companies with the ability to exert market power over competitors and customers be provided the effective regulatory protection promised and, until recently, delivered by PUHCA.

The final question raised is why shouldn’t PUHCA be repealed and replaced with

a more modern law? APPA has been and remains open to modernization of PUHCA,

as long as the important protections afforded consumers and investors are preserved. In our view, the repeal of PUHCA proposed in H.R. 6 amounted to an almost

total repeal with no effort to modernize the law or preserve PUHCA’s important protections.

APPA has done extensive research on the background of PUHCA and its implementation, which has resulted in our opposition to its repeal. In fact, APPA released

a report in February 2003 entitled ‘‘The Public Utility Holding Company Act: Its

Protections Are Needed Today More than Ever,’’ that provides a detailed history of

the Act. Should you wish to explore this issue further, the report may be accessed

on APPA’s website at: http://www.appanet.org/files/PDFs/PUHCA0203.pdf

a) Although APPA supports the increased access to books and records by federal

and state regulators in the discussion draft, the provision is nonetheless inadequate

to offset the full repeal of PUHCA. PUHCA guards against several types of potential

holding company abuses. For example, while increased access to books and records

would in theory allow regulators to identify holding company activities, such as

inter-affiliate transactions that result in undue favoritism and self-dealing, repeal

of the Act removes the limitations on these types of transactions, thereby leaving

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regulators no remedy once the transactions are identified. Furthermore, in the discussion draft, the access only goes to the operating utility, not the holding company,

yet to truly understand affiliate and subsidiary transactions in order to fulfill their

obligation to protect consumers, regulators must have unfettered access to all of the

holding company books and records.

b) We do not believe PUHCA is an impediment to new investment in new infrastructure. PUHCA does limit the acquisition of existing utilities by holding companies. Repeal of PUHCA would not necessarily stimulate new investment in utility

infrastructure. Instead, it would at best bring in new investors whose funds would

be used to acquire utilities, not build them. Repeal would encourage procurement

of existing utilities by domestic or foreign corporations that have little knowledge

or understanding of the electric utility industry. However, the steady stream of revenue from these utilities’ captive customer base makes them extremely attractive

takeover targets. Electric utilities would simply become pawns on the chessboard of

corporate acquisitions. Under PUHCA, utilities are not limited in their ability to

build new generation, transmission or distribution within their service territories—

and, the building of independent wholesale generation is not restricted.

There has been no lack of investment in power generation facilities in recent

years. In fact, many APPA members are building or are considering proposals to

build new power plants. The lack of new investment in new transmission infrastructure cannot be traced to PUHCA. The uncertainty involved in getting necessary approvals to site transmission projects is a major deterrent to investment, which is

why APPA supports the siting provisions included in Section 1221 of the discussion

draft. Another deterrent is the desire of vertically-integrated utilities with large

generation facilities to protect their own generation from competition by limiting the

availability of adequate transmission to their merchant generator competitors

(please see the answer to question 3 below for an additional discussion about transmission infrastructure).

Question 2: APPA supports open access transmission rules yet appears to oppose

or not support open nondiscriminatory access provisions applying to its members.

Why doesn’t APPA think Sec. 1231 of the discussion draft is necessary?

APPA Response: APPA was one of the strongest proponents of the amendments

to the Energy Policy Act of 1992 that expanded FERC’s authority to require all

transmitting utilities, both publicly and privately owned, to provide transmission

service to others. Since the act was passed, few if any requests have been made to

FERC by parties seeking access to publicly owned transmission facilities. Further,

most APPA members with transmission facilities have developed open access transmission tariffs as envisioned in FERC Order Nos. 888 and 889, under which they

offer transmission services to others comparable to the service they provide to themselves and post the availability of transmission on their website. Based on this

record, it does not appear that access to publicly owned transmission facilities is a

problem.

In addition, we have watched FERC seek to expand its jurisdiction over publicly

owned utilities in a number of instances in the recent past. Even the limited legislative expansion proposed in Section 1231 might be regarded as an invitation by

FERC to push its jurisdictional reach.

To paraphrase my testimony presented to the Committee, APPA believes that Section 1231 is a solution in search of a problem, and unnecessarily subjects APPA

members to increased FERC jurisdiction and associated costs. However, APPA has

agreed to this language in previous iterations of the energy bill, and does not oppose

its inclusion in the discussion draft.

Question 3: What specific suggestions does APPA have to ‘‘promote mid-course corrections’’ with respect to RTO policies?

APPA Response: In answering this question, we are drawing from the APPA document, ‘‘Restructuring at the Crossroads: FERC Electric Policy Reconsidered’’ that

was released in December 2004. It should be noted that the mid-course corrections

we recommend in the white paper require only minimal legislative action (federal

backstop siting authority and the enhanced ability for FERC to assess penalties for

market manipulation). We believe that FERC has enough existing authority under

the FPA to implement the vast majority of our recommendations. Due to its length,

we are not attaching this document. If you wish to review it, it may be found on

our website at http://www.appanet.org/legislative/index.cfm?ItemNumber=10084&sn.

ItemNumber=2064&sn.ItemNumber=2064&tn.ItemNumber=2065

As was noted in our testimony, public power systems in RTO regions are experiencing across-the-board problems with increasing RTO costs, unresponsive governance and over reliance on market mechanisms. APPA members served by RTOs are

often unable to obtain long term transmission service rights at a known and reasonable cost. These problems impair public power’s ability to maintain existing and

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make new, long term generation resource arrangements necessary to provide reliable and affordable electric service to their consumers now and into the future.

In addition, regional differences and the largely negative experiences of public

power systems with RTOs have prompted public power utilities in other regions to

oppose RTO expansion. Instead, they are pursing more cost-effective means to promote infrastructure expansion and market efficiency and to provide open access

transmission service.

APPA believes that FERC should embrace the following general policies in both

RTO and non-RTO regions:

• Foster adequate investment in transmission and generation infrastructure; • Recognize and respect regional industry differences and preferences; • Encourage cost-effective and not overly complex regional solutions; • Support rational long-term generation resource arrangements that are in turn

supported by dependable, long-term transmission service provided at just and

reasonable rates, • Foster well-functioning wholesale electric markets; and • Ensure that FERC jurisdictional sellers of power charge ‘‘just and reasonable’’

rates.

In existing FERC jurisdictional RTOs, APPA recommends the following ‘‘midcourse’’ corrections. FERC should ensure that:

• Load-serving utilities have the right to retain existing transmission rights arising

out of ownership, existing contracts or service agreements under whatever market design is approved by FERC, and the ability in the future to obtain new,

long-term transmission rights at a known and reasonable cost in order to

achieve reasonable delivered cost certainty;

• Meaningful mechanisms are provided to get adequate transmission infrastructure

built in a timely fashion, including mechanisms that encourage joint participation in development of new transmission facilities by all load serving entities

within the region, instead of relying on incentive rates of return and accelerated

depreciation and the presumed price signals of Locational Marginal Pricing and

Financial Transmission Rights;

• A pricing methodology for transmission that produces reasonably certain and stable prices over the long term in order to support new generation construction

and long-term power supply contracts;

• RTOs are fully accountable to stakeholders and the public for their costs and decisions;

• RTO governance is accountable to electric consumers’ interests;

• The region encompassed within the RTO footprint makes sense from a commercial

and reliability perspective; and

• Through their operations and policies, that RTOs bring real, identifiable net cost

savings to electric consumers.

Additionally, APPA believes that FERC should respect the considerable regional

diversity that exists throughout the country and should embrace regional alternatives developed within regions that do not have and do not wish to have RTOs

by:

• Encouraging practices and institutions that meet the needs of specific regions;

• Enabling open regional transmission planning through means other than RTOs;

• Encouraging joint ownership of transmission and generation that supports longterm power supply planning while also helping to limit market power;

• Addressing remaining residual undue discrimination in transmission access by focusing on clarifying and enforcing open access rules;

• Addressing concerns of network service customers by vigorously enforcing the

joint planning and transmission construction obligations of FERC-jurisdictional

transmission owners under their existing Open Access Transmission Tariffs.

APPA has been heartened by recent FERC initiatives and statements by FERC

Commissioners that seem to indicate the Commissioners share some of APPA’s concerns. APPA intends to continue to advocate its views before the Commission, and

has some hope that its members’ concerns will be meaningfully addressed.

Question 4: Does APPA have any recommendations concerning FERC’s current

SMA policy?

APPA Response: By way of clarification, FERC’s current test for assessing the

generation market power of public utilities seeking market-based rate authority has

changed from the ‘‘Supply Margin Assessment’’ (SMA) test first proposed in the fall

of 2003. FERC is now employing on an interim basis two generation market power

screens, the ‘‘Pivotal Supplier’’ screen and the ‘‘Market Share’’ screen. FERC is also

examining all aspects of its market-based rate policy in a rulemaking docket, Docket

No. RM04-7-000.

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The ability of FERC-regulated public utilities to sell power at market-based rates

under the FPA is a privilege, not a right. It is not FERC’s mission to ensure that

its market-based rate regime benefits the sellers (and the financial institutions that

have lent money to them). Instead, FERC’s market-based rate policies must benefit

consumers and their communities by ensuring they are charged only ‘‘just and reasonable’’ rates, as Congress intended when it enacted the FPA.

Many small APPA members are facing very serious threats to their viability because of lack of availability of long-term firm transmission service at just and reasonable rates and increasing generation consolidation. These systems get few if any

bids from suppliers, are often unable to obtain transmission to reach alternative

sources of power, and are faced with dramatic price increases from local suppliers

with significant market power.

APPA member experience demonstrates that merely imposing ‘‘global’’ generic

conditions (such as RTO participation) on market-based rate authorizations may

have substantial unintended consequences, require years to put in place, and may

or may not address the underlying problems (e.g., generation market dominance

compounded by a dearth of long-term firm transmission capacity to obtain access

to competitive suppliers). APPA believes that lack of competitive conditions must be

addressed through a new market-based rate policy at FERC that ensures just and

reasonable wholesale rates at all times. It is participating actively in Docket No.

RM04-7-000 to achieve this end. APPA’s filings to date in Docket No. RM04-7-000

are available on APPA’s website, www.appanet.org.

Question 5: Please provide legislative language consistent with APPA’s suggestions to the Native Load Service Obligations of Sec. 1236 of the discussion draft.

APPA Response: APPA is not yet prepared to offer legislative language on this

section to the Subcommittee, but we are working with our members to provide

changes that are consistent with the suggestions we made in our testimony. A major

concern of APPA’s members worth reiterating here is that while Section 1236 addresses the preservation of existing transmission rights needed for utilities to meet

their current service obligations, it is silent on their ability to obtain new, long-term

transmission rights. Yet future long-term rights and predictable transmission rates

are critical to meeting future long-term obligations to their loads. They are equally

critical to the development of new renewable generation resources, particularly

wind, and new base load generation, which generally must be built far from load

centers.

Question 6: In your testimony you state that you recommend the deletion of the

sanctity of contract provision of this bill. Doesn’t this provision benefit both ways?

Wouldn’t there be times when public power systems has [sic?] a contract and would

not want the contracting IOU to break out of it? Also, wouldn’t this provision provide a clear cut standard? Without it, isn’t it true that any litigation would have

to start with establishing a standard by which the contract is evaluated?

APPA Response: We recognize the Subcommittee’s point that in certain cases,

public power entities could be disadvantaged by Commission abrogation of their contacts using the just and reasonable standard of contract review. But the more pressing issue for most public power entities is that of unequal bargaining power in the

negotiations leading up to the execution of a contract. As we delineate in our testimony, where two parties to a contract do not have equal bargaining power, the

stronger party could insist that the contract be silent on the terms of review, resulting in the application of the more stringent Mobile-Sierra ‘‘public interest’’ standard

by default in any subsequent litigation regarding the contract. Public power systems

are frequently the weaker of the two parties in such bargaining situations for the

reasons discussed above in response to questions one, three and four. Because they

have an absolute obligation to meet the needs of their customers, and often have

only a limited number of contractual options (especially when obtaining transmission service), they may have little choice but to accept a contract that is contrary

to their interest in terms of the standard of review, not through legitimate negotiations with the other party, but by congressional fiat. Through the application of this

proposed provision, they could well be deprived of the protection of the ‘‘just and

reasonable’’ standard to which they should and otherwise would be entitled under

the FPA. In essence, this provision substantially undermines the ‘‘just and reasonable’’ standard itself--one of the most fundamental consumer protection provisions

of the Act. In other words, we believe that the ‘‘clear cut’’ standard of review for

contracts subject to the Commission’s jurisdiction should be the just and reasonable

standard.

While this provision would eliminate litigation over which standard of review to

use in reviewing contract terms, the same certainty would occur were the section

to provide that the contract terms should be reviewed pursuant to the ‘‘just and reasonable’’ standard unless the contract provides otherwise. We would be pleased to

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support this section if itwere so modified, however such a change would certainly

result in strong opposition from those who would stand to benefit from the section

as currently drafted. Therefore, we believe the parties to contracts, not the Congress, should determine which standard of review should be used, and when they

do not address this in their contracts, the issue will then be decided by the Commission or the courts.

We therefore recommend that this provision be deleted.

Question 7: In your statement, you urge Congress to explore avenues to encourage

joint ownership of new transmission facilities by all load-serving entities in a region,

be they public or private. This would entice new investment into electric infrastructure, which APPA is strongly in favor of. However, to do this most efficiently would

require the repeal of PUHCA. How do you reconcile your desire for increased investment in this manner while discouraging the repeal of PUHCA?

APPA Response: As discussed above, we do not believe that PUHCA is an impediment to transmission investment. And PUHCA is certainly not an impediment to

public power investment in, and joint ownership of, new transmission facilities.

Joint transmission ownership arrangements exist today in many states and regions.

To expand upon our testimony with regard to joint ownership of transmission facilities, we believe that it is a structural solution that can address many of the accessrelated issues that RTOs were intended to address. Proportional ownership by those

load-serving entities providing service in the region is an effective means to mitigate

the transmission market power of utilities seeking market-based rate authority from

FERC. If the responsibility for building and owning the transmission grid is spread

more broadly among entities serving loads in a region, then joint transmission planning will be facilitated, simply because there are more participants at the planning

table. If network customers of a dominant regional transmission provider are encouraged to buy into their load ratio share of the transmission system, transmission

usage and ownership will be more closely aligned, and the frictions between transmission-dependent utilities and transmission owners can be reduced.

Public power utilities have participated in jointly-owned transmission arrangements for many years. One model of joint ownership that has worked for public

power is investment in a transmission-only company. There are two transmissiononly companies that are partially owned by public power utilities. These are the

American Transmission Company and the Vermont Electric Power Company. A second model is ownership in a shared system. In shared or joint transmission systems,

two or more load-serving utilities combine their transmission facilities into a single

system. Examples of public power participation in shared transmission systems are

found in Indiana, Georgia, Minnesota, and the upper Midwest region.

Besides the backstop federal siting authority included in the discussion draft, another way to encourage investment in transmission facilities, including increased

joint ownership of transmission facilities, is to address the issue of long-term transmission rights.

We are encouraged by FERC Commissioner Kelly’s comments to the Committee

on the issue of joint transmission ownership, dated February 15, 2005: ‘‘Electricity

legislation should include a ‘Sense of Congress’ to allow the Commission to encourage grid investment through stand-alone transmission companies or by developing

inclusive, joint transmission systems that enable all utilities in an area to participate.’’

Question 8: Why does APPA consider the Voluntary Transmission Pricing Plans

of Sec. 1242 mandatory? Please comment on such plans being subject to FERC’s just

and reasonable authority?

APPA Response: Although Section 1242 is attractively titled ‘‘Voluntary Transmission Pricing,’’ in practice the Commission would be required to accept the transmission pricing methodology proposed by the private transmission owner for new

transmission not required for reliability purposes. FERC may reject the methodology

only if it finds it will result in unjust and unreasonable rates. Although the rates

charged may be just and reasonable, the allocation of all costs to a specific party,

as happens under the ‘‘participant funding’’ methodology, may be inappropriate.

APPA is not opposed to participant funding per se. We think that FERC’s existing

authority to determine appropriate transmission rate design and cost allocation can

best assure that the ‘‘right’’ customers, i.e. those who benefit from a specific transmission upgrade, pay for needed modifications, even if the right customers are located in a neighboring state. This is especially so given that the customers that

might ‘‘benefit’’ from a specific transmission upgrade may well change over time, as

transmission system usage patterns shift. This flexibility is essential to ensure timely improvement to the weak U.S. transmission infrastructure, and to allow regional

consideration of appropriate methods for financing and assigning costs of specific

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projects, in light of the benefits provided to specific customers and to the overall region.

It is clear from the Chairman’s questions that he is interested in promoting a robust transmission infrastructure. APPA shares this goal, but firmly believes that

Section 1242 would in fact do the opposite by requiring FERC to approve proposals

forcing transmission customers who have requested service to bear 100 percent of

the costs of the upgrade, even if others—in fact, the entire region—benefit from the

upgrade. Only the very largest utilities could afford to undertake such bulk transmission upgrades, but these utilities often benefit from an undersized grid that protects their generation from competition. In contrast, regional transmission planning

and shared transmission ownership would promote robust transmission infrastructure as we have also noted in our response to questions three and seven above.

RESPONSE FOR THE RECORD BY ED HANSEN, GENERAL MANAGER, SNOHOMISH

COUNTY PUBLIC UTILITY DISTRICT,

Question 1. LPPC appears to support language that would require you to provide

transmission service to others on the same terms and conditions you provide yourself. Can you describe the service you provide yourselves and the service you would

then provide to others under this language?

Response: LPPC supports open-access transmission. A statutory requirement to

require public power systems to provide transmission service on non-rate terms and

conditions that are comparable to those under which the unregulated transmitting

utility provides service to itself would be acceptable to LPPC. This codifies the current comparability standard that non-jurisdictional utilities must meet under the requirements of FERC Order 888 in order to receive service from jurisdictional utilities. We believe that the core requirement in providing non-discriminatory open access transmission service is providing service comparable to what we provide ourselves.

Generally speaking, public power systems provide the following type of transmission service to themselves: (1) service necessary to serve native load within our

service territory; (2) service necessary to bring power into our service territories to

serve our native load; and (3) service to transport surplus power under contract or

sale to other utilities outside of our service territory. We would provide similar service, to the extent of available transmission capacity, to others on request.

Question 2. Your testimony states that public power is ‘‘unique’’ because of your

service obligations, non-profit status, etc. What obligation do you have to your consumers to procure for them the lowest priced power you can? Where does that obligation come from?

Response: Public power systems are owned by the communities we serve, not by

investors. We are not-for-profit entities, which does make us different. Public power

systems exist for a variety of reasons and were often created in response to specific

concerns. These systems are usually established by state law and are obligated,

again generally by state law, to provide electric service to their customers. Additional obligations are imposed by the governing board of a public power system—

which can be a city council or separately elected or appointed utility board.

The obligation to serve comes from a variety of sources, depending on the governance structure and creation of the particular public power system. In some instances, the obligation is imposed by the organic statute that created the system.

In others, that obligation was created by the state legislature in other legislation.

In other situations, a county or municipal government may impose the requirement.

The obligation to serve our customers and provide electricity to them means that

we are required to provide reliable service at the lowest reasonable rate. This differs

from a requirement to purchase the lowest priced power and is one reason that

many LPPC members build the generation and transmission to serve their native

load customers—in order to ensure reliable service.

A wide variety of procurement requirements, based on state and local law, are

also imposed on public power systems. This affects how and when we purchase

power off-system.

Question 3. What obligation do you have to procure the highest priced you can

for your power? What is the benefit for procuring a high price for your power?

Where would those revenues go? Isn’t it in your interests to secure the highest price

you can for your power while securing the lowest price for your citizens? How, then,

are you different from a regulated utility in that respect?

Response: Most LPPC member systems have built their transmission and generation systems specifically to serve their customer base—existing and reasonably proVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00224 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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jected. Since we have an obligation to first serve our customers, all available resources go first to accomplishing that objective. Power is sold and surplus transmission made available only if it is surplus to those needs. We do, in some instances, have surplus power since demand is fluid and will fluctuate. In order to

efficiently operate and use the capacity of our generation facilities, we will make offsystem sales or sales into the wholesale market. The market rules and price will

generally impact the price received.

However, the states and municipalities may also impose various requirements vis- a`-vis any power sales. In so far as we are selling power within our service territory,

those rates are set by a variety of means—again, either by the state legislature, the

local government, or the utility’s governing board. Surplus power sales are, similarly, subject to requirements by the state, municipality, county, or our governing

board. While the wholesale market does sometimes deliver a price above our retail

rates, this is not always the case.

Unlike investor-owned utilities, public power systems continue to be constrained

by IRS ‘‘private use rules’’ from making wholesale sales to non-governmental entities using facilities financed with tax-exempt bonds. By way of background, public

power systems have no practical source of external financing other than the municipal debt markets. Unlike private companies, public entities cannot issue stock. The

current private use rules limit the extent to which state and local governmental

units that own generation financed by tax-exempt bonds are allowed to let non-governmental entities use those facilities. The rules provide that no more than the lesser of 10 per cent, or $15 million, of power generated by a power plant financed with

tax-exempt debt may be sold to a private entity under a customer-specific contract.

Violation of these private use rules results in loss of tax-exempt status for the bonds

(in some cases retroactively to the date of issuance).

What these limitations mean in practice is that public power systems can build

generation with tax exempt financing to serve their own customers and other public

power systems but not the wider wholesale market.

In so far as we are able to sell surplus power in the market, generally, the revenues in excess of cost are used to cover operating costs, pay down debt—generally

relating to generation or transmission facilities—or contributed to the state or local

government as a ‘‘payment in lieu of taxes’’—which is sometimes mandated by statute.

FEDERAL ENERGY REGULATORY COMMISSION

March 15, 2005

The Honorable RALPH M. HALL

Chairman

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

U.S. House of Representatives

Washington, D.C. 20515

Re: Federal Energy Legislation

DEAR MR. CHAIRMAN: Thank you for the opportunity to appear before the Subcommittee on Energy and Air Quality on February 10, 2005, to present testimony

regarding the Discussion Draft of the Energy Policy Act of 2005: Ensuring Jobs for

Our Future with Secure and Reliable Energy.

Your letter dated February 28, 2005 enclosed several questions by Members to

supplement the hearing record. I have enclosed my responses. If you need additional

information, please do not hesitate to let me know.

Sincerely,

CYNTHIA A. MARLETTE

General Counsel

Enclosure

cc: The Honorable Rick Boucher, Ranking Member

Subcommittee on Energy and Air Quality

Question 1: Section 1241 of the bill would authorize and require FERC to do a

rulemaking on transmission incentive-based and performance-based rates. Do you

believe that there is too much congestion at certain transmission bottlenecks in various parts of the country? If so, do you agree that incentive and performance-based

rates are an appropriate vehicle for encouraging investment in new transmission to

relieve this congestion?

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Response: Yes, there is too much congestion at certain transmission bottlenecks

on the grid. Some transmission constraints create fairly small local load pockets

that require very expensive generation resources to meet load. These load pockets

typically cover urban areas. Many are well known—for example, New York City,

Long Island, Boston, parts of Connecticut, and the San Francisco Bay Area. However, there are other current and future load pockets around the country, including

parts of northern Virginia, New Orleans, and various load centers in the Southwest

Power Pool (SPP).

Other constraints are more regional in scope. They include:

• From the Midwest to the Mid-Atlantic. Congestion on these paths prevents

cheaper Midwestern power from reaching the East Coast.

• From the Midwest to the Tennessee Valley Authority (TVA). The lack of

strong connection between these two regions prevents Midwestern power from

reaching markets farther south.

• From TVA and the Southern Companies into Entergy. This transmission

constraint prevents power from reaching Entergy’s service territory.

• Into Florida. The lack of transmission from the Southern Companies into Florida

is a long-standing constraint.

In response to the second part of your question, I agree that incentive and performance-based rates are an appropriate vehicle for encouraging investment in new

transmission to relieve this congestion. By enacting section 1241 of the Discussion

Draft, the Congress could provide greater certainty to investors and thus encourage

quicker, appropriate investments in grid improvements.

Question 2: Do you believe that section 1241 will help the Commission to avoid

counter-productive legal challenges to its authority to allow incentive and performance rates?

Response: Yes. While I believe the Federal Energy Regulatory Commission (Commission or FERC) currently has adequate authority to provide transmission incentives, the enactment of section 1241 would lay to rest any potential legal arguments

that the Commission does not have authority to provide transmission incentives.

Question 3: Is FERC taking steps to address any electricity supply shortages that

may occur in the West either this summer or in the next few years?

Response: Yes. For example, the Commission has encouraged the development of

additional transmission and generation resources by: (1) offering financial incentives

such as a 13.5 percent rate of return for TransElect’s investment in a project to increase the transfer capacity of Path 15, the major intertie between northern and

southern California (a project which was completed on time and under budget, and

became operational in December 2004); and (2) approving proposals for new generation resources such as Southern California Edison’s Mountainview generating

project, which will provide 1,054 megawatts of capacity. Further, the Commission

continues to work with the California Independent System Operator (CAISO), market participants and California governmental entities to reform and restructure

California wholesale electricity markets to increase their efficiency and reliability.

With respect to other parts of the West, the Commission approved an innovative

rate and tariff proposal by Arizona Public Service Company that allowed the construction of a new Hassayampa switchyard and combined its operations with those

of Palo Verde, effectively creating an energy trading hub. By allowing flexible access

to markets without additional transmission charges, these changes allow and encourage the development of additional generation resources.

Finally, the Commission has taken steps to encourage development of adequate

interstate natural gas pipeline and liquefied natural gas (LNG) resources to ensure

supply and service reliability to all natural gas customers. For example, the Commission has authorized the construction and operation of a number of major pipeline

system expansions in the West over the past several years, including Northwest

Pipeline Corporation, Kern River Gas Transmission Company, Transwestern Pipeline Company and El Paso Natural Gas Company. The bulk of these system expansions were designed to serve natural gas-fired electric generation projects as well

as other growing demands for natural gas.

Question 4: What is the current status of FERC’s SMD proposal?

Response: Following ten months of public workshops and conferences on the questions of how to prevent market manipulation and market power abuses, promote

new transmission construction and capture competitive efficiencies for customers,

the Commission issued a proposed rule on Remedying Undue Discrimination

Through Open Access Transmission Service and a Standard Electricity Market Design in July 2002. This proposed rule was issued to remedy the types of undue discrimination and market power abuse that have occurred in the power industry since

the adoption of Order No. 888 in 1996.

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In response to comments on the proposed rule, in April 2003, the Commission

issued the Wholesale Power Market Platform White Paper (White Paper). The substance of the White Paper has been reflected in Commission policy over the past

two years.

Today, utilities encompassing approximately 69 percent of the nation’s economy

have formed or joined Regional Transmission Organizations (RTOs) or Independent

System Operators (ISOs) consistent with the Commission’s guidance. In each region,

all market participants are working together to address the issues of market manipulation and market power abuse, the expansion of the transmission system and

competitive efficiencies as spelled out in the White Paper. In the remaining parts

of the country, the Commission is using traditional regulatory tools to fulfill its statutory mandates. For those reasons, the Commission is no longer working on the proposed rulemaking but is, instead, focusing on the individual markets and utilities

to ensure that appropriate regional solutions are pursued.

Question 5: In your statement FERC suggested adding authority for the ERO to

order the construction of new transmission in certain circumstances. Are you aware

of any specific instances where this authority could have been used, i.e., where

transmission was needed but not built, to improve system reliability?

Response: One example is the Arrowhead-Weston project, which was announced

on April 15, 1999. This line is intended to be built through a partnership between

Wisconsin’s American Transmission Company (ATC) and Minnesota Power. Although ATC and Minnesota Power have expended significant effort to bring this line

to construction, it has been repeatedly delayed by local opponents and counties over

siting issues. Most recently, on February 3, 2005, the Douglas County Board voted

‘‘no’’ for the line to be sited on public land.

The Arrowhead-Weston line would strengthen the regional transmission system,

reducing its vulnerability to disturbances. In June 1997, through a series of unique

circumstances, power flows on the transmission system in Wisconsin were interrupted. This prompted extensive studies of the system’s inadequacies, and the need

for this project was reinforced in June 1998 when several Canadian provinces and

several Midwestern states came close to a large-scale, regional blackout. According

to testimony presented to the Public Service Commission of Wisconsin by ATC, all

of these studies consistently showed that the transmission system needs reinforcement and the Arrowhead-Weston Project would resolve many of Wisconsin’s most

critical transmission problems.

In this instance, FERC backstop authority to site this transmission line if the

Electricity Reliability Organization required it to be built for reliability would serve

the reliability interests of several Midwestern states and parts of Canada.

Question 6: The bill would increase civil penalties that FERC could impose in Section II of the FPA. You recommend that these increased civil penalties also be applied to Section III of the FPA, which addresses Procedural and Administrative Provisions. Why is this civil penalty authority needed for administrative and procedural

matters?

Response: There are two principal concerns. First, under sections 301(a) and (b)

contained in Part III of the Federal Power Act (FPA), the Commission has authority

to request that entities provide information, documents and other materials during

investigations and audits. However, under the existing statutory scheme, without

applicable civil penalties, entities that are undergoing an audit face no direct consequences for failure to comply with requests by the Commission for information,

documents and other materials.

Second, while Part III of the FPA primarily covers administrative requirements,

it also covers important substantive requirements involving interlocking directorates

and paying dividends from funds properly included in a capital account. For example, FPA—section 305 prohibits individuals from holding certain interlocking directorates without obtaining prior authorization from the Commission. The purpose of

the provision is to prevent conflicts of interest and the Commission may authorize

such interlocking directorates only if there would be no adverse effect on public or

private interests. However, the Commission has no civil penalty remedy for persons

that fail to obtain Commission approval to hold an interlocking directorate or otherwise violate the provision or orders thereunder.

Question 7: In your statement FERC discusses the progress made thus far on price

transparency in the electric and gas markets and makes several recommendations regarding price reporting.

a. FERC currently requires the electronic filing of quarterly transaction reports.

Non-governmental agencies voluntarily report much of the same information

contained in FERC’s quarterly reports on a daily basis. Based on FERC’s experience monitoring these markets, how successful is the quarterly reporting sysVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00227 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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tem? What specific authority, if any, does FERC need to require timely reporting of electric and gas transactions?

Response: The electronic filing of quarterly reports applies only to electric transactions and only to wholesale sales by jurisdictional public utilities. The Commission

designed the Electric Quarterly Report (EQR) to fulfill the statutory requirement

under section 205(c) that ‘‘every public utility shall file with the Commission—

schedules showing all rates and charges for any transmission or sale subject to the

jurisdiction of the Commission.’’ The details and quantity of the information collected in the EQR are significantly different from the survey data reported voluntarily to price index developers.

The EQR is an after-the-fact filing of the previous calendar quarter’s jurisdictional

contracts and transactions. The Commission posts submitted data on its website for

public access. The Commission does not convert the data into weighted average

prices—functions routinely performed by price index publishers.

To require routine timely reporting of both electric and natural gas transactions

and obtain a complete picture of the market, the Commission would need additional

authority. First, the Commission would need authority to collect, on a routine basis,

sales and purchase information from all wholesale sellers of electric energy, including governmental entities (such as power marketing agencies and municipal utilities) and electric power cooperatives. Second, the Commission would need additional

authority to require submission by all wholesale sellers of natural gas, given the

substantial number of transactions now exempt from the Commission’s Natural Gas

Act (NGA) jurisdiction. It is important to point out, however, that any extension of

the Commission’s FPA or NGA information collection authority to entities that are

not currently subject to the Commission’s comprehensive regulatory authority would

not result in such entities becoming jurisdictional for any other purposes. The legislative text contained in Chairman Wood’s February 14, 2005 response to Congressman Dingell would address the authorities needed.

b. FERC suggests the framework for market transparency should be the same for

both the electric and gas markets. Why should there be no difference? Should

the statutory provisions be the same, provided changes are made as FERC suggested in its statement?

Response: The Commission’s information collection authority would be less confusing if the same general framework were contained in both the FPA and NGA.

Also, the most consistent result would be achieved if the market transparency provisions of each statute were as similar as possible. The goal and authorities should

be the same, and differences should be considered only to the extent necessitated

by the different natures of the two commodities.

c. You state that FERC should have the tools to step in and require reporting if

there is a problem. Please describe the specific tools FERC believes it needs.

Response: If voluntary price reporting is not successful, the Commission should

have the authority to require reporting by all market participants, subject to appropriate rules. The authority should extend to both sellers and buyers in wholesale

energy transactions. In addition, the Commission should be given the authority to

rely on a non-governmental entity to perform the tasks of collecting, screening, calculating, and disseminating price information to market participants, along with a

means of generating the revenue necessary to support such functions.

d. Why shouldn’t Congress grant exceptions to the gas reporting requirements?

Aren’t there sufficiently small pipeline operators who may trade rarely, if ever,

in transactional amounts to affect the markets?

Response: Exceptions for small sales or purchases of natural gas would be better

dealt with in rules issued by the Commission than in legislation, so that the exceptions can be broadened or narrowed more flexibly in response to future circumstances. The Commission has been quite responsive to these sorts of requests

in developing regulations.

e. FERC suggests Congress consider a private entity for the electric and gas markets reporting function. What are the pros and cons of allowing a private entity

to compile this data?

Response: Independent, non-governmental entities are often the best choice to perform specific technical functions in market environments. In particular, independent

non-governmental entities prove effective when they provide a range of benefits to

market participants under government oversight.

The ‘‘pros’’ of making use of an independent non-governmental entity include: (1)

the customer credibility of an independent entity; (2) self-governance under rules

well understood by participants and by the Commission; (3) the efficient ability to

collect, screen, process, and disseminate an enormous volume of data daily; and (4)

the ability to finance operations from fees for access to the price data produced from

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market participants, interested consultants and analysts, and governmental agencies with oversight responsibilities.

‘‘Cons’’ might include (1) less credibility because the collecting entity is not a governmental agency and (2) possible limitations on regular Commission access to

transaction data because of confidentiality agreements with voluntary participants.

The first possible ‘‘con’’ could be remedied through an effective governance structure

designed to enhance credibility across industry suppliers, customers and resellers.

The second could be managed through careful design, in advance, of Commission/

entity relationships. Any solution would need to deal with these potential issues effectively.

f. FERC offers four recommendations regarding natural gas reporting. Could you explain the rationale behind (the pros and cons) each of the four recommendations?

Response: The first recommendation was that statutory authority should permit,

but not require, an electronic price reporting system. The industry has made substantial improvements in all facets of price discovery under the guidance of the

Commission’s July 2003 Policy Statement. Policy Statement on Natural Gas and

Electric Price Indices, 104 FERC ¶ 61,121 (2003). If this progress continues, there

may be no need for a mandatory price reporting program. If, however, the current

voluntary system proves to be inadequate in the future, the Commission should

have the authority to establish mandatory price reporting.

The second recommendation was that the Commission should be able to require

all market participants to provide price information, subject to appropriate confidentiality protection. Under the current voluntary price discovery system, price information is supplied to independent price index developers both from companies subject to the Commission’s jurisdiction and from companies outside the Commission’s

jurisdiction. If a mandatory reporting system is required in the future, the Commission should be able to require that all participants, including both sellers and buyers, contribute transaction data. Otherwise, the Commission will not have a comprehensive understanding of what is going on in the market-place.

The third recommendation was that the Commission be able to rely on external

commercial companies to collect and publish price information. This is the independent, non-governmental entity as discussed in response to question 7e.

The fourth recommendation is that the savings clause referring to the Commodity

Futures Trading Commission (CFTC) should be modified so as not to inadvertently

limit the Commission’s existing authority to conduct investigations. Under section

307 of the FPA and section 14 of the NGA, the Commission currently has broad authority to obtain information from persons, or to subpoena witnesses, if relevant to

an investigation under the statutes. The CFTC savings clause, as currently worded,

could be construed as precluding the Commission from exercising its statutory authority to obtain information directly from any entity if that information is relevant

to the FERC investigation. Any savings clause for the CFTC should make clear that

there is no change to the Commission’s existing broad authority to collect information directly from entities if necessary in conducting investigations under the FPA

and NGA. It should be noted that the ability to obtain information directly from an

entity, when needed to conduct an investigation, does not equate to regulation of

such entity, or impede any other governmental agency’s regulation of such entity.

Question 8: How would FERC define ‘‘economic dispatch’’? What criteria would be

used? Why should ‘‘economic dispatch’’ apply only to a multi-state utility? Why not

have it apply in any regional market and to any entity supplying power to its customers? Should Congress grant FERC authority to have it apply to traditionally

non-jurisdictional entities? Would a focus on economic dispatch increase reliance on

short-term markets at the expense of mid- and long-term markets?

Response: The Commission has not formally defined ‘‘economic dispatch.’’ Staff believes one appropriate definition would be ‘‘the operation of the integrated transmission and electric power supply system in a manner that schedules and economically prioritizes all available electric generation resources, including proposed offers

from independent power suppliers, so as to minimize the cost of electric power used

to serve customers reliably, recognizing any operational limits of generation and

transmission facilities and any applicable renewable portfolio standards.’’ The key

criterion is whether a utility’s dispatch minimizes the costs incurred to serve customers reliably.

All utilities should use economic dispatch as defined above. The reason for giving

the Commission explicit, direct authority to require economic dispatch for a multistate utility, but not for others, is that dispatch costs for a multi-state utility are

generally controlled or allocated by a FERC-regulated contract among the utility’s

operating companies. States would be less able to require economic dispatch in these

circumstances, compared to their ability to regulate single-state utilities.

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I do not advocate that Congress give the Commission the authority to require economic dispatch by non-public utilities. While those utilities should use economic dispatch, any failure to do so can be addressed by means other than expanding the

Commission’s jurisdiction. However, public utilities should offer to purchase excess

power available for sale by non-public utilities and include such purchases in their

economic dispatch, when such purchases will reduce costs for customers of public

utilities.

Economic dispatch should not increase reliance on short-term markets at the expense of longer-term markets. Economic dispatch should minimize costs in shortterm markets, but buyers and sellers both would benefit from conducting much of

their trading in longer-term markets. However, in order to ensure that all generators have the opportunity to fully recover both the fixed and incremental costs of

their facilities, longer term contractual arrangements would be a necessary complement to the inclusion of independent generation in any economic dispatch program.

Question 9: If Congress grants FERC emergency authority to approve temporary

changes to, or temporarily suspend, tariff provisions on file with the Commission as

suggested by FERC in your testimony, how would FERC define ‘‘market power

abuse’’? What conditions may be appropriate to suspend tariffs beyond the 30-day

period, if any?

Response: The Commission has not explicitly defined ‘‘market power abuse.’’ At

times, the Commission has defined market power in ways similar to the definition

in the Department of Justice Merger Guidelines, i.e., ‘‘the ability of a seller to profitably maintain prices above competitive levels for a significant period of time.’’ Applying this principle, however, requires careful analysis of specific circumstances, to

properly distinguish legitimate competitive practices from abuses of market power.

For example, in the context of market-based rates for public utilities, the Commission now uses two indicative screens (a pivotal supplier screen and a wholesale market share screen) and, if a utility fails either screen, a more detailed ‘‘delivered price

test’’ is required. Also, in response to the market manipulation during the Western

energy crisis, the Commission has adopted rules prohibiting ‘‘actions or transactions

that are without a legitimate business purpose and that are intended to or

foreseeably could manipulate market prices, market conditions, or market rules . . .’’

Any future findings of ‘‘market power abuse’’ presumably would be based on these

concepts or related concepts in prior Commission decisions.

I do not know at this time what precise conditions might warrant suspension of

tariffs beyond the 30-day period. However, as an example, if market conditions

would allow potential abuse of market power or threaten reliability of service for

a foreseeably temporary period longer than 30 days, a suspension of certain tariff

provisions (or perhaps suspension of market-based rates) might be appropriate.

Question 10: Briefly describe FERC’s SMA proceeding. What is its status? How

does FERC define ‘‘market power’’, if at all, in such proceeding?

Response: For 15 years, the Commission has used a four-prong test to assess the

eligibility of an applicant for electric market-based rate authority: (1) whether the

applicant or its affiliates have, or have adequately mitigated, generation market

power; (2) whether the applicant or its affiliates have, or have adequately mitigated,

transmission market power (sometimes called vertical market power); (3) whether

the applicant or its affiliates can erect barriers to entry into the market; and (4)

whether there are concerns involving the applicant that relate to affiliate abuse and/

or reciprocal dealing. In November 2001, the Commission adopted the Supply Margin Assessment (SMA) methodology as a new way to measure whether the applicant

has generation market power. After several rounds of public comment and a twoday technical conference on how the Commission should measure generation market

power, in April 2004 the Commission replaced the SMA methodology with two interim screens that are indicative of the presence of market power in generation: the

uncommitted pivotal supplier screen and the uncommitted market share screen. In

contrast to the SMA methodology, in measuring generation market power the new

interim screens specifically recognize utility commitments to serve native load customers, long-term power sales obligations, and generation that utilities need to keep

as operating reserves to backup their other capacity that is in operation. The Commission has used the new interim screens to process numerous electric marketbased rate filings. If a utility fails either screen, the Commission uses a more detailed ‘‘delivered price test,’’ for the generation market power prong. The Commission has also initiated a generic rulemaking proceeding (Docket No. RM04-7) to consider whether to retain or modify the four-prong test, including whether to retain

or modify the interim generation market power screens. The Commission did not explicitly define the term ‘‘market power’’ in these proceedings, but the two indicative

screens and the delivered price test are tools for evaluating market power.

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Question 11: Without legislation, can FERC address the fundamental problem

with hydro licensing process—namely, the fact that federal resource agencies mandate restrictive conditions on the operations of hydropower projects without either

comprehensive analysis of their impacts or an independent review of the conditions?

Response: No. Section 4(e) of the FPA requires the Commission to include in licenses issued within reservations of the United States such conditions as the Secretary of the department under whose supervision the reservation falls deems necessary for the adequate protection and utilization of the reservation. Section 18 of

the FPA requires the Commission to require licensees to construct, maintain, and

operate fishways prescribed by the Secretaries of Commerce and the Interior. While

the Commission analyzes these conditions and prescriptions in its environmental

documents, it must accept them, and therefore cannot act independently on them.

It should be noted that the proposal in Title II would place requirements on the federal resource agencies with respect to their development of conditions and prescriptions, but in no way expands or otherwise alters the Commission’s authority concerning these matters.

Question 12: Is FERC’s ILP process a substitute for the hydroelectric language in

title II of the discussion draft? Please explain.

Response: No. The integrated licensing process (ILP) establishes a process

through which environmental review can begin and issues can be identified at an

early stage in the hydroelectric licensing process. If all parties cooperate in the ILP

and conduct their activities in a coordinated fashion, the Commission should receive

all necessary information, including mandatory conditions and prescriptions, such

that it can issue a license in a timely manner. However, while the ILP might affect

the timing for the development by the federal resource agencies of their mandatory

conditions and prescriptions, it does not alter the manner in which they develop

them—i.e., the ILP does not give the Commission the authority to revise or reject

mandatory conditions or prescriptions. Since, as noted above, the FPA requires the

Commission to accept mandatory conditions and prescriptions, it lacks authority to

impose such requirements.

Question 13: Does the hydroelectric licensing rulemaking ongoing at the Department of Interior make the hydroelectric language in Title II of the Discussion Draft

unnecessary? Please explain.

Response: No. The Department of the Interior’s rulemaking may or may not accomplish the objectives of the proposed legislation, but is not yet finalized. It is

Commission staff’s understanding that the Department of Commerce is deciding to

what extent it concurs with Interior’s procedures. The Department of Agriculture at

one time had a process for internal review of mandatory conditions, but no longer

does so.

Question 14: Currently, what is the appeals process in a hydroelectric relicensing

proceeding? How would that change under the proposed legislation in Title II?

Response: After the Commission issues a hydroelectric license, aggrieved parties

may petition the Commission for rehearing. After the Commission acts on rehearing,

a party who has sought rehearing may then seek review of the Commission’s orders

in the United States Courts of Appeals. Under the proposed legislation, the federal

resource agencies would be required to provide a formal opportunity for review of

proposed mandatory conditions and prescriptions within those agencies.

Question 15: Some parties have claimed that the proposed changes to hydroelectric licensing may result in a violation of due process. Does FERC agree? Please

explain.

Response: I am not aware of the exact nature of the referenced concerns. However, some parties have alleged that the proposed legislation is problematic because

it would require the federal resource agencies to consider those alternatives to mandatory conditions and prescriptions proposed by license applicants, and would permit the agencies to consider alternatives raised by other entities. I do not consider

this to be a deficiency in the proposed legislation. Allowing the agencies to consider

alternatives proposed by entities other than license applicants should give those entities a fair opportunity to be heard.

Question 16: Do the changes proposed in the Energy Policy Act of 2005 work with

FERC’s ILP process?

Response: There is nothing inconsistent between the proposed legislation and the

ILP, and, to the extent that the proposed legislation would improve decision making

and increase transparency, the hydroelectric licensing process would benefit accordingly. If the federal resource agencies are required to establish internal review processes, however, it is important that the timing of those processes be integrated with

the ILP, such that the Commission’s licensing process is not delayed.

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Question 17: American Rivers’ testimony states that if the language in the Energy

Policy Act of 2005 were in effect, the recent Tapoco settlement would not have occurred? Does FERC agree?

Response: No. I have no reason to believe that this would have been the case, and

see nothing in the proposed legislation that would have a negative effect on the settlement of hydroelectric licensing proceedings.

Question 18: American Rivers’ testimony states that the Energy Policy Act of 2005

would not bring current hydroelectric projects up to today’s environmental standards. Does FERC agree?

Response: No. The Commission is required by the FPA to license only projects

that are best adapted to a comprehensive plan for the development of the waterways

at issue, giving equal consideration to power and development purposes, and to environmental and other nonpower purposes. Pursuant to these standards, any license

issued by the Commission will bring projects up to current environmental standards. The proposed legislation, while potentially increasing the efficiency and equity

of the licensing process, would not have any impact on the standards by which the

Commission determines what conditions to include in a license.

Question 19: If FERC loses its LNG siting case in the 9th Circuit, will it affect

just that site or could it have greater repercussions?

Response: Were the 9th Circuit to determine that the states have jurisdiction over

the siting of LNG import facilities, it would likely have impacts across the country.

The California Public Utilities Commission makes the argument that the Commission lacks any authority over LNG imports. If this argument prevails, federal regulation of LNG siting and safety would become uncertain. State jurisdiction would

make it more difficult for the federal government to site LNG facilities based on the

overall energy needs of the nation. Moreover, different states might impose different

siting requirements, which could be inconsistent with national safety standards.

Question 20: The Voluntary Transmission Pricing Plans in the discussion draft attempt to allow the fair distribution of costs necessary to interconnection merchant

generation facilities to the grid in regions of the country in which ratepayers do not

need the merchant generation or improvements in the region’s transmission grid to

accommodate such generation.

a. What is FERC’s position on the Voluntary Transmission Pricing Plans contained

in the discussion draft? Please describe FERC’s views on the voluntary nature

of such provisions and how such pricing plans may be subject to FERC’s just

and reasonable ratemaking authority.

Response: I would note that the Voluntary Transmission Pricing Plan provision

under section 1242 is not limited to merchant generator interconnection cases and

applies to all construction, expansion or modification of transmission facilities in

interstate commerce. The Commission has adequate authority to approve voluntary

transmission pricing proposals under FPA sections 205 and 206. Moreover, the Commission’s existing transmission pricing policies are consistent with the core policy

of section 1242—that customers who benefit from new transmission facilities should

pay for those facilities. Any plans approved under current law, or under section

1242, would have to be just, reasonable, and not unduly discriminatory or preferential. Accordingly, I do not believe that section 1242 of the Discussion Draft is

necessary.

b. How does the proposed language compare with FERC’s current interconnection

policies? How does FERC’s policy compare with transmission pricing policies of

existing and FERC-approved RTOs? How, if at all, does FERC’s current policy

promote the economically efficient siting of generation?

Response: Under the Commission’s current policy for assigning the costs of interconnection, the new generator pays for all the studies required in advance of constructing the interconnection. The new generator also pays for all the interconnection facilities and equipment on its side of the interconnection (i.e., the point where

its electrical equipment and other facilities interconnect to the interstate transmission network). For example, a new long radial line may be needed from the generator to the grid, and the generator pays for the entire cost of this line, up to the

point of interconnection to the grid, even if the line is constructed by the transmission owner.

Sometimes, an interconnection also requires upgrades to the interstate transmission network. The debate about pricing for new generators interconnecting to the

grid concerns who pays for such ‘‘network upgrades.’’ A network upgrade often benefits all transmission customers by making the entire network stronger and more reliable. Although the request from a generator to interconnect may be the immediate

reason for upgrading the network, the generator is seldom, if ever, the sole beneficiary of the network upgrade.

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In determining who should pay for network upgrades, the Commission examines

the effect of including the costs for the upgrades in the rates of existing customers.

If the rate for existing customers would decrease (by virtue of including the additional costs of the upgrade in the numerator and the additional usage of the transmission network in the denominator of the rate calculation), the Commission permits the network upgrades to be ‘‘rolled-in’’ to the existing average rate, leaving all

customers better off. However, if including the costs of the upgrades would have the

effect of increasing the average transmission rate for existing transmission customers, including the utility’s native load, the Commission permits the utility to directly charge the generator for the costs of the upgrades through an ‘‘incremental’’

rate (the cost of the network upgrades divided by its increased throughput). The

new generator may be charged the rolled-in rate or the incremental rate, as appropriate, but not the sum of the two rates. Under either method, existing transmission

customers (including native load) are held harmless.

The proposed language of the Voluntary Transmission Pricing Plan provision has

much in common with the Commission’s current pricing method, providing that

rates must be just and reasonable and that costs must be assigned in a fair manner.

The proposal appears to allow a variety of cost allocation methods, including direct

assignment, participant funding, and roll-in.

Requiring the Commission to approve a rate proposal by a regulated entity based

on any detailed legislative test is, in general, not recommended. I believe our existing rate authority is more than adequate to address the transmission pricing issues

associated with the interconnection of merchant generation in ways that are just,

reasonable and not unduly discriminatory or preferential under the Federal Power

Act.

Because a utility owning or operating transmission facilities outside an RTO or

ISO typically owns generation that competes with the new generator, the Commission permits little deviation from its existing pricing policy for such non-independent

transmission providers. The Commission remains concerned that non-independent

transmission providers have a strong incentive to assign transmission costs to competing generators in ways that may be unduly discriminatory or preferential.

The Commission permits additional pricing flexibility when an independent transmission provider proposes to allocate the costs of transmission network upgrade.

This is because an independent entity that does not compete in the marketplace for

generation sales is less likely to act in a discriminatory or preferential manner in

making determinations regarding the allocation of transmission costs associated

with a particular upgrade. Further, many RTOs and ISO have developed innovative

and sophisticated approaches for sharing the existing costs of the transmission network among their members and for managing and pricing transmission congestion

within the region. To allow all the components of such innovative policies to work

together effectively, the Commission permits additional flexibility for the ISO or

RTO to design complementary policies for assigning the costs of network upgrades.

Economically efficient siting of generation occurs when power customers can

choose to add either generation or transmission, whichever costs less. While the

siting of any proposed new generation or transmission is generally subject to state

regulatory approval, the Commission’s current transmission pricing policy ensures

that generators understand the cost consequences of their siting decisions. It requires the generator to pay for all facilities that must be constructed between the

generating facility and the point of interconnection with the grid. As a result, the

generator is motivated to locate as close as possible to an existing transmission line

to reduce its costs, which is the economically efficient incentive.

Further, in the case of a network upgrade needed for an interconnection, the Commission permits the transmission owner to require the generator to advance the

funds for constructing the network upgrade. The generator’s ‘‘loan’’ to the transmission owner is returned over time as a credit against the generator’s transmission

bill. This means that a merchant generator is initially responsible for the costs of

any network upgrade regardless of whether it is ultimately charged an average,

rolled-in rate or an incremental rate for transmission service. Further, the transmission owner is allowed to extend the period of time over which it must reimburse

the generator through credits for this up-front construction loan for as long as 20

years. Thus, the generator bears a substantial cost burden to complete its interconnection—a burden that is greater to the extent that the generator chooses a site

that is far removed from the grid or otherwise entails the construction of costly facilities and grid upgrades.

c. Is it FERC’s policy to encourage the siting of merchant generation regardless of

costs necessary to interconnect such merchant generation with the grid?

Response: The Commission’s policy is to encourage the development of energy infrastructure, including merchant generation, so long as the costs of new infrastrucVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00233 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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ture are allocated in a just and reasonable and not unduly discriminatory or preferential manner. The Commission’s transmission pricing policies encourage economically efficient new generation while holding native load customers harmless from

the costs associated with necessary upgrades to the interstate transmission grid.

d. Why should ratepayers who do not need the generation or benefit form the energy

supply across their local utility’s transmission lines be compelled to pay for

transmission upgrades they do not need?

Response: The Commission’s existing transmission pricing policies fully protect

existing customers (including native load) from the costs of transmission upgrades

occasioned by the interconnection of new merchant generation.

e. Does FERC’s transmission pricing policy encourage the building of generation

within load pockets? If so, how?

Response: The Commission’s current interconnection pricing policy promotes the

economically efficient siting of generation, including generation within a load pocket. A load pocket is typically a small region of the grid that has limited ability to

import power because of transmission constraints. New York City, San Francisco,

and San Diego are examples of load pockets. A load pocket is a potential problem

both for reliability and for the potential exercise of market power by generators in

the region. In general, a load pocket is an attractive market for new generation because competition from outside suppliers is limited. However, load pockets generally

exist because it is difficult to site new generation or to build new transmission into

the constrained area.

The Commission has encouraged RTOs and ISOs to adopt an efficient pricing system for managing and pricing congestion for the region. In an RTO or ISO with efficient congestion pricing, a generating facility located outside a load pocket faces increased congestion costs to move power into the load pocket. However, for a generating facility located inside the load pocket, these congestion costs are largely avoided. Thus, the Commission’s pricing policies provide the generator with a strong incentive to locate within the load pocket, whenever possible.

Question 21: What is FERC’s position on the Open Nondiscriminatory Access provisions of Sec. 1231? How, if at all, may this language be changed to ensure open

access over interstate transmission facilities at comparable rates?

Response: The provisions in section 1231 of the Discussion Draft would provide

helpful authority to ensure that non-public utilities provide non-discriminatory access to their transmission systems similar to the requirements currently imposed on

public utilities. The provisions on rates, terms and conditions are adequate to ensure that customers receive service comparable to the service the utilities provide

themselves. However, section 1231(f) would give the Commission the authority to

remand transmission rates to an unregulated transmitting utility for review and revision where necessary, but would not give it the authority to modify the rates directly. The Commission could be given the authority to modify the rates where necessary, to prevent any delay in the establishment of rates in compliance with this

section.

NATIONAL GOVERNOR’S ASSOCIATION

March 23, 2005

The Honorable RALPH M. HALL

Chairman

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

2125 Rayburn House Office Building

Washington, DC 20515

DEAR CHAIRMAN HALL: On behalf of the National Governors Association, thank

you for the opportunity to respond to the Subcommittee’s questions in regard to my

testimony on February 10, 2005. Following are the questions posed, and our answers. With regard to methane hydrates and the Alaska Natural Gas Pipeline, the

responses represent the views only of the State of Alaska.

Question 1. In your testimony, you raise an objection to the federal coordination

of interstate electric transmission facilities. In objecting to federal government authority pursuant to this provision, you explain that NGA has yet to see credible evidence that states have abused their responsibility to balance electricity transmission

needs with other important public considerations. If the problem is not the states,

why is it so difficult to site power lines? There have been very few major interstate

transmission lines built in this country in the last 20 years. In fact, the Cloverdale

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line across the states of Virginia and West Virginia took over 10 years to get all

approvals. So if it is not the States, perhaps it’s parochial opposition preventing

transmission siting. If that’s the case, wouldn’t that justify the need for a federal

backstop to achieve interstate transmission goals that are in the national interest?

What was siting process of the Cloverdale line and what is its current status?

Response: There are a myriad of reasons that it is difficult to site power lines,

and most of them are due to reasons that have little to do with state regulators.

Generators and competing transmission owners sometimes are opposed to new

transmission lines because the lines may conflict with existing commercial objectives

and inject price rivalry into a monopoly situation.

Transmission lines are also difficult to site because they sometimes cross sensitive

environmental areas, like parks, wetlands, habitats, or streams and waterways.

Often they interfere with someone’s view of the surrounding landscape. The concern

that electromagnetic fields produced by the currents in the transmission lines may

have an effect on people also is a matter required to be taken into account in some

states. Our legal system requires that persons with an interest in a transmission

line have the right to intervene in order to present their point of view or question

a proposed line. Neighbors, communities, environmental groups, and other utilities

are typical intervenors in transmission siting proceedings, and assume a similar role

regardless of which entity is responsible for siting.

Existing federal laws are sometimes another impediment to siting transmission

lines. The approval procedures that transmission owners must undertake to site

power lines that cross federal lands can be long and difficult because of federal process requirements and because these applications struggle for priority among the

agencies’ other missions. Since the costs of a transmission project often fall on consumers who have no direct say in whether they want to pay those costs, regulators

and siting authorities must weigh very carefully their responsibility for passing

along construction costs to people who will not benefit.

Within the Western Interconnection, no state has denied a permit for an interstate transmission line in the past 17 years. The example that you cite—the

Cloverdale line through Virginia and West Virginia—was impeded in its construction in large part because of federal agencies’ objections to the line traversing national forest land. Both the U.S. Forest Service and the U.S. Park Service took years

to complete environmental impact statements and recommended that the line not

be built through the Jefferson National Forest and across the New River. Only after

an alternative route was chosen that was satisfactory to the federal agencies, was

the normal siting process allowed to proceed in both states. The legal requirements

to consider the amended application with its alternate route, along with the statutory requirements for public notices and hearings, were not within the states’ authority to change. The line is now under construction.

Preempting state law and state decisions with the judgment of Federal Energy

Regulatory Commission (FERC) regulators for would not change the requirements

to comply with the requirements of federal land management agencies. Nor would

it reduce citizen’s opposition or lawsuits or expedite the administrative process of

reviewing an application. Arguably, given the track record of many federal agencies

in addressing their backlogs of reviewing and approving permit applications, it

might actually increase the length of time that it takes to build transmission lines.

Lastly, it’s important to note that the so-called federal ‘‘backstop’’ in HR 6 gave

the FERC the authority to preempt a state’s siting process if the state ‘‘withheld

approval, conditioned its approval in such a manner that the proposed construction

or modification is not economically feasible, or delayed final approval for more than

one year after the filing of an application seeking approval.’’ This so-called ‘‘backsto

authority’’ virtually gives the states an ultimatum—‘‘approve the project within one

year or FERC will approve it for you.’’ The NGA opposes ultimata on states. As the

Cloverdale line history indicates, federal approval decisions that took more than

four years to complete would have eliminated state jurisdiction despite the fact that

the states were not at fault for the delay. (A copy of the Cloverdale line chronology

is attached.)

Question 2. In your testimony you tout the potential for methane hydrates to be

a viable source for natural gas supply. However, you also site the need for government-sponsored research and tax credits in this area. In light of DOE’s proposed termination of its Fossil Energy Oil and Natural Gas R&D program where such research was performed, what is the likelihood that production from this resource will

become a reality? Do you feel private industry can champion this effort?

Response: The federal funds from the Hydrate Research Act of 2000 that have

flowed through the Department of Energy Office of Fossil Fuels have been critical

in advancing the characterization of this huge potential natural gas resource. The

onshore North Slope of Alaska alone is estimated to contain 529 trillion cubic feet

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(TCF) of methane contained within hydrates while the area offshore of the North

Slope is estimated to contain 32,000 TCF. Reservoir characterization and computer

production simulations by BP, the USGS, and various universities, coordinated and

funded through DOE, have indicated that at least some of these hydrates (100 TCF

of hydrates overlie the producing oil fields) could potentially be produced at economic rates. However, this work fell short of the necessary production tests which

would verify the models. Reauthorization of the Hydrate Research Act, as recommended, would lead to these critical tests.

Additionally, hydrate production shows promise in the area of carbon sequestration, where CO2 is injected into the hydrate-freeing methane and trapping the CO2. It is very likely that with further government-sponsored research hydrate production will become a reality. This research is most effective when the research is conducted through joint government and industry partnerships. Private industry alone

is unlikely to advance the technology nearly as rapidly and will not have the same

motivation to make the data public.

Question 3. In your testimony you mention the progress that has been made on

the Alaska Natural Gas Pipeline. EIA’s 2025 natural gas supply projections anticipate the pipeline being live no later than 2016. Do you see any impediments at this

early state to that timeline? If so, what are they and what can be done to remove

any such hurdles?

Response: The State of Alaska is strongly committed to the realization of the Alaska Natural Gas Pipeline. Under the framework of the Alaska Stranded Gas Development Act, the State is currently participating in negotiations with the Alaska gas

producers, ExxonMobil, BP, and ConocoPhillips to result in a viable contract. The

State is also negotiating with other companies on a potential contract. The Alaska

State Legislature must then approve a contract. The Governor intends to present

a contract or contracts to the Legislature as soon as possible, and would like to do

so during the current legislative session or a special session later this year. The

Alaska Port Authority also is proposing a project that would not require negotiations with the state government under the Alaska Stranded Gas Development Act.

Under the current timetable of the state process, the Alaska Natural Gas Pipeline

should be online in 2012, well before the EIA-projected date of 2016.

While the Stranded Gas Act establishes the order for much of the activity underway, the federal government continues to be involved. The State has been actively

engaged with the federal agencies that will play various regulatory roles pursuant

to the Alaska Natural Gas Pipeline Act, including the Department of Energy and

the Federal Energy Regulatory Commission. To that end, our interactions have been

positive and without significant obstacles or delays. If, however, problems occur

later in the process, we will inform the Congress.

Please feel free to contact me, or Diane S. Shea, NGA Natural Resources Committee Director, at (202) 624-5389, or dshea@nga.org, if you have any additional

questions. We look forward to working closely with the Committee as you develop

energy legislation.

Sincerely,

FRANK H. MURKOWSKI

Chairman, Natural Resources Committee

Enclosure

Policy Position

NR-18. COMPREHENSIVE NATIONAL ENERGY AND ELECTRICITY POLICY

18.1 Preamble

The Governors recognize the energy and environmental challenges facing the

United States at the beginning of the 21st century. Periodic shortages in oil, gas,

and electricity cause hardship for consumers and businesses, harm the economy,

and can reduce national security.

Our nation’s dependence on foreign sources of oil is at an all-time high. At the

same time, improved energy efficiency and conservation has reduced energy consumption and energy costs, while allowing consumers to enjoy a cleaner environment and more energy services without commensurate increases in energy demand.

Demand for energy will continue to grow, however. Simultaneously, energy efficiency is projected to continue to improve. Yet even with more conservation, innovation, and new technology, the United States will need more energy supplies.

Energy issues must be addressed nationally, while still recognizing state and local

authority over environmental and energy matters. The solution to the need for energy will require increased conservation and energy efficiency as well as exploration

of new energy supplies, including environmentally responsible development of tradiVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00236 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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tional sources and greater reliance on alternative and renewable sources. We also

must continue the trend of reducing emissions associated with energy production.

Affordable and reliable electricity is essential to improved quality of life and economic opportunity. A number of states have passed legislation introducing competition into their retail electric industry, and many other states are considering such

proposals. Although the cost of electricity varies greatly across the country, as do

the issues each state faces, electric industry restructuring may result in lower consumer prices for everyday goods and services, the development of innovative new

products and services, and a growing, more productive economy.

States have regulated the electric industry in the United States for nearly 90

years, during which time the state and federal roles have evolved. Traditionally the

federal government, through the Federal Energy Regulatory Commission (FERC),

has regulated wholesale electricity sales and the interstate transmission of electricity, while states have had jurisdiction over the retail transmission, distribution,

and sale of electric energy to consumers within a state.

18.2 Principles

A comprehensive national energy policy must meet the public’s current and future

needs for energy, environmental quality, national security, and a healthy economy.

Recognizing the costs and benefits associated with these public needs, the Governors

support a national energy policy based on these ten principles.

• Provide our citizens with adequate, affordable energy supplies and services.

• Ensure environmental quality.

• Promote conditions in the federal and state regulatory context that recognize the

unique and complementary roles of federal, state, and local governments, and

are conducive to the development of economically viable and environmentally

sound energy resources.

• Recognize the authority of states, tribes, and local communities in decisionmaking.

• Promote a diverse and reliable portfolio of energy sources and increase production

of domestic sources of energy in a safe and environmentally sound manner.

• Support the production and use of domestic renewable energy sources.

• Promote the prudent and efficient use of our country’s resources through conservation and efficiency efforts.

• Support sustained investment of public and private funds into expansion and updating of infrastructure capacities, and ensure improved public and private investment into research and development for alternative and renewable energy

resources and advanced technologies for cleaner, more efficient production of

traditional energy resources.

• Provide Americans with access to the information they need to make sound energy choices.

• Recognize that states are part of an integrated energy system and partners with

neighboring states in developing regional solutions.

18.3 Energy Conservation and Improved Energy Efficiency

Energy conservation and improved energy efficiency represent a first, low-cost, environmentally safe, and sustainable option to respond to our nation’s energy needs.

The nation’s Governors are dedicated to maximizing energy conservation and improved efficiency as a means to decrease our reliance on imported oil, reduce the

environmental impacts of fossil fuels, reduce the long-term operating costs of businesses and industries, slow the depletion of our finite energy resources, and extend

the time to transition to new and innovative energy technologies.

The Governors believe that the federal government should maintain its central

role in promoting funding and developing a wide-ranging program of energy conservation and improved energy efficiency that considers all sectors of the economy.

Such a program should be cooperatively developed and implemented by the states

and the federal government working together as full partners.

A properly constructed program must build on existing public and private elements and must recognize the benefits and limitations of the marketplace in realizing the full potential for energy conservation. To maximize energy efficiency and

conservation efforts, Governors support:

• programs to increase consumer awareness;

• increased technology transfer opportunities;

• incentives to encourage greater investment in energy efficiency and conservation

technologies; and

• elimination of unnecessary regulatory barriers to achieving greater energy efficiency.

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Energy conservation and efficiency programs should include the following.

18.3.1 Federal Government Actions. The federal government should show leadership by directing federally owned buildings to make use of economical energy conservation and efficiency programs, including introducing new efficiency techniques

into federal buildings. Federal departments and agencies should take appropriate

actions to conserve energy consumption at their facilities to the maximum extent

that is cost-effective in the long term. The U.S. Department of Energy (DOE) should

promote greater energy efficiency and conservation by expanding the Energy Star

labeling and buildings programs.

18.3.2 Appliance Standards. DOE should take steps to improve the energy efficiency of appliances by supporting and expanding the scope of the appliance standards programs, setting higher standards where technologically feasible and economically justified.

18.3.3 Transportation Efficiency. The Governors recognize that meeting our

national energy policy objectives in the transportation sector will require significant

reductions in fuel consumption. The Governors believe that the following policies

can help reach this goal:

• encouraging greater fuel efficiency;

• providing better congestion management in high traffic areas;

• retiring older, less efficient vehicles from the market more quickly;

• promoting the development and introduction of, and the infrastructure for, advanced technology vehicles;

• creating federal tax incentives for the purchase of fuel-efficient hybrid and fuelcell vehicles;

• supporting public/private partnerships for investment in research and development of fuel efficiency technologies; and

• improving the efficiency of mass transit systems.

Our nation’s desire for mobility, safety, consumer preference, vehicle affordability,

and functionality must be carefully considered as government considers new policies

to promote the rapid deployment of more fuel-efficient vehicles into the market.

18.3.4 Demand Response. The federal government should create incentives for

energy providers to provide mechanisms for consumers to change their energy demands in response to price fluctuations. Incentives for retail consumers also should

be provided to manage demand for peak load, conserve energy, and utilize energyefficient technologies and tools.

18.3.5 Energy Conservation Education, Research, and Development. The

federal government should promote energy conservation education programs and

fund research into conservation technologies. Federal funding of energy conservation

programs, including grants to states, should be enhanced. The development of energy-efficient technologies, including fuel-efficient engine and vehicle technologies,

should be actively promoted. DOE should be provided with adequate authority,

staffing, and funding to undertake and coordinate conservation activities.

18.3.6 Energy Efficiency Programs. The federal government should provide

funding and incentives for programs that help businesses, industries, schools, public

agencies, and residences use energy-efficient building techniques, building materials, appliances, equipment, motors, and other systems readily available in today’s

market. Public benefits funds and tax incentives are examples of how these programs may be accomplished.

18.4 Improving Energy Supply

The national security and economic well-being of this nation are predicated on securing economic and environmentally sustainable supplies of energy. To improve energy supply, the Governors support the following measures:

• exploration and development of the nation’s energy resources, to the extent they

are competitive in energy markets and can be developed consistent with federal,

state, and local environmental requirements;

• federal land management agency participation and coordination with states regarding decisions by federal agencies about energy exploration and production

on federal lands, particularly regarding public lands withdrawals and lease stipulations;

• continuation of the production of energy on federal lands and allowing states

physical access to federal lands for state exploration and production projects

that will promote the development of clean energy supplies;

• federal policies and incentives that encourage reliable, affordable, and clean energy supplies and that encourage capital investment, protect current production,

and promote marginal production; and

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• removal of barriers that discourage energy-efficient technologies, renewable energy resource development, and fuel diversity.

Consistent with these measures, there is a need to develop a diverse and flexible

portfolio of fuel sources, including increased domestic production from renewable, alternative, and conventional sources.

18.4.1 Oil. Promote new domestic production through exploration and development of additional petroleum reserves and refining capacity, and promotion of enhanced oil recovery technologies.

18.4.2 Natural Gas. Encourage effective market-based measures that will support production of natural gas supplies and development of infrastructure in an environmentally sound manner, reduce impediments that limit such production, provide appropriate funding levels to avoid unnecessarily lengthy reviews imposed by

the Federal Energy Regulatory Commission (FERC) and other federal agencies, and

promote policies against unfair transportation practices. In addition, Governors endorse, pending completion of appropriate environmental reviews, a project to bring

Alaska natural gas to market via a pipeline from the North Slope along the Alcan

Highway through Canada to the North American distribution system, while ensuring full pipeline safety to protect the public and the environment.

18.4.3 Coal. Encourage technologies to utilize coal more cleanly and efficiently,

including continued support for the Clean Coal Technology Program, in partnership

with the private sector, as well as research and development in clean coal usage.

18.4.4 Nuclear. Support efforts to resolve nuclear power issues including the

oversight of operations, licensing, plant life extension, and decommissioning of nuclear facilities. The Governors believe a safe solution to the nuclear waste issue

must be achieved. The Governors support adequate resources dedicated to research

of promising technology options for waste reduction, reuse, and disposal. Without a

resolution of these issues, the long-term viability of nuclear power is limited.

18.4.5 Renewables. Support federal incentives and continuing research and development of renewable energy sources (small-scale hydroelectric, photovoltaics,

solar, wind, biomass, geothermal, landfill gas, etc.), including environmental and

economic impacts, as well as support of technologies that assist in integrating renewable energy into existing energy systems. The Governors also support federal

interconnection rules and net metering that promote distributed generation from all

types of renewable resources.

18.4.6 Alternative Transportation Fuels. Support continued federal incentives

for the production of biomass and other alternative transportation fuels in the near

term and expanded incentives for agricultural biomass development generally.

18.4.7 Hydrogen. Support efforts to promote the development and use of hydrogen through fuel cell technologies and distributed generation. As the nation transitions into new technologies to back up our fossil reserves, hydrogen offers promise

as a fuel source for mid- and long-term fuel supply. Federal assistance for research

and development, removal of institutional barriers, development of unified standards, as well as production and use incentives, are warranted to promote hydrogen

as a viable fuel source.

18.5 Improving Energy Transmission

Energy transmission and distribution networks must be adequate to move energy

from the source to the consumer. Adequate resources must be invested and equal

access for all suppliers must be protected. The transmission network of the United

States must be upgraded and expanded. The Governors support:

• recognition of state responsibility to ensure timely decisions on permitting, siting,

and licensing of energy facilities, consistent with state and federal laws and

health and safety requirements; • encouragement of multistate cooperation in identifying the economics of, and need

for, additional energy transmission and generation projects, including improved

communication among the appropriate state and federal regulatory agencies, affected utility companies, and other affected parties; • measures to encourage market-based infrastructure investment in transmission

capacity and distributed generation; • a requirement that the federal government cooperate with the states in the permitting, licensing, and construction of interstate and intrastate natural gas

pipeline construction that allows for the expeditious development of natural gas

infrastructure; and

• full utilization of existing rights-of-way for energy transmission, consistent with

state and federal laws and health and safety requirements, and coordinated environmental reviews.

Governors oppose preemption of traditional state and local authority over siting

of electricity transmission networks, but Governors recognize that situations exist

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where better cooperation could improve competition and reliability. Governors are

willing to engage in a dialogue with the federal government and industry to address

these situations in a manner that does not intrude upon traditional state and local

authority.

18.5.1 Multi-State Entities. While states do not support federal preemption of

state planning and siting authority, better cooperation between states can improve

the reliability of interstate transmission networks. Governors recognize and support

the efforts that states and regional governors associations are making to develop

interstate mechanisms to work with regional electricity markets. Congress should

direct the Federal Energy Regulatory Commission to recognize state-created regional mechanisms—Multi-State Entities (MSEs)—designed to address transmission

planning, certification of need, and siting of facilities. The MSEs also should be designed to seek regional solutions to issues that may fall under federal, state, or

shared jurisdiction.

FERC should in no way impede states’ authority to design the MSE in a manner

most appropriate for the region. The federal government should provide financial assistance to state organizations to assist states in forming MSEs.

The MSE should be formed through a memorandum of understanding signed by

Governors and, where appropriate, federal land management agencies, public power

authorities, tribal authorities, and border countries. Any memorandum of understanding should recognize the authority of each state to approve or deny the construction or expansion of facilities and also should establish procedures to address

conflicts and impasses among states and the other parties. The boundaries of the

MSE should follow the footprints of regional electricity markets, as defined by the

participating and affected states.

FERC should direct the regional transmission organization (RTO) or independent

transmission provider (ITP) to comply with MSE guidelines and decisions regarding

regional transmission construction and expansion plans, as well as other regional

electricity issues subject to state jurisdiction. With respect to regional electricity

issues subject to FERC jurisdiction, FERC should direct the RTO or ITP to show

deference to the judgment of the MSE.

The Governors believe that it is preferable to have the MSE serve as the sole vehicle for collective state input to the RTO or ITP and recommend against having

both Regional State Advisory Committees and an MSE.

18.6 Regulatory and Environmental Issues

Within our federal system, the states have responsibilities over areas such as land

use planning, environmental protection, public health and safety, and the conservation and management of natural resources. The states have the lead responsibility

for the protection of the environment and the judicious management of their energy

and other natural resources. States must exercise lead authority for:

• exploration and development of energy resources within their borders, especially

those resources whose development has highly regional and local impacts;

• continuation of primary state responsibility and final decision authority for the

approval and siting of energy facilities, consistent with state and federal law,

along with safety and environmental requirements (siting of energy transmission facilities should follow existing rights-of-way whenever possible);

• prevention and abatement of air and water pollution;

• management of water resources;

• management of the coastal zone, and continued authority under the Coastal Zone

Management Act to ensure consistency of federal activities with approved state

plans; and

• administration and enforcement of building codes.

Because of these primary responsibilities, the states recognize they bear a heavy

burden in the achievement of our national energy goals. Successful development of

these national policies requires the early, effective, and sustained participation of

state and local governments. Essential to this partnership is consultation and concurrence between the states and the federal government in all areas of national energy policy.

• Joint federal-state task forces should ensure effective state-federal communication.

• There should be adequate and early opportunity for state review and comment on

federal energy regulations and policies.

• Administration of federal programs should be flexible so that the regional differences and diversity among states are recognized and incorporated into the

goals of the federal energy programs.

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• Multi-state cooperation should be encouraged in identifying the economics and

need for additional energy transmission and generation projects. Regional energy transmission and generation planning should be further enhanced through

improved communication and coordination of regulatory reviews among the appropriate state and federal regulatory agencies, affected energy suppliers, and

other affected parties.

• There should be no preemption of state regulatory authority or the establishment

of federal standards governing state regulation of utilities. Utility commissions

should continue to have authority over mergers, retail energy rates and ratemaking processes, and consumer protection measures. In addition, there should

be no preemption of state regulatory authority governing energy exploration

and development when states have primacy or delegation over the relevant environmental regulations.

• The backlog of permit applications by federal land management agencies should

be addressed and unnecessarily burdensome regulations and procedures for energy production, transmission, and generation projects should be streamlined.

In the process of developing any federal legislation, Congress should examine the

implications of their actions on public health and the environment based on sound,

peer-reviewed science. The Governors recognize their responsibility to ensure that

emissions from all sources, including the electric utility industry, must meet federal

objectives of the Clean Air Act. Therefore, any such impacts that might result from

federal legislation encouraging further competition within the electric utility industry must comply with the Clean Air Act. The Governors also believe, however, that

states should be afforded flexibility to apply the law effectively to this specific source

of emissions.

In addition, regulatory practices should encourage net environmental improvements, while providing a stable planning environment for energy providers and consumers as well as a well-defined planning horizon. Unnecessary federal energy regulations, policies, and programs should be reviewed and revised as necessary. The

Governors specifically recommend the following.

• Motor fuel composition must continue to be an integral component for reducing

mobile-source air emissions. Efforts must be undertaken to avoid policies that

promote and sustain the development of ‘‘boutique fuels.’’ More simplified approaches and streamlined regulatory requirements that promote the standardization of motor fuel products must be explored.

• Congress should pass legislation to establish a flexible, market-based program to

significantly reduce and cap emissions of sulfur dioxide, nitrogen oxides, mercury, and voluntary reductions of carbon dioxide from electric power generators.

The legislation should provide regulatory certainty by establishing reduction

targets for emissions, phasing in reductions over a reasonable period of time,

and providing market-based incentives, such as emissions-trading credits, to

help achieve the required reductions.

• New Source Review requirements should be reformed to achieve improvements

that enhance the environment and increase energy production capacity, while

encouraging energy efficiency, fuel diversity, and the use of renewable resources.

18.7 Energy Emergency Preparedness

States have played a unique and important role in response to past energy crises

and must maintain their ability to meet their responsibilities to mitigate the effects

of future supply disruptions or shortages. It is imperative that states and the federal government develop strategies for responding to a broad variety of possible energy and electricity emergencies. Initial efforts should focus on strategies to prevent

emergencies from occurring. Efforts to diversify our energy systems while maximizing our use of cost-effective domestic energy resources are part of this long-term

effort. Additional efforts must focus on planning the response federal and state governments would take if an energy or electricity emergency occurs. Any federal actions must give consideration to existing state laws and programs, and state and

local officials must be included in any federal planning process.

Voluntary conservation should be preferred to mandatory measures whenever possible. Any mandatory response should be phased in, beginning with the least stringent measures, with rationing reserved for only the most severe shortage.

To facilitate emergency preparedness, the Governors support the following measures.

• It is essential that integrated emergency response plans and procedures be developed and well tested to ensure the coordination and flow of information among

energy suppliers; consumers; and federal, state, and local governments.

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• Fuel switching capability for large energy users to reduce dependence upon a single fuel source should be encouraged. • A timely official review of the Strategic Petroleum Reserve (SPR) should be undertaken by Congress and the Administration to determine its ideal size. The Administration also should establish more specific criteria for determining when

the SPR should be tapped, taking into account regional reserves. • Upon a Governor’s declaration of an energy or electricity emergency, non-exempt

federal facilities within a state should be required to reduce their energy consumption by at least 10 percent from the previous year’s consumption, for the

duration of the emergency.

18.8 Energy Infrastructure Security

Energy infrastructure—power plants, refineries, and transmission and distribution networks—share the vulnerability of all types of critical infrastructures to risks

associated with threats from terrorist attacks and weapons of mass destruction.

Managing the vulnerability of energy infrastructure is a necessary element of our

national security, economic well-being, and environmental protection. Based on the

level of vulnerability and risk, measures should be taken to detect, prevent, control,

and manage the consequences of terrorism directed toward energy infrastructure.

The Governors also support the principles outlined in NGA policy HR-10, Terrorism

and Homeland Security*, and support the use of those principles in the implementation of this provision.

18.9 Electricity

8.9.1 Principles

The Governors support an electric utility industry that provides consumers with

lower prices, improved performance, and enhanced reliability. As the industry undergoes structural changes to promote competition, the Governors endorse the following principles.

• Any action taken by Congress should enable states to restructure the electric industry but not impose a mandate on states to do so. Should Congress legislate,

it must grandfather state actions to establish retail competition. • All consumers should have access to adequate, safe, reliable, and efficient energy

services at fair and reasonable prices as a result of competition. Structural

changes in the industry should be encouraged when they result in improved economic efficiency and serve the broader public interest. • The safety, reliability, quality, and sustainability of services should be maintained

or improved. • All consumers should share the benefits of structural improvements and be protected from anticompetitive behavior, undue discrimination, poor service, and

unfair service practices. • States should maintain the authority to require public benefits programs within

a state. • States should maintain their flexibility to determine retail electric policies, including the content and pace of restructuring programs and retail stranded cost determinations. • Structural changes to the industry should not impede compliance with the Clean

Air Act.

18.9.2 State Role

18.9.2.1 Retail Electricity Sales and Services. During the past nine decades,

the state role in utility regulation has evolved to include jurisdiction over public

benefits programs, universal service, reliability, and all functions and services related to the sale of retail electric energy. States should maintain their authority

over the retail transmission, distribution, and sale of electric energy to consumers

within a state, including the ability of a state to implement, or not implement, retail

competition. FERC should be guided by and give deference to states’ differentiation

and identification of transmission facilities dedicated to retail service and facilities

used in interstate commerce.

18.9.2.2 Public Benefits. States should maintain the authority to require public

benefits programs on a nondiscriminatory basis, including those that support reliable and universal service, energy efficiency, renewable technologies, research and

development, and low-income assistance. States also should:

• maintain their authority to impose nonbypassable charges to fund such programs

that provide societal benefits; and

• be allowed to decide what mix of renewable technologies should be included in any

renewable portfolio package implemented in a state.

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18.9.2.3 Stranded Costs. The Governors believe that states should continue to

have clear authority to determine costs that are stranded or made unrecoverable by

retail competition and to provide for the recovery of those costs, as the state deems

it necessary or appropriate. States should maintain their authority to impose

nonbypassable charges to recover retail stranded costs.

18.9.2.4 Disclosure. Many consumers will want to express their preferences for

energy supply qualities with their choice of electricity supplier, while many suppliers will want to appeal to consumers with special power supply portfolios. The

system governing wholesale electricity markets, which FERC oversees, must enable

states to ensure that consumers are getting the information they need to make informed decisions and to verify that suppliers are delivering the products they promise. The Governors urge Congress to direct a federal entity, such as the National

Academy of Sciences, to study and make recommendations on setting model national

disclosure standards. The Governors are committed to working on such an effort and

with all stakeholders to develop this model.

18.9.3 Federal Role

18.9.3.1 Regulate Wholesale Electricity Sales. The federal government,

through the Federal Power Act and the Energy Policy Act, has the responsibility

to regulate wholesale electricity sales and oversee the implementation of wholesale

competition. The Governors believe that these responsibilities are consistent with

state authority over retail sales and services. The federal government will determine

the appropriate mechanism for recovery of wholesale stranded costs for federal

power entities and power marketing administrations.

18.9.3.2 Empower States to Make Decisions and Take Actions. There are

certain aspects of federal law that Congress can change to empower states to move

forward successfully and facilitate the transition to competition. The Governors support the following changes to federal law that allow states to move forward, if a

state chooses, with fewer obstacles.

18.9.3.2.1 PURPA. The Public Utilities Regulatory Policy Act (PURPA) of 1978

mandates utilities to purchase electricity from FERC-certified cogenerators and

small power producers that rely on renewable energy resources. The Governors support the goal of increased use of renewable energy but recognize that reform of

PURPA is necessary to remove barriers to effective competition. The Governors believe that Congress should authorize states to make the mandatory purchase provisions of PURPA inapplicable in a state that deems it necessary or appropriate. Although respecting existing PURPA contracts, the Governors recognize that many

contracts reached under PURPA contribute to high electricity prices and encourage

all parties to seek ways to reduce costs associated with these contracts.

18.9.3.2.2 PUHCA. Congress enacted the Public Utility Holding Company Act

(PUHCA) of 1935 to remedy a broad range of abuses. Many states are moving toward competition and want to ensure that effective competition can survive with no

return to the abuses of the 1930s. Congress should repeal unnecessary and burdensome PUHCA provisions and replace them with state and federal measures to ensure a transition to effective competition, after a thorough review to ensure that

necessary consumer protections are adequately preserved.

18.9.3.2.3 Reciprocity Provisions. States allowing retail competition may be at

a competitive disadvantage if utilities, in a state that has not yet implemented retail

competition, are allowed to sell to customers in other states and at the same time

unfairly limit access to historic customers. A state should be able to implement a

reciprocity provision with respect to out-of-state suppliers if it deems it necessary.

18.9.3.2.4 Reliability. With restructuring of the industry, the creation of independent system operators, and greater diversity of generation ownership, electricity

capacity margins have dropped and historical regulatory responses are more difficult to implement. As a result, legislation is needed establishing mandatory compliance with reliability standards and providing explicit authority to FERC and the

states to cooperate to enforce those standards. Any national mandatory reliability

standards must be flexible and should recognize and protect state responsibilities.

They should allow for regional variations in system reliability needs, based on geographic and electrical system differences.

A strong savings clause in any federal legislation must recognize the role of the

states in preserving their existing authorities and their ability to reasonably control

their electricity systems. The states’ views should be recognized and represented in

both national and regional reliability organizations, and states should actively participate in the work performed by these organizations to review existing reliability

criteria and design new ones. States should help to ensure that new reliability

standards developed to meet competitive conditions balance reliability benefits with

compliance costs. When a group of states devises reliability standards of the type

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being developed by the Western Interconnection, any legislation should ensure that

deference is granted by the federal government to those states’ decisions.

18.9.4 Facilitate Operations of State Institutions. The U.S. Department of

the Treasury should promptly take administrative action to permanently preserve

the tax-exempt status of existing debt associated with the transmission systems of

public power utilities that choose to participate in Independent System Operators.

NGA Policy HR-10 was incorporated into NGA Policy EC-5, Homeland Security

Comprehensive Policy, at the 2003 Annual Meeting.

Time limited (effective Annual Meeting 2003—Annual Meeting 2005).

Adopted Annual Meeting 2001; revised Winter Meeting 2002, Winter Meeting 2003,

and Annual Meeting 2003.

RESPONSE FOR THE RECORD BY GUY F. CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION,

QUESTIONS FROM CHAIRMAN RALPH HALL

Question 1. What effect do you see the competition for LNG internationally playing on natural gas prices?

Answer 1. Currently, Liquefied Natural Gas (LNG) imports into the United States

represent a small portion of the world LNG market (less than 10 percent) and an

even smaller portion of domestic natural gas supplies (less than 3 percent). Also,

a smaller portion of our import capacity is committed under long-term contracts

than in other importing countries. As a result, our supply of LNG is more subject

to market forces. Our domestic natural gas prices could also be affected if international supplies were either tight or in excess. For example, when more than a

dozen nuclear reactors were closed in Japan early in 2002 and Japan substituted

LNG imports to make up the shortfall, LNG imports to the United States were less

than half of the level in 2001; however, in this case, low domestic natural gas prices

also contributed to the decline in LNG imports. In the winter of 2002/2003, when

abnormally cold weather in South Korea resulted in tight supplies, U.S. imports

were somewhat less than they might have been otherwise, even with relatively high

U.S. prices. As LNG supplies an increasing share of U.S. natural gas consumption,

the impact of changes in LNG-related costs or a loosening or tightening of the international market will have a greater effect on domestic prices. Even so, increasing

LNG imports into the United States should result in lower domestic gas prices than

would occur otherwise.

Question 2. In your testimony, you state that in 2003, 67 percent of the petroleum

consumption is consumed in the transportation sector and you see this percentage

increasing to 71 percent in 2025. Do your projections include the federal hydrogen

economy programs or state hydrogen economy programs such as California’s? While

there are not many, I know we have one hydrogen fueling station here in D.C. If

your projections do not include the hydrogen programs, why not?

Answer 2. The Annual Energy Outlook 2005 (AEO2005) projections do include the

anticipated impacts from Federal and State hydrogen programs. With respect to

Federal programs, projections of regional hydrogen fuel prices and the associated

availability of fueling stations developed for the FreedomCar program are used in

the AEO2005 projections. In addition, Federal research and development programs

are assumed to reduce the price of a fuel cell vehicle from current levels of

$1,000,000 for a prototype vehicle to $71,000 by 2013. With respect to State programs, the AEO2005 projections reflect State-mandated sales of fuel cell vehicles,

which are required under California’s Zero Emission Vehicle program. Due to the

higher incremental cost of hydrogen fuel cell vehicles and the lack of an established

fueling infrastructure, hydrogen fuel cell vehicles are projected to account for only

0.4 percent of new vehicle sales by 2025, and that penetration is projected to be primarily the result of State-mandated sales requirements.

Question 3. In your testimony, you project renewable fuel consumption growing

from 6.1 quads in 2003 to 8.5 quads in 2025. What role does wind and solar play

in these calculations?

Answer 3. In 2003, wind energy accounted for 0.11 quadrillion Btu (quads), or 1.8

percent of total renewable energy consumption. By 2025, EIA projects wind to account for 0.36 quads, or 4.2 percent of total renewable consumption. Solar energy,

including both electricity sold to the grid and solar heat and electricity produced by

the end-user, accounted for 0.05 quads in 2003, or 0.8 percent of renewable energy

consumption. EIA projects solar to account for 0.10 quad by 2025, or1.2 percent of

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total renewable consumption. These projections are based on current laws and regulations, including expiration of the Production Tax Credit for renewable electricity

generation on December 31, 2005. Hydroelectric power and biomass combustion for

heat and electricity account for most of the renewable energy consumption throughout the projection period.

QUESTION FROM CONGRESSMAN MIKE ROGERS

Question 1. Mr. Caruso, a constituent brought to my attention a reporting error

that was made by the Energy Information Administration (EIA) in November of last

year that disrupted natural gas markets on the New York Mercantile Exchange. My

constituent claims the error cost the U.S. economy ‘‘billions’’ of dollars. Is this an

accurate description of what occurred and its effect on the economy, and what is

the EIA doing to ensure it does not happen again?

Answer 1. In the November 24, 2004, Weekly Natural Gas Storage Report

(WNGSR), EIA reported working gas stock volumes that overstated the implied net

withdrawal from underground storage by 32 Billion cubic feet (Bcf) for the week

ending November 19. According to a Federal Energy Regulatory Commission

(FERC) report about the incident, because of a clerical error, Dominion Transmission, Inc., submitted erroneous data to EIA; this data was then used by EIA in

preparing the report released on November 24th. In accordance with EIA’s current

revision policy, established in 2002, EIA corrected the error in the next WNGSR,

released on December 2, 2004, based on corrected data from the reporting company.

The November 24 WNGSR gave the impression that inventories were being drawn

down at a faster pace than expected. The price of natural gas futures contracts on

the New York Mercantile Exchange (NYMEX) for December increased $1.183 per

MMBtu on November 24 from the price of the previous day. However, it cannot be

stated with certainty how much prices were affected by the report. Prices rose immediately following the release of the report, but then flattened before rising sharply prior to the close of market trading. Since November 24 was the expiration date

of the NYMEX contract for December delivery, there was no opportunity for the

price of this contract to change in response to corrected information.

While many companies use the NYMEX settlement price for a given month as an

index for gas procurement contracts involving gas purchases for the next month,

many other purchasing strategies are employed, including long-term, fixed price

contracts and contracts indexed to physical gas prices at various market centers.

EIA does not collect the type of information that could provide for a systematic analysis of the report’s impact on the cost of natural gas to consumers under the variety

of contract types.

Following this occurrence, EIA has taken a number of actions to enhance the

quality and reliability of the data used in preparing its reports. These include adding new survey review procedures, using more secondary data tools for context, reviewing the schedule and staffing around holidays on a case-by-case basis, and asking for greater attentiveness from data respondents. EIA has also asked for, and received, public comment on possible changes to the present policy regarding the timing for release of WNGSR revisions. We plan to announce the outcome of this review

in the near future.

RESPONSE FOR THE RECORD BY HON. DAVID GARMAN, ASSISTANT SECRETARY FOR

ENERGY EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY

QUESTIONS FROM CHAIRMAN RALPH HALL

Yucca Mountain

Question 1. As you know, in 2002 the President recommended Yucca Mountain

as the site for a geologic repository for nuclear waste. The Congress concurred by

enacting the Yucca Mountain Development Act providing for development of the

site. The next step in the process for the federal government to fulfill its contractual

obligations is to submit a construction license application to the Nuclear Regulatory

Commission (NRC). NRC will then begin a three to four year review process before

deciding whether to issue a construction license for the project. Continued progress

on this program is clearly linked to the Administration’s energy policy that includes

a continuing significant role for nuclear power.

I was disappointed by the Department’s decision not to submit the license application in December 2004 as previously scheduled, but understand the importance of

submitting a high quality application. Delays in the program will cost the federal

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government up to $1 billion a year, according to previous Department of Energy testimony, for both costs associated with defense waste in states like Washington and

South Carolina and for delays in meeting the legal obligation to move civilian fuel

beginning in 1998.

Are you committed to giving this program your priority attention so that the licensing process can move forward expeditiously and federal costs from undue delay

minimized?

b. It was recently announced that Yucca would not be ready now until 2012, rather than 2010. I know the license application has been delayed about a year. What

caused the additional delay?

c. What is the status of the rail car program for Yucca?

Answer 1. a. Yes, I am absolutely committed to giving the Yucca Mountain project

priority attention. The success of the Program is necessary to protect public health

and safety and the environment, to maintain our energy options and national security, to allow the cleanup of former weapons production sites, to continue operation

of our nuclear powered naval vessels, and to advance our international non-proliferation goals. The Program is well situated for the future. It is moving ahead deliberately, step-by-step, toward development of a geologic repository at Yucca Mountain and the Administration continues its strong support of the Program as we move

forward with its implementation.

b. The delays have been caused by the Court of Appeals’ remand of the Environmental Protection Agency standard, by the inability to secure long-term stable funding for the program and by action by the Nuclear Regulatory Commission’s Pre-Application Presiding Officer Board requiring that additional documents be placed into

the Licensing Support Network.

c. The rail program for Yucca is moving forward with the acquisition process for

the rail cars that will be required for the transportation of spent fuel to the Yucca

Mountain repository. The Department held meetings with a number of rail car manufacturers in the fall of 2004, and, specifications that are necessary for the procurement of these rail cars are now being prepared. The Department plans to initiate

the procurement of the rail cars in FY 2005, with contract awards taking place in

FY 2006.

LANL Security

Question 2. Last summer, a problem was discovered with the security of disk

drives at the Los Alamos National Laboratory. What is the status of security at the

Los Alamos National Laboratory? What is the security status at the other labs.

Answer 2. On July 7, 2004, Los Alamos National Laboratory reported that two

pieces of Classified Removable Electronic Media (CREM) appeared to be missing. On

July 16, 2004, the laboratory director halted operations at LANL, based on both security and safety lapses.

On July 23, 2004, my predecessor ordered that all DOE operations using CREM,

such as classified hard drives or computer discs, conduct an immediate stand-down

to improve procedures for protecting such media.

LANL has completed the process of restarting operations, with the approval of

DOE. DOE and NNSA have validated that LANL has centralized CREM holdings,

significantly reduced holdings, eliminated some CREM by installing media-less computing systems, and held employees accountable through termination, suspension

without pay, and written reprimands. Stricter controls and accountability of Secret/

RD CREM have been instituted.

In December 2004, the FBI completed an investigation on the missing CREM and

concluded that: ‘‘The unaccounted for pieces of CREM... never were created and,

therefore, (are) not missing from the inventory’’. Therefore, there was ‘‘no compromise of classified material.’’ NNSA has taken corrective action to enforce accountability, improve handling of CREM and improve oversight (see below).

Answer 2. NNSA has made significant improvement in the readiness of our protective forces and the physical plants they defend at Los Alamos National Laboratory, Lawrence Livermore National Laboratories, Y-12 National Security Complex,

Pantex Plant, and Nevada Test Site. NNSA is moving ahead smartly to ensure the

special nuclear materials entrusted to the NNSA are stored in modern, secure facilities:

• Movement of material is underway from the TA-18 site at Los Alamos to the Device Assembly Facility on the Nevada Test Site

• Construction of the Highly Enriched Uranium Materials Facility at Y-12 for storage of materials has been accelerated.

LANL has implemented policies and procedures that include stricter controls and

accountability of Secret/RD CREM by:

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• Centralizing and significantly reducing CREM holdings,

• Eliminating CREM where possible, by installing media-less computing systems,

and

• Holding employees accountable through termination, suspension without pay, and

written reprimands.

The Safeguards and Security Program is strong. When mistakes are made or

vulnerabilities discovered, corrective actions are quickly developed and applied complex-wide.

Strategic Petroleum Reserve Expansion

Question 3. Since the Strategic Petroleum Reserve is one of the nation’s central

energy security measures, and since it is the obvious wish of this Congress to increase the size of the SPR to 1,000,000,000 barrels, what is the reasoning behind

decreasing funding for the SPR facilities development? Are the facilities already

adequate in order to accommodate this increase in supplies?

Answer 3. The current capacity of the Strategic Petroleum Reserve storage facilities is 727 million barrels. It is the Administration’s intent to fill the Reserve to 700

million barrels by August 2005. The Administration fully supports a robust Strategic Petroleum Reserve, and since the President directed the Department of Energy

to commence fill in November 2001, we have added over 140 million barrels of oil

to the inventory.

The President’s budget request for the Strategic Petroleum Reserve in fiscal year

2006 reflects a slight decrease in the cost of field facilities from the previous 3 years,

which reflected the costs of commissioning a now completed large degasification facility. The Strategic Petroleum Reserve budget is sufficient for all operations, maintenance, proposed fiscal year 2006 facilities construction and security.

CONSUMER FEDERATION OF AMERICA

May 9, 2005

RALPH HALL, Chairman

RICK BOUCHER, Ranking Member,

Subcommittee on Energy and Air Quality,

DEAR SIRS, Please find the responses to the post-hearing questions.

Question 1. Mr. Cooper, in your testimony, you state that the one-third of states

that have deregulated their electric industries, primarily in the Midwest, Northeast,

and Mid-Atlantic, have less reliable and more costly electricity prices that that of

still fully regulated states. Isn’t true that the states in question had higher electric

costs that have come down as a result of deregulation and that those states that

are still regulated today are generally low-cost states and therefore cannot be fairly

compared with states that have had historically high electricity costs?

Response: This comparison is made to counter the misleading claims made by advocates of deregulation. The point of this comparison is three-fold. First, although

it is true that rates have come down somewhat in ‘‘restructured’’ that is overwhelmingly the result of regulatory decisions and has nothing to do with the operation of

the ‘‘market’’ for electricity. Second, the fact that many states had lower rates indicates that regulation can, in fact, serve consumer interests. Many of the states that

are ‘‘lower cost’’ actually have worse resource endowments. Third, as the regulatory

deals to lower rates come to an end, many of the restructured states are experiencing substantial price increases.

Question 2. You stated in your testimony that improvement to energy efficiency

must be the central pillar of our national energy policy. This Committee agrees that

energy efficiency is one of the cornerstones to a successful and comprehensive national energy policy. Is it your position that energy efficiency alone will alleviate the

pressures on current energy markets? Considering how long energy-efficient technology takes to get to commercial viability and available to the consumer market,

is it realistic to think that energy efficiency without concurrent increases in production will be able to add the much needed supply margin that encourages more stable

markets?

Response: The Consumer Federation of America supports a balanced approach to

energy policy, but we find that energy efficiency is frequently given short shrift in

federal policy. Therefore, we believe it must be given primary emphasis in the current circumstances. Off the shelf energy efficiency technologies can substantially

slow the growth of demand in the near terms and reduce it in the mid-term. AlterVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00247 Fmt 6633 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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native sources of supply, like coal gasification, high-efficiency hybrid vehicles, will

take longer to develop than efficiency.

Sincerely,

MARK COOPER, Director of Research

Consumer Federation of America

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THE ENERGY POLICY ACT OF 2005: ENSURING

JOBS FOR OUR FUTURE WITH SECURE AND

RELIABLE ENERGY

WEDNESDAY, FEBRUARY 16, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON ENERGY AND AIR QUALITY,

Washington, DC.

The subcommittee met, pursuant to notice, at 11:10 a.m., in room

2322 of the Rayburn House Office Building, Hon. Ralph M. Hall

(chairman) presiding.

Members present: Representatives Hall, Whitfield, Shimkus,

Radanovich, Walden, Otter, Sullivan, Murphy, Burgess, Barton (ex

officio), Boucher, Waxman, Markey, Green, Strickland, Capps,

Allen, Solis, Gonzalez, and Dingell (ex officio).

Staff present: Mark Menezes, chief counsel for energy and the

environment; Margaret Caravelli, majority counsel; Kurt Bilas, majority counsel; Maryam Sabbaghian, majority counsel; Annie

Caputo, majority counsel; Tom Hassenboehler, majority counsel;

Peter Kielty, legislative clerk; Sue Sheridan, senior minority counsel; Dick Frandsen, senior minority counsel; Michael Goo, minority

counsel; and Bruce Harris, minority professional staff.

Mr. HALL. The subcommittee will come to order. Today, the committee continues its hearing from last week on the Energy Policy

Act of 2005, Ensuring Jobs For Our Future With Security and Reliable Energy.

Today, we will continue to hear from individuals representing

various industry groups and environmental and consumer advocates. Because this is a continuation of last week’s hearing, we are

not going to be having opening statements and therefore, we will

head right straight into the fourth of five total panels.

We have reached an agreement to include written statements

and letters by some of those who want to submit them for the

record. Without objection, it is so ordered.

Mr. Boucher and I want to thank all the witnesses for your time

and we welcome your views with respect to this legislation, especially your guidance with respect to issues that face your industry

as they relate to our Nation and our people’s energy security. With

that, we will get under way.

Our first witness will be Red Cavaney, President of API. Wellknown. A graduate in economics and history from the University

of Southern California. Served three tours of combat duty in VietVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00315 Fmt 6601 Sfmt 6601 99906 HCOM1 PsN: HCOM1
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nam, so he ought to be a good battler in this energy fight here. A

little history of success.

I recognize you for 5 minutes, or as little time as you care to use.

You need to put your microphone on, please, sir.

Mr. CAVANEY. Oh, sorry. Apologies.

STATEMENTS OF RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM INSTITUTE; BOB DINNEEN, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, RENEWABLE FUELS ASSOCIATION; BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION; ERIK D. OLSON,

SENIOR ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; LEE FULLER, VICE PRESIDENT OF GOVERNMENT RELATIONS, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA; LAURENCE M. DOWNES, CHAIRMAN, AMERICAN GAS ASSOCIATION; GERALD A. NORLANDER, EXECUTIVE DIRECTOR,

PUBLIC UTILITY LAW PROJECT; DAVID HAMILTON, DIRECTOR, GLOBAL WARMING AND ENERGY PROGRAMS; AND

DONALD F. SANTA, JR., PRESIDENT, INTERSTATE NATURAL

GAS ASSOCIATION

Mr. CAVANEY. Mr. Chairman, Chairman Barton, members of the

Committee, I appreciate this opportunity to present the view of API

and its members on National Energy legislation. We support passage of comprehensive energy legislation consistent with the H.R.

6 Conference Report passed by the House of Representatives last

year. We are please that both the subcommittee and the full committee are moving aggressively to pass it. Your swift action will

send a powerful signal that the new Congress recognizes the urgent need to address the serious energy problems facing the Nation. My written testimony, submitted for the record, details a

number of recommended issues related to energy production, energy efficiency and conservation, access, infrastructure, and fuels.

Today, I will focus on a major threat to the U.S. oil and natural

gas industry that a comprehensive energy bill should alleviate. Oil

and natural gas currently meet two-thirds of America’s energy

needs, and tens of billions of dollars in capital investment are needed to keep pace with increasing demand. That investment, the industry’s future, and consumer well-being are, however, being

threatened by defective product-liability lawsuits for company’s use

of an EPA-approved fuel additive, MTBE.

In 1990, when Congress imposed the Federal RFG oxygen requirement in cities with the worst air quality, the authors of the

legislation and others said on the floor of the House and Senate

that MTBE would have to be used in significant quantities to comply with this requirement. As well, the EPA approved MTBE’s use

as fuel additive. Today, companies who have used MTBE to comply

with the oxygen requirement are facing multi-million dollar suits

brought by personal injury lawyers with claims that gasoline containing the fuel additive was a defective product; yet use of MTBE

to meet the oxygen requirement is exactly what Congress mandated 14 years ago.

This is, above all, an issue of fairness. Any industry that acts as

mandated by the Federal Government to meet a societal need, in

this case cleaner air and improved health, should not later be vicVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00316 Fmt 6601 Sfmt 6601 99906 HCOM1 PsN: HCOM1
309

timized for doing what the government required it to do. Our company has acted in good faith and heeded the Federal Government’s

call to use MTBE to enhance air quality. What we ask is that the

Federal Government also act in good faith to protect us against

lawsuits for doing what the law required us to do.

If we are not protected against these suits, one need only look

at the asbestos industry to see the disastrous consequences of this

breech of faith by government. Unlimited, unrestrained lawsuits of

this type create massive uncertainly, discourage investment, and

threaten jobs. This is an opportunity for Congress to address this

egregious abuse of our Nation’s legal system.

There is a history of the Federal Government protecting vital

businesses and industries against adverse economic consequences,

especially when these parties have acted in good faith in complying

with the law. In 1976, the manufactures of the swine flue vaccine

responded to the government’s call for the immediate mass-immunization of the general public by mass producing the needed vaccine. When insurance companies refused to insure the manufacturers of the vaccine over concerns regarding vaccine-related injuries,

the government stepped in to protect manufacturers against personal-injury claims. Later, in 1994, Congress went so far as to provide immunity to manufactures of small, non-commercial carrier

airplanes from civil liability suits for accidents involving aircraft

and certain parts in use beyond their expected useful lives. With

manufacturers facing endless court claims, passage of the General

Aviation Revitalization Act of 1994 ensured the availability of insurance coverage, sufficient to enable the industry to remain in

business in the United States.

Let me stress that the defective product provision would not in

any way affect the company’s legal responsibility to clean up any

groundwater affected by gasoline, regardless of whether or not it

contains oxygenates. The authority remains in force in the Resource Conservation and Recovery Act, the Federal Clean Water

Act, and States’ Clean Water Acts. Cleanup of any orphaned underground storage tank releases is covered by the LUST fund. Moreover, EPA has determined that more than 95 percent of all cleanups have been paid for by the responsible parties, private insurance, or State cleanup funds that are funded by taxes on petroleum

products.

For this and many other important reasons, Congress needs to

pass the comprehensive energy legislation early in the new session.

Too much is at stake for our country, our economy, and our place

in the world to delay any action further on this urgent, national

priority. Thank you.

[The prepared statement of Red Cavaney follows:]

PREPARED STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN

PETROLEUM INSTITUTE

I am Red Cavaney, President and CEO of the American Petroleum Institute. API

is a national trade association representing more than 400 companies engaged in

all sectors of the U.S. oil and natural gas industry.

API welcomes this opportunity to present the views of its member companies on

national energy legislation. We support passage of comprehensive energy legislation

consistent with the H.R. 6 conference report passed by the House of Representatives

in the last Congress. We are pleased that the Subcommittee and the full Committee

are moving aggressively to pass it. Your swift action will send a powerful signal that

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the new Congress recognizes the need to address the serious energy problems facing

our Nation. We also very much appreciate the House’s action in passing national

energy legislation several times over the past four years.

The Need for National Energy Legislation

The sad fact is that the current policy framework has failed U.S. consumers. The

net effect of current oil and natural gas policy is to decrease reliance on U.S. production and increase dependence on foreign imports. Moreover, while crude oil imports

have been growing for some time, product imports have also started to grow due

to constraints on U.S. refining capacity.

Four years ago, when Congress began debating national energy policy, we recognized the steadily growing U.S. demand for energy of all types. Today, that growth

in demand continues to increase. Recently, the DOE Energy Information Administration issued forecasts of increased energy demand from 2003 to 2025. EIA projects

that:

• Real GDP will increase by 95 percent; • Population will increase by 20 percent; • Total energy consumption will increase by 36 percent; • Petroleum demand will increase by 39 percent; • Natural gas demand will increase by 40 percent; • Coal demand will increase by 34 percent; and • Electricity consumption will increase by 50 percent.

Global Energy Situation

We cannot discuss the challenge of meeting the growing U.S. energy demand

without first understanding the global energy situation. In the world of energy, the

U.S. must operate in a global market. What others do in that market matters greatly.

Look at what happened just last year. World demand for crude oil typically grows

annually a bit more than 1 million barrels per day. In 2004, it grew 2.7 million barrels per day—to a point too closely approaching total worldwide production capacity.

Not surprisingly, China has played a big role in the increase in world oil demand,

and India will not be too far behind in the future. China, long self-sufficient in oil,

is now becoming one of the world’s biggest importers. China accounted for more

than half of world oil-demand growth in 2002 and 2003. The highly regarded energy

analyst Daniel Yergin has noted that, over the next 10 years, Chinese and Indian

oil companies will emerge as major players in the global oil industry.

Correspondingly, the International Energy Agency (IEA) forecasts oil demand in

South Asia will grow by 3.3 percent per year between 2000 and 2030, the highest

of any region in the world.

A comprehensive U.S. energy policy must recognize the growing impact of these

new, major competitors for energy supply in the world. For the U.S. to secure energy

for its economy, government policies must create a level playing field for U.S. companies to ensure international supply competitiveness. With the net effect of current

U.S. policy serving to decrease U.S. oil and gas production and increase our reliance

on imports, this international competitiveness point is vital. In fact, it is a matter

of national security.

A Need for Action

These global realities underscore the need for action to meet the energy challenges facing the United States. Experience tells us that—in a nation with an economy and way of life so tied to energy—inaction comes at a high cost.

What is so difficult to understand is how we could have failed to act on energy

at a time when the nation has been beset by energy problems. Just look back over

the last four years:

• An estimated loss of one-half to a full percentage point of GDP growth already,

according to published reports, to say nothing of the related job losses, caused

by higher prices, a worsening trade deficit, and a loss in international competitiveness;

• Gasoline and diesel price spikes and tight supplies in the Midwest and elsewhere;

• Declining U.S. natural gas production in the face of increased demand, resulting

in high prices and greater market volatility;

• Soaring heating oil prices and tight supplies in New England; and

• Electric power blackouts in the Northeast and in portions of California.

These are the results of a failed energy policy. While no energy bill will solve all

the energy problems facing our country, inaction has a direct and harmful impact

on all U.S. energy-users: small business men and women, home-owners, schools and

hospitals, stores, factories, and businesses of all sizes and types all over this counVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00318 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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try. Failing to pass national energy legislation hurts real people—those who rely on

energy to heat their homes, fuel their vehicles, and power their small businesses.

They are the ones who bear the brunt of higher energy prices and supply disruptions.

Clearly, action on energy policy is long overdue. Congress needs to approve a comprehensive, national energy policy. The key word is comprehensive. A piece-meal approach is not the answer.

Enactment of this legislation will ensure diversity in energy supplies; promote energy efficiency, new technologies, conservation, and environmentally responsible production; modernize America’s energy infrastructure; strengthen our economy; and

create new jobs.

What follows are API’s more detailed views on components of the energy legislation:

Defective Product Liability

Comprehensive energy legislation must address a major threat to the U.S. oil and

natural gas industry. Oil and natural gas meet two-thirds of America’s energy

needs, but tens of billions of additional dollars in capital investment are needed to

keep pace with increasing demand. That investment, the industry’s future and consumer well-being are, however, being threatened by defective product liability lawsuits for companies’ use of the EPA-approved fuel additive MTBE. Under a defective

product claim, if the defendant simply put the product into the stream of commerce,

regardless of having exercised proper care, the defendant can be found liable.

In 1990, when Congress imposed the federal reformulated gasoline (RFG) oxygen

requirement in cities with the worst air quality, the authors of the legislation and

others said on the floor of the House and Senate that MTBE would have to be used

in significant quantities to meet this federal requirement. There were two

oxygenates available for RFG—ethanol and MTBE. Both were approved for use by

EPA, but the ethanol industry was in its infancy and unable to supply adequate volumes to meet the demand for RFG. A decision to use ethanol in most areas of the

country would have put supply in jeopardy and increased costs, which would have

impacted consumers. Since there was insufficient ethanol to meet overall RFG demand, the only choice for most producers was to use MTBE or break the law.

Today, companies who used MTBE to comply with the oxygenate requirement are

facing multi-million dollar suits brought by personal injury lawyers with claims that

gasoline containing the fuel additive was a defective product. Yet, use of MTBE to

meet the oxygenate mandate is exactly what Congress mandated 14 years ago.

This is, above all, an issue of fairness. Any industry that acts, as mandated by

the federal government, to meet a societal need—in this case, cleaner air and improved health—should not later be victimized for doing what the government required it to do. Our companies acted in good faith and heeded the federal government’s call to use MTBE to enhance air quality. What we ask is that the federal

government also act in good faith to protect us against defective product lawsuits

for doing what the law required us to do.

If we are not protected against this type of litigation, one need only look at the

asbestos industry to see the disastrous consequences of this breach of faith by government. Unlimited, unrestrained defective product lawsuits create massive uncertainty, discourage investment and threaten jobs. We have seen in asbestos cases the

results produced by entrepreneurial trial lawyers: scores of bankruptcies, job losses,

and retarded growth. Likewise, in MTBE litigation, trial lawyers are marketing

these cases to municipalities and water districts. This is an opportunity for Congress to address this egregious abuse of our nation’s legal system.

There is a history of the federal government protecting vital businesses and industries from unfair consequences, especially when they have acted in good faith in

complying with the law. In 1976, the manufacturers of the Swine Flu vaccine responded to the government’s call for the immediate mass immunization of the public

by mass producing the needed vaccine. When insurance companies refused to insure

the manufacturers of the vaccine over concerns regarding vaccine-related injuries,

the government stepped in to protect manufacturers against personal injury claims.

Later, in 1994, Congress went so far as to provide immunity to manufacturers of

small non-commercial carrier airplanes from civil liability suits for accidents involving aircraft and certain parts in use beyond their expected service lives. Businesses

were being sued under defective product claims up to 40 years after manufacturing

an aircraft. Again, Congress decided to take action in the interest of fairness because the general aviation industry, facing endless tort claims, was all but brought

to its knees due to this exploitation of the legal system. Passage of the General

Aviation Revitalization Act of 1994 insured the availability of insurance coverage

sufficient to enable the industry to remain in business in the U.S.

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The energy bill includes a narrowly tailored provision—approved by the House of

Representatives last year—that would apply only to defective product claims under

products liability law. This provision simply and fairly recognizes that when Congress mandated the use of fuels components, and when those components have been

studied and approved by EPA, their mere presence in gasoline should not make it

a ‘‘defective’’ product. Such a designation in court enables trial lawyers to bypass

proof of wrongdoing.

Let me stress that the defective product provision would not affect, in any way,

a company’s legal responsibility to clean up any groundwater affected by gasoline,

regardless of whether it contained oxygenates. That authority remains in force in

the Resource Conservation and Recovery Act (RCRA), the federal Clean Water Act,

and states’ Clean Water Acts. Cleanup of any ‘‘orphan’’ underground storage tank

release is covered by the LUST fund. Full cleanup coverage will continue in force.

Moreover, EPA has determined that more than 95 percent of all cleanups have been

paid for by the responsible parties, private insurance or state cleanup funds that

are funded by taxes on petroleum products.

Underground storage tank laws would still apply if gasoline were released and migrated into a well or a public drinking water supply. There would be no defective

product relief if EPA requirements are violated.

This is not an issue limited to the petroleum industry, but should be of concern

to all businesses and industries that could face similar lawsuits for complying with

congressional mandates.

We also support the LUST provisions of the fuels title that will significantly

strengthen the federal underground storage tank program. These provisions would

expand the LUST trust funds for enforcement, inspection, training and remediation

of oxygenated-fuel releases. The bill would enhance the nation’s overall cleanup efforts by ensuring that states have the funds they need to address ‘‘orphan sites,’’

where the responsible party for a leak cannot be identified.

Refining Capacity

The expansion of refinery capacity must also be a national priority. Recent gasoline price increases, while primarily caused by increased crude oil prices, have underscored the fact that U.S. demand for petroleum products has been growing faster

than—and now exceeds growth in domestic refining capacity. While refiners have

increased the efficiency, utilization and capacity of existing refineries, these efforts

have not enabled the refining industry to keep up with growing demand. Even with

a projected expansion of product imports of 90 percent, DOE’s Energy Information

Administration forecasts a need for 5.5 million barrels a day of additional refinery

capacity and a 2 percent increase in refinery utilization.

Government policies are needed to create a climate conducive to investments to

expand refining capacity. The refining situation needs to be addressed now. The federal government needs to act as a facilitator for coordinating and ensuring the timely review of federal, state and local permits to expand capacity at existing refineries

and possibly even build a new refinery. Passage of the energy bill would be an important step by encouraging new energy supply and streamlining regulations, leading to greater production and distribution flexibility.

Fuels Issues

API and its members support the fuels title that was contained in the H.R. 6 conference report approved by the House in the last Congress. The fuels title would repeal the federal oxygenate requirement for reformulated gasoline and require a national phasedown of MTBE. It also provides a renewable fuels standard phasing up

to 5 billion gallons, with a credit trading program to allow the use of renewable

fuels where most feasible and cost-effective.

The fuels provisions are needed to discourage state MTBE bans and other specialty fuel requirements. Individual state requirements can increase the number of

fuels required within supply regions, thereby increasing the potential for fuel distribution and supply problems. Twenty states have already enacted uncoordinated

MTBE bans, caps, or other limits; and other states are considering them.

API, the National Petrochemical & Refiners Association, fuel marketers, and numerous farm and ethanol interests support these fuels provisions. They offer carefully considered solutions to the fuels problems that have challenged fuel providers

and burden energy consumers.

Boutique Fuels

Passage of comprehensive energy legislation consistent with the H.R. 6 conference

report passed by the House last year is the best way to address the boutique fuels

problem. The fuels title of H.R. 6 would repeal the federal reformulated gasoline oxygenate requirement in the Clean Air Act, a major driver of boutique fuels. It would

313

also require that EPA consult with DOE on the supply and distribution impacts of

new state requests for specialized fuels. Finally, the bill would require EPA and

DOE to conduct a comprehensive study of the impacts of boutique fuels and make

recommendations to Congress for addressing them, within 18 months of enactment.

Given these significant changes and the benefit of the study recommendations, we

urge members of Congress to resist imposition of any additional fuel specification

changes outside the context of the national energy legislation.

Federal Lands

Currently, only about 1.5 percent of all federal lands onshore and one-half percent

offshore are under lease and producing oil and natural gas, according to the U.S.

Department of the Interior. Only 11 percent of the offshore submerged lands under

U.S. jurisdiction are available for leasing. Huge areas off the east and west coasts

and in the Eastern Gulf of Mexico have been placed ‘‘off limits.’’

Comprehensive energy legislation must address a number of exploration and production issues for non-park federal lands and offshore resources, including increased

access; streamlined and expedited regulatory and permitting processes; and better

coordination between state and federal agencies. Access should be provided to the

potentially vast oil resources beneath a small portion of ANWR in northeastern

Alaska that could provide the equivalent of current oil imports from Saudi Arabia

for more than 20 years.

Natural Gas

Comprehensive energy legislation will also help America develop and diversify its

sources of natural gas supply, both domestically and internationally, to meet increased demand for clean-burning natural gas. DOE projects total demand for natural gas will increase by 40 percent by 2025, primarily as a result of its increased

use for electricity generation and industrial applications.

America’s natural gas policy has encouraged the use of this clean-burning fuel

while discouraging the development of new supplies. The result is the current tight

supply/demand balance and the prospect of continual future tightening, if action is

not taken. Natural gas markets have distributed supplies efficiently, but prices have

risen and markets have become more volatile due to the tight supply/demand balance. To ensure the long-term availability of adequate, affordable natural gas supplies, the nation must develop its abundant domestic supplies and diversify its supplies by tapping into global supplies through liquefied natural gas (LNG).

However, there is no ‘‘silver bullet’’—no single policy to alleviate the tight supply/

demand balance. Rather, a balanced portfolio of policies is needed. Both comprehensive energy legislation and regulatory changes are overdue. While conservation and

efficiency can have important, near-term effects and must be pursued, the urgent

need to develop future supplies must also be addressed. For too long, the supply side

of the equation has been ignored. Much of the domestic resource base has been

placed ‘‘off limits’’—either directly through withdrawals and moratoria or indirectly

through constraints on operations that delay development and/or make it uneconomic.

API’s natural gas policy suggestions can be summarized in one phrase: implement

the policy recommendations in the National Petroleum Council’s (NPC) 2003 study,

‘‘Balancing Natural Gas Policy: Fueling the Demands of a Growing Economy.’’ Key

recommendation include:

• Expanding access to world gas supplies. Expediting the approval process for expanding existing LNG terminals and constructing new facilities is essential.

• Increasing access to non-park, non-wilderness onshore areas and reducing permitting costs and delays. More than half the technically recoverable resources in

the Rockies are either off limits or highly restricted—that is enough natural gas

(about 125 trillion cubic feet (Tcf) to heat the 60 million homes currently using

natural gas for 30 years.

• Lifting constraints on key offshore areas with high-resource potential. Only 11 percent of the offshore submerged lands under U.S. jurisdiction are available for

leasing. Administrative moratoria preclude exploration and development in

many OCS areas until 2012—at least 79 Tcf is off limits off the East and West

Coasts and in the Eastern Gulf of Mexico (and this estimate may be low as it

is based on old and limited data).

• Developing infrastructure to deliver natural gas supplies to consumers. Large resources of Alaskan natural gas will be stranded until a pipeline can be built

to move this gas to consumers in the lower 48 states. A simple and timely regulatory process is needed.

The hydraulic fracturing and stormwater provisions of the energy bill will have

a positive impact on natural gas, as well as oil, exploration and production:

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Hydraulic Fracturing. The energy bill clarifies that hydraulic fracturing should

not be regulated under the Safe Drinking Water Act. Fracturing technology plays

a particularly important role in developing nonconventional resources such as coalbed natural gas (CBNG) and natural gas trapped in sand stone (in the west, nearshore and offshore Gulf of Mexico, and Alaska’s Cook Inlet). Nonconventional resources must play a greater role in supplying future domestic natural gas supplies.

The National Petroleum Council estimates that 60 to 80 percent of all wells drilled

in the next decade will require fracturing. Any uncertainty about regulation of such

operations should be removed. CBNG, in particular, might be developed and brought

to the market more quickly than more remote Arctic or deepwater reserves.

Stormwater. The energy bill provides a needed clarification that the existing exploration and production (E&P) exemption applies to E&P construction activities

too. Despite an explicit exemption in the Clean Water Act for stormwater discharged

from E&P operations, recent regulatory proposals have sought to subject construction at E&P sites to the type of stormwater requirements imposed on other types

of construction activities like the building of shopping centers. This regulatory approach is counter to congressional intent and imposes unnecessary costs on domestic

E&P operations.

Liquefied Natural Gas (LNG)

Increased import capacity for liquefied natural gas, or LNG, is absolutely critical

to meeting projected natural gas demand. LNG currently provides 2 percent of the

nation’s natural gas, a figure that could rise to 21 percent by 2025, according to

DOE. LNG can provide a dependable and competitive supply link to some of the

largest, underutilized gas resources in the world. However, complicated rules stand

in the way of bringing increased supplies of LNG to U.S. markets. Improved federal

and state policy coordination is needed to facilitate the siting, construction and licensing of LNG import terminals.

The energy legislation will make a real contribution to the timely consideration

of permit applications for the siting and construction of LNG imports and pipeline

infrastructure and the delivery of natural gas to consumers. Provisions of the bill

will:

• Guard against any attempts to change the FERC policy decision in the Hackberry

Case. This policy decision allows companies to develop integrated LNG projects,

which is important to reducing the financial risk associated with these large,

complex projects.

• Clarify that FERC has exclusive authority for onshore terminal siting decisions,

and require other federal and state agencies involved in permitting to work

within the FERC process. Final decisions should be made within one year of the

original application.

• Specify that the extensive record developed by FERC or the Coast Guard (for offshore facilities) in their certificate and permitting proceedings must be used by

other agencies in any administrative appeals concerning a project that has been

reviewed by either of the lead agencies.

Conclusion

All of these energy issues and concerns you will hear today add up to a need for

action. America’s energy problems are becoming acute. Congress needs to pass comprehensive energy legislation early in the new session. Too much is at stake for our

country, our economy, and our place in the world to delay action any longer on this

urgent national priority.

Mr. HALL. I recognize you for 5 minutes at this time, Mr.

Dinneen. And I want to recognize the presence, and appreciate the

presence, of the Chairman of the big committee, Energy and Commerce Chairman Barton of Texas. Mr. Dinneen.

STATEMENT OF BOB DINNEEN

Mr. DINNEEN. Good morning, Mr. Chairman and members of the

subcommittee. Thank you for this opportunity to testify, and I want

to thank you in particular for surrounding me by my good friends

in the petroleum industry.

When I last testified before this committee in 2002, I proudly announced the production of more than 2 billion gallons of ethanol for

the very first time. Since then, the industry has continued its

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record growth. In 2004, the 81 ethanol plants across the United

States produced more than 3.4 billion gallons of ethanol from over

1.25 billion bushels of grain. There are another 16 plants and 2

major expansion currently under construction that will add another

754 million gallons of capacity and bring the industry’s total production capacity to more than 4.4 billion gallons by the end of this

year.

Today, ethanol is blended in one-third of the Nation’s gasoline.

This level of ethanol production and use is providing significant

economic and energy benefits for the Nation. The ethanol industry

added more than $25 billion to the Nation’s gross economic output

last year. The industry is now responsible for over 147,000 jobs

across all sectors of the economy. Domestic ethanol production currently displaces approximately 400,000 barrels of oil a day, and

last year, the use of ethanol reduce greenhouse gas emission by 7

million tons, or the equivalent of taking a million vehicles off the

road.

As the industry grows, it is changing, becoming much more energy efficient. According to the most recent analysis by the U.S. Department of Agriculture, ethanol now yields 167 percent of the fossil energy used to grow, harvest, transport, and refine grain into

ethanol. That represents a 24 percent improving in efficiency since

USDA completed a similar analysis just 4 years ago.

The industry is changing in other ways as well. Virtually all of

the new production is from farmer-owned ethanol facilities. Indeed,

with more than 40 percent of the industry’s capacity taken together, farmed-owned ethanol plants now represent the single,

largest producer of ethanol across the country.

The tremendous growth in ethanol demand over the last several

years is a direct response to State efforts to reduce the use of

MTBE. This past year, ethanol successfully replaced MTBE in California, New York, and Connecticut. Due to the diligent efforts of

both the ethanol and the petroleum industries, the switch to ethanol went off without a hitch in terms of supply, price, and air

quality.

While we believe we can continue to successfully replace MTBE

in RFG areas where it is being phased out, we have also heard the

requests of our customers for greater flexibility in meeting Clean

Air Act requirements. Consequently, we have worked for several

years to develop a consensus proposal that addresses the concerns

of a number of stakeholders. We are proud to be part of a unique

coalition that includes the API in support of a fuels package that

will provide our industry with greater marketplace certainty and

refiners with greater marketplace flexibility.

The RFA commends the leadership of Chairman Barton and this

committee for including a comprehensive fuels package in the Draft

Energy Policy Act of 2005. The Energy Policy Act of 2005 provides

a Federal resolution to persistent concerns related to MTBE, avoiding a patchwork of State actions. It maintains the existing Clean

Air benefits of Federal RFG. It provides refiners with the flexibility

they have sought by eliminating the Federal oxygen requirement.

And it provides marketplace certainly to farmers and ethanol producers by including a renewable fuel standard. The RFS included

in the Energy Policy Act boosts the demand for renewable fuels

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such as ethanol and biodiesel to 5 billion gallons by 2012. As the

industry has now grown to the point where it will produce more

than 4 billions gallons of ethanol this year, however, it should be

obvious that the ethanol industry could supply a much greater volume of ethanol under an RFS.

With good crude oil prices topping $50 a barrel and gasoline

prices across the country once again on the rise, consumers are

seeking the increased production use of domestic renewable fuels

as a means of adding to supply and lowering prices. Consequently,

we would hope that as the legislative process regarding the energy

bill progresses, Congress would recognize the potential of U.S. ethanol companies to increase production and seek to expand the volume—excuse me—of ethanol—excuse me—in the RFS program.

This all gets me choked up.

Mr. Chairman, the RFA is committed to working with you and

members of the committee as this process moves forward to finalize

an energy bill that assures a reliable fuel supply, lowers consumer

fuel costs, protects the environment, and stimulates further growth

and develop of domestic renewable fuels such as ethanol and biodiesel. Thank you.

[The prepared statement of Bob Dinneen follows:]

PREPARED STATEMENT OF BOB DINNEEN, PRESIDENT, RENEWABLE FUELS

ASSOCIATION

Good morning, Mr. Chairman and Members of the Subcommittee. My name is Bob

Dinneen and I am president of the Renewable Fuels Association, the national trade

association for the domestic ethanol industry. The RFA represents the 81 ethanol

producing companies across the United States that last year produced more than

3.41 billion gallons of ethanol from over 1.25 billion bushels of grain.

I greatly appreciate the opportunity to testify. Your review of national energy policy and your efforts to formulate a comprehensive energy bill are very much needed.

With rising crude oil costs, declining gasoline inventories and natural gas shortages

across the country, it is clear the nation needs an energy policy that focuses on increased production, particularly from domestic renewable sources like ethanol that

can help build a sustainable energy future.

Mr. Chairman, I can tell you the U.S. ethanol industry is already doing its part.

Ethanol producers are expanding at an unprecedented rate to extend gasoline supplies and provide the octane and oxygen refiners need to meet air quality and performance standards. When I last testified before this Committee in 2002, I proudly

announced the production of more than 2 billion gallons of ethanol for the first time.

Since then, the industry has continued its record growth.

In 2004, the U.S. ethanol industry opened 12 new state-of-the-art production facilities, bringing the industry’s total annual production capacity to more than 3.6

billion gallons. There are another 16 new plants and 2 major expansions at existing

facilities currently under construction that add another 754 million gallons of capacity and bring the industry’s total production capacity to more than 4.4 billion gallons. This year, the U.S. ethanol industry is on pace to process 1.5 billion bushels

of grain in the production of more than 4 billion gallons of ethanol.

Today, ethanol is blended into more than a third of the nation’s gasoline. This

level of ethanol production and use is providing significant economic and energy

benefits for the nation.

• Last year, the ethanol industry added more than $25 billion to the nation’s gross

economic output through annual operating spending and capital spending for

new plants.

• The industry is now responsible for over 147,000 jobs across all sectors of the

economy.

• Ethanol producers spent more than $3.1 billion on grain, using 13% of the corn

and sorghum crops and becoming the third largest consumer of each, behind

only feed and export. In fact, at a time when export markets are stagnating or

declining, ethanol is providing farmers a critically important value added market.

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• Another $4.4 billion went directly to consumers this past year through increased

economic activity and new jobs—money that will go to pay for school shoes and

college tuition and putting food on the table. • And federal and state governments collected almost two-and-a-half billion dollars

in needed tax revenues from the ethanol industry.

Domestic ethanol production displaced approximately 400,000 barrels of oil a day

in 2004, about the volume of oil the U.S. imported from Iraq prior to the war. And

the environmental benefits are significant also. According to Argonne National Laboratory, the use of ethanol in 2004 reduced greenhouse gas emissions by 7 million

tons, or the equivalent of taking more than a million cars off the roads.

As the industry grows, it is changing, becoming more and more energy efficient

with new production facilities using the latest and most efficient technologies. According to the most recent analysis by the U.S. Department of Agriculture, ethanol

now yields 167% of the fossil energy used to grow, harvest, transport and refine

grain into ethanol. That represents a 24% improvement in efficiency since USDA

completed a similar analysis just four years ago.

The industry is changing in other ways as well. Virtually all of the new production capacity is from farmer-owned ethanol facilities as farmers seek to take direct

advantage of the value-added and rural economic development benefits of ethanol

processing. Indeed, with more than 40 percent of the industry’s capacity, taken together farmer-owned ethanol plants now represent the single largest producer of

ethanol across the country.The tremendous growth in ethanol demand over the last

several years is a direct response to state efforts to reduce the use of MTBE. To

date, nineteen states have acted to phase out the use of MTBE, and the ethanol industry has acted responsibly to build additional capacity so that refiners could continue to supply consumers with competitive fuels that meet federal Clean Air Act

requirements.

The ethanol industry has developed a strong track record of seamlessly replacing

MTBE in major gasoline markets. This past year, ethanol successfully replaced

MTBE in California, New York and Connecticut. Due to the diligent work of both

the ethanol and petroleum industries, the switch to ethanol went off without a

hitch. Consider this statement by the Coalition of Northeastern Governors Policy

Research Center:

‘‘The supply and infrastructure challenges to implement the New York and Connecticut MTBE bans have been successfully met by the petroleum and ethanol

industries to date. An adequate ethanol distribution system was developed; adequate stocks of ethanol have been in place; distribution terminals were retrofitted to accommodate ethanol delivery, storage and blending; and adequate

stocks of reformulated blendstock used for ethanol blending have been produced

and distributed. MTBE ban induced price increases have not been reported by

EIA [U.S. Energy Information Administration], New York or Connecticut who

are monitoring prices. California energy officials report a similar experience in

meeting their January 2004 MTBE ban.’’ (emphasis added)

While we believe we can continue to successfully replace MTBE in RFG areas

where it is being phased out, we have also heard the requests of our customers for

greater flexibility in meeting Clean Air Act requirements, i.e., eliminating the federal oxygen standard. Consequently, we have worked for several years to develop

a consensus proposal that addresses the concerns of a number of stakeholders, including environmentalists, oil companies and farmers. We are proud to be part of

a unique coalition that includes the American Petroleum Institute in support of a

fuels package that includes replacing the existing oxygen standard with a new more

flexible renewable fuels standard (RFS) while preserving the air quality benefits of

the federal reformulated gasoline program.

The RFA commends the leadership of the Chairman and this Committee for including a renewable fuels standard in the draft Energy Policy Act of 2005.

The Energy Policy Act of 2005 provides a federal resolution to persistent concerns

related to MTBE, avoiding a patchwork of state actions. It maintains the existing

clean air benefits of federal RFG with strong anti-backsliding provisions. It provides

refiners with the flexibility they have sought in meeting Clean Air Act requirements

by eliminating the federal RFG oxygen standard. And it provides some marketplace

certainty to farmers and ethanol producers that have acted responsibly to meet the

demand created by current law.

Importantly, the RFS does not require that any renewable fuels be used in any

particular area, allowing refiners to use these fuels in those areas where it is most

cost-effective. Moreover, there are several provisions allowing the requirement to be

adjusted or eliminated if supply problems occur. Small refiners are exempted from

the RFS for several years, allowing those companies an easier transition to the program.

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The RFS included in the Energy Policy Act of 2005 boosts the demand for renewable fuels such as ethanol and biodiesel to 5 billion gallons by 2012. An analysis

conducted by the U.S. Department of Energy in 2003, ‘‘Infrastructure Requirements

for an Expanded Fuel Ethanol Industry,’’ concludes, ‘‘no major infrastructure barriers exist’’ to expanding the U.S. ethanol industry to 5 billion gallons per year.

As the industry has now grown to the point that it will produce more than 4 billion gallons of ethanol this year, DoE’s conclusion has certainly been validated. Indeed, it should be obvious that the ethanol industry could supply a much greater

volume of ethanol under an RFS. With crude oil prices recently topping $50 per barrel and gasoline prices across the country once again on the rise, consumers are

seeking far greater production and use of domestic renewable fuels as a means of

adding to supply and lowering prices. Consequently, we would hope that as the legislative process regarding the energy bill progresses, Congress will recognize the potential of U.S. ethanol companies to increase production and seek to maximize the

volume of ethanol in the RFS.

Moreover, as the ethanol industry has had to dramatically increase production to

respond to increased demand created by state MTBE legislation in the absence of

federal action, it is clear that the proposed RFS schedule no longer provides a rational transition from the existing oxygen standard to an RFS. Thus, I would hope

the Committee would consider an accelerated schedule as the legislative process

moves forward.

Mr. Chairman, the Renewable Fuels Association is committed to working with you

and members of the Committee as this process moves forward to finalize an energy

bill that assures a reliable fuel supply, lowers consumer fuel costs, protects the environment and stimulates further growth and development in domestic renewable

fuels such as ethanol and biodiesel.

Thank you.

Mr. HALL. Thank you very much. The Chair now recognizes Bob

Slaughter, President of the National Petrochemical and Refiners

Association, also not a stranger to this area. We will recognize you,

Mr. Slaughter, for 5 minutes.

STATEMENT OF BOB SLAUGHTER

Mr. SLAUGHTER. Thank you, Chairman Hall, Chairman Barton,

Congressman Boucher, and other members of the subcommittee.

Thanks for allowing NPRA, again, to present its views on comprehensive energy legislation. As you know, our members include

virtually all U.S. refiners, as well as most domestic petrochemical

manufacturers.

First, thanks to this subcommittee, the full committee, and the

entire House for approving H.R. 6, three times in the previous Congress. You’ve done the lion’s share of the work in advancing a supply based national energy policy. NPRA believe that this year in

this Congress there is an excellent chance that a comprehensive

energy bill quite similar to Energy Policy Act of 2005 will become

law.

The NPRA has the following specific recommendations regarding

ways to ensure an abundant supply of transportation fuels and natural gas: repeal of the 2 percent RFG oxygenation requirement is

needed to provide greater flexibility to refiners. Congress should

make a clean break from overly prescriptive fuel policy by avoiding

enactment of an ethanol mandate of MTBE ban. These intrusive

actions add unnecessary costs and complications to the already difficult business of manufacturing gasoline in accordance with modern, environmentally sensitive fuel specification. Avoid prescriptive

legislative action regarding boutique fuels, pending development of

more accurate information on their cause, extent, and impact. The

H.R. 6 Conference Report contained language ordering an EPA/

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DOE study of this phenomenon, and that is the only appropriate

action at this time.

Please take steps to increase domestic natural gas supply and to

balance future gas supply and demand. It is time to review and

curtail the practice of closing of promising areas on and offshore

where production of domestic natural gas can proceed in an environmentally acceptable manner. The petrochemical industry, a

$200 billion per year industry on which 150,000 good, American

jobs depend, is one of many U.S. industries that rely on a secure,

predictably priced supply of natural gas and its derivatives to do

business in an increasingly competitive world market. Refiners are

also significant users of natural gas. This means we need enhanced

domestic production, plus LNG, plus Alaskan gas. We need them

all and cannot afford to forego any of these crucial supply increments to maintain U.S. economic viability and environmental

progress.

We also would like to suggest that this subcommittee consider

having a hearing on the recently completed National Petroleum

Council study of the refining industry. That report’s summary is attached to my testimony, and it makes many important recommendations about policy changes need to keep the domestic refining industry running strong and producing the lion’s share of

critical products like gasoline, diesel, and home-heating oil, right

here in the United States.

And last, but far from least, the NPRA urges you to include, once

again, in this year’s energy bill, the provision to provide limited liability protection for mandated fuel components MTBE and renewables. As you know, this provision affects only the defective products claim, leaving in place other traditional causes of action such

as negligence and trespass. Those who are responsible for oxygen

contamination of water remain explicitly liable for cleanup costs

under this provision.

Refiners and petrochemical manufactures worked hard with the

EPA and other stakeholders to make the RFG program established

by the 1990 Clean Air Amendments a success. They invested billions of dollars to make RFG as required by the Act, including the

mandatory 2 percent oxygen content that was originally opposed by

a near-unanimous refining industry. I, personally, lobbied against

that provision at the time, in favor of performance standards rather than an oxygenic mandate. Nevertheless, industry made that

program a success when Congress acted and the final regulation

were in place. Everyone knew then that MTBE would be the most

widely used oxygenate in the new RFG program. The sponsor of

the provision said so during debate on the floor of the other body.

The EPA had approved MTBE for use in gasoline, twice modeled

its proposed RFG regulations explicitly around MTBE use to reflect

this fact, while without the RFG program would have been infeasible. No alternate oxygenate was available at the time in sufficient

quantity and at economically viable costs to provide the large volumes needed in the vast RFG program, which eventually amounted

to one-third of the Nation’s gasoline supply. The U.S. refining industry spent approximately $47 billion in environmental expenditures in the last 2 decades and will spend about $20 billion in this

decade to comply with new environmental requirements. Our memVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00327 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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bers are committed to improving the Nation’s air through compliance with EPA regulations which are usually quite prescriptive and

challenging. The—in fact, the Clean Air Act would not be successful without the help and cooperation of industry and the implementation of new regulations. This is why the Energy Policy Act of

2005 should continue to provide as it does, a carefully tailored provision eliminating nuisance suits that seek to penalize the industry

for complying with the clear intent of Congress in using MTBE,

and EPA-approved gasoline component, to help clean the Nation’s

air.

Thank you again for the opportunity to appear here, and I look

forward to your questions.

[The prepared statement of Bob Slaughter follows:]

PREPARED STATEMENT OF BOB SLAUGHTER, PRESIDENT, NPRA

Mr. Chairman and members of the subcommittee, thank you for the opportunity

to appear before you today to discuss the need for a comprehensive U.S. energy policy. My name is Bob Slaughter, and I am President of NPRA, the National Petrochemical & Refiners Association.

NPRA is a national trade association with about 450 members who own or operate virtually all U.S. refining capacity, as well as petrochemical manufacturers who

operate similar manufacturing processes. NPRA’s refining members include large integrated refiners, large independent refiners, regional independents, and small refiners.

The refining and petrochemical industries produce clean transportation fuels to

power today’s sophisticated engines, provide a steady supply of home heating oil,

and manufacture the basic building blocks of items that touch every aspect of our

daily lives. The prospects for success in the refining and petrochemical industries

are based upon the efficient, economic rearrangement of the links between hydrocarbon molecules. Our remarks today will concern links as well. There is a link between energy and economic strength for the United States; there is a link between

energy and the continued development of innovation and discovery, and another link

between energy and our national security.

These links are in some jeopardy today. Our energy policies do not reflect the importance of supply. For too long government actions, especially in the environmental

area, have inadequately balanced energy supply impacts with other policy objectives.

NPRA supports the development and use of cleaner-burning fuels to meet health

and environmental goals while maintaining adequate supplies to meet the demand

of the motoring public and basic consumer. We believe that this can best be

achieved if energy and environmental policymaking are integrated, and if the costs

and benefits of new regulatory or legislative requirements are carefully analyzed

and balanced so that any adverse impact on energy supplies is both assessed and

mitigated. We urge caution in attempts to promote agriculture or social policy as

part of this process. The politics of the moment often result in adoption of policies

that run counter to overall national concerns and objectives.

With these thoughts in mind, NPRA sincerely appreciates the opportunity to address the subcommittee today and to present our views on the need for comprehensive energy legislation. Simply stated, NPRA supports policies that both encourage

the production of an abundant supply of petroleum-based products for U.S. consumers and that promote a robust and diverse energy supply mix for all sectors.

I. ENERGY POLICY

In March of 2003, nearly two years ago, NPRA also had the privilege to appear

before the Subcommittee on Energy and Air Quality concerning this same subject.

In summarizing NPRA’s energy policy recommendations at that time, we urged Congress to: repeal the 2% RFG oxygenation requirement; avoid a federal ban or mandatory phase-out of MTBE; resist calls for an ethanol mandate; extend product liability protection to MTBE and ethanol; avoid unnecessary changes in fuel specifications, including boutique fuels; take steps to increase natural gas production and

supply; and ensure the continued viability of combined heat and power systems as

the electricity industry transitions to a more competitive model.

NPRA urges you again today to enact comprehensive energy legislation that incorporates our proposals. We realize that the House of Representatives has acted boldly

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and with conviction in passing H.R. 6 on at least 3 separate occasions. Unfortunately, enactment of comprehensive energy legislation remains elusive. NPRA members hope that this subcommittee, the full committee and the House will again take

the lead on this crucial legislative initiative by passing once again the fuels provisions of the H.R. 6 conference report, as currently proposed in the Energy Policy

Act of 2005.

NPRA would like to review our specific recommendations in more detail:

A. Transportation Fuels

1. Repeal The 2% RFG Oxygenation Requirement, Fuel Producers Need More Flexibility

Repeal of the 2% by weight RFG oxygenation requirement [Clean Air Act section

211(k)] is key to provide refiners with more flexibility to meet supply and air quality

requirements, and is the lynchpin for other much-needed modifications to the fuels

provisions of the Act. Elimination of the 2% requirement will give refiners increased

flexibility to deal with changing market conditions. It will also permit them to blend

gasoline to meet the standards for reformulated gasoline more efficiently and economically, without mandated oxygenate content. NPRA also supports the petitions

filed by the states of California and New York to waive the existing 2% RFG oxygenation requirement pending enactment of a federal repeal. We urge this subcommittee to monitor closely the EPA response to these petitions, which are long

overdue for final approval.

2. Avoid Fuel Bans—They reduce supply.

NPRA remains concerned about proposals to ban MTBE nationally or to mandate

a national phase-down of MTBE. MTBE elimination may cause a significant reduction in some gasoline volumes when fully implemented. (MTBE provides over 10%

of RFG volume in many RFG areas.) NPRA is concerned about the possible impact

of such policies on gasoline supply and manufacturing costs. The supply and demand balance in the nation’s gasoline market is increasingly tight. Supply and price

can be affected by weather, unforeseen outages, and accidents, resulting in economic

losses and negative public reaction, and we are seeing this happen with increasing

frequency. EIA predicted that an MTBE ban could raise the national average price

of RFG in 2006 by several cents per gallon and reduce supply. (‘‘Supply Impacts of

an MTBE Ban,’’ EIA, September 2002) Recent experience in the gasoline market

suggests that such significant changes should be made only with an abundance of

caution, and with full disclosure to the public regarding any possible supply and cost

impacts. At a minimum, prudence requires much deliberation and thought before

acting to reduce gasoline supplies.

EIA noted in a presentation in October 2003: ‘‘MTBE is a very clean component

from an air emission standpoint. It contains oxygen and has no sulfur, no aromatics,

no olefins and an RVP that is very close to the RVP of the remaining gasoline components.’’ The author also wrote: ‘‘What is not appreciated by many people outside

of the petroleum business, is that losing MTBE is more than just losing the volumes

of this blending component . . . no other hydrocarbon or oxygenate equals the emission and engine performance characteristics of MTBE. Hence, losing a barrel of

MTBE results in losing more than a barrel of gasoline production. When you remove

a clean, high performance gasoline stream from the gasoline pool, it is difficult to

find material to replace its volume and quality contributions.’’ (EIA, J. Shore, ‘‘Supply Impact of Losing MTBE & Using Ethanol,’’ October 2002, pp. 10, 12)

Recent EIA studies confirm that elimination of MTBE could also affect many refiners’ abilities to comply with the Mobile Source Air Toxics (MSAT) rule, which requires refiners to maintain their average 1998-2000 gasoline toxic emission performance levels. The result might be that some refineries would have to reduce their production of RFG to achieve compliance. Exacerbating the MSAT problem is EPA’s recent announcement that it will propose revisions to the MSAT rules that will further alter gasoline composition and emissions.

3. Resist Calls for an Ethanol Mandate—Avoid Added Cost and Complications

Many NPRA members already use large volumes of ethanol, and they expect to

increase their ethanol usage in the years ahead. EIA and other policy analysts also

predict a significant increase in ethanol markets in coming years, without a mandate. Thus, given the relative scarcity of quality gasoline blend stocks, ethanol has

a bright future without any need to resort to the dubious policy of a national ethanol mandate.

As a state that is at the forefront of fuel specifications, California has experienced

and continues to experience problems with bans and mandates. According to the

California Energy Commission (CEC), the state substantially overestimated the cost

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of addressing the perceived MTBE water problem ($1.5 billion vs. $200 million),

while it substantially underestimated the costs of replacing MTBE with ethanol in

gasoline ($400 million vs. $1.6 billion).

Further, a September 2004 study from the California Air Resources Board and the

Auto industry confirms that the permeation effects from ethanol blended fuels are

65% greater than from fuels with MTBE. For California, this translates into significant additional VOC emissions to the atmosphere.

Refiners have worked with ethanol suppliers and other stakeholders to achieve a

transition to ethanol use as smoothly as possible given the magnitude of the RFG

markets in California, New York and Connecticut. NPRA views ethanol as a valuable gasoline blendstock, and we are certain that significant quantities of the product—quantities much larger than today’s record use—will be required to meet the

ever-increasing demand of the motoring public in the years to come. This means

that a mandate will only increase the cost of material that would have been used

in any case. NPRA requests that economic and environmental considerations be allowed to dictate the quantity and geographic location of ethanol’s use. Mandates

(and bans) are inefficient and costly mechanisms that only serve to distort true marketplace dynamics and inhibit innovation. NPRA urges the committee to make a

clean break with the market intervention theory typified by both the existing 2%

requirement and calls for an ethanol mandate to replace it.

4. Support Limited Liability Protection for Mandated Fuel Components

The Energy Policy Act of 2005 contains a narrow provision that (1) would disallow

suits against the manufacturer of fuel containing MTBE or a renewable fuel, (2)

only on a claim that the product is defective, (3) if that product is made and used

as intended and as approved by EPA.

This provision preserves other causes of action, such as negligence, trespass,

breach of warranty, breach of contract, and public nuisance. The provision does not

affect liability under federal and state environment laws and therefore would not

affect a responsible party’s obligation for response, remediation, and clean up.

The Act includes the same limited liability provision for both MTBE and renewable fuels.

This provision merely provides fair treatment. In 1990, Congress established the

Reformulated Gasoline (RFG) program mandating the use of oxygenates in gasoline

in cities with the worst U.S. air quality. The authors of the bill acknowledged on

the floor of the House and Senate that fuel manufacturers would have to use significant volumes of MTBE to comply with this federal requirement. EPA also approved

the use of MTBE as a fuel additive.

Despite this compelling evidence of the intent of Congress and the approval of the

key regulatory agency, some manufacturers are now being sued just because they

use MTBE as an additive in gasoline. Yet this use is exactly what Congress mandated some 14 years ago and EPA approved.

The provision disallows only a defective product claim. Under a defective product

claim, a defendant can be found liable simply by making a product for sale, even

if he exercised proper care. Thus, by adding a defective product count to a lawsuit,

the plaintiff can bypass all the usual legal requirements to establish wrongdoing.

The limited liability provision only affects manufacturer liability under this extraordinary defective product claim. It says suppliers cannot be sued under a defective product claim for simply transporting, distributing, or selling gasoline containing MTBE or a renewable fuel, just as intended by Congress and approved by

EPA.

Many legal causes of action remain available if gasoline with MTBE or ethanol

is mismanaged. For example, if any such gasoline is spilled or leaked, those responsible remain liable for legal action under classic tort theories such as negligence,

trespass, breach of warranty, breach of contract, and public nuisance.

Elimination of the defective product claim will not affect cleanup. In fact, litigation is the least effective way to achieve groundwater cleanup. The vast majority

of cleanups are initiated with no a need for litigation. Further, the Act provides an

additional $800 million to clean up of leaks and spills of fuel containing MTBE or

ethanol in those few cases in which responsible parties cannot be identified.

Once again, the Energy Policy Act’s fuel additive limited liability provision simply

removes a cause of action that results in a suit against manufacturers for doing

properly exactly what Congress intended them to do. It is based on fundamental

fairness and common sense.

5. Avoid Unnecessary Changes in Fuel Specifications

The refining industry faces significant investment requirements—on the order of

$20 billion this decade—to comply with regulations to improve the environmental

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performance of both gasoline and diesel fuel in coming years. Significant additional

investments will also be required to respond to regulations affecting facilities. NPRA

urges the subcommittee and committee to avoid any additional fuel specification

changes while work is in progress to comply with the existing requirements. Particular care should be used in responding to calls to address ‘‘boutique fuel’’ gasoline

programs. In many cases these programs represent a local area’s attempt to address

its own air quality needs in a more cost-effective way than with reformulated gasoline. NPRA welcomes further study of the ‘‘boutique fuels’’ phenomenon, but urges

members of the committee to resist imposition of boutique fuels limitations. The

practical effect of regulating boutique fuels is to deny state and local governments

a way to meet stringent environmental requirements in the most cost effective manner. The Boutique Fuels provisions in the Act stipulate that EPA and DOE perform

a comprehensive analysis of the impact of state requests for specialized fuels on (1)

air quality, (2) the overall number of boutique fuels, and (3) fuel availability and

cost. The bill also requires recommended legislative changes to be submitted to Congress within 18 months.

NPRA believes the Act’s language to be a prudent approach. U.S. gasoline and

diesel fuel specifications are currently undergoing substantial modifications as a result of several regulatory programs, as well as other changes that will result with

final enactment of the Energy Policy Act of 2005. These new programs, including

repeal of the 2% oxygenate requirement, will effectively address the boutique fuels

issue.

B. Balancing Natural Gas Supply and Demand

America’s standard of living and overall economic health are closely linked to the

need for adequate supplies of energy at reasonable prices. Our nation currently

faces severe challenges as it strives to balance ever-increasing energy demands from

all consuming sectors, largely due to contradictory and short-sighted policies that

have limited supply of many forms of energy. This is especially the case with domestic natural gas production. Our national policy actually discourages domestic gas

production while encouraging increased U.S. consumption!

In recent years, domestic demand for natural gas has substantially increased,

while production has recently decreased. Our experience with volatile natural gas

prices and short supplies over the last several winters was a reality check for the

nation’s flawed policies, and we must act now to correct that situation. Government,

industry, and other private experts agree that natural gas demand is expected to

rise by the year 2020 by as much as 60% over today’s levels. But it is still unclear

whether and to what extent domestic gas production will be allowed to increase to

satisfy as much as possible of this new demand from U.S. sources.

Current policies discourage U.S. gas production and supply in several ways. But

two aspects are most significant. Federal policy has:

• limited access to federal lands and thus reduced the number of places where gas

may be produced, while at the same time encouraging more gas use as a cleaner

burning fuel; and it has • imposed restrictive regulations that discourage investment in pipelines needed to

bring new gas to market;

There is, on the other hand, some good news. The U.S. Geological Survey estimates that the U.S. has 1,400 trillion cubic feet of technically recoverable natural

gas resources. Thus, the U.S. is not running out of gas; it is just running out of

places where industry is allowed to look for it. Further and NPRA believes most

telling, the U.S. is the only developed country that prohibits much off-shore

exploration and development of natural gas. U.S. energy policy should encourage greater access and development opportunities on onshore public lands as well

as those on the Outer Continental Shelf. New and promising domestic areas for development must also be open for exploration and production. An Alaskan natural

gas pipeline should be built to tap more gas and transport it to the lower 48 states

as soon as economically feasible.

For all these reasons, NPRA urges this Committee and the Resources Committee

to review the natural gas situation. NPRA recommends that particular attention be

paid to the following:

• Timely issuance of leases and permits—DOI has indicated that over 1,000 various

stipulations impede resource development on federal lands. Federal agencies

should be required to update resource management plans and to process environmental reviews of proposed natural gas pipelines and drilling programs in

a timely, efficient manner.

• Federal lands should be leased for multi-purpose uses, including natural resource

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cially in the Rocky Mountain region, these lands are systematically placed offlimits for development through unnecessary and increasingly stringent restrictions.

• The Energy Policy & Conservation Act (EPCA) of 2000 should mandate a second

phase that would promote additional onshore leasing—Issued in 2003, the

Phase I study identified and assessed resource estimates and outlined the impediments to development in five onshore basins. Congress should require a

Phase II project that will investigate the post-sale impediments to development

of the areas/resources.

There is also a problem on the demand side of the equation. For too long, the impact of environmental legislation and/or regulations on natural gas supply have had

little or no consideration when these policies are developed. This has resulted in

programs which encourage increased gas use—mostly in the generation of both base

and peak-load electricity—because of its environmental benefits. This has led to

(and will most likely continue to exacerbate) higher gas prices and volatility. In fact,

EIA reports that demand by electricity generators is expected to account for 30%

of total natural gas consumption in 2025. This equates to a doubling of gas use by

the utility sector over current demand. If present policies continue, it is clear that

adequate supplies will not be available to accommodate this demand figure unless

current natural gas users in core industries are forced to switch fuels, close, or relocate operations to a more favorable supply situation outside of the U.S. In the process, we will lose billions of dollars in economic benefit to the U.S. economy along

with many thousands of well-paying jobs.

The domestic petrochemical industry relies upon natural gas and natural gas liquids as feedstocks. About 70% of U.S. petrochemical manufacturers use natural gas

liquids as feedstocks. In contrast, about 70% of petrochemical producers in Western

Europe and Asia use naphtha an oil product, as a feedstock.

The U.S. has generally maintained a reasonable-cost feedstock position relative to

its competitors in Europe and Asia. However, that situation has eroded as the price

of natural gas has increased due to supply concerns. North American natural gas

and natural gas liquids prices have risen and placed a significant portion of the domestic petrochemical industry at a disadvantage to European and Asian producers.

The Middle East countries are attracting many new petrochemical plants because

their gas supplies are vast and very cheap in comparison with the U.S.

Chemical product exports are usually significant contributors to U.S. trade receipts. Unfortunately, natural gas supply concerns have impacted the already depressed chemical export market, resulting in a negative trade balance in recent

years. This negative trade balance allows foreign businesses to capture U.S. market

share, in part because European and Asian producers are not experiencing similarly

increased feedstock prices and supply concerns.

Based on the above, we recommend the following demand-side policy options be

adopted:

• Provide appropriate incentives for facilities with dual fuel capability to switch

from gas to more abundant fuels, especially when supply concerns exist.

• Federal, state and local governments should encourage electric utilities and industrial facilities to use fuels other than natural gas during the current shortage

where this can be done without negative impacts on air quality.

• Provide sufficient funds for the increased use of clean coal technology, more nuclear and hydro-power generation, and other forms of energy used to generate

electricity. This will displace gas supplies for use as feedstock and home heating.

• Electricity generating units which use natural gas as a primary fuel should be

dispatched based on fuel efficiency. Fixed cost components of existing units

should be secondary relative to fuel efficiency. Emergency plans, including temporary air quality exemptions or waivers, should be developed by FERC, DOE

and EPA when supplies of preferred fuels become inadequate.

• Review environmental regulations or enforcement actions which require the use

of natural gas to achieve air quality standards. A primary example is EPA’s action to require refiners and other manufacturers to switch to natural gas with

no attention to the impact on total gas supply.

• Codify Executive Order # 13211, which requires a statement of energy impacts

when undertaking certain federal/regulatory actions. These include potential

impacts on energy supply, distribution, or use.

• Review public policy initiatives such as fuel mandates and global climate change

proposals that have the potential to impact natural gas supplies because they

may encourage even greater reliance on natural gas to generate electricity.

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II. THE U.S. REFINING INDUSTRY

Before addressing the current state of the U.S. refining industry, NPRA wants to

reaffirm its commitment to the orderly production and use of cleaner-burning fuels

to address health and environmental concerns, while at the same time maintaining

the flow of adequate and affordable gasoline and diesel supplies to the consuming

public. Our cleaner fuels and facilities will greatly benefit the environment.

For example, according to EPA, the new Tier II low sulfur gasoline program, initiated in January 2004, will have the same effect as removing 164 million cars from

the road when fully implemented. Since 1970, clean fuels and clean vehicles account

for about 70% of all U.S. emission reductions from all sources, according to EPA.

Over the past 10 years, U.S. refiners have invested about $47 billion in environmental improvements, much of that to make cleaner fuels.

In order to fully appreciate the impact of environmental regulations on fuel supply, we should first consider the dynamics of current gasoline markets. It is important to begin with the most significant factor affecting gasoline prices: crude oil. The

cost of crude oil represents about 45% of the total cost of a finished gallon of gasoline. Crude oil prices have increased nearly 67% since April 2003, once having

crossed the $50 per barrel threshold. High demand for crude from Asia and the

U.S., plus OPEC activities to restrain crude production in recent years, are the most

important factors affecting crude prices.

The other key factor underlying current gasoline market conditions is the tight

supply/demand balance. This is due to steadily increasing gasoline demand (growing

population, Americans drive larger vehicles greater distances) and the meager

growth in refining capacity in the United States. Due to U.S. economic recovery, the

U.S. Energy Information Administration (EIA) estimates that growth in our already

significant gasoline demand averages 1.7%. Gasoline demand currently amounts to

approximately 9 million barrels per day. Domestic refineries produce about 90 percent of U.S. gasoline supply, while 10 percent is imported. Therefore, growing demand can only be met by either increasing domestic refinery production or by relying on more foreign gasoline imports.

A. Domestic Refining Capacity Should Increase To Help Meet the Growing

Demand for Fuel

Domestic refining capacity is a scarce asset. There are currently 149 U.S. refineries owned by almost 60 companies in 33 states. Their capacity is roughly 16.8 million barrels per day. In 1981, there were 321 refineries in the U.S. with a capacity

of 18.6 million barrels per day. No new refinery has been built in the United States

since 1976, and it is unlikely that one will be built here in the foreseeable future,

due to economic, public policy and political considerations, including siting costs, environmental requirements, rate of return and, most importantly, ‘‘not in my backyard’’ (NIMBY) public attitudes.

U.S. refining capacity has increased slightly in recent years, but it has become

increasingly difficult to keep pace with the growth in demand for petroleum products. New refineries have not been built, but refiners have increased capacity at existing sites to offset the impact of capacity lost elsewhere due to refinery closures.

It has now become harder to add capacity at existing sites due in part to more stringent environmental regulations. Proposed capacity expansions can often become difficult and contentious at the state and local level, even when necessary to produce

cleaner fuels pursuant to regulatory requirements. We hope that policymakers will

recognize the importance of domestic refining capacity expansions to the success of

the nation’s environmental policies, and help inform the public of the need for these

facility improvements.

Domestic refiners do not produce all of the transportation fuels needed to meet

the demand of the nation’s consumers. On average, about 10% of the demand volume is imported, either as finished product or as blending components that can be

added to the gasoline and diesel pool. The current level of U.S. refinery capacity,

resulting from lack of new construction but with some expansion at existing facilities, will result in a need to import ever-increasing volumes of transportation fuels

from foreign refineries.

B. The National Petroleum Council Refinery Study Recommendations

With these circumstances as a backdrop, the Secretary of Energy, in June 2004,

requested that the National Petroleum Council (NPC) a key advisory group, provide

advice on issues surrounding domestic refining capacity, product imports, and inventories. The Secretary requested that the Council’s advice be provided on an expedited schedule and a final report was presented to the Secretary in December 2004.

NPRA was one participant among many in the study group.

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The NPC review of refining and inventory issues presents observations on petroleum product supply and a response to the Secretary’s request for advice on both

refining and inventory issues. It is intended to update the 1998 and 2000 NPC reports on these subjects. The report provides insights on petroleum market dynamics,

as well as advice on actions that can be taken by industry and government to ensure adequate and reliable supplies of petroleum products to meet the energy and

environmental requirements of American consumers. The report recommends actions that, if implemented, would:

• help avoid policies that hinder refining capacity expansions; • improve the environment for investment in domestic refining and logistics capability; and • allow the current supply system to continue to operate efficiently.

More specifically, the NPC study focused on precise topics of immediate impact

and concern to the refining industry and recommended appropriate actions that

should be taken to ameliorate current and potential problems. These topics and associated recommendations include:

New Source Review

‘‘Immediate implementation of comprehensive NSR reform is a very important

policy step needed to improve the climate for investment in domestic refinery expansion. The NSR reforms promulgated by the Administration, including the Equipment Replacement Rule currently under judicial review, should be implemented as

soon as possible. Attempts to delay or overturn the reforms should be vigorously opposed. Additional NSR reform proposals regarding de-bottlenecking and product aggregation should be issued and finalized.’’

National Ambient Air Quality Standards

‘‘The U.S. Environmental Protection Agency (EPA) should revise the NAAQS compliance deadlines and procedures to take full advantage of emissions reduction benefits from current regulatory programs such as cleaner fuels/engines and reduction

of regional emissions transport. As currently structured, attainment deadlines precede the benefits that will be achieved from emissions reductions already

planned...The current deadlines could result in:

• Requirements for additional emissions offsets for any refinery modifications, reducing the economic attractiveness of investment in refinery capacity expansion

• Additional investment in stationary controls at refineries, reducing the overall

profitability and viability of domestic refining versus imports

• Additional requirements for boutique fuels . . .’’

Implementation of Ultra Low Sulfur Diesel (ULSD) Regulations‘‘. . . there are concerns about meeting Ultra Low Sulfur Diesel (ULSD) demand during the transition to the 15 ppm maximum sulfur specification beginning in mid-2006...

To reduce the potential for supply disruption, EPA should work with the Department of Energy (DOE) and the various fuels supply industries to consider emerging

information about the behavior of ULSD moving through the entire distribution system and to consider how to achieve the goals of the program while recognizing distribution system realities. EPA’s current testing tolerance for ULSD should be adjusted to reflect the reproducibility of the tests that will be available for regulatory

compliance; otherwise, enforcement actions based on testing inaccuracy may result

in disruption to the supply system.’’

National Energy Legislation

‘‘The NPC recommends passage of national energy legislation as embodied in the

108th Congress report on HR. 6 as the vehicle with the highest probability of obtaining prompt action on the reformulated gasoline (RFG) oxygenate, oxygenate liability and boutique fuels issues...

• Oxygenate Liability. Congress should enact limited liability protection against

defective product claims involving methyl tertiary butyl ether (MTBE) and other

federally required additives. This action would eliminate only defective product

claims that penalize fuel manufacturers for meeting the Clean Air Act requirements. Negligence and other traditional causes of actions for MTBE cleanup

would be unaffected.

• Boutique Fuels. Requests for specialty fuels formulations, whether driven by

NAAQS or other wise, should be approved only where such programs are necessary and cost-effective relative to other emissions reduction options... Repeal

of the 2% oxygenation requirement for RFG could eliminate much of the incentive for boutique fuel proliferation... DOE and EPA should conduct a joint

study of the boutique fuel issue, with participation by the stakeholders—This

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study should provide important information on the impact of boutique fuels on

fuel production and distribution.’’

Sound Science, Cost Effectiveness, and Energy Analysis

‘‘The 2000 NPC refining report recommended that: ‘Regulations should be based

on sound science and thorough analysis of cost effectiveness.’

Executive Order 13211, signed by President Bush in 2001, requires agencies to

prepare a ‘Statement of Energy Effects’ including impacts on energy supply, distribution and use, when undertaking regulatory actions. The NPC recommends that

Executive Order 13211 be made law and strictly enforced. The NPC is not suggesting elimination or rollback of environmental requirements, but rather that the

cost analysis of proposed regulations should include a thorough analysis of energy

supply effects from production to end-use. Examples of regulations that the NPC

does not believe reflect a thorough analysis of the energy supply effects include

ULSD and NAAQS regulations. As a result, implementation of these regulations

may impose unintended costs without commensurate benefit . . . ’’

Permitting

Streamlining the permitting process would help improve the environment for domestic refining capacity investment...(A)ctivities . . . to review the processes and

identify streamlining opportunities should include industry and other stakeholders.

Streamlining should provide for expeditious overall review and a clearly defined

process for obtaining a permit, with agency roles and responsibilities well-defined

and specific deadlines for making permit decisions.’’

Depreciation Schedule Adjustment

‘‘Adjusting the depreciation schedule for all refining equipment to five years from

the current ten years, consistent with the treatment of similar process equipment

in other manufacturing industries, would have a positive impact on expansion investment economics... helping to offset the historically low returns in the refining/

marketing business that have hindered investment in capacity expansion...The depreciation adjustment should be applied to all new domestic refining investment . . .The depreciation schedules for petroleum pipelines and storage facilities

should be similarly reduced.’’

Fuel Waivers and Enforcement Discretion

‘‘Use of exemptions, exceptions and waivers should be limited to serious supply

disruptions that affect end users’ ability to obtain petroleum products...Proposed

guidance on waivers has been recently released by EPA as a first step in this process . . . ’’

Alternative Fuels

‘‘Mandates or subsidies for alternative fuels increase uncertainty and reduce the

incentive for investment in additional domestic petroleum refining capacity. Therefore, these mandates and subsidies may not reduce petroleum product imports as

intended and could increase the cost to consumers.’’

Distillation and Driveability Index

‘‘The 2002 NPC refining report recommended that the Driveability Index not be

changed without thoroughgoing additional analysis. To date, EPA has resisted automakers’ calls for a reduction in Driveability Index, or a change to Distillation Index

(Driveability Index plus an ethanol adjustment). EPA should continue this position.

A reduction in Driveability or a change to Distillation Index could result in a significant reduction in domestic refinery gasoline producibility.’’

Site Security

‘‘Site security enhancement should remain an industry responsibility with ongoing

risk assessment coordinated with the Department of Homeland Security, which

should retain the lead federal coordination role. Refining industry participants are

committed to keeping their facilities secure from threats of violence and terrorism.

Refiners have expended substantial resources to enhance security and expect to continue to do so. There are proposals being discussed to include provisions for refining

technology changes and criminal liability. In the opinion of the NPC, these provisions do not provide an additional security benefit but have the potential to negatively impact light product production capability.’’

In addition, the 2004 report re-emphasized the need to implement the recommendations of the NPC 2000 refining study. NPRA, both as a participant in

the study and whose members are directly impacted by these and other

issues, firmly endorses these findings and recommendations and urges

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plementation. We ask that this subcommittee hold a hearing on the NPC

studies at the earliest possible opportunity. We are attaching a copy of the

Executive Summary of the study to this testimony.

Summary

In conclusion, NPRA would like to stress that energy is a strategic commodity.

The world measures a nation by its economic health, its national security, its quality of life, and its ability to develop and implement new ideas. Our nation is at a

point where its future capabilities may very well rest on a stable supply of fuels

and other forms of energy at reasonable prices. To succeed, we and other energy

suppliers must have the support of the American people. This is a link that must

be forged. All Americans want and expect clean air and pure water, but we also

want to fuel our industries, heat our homes and compete successfully in an everdemanding international marketplace. NPRA is certain that by working with Congress to enact both fair and far-reaching comprehensive energy legislation, we can

begin this process in earnest. And enactment of the fuels provisions in the Energy

Policy Act of 2005 is a good place to start.

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Mr. HALL. Mr. Slaughter, thank you. The Chair now recognizes

Erik Olson, Senior Attorney of the Natural Resources Defense

Counsel. Mr. Olson is the National Coordinator of the Campaign

for Safe and Affordable Drinking Water and previously an attorney

at the Office of General Council of the Federal EPA. I recognize

you for 5 minutes, Mr. Olson, and thank you.

STATEMENT OF ERIK OLSON

Mr. OLSON. Thank you for inviting us to testify this morning. I

appreciate the opportunity. I would like to, just as an overview, say

that we believe strongly that this legislation should make energy

efficiency and renewables the centerpiece of the entire legislation.

We recognize that there are titles on both issues, but we believe

that there is a lot farther that we could go to improve energy efficiency and renewables as part of it. It is good for the economy, good

for the environment, and good for national security to do that. It

is ironic, unfortunately, that the bill, at a time when the New York

Times reported in the last week that the oil companies are ‘‘making

more money than they can comfortable spend,’’ that this bill goes

forward with several bail-outs or subsidies for the very fossil fuel

industry, in many cases, that are making this money. We don’t oppose further drilling. We do not oppose further energy development

as long as it is in areas that can handle it and within laws that

apply, including laws like the National Environmental Policy Act,

the Clean Air Act, and the Drinking Water and Clean Water Act.

I wanted to address an issue that has been raised by several previous panelists, which is the MTBE issue. We are very concerned

that there is widespread contamination of drinking water by

MTBE, something in the neighborhood, according to U.S. geological

survey, of about 5 percent of drinking water wells and far higher

than that percentages in some areas, including the Northeast, are

contaminated. This is a very soluble compound. It is very mobile;

it is very persistent; and there are health concerns. I wanted to

quote what the Environmental Protection Agency’s Health Advisory

says about the cancer risk. The carcinogenicity data support a conclusion that MTBE poses a potential carcinogenicity to humans at

high doses. The data do not support a confident quantitative risk

estimate, but they did find that there is a cancer risk. There are

also other health risks.

We believe that it is unfortunate that this bill includes a MTBE

liability waiver. The problem that has been raised is that not only

are these widespread contamination incidents continuing to crop

up, but there are many communities that simply can’t afford to

clean it up. These are not issues of wild trial lawyers running

around, filing lawsuits. These suits are mostly filed by local governments, by State Attorneys General, by State officials, and the costs

are being imposed on local communities on these types of spills and

leaks. Unfortunately, because of the widespread contamination, the

cost of cleanups are going to be enormous, and waiving liability for

the oil industry for these cleanup costs, unfortunately, is going to

result in mom-and-pop gas station being the only ones caught holding the bag, and unfortunately, they will not be able to pay for

many of these cleanups.

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It has been raised that negligence and other forms of liabilities

still would be allowed. Again, generally, that type of liability only

goes against a mom-and-pop gas station. It is not going to likely

be held against a large oil company; and therefore, the deep pockets that can afford to clean this up will not be available to pay for

it.

I would also like to raise the issue of industry’s argument that

the Clean Air Act required them to use MTBE. It is simply not a

fact. There is an oxygenate mandate in the 1990 Clean Air Act;

however, the industry, as my testimony documents, was using

MTBE widely, well before the Clean Air Act was passed. And in

fact, one of the reasons that liability has been held to apply to the

oil industry is that the industry knew of the risks and did not warn

of the risks, so a lot of people thought that MTBE was going to be

used, but they were not in possession of the information that industry had of some of the risks of MTBE. In fact, not only were there

large amounts being used prior to 1990, but the industry knew well

that there were leaks and there were contamination problems that

were already cropping up well before the Clean Air Act was passed.

Therefore, we think it is a mistake to waive liability, that the

costs being imposed on local and State governments are large, and

that it is simply inappropriate for Congress to step in and preempt

State and local governments from protecting their citizens.

One other issue that I just wanted to briefly raise is the issue

of hydraulic fracturing. We believe strongly that hydraulic fracturing, which is pumping under high pressure certain fluid into the

ground to enhance oil or gas recovery, is, in some cases, risky. It,

in some cases, uses MTBE-contaminated or diesel fuel in the injected fluids and can cause contamination of groundwater as well

as drinking water. We believe that, as the National Drinking

Water Advisory Council recommended, there should be a preservation of the EPA’s authority to regulate hydraulic fracturing. The

bill would block that kind of regulation. I will just point out that

a court recently held that this should be regulated under the very

flexible, so-called class II well requirements that are applied to

over 100,000 other oil- and gas-related wells.

Thank you, and I would like to, again, extend our appreciation

to the committee to allowing us to testify.

[The prepared statement of Erik D. Olson follows:]

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Mr. HALL. Thank you, sir. Again, another member of the panel,

not unaccustomed to the ways of the Hill, Vice President of Governmental Relations of IPAA, worked on the U.S. Senate Committee on Environment and Public Works and was a Minority Staff

Director, served under former Senator Lloyd Benson, a long-time

friend of the Chairman of this committee and of many of us. I recognize you for 5 minutes.

STATEMENT OF LEE FULLER

Mr. FULLER. Thank you, Mr. Chairman. Mr. Chairman, members

of the subcommittee, I appreciate the opportunity to testify today.

Independent producers drill 90 percent of domestic oil and natural

gas wells, produce approximately 85 percent of domestic natural

gas, and produce about 65 percent of domestic oil, well above that

percentage in the lower 48 States. This testimony will focus on the

importance of improving the conditions necessary to develop natural gas.

Natural gas has become a clear energy policy focal point because

it represents an energy source that is dominated by domestic supply and an energy need that can affect hundreds of thousands of

American jobs in key industries. It is a clean burning fuel that is

essential to the American economy. However, the principle issues

and policy actions raise in this testimony are similarly applicable

to crude oil, a natural resource that can be developed more fully

and a resource that can shift international actions with wide-ranging domestic, economic, and security implications.

Developing domestic natural gas supply will be an essential component to meet future natural gas demand. This challenge requires

action by Congress to encourage and allow supply to be developed.

Broadly stated, it will require access to the natural resource base,

the capital to produce it, and a reasonable regulatory framework.

Access to the national resource base is significantly dependent

upon resources underlying Federal lands both onshore and off

shore. Access to onshore resources is constrained by a mosaic of restrictions that arise in the Federal leasing and permitting process.

Some of these arise because of the complexity of the process and

the failure to adequately fund the agencies that must administer

it under increasingly more complicated standards. Others, however,

are a result of plan’s efforts to use the complexity of the process

to delay or derail development.

Access to key offshore resources is prohibited by moratorium.

These moratoria are a reflection of events that took place 36 years

ago when the terrible offshore oil spill occurred near Santa Barbara. Thirty-six years ago, a man also landed on the moon. Today,

we are sending remote satellites to the moons of Saturn, and we

are using similarly advanced technologies to develop our offshore

oil and natural gas resources. Yet today, we are arbitrarily foreclosing the development of critical national resources at a time

when there can be no question that those resources are crucial to

meeting key energy needs, key to the retention of thousands of important domestic jobs in essential manufacturing industries. Congress can no longer ignore the consequences of its failure to address this critical issue.

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Domestic natural gas cannot be developed without adequate capital. A stable Federal permitting process is a key step. Without a

belief that projects can be completed in a time certain, external

capital will not be attracted to this inherently high-risk industry.

Similarly, internal capital, income from production, is dependent in

part on Federal tax policy and royal policy.

The regulatory framework must be well reasoned. Environmental

management of natural gas production remains and important

component of supply development; however, novel interpretations

of Federal laws and burdensome procedural requirements that do

not benefit the environment must be avoided. For example, interpretations of regulations of hydraulic fracturing under the Safe

Drinking Water Act and of storm water management during construction of exploration and productionsites under the Clean Water

Act are clearly at odds with the intent of these laws. Federal environmental regulatory policies and procedures can determine the

success or failure of independent producers. Providing a balanced,

predicable, and well-reasoned Federal framework is essential.

Finally, development of the resource base, whether onshore of

offshore, requires the continual development of the technology to

find and produce it. The dramatic and environmentally protective

successes in the offshore would not have been possible without research and development funding. The new geological and geophysical exploration tools in the onshore started with Federal research. Adequate funding or Federal energy research and development activities is essential to continue this progress. federally

funded research and development programs have enabled industry

to exact more gas from more geologically complex formations, yet

in a more environmentally sensitive manner.

Unfortunately, these Federal research programs have been

threatened in recent years and likely will continue to be; their

value will be understated in the budget process. As the domestic

industry has shifted more to independents, historic funding sources

for R&D are largely extinguished. Congress needs to support these

Federal research programs.

Comprehensive energy legislation has been pending before Congress since 2001. Each passing year has shown that the failure to

address this key national issue has resulted in increasingly more

serious energy challenges. The legislation developed and almost

passed in the 108th Congress is not a perfect solution; no bill will

be. However, its provisions built an important framework. Passing

legislation with these elements may not be a sufficient step, but it

is a necessary one. Congress needs to enact these steps to allow it

to take the next ones. Thank you.

[The prepared statement of Lee Fuller follows:]

PREPARED STATEMENT OF LEE FULLER ON BEHALF OF THE INDEPENDENT PETROLEUM

ASSOCIATION OF AMERICA

The Independent Petroleum Association Of America, The International Association Of Drilling Contractors; The International Association of Geophysical Contractors; The National Stripper Well Association; The Petroleum Equipment Suppliers

Association; The Association Of Energy Service Companies; and California Independent Petroleum Association; Colorado Oil & Gas Association; East Texas Producers & Royalty Owners Association; Eastern Kansas Oil & Gas Association; Florida Independent Petroleum Association ; Illinois Oil & Gas Association; Independent

Oil & Gas Association of New York; Independent Oil & Gas Association of PennsylVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00389 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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vania; Independent Oil & Gas Association of West Virginia; Independent Oil Producers Association Tri-State; Independent Petroleum Association of Mountain

States; Independent Petroleum Association of New Mexico; Indiana Oil & Gas Association; Kansas Independent Oil & Gas Association; Kentucky Oil & Gas Association; Louisiana Independent Oil & Gas Association; Michigan Oil & Gas Association;

Mississippi Independent Producers & Royalty Association; Montana Oil & Gas Association; National Association of Royalty Owners; Nebraska Independent Oil & Gas

Association; New Mexico Oil & Gas Association; New York State Oil Producers Association; Northern Alliance of Energy Producers; Ohio Oil & Gas Association; Oklahoma Independent Petroleum Association; Panhandle Producers & Royalty Owners

Association; Pennsylvania Oil & Gas Association; Permian Basin Petroleum Association; Petroleum Association of Wyoming; Tennessee Oil & Gas Association; Texas

Alliance of Energy Producers; Texas Independent Producers and Royalty Owners;

Virginia Oil & Gas Association; and the Wyoming Independent Producers Association

This testimony is submitted on behalf of the Independent Petroleum Association

of America (IPAA), the International Association of Drilling Contractors (IADC), the

International Association of Geophysical Contractors (IAGC), the National Stripper

Well Association (NSWA), the Petroleum Equipment Suppliers Association (PESA),

the Association of Energy Service Companies (AESC), and 35 cooperating state and

regional oil and gas associations. These organizations represent petroleum and natural gas producers, the segment of the industry that is affected the most when national energy policy does not recognize the importance of our own domestic resources. Independent producers drill 90 percent of domestic oil and natural gas

wells, produce approximately 85 percent of domestic natural gas, and produce about

65 percent of domestic oil—well above that percentage of the oil in the lower 48

states. This testimony will focus on the importance of improving the conditions necessary to develop domestic natural gas. Natural gas has become a clear energy policy focal point because it represents both an energy source that is dominated by domestic supply and an energy need that can affect hundreds of thousands of American jobs in key industries. It is a clean burning fuel that is essential to the American economy. However, the principal issues and policy actions raised in this testimony are similarly applicable to crude oil—a national resource that can be developed more fully and a resource that can shift international actions with wide ranging domestic economic and security implications.

OVERVIEW

Developing domestic natural gas supply will be an essential component to meet

future domestic natural gas demand. This challenge requires action by Congress to

encourage and allow supply to be developed. Broadly stated, it will require access

to the national resource base, the capital to produce it, and a reasonable regulatory

framework.

Access to the national resource base is significantly dependent upon resources underlying federal lands, both onshore and offshore. Access to onshore resources is

constrained by a mosaic of restrictions that arise in the federal leasing and permitting process. Some of these arise because of the complexity of the process and the

failure to adequately fund the agencies that must administer it under increasingly

more complicated standards. Others, however, are a result of planned efforts to use

the complexity of the process to delay or derail development. Access to key offshore

resources is prohibited by moratoria.

Domestic natural gas cannot be developed without adequate capital. A stable federal permitting process is a key step. Without a belief that projects can be completed

in a time certain, external capital will not be attracted to this inherently high risk

industry. Similarly, internal capital—income from production—is dependent in part

on federal tax policy and royalty policy.

The regulatory framework must be well reasoned. Environmental management of

natural gas production remains an important component of supply development.

However, novel interpretations of federal law and burdensome procedural requirements that do not benefit the environment must be avoided. For example, interpretations of the regulation of hydraulic fracturing under the Safe Drinking Water Act

and of stormwater management during construction of exploration and production

sites under the Clean Water Act are clearly at odds with the intent of these laws.

INCREASING DOMESTIC NATURAL GAS SUPPLY

Access to the federal resource base is the biggest challenge to developing domestic

natural gas supplies both onshore and offshore. Some development opponents have

suggested that access to the resource base is not an issue; they are wrong. For exVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00390 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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ample, in 2003, the Department of Interior released a study on federal lands in the

Intermountain West. It showed that 12 percent of natural gas resources were completely off limits. But, it also identified another 26-27 percent of the resources that

were constrained by restrictions ranging from no surface occupancy to constraints

on when development can occur. Collectively, close to 40 percent of the resource

base is restricted. The remaining 60 percent is not restricted at the time of leasing,

but can be limited as part of the federal permitting process and, obviously, producers must obtain a permit to develop the lease.

Some development opponents have argued that the existence of differences between the leases granted and those being developed, between the permits issued

and wells being drilled suggest that leasing and permitting activities should slow.

Natural gas exploration and production is not a ‘‘just in time’’ business. A viable

natural gas project requires numerous factors to come together—leases need to be

obtained that cover the potential scope of the ‘‘play’’, permits need to be obtained,

exploration must be done, drilling rigs must be scheduled consistent with the limitations of the lease and/or permit. Each of these takes time and each depends on the

prior action. Not all leases will be developed because the exploration process may

show them to be undesirable or the reserve may be found to exist only under certain

portions of the total lease group. This has always been the case, but when a snapshot of conditions is used to suggest lack of effort, it can only be characterized as

misleading at best. Take, for example, the recent comparison between the permitting of 6,100 wells in Fiscal Year 2004 compared to spudding of 2,700 wells. One

obvious issue is whether it is appropriate to compare these actions in the same fiscal year. It would be more reasonable to compare new wells to permits in the prior

year, where the number would be 3,800 permits in Fiscal Year 2003. Additionally,

nothing in these raw number comparisons addresses whether the leases where the

permits were issued or the permits limit when drilling can occur. Many parts of the

Intermountain West have habitat management constraints that create such limits

and most of the permits are in those states. And, it is important to recognize that

drilling rigs and drilling labor are inelastic. There must be a sense that sustainable

activity is likely before the service industry can expand its capacity. The oil price

crisis of 1998-99 resulted in a loss of 65,000 jobs in the E&P industry that has not

been completely replaced. The persistent leasing and permitting challenges of the

past several years has not generated the sense of sustainability that is necessary

to expand this industry segment.

In the offshore, moratoria in the Eastern Gulf of Mexico, the Atlantic Ocean, and

the Pacific Ocean prohibit access to over 70 trillion cubic feet of potential natural

gas—a conservative estimate. Without access, these national resources are lost.

Onshore, challenges are largely wrapped up in the federal land management, leasing, and permitting process. At the heart of this challenge is the fundamental question of how the federal government makes its decisions. In large part, addressing

this question involves the role of the National Environmental Policy Act (NEPA).

NEPA has become the most significant visible factor in the federal decision-making

process.

When NEPA passed, at issue was the need to include environmental implications

in the factors that the federal government considered as it made decisions. NEPA’s

purpose was to assure that all stakeholders had the opportunity to participate in

the federal decision-making process. NEPA is a vague statute passed in 1969 and

largely unchanged since then. Its implementation has essentially been driven by Executive Orders and judicial decisions. Now, it has become the vehicle for multivolume Environmental Impact Statements that can be triggered at several points

in the federal permitting process—the development of Resource Management Plans,

the leasing process, and at times during the Application for Permits to Drill (APD).

Opponents of development understand that NEPA and other federal procedural

requirements offer opportunities for delay. Delay in making decisions can have a

critical impact on development. Producers must replace their production to account

for the natural decline rate, a rate for natural gas that is now approximately 28

percent per year and increasing. Federal lands offer the most cost effective potential

reserves to develop. Other basins are mature and require greater effort such as deep

gas development to compete. These are more costly projects. Producers must reinvest their capital continuously and cannot allow it to stagnate because of permitting

delays. Consequently, development opponents have embarked on a strategy to abuse

the federal process by challenging decisions at every opportunity in both administrative adjudication procedures and the courts.

NEPA and the other federal processes were intended to assure that all factors

were considered in making decisions; they were not created to prevent decisions.

Congress needs to develop a mechanism to expedite federal approval of natural gas

projects while the nation faces current serious supply and demand challenges. Such

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an approach should assure that proper environmental factors are considered and addressed but should limit the opportunity to abuse the federal decision-making process

to delay decisions.

Adequate funding to conduct the federal planning, leasing, and permitting process

is essential to meet the challenge of developing domestic natural gas. While agencies

like the Bureau of Land Management (BLM) and the Minerals Management Service

(MMS) bear the greatest of these responsibilities, other federal agencies that must

provide consultation and concurrence are similarly important. Moreover, during the

past several years the BLM has faced diversion of its resources to respond to challenges to its decisions that diminish its principle functions.

Lack of funds contributes to permitting backlogs and uncertainty regarding the

time in which permits will be approved. For example, during the past several years

the BLM has been aggressively acting to reduce permit backlogs and provide timely

action on permit applications. However, without continuing funding support the

BLM will not be able to maintain the quality of this effort. Moreover, it is essential

that funding translates into adequate staffing to meet the challenges of the permitting process and that it be directed to execution of the leasing and permitting process. Some progress has been made to improve the interaction between agencies and

within agencies through the President’s Energy Permit Streamlining Task Force,

but this type of effort needs to continue. Similarly, regulatory agencies need to establish time limits to complete the approvals and use a goal-oriented measurement

to determine if their efforts are achieving the goals.

Congress should assure that the federal planning, leasing, and permitting process

receives funding to meet its responsibilities including funding for the ancillary agencies that must support these efforts.

Congress should pass the provisions in the H.R. 6 Conference Agreement requiring

federal permits to be resolved in a timely manner after receipt.

A particular example showing the implications of limited funding relates to the

development of NEPA-related documents during the federal process. NEPA’s requirements that the federal government evaluate the environmental implications of

federal actions places the responsibility for developing the documents needed for

these decisions on the federal agency. However, because of inadequate federal funding, producers have been compelled to fund the development of these documents in

order for the agency to have them and complete its decision. Congress purposely

chose to make the development of NEPA documents a federal responsibility. It

should not shift to the private sector because of a failure to adequately fund the

federal process; but it has. Producers have no choice if they want expeditious action

on their project. An equitable resolution of this situation is needed.

Congress should pass the provision in the H.R. 6 Conference Agreement that allows

producers to be reimbursed from future federal royalties for the costs of financing

these federally required studies if adequate federal funding is unavailable.

Offshore, challenges are driven by the moratoria on access to key portions of the

federal offshore. These moratoria—both legislative and executive branch—are unreasonable. They rely on antiquated and inaccurate assessments of the risks of developing offshore resources. Current offshore development technology ranks with the

most sophisticated in the world. It allows for rapid responses to potential environmental threats. As described in the 1999 Department of Energy report, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology:

In the event of a well control emergency, advanced ‘‘intelligent’’ subsea trees

allow live wells to be shut in quickly under a variety of well conditions and

operational circumstances. Moreover, current measurementwhiledrilling technology enables drillers to accurately steer a deepwater relief well to regain well

control if necessary.

The use of these technologies has produced a record of success over the past decades. Our Ocean Future, prepared for the International Year of the Ocean in 1998

reported:

The number of significant spills from oil production in state and federal waters has been low, and the volume of oil spilled has declined fairly steadily over

the years (Minerals Management Service, 1997). There has not been a spill larger than 1,000 barrels from oil and gas platforms on the outer continental shelf

since 1980; in fact, natural seeps introduce approximately 100 times more oil

into U.S. marine waters than do spills from offshore development and production activities. Increased precautions by industry, enhanced safety technologies

(e.g., blowout prevention systems, shut-in valves), and strict adherence to government regulations most likely have minimized the risk of oil spills from offshore activities.

The U.S. Commission on Ocean Policy report, An Ocean Blueprint for the 21st

Century, reiterates this assessment:

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According to MMS, 97 percent of OCS spills are one barrel or less in volume

and U.S. OCS offshore facilities and pipelines accounted for only 2 percent of

the volume of oil released into U.S. waters for the period 1985-2001 (Figure

24.3). The total volume and number of such spills over that period have been

significantly declining due to industry safety practices and improved spill prevention technology. By comparison, the National Research Council (NRC) estimated that 690,000 barrels of oil enter North American ocean waters each year

from land-based human activities, and another 1,118,000 barrels result from

natural seeps emanating from the seafloor.

A review of the MMS publication, OCS Oil Spill Facts (September 2002), shows

that no platform in the Outer Continental Shelf has generated a 1000 barrel oil spill

over the 20 year period from 1980 through 2000.

These facts can be ignored no longer. The national need for natural gas to sustain

and grow its economy and meet its environmental objectives compels a realistic consideration of its offshore resources. Coastal states have real concerns about the consequences of offshore development. Their opposition—where it occurs—is not founded on risks based on current offshore technology. Nonetheless, this opposition must

be addressed.

Given the very significant potential resources on the Outer Continental Shelf lands

currently off limits by congressional and Executive Branch moratoria to exploration,

development and production of natural gas and crude oil, Congress should put in

place a process to:

• Begin lifting of moratoria; and, • Allow states to share in revenues generated by federal lease bonuses and royalties

in proportion to the amount of leasing and production that occurs off their

coasts.

Finally, development of the resource base—whether onshore or offshore—requires

the continual development of the technology to find and produce it. The dramatic

and environmentally protective successes in the offshore would not have been possible without research and development (R&D) funding. The new geological and geophysical exploration tools in the onshore started with federal research. Adequate

funding of fossil energy research and development activities is essential to continue

this progress. Federally funded research and development programs have enabled

industry to extract more gas from more geologically complex formations, yet in a

more environmentally sensitive manner. Unfortunately, these federal research programs have been threatened in recent years and likely will continue to be; their

value will be understated in the budget process. Congress needs to support these

federal research programs. As the domestic industry has shifted more to independents, historic funding sources for R&D are largely extinguished.

Congress should continue to adequately fund vitally important oil and gas R&D

programs.

LIQUEFIED NATURAL GAS

Liquefied Natural Gas (LNG) will be an increasingly important supply component

to meet domestic—and international—demand for natural gas. LNG must be considered a supplement to domestic natural gas production—not an alternative. The National Petroleum Council’s 2003 Natural Gas study, Balancing Natural Gas Policy—

Fueling the Demands of a Growing Economy, presented three Findings that state

well the situation.

Traditional North American producing areas will provide 75% of long-term

U.S. gas needs, but will be unable to meet projected demand.

Increased access to U.S. resources (excluding designated wilderness areas and national parks) could save consumers $300 billion in natural gas costs over the

next 20 years.

New, large-scale resources such as LNG and Arctic gas are available and

could meet 2025 % of demand, but are higher-cost, have longer lead times, and

face major barriers to development.

The NPC Study goes on to state: A balanced future that includes increased energy

efficiency, immediate development of new resources, and flexibility in fuel choice,

could save $1 trillion in U.S. natural gas costs over the next 20 years. Public policy

must support these objectives.

Congress needs to recognize the essential need to create these balanced solutions

as it considers future natural gas policy.

natural gas infrastructure

To encourage construction of necessary energy infrastructure, the Federal Energy

Regulatory Commission (FERC) should be the lead agency in the regulatory process.

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Specifically, FERC’s record in the certification process should be the exclusive record

for any administrative appeals. Other relevant government agencies would be involved in the process concurrent with FERC, possibly avoiding administrative and

judicial appeals or, at a minimum, shortening the time needed for review. While

market-based rates may be appropriate for some new interstate infrastructure development, FERC should continue to apply its cost-based rate regulations to pipelines with market power. With appropriate FERC oversight, producers can be assured of the ability to get gas to market via interstate pipelines at fair prices and

under non-discriminatory terms and conditions.

ENVIRONMENTAL REGULATORY ISSUES

Dual environmental challenges confront the expansion of domestic natural gas

supplies during the exploration and production (E&P) phase. The first relates to

specific regulatory requirements; the second involves the federal decision-making

process. This latter issue was addressed under Increasing Domestic Natural Gas

Supply.

In general, natural gas E&P operations must address the costs of environmental

regulation compliance largely driven by federal laws. However, several compliance

issues pose significant threats to the development of future supply.

First, potential federal regulation of hydraulic fracturing well stimulation practices would affect new natural gas development, particularly in nonconventional gas

plays. Hydraulic fracturing is a technique used to allow natural gas and oil to move

more freely from the rock pores where they are trapped to a producing well that

can bring them to the surface. The technology was developed in the late 1940s and

has been continuously improved and applied since that time.

Application of hydraulic fracturing to increase recovery is estimated to account for

30 percent of U.S. recoverable oil and gas reserves and has been responsible for the

addition of more than 7 billion barrels of oil and 600 trillion cubic feet of natural

gas to meet the nation’s energy needs. The National Petroleum Council estimates

that 60 to 80 percent of all the wells drilled in the next decade to meet natural gas

demand will require fracturing.

Congress enacted the Safe Drinking Water Act (SDWA) in 1974. By then, hydraulic fracturing had been used for 25 years with no environmental problems. State

permitting programs regulated it to assure its safe use. Under the Act, states developed extensive Underground Injection Control (UIC) programs to manage liquid

wastes and the reinjection of produced waters. These programs addressed liquids intended to be injected and—to remain—in underground geologic formations.

At no time during these debates was there any suggestion of including hydraulic

fracturing in the UIC waste management requirements. Yet, in the mid-1990s litigation challenged the Environmental Protection Agency’s (EPA) failure to regulate hydraulic fracturing of coalbed methane under the SDWA. The 11th Circuit Court

ruled against EPA but never addressed the environmental risks of hydraulic fracturing; it merely decided that the plain language of the statute includes hydraulic

fracturing as underground injection. Years of further litigation has resulted in EPA

requiring Alabama to regulate hydraulic fracturing of coalbed methane wells under

its UIC program.

States are concerned about the implications of the court’s decision. States recognize the large threat of the decision to state UIC regulatory programs. Currently,

the two state organizations with the greatest involvement in oil and gas regulation—the Interstate Oil and Gas Compact Commission (IOGCC) and the Ground

Water Protection Council (GWPC)—support the need for legislation to resolve the

issue and return the SDWA to its original intent.

Meanwhile, EPA initiated a study of coalbed methane hydraulic fracturing environmental risks. EPA limited its study to coalbed methane partly because the court

cases were directed toward coalbed operations and partly because, if hydraulic fracturing environmental risks existed, they would occur in the shallow coalbed fields.

In June 2004, EPA released the results of its study. Its results were straightforward. ‘‘Based on the information collected and reviewed, EPA has concluded that

the injection of hydraulic fracturing fluids into coalbed methane wells poses little

or no threat to USDWs and does not justify additional study at this time.’’

The H.R. 6 Conference Agreement provided a straightforward resolution to the regulatory uncertainty facing hydraulic fracturing. The 109th Congress should adopt it.

A second regulatory issue posing significant implications for the E&P industry is

the regulation of stormwater discharges during construction of its facilities. The

1987 Clean Water Act (CWA) included two stormwater provisions that are now

intertwined regarding their application to oil and natural gas E&P operations. The

first provision—Section 402(l)(2)—excludes uncontaminated stormwater from oil and

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natural gas E&P operations from the National Pollutant Discharge Elimination System (NPDES) permitting process. The second subsection—Section 402(p)—directs

the EPA to permit municipal and industrial stormwater discharges.

In 1992, EPA promulgated stormwater construction permitting regulations affecting construction sites greater than five acres. In Natural Resources Defense Council

v. Environmental Protection Agency (NRDC v EPA), the Court concluded that EPA

had been arbitrary and capricious in proposing a one acre limit and finalizing the

regulations at five acres. Following this litigation EPA developed stormwater construction permitting regulations in two Phases. Phase I covered sites greater than

five acres; Phase II covers sites from one to five acres. During this period EPA also

issued a guidance document in one Region that the stormwater construction regulations applied to the construction of E&P operations. This guidance is inconsistent

with the intent of the law. Congress was clear that E&P operations should be regulated based on the nature of its discharge, not the mere act of construction.

The consequences of EPA’s action are significant. Most oil and natural gas E&P

sites fall within the one to five acre range. The Energy Information Administration

reports that over 31,500 wells were drilled in the first eleven months of 2004. Over

10,000 were in Texas and Oklahoma. To meet future natural gas demand, the National Petroleum Council estimates that the number of natural gas wells alone

needs to increase to approximately 48,000 wells annually. EPA’s approach is inappropriate for oil and gas facilities; it is oriented for subdivision and shopping center

projects. Oil and gas production operations involve the leasing of surface rights, construction occurs within a matter of weeks, and timing is critical because it involves

obtaining a drilling rig that must be carefully scheduled and is paid for based on

the number of days it is in use. Disruption in this process can place entire projects

and substantial capital at risk. A new analysis by the Department of Energy concludes that these EPA regulations could cost the country between 1.3 and 3.9 billion

barrels of domestic oil production and between 15 and 45 trillion cubic feet of domestic natural gas production over the next 20 years.

H.R. 6 included a provision to clarify this regulatory process by directing that regulation occur under subsection 402(l). It needs to be enacted by the 109th Congress.

Third, the Coastal Zone Management Act (CZMA) and its consistency provisions

have a long history of impeding energy exploration, development and production at

essentially every step of the process. The CZMA created a national program designed to encourage the States to develop programs to manage and balance competing uses of and impacts to coastal resources. The law was designed to enhance

communications between federal agencies responsible for permitting activities on

Federal lands and coastal states to minimize or eliminate conflicts with approved

State goals and programs. It was viewed as a positive law designed to help resolve

issues.

However, regulatory implementation and States’ misuse of the consistency provisions of the CZMA have created uncertainty and have impeded federal offshore exploration and production projects as well as the siting of onshore and offshore energy infrastructure. Some coastal management policies conflict with the CZMA law,

prohibiting siting of onshore and offshore infrastructure in the state coastal zone

and on federal lands.

The National Oceanic and Atmospheric Administration’s (NOAA) revised CZMA

federal consistency regulations expand the ability for a state to use its coastal management program to impede federal permitting involving proposed activities that

occur in federal waters off the coasts of other States. States have blocked or delayed

federal offshore energy activities far outside of their coastal waters through unreasonable application of the CZMA consistency provisions. The Secretary of Commerce

has not acted in a timely manner to make decisions on consistency appeals, thus

making the appeals process last many years.

The H.R. 6 Conference Agreement included provisions to resolve these conflicts revising the CZMA consistency review process and bring its implementation into harmony with Congress’s original goals. These changes should be passed by the 109th

Congress.

Fourth, habitat management, particularly those related to the Endangered Species Act, can pose a significant challenge to natural gas development primarily on

federal lands. Lease stipulations and permit restrictions that limit either the time

or the location for development can effectively prevent access to the resource base.

These restrictions need to be carefully crafted to balance the protection of wildlife

habitat with the need to develop domestic natural gas. Both the temporal and spatial restrictions need to be essential to protect the wildlife. Similarly, the listing

process of the Endangered Species Act and the subsequent constraints need to be

based on sound science.

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The H.R. 6 Conference Agreement included provisions to improve the coordination

between agencies in the federal leasing and permitting process that need to be enhanced. The House Committee on Resources reported legislation to improve the procedures of the Endangered Species Act that need to be considered by the 109th Congress.

Fifth, when Congress passed the 1990 Clean Air Act Amendments, it decided that

multiple oil and natural gas wells could not be aggregated to treat them as a single

stationary source. It rejected efforts to consolidate these separate facilities—often

owned by different companies. However, technically, the definition is within the hazardous air pollutants title of the Act and needs to be clarified.

Congress should clarify that oil and natural gas wells cannot be aggregated to

treat them as a single stationary source for all purposes under the Clean Air Act.

Sixth, the Clean Water Act currently provides authority for the regulation of produced waters associated with natural gas development that are discharged to the

environment. This authority is adequate and does not need to be altered.

Congress should reject efforts to alter the Clean Water Act produced water authority.

Seventh, offshore development requires the development of geological and geophysical data. Use of the equipment to develop this information has raised concerns

about the effects of its sounds on marine mammals. The Marine Mammals Protection Act (MMPA) addresses harassment of marine mammals and incidental takings.

However, its provisions are imprecise.

If Congress reauthorizes MMPA, it should address the definition of ‘‘harassment’’

under the Act and modify the Incidental Takings provisions to make the Act more

responsive to genuine protection of marine mammals while considering the importance of human activities.

DIVERSIFICATION AND CONSERVATION

While conservation and efficiency measures and diversification of energy sources

present opportunities to reduce natural gas demand, it is important to avoid policy

options that deter the development of new supply. The Fuel Use Act of 1978 was

one of the worst policy choices that could have been made. It rejected a marketbased approach to resource development. It created disincentives to develop domestic natural gas resources. The objective of national energy policy should be to enhance energy availability including natural gas.

TAX INCENTIVES

Federal tax policy has played an important role in encouraging the development

of domestic oil and natural gas resources essentially since the inception of the income tax. After successfully creating tax incentives to develop these resources, Congress then began to systematically reduce them. At the same time the Internal Revenue Service (IRS) has interpreted the remaining tax provisions to reduce their effectiveness. Looking forward, there are a number of areas where tax reforms could

benefit the development of domestic natural gas.

Independent producers develop 90 percent of domestic wells and produce 85 percent of domestic natural gas. These producers principally generate the capital to expand their production through their revenues—through the wellhead. Consequently,

to the degree that taxes reduce these revenues inappropriately, those funds cannot

be reinvested in new exploration and production.

For example, development of new resources requires, in part, the development of

geological and geophysical (G&G) data. G&G expenses include the costs incurred for

geologists and geophysicists, seismic surveys, and the drilling of core holes. These

surveys increasingly use 3-D technology rather than the conventional 2-D technology used for most of the last seven decades. Previously only very large companies

were able to utilize this state-of-the-art, computer-intensive, 3-D technology because

of its high cost and the considerable technical expertise it requires. However, as the

costs of computer technology have declined, more and more domestic independent

producers are making use of this technology. Still, while 3-D seismic provides a

vastly superior tool for exploration, it is far more expensive than 2-D technology.

3-D seismic surveys usually cost between five or six times more per square mile onshore than the older technology and, in some instances can account for two-thirds

of the costs of some wells. Encouraging use of this technology has many benefits:

• More detailed information. Conventional 2-D seismic is only able to identify

large structural traps while 3-D seismic is able to pinpoint complex formations

and stratigraphic plays. These are particularly important for developing nonconventional fuels.

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• Improved finding rates. Producers are reporting 50-85% improvements in their

finding rate. In prior years a producer might have to drill three to eight wells

in order to find commercially viable production.

• Reduced environmental impact. Because the use of advanced seismic technology significantly improves the odds of drilling a commercially viable well on

the first try, this reduces the number of wells that are drilled and, thus, reducing the footprint of the industry on the environment.

• Investment capital. Many investors are requiring producers to provide 3-D seismic surveys of potential development before committing their capital to the

project in order to minimize their risk.

Currently, the IRS considers G&G costs nondeductible as ordinary and necessary

business expenses but requires them to be treated as capital expenditures recovered

through cost depletion over the life of the field. G&G expenditures allocated to abandoned prospects are deducted upon such abandonment.

These costs are an important and integral part of exploration and production for

oil and natural gas. They affect the ability of domestic producers to engage in the

exploration and development of our national oil and natural gas reserves. Thus,

they are more in the nature of an ordinary and necessary cost of doing business.

These costs are similar to research and development costs for other industries.

For those industries such costs are not only deductible but also a tax credit is available.

New exploration and development of natural gas resources is essential to address

the current supply and demand challenges. Allowing the deduction of G&G costs

would increase capital available for domestic exploration and production activity.

The technical ‘‘infrastructure’’ of the oil services industry, which includes geologists and engineers, has been moving into other industries due to reduced domestic

exploration and production. Stimulating exploration and development activities

would help rebuild the critical oil services industry.

Congress should act to clarify that G&G expenses can be expensed as other similar

costs are treated in other industries.

Tax incentives to increase domestic development have a history of success. The

nonconventional fuels tax credit (Section 29) resulted in increased development of

natural gas sources that would not have otherwise occurred. Nonconventional gas

sources—coalbed natural gas, tight formations, and shale formations—and deep conventional gas will need to be an essential component of domestic natural gas supply.

The 2003 National Petroleum Council Natural Gas study reports that 35 percent of

undiscovered resources will come from nonconventional sources.

While current natural gas prices are driving development activity now, the nation

needs to be concerned about sustaining consistent development efforts. For example,

while drilling activity increased dramatically when prices increased in 2000, it

dropped significantly in 2001 when prices fell. Reduced drilling results in less supply and catching up takes time, thereby further pressuring the marketplace. Tax

policies that would support domestic development would provide long-term benefits

to the supply/demand balance.

Congress should examine tax policies that encourage domestic natural gas development, particularly nonconventional gas and deep conventional gas. These could include tax credits or deductions for actions that increase domestic natural gas development activity.

Additional tax policy provisions can further enhance domestic natural gas development.

• Delay Rental Payments. As a general rule, oil and natural gas exploration companies do not purchase the land on which they intend to search for minerals

but instead lease the land and agree to pay royalties as the minerals, if any,

are produced. A typical lease expires in one year unless exploration has begun

or the lessee pays the lessor a fee for the privilege of deferring the commencement of exploration or production on the leased property. A host of legitimate

reasons exist that may prevent oil and gas exploration companies from currently developing certain properties, and ‘‘delay rentals’’ are the payments made

to retain the leases on those properties. For decades, it remained uncontested

that lessees could elect to currently deduct these payments. However, during

the 1990s, the IRS began to take the position that these payments must be capitalized and generally recovered through cost depletion over the life of the lease.

Legislation clarifying the current deductibility of these payments would bring

much-needed simplification by reducing the burdensome and costly compliance

requirements associated with capitalizing these expenditures. In turn, these

lower costs would help encourage new domestic natural gas production by making more money available for capital investment.

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• Net Income Limitation on Percentage Depletion. Congress has suspended

the property taxable income limitation on percentage depletion for marginal

wells through 2005. The suspension that was in place in 1998 and 1999 saved

many marginal wells during the price crisis. This provision should be permanently eliminated to provide domestic producers of these wells an incentive not

to shut down these wells. Once the well is closed, the potential to produce the

remaining reserves is lost forever.

• Net Taxable Income Limit. The H.R. 6 Conference Agreement tax title would

have also suspended the 65 percent net overall taxable income limit on percentage depletion. This constraint on independent producers limits the amount of

capital that can be retained for reinvestment into existing and new production.

In an industry that typically reinvests its profits back into it operations, this

constraint means less domestic natural gas. It too should be eliminated.

• Percentage Depletion Rates and Limits. The number of independent producers qualifying for percentage depletion has decreased. Percentage depletion

has been further limited as a result of mergers and acquisitions of the various

producers as they seek ways of reducing their costs, consolidating production

fields, and operating more efficiently. However, percentage depletion remains

very important to the small producer with marginal well production. Limiting

the number of barrels qualifying for percentage depletion and artificially lowering the rate in a declining industry is counterproductive. Increasing the number of barrels qualifying and/or increasing the depletion rate would help the

small independent develop resources more effectively

• Intangible Drilling Costs (IDC). Despite great advances in geological and geophysical know-how and technology, drilling a well is still the only means of determining with absolute certainty the presence of hydrocarbons in reservoir rock

or sand. Once a discovery is made, a series of wells may be required to produce

the underground deposit economically. The well costs with no salvage value are

called ‘‘intangible drilling and development costs’ or IDC (‘‘since they produce

nothing ‘‘tangible’’ but only a hole in the ground’’). These intangible costs include the amounts paid for labor, fuel, materials and necessary technical services such as clearing ground, road making, surveying and constructing such

physical structures as are necessary for the production of oil and gas. IDC represent the normal day-to-day costs of doing business for an oil and gas exploration and production company. For exploratory and development wells, IDC account for approximately 90% and 70% of total costs, respectively. About 60% of

an offshore production platform are IDC.

The preference for IDC from oil and gas wells does not apply to taxpayers

who are independent producers with the following limitation: If the taxpayer’s

Alternative Minimum Tax (AMT) IDC exceed the taxpayer’s AMT income by

40%, the excess is a preference item. The IDC preference should be eliminated

for independent oil and gas producers.

Collectively, these provisions would further enhance domestic natural gas development by providing more capital for producers.

Congress should consider enactment of these capital enhancing tax provisions.

Equally important, they must be crafted in such a manner to assure that the AMT

does not nullify the benefits that they would create. The mistake of 1986 should not

be repeated.

INVESTMENT

Oil and natural gas exploration and production—despite significant technological

advances—remains a capital intensive, high risk business. Yet, it does not historically yield high returns. At the same time, it must compete for capital with higher

yielding, lower risk investments. Domestic production opportunities must also compete against the lure of foreign, lower cost opportunities.

One factor that encourages investment in natural gas production is a sense of certainty that projects can be completed—and completed in a predictable time. Many

of the issues described in the previous questions address federal government practices that generate uncertainty. Congressional action to improve the pace of federal

actions and, more importantly, to improve the predictability of a successful outcome

are an essential element to attract more investment into development of natural gas

supplies.

Financial factors play a similarly significant role. Early on, after the creation of

the federal income tax, the treatment of costs associated with the exploration and

development of this critical national resource helped attract capital and retain it,

despite its risk. Allowing the expensing of geological and geophysical costs and perVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00398 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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centage depletion rates of 27.5 percent are examples of policy decisions that resulted

in the United States’ extensive development of its petroleum and natural gas.

But, the converse is equally true. By 1969, Congress reduced the depletion rate

and later eliminated it for all producers except independents. However, even for

independents, the rate was dropped to 15 percent and allowed for only the first 1000

barrels per day of petroleum (or natural gas equivalent) produced. A higher rate is

allowed for marginal wells (— 15 barrels/day or 90 mcf/d) which increases as the

petroleum price drops, but even this is constrained—in the underlying code—by net

income limitations and net taxable income limits. In the Windfall Profits Tax, federal tax policy extracted some $44 billion from the industry that could have otherwise been invested in more production. Then, in 1986 as the industry was trying

to recover from the last long petroleum price drop before the 1998-99 crisis, federal

tax policy was changed to create the Alternative Minimum Tax that sucked millions

more dollars from the exploration and production of petroleum and natural gas.

These changes have discouraged capital from flowing toward this industry.

Even now, in the midst of the current challenges to increase domestic natural gas

production, tax policy options remain controversial because of these prior actions.

Additionally, they may be constrained by the federal budget process.

Thus, another continuing challenge to draw investment to the E&P component of

the natural gas industry will be assuring the capital marketplace and investors that

a reasonable return can be obtained relative to the risk the venture poses. Absent

use of federal tax policy, there are limited but useful federal options to support domestic E&P investment.

The Deep Water Royalty Relief Act provided royalty incentives to encourage production in the deep water portions of the Gulf of Mexico. All estimates indicate that

it has been a highly successful effort. Similar royalty incentives have been implemented for the development of deep natural gas formations in the shallow waters

of the Outer Continental Shelf. These royalty incentives work because they provide

producers with a better potential economic return for the risk they are taking in

these frontier developments. They attract investment.

Congress should continue its support for offshore royalty incentives by enacting

provisions from the H.R. 6 Conference Agreement with updates reflecting the passage

of time.

The economic pressures on E&P companies to increase their production and reserves, to generate the capital necessary for additional development, and to demonstrate their ability to compete in the marketplace have compelled a consolidation

in the industry. Mergers and acquisitions have always been part of the E&P industry, but they have intensified over the past decade. One aspect of these mergers has

been the aggregation of federal lease acreage under one company’s control that exceeds the allowable acreage limit. Without some alteration of the current acreage

limitations, companies will be reluctant to expand their efforts on federal lands if

the possibility exists that they may later be faced with divesting themselves of profitable properties. Industry understands the importance of providing for broad opportunities to develop the federal resource base. Consequently, there is a consensus

that properties where production already exists should not be subject to the acreage

limitation.

Congress should enact the provision of the H.R. 6 Conference Agreement that exempts ‘‘held by production’’ acreage from the federal acreage limitations.

Another element of the H.R. 6 Conference Agreement provided for marginal well

royalty relief on federal lands when prices are low. This provision does not directly

encourage new investment in natural gas production, but it does encourage production from both onshore and offshore wells during times of economic distress. It

builds on existing provisions that have helped maintain domestic onshore oil production from federal lands.

Congress should adopt this safety net for federal natural gas production.

Ultimately, a stable natural gas market with prices that are adequate to provide

acceptable returns will draw investment to natural gas exploration and production.

Congress can support this effort through tax policies and royalty incentives that encourage such investment.

FERC AND EIA NATURAL GAS MARKET DATA

The current voluntary system by which industry participants report pricing data

to index developers works. While confidence in the integrity of natural gas price indices was undermined by the inappropriate activities of some gas traders, the efforts

by industry, the FERC, and the Commodity Futures Trading Commission (CFTC)

have resulted in increased accuracy, reliability, and transparency of wholesale energy prices.

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A balanced, workable framework for natural gas price reporting has developed,

and FERC continues to exercise its oversight authority. FERC has taken an active

interest in the process by which price indices reflect and influence the formation of

wholesale prices for natural gas and electricity. After hosting technical conferences,

issuing a policy statement on standards for price index developers and market participants, conducting surveys of industry practices in price reporting, and issuing a

staff report, FERC approved an order on November 19, 2004, directing staff to continue to monitor price formation in wholesale markets. In the order, FERC reports

on improvement in (a) the amount of transaction data being reported to index developers, (b) the processes by which market participants provide data to index developers; (c) the amount and quality of information provided by indices, and (d) the

confidence market participants currently have in price indices.

Specifically, one of the index publishers, Platts, reported that volumes and transactions for its monthly gas survey from February through June 2004 increased 35

and 38 percent, respectively, from 2003 levels. In the daily gas survey, Platts stated

that the number of natural gas transactions reported in May 2004 was double that

of November 2002. Another index publisher, Intelligence Press/NGI reported that 13

of the top 20 trading companies are reporting or plan to begin reporting, and that

these 13 companies represent 96 percent of the volumes traded by the top 20 firms.

Nearly two-thirds of the companies that report to index developers now report

through a department independent from trading. The number of companies conducting annual independent audits of their price reporting practices has risen from

5 percent to 58 percent. Index developers now provide more information in their indices. Because of these improvements, the overall average level of confidence in

price indices is 6.93 on a scale of one to ten. The confidence level for gas utilities

is even higher, at 7.49. Industrials, as exemplified by the Process Gas Consumers

group, noted that their ‘‘faith in the price indices has been strengthened by the

events of the past two years.’’

The CFTC amended its larger-trader reporting rules to raise contract-reporting

levels and subsequently will alter the number of reportable positions and the information provided by those positions in its weekly Commitments of Traders reports.

The new final rules become effective January 20, 2005.

While the focus on market data has centered on pricing information, the accuracy

of storage data has been in the headlines since the Energy Information Administration (EIA) issued its weekly storage report on November 24, 2004. In that report,

EIA reported a storage withdrawal that greatly exceeded market expectations, and

subsequently issued a downward correction from 49 Bcf to 17 Bcf. Based on preliminary investigation, it appears that this error was administrative in nature, not the

result of market manipulation. The operator submitting the incorrect data has revised its system for reporting to EIA to ensure the accuracy of future reports. It is

likely that other operators also will review their reporting systems to ensure that

accurate data is submitted to EIA.

The Committee needs to look beyond the concerns with storage data and market

information to the underlying issues of adequacy of storage capacity and natural gas

supply availability. The focus on market data stems from actual manipulation,

which has been curbed through oversight, and from volatility that naturally arises

in a commodity market where supply and demand are not in balance.

Some industry participants have called on the CFTC to put in place more limited

‘‘stops’’ for natural gas trading. Under current NYMEX rules, a $3/MMBtu change

in price results in a stop in trading for 5 minutes. Those advocating tighter stops

compare this unfavorably with stops on the beef exchange, where a movement of

1.5 cents results in a stop in trading for 24 hours. This proposal should not be

adopted.

• The current stop of $3 is reasonable for natural gas; the cattle market is not as

volatile, so 1.5 cents is reasonable for that commodity.

• If you place limits on NYMEX trading, parties will go to the over-the-counter market. This is particularly true for natural gas, which does not have substitutes

and is a necessity.

• Limits are intended to prevent a runaway market, not to alleviate volatility.

• NYMEX keeps prices honest.

• Stops wreak havoc with contract expirations.

While market oversight and transparency are important to assure the trading activities are legal and understandable, natural gas—like it or not—now trades

through commodity markets. By their very nature, commodity markets, like stock

markets, are inherently subject to volatility. Volatility can be diminished by greater

transparency or greater storage capacity, but it cannot be eliminated.

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Congress should not enact legislation to interfere with a market that is responding

to the need to control its abuse by past practices. Existing governmental authority

is adequate to address these improper practices.

CONCLUSION

Comprehensive energy legislation has been pending before Congress since 2001.

Each passing year has shown that the failure to address this key national issue has

resulted in increasingly more serious energy challenges. The legislation developed

and almost passed in the 108th Congress is not a perfect solution; no bill will be.

However, its provisions built an important framework. Passing legislation with

these elements may not be a sufficient step, but it is a necessary one. Congress

needs to enact these steps to allow it to take the next ones.

Mr. HALL. Thank you. And the Chair recognizes, now, the Chairman of Board and Chief Executive Officer of New Jersey Resources

and its principal subsidiary New Jersey Natural Gas. He served as

Director, and in 2005 was Chairman of the American Gas Association, and trustee of the American Gas Foundation. I recognize Mr.

Downes for 5 minutes, sir.

STATEMENT OF LAURENCE M. DOWNES

Mr. DOWNES. Thank you, Mr. Chairman. Good morning, and

good morning, members of the Committee. Thanks for the opportunity to be here today. As you noted, I am here today on behalf

of the American Gas Association, but also as a CEO of a local distribution company. The AGA, as you might know, has 195 members. We are the national trade association that represents America’s natural gas utilities. Collectively, our members provide lifeline

services to more than 56 million customers; so in essence, we are

the face to the customer.

First of all, I want to say thank you for your leadership in addressing what is the most pressing issue that faces our industry

today, ensuring reasonably priced natural gas for America’s natural

gas customers.

Natural gas is America’s preferred fuel for homes and businesses,

in large measure because of its environmental advantages. We believe that the Nation’s energy needs require a 2-prong attack on

this problem: first, to increase supply, but also to promote energy

efficiency. We all know that demand for natural gas is growing. We

know that supply is struggling to keep up. The result has been

prices that are high and volatile. Our 56 million customers are

bearing the burden and prompt action must be taken. What should

we do? Today, I would like to suggest to you 4 areas.

First of all, we must make an objective reassessment of restricted

Federal lands and streamline Federal permitting processes. The

fact is there are large tracts of Federal lands that are currently restricted for resource activity. The limitations that were put in place

may have been appropriate when put in place decades ago; but

today, technology allows for the development of our Nation’s resources in an environmentally sensitive way. We must also look at

the limitations which remain necessary for protecting our environment and look at those which do not.

In addition, current permitting processes seriously delay producer’s ability to develop our Nation’s ample resource base. Given

our energy needs, we need to expedite these procedures. Second, we

need to ensure that an Alaskan natural gas pipeline is constructed

and that LNG supplies are increased. We applaud Congress for

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passing the package of provision last fall that were needed to jump

start the Alaskan pipeline, which could play a major role in our

Nation’s long-term supply picture.

We also urge Congress to enact provisions that will expedite and

streamline the building of LNG import facilities, which will be a

necessary step in bringing prices down.

Third, we must reaffirm our strong commitment to environmental values. Natural gas is the cleanest of the fossil fuels, and

it is in great demand. And natural gas can be the bridge to a future that will rely more heavily on renewables.

Now, it is sometimes suggested that our industry seeks a relaxation or a loosening of our Nation’s environmental values. That is

simply not the case. In fact, our commitment to the environment

has never been stronger, and we also recognize that all of our suggested initiative must be undertaken with the highest level of environmental sensitivity.

Finally, energy efficiency is as much an answer to our problems

as is increasing gas supply. The difficulties that we face in our industry today cannot be solved simply by increasing supply. In fact,

there is no single solution. As a result, we must also improve energy efficiency because a unit of natural gas conserved benefits customers at least as much as a new unit of natural gas produced. In

fact, when you look at our industry over the last quarter-century,

the average residential household has reduced its natural gas consumption by 25 percent.

But more needs to be done. At the State level, many of our member companies are exploring regulatory strategies to encourage

greater efficiency and conservation. But apart from that, here in

Washington, we need to change how energy efficiency is measured

and not ignore huge energy losses.

Now, you may ask, what are those energy losses? They are the

energy lost between the time when energy-producing raw material

is extracted and when it is ultimately delivered to the customer.

Existing Federal energy efficiency legislation should be amended to

require that energy efficiency is measured on a full fuel-cycle and

full life-cycle basis from wellhead to burner tip, from the source to

the electric appliance.

In summary, we can determine how this problem is solved. It is

not an issue of inadequate resources. It is an issue of making the

right policy choices. We can choose to have plentiful, clean supplies

of natural gas at affordable prices. We can choose to have economic

growth and robust employment. That decision is in your hands.

Our customers are counting on us.

Thank you very much.

[The prepared statement of Laurence M. Downes follows:]

PREPARED STATEMENT OF LAURENCE M. DOWNES, CHAIRMAN, AMERICAN GAS

ASSOCIATION

THE GAS SUPPLY, INFRASTRUCTURE AND EFFICIENCY CHALLENGE

My name is Laurence M. Downes. I am Chairman and Chief Executive Officer of

New Jersey Resources, which operates a natural gas utility in New Jersey that provides service to more than 455,000 customers. I am also the Chairman of the American Gas Association (AGA), which represents approximately 200 local energy utility

companies that deliver natural gas to more than 56 million homes, businesses and

industries throughout the United States. Natural gas currently meets one-fourth of

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the United States’ energy needs, and it is the fastest growing major energy source.

As a result, adequate supplies of competitively priced natural gas are of critical importance to AGA and its member companies. Similarly, ample supplies of reasonably

priced natural gas are of critical importance to the millions of customers that AGA

members serve. AGA speaks for those customers as well as its member companies.

The natural gas industry is at a critical crossroads. Natural gas prices were relatively low and very stable for most of the 1980s and 1990s, largely as a result of

ample supplies of natural gas. Wholesale natural gas prices during this period tended to fluctuate around $2 per million Btus (MMBtu). But the balance between supply and demand has become very tight since then, and, therefore, even small

changes in weather, economic activity, or world energy trends have resulted in significant wholesale natural gas price fluctuations.

Market conditions have changed significantly since the winter of 2000-2001.

Today our industry no longer enjoys prodigious supply; rather, it treads a supply

tightrope, bringing with it unpleasant and undesirable economic and political consequences—most importantly high prices and higher price volatility. Both consequences strain natural gas customers—residential, commercial, industrial and

electricity generators.

Since the beginning of 2003, the circumstances in which our industry finds itself

have become plainly evident through significantly higher natural gas prices. Natural

gas prices have consistently hovered in the range of $5-6 or more per MMBtu in

most wholesale markets. In some areas where pipeline transportation constraints

exist, prices have skyrocketed for short periods of time to $70 per MMBtu. Simply

put, natural gas prices are high and volatile, and the marketplace is predicting that

they will stay high. At this point there is no significant debate among analysts as

to this state of affairs. Changing the current supply/demand balance requires continuing efforts aimed at energy efficiency as well as initiatives to provide more natural gas supply.

As this Committee well knows, energy is the lifeblood of our economy. More than

60 million Americans rely upon natural gas to heat their homes, and high prices

are a serious drain on their pocketbooks. High, volatile natural gas prices also put

America at a competitive disadvantage, cause plant closings, and idle workers. Directly or indirectly, natural gas is critical to every American.

The consensus of forecasters is that natural gas demand will increase steadily

over the next two decades. This growth will occur because natural gas is the most

environmentally friendly fossil fuel and is an economic, reliable, and homegrown

source of energy. It is in the national interest that natural gas be available to serve

the demands of the market. The federal government must address these issues and

take prompt and appropriate steps to ensure that the nation has adequate supplies

of natural gas at reasonable prices.

Many of the fields from which natural gas currently is being produced are mature.

Over the last two decades, technological advances have greatly enhanced the ability

to find natural gas as well as to produce the maximum amount possible from a field.

While technology will undoubtedly continue to progress, technology alone will not

be sufficient to maintain or increase our domestic production.

Today’s tight natural gas markets have been a long time in coming, but there are

still numerous unexploited sources of gas in the United States. We are not running

out of natural gas; we are not running out of places to look for natural gas; we are

running out of places where we are allowed to look for gas. The truth we must confront now is that, as a matter of policy, this country has chosen not to develop much

of its natural gas resource base.

Without prudent elimination of some current restrictions on U.S. natural gas production, producers will struggle to increase, or even maintain current production

levels in the Lower-48. This likely would expose 63 million homes, businesses, industries and electric-power generation plants that use natural gas to unnecessary

levels of price volatility—thus harming the U.S. economy and threatening America’s

standard of living.

If America’s needs for energy are to be met, there is no choice other than for exploration and production (E&P) activity to migrate into new, undeveloped areas.

There is no question that the nation’s natural gas resource base is rich and diverse.

It is simply a matter of taking E&P activity to the many areas where we know natural gas exists. Regrettably, many of these areas—largely on federal lands—are either totally closed to exploration and development or are subject to so many restrictions that timely and economic development is not possible. As we contemplate taking these steps, it is important that all understand that the E&P business is—again

as a result of technological improvements—enormously more environmentally

friendly today than it was 25 years ago. In short, restrictions on land access that

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have been in place for many years need to be reevaluated if we are to address the

nation’s current and future energy needs.

This year, like the past several years, the most important step the entire Congress can take to address these pressing issues is to enact a comprehensive energy

bill with provisions ensuring that lands where natural gas is believed to exist are

available for environmentally sound exploration and development. Additionally, it is

appropriate to create incentives to seek and produce this natural gas. These steps

are necessary to help consumers and the economy.

The ‘‘Natural Gas Outlook to 2020’’ by the American Gas Foundation underscores

all of these concerns. That study looks at anticipated natural gas demand and supply in the year 2020. The report expects that, if the nation continues on its present

course, by 2020 natural gas prices will increase by 70 percent, reaching approximately $13.76. This is anticipated to lead to increased unemployment, plant closings, and the movement of industrial operations overseas, just as it has in the last

several years. It also indicates that, in two alternative policy scenarios (the ‘‘expanded’’ and the ‘‘expected’’), customers can save annually $200 billion or $120 billion when compared to going forward on a status quo basis.

THE GAS DEMAND OPPORTUNITY

While it may seem unduly elementary, it is important to remember that the market relies upon two countervailing forces to operate: supply and demand. Price is

determined by the intersection of the two, and volatility, which has become a challenge for all energy stakeholders, is a result of the particular intersection of those

two factors. As the discussion above notes, additional gas supply is both necessary

and desirable. Nevertheless, we must continue to focus on the opportunities to serve

the interests of customers presented by taking actions with regard to natural gas

demand as well. In terms of the market and prices, a unit of natural gas not consumed is indistinguishable from a unit of natural gas produced and consumed.

There clearly are opportunities for Congress to capitalize on this gas demand opportunity.

AGA is not, however, an advocate of government action that interferes with the

operation of efficient markets. Nevertheless, there are opportunities where government policy can point the invisible hand in the right direction. There are at least

three opportunities where government policy can allow us to capitalize on the demand opportunity. First, Congress can ensure that we as a nation utilize the best

approach to our energy-efficiency analysis, by requiring that we look at efficiency

on a full-fuel-cycle basis. Second, Congress can provide tax incentives for efficiency

that require very modest public support but that will provide large efficiency gains.

Third, we need to ensure that the interests of energy industry stakeholders are

aligned with the goals of energy efficiency.

A brief summary of AGA’s priorities in this regard is attached.

INCREASING DOMESTIC NATURAL GAS SUPPLY

The most important step in sustaining and increasing domestic natural gas

production would be to look, with an environmentally sound eye, to develop new natural gas frontiers within the United States.

The United States possesses a resource base that is adequate for many more decades of energy production. Growth in production from this resource base is, however, jeopardized by limitations currently placed on access to it. For example, most

of the gas resource base off the East and West Coasts of the U.S. and the Eastern

Gulf of Mexico is currently closed to any exploration and production activity. Moreover, access to large portions of the Rocky Mountains is severely restricted. The potential for increased production of natural gas is severely constrained so long as

these restrictions remain in place.

America is not running out of natural gas, and it is not running out of places to

look for natural gas. America is running out of places where we are allowed to look

for gas. The fields where we currently produce natural gas are mature. More and

more effort is required to produce less and less gas with each well. Quite simply,

there is no way, other than exploring for natural gas in new geographic areas, to

meet America’s anticipated demand for natural gas unless we turn increasingly to

sources located outside North America.

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The existing universal prohibitions on all E&P activity on the East Coast,

the West Coast Coast, and the Eastern Gulf of Mexico must be reevaluated with an objective, dispassionate eye to determine if these areas

can be explored without adverse environmental consequences.

A gigantic swath of federal lands, much of which is known to overlay large deposits of natural gas, has been placed off limits to any form of E&P activity, no matter

how environmentally sound and sensitive. This blanket prohibition can no longer

stand. The U.S. E&P industry has been transformed by technology over the last

quarter century such that drilling for natural gas today is an entirely different venture compared to thirty or forty years ago. The nation’s pressing need for energy

to warm its homes and to supply its businesses mandates that we reevaluate this

prohibition. A process must begin where individual offshore areas are evaluated to

determine, with a dispassionate and objective eye, whether sound environmental

stewardship continues to mandate the universal prohibition of E&P activity offshore

under which we live today. AGA believes that such an analysis will reach the conclusion that some areas should remain off-limits, some areas should be made the

subject of stringently controlled activity, and many areas can be safely explored

with the latest environmentally friendly E&P techniques.

There are undoubtedly many avenues that could be followed to achieve this objective. AGA has recently reviewed the ‘‘SEACOR’’ proposal to restructure the current

regulatory scheme for the offshore areas of the United States. That proposed legislative represents a sound and balanced means to begin the process of striking the environmental balances that the United States needs to undertake. Undoubtedly other

proposals could harmonize the nation’s energy needs with the protection of environmental values.

An integrated, omnibus review of restrictions in the Intermountain West

must be undertaken to harmonize and rationalize overlapping and duplicative restrictions that make many areas effectively closed to E&P

activity.

The Intermountain West has been, and is expected to continue to be, a growing

supplier of natural gas. This can, however, only be the case if access to key prospects is not unduly impeded by stipulations and restrictions, which are often conflicting and overlapping. Two separate studies by the National Petroleum Council

and the U.S. Department of the Interior have reached a similar conclusion—that

nearly 40 percent of the gas resource base in the Intermountain West is restricted

from development, in some cases partially and in some cases totally. On this issue,

the Department of the Interior noted that there are nearly 1,000 different stipulations that can impede resource development on federal lands.

It is essential that energy needs be balanced with environmental impacts and that

this evaluation be complete and up-to-date. Finding and producing natural gas is

accomplished today through sophisticated technologies and methodologies that are

cleaner, more efficient, and much more environmentally sound than those used in

the 1970s. Many restrictions on natural gas production in the Intermountain West

have simply not taken account of the important technological developments of the

preceding thirty years. The result has been policies that deter and forestall increased usage of natural gas, which is, after all, the nation’s most environmentally

benign and cost-effective energy source.

Congress should mandate a from-the-ground-up review of the various restrictions

and limitations applicable to federal lands in the West with the goal of rationalizing

and harmonizing the restrictions and reviews currently involved.

Adequate authorizations and appropriations are essential for the various

federal permitting agencies to perform their functions responsibly, efficiently, and promptly.

A number of federal agencies are charged with responsibility for reviewing and

acting upon applications for permits for E&P activities. These include the Minerals

Management Service, the Bureau of Land Management, the Fish & Wildlife Service,

and Forest Service. AGA is aware of numerous instances where these agencies have

not been able to perform their necessary functions in timely fashion simply for lack

of fiscal resources. This represents an unnecessary and unwarranted barrier to

sound energy and resource development. Fiscal resources that are miniscule in

amount—when compared to the scope of so many federal programs—would, if applied here, provide major benefits for the nation’s energy customers. AGA respectfully requests that Congress authorize and appropriate sufficient funds for these

agencies to undertake their functions responsibly and in a reasonable time frame.

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Streamlining and expediting permitting processes for E&P activities will

assist in bringing forth additional natural gas supplies.

There is no question that improvements can be made in the processes for permitting associated with natural gas E&P activities. The November 18, 2003, conference

report for the Energy Policy Act of 2003 contains an array of provisions aimed at

making permitting processes more efficient (see, e.g., Sections 341-351). Enactment

of these provisions by Congress would be a step toward increased natural gas production.

Similarly, a variety of provisions in Subtitle B of Title III would have the effect

of improving the various administrative processes associated with E&P activities

(see, e.g., Sections 312, 318, 319, 321, 322, 323, 325, 326, 327, 328, 329, 330). Enactment of these provisions would help bring forward additional natural gas supplies.

Adopt reasonable production incentives and royalty relief provisions.

Without question tax incentives can help achieve both objectives. Perhaps the most

dramatic example is the Section 29 tax credit. The Section 29 tax credit brought

forth coal-bed methane supplies in numerous parts of the country. Today, that supply accounts for approximately 10 percent of U.S. natural gas consumption. The conference report for the Energy Policy Act of 2003 contained an array of incentives.

First, that bill contained a number of royalty-relief provisions. (See, e.g., Title II,

Subtitle B, Sections 311-316.) These provisions were aimed at encouraging the more

difficult types of exploration and production activity. Second, the bill contained a

number of tax incentives aimed at spurring production. (See, e.g., Title XIII, Subtitle

C, Sections 1341-1348.) These measures were aimed at improving the cash flow of

smaller producers or providing an incentive for several more difficult types of production. Incentives of this type, if reasonable in nature, are a constructive component of a balanced, comprehensive energy plan.

It is often reported that the energy industry focuses unduly upon producing more

fossil fuels, The implication, stated or unstated, is that doing so is harmful to the

environment as well as the nation’s quality of life. What is almost universally overlooked in these reports is that natural gas is the cleanest of the fossil fuels. When

burned, natural gas emits virtually no sulfur dioxide or particulate matter and

emits far lower levels of nitrogen oxides, carbon monoxides, carbon dioxide, and reactive hydrocarbons than either coal or gasoline. It is critically important to keep

these environmentally friendly characteristics of natural in mind when addressing

the policy issues related to the production of natural gas.

As suggested above, the most important action that can be taken to bring new

gas supplies to customers is opening to exploration and production the many areas

throughout the United States that we know to contain significant natural gas resources. Many of these areas have been closed to exploration or have been made the

subject of so many restrictions that they are de facto closed to exploration. At heart,

these closures and restrictions are ostensibly grounded in environmental concerns.

The nation needs to review these restrictions. Most importantly, it needs to review

them with a contemporary view that reflects the fact that the exploration and production business is enormously more environmentally friendly today than was the

case thirty or forty years ago. Equally importantly, these assessments must be made

with an understanding of the importance of energy production to the nation, particularly as it bears upon economic prosperity and well being.

INCREASING THE SUPPLY OF LIQUEFIED NATURAL GAS

LNG will be an important source of supply, and, it will, even in modest

quantities, have a significant effect upon natural gas prices.

Given the policy choices that the nation has previously made with regard to gas

supply and with regard to land access, imported LNG will be an essential incremental supply of natural gas. Although several dozen such import projects have

been announced, in all likelihood a far smaller number will actually be constructed.

Even if only several projects are ultimately brought online, the impact of these imports upon U.S. natural gas prices will be material and significant. Accordingly, it

would be sound policy for the government to take whatever actions it can to facilitate the siting and construction of LNG marine import terminals.

Congress should create certainty for LNG project developers by codifying

FERC regulatory policy with regard to LNG and by reaffirming exclusive FERC jurisdiction over LNG import terminals.

The current process for siting LNG import terminals—with appropriate applications being submitted to FERC—is working efficiently. Over the past decade and a

half, FERC has materially improved its processes for approving energy infrastructure. There is no need at present to interfere with that process.

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Congress can, however, give encouragement to LNG project developers by codifying current FERC regulatory policy, announced in FERC’s Hackberry orders, that

LNG import terminals will be treated as if they were natural gas producers and will

not be made subject to the open-access requirements imposed upon interstate natural gas pipelines. Doing so will provide certainty that will assist in the development of these projects. (The November 18, 2003, conference report for the Energy

Policy Act of 2003, in Section 320, proposes to do just that.)

Additionally, Congress can take important action to reaffirm that FERC has exclusive jurisdiction under Section 3 of the Natural Gas Act over the facilities for the

importation of LNG into the United States. Doing so will remove a cloud of uncertainty spawned by the Public Utilities Commission of the State of California, which

is currently being addressed by the courts in Californians for Renewable Energy v.

FERC, No. 04-73650 (Ninth Circuit).

INCREASING NATURAL GAS INFRASTRUCTURE

In the fall of 2005 Congress took the most important infrastructure action possible

by approving the package of legislative provisions essential to spur construction of

the Alaska natural gas transportation system. But further actions to this end are

in order. Further actions, however, as suggested below, are in order.

Reduce the depreciation period for new gas distribution lines from 20 to

15 years. AGA anticipates that growing gas demand over the coming decades will

require local natural gas utilities to construct approximately $100 billion in new infrastructure. Congress should facilitate this essential infrastructure by enacting accelerated tax depreciation for local gas distribution companies. (This provision was

included as Section 1322 of the conference report for the Energy Policy Act of 2003.)

Adopt the infrastructure provisions contained in H.R. 6. The conference report for the Energy Policy Act of 2003 contained a number of other worthwhile provisions that would assist in ensuring that adequate natural gas infrastructure is

available to serve the nation’s natural gas customers. (Sections 321, 325, 326, 330,

341, 346, 347, 348, 349, 350, and 351.)

Improve federal permitting processes. A widespread difficulty with infrastructure permitting is the multiple layers of review required as part of the permitting process, even though FERC is generally the lead agency in the licensing process. The conference report on the Energy Policy Act of 2003 attempted to address

some of those difficulties by mandating one record to be relied upon (Section 330)

and by requiring deadlines in Coastal Zone Management Act proceedings (Section

325). The infrastructure problem is, however, broader than this, and broader solutions are required. A number of studies have documented the overlapping and conflicting review processes that are regularly involved in energy infrastructure permitting. At the federal level, the simple and elegant solution is to vest FERC with authority to oversee all ancillary permitting of interstate natural gas pipelines, whether state or federal, and to authorize it to require that ancillary reviews be undertake

within a time certain. These multiple layers of review are perhaps the largest roadblocks in terms of time for interstate natural gas infrastructure, and they without

question add costs to infrastructure—costs that are ultimately borne by customers.

THE IMPORTANCE OF FUEL DIVERSITY AND ENERGY EFFICIENCY

At present there is no significant ability to increase natural gas production in the

very near term because production is essentially occurring at full capacity. In this

context, additional demand—whether generated by weather or economic activity—

produces great volatility in prices. In essence, in instances of additional demand the

market rationalizes through price volatility.

In this context, only efficiency measures can, in the near term, moderate demand

and, therefore, moderate prices. Market-driven conservation can have an impact in

the short term, but true efficiency measures can only be effective in the longer term.

Over the last twenty years, America’s households have decreased their natural gas

consumption 1% per year on average. Similarly, commercial and industrial concerns

have made great strides in improving their efficiency. These trends will undoubtedly

continue, but government can take steps to make quantum leaps in efficiency.

AGA strongly endorses addressing the nation’s energy policy on a comprehensive

basis, with energy efficiency playing an essential role. The conference report on the

Energy Policy Act of 2003 includes a large number of energy efficiency provisions,

addressed not only to natural gas but also to almost all fuel sources. Congress

should move forward with these provisions as an integral element of a comprehensive energy bill. These relatively modest provisions can pay enormous dividends in

the longer haul.

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AGA also believes that the nation should rely upon a full portfolio of energy

sources to meet its energy needs. A balanced portfolio of energy sources is in the

national interest.

Adopt full fuel-cycle energy-efficiency analysis. Moreover, energy policy

should seek to put each fuel to its most effective use. Regrettably our energy policy

today is not founded upon this principle. In most instances, for example, on a lifecycle basis and from the perspective of allocative efficiency, natural gas is most efficient in direct-flame applications—space heating, cooking, and water heating. On a

life cycle, full-fuel-cycle basis, electricity generally is considerably less efficient for

these uses. Thus, by ignoring this fundamental precept, our energy policy today

misallocates resources. Energy policy would make a great step forward in this regard by performing its analysis on a full-fuel-cycle, full life-cycle basis.

Congress should move forward in this realignment of the nation’s approach to energy efficiency. To make federal energy usage measurement accurate, Congress

should direct the federal agencies that sponsor promotional and rating programs for

energy-efficient appliances, homes, and buildings (i.e., DOE, EPA Energy Star, etc.)

to base those programs on total energy usage (in addition to measuring the energy

usage at the site of consumption). All other things being equal, this shift would tend

to shift gas toward direct flame applications and somewhat away from consumption

in generating peak electricity, resulting in a more efficient usage of the nation’s resources.

Adopt reasonable tax provisions that promote efficiency. Similarly, tax

credits can lead to more efficient energy consumption. The conference report on the

Energy Policy Act contains a number of tax provisions seeking to promote this end.

Provisions of this type play an essential part in a balanced, comprehensive energy

proposal.

Reliance on market forces. AGA also believes that government policy should

not seek to interfere in the market decisions that result in the nation’s energy portfolio. High natural gas prices as we are experiencing at the moment tend to produce

calls for energy allocation schemes (for example, suggestions that government policy

should affirmatively discourage the use of natural gas in the generation of electricity). Past events should provide ample proof that such calls, if accepted, always

produce new, unintended, and unforeseen deleterious consequences. AGA believes

that the market, if left unhindered, will produce a diverse and robust energy portfolio for the nation.

Encourage innovative gas utility regulatory structures that reward utilities for encouraging energy efficiency. Additionally, from the perspective of

AGA and its members, the goals of energy efficiency are often ill served by the rate

and cost recovery mechanisms employed at the retail level by local natural gas utilities. More often than not utility rates are designed on a volumetric basis, where

utility efforts to encourage efficiency and reduce natural gas consumption result in

financial harm to the utility. These traditional rate mechanisms run counter to public policies regarding energy efficiency. This need not be the case. Recently several

states have adopted innovative rate structures that align the utility’s economic interests and the goals of energy efficiency. Other state public utility commissions will

soon be considering similar proposals. Adoption of these mechanisms should reduce

natural gas consumption and reduce overall customer bills while allowing natural

gas utilities to earn their authorized returns. Last year leading environmental and

energy conservation organizations joined the American Gas Association in supporting such innovative gas utility proposals.

SUMMARY AND CONCLUSION

These are challenging times in the natural gas industry. Natural gas prices are

both high and volatile. Natural gas customers across America are counting on our

leadership to bring them a solution. It lies in taking action in Washington that encourages a three-part assault on the problem:

• Taking the necessary steps to allow and stimulate natural gas exploration and

production off the East Coast, off the West Coast, in the eastern Gulf of Mexico,

and in the Intermountain West

• Taking the necessary steps to stimulate and expedite the expansion of our natural

gas infrastructure to bring natural gas to those Americans who want and need

it

• Taking the necessary steps to stimulate new advances in energy efficiency

Mr. HALL. Thank you, and the Chair now recognizes Mr.

Norlander, who is here on behalf of the National Association of

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State Utility Consumer Advocates, the Executive Director of Pubic

Utility Law Project of New York. I recognize you for 5 minutes, sir.

STATEMENT OF GERALD A. NORLANDER

Mr. NORLANDER. Thank you Chairman Hall and Chairman Barton and members of the subcommittee for this opportunity to be

here today for the NASUCA. I am here, also, in my capacity as Director of Public Utility Law Project of Albany, New York. I am also

chairman of the Electricity Committee of NASUCA. NASUCA is an

association of 44 State consumer advocates across the country and

District of Columbia. And some of the NASUCA members are from

States that restructured their electric industries, as did New York

and Texas and a number of others. Some members are from States

that retain the traditional, vertically integrated electric utility system.

I speak today on behalf of all of NASCUA’s members in opposition to much of the electricity title of the proposed Energy Policy

Act of 2005. This unified opposition represents a national consensus of State consumer advocates from a variety of structures.

And that consensus is that much of this bill, if enacted, would not

materially advance, and could be detrimental to the public interest

and interests of consumers. NASUCA does, however, support the

provision in the bill that would require mandatory, enforceable liabilities standards throughout the transmission grid.

The primary purpose of the Federal Power Act of 1935 is the protection of consumer. Proposals to change it should be measured by

whether they add meaningful protections or whether they erode the

existing statutory bond the act creates with consumers. That bond

is that all rates demanded and charged, that are subject to the

Federal jurisdiction, will be just and reasonable. And they will be

subject to review by the agency charged with setting and fixing the

rates. Once that is done, those rates and charges are then, under

the Supremacy Clause, pushed through to the retail level to consumers across the country. And so therefore, the test, again, should

be whether the statute actually adds to or protects the protection

that the customers have now.

The bill has a number of features in it. It has considerable language that would crate new rate incentives for transmission facilities. I discussed it at some length; we’ve put in evidence at a past

hearing that this, essentially, would ratify a FERC initative underway that would add to transmissions rates to reward utilities for

things like joining RTOs, to give extra money for building new facilities, and so forth. And we estimated that the FERC proposal

would cost about $13 billion, and accordingly, have opposed it at

FERC.

The bill actually sets up a system which provides for rate incentives, and then, at the end, I think it comes back to some confusion.

There is a lack of clarity, because then it says that the rate incentives still must be just and reasonable. We think that under existing law, FERC already possesses sufficient flexibility in its ratemaking procedures to establish just and reasonable transmission

rates that will duly reward investors and provide a reasonable rate

of return necessary to see that the essential transmission grid development occurs.

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1PULP is an Associate Member of NASUCA, with offices at 90 State Street, Suite 601, Albany, New York 12207.

Similarly, with transmission cost allocation, we think is a matter

for FERC. FERC already has the tools it needs to set just and reasonable allocation of the cost of new transmission facilities.

NASUCA has opposed, consistently, the repeal of the Public Utility Holding Company Act. That, too, we believe, is a consumer statue. It perhaps accomplishes more by what it detours than by what

it regulates, at least historically has done so. We think it is an essential protection that should be retained, and there are some problems with the residual powers given to States to get at the books

of holding companies. We don’t think they are broad enough, and

accordingly, we don’t think there is an adequate substitute for the

existing statute.

Similarly, with FERC Merger Review Authority, the statute actually alters the traditional standard for review of mergers, and we

don’t see any reason to change that.

We are concerned with several measures that mentioned market

transparency, contract sanctity, anti-manipulation. There is definitely a concern that market power will be exercised in electric

markets. It is not a theoretical possibility; it has happened. Every

market monitor notes the possibility. We think that the statute

mentions rate transparency, but it actually gives FERC the power

to make rates secret. FERC probably had the power, today, to require utilities to file their rates electronically, so that provision

really adds nothing new.

Under contract sanctity, the proposed statute would essentially

substitute contract sanctity for just and reasonable rate, and I believe that would ratify a FERC determination that it lacked the

power to review for reasonableness a market-based rate that had

never filed and had never been reviewed initially for reasonableness. And so I think that, again, that weakens it.

To conclude, the NASUCA believe that there is merit to the reliability provisions. That was the first recommendation of the U.S.-

Canada Blackout Task Force, and that is where we think action

should be taken. Thank you.

[The prepared statement of Gerald A. Norlander follows:]

PREPARED STATEMENT OF GERALD A. NORLANDER ON BEHALF OF NATIONAL

ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES

Chairman Hall And Members Of The Subcommittee on Energy And Air Quality:

Thank you for inviting me to testify today for the National Association of State Utility Consumer Advocates (NASUCA) regarding the proposed ‘‘Energy Policy Act of

2005: Ensuring Jobs for Our Future with Secure and Reliable Energy.’’ I am Gerald

Norlander, Executive Director of the Public Utility Law Project of New York, Inc.

(PULP) 1 and Chairman of the NASUCA Electricity Committee.

NASUCA is a voluntary, national association of 44 consumer advocates in 42

states and the District of Columbia. NASUCA Members are designated by the laws

of their respective jurisdictions to represent the interests of utility consumers before

state and federal regulators and in the courts. Members operate independently from

state utility commissions, as advocates primarily for residential ratepayers.

NASUCA appreciates this opportunity to provide input to the subcommittee regarding utility consumer concerns before introduction of a new energy bill.

Some NASUCA Members are from states with traditional vertically integrated

utility industry structures; others are from states like New York and Texas, where

utilities sold their power plants to new owners and created single-state ISOs; others

are from states whose utilities joined with others across state lines to form large

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2Proposed Pricing Policy for Efficient Operation and Expansion of the Transmission Grid,

FERC Docket No. PL03-1-000.

RTOs. Today, I speak on behalf of all NASUCA members in opposition to a large

portion of the Electricity Title of the discussion draft of a proposed Energy Policy

Act of 2005. This unified opposition reflects a national consensus of state consumer

advocates that much of the bill, if enacted, would not materially advance, and could

be detrimental to, the public interest and the interests of consumers. NASUCA,

however, does support the provisions in the Bill that would require mandatory enforceable reliability standards throughout the transmission grid.

STATUTORY RATE INCENTIVES FOR TRANSMISSION FACILITIES ARE UNNECESSARY

The proposed Energy Policy Act of 2005 bill would add a new Section 218 of the

Federal Power Act requiring the Federal Energy Regulatory Commission (FERC)

within one year to establish new rules for ‘‘incentive-based’’ rate treatments. This

language appears to authorize a pending FERC proposal to increase interstate electricity transmission rate allowances which has been met with broad consumer opposition.2 The pending FERC proposal is to allow automatic increases in the return

on equity (ROE) for transmission investments, well beyond the level normally allowed in the development of just and reasonable rates. These ROE ‘‘adders’’ are intended to reward utilities for divesting control over their transmission assets to regional transmission organizations (RTOs), for outright divestiture of these assets to

an ‘‘Independent Transmission Company,’’ for construction work in progress and for

new transmission facilities. Cooperating utilities will receive ROE bonuses, well

above the normally calculated reasonable rate of return on equity invested, of 200

basis points—2%—for existing transmission facilities, and 300 basis points—3%—for

new investments in transmission. Nothing in the proposed FERC rule requires any

showing that these bonus-conferring actions are cost effective, and nothing in the

proposed bill places any upper limit on the rate making incentives. In response to

the FERC proposals for ROE ‘‘adders,’’ NASUCA commissioned an examination of

the cost and policy implications, and filed comments in the pending FERC proceeding. Those NASUCA comments, which are attached to my prior testimony in

2003 as an exhibit show that the current FERC initiative, if fully utilized by transmission owners, will cost consumers over $13 billion, or approximately $711 million

per year for the 19 year time horizon in the FERC proposal. This is a conservative

estimate of the potential cost of these investment incentives, and it virtually offsets

the putative $725 million per year benefit of forming Regional Transmission Organizations, a benefit estimate that is controversial for its optimism. The $13 billion incentive—which might be authorized by the bill—is unnecessary and will provide no

incremental benefit in many areas where transmission owners already have agreed

to turn over control of their systems to regional transmission organizations (RTOs)

or independent system operators (ISOs). If Congress seeks to encourage national

adoption of the system proposed by FERC, statutory ROE incentives may only impede that result. States that have not approved divestiture of transmission facilities

owned by state-regulated utilities may be more reluctant to do so if automatic cost

increases are the result, without any clear, offsetting benefits.

The draft bill also lacks clarity on this point because the section on rate incentives

concludes with a provision that all rates still must be just and reasonable. Under

existing law, the FERC has ample flexibility to set appropriate, just and reasonable

transmission rates without additional ‘‘incentives’’ prescribed by statute.

TRANSMISSION COST ALLOCATION

Section 219 of the draft contains detailed provisions for the pricing of transmission facilities not required for reliability purposes. Legislation prescribing a particular cost allocation formula is unnecessary. FERC possesses sufficient flexibility

within its jurisdiction to fix just and reasonable rates for interstate transmission.

PUHCA REPEAL

Subtitle F of the draft bill would repeal the Public Utility Holding Company Act

(PUHCA). PUHCA is a statutory bulwark against reassembly of vast utility holding

company empires. NASUCA has adopted the following resolution on this subject:

‘‘in considering action affecting regulation or the structure of the electric industry, including PUHCA repeal or reform, Congress should require federal regulatory agencies to: 1) prevent abusive or preferential affiliate transactions, 2)

continue oversight and protection over corporate and market structure to prevent abuses to consumers and competition, 3) disallow costs which are not pruVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00411 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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3 A GAO report questions whether the FERC’s capabilities and enforcement powers, originally

designed for the traditional rate setting paradigm, are sufficient tools for an effective market

overseer. Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That Impede Effective Oversight, GAO-02-656, Table 4, 69 (June, 2002). 4 NASUCA Resolution, Promoting Market Monitoring Functions Within Regional Transmission

Organizations (RTOs) Whenever Such Regional Entities Are Created, June 2002, available at

www.nasuca.org.

dent and reasonable from wholesale rates, 4) exercise sufficient regulatory authority to prevent ratepayers from bearing any risk of utility diversification and

to prohibit cross-subsidies between regulated and nonregulated subsidiaries . . .’’

NASUCA Resolution 1996-04, Urging the Congress and Federal Agencies to Address Market Power as a Component of Any Federal Restructuring Action.

The bill does not satisfy NASUCA’s criteria because it would eliminate current

PUHCA ownership restrictions on foreign ownership and non geographically contiguous utilities, would limit state and federal regulatory agency access to books and

records of the holding company to the costs of regulated entities, would require a

showing of necessity for regulators to examine holding company books, and could

make much information regarding holding company affiliate transactions, obtained

in regulatory proceedings, confidential. The proposed requirement for state commission findings of necessity before holding company affiliate data is made available

could delay, if not bar altogether, timely rate case discovery of utility records normally available to state consumer advocates in rate proceedings without prior litigation and without state commission ‘‘findings’’ that the records are necessary or related to costs. The Enron debacle illustrates the recurring tendency of holding companies in financial trouble to look to regulated affiliates as a source of credit, cash,

or other resources, all at the expense of captive utility consumers. PUHCA remains

an essential consumer protection which should be vigilantly enforced, not repealed.

FERC MERGER REVIEW AUTHORITY

Some parties have urged repeal of FPA Section 203, which provides for FERC review of electric utility mergers. The draft in Section 1291 commendably retains

FERC powers to review mergers continues such authority but alters the standard

for review and allows for fast-tracking of FERC review and approval. There is a

growing understanding that the nature of electricity and evolving electricity markets may permit the subtle exercise of market power, even without overt collusion,

by entities having market shares typically allowed in other industries by the Department of Justice and the FTC. Many of the benefits projected by the FERC in

its efforts, at significant expense, to create broader geographic markets for electricity rest upon the assumption that market power or flaws in existing markets will

be mitigated if buyers can find more sellers in expanded regional trading areas. If,

however, utility industry mergers and consolidation are allowed to occur simultaneously even as costly transmission expansions are undertaken to facilitate larger

geographic marketing areas, the mergers could result in a shrinkage of the number

of sellers, and a corresponding re-concentration or reappearance of market power.

FERC should have authority to scrutinize and reject proposed electric industry

mergers under evolving standards for measuring market power in electricity markets.

MARKET TRANSPARENCY, CONTRACT SANCTITY, ANTI-MANIPULATION, ENFORCEMENT

NASUCA is concerned that electricity rates at the wholesale level may at times

be vulnerable to the exercise of market power, without effective remedies for consumers. There is a widespread concern that the FERC may lack certain powers

needed to broaden its activities from that of a rate regulator to that of a market

regulator, capable of supervising markets effectively and able to effectuate full remedies for consumers injured by the exercise of market power or unreasonable market

rates.3 In 2002, NASUCA adopted a detailed resolution supporting effective monitoring of such markets where they have been approved by the FERC.4

The ‘‘market transparency’’ provisions in Section 1281 of the draft actually authorize FERC to grant ‘‘exemptions’’ from existing transparency and sunshine principles long embodied in Section 205 of the FPA regarding public rate filing, notice

of rate changes, and public inspection of all rate schedules.

The draft would authorize the FERC to implement an electronic rate filing system

in which all rates would be publicly accessible via electronic means. There is no impediment under existing law, however, that prevents FERC from requiring utilities

publicly to file their rates electronically; indeed, many utility filings are now made

electronically.

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5 ‘‘The Federal Power Act’s primary purpose [is] protecting the utility’s customers.’’ Electrical

Dist. No. 1 v. FERC, 774 F.2d 490, 493 (D.C. Cir. 1985)(Scalia, J). 6 NASUCA Resolution 02-02, Urging Jurisdictions Introducing the Competitive Provision of

Electricity or Natural Gas Service to Assure the Continued Availability of Reliable Service to

Customers from a Default Service Provider at Just and Reasonable Rates, at www.nasuca.org.

Section 1281 of the draft also includes provisions to outlaw the specific abuse of

‘‘round-trip’’ trading, but they are not comprehensive enough to reach new or more

novel market manipulation strategies that may not be expressly covered in the statute. For example, the bar of ‘‘round-trip’’ trading seems to apply only to bilateral

strategies, and might not cover more complex trading gambits to manipulate rates.

The refund remedy would allow refunds when commission rules are violated, but

only with regard for short term sales.

CONSUMER PROTECTIONS

NASUCA does not view customer protections as a separate item within the overall

statutory framework for federal oversight of the electricity industry. Rather, the

fundamental purpose of the entire Federal Power Act of 1935 is to protect customers

and to assure reasonableness in the provision of a service essential to life in modern

society.5 Accordingly, any effort to amend the FPA must address whether the proposed modifications assure real benefit to consumers, or at least maintain and not

jeopardize the existing level of customer protection. From this broad perspective, the

pending legislative proposals do not, in NASUCA’s view, increase overall customer

protection, and some measures may erode existing protections.

Some of the specific consumer remedies really add nothing to existing state measures. For example, states that allow retail utility competition quickly and effectively

addressed the ‘‘slamming’’ issue—the unauthorized switching of providers. Accordingly, there is no need for federal legislation in this area of traditional state jurisdiction, especially when many states have not adopted retail energy competition models.

NET METERING, ‘‘SMART METERING’’ AND REAL-TIME PRICING

Federal measures to require or encourage states to address net metering, ‘‘Smart

Metering’’ and real time pricing, such as contained in Section 1251 and 1252 of the

draft bill, are unnecessary. NASUCA is not opposed to net metering or to voluntary

real-time pricing options. At the retail level, traditionally not an area of federal concern, states are experimenting with a variety of net metering, ‘‘smart metering’’ and

time of use pricing methodologies for retail rates. NASUCA adopted a resolution in

2001 favoring retail rate methodologies that promote price stability and predictability of the ‘‘default’’ service rates for residential customers, urging each jurisdiction which introduces competitive markets for the provision of elements of electric

service to design default service rates so that:

The Default Service Provider is equipped and able to assure that the rates,

terms and conditions, reliability and quality of customer service offered to such

customer are no worse with such service than they would be with traditional

utility service;

The rates charged by such Default Service Provider are stable and predictable

over the long term and that the rates or formulas to determine such rates are

approved only after appropriate notice to the public, consumers, and adequate

administrative review;

The Default Service Provider shall not simply pass through wholesale spot

market rates for the energy or gas commodity portion of Default Service, and

shall be required to take prudent measures to provide least cost service and assure long term rate stability, through various means including but not limited

to competitive bid, bilateral contract, or provider-owned generation or supplies...6

Accordingly, NASUCA is opposed to federal mandates for real-time pricing of electricity for residential consumers, and opposes the incorporation of volatile wholesale

real-time price determinants into retail rates in states that ‘‘unbundled’’ their rates

for generation.

RELIABILITY PROVISIONS SHOULD BE ENACTED

At the present time, reliability standards for electric grid system, including operation of generating plants and transmission lines, are set by a voluntary organization, the North American Electric Reliability Council (NERC). In recognition that

the cooperative and voluntary underpinnings of reliability standards need strengthening in a competitive environment where responsibilities for keeping the energy

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7Final Report on the August 14, 2003 Blackout in the United States and Canada, Causes and

Recommendations, U.S.-Canada Power System Outage Task Force (April, 2004) at 140. ‘‘The

U.S. Congress should enact reliability legislation no less stringent than the provisions now included in the pending comprehensive energy bills, H.R. 6 and S. 2095.’’ Id. 8 ‘‘DOE and Natural Resources Canada should commission an independent study of the relationships among industry restructuring, competition in power markets, and grid reliability, and

how those relationships should be managed to best serve the public interest.’’ Final Report on

the August 14, 2003 Blackout in the United States and Canada, Causes and Recommendations,

U.S.-Canada Power System Outage Task Force (April 2004) at 148.

flowing are distributed among a larger number of grid participants, NASUCA adopted the following resolution in 1998:

WHEREAS, the reliability of the Nation’s electric system is of paramount importance to the consumers represented by the members of the National Association of State Utility Consumer Advocates (NASUCA);

WHEREAS, the reliability of the Nation’s electric system must not be allowed

to be compromised by the current restructuring of the electric industry;

**** NASUCA supports efforts to develop a national reliability organization

that will continue the vital functions now performed by NERC, and will do so

in a manner that is competitively neutral and recognizes the paramount concerns of consumers in a reliable electric system;

  NASUCA supports efforts to establish an independent Board of Directors that will govern NERC (or any successor national organization) in a competitively neutral manner that will benefit all consumers and that will not be

dominated or controlled by any particular industry participant or segment;

** ** NASUCA supports federal legislation that would clarify FERC authority

to review the reliability requirements imposed by NERC (or any successor national organization) and to ensure that such requirements are adopted and implemented in a manner that benefits all consumers*****

NASUCA Resolution 1998-07,

Urging the Establishment of an Independent Board to Govern Electric Reliability

Matters and the Enactment of Federal Legislation to Ensure FERC Jurisdiction

Over the Actions of Such a Board in the Future. With each iteration of comprehensive energy bills in recent years, NASUCA has supported reliability legislation. In

addition, NASUCA has often urged, along with others, passage of standalone reliability legislation.

Since NASUCA’s last testimony on this subject in March 2003, the widespread

blackout of August 2003 underscored the importance of enacting measures to establish firm grid reliability standards and their enforcement. The very first recommendation of the final report of the U.S.-Canada Power System Outage Task

Force issued in April 2004 is to ‘‘Make reliability standards mandatory and enforceable, with penalties for noncompliance.’’ 7 The international Task Force also called

for an independent study of the relationships among industry restructuring, competition, and reliability.8 Such concerns over the impact of restructuring on reliability—signaled by NASUCA in its 1998 Resolution—are now heightened by recent

evidence in a FERC proceeding that a utility power plant was deliberately shut

down during the California market crisis with the apparent intent to create scarcity

and drive prices up during a period when blackouts were imminent:

‘‘In one transcript released Thursday, an Enron trader identified only as Bill

called it ‘‘a good plan’’ to shut down a small Las Vegas power plant on Jan. 17,

2001, under the guise of ‘‘checkin’ a switch on the steam turbine.’’ Enron employees also suggested that their plans to exploit Western energy markets predated the meltdown of 2000 and 2001, which brought record electricity prices

and emergency blackouts.’’

Tapes Reveal Enron’s Power Plant Rigging—Transcripts Detail How Electricity

Traders Conspired to Shut down Smooth-running Generating Facilities During the

Energy Crisis, L.A. Times, Feb. 4, 2004.

In the absence of legislation, FERC within the past year issued a Policy Statement which defines compliance with NERC standards to be ‘‘Good Utility Practice’’

and this has been engrafted into utility tariffs. Policy Statement on Matters Related

to Bulk Power System Reliability, FERC Dkt. No. PL 04-5 (April 19, 2004). As a result, a utility that fails to follow NERC reliability standards, for example, following

instructions from grid operators, will be deemed by FERC to be violating ‘‘Good Utility Practice’’ and thus violating provisions of its own tariffs. It is not clear, however,

that this commendable step will be sufficient. Indeed, it is significant that FERC

also seeks legislative enactment of standards with enforcement provisions, notwithstanding its efforts and actions after the blackout to clarify NERC standards and

to engraft compliance with them into utility tariffs.

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In sum, there is general agreement among many parties with diverse interests

that enactment of the reliability provisions is desirable. If it appears that enactment

of an omnibus energy bill is unlikely, NASUCA urges that the reliability provisions

be adopted as a stand alone measure.

CONCLUSION

The primary purpose of the Federal Power Act is the protection of consumers, and

so proposals to change it should be measured by whether they add meaningful protections or whether they erode the existing statutory bond with consumers that all

rates demanded and charged will be just and reasonable. The reliability measures

have merit and should be enacted. Taken as a whole, however, the remainder of the

draft bill does not assure demonstrable benefits or meaningful added protection that

would make its enactment into law a value proposition for consumers.

The bill may increase consumer rates unnecessarily by prescribing rate increases

for electricity transmission lines and facilities beyond a level that is just and reasonable. FERC already possesses sufficient flexibility to set rates for transmission and

to determine how rate burdens will be allocated. The bill alludes to deregulated

market-based rates and private market rate setting mechanisms, as substitutes for

the existing bond of the FPA that no rate will be charged that is not subject to

FERC review for reasonableness before it is charged. Yet the bill does not establish

any criteria for FERC to follow when granting or denying market-based rates, it

does not grant FERC or any other body sufficient market oversight powers, and it

does not provide full remedies to consumers when there is market abuse or rate manipulation. In light of recent instances of energy market manipulation, holding company abuses, FERC’s inability to provide timely and complete consumer refunds and

remedies when the market rates it has allowed are unreasonable, and the possibility

of further industry consolidation, it is clear that consumers need greater, not less,

statutory protection from the exercise of utility market power. For these reasons,

NASUCA concludes that other than the reliability provisions, the proposals to modify the Electricity title of the FPA now under consideration are not in the interests

of utility consumers.

I want to thank Chairman Hall and the committee again for permitting me to

share NASUCA’s views on these important issues. I would be pleased to address

any questions you may have at this time.

Mr. HALL. Thank you, Mr. Norlander. The Chair now recognizes

the Director of Global Warming and Energy Programs for the Sierra Club, formerly with the consulting firm of Bob Lawrence and

Associates, Policy Director for the Alliance to Save Energy. I recognize you, Mr. Hamilton, for 5 minutes.

STATEMENT OF DAVID HAMILTON

Mr. HAMILTON. Thank you very much, Mr. Chairman, and thank

you for having the Sierra Club to come and give our view on the

bill. I wish I was going to give a more upbeat and sanguine assessment of it. And I also appreciate the committee’s encouragement

for us to give a very broad comment on the bill, as opposed to staying within the motor-fuels rubric.

The Sierra Club believes that the U.S. can have an energy policy

that provides the energy that we need to grow economically and

fulfill our needs, that creates job, that controls energy costs for consumers, and that respects and preserves the environment. Unfortunately, H.R. 6 does not provide the policy that we need to get there,

partly because of the way it was constructed and its evolution out

of the National Energy Policy Development Group headed by the

Vice President.

H.R. 6, we believe, is weighted far too heavily toward an answer

to every energy problem that is more ‘‘supply solves the problem,’’

and we believe that that ignores and neglects several of our key energy problems that we have yet to really make progress on, and

those include oil dependency. The Energy Information AdministraVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00415 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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tion has looked at H.R. 6 and said this is not materially going to

change price and supply. Okay. That is clearly one of our largest

energy problems.

H.R. 6 does not address global warming, and I think it is worth

noting that today, in other areas of the world, the Kyoto protocol

goes into effect, where other nations are rolling up their sleeves to

acknowledge and figure out how they are going to address carbon

emissions and the problem of global warming. Then 2004 saw an

immense amount of research come out detailing what is happening

from the global warming, and though the Sierra Club, as well as

many of you, may have problems with the Kyoto treaty, the complete disengagement of the U.S. from international discussion on it

is, we believe, a disgrace.

Third, H.R. 6 will not protect consumers in the long run from

price and supply swings, partly because we have such small oil reserves, related to our oil consumption. Increasing supply cannot

fundamentally do the job of securing consumers.

Fourth, H.R. 6 causes other environmental damage by drilling in

environmentally sensitive areas. And Mr. Chairman, I was excited

to see on my e-mail this morning that drilling in the Arctic National Wildlife Refuge is planning to have been taken out of the energy bill. I would be even more excited to see it not offered as a

stand-alone bill, but don’t expect that.

Mr. HALL. Don’t get your hopes up.

Mr. HAMILTON. No, no danger.

And the fifth thing that H.R. 6 exacerbates, rather than solves,

is the fact that energy prices in this country are hugely distorted

by a system of subsidies, by the fact that things like environmental

costs, like global warming, are not included in energy prices, vastly

distort the relative values of energy supply options. And until we

go back and take another look at what tax breaks, what subsidies,

what externalities really cost the American public, whether it is

rising childhood asthma rates, whether it is lower tree growth in

the Northeast because of acid rain, until we start including those

kind of costs in our energy prices, we will always have a distorted

market.

Finally, we believe that there are 3 things that we should pursue

much more heavily in an energy policy and a bipartisan strategy,

we hope, can go a long way toward accomplishing this. We were

very pleased to see that the National Commission on Energy Policy

advocated the increase of auto-fuel efficiency standards to reduce

our dependence on oil and to increase our national security. It will

vastly reduce carbon emission; it will address global warming.

Second, Mr. Chairman, I was very happy to see that you have

see that you have become a vice-chair of the Alliance to Save Energy, where I worked for about 81⁄2 years. We need to be much

more aggressive about the energy efficiency programs that we take

on, and I was very happy to hear Mr. Downes talking about the

gas industry’s interest in that. And you know, I talk about 3 studies in my testimony that I won’t go into details of, but we can save

money, create jobs, reduce emissions all in the same vote, by treating energy efficiency as an energy source in the same way if you

pulled it out of the ground and burned it. And I think that we find,

when we consider all of those costs, the environmental costs, that

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it is one our most economical, if not our most economical, energy

source.

Finally, the Senate has sent over, twice, a renewable energy

portfolio standard that would give a boost to our renewable energy

industries in the same way the U.S. Congress gave a boost to the

nuclear industry in the late 1950’s. We urge you to accept that at

this time, when and if it comes over. You know, again, renewables

are undervalued because of externalities and because of the vastly

greater subsidies for conventional industries substantially distort

the price.

So we urge that you would accept the renewable portfolio standard. Again, Mr. Chairman, thank you very much for allowing me

to come testify.

[The prepared statement of David Hamilton follows:]

PREPARED STATEMENT OF DAVID HAMILTON, DIRECTOR, GLOBAL WARMING AND

ENERGY PROGRAMS, SIERRA CLUB

Thank you, Mr. Chairman, for inviting the Sierra Club to testify on national energy legislation. My name is David Hamilton, and I am the Director of Global

Warming and Energy Programs at the Sierra Club. The Sierra Club is a non-profit,

non-partisan organization with about 750,000 members and chapters in 50 states

and Puerto Rico.

INTRODUCTION

I am here today to comment on behalf of the Sierra Club on the upcoming Committee energy bill. I am very hesitant to address a bill I have not yet seen. But at

the instruction of Committee staff, I am treating the Energy Policy Act OF 2005 as

if it will have identical provisions to the H.R. 6 Conference Report from the 108th

Congress.

Though I am testifying today on the Oil, Natural Gas, and Motor Fuels panel, we

appreciate the Committee’s open invitation to make a broader comment on the bill.

In as much as the Chairman and the Committee have chosen to make H.R. 6 and

its successor a package rather than considering various provisions separately, it behooves us to look at the bill as a whole as the Congress again begins the process

of considering the appropriate answers for our national energy problems.

Mr. Chairman, the Sierra Club believes that our nation can have an energy policy

that provides the needed resources for economic development, creates jobs for American workers, reduces energy costs and makes them more predictable for consumers,

and respects and preserves our environment. We believe that, while such a policy

requires that Americans be better educated about their energy choices, our nation

brims with the ingenuity, creativity and drive required to solve our energy problems

in a way that is, to use an overused word, sustainable. That means that we can

prosper today while leaving our children and grandchildren equivalent assets and

quality of life that they might prosper themselves in their maturity.

The Sierra Club believes that H.R. 6 did not provide the kind of energy policy I

just described. We strongly opposed H.R. 6 and it is likely we will strongly oppose

the Energy Policy Act of 2005. We believe that the bill fails to measure up to an

energy policy worthy of the nation in myriad ways. To say that it subverts existing

environmental protections is to grossly understate the case. It leaves consumers

with less protection from violent swings and steady upward pressure on energy

prices. H.R. 6 gives vast subsidies to fully established industries and purports to

support new, cleaner energy industries with one hand while it undercuts them with

the other.

IT WON’T SOLVE THE PROBLEM—

But perhaps the greatest flaw of H.R. 6 is that it doesn’t even address, much less

solve many of our most thorny and pressing energy problems. The flaws in this energy bill can be traced to its origins and evolution from the 2001 report of the National Energy Policy Development Group, administered by the Vice President. Our

issues with the secretive process of the Cheney Energy Task Force are on record

with the Supreme Court and in the media. Our criticism of its results, however,

stem from the assumption that a single-minded focus on increasing conventional energy supply is capable of solving the energy-related problems faced by our nation.

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As reflected by the Task Force report, that panel responded to natural gas and

gasoline price hikes of 2001, and operated from the conclusion that we don’t have

enough energy and that our problems could largely be solved by simply augmenting

our supplies of coal, oil, natural gas, and nuclear electricity. They looked at our existing energy sectors and asked what can we do for the coal industry to make more

coal-fired electricity. It asked what we can do for oil and natural gas to get more

energy. How do we get nuclear power going again?

The fundamental flaw of this approach is that both the NEPDG and H.R. 6 fail

to address critical problems inherent in our energy system. Ironically, they are

many of the same problems that motivate voters to create the political momentum

to pass a bill, such as high gasoline prices. These problems will not be solved simply

by an increase in energy supply.

The Sierra Club believes that our most pressing energy problems are:

1.) Our Dangerous Dependence on Petroleum—H.R. 6 fails to protect American families from steadily increasing upward pressure on crude oil and gasoline

prices. We continue to be reliant on politically unstable regions for the underpinning

of our transportation system, and, by the judgment of the Energy Information Administration (EIA), H.R. 6 will not fundamentally affect the price and supply of oil.

This remains true despite the scores of times that high gasoline prices have been

used as a reason we need to pass this bill. It remains true despite the blitzkrieg

of drilling for oil and gas that the bill unleashes on the wild areas of the United

States. We use 25 percent of the world’s oil supply and hold less than 3 percent of

the world’s reserves. We can open every square foot of our nation to fossil fuel exploration, and it will not begin to solve our problem.

Our oil dependence saps our resources as prices rise, skimming the cream off of

our economy and causing unpredictable cost swings for consumers. Crude oil prices

have risen from the mid $20s per barrel to the mid $40s since 2000. Our failure

to address our dependence on oil has cost literally trillions of dollars, according to

Oak Ridge National Laboratory. Again, H.R. does nothing to materially solve the

problem.

Perhaps more importantly, H.R. 6 fails to protect American soldiers from the need

to secure adequate future oil supplies. Without steps to actually save oil and stem

the rising percentage of oil supply that is imported, the only alternative is to follow

the NEPDG report’s strategy of cajoling and using diplomatic leverage in oil-producing regions around the world and somehow motivate a near doubling of oil production over the next two decades. If that doesn’t work, Mr. Chairman, what is our

option?

In our view, Mr. Chairman, solving our oil dependence problem is a matter of life

and death. But this bill does not do it.

2.) Global Warming—It should not escape our notice, Mr. Chairman, that the

Kyoto Protocol goes into effect today. The willful refusal of the United States to respond to the accumulated scientific evidence of global warming when we are responsible for far and away the greatest share of greenhouse gas emissions of any nation

in the world constitutes an ongoing and growing national disgrace.

Last year’s multi-nation study of the effects of warming on the Arctic region

shows that the environmental effects of global warming are advancing more quickly

than scientists previously believed. There has been widespread melting of glaciers

and sea ice as well as significant shortening of the snow season that carries dire

implications for local populations and wildlife species. 2004 research on ocean chemistry revealed much about carbon absorption in our oceans and points up the vulnerability of their chemical and acidic balance. The geographic ranges of many plant

and animal species are changing. Several noted climate scientists are warning of a

potential ‘‘tipping point’’ at which the effects of warming accelerate and perhaps result in dramatic and permanent changes in our natural systems.

It is with growing incredulity that the rest of the industrialized world views the

effectiveness of energy industry disinformation campaigns with the American public.

It is with growing distress that many Americans view the unresponsiveness of our

political leaders to the significant and ominous results of the scientific inquiry thus

far. Our lack of action to address global warming raises concern about the capacity

of the U.S. Congress to respond to a genuine environmental emergency in the public

interest.

Further, even measures in H.R. 6 described as the key to a ‘‘cleaner’’ future are

expected to be ineffective. The incentives in the bill for ‘‘clean coal’’ technology—

though the Sierra Club has significant concerns over whether coal can be truly

clean—have been argued to be a hedge against global warming. But EIA estimates

that between now and 2025, 77 gigawatts of new coal capacity will be built in the

U.S. Their estimate is that only 7-8 gigawatts, or roughly 10 percent of that total

will be advanced clean coal technology. The lion’s share of the new coal capacity is

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expected to be dirty, pulverized coal that could cripple prospective efforts to curb

domestic global warming emissions and eviscerate demand for cleaner alternatives.

There are currently 60 gigawatts of new coal capacity—or roughly 100 new

plants—in the application pipeline across the country. Less than 10 percent of the

new proposed capacity is IGCC, or another form of gasification. There is currently

little attention being paid to the fact that possibly irrevocable national global warming policy is being made in hundreds of individual decisions around the country.

These decisions by state agencies, public utility commissions, and the courts may

well determine our ability to do anything about global warming in the future. They

will certainly affect future demand for cleaner alternatives such as renewable energy and energy efficiency. As far as I know, no Committee in Congress or agency

of the federal government has officially regarded this development as a matter of

concern. We urge the Committee to address the implications of this new ‘‘coal rush’’

as soon as possible.

3.) Fluctuating and Increasing Energy Prices—American energy consumers

remain at the mercy of not only periodic violent swings in consumer energy prices,

but a steady upward pressure on oil and natural gas prices that has proven financially difficult, if not devastating for many American families. The remedies for our

energy woes prescribed by H.R. 6 assume that solving the problems of the energy

industries will solve problems for consumers.

In fact, energy efficiency and demand reduction programs for oil, natural gas, and

electricity have proven extremely fruitful solutions for price stability by reducing the

likelihood of price spikes, and fostering broad-based economic returns and development. Unfortunately, demand reduction and efficiency programs received wholly insufficient attention in H.R. 6.

4.) Other Critical Environmental Damage—Beyond global warming, H.R. 6

fails to assign environmental quality the value it deserves in our society. There is

a long list of environmental harms in this bill. Provisions will likely result in increased mercury contamination of waterways, the opening of some of our most environmentally sensitive and valuable lands to oil and gas drilling, increases in childhood asthma, water pollution, and wholesale landscape destruction caused by mountaintop removal and other forms of coal mining. The strategy behind H.R. 6 simply

fails to solve our energy problems in a way that attempts to minimize environmental damage.

We expect that when combined with provisions from the Resources Committee,

the bill will again include the opening of the Arctic National Wildlife Refuge to oil

and gas production. This is another example of how a myopic strategy of ‘‘more energy’’ fails to take into account the value of pristine wilderness or calculate the benefits to Americans of wild areas that will remain protected. Opening the Arctic Refuge to drill for oil that will supply us for only a few months—that won’t begin to

flow until 10 years after approval—will neither solve our oil dependence problems

nor even noticeably delay them. We need better solutions that structurally change

the equation.

5.) Distorted Energy Values—It is the year 2005, and we still fail to incorporate the societal costs of our energy system into the wholesale and retail prices

of energy end products. We willfully ignore the costs of energy use to public health,

the environment, diplomatic and military defense of our oil and gas supplies, and

a system of accumulated subsidies that serves the haves at the expense of the havenots and, while it continues to supply energy to American families, it does so on

highly unfavorable terms.

The Sierra Club urges the Congress to take a very close look at the complex web

of U.S. energy subsidies with the intention of revealing the true relative costs of energy sources. The idea that U.S. energy consumers are somehow protected from

extra energy costs by federal subsidies only obscures the true market value of energy. The distortion in true economic value that results from this system penalizes

Americans and makes the job of choosing the most beneficial energy investments

even more difficult.

Though the federal government has agreed to take control of utilities’ nuclear

waste, taxpayers will still be paying the cost of its maintenance for 150,000 years,

as well as the industry’s liability insurance through the Price-Anderson Act. The

cost of the Iraq war should be added to our price at the gas pump in order that

we understand the relatively low cost of fuel efficiency. The public pays the health

costs of high mercury concentrations in fish, exploding rates of childhood asthma,

and depleted crop and lumber yields from acid rain—all ancillary costs of our energy

use. That is not to mention the existing labyrinth of tax breaks for the oil, coal, gas,

and nuclear industries.

Even the relatively small subsidies for energy efficiency and renewable energy

should be put on the table, as we believe a transparent and equitable system—the

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theoretical ‘‘level playing field’’—will result in a much bigger gain than loss for

cleaner energy sources and a better system for the nation. A party that champions

the free market should relish the opportunity to clear the air in this fashion.

BROADEN THE CRITERIA

H.R. 6 might have better addressed our range of energy problems if some additional criteria had been set to evaluate potential energy policies beyond more-energy-is-better. An energy policy based on industry wish-lists is good for energy companies, but we need an energy policy that is good for Americans—not just for the

next quarter or next year, but through the lives of our children and grandchildren.

If many of the criteria below were used to evaluate provisions considered for H.R.

6, I believe we would have ended up with an energy bill that looks largely different.

We recommend the following criteria:

• Prioritize policies that actually reduce price and supply volatility above and beyond simply providing marginal increases in output;

• Favor policies that reduce future greenhouse gas emissions, criteria air pollution,

or water pollution and their inevitable future costs;

• Seek measures that maximize the overall benefit to the taxpayer and American

families, factoring in environmental externalities and equalizing for the level of

public subsidy currently provided for that industry;

• Favor strategies that will create broad-based economic development and job creation rather than profit for narrow existing industries;

• Energy policies should enhance genuine free market competition within an industry and prevent concentrations of market power that can potentially harm

American families and create the atmosphere of abuse that led to the Enron

scandal and its self-dealing and price fixing;

• Set a very high bar for requests by industries to eliminate environmental measures as regulatory barriers to increased production, requiring that there be significant evidence that the environmental regulation has actually depressed production—not just increased costs or proved a nuisance to producers—and require evidence that the benefit would significantly outstrip the existing benefit

to public health and the environment of the regulation;

• Consider the conveyance of drilling rights on environmentally sensitive and protected lands something that should occur as a lat resort—after cheaper, cleaner

options like energy efficiency are fully exploited.

We hold that had a least-cost priority structure for energy policy options been

used to build our energy policy—H.R. 6 would have been much more focused on demand reduction strategies and fostering renewable energy than it is now. By participating in a process that sought to fill industry wish-lists, and then allowed those

measures with the most political muscle behind them to survive, Congress has done

the nation a disservice and put its future economic, environmental, and military security at the mercy of highly volatile markets without solving the problems inherent

in our reliance on those markets.

One of the many benefits of energy efficiency programs is the level to which they

insure energy markets against price and supply shocks—or even rescue them as in

the case of the California electricity crisis of 2001. Failure to even attempt the most

rudimentary assistance to states or incentives for creating and sustaining strong energy efficiency programs is a glaring indicator that the power of these options is either being misunderstood or ignored by the U.S. Congress.

WHAT H.R. 6 IS MISSING

We believe that H.R. 6 vastly under-utilizes both energy efficiency and renewable

energy options. Due to the skewed costs of energy caused by the tangled web of subsidies and the omission of many environmental costs from the end-use price of energy, both energy efficiency and renewable energy are economically under-valued.

Further, political opposition by affected industries have forced some energy efficiency measures—such as an increase in fuel economy standards—completely off the

table.

DRILL IN DETROIT: WE MUST INCREASE THE FUEL ECONOMY OF OUR VEHICLES

Mr. Chairman, there is no way that we can drill our way out of the economic,

environmental, and political difficulty caused by our dependence on oil supplies and

the inevitable rise of our level of imports past 60 percent. U.S. domestic oil production has fallen steadily since 1970 and will continue to fall inexorably over time

whether we drill in the Arctic, on the Rocky Mountain Front, or under this building.

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Our greatest, most available untapped domestic source of oil is that which we

waste by failing to adopt existing energy saving-technologies in our light duty vehicles. We have the technology to significantly improve fuel economy and reduce pressure on international oil prices by cutting domestic oil demand. Over the past 20

years, advanced transmissions, ignitions, lightweight (but strong) materials, hybrid

electric drive trains, and other technologies have shown that significantly improving

fuel economy is no longer a technological obstacle. It’s the political obstacle that remains, Mr. Chairman.

If all of the vehicles in the U.S. averaged 40 miles per gallon (mpg) we would save

over 3 million barrels of oil each day, more than the United States currently imports

from the Persian Gulf and could ever extract from the Arctic National Wildlife Refuge, combined. Getting 40 mpg would cut global warming pollution by 600 million

tons a year and save consumers more than $45 billion each year at the gas pump.

Mr. Chairman, new research shows that advanced technologies and engineering

strategies largely put to rest the claim that increasing fuel economy necessarily decreases auto safety. Auto safety is a question of the specific engineering of vehicles,

not a simple inverse relationship between size and weight. In fact, recent research

by Dr. David Greene at Oak Ridge National Laboratory shows that much of the

safety data that had been used to fight increases in fuel economy has been misinterpreted and misused over the years. While we must continue to make our vehicles

safer for our families, we can make strides toward more fuel efficiency at the same

time.

Further, while they might disagree, we believe that the adoption of new technology is critical to providing consumers what they want and maintaining the competitiveness of the domestic auto industry. In an echo of the 1970s, resistance by

domestic manufacturers to incorporating hybrid electric drive technology in vehicles

has allowed Honda and Toyota to jump way ahead in the marketing of hybrid vehicles. Thus far, hybrids have proven very popular and many models have waiting

lists of many months. The addition of the Ford Escape hybrid SUV last summer was

a positive development, and the strong demand has encouraged them to increase

their production for 2005.

By failing to get serious about reducing demand for oil in our transportation system, we set up a situation where our only alternative is to diplomatically or—if necessary—militarily secure oil supplies from other nations, opening worldwide supply

lines to attack or disruption by terrorists. Mr. Chairman, without an aggressive program to reduce demand and insulate our economy from price and supply shocks, we

may doom ourselves to fight one oil war after another after another in order to allow

our citizens to maintain their lifestyle. Mr. Chairman, that is not a situation I want

for my children, and one that I believe is not necessary if we pursue cost-effective

options available to us.

ENERGY EFFICIENCY: A POWERFUL ECONOMIC DEVELOPMENT TOOL

Mr. Chairman, I was pleased to see recently that you have joined the leadership

of the Alliance to Save Energy as a vice-chair. Before joining the Sierra Club, I was

policy director of the Alliance for eight and a half years. Your contribution to that

fine organization displays your understanding and appreciation for the broad-based

economic power of using energy more efficiently.

Too often, Mr. Chairman, people view energy efficiency as doing little things to

save a nickel here and dime there. But as you understand through your work with

the Alliance, energy efficiency is a potent, powerful tool for economic development

and environmental protection that showers benefits across economic sectors, creates

jobs for American workers, makes us more competitive internationally, and offers

solutions to many of the problems of our energy system discussed previously.

In addition, too many people consider demand and supply side options as wholly

different things. As you know, and the Alliance to Save Energy trumpets every day,

energy efficiency programs extend and increase energy supply just as surely as if

we pumped it out of the ground or mined it. In fact, it can increase energy supply

more cheaply than building new power plants or sinking new oil and gas wells.

Unfortunately, H.R 6 fails to exploit energy efficiency to a meaningful degree.

There are useful provisions, such as the addition of a variety of products for which

the Department of Energy must set energy standards and roughly $3 billion over

5 years for highly efficient products and practices. Overall, however, Mr. Chairman,

the bill fails to pursue energy efficiency commensurate with other energy sources

or do more than scratch the surface of the potential benefits available from using

energy more efficiently.

The American Council for An Energy Efficient Economy estimates that the energy

efficiency provisions in H.R. 6 would improve our nation’s overall efficiency level by

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a mere 1.5 percent over an 18 year period. By contrast, aggressive energy efficiency

efforts in states like Vermont and California are currently achieving electric efficiency gains of greater than 1 percent per year.

In his testimony before your Committee last week, ACEEE Executive Director

Steven Nadel described their research on the potential effect of aggressive energy

efficiency programs on natural gas prices. ACEEE concluded that achieving a savings target of 4 percent per year can result in a 25 percent reduction in natural gas

prices and a national economic savings of $100 billion by 2010. No proposed means

of simply increasing gas supply has the potential to provide the same level of benefits to American families and the environment.

In October, 2004, Mr. Chairman, the research organization Redefining Progress

released a study that detailed the potential economic results of a suite of energy efficiency and renewable energy programs. The results of the Redefining Progress report showed that making the kind of investments in energy efficiency and renewable

energy that are available to us now would result in the creation of 1.4 million new

jobs over and above the business as usual case by 2025. In addition American families would achieve an average household savings on energy costs of $1,275 per year

while the nation would benefit from reduced foreign oil dependence and significantly

lower greenhouse gas emissions. Mr. Chairman, with potential results for American

families like these on the table, strong clean energy policies should be a no-brainer

for the nation.

There are a variety of options that have been proposed to better exploit potential

energy efficiency resources in the electric sector. Those include an energy efficiency

standard structured similarly to the one in Texas, or a public benefits fund that

mirrors many of the most effective efficiency programs currently being carried out

in a variety of other states. The Alliance to Save Energy estimates that a national

public benefits fund would save 440 billion kWh per year, reduce peak electricity

demand by 160,000 MW (the equivalent of 503 300MW power plants), save consumers a net $68 billion dollars, and prevent annual carbon dioxide emissions of 96

million metric tons by 2020.

We urge that the Committee incorporate such ambitious energy efficiency provisions in the Energy Policy Act of 2005. Such measures would begin to balance the

bill’s myriad benefits for energy industries with ones that benefit the American public.

RENEWABLE ENERGY: CLEAN POWER FOR THE FUTURE

Mr. Chairman, the Senate has twice sent a proposal for a renewable energy

standard to the House, only to have it removed in a Conference Committee. We applaud the inclusion of the renewable energy production tax credit (PTC) in H.R. 6,

which both extends the tax credit for the production of electricity by wind energy

and broadens that credit to include additional renewable energy sources. If the nation is to take global warming seriously, however, we need to maximize the future

share of our electricity that will come from clean renewable sources.

The Senate provision would require electricity companies to increase the share of

renewable energy in the mix of their power sales to 10 percent by 2020. The enactment of this provision would increase renewable energy electricity production in the

U.S. from about 18,000 megawatts in 2002 to approximately 80,000 megawatts in

2020. An analysis by the Union of Concerned Scientists (UCS) analysis found that

the Senate-passed 10 percent renewable electricity standard, in combination with

the expanded and extended PTC, would result in a $12.6 billion savings for consumers and taxpayers through 2020.

The Sierra Club strongly urges the incorporation of a renewable energy standard

at least as strong as that passed twice by the Senate. The benefits of renewable energy will accrue to future generations as the low environmental and fuel cost of the

power becomes more fairly valued. These young industries deserve at least the consideration given to nuclear energy by the federal government in the 1950s, when

it passed measures to assist that industry.

ENVIRONMENTALLY HARMFUL PROVISIONS OF H.R. 6

Providing an in-depth analysis of the environmentally damaging provisions of

H.R. 6 would have been such an extensive and discouraging task, that I appreciate

the Committee’s permission to a give a broader treatment of what we believe the

energy bill should look like. We cannot turn away, however, from a set of provisions

that constitute an aggressive attack on environmental protection in the U.S.

We urge that the Committee reconsider and remove the following provisions from

the successor to H.R. 6. While we have no illusions that this will take place, this

assault on the environment in the name of increased energy production should not

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go forward. Most of the following proposals do not serve the American public or

solve our nation’s major energy-related problems. The continued inclusion of the

vast majority of these provisions will secure the continued opposition of the Sierra

Club to House energy legislation.

Damaging Public Health

—Allows more smog pollution for longer than the current Clean Air Act

—Exempts all oil and gas construction activities from certain stormwater runoff provisions of the Clean Water Act

—Delays air pollution clean up in southwestern Michigan for two years.

—Dramatically increases air and global warming pollution with incentives for burning coal, oil and gas.

—Inhibits deployment of ‘‘clean coal’’ by disqualifying federally-funded clean coal

projects as ‘‘best available control technologies’’ that must be adopted by other

coal-powered industrial facilities.

—Threatens drinking water sources.

—Fails to ban MTBE

—Gives legal protection and exemption to owners of abandoned oil and gas wells.

—Encourages the mixture of hazardous wastes in concrete products as an alternative to safe disposal.

—Fails to include standards for providing clean, renewable energy sources.

—Allows electric utilities to enter into emission trading with mobile sources.

—Fails to do anything to address global warming.

—Provides millions in taxpayer funds to uranium companies for polluting mining

practices that threaten drinking water aquifers.

—Sets dangerous precedent for arbitrarily reclassifying radioactive waste.

Attacking Public Lands and Resources

—Allows the Interior Secretary to designate utility and pipeline corridors across

public lands without seeking public input.

—Opens the National Petroleum Reserve Alaska for oil and gas production.

—Allows the Secretary of Energy to permit electric power lines across federal public

lands.

—Allows applicants for federal drilling permits to take up to two years to comply

with application requirements

—Expedites the permitting and completion of energy projects on federal lands.

—Requires the U.S. Geological Survey to identify ‘‘restrictions and impediments’’ to

the development of federal oil and gas deposits.

—Expedites the approval of energy projects in the Rocky Mountain region.

—Lifts the limitation on the amount of federal oil and gas acreage one entity can

control, encouraging monopolization.

—Mandates the siting of a high voltage electricity transmission line through the

Cleveland National Forest and other public lands.

—Encourages oil and gas development under Padre Island National Seashore.

—Waives existing National Environmental Policy Act (NEPA) environmental review

and public participation process for all types of energy development projects on

Indian lands.

—Grants the hydropower industry unprecedented rights to appeal environmental

—Authorizes $550 million for timber companies to log trees in our national forests

—Permits activation of an energy cable that is running the length of the Long Island Sound and that is in violation of both state and federal permits.

Attacking Coastal Areas

—Seeks to create unprecedented streamlined authority for the Department of Interior to permit new energy projects in the Outer Continental Shelf (OCS).

—Weakens states’ ability to have a say in projects and federal activities that affect

their coasts.

—Circumvents the environmental review process for construction of storage facilities and terminals for LNG on the OCS

—Creates incentives for expanded offshore oil and gas drilling.

—Promotes coastal drilling through revenue sharing

—Gives away taxpayer owned oil and gas to the petroleum industry in fragile Alaskan waters.

—Promotes the development of all Outer Continental Shelf lands through two illdefined studies of energy resources within the OCS.

Hurting Consumers & Taxpayers

—Gives billions of dollars in tax breaks and subsidies to energy companies.

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—Tax breaks are even provided for technologies that will increase pollution, including

• creating a program to assist and encourage companies to develop ‘‘ultra deepwater

and unconventional’’ gas reserves.

• mandating royalty exemptions for offshore wells deeper than 400 meters;

• allows the Secretary of the Interior to reimburse oil and gas companies for environmental review of their projects;

• creating a new, first-ever $1.5 billion tax break for burning coal,

—Requires taxpayers to pay up to $2 billion to clean up leaking underground storage tanks.

—Provides $2 billion in ‘‘MTBE Conversion Assistance’’ for oil companies.

—Preempts state authority to site transmission lines, based on very vague criteria,

for every state but Texas.

—Extends for 20 years the limits on liability for nuclear plant operators in case of

a catastrophic accident.

—Repeals the PUHCA, the main law to protect consumers from market manipulation, fraud, and abuse in the electricity sector.

—Authorizes a $1.1 billion nuclear reactor in Idaho, with a potential exemption

from Federal management rules.

—Leaves landowners, ranchers and others affected by oil and gas development powerless to protect their land and water from development activities.

—Waives existing law and mandates expeditious oil and gas leasing throughout the

NPR-A, and allows for waivers of all royalties due the taxpayers as a result of

leasing of these lands.

—Spends $3.7 billion for polluting coal-based technologies.

—Allows the Interior Department to reimburse the oil and gas industry from federal

royalty revenues for the costs of environmental analyses.

—Reverses the Federal Power Act’s consumer protection requirements by allowing

parties to enter into contracts that can only be challenged by the Federal Regulatory Commission prospectively.

—Authorizes the Energy Department to provide open-ended U.S. loan guarantees

for coal-to-synthetic-diesel fuel projects.

—Allows the Interior Department to compensate oil and gas companies 115 percent

of the costs of cleaning up abandoned wells on public lands.

—Limits the Bureau of Land Management’s ability to receive fair market value for

utility corridors crossing public lands.

—Gives production tax credits to conventional nuclear reactor.

—Increases the burden of proof on the Commodity Futures Trading Commission in

cases of investigations of market manipulation and/or reports to investors.

Undermining National Security

—Reverses a long-standing U.S. nuclear non-proliferation policy against reprocessing waste from commercial nuclear reactors

—Fails to reduce the nation’s dependence on oil by improving the fuel economy of

our cars, trucks and SUVs.

—Extends the Dual-Fueled Vehicles loophole that allows automakers to get CAFE

credit for producing vehicles that can run on alternative fuels.

—Makes it more difficult to update fuel economy standards.

—Fails to develop and implement a plan to reduce oil consumption by at least one

million barrels per day by 2013.

—Fails to ensure deployment of hydrogen fuel cell vehicles

—Reverses 10-year policy of restricting the export of bomb-grade uranium for the

benefit of one company.

—Reclassifies undefined ‘‘residual’’ amounts of depleted uranium as ‘‘low-level’’ radioactive waste, thereby making it subject to far less secure handling and disposal protections.

—Strikes down requirements in current law for utilities to diversify and decentralize the electricity supply by renewable power.

Mr. HALL. Thank you very much, sir. The Chair now recognizes

Donald Santa, Jr., a former member of the FERC, President of

Interstate Natural Gas Association of America, served as Majority

Counsel on the U.S. Senate Committee on Energy and National Resources. Glad to have you back before us, Mr. Santa. I recognize

you for 5 minutes, sir.

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STATEMENT OF DONALD F. SANTA, JR.

Mr. SANTA. Thank you Mr. Chairman, Chairman Barton, and

members of the subcommittee for inviting INGA to testify at today’s hearing. The interstate natural gas pipeline industry agrees

with President Bush that 4 years of debate on energy legislation

is long enough; and therefore, we applaud your efforts to move

quickly this year on an energy bill.

If you remember only one thing about INGA’s testimony, I ask you to remember the figure $200 billion. According to a study completed by the INGA foundation last year, $200 billion would be the

estimated cost to American consumers between now and the year

2020 if needed, new natural gas infrastructure projects are delayed

by 2 years. And that is the cost associated with delays and not

product cancellations. Infrastructure, which includes pipelines,

storage, and LNG import terminals, is a critical element in addressing the higher natural gas commodity prices we are experiencing today. During peak demand periods, a robust infrastructure

can mitigate price volatility and help ensure that everyone who

needs natural gas can get it at reasonable prices.

Until recently, the processes for approving and permitting new

interstate natural gas pipelines worked well. Congress, in 1942,

granted FERC’s predecessor agency broad authority to approve and

site these pipelines. The past several years, however, have seen

growing conflicts between FERC, acting in its capacity to administer the Natural Gas Act, and other Federal and State agencies,

acting pursuant to other Federal statutes. The 2 main examples

are actions, or in some cases, inactions, taken pursuant to the

Costal Zone Management Act and the Clean Water Act.

The committee’s discussion draft addresses these issues in several ways. First, the draft requires that all administrative appeals

of actions by other agencies, involving a FERC approved project,

must use the record developed during FERC’s comprehensive review under the National Environmental Policy Act. This is intended as a powerful incentive for other agencies to participate

fully in the FERC NEPA process and do avoid duplicative expenditures of time and resources to compile individual records addressing the same issues.

INGA also strongly supports the provision in the draft to create

an expedited appeal to the U.S. Court of Appeals for the D.C. Circuit when other agencies take actions inconsistent with or fail to

act on permits required in connection with a FERC approved

project. INGA believes that these provisions go a long way toward

addressing the emerging conflicts in pipeline siting, and we appreciate their inclusion in the discussion draft.

We also wish to bring several other issues to the subcommittee’s

attention. For example, INGA supports a statutory clarification of

FERC’s lead agency status under NEPA. Let me be clear that we

do not propose to effect substantively the authority conferred on

Federal and State agencies by statues such as CZMA and the

Clean Water Act. We do propose that FERC be tasked with coordinating all environmental reviews associated with interstate pipelines that are mandated under Federal law.

In addition, INGA believe that the same process for reviewing,

approving, and siting interstate pipelines should also apply to onVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00425 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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shore, liquefied natural gas terminals. These facilities are engaged

in both foreign commerce, and in some cases, interstate commerce.

Wherever they may be constructed, LNG facilities will have economic effects that span entire regions, if not the entire country.

Again, we do not propose leaving State governments out of the permitting process. Just as with interstate pipelines, states already

have significant, federally delegated powers that are relevant to

permitting new LNG import terminals.

INGA also supports affirming in statue FERC’s clear preemptive

authority to cite such facilities, which in our view is wholly consistent with case law, interpreting Section 3 of the Natural Gas

Act. Subject, of course, to the associated permitting authority that

State and Federal agencies now exercise under Federal law and

under State law where that does not conflict with Federal law. Mr.

Chairman, INGA’s more detailed legislative recommendations are

part of our written comments, including a request that Congress

provide a Federal forum for addressing State tax policies that discriminate by singling out interstate pipelines for higher taxes. The main point that I want to leave you with today is the $200

billion figure that I referenced earlier. The status quo carries a cost

to American consumers in our economy. That is why INGA wants

to work with the Congress to enact statutory reforms to ensure

that these forecasted higher costs do not become a reality. Thank

you very much.

[The prepared statement of Donald F. Santa, Jr. follows:]

PREPARED STATEMENT OF DONALD F. SANTA, JR., PRESIDENT, INTERSTATE NATURAL

GAS ASSOCIATION OF AMERICA

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to

testify today. I am Donald F. Santa, Jr., President of the Interstate Natural Gas

Association of America (INGAA). INGAA represents the interstate and interprovincial natural gas pipeline industry in North America. INGAA’s members transport

over 90 percent of the natural gas consumed in the U.S., through a 200,000 mile

pipeline network. In addition, the association’s members include the owners of all

of the existing liquefied natural gas import terminals in the continental U.S., as

well as the developers of several proposed new LNG terminals.

INGAA appreciates this opportunity to comment to the Subcommittee on the importance of enacting comprehensive energy legislation that addresses natural gas

supply and infrastructure challenges. Infrastructure—which includes pipelines, storage and LNG import terminals—is a critical element in addressing the higher natural gas commodity prices we are experiencing today. During peak demand periods,

a robust infrastructure can mitigate market price volatility and help ensure that everyone who needs natural gas can get it at reasonable prices.

According to a July 2004 study sponsored by The INGAA Foundation, Inc., approximately $61 billion of investment in new transmission pipeline and storage infrastructure will be needed by 2020 to keep pace with shifting supply sources and

growing demand for natural gas in North America. This figure includes the Alaska

Natural Gas Pipeline and pipeline expansions in Canada that would be needed to

serve U.S. markets. The Alaska project and Canadian expansions, however, represent less than half of this total investment; a majority of the investment will

be needed for transmission pipeline systems and storage facilities in the

Lower 48.

Even as the Federal Energy Regulatory Commission (FERC) has made great

strides in improving its performance, the approval and siting of natural gas infrastructure has become problematic in recent years due to conflicting federal laws and

the ability of other federal and state agencies who administer these other statutes

to delay or even halt new infrastructure development. This situation can be addressed conclusively only by the Congress acting to ensure that there is a single coherent and comprehensive process for reviewing, approving and siting natural gas

infrastructure used in interstate and foreign commerce. INGAA supports establishing a consistent set of general procedures that would apply with equal force to

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interstate natural gas pipelines, interstate storage facilities, and LNG import terminals. INGAA’s recommendations include:

• Establishing FERC’s clear authority as the ‘‘lead agency’’ under NEPA for approving natural gas pipeline, storage and import facilities and FERC’s authority to

prescribe the schedule for all Federal and State administrative proceedings

commenced under the authority of Federal law.

• Requiring that the FERC administrative record be used as the exclusive record

for all subsequent administrative and judicial appeals of actions by other agencies involving a project authorized by FERC.

• Expedited judicial review of permitting decisions related to FERC-approved natural gas projects, in which unreasonable delay or conditioning of permits is alleged.

• Providing a federal forum in which to raise allegations that State tax policies discriminate against interstate natural gas pipelines.

• Clarifying Natural Gas Act section 3 authority for siting natural gas import facilities.

• Codifying FERC’s ‘‘Hackberry’’ policy for the regulatory treatment of LNG terminals.

WHAT WILL HAPPEN IF THE INFRASTRUCTURE IS NOT EXPANDED?

Inadequate natural gas infrastructure will result in both higher average natural

gas prices and far greater price volatility, both of which would negatively affect consumers and the nation’s economy. It is important to emphasize that, even if natural

gas supplies are adequate, bottlenecks in the natural gas transportation infrastructure will cause natural gas prices to be higher and more volatile than otherwise

would be the case.

The INGAA Foundation study attempted to quantify the consumer costs associated with delays in constructing necessary natural gas infrastructure. The analysis

assumed a two-year delay in all pipeline and LNG terminal construction and estimated that the cumulative cost to consumers in the form of higher natural gas commodity prices would be $200 billion by 2020. Higher natural gas costs would be seen

in all parts of the country. This analysis assumed that needed infrastructure eventually would be built, albeit after a delay. Should obstacles result in the abandonment of necessary expansions, the cost to consumers would be even greater.

This is an important point for the Congress to bear in mind as it considers proposals for streamlining the approval and siting process for natural gas infrastructure. While the opponents of natural gas pipeline, storage and LNG projects may

assert that the status quo (i.e., no action) is a risk free alternative, economic analysis strongly suggests otherwise. Natural gas is a commodity that must be moved

through a transportation network in order to reach consumers and, unlike other

fuels, natural gas cannot practicably be transported within North America using

modes of transportation other than pipelines. If the pipeline delivery network is insufficient, all consumers will pay higher prices for natural gas and the products

made using natural gas as a fuel or feedstock (e.g., plastics, fertilizers, aluminum,

and electricity).

WHAT ARE THE OBSTACLES TO INFRASTRUCTURE EXPANSION?

The Natural Gas Act (NGA) requires the proponents of interstate natural gas

pipelines and most storage facilities to seek an authorization from FERC that the

proposed new facility is in the public convenience and necessity. FERC overall is

doing an excellent job reviewing applications for these infrastructure improvements

on a timely basis. Pursuant to the National Environmental Policy Act (NEPA),

FERC coordinates with the various other federal, state and local agencies that are

responsible under other laws for the numerous environmental and land-use permits

that must be obtained prior to constructing a natural gas pipeline or storage facility.

Unfortunately, some federal and state agencies have chosen not to become fully engaged in the FERC NEPA process, and instead have waited until after FERC has

made a determination in favor of the proposed project before beginning their work

in earnest. This greatly adds to the time required to obtain all necessary authorizations to construct such projects and increases the likelihood that such other permitting agencies will impose conditions at odds with the authorization contained in the

FERC certificate of public convenience and necessity. This disjointed process presents a tempting target for the opponents of natural gas infrastructure development

and creates the opportunity for parochial concerns to trump FERC’s overall determination, made following a careful balancing of competing concerns, that the proposed project is required by the greater good.

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The Natural Gas Act confers on FERC broad, preemptive authority in the approval and siting of natural gas facilities used in interstate commerce. This was

done in large part to prevent one state from thwarting the construction of infrastructure that meets the broader public interest for a multi-state region. Where

state law and regulations have come into conflict with the NGA, the federal courts

(including the U.S. Supreme Court) have held that states are preempted in matters

under the FERC’s jurisdiction. Since the 1942 amendment of the NGA to add certificate authority to section 7, however, several federal statutes have been enacted that

provide other federal agencies with the authority to issue permits required for constructing natural gas pipelines and storage facilities and, in some cases, these statutes have delegated such permitting authority to the states. Examples include the

Coastal Zone Management Act (CZMA) and the Clean Water Act (CWA). Although

state regulatory action typically would be preempted where it conflicts with the exercise of federal authority pursuant to the NGA, state action pursuant to federallydelegated authority presents a different legal question. Pipeline opponents, abetted

by state government officials, have, in recent years, taken advantage of this situation by using the permitting authority under the CZMA and/or the CWA to frustrate

pipeline projects already found by FERC to meet ‘‘the public convenience and necessity.’’

This end result would appear to fly in the face of the Congressional intent to provide FERC with exclusive authority over pipeline construction approvals and the

purpose of the Commerce Clause of the U.S. Constitution to preclude states from

erecting barriers to interstate commerce. It is unlikely, however, that this problem

can be satisfactorily resolved by the courts, because legally the conflict is between

competing federal statutes. Only the Congress is in the position to address this

growing inconsistency conclusively.

PIPELINE LEGISLATIVE RECOMMENDATIONS

INGAA’s recommendations deal primarily with improving and rationalizing the

process for authorizing interstate pipeline, storage and importation infrastructure.

Several of these provisions are part of the discussion draft being considered today,

including using the FERC record for subsequent appeals of FERC-approved projects

(Section 330) and creating an expedited appellate process (Section 1442). INGAA’s

recommendations are as follows:

1) Clear Authority for FERC to be the Lead Agency for NEPA, and to Establish the

Schedule for all Federal and State Administrative Proceedings Commenced Pursuant to Federal Law.

For decades, it has been accepted that FERC is generally the ‘‘lead agency’’ for

purposes of environmental reviews required under the National Environmental Policy Act (NEPA) for an interstate pipeline proposed under section 7 of the NGA.

Under FERC procedures, other federal and state agencies with relevant permitting

responsibilities are solicited to review the proposed pipeline, make suggestions for

mitigating environmental impacts, and reach agreement on permitting decisions.

The process is inclusive, and under a recent Memorandum of Understanding, relevant federal agencies are encouraged to work together, concurrently and cooperatively, to reach decisions in a timely manner.

Recently, however, some federal agencies have questioned whether FERC is really

the ‘‘lead agency’’ for NEPA reviews, and whether there should be ‘‘co-lead agencies’’

instead. Of course, the concept of a ‘‘co-lead agency’’ would undermine the purpose

of having a ‘‘lead agency’’ in the first place.

In addition, some permitting agencies, as mentioned previously, have chosen not

to participate in the FERC NEPA review process, and instead have waited until

after FERC makes a decision regarding approval of a project before weighing in on

the permitting questions subject to their authority. Since these permits are a necessary requirement for pipeline construction, even projects that have been approved

by the FERC can be thwarted by such agency’s ‘‘last-minute’’ objections. This allows

a single state agency (or the regional office of a federal agency) to block the construction of a federally-approved, multi-state pipeline.

Although Congress largely would be clarifying what, until recently, was the accepted practice, a clear Congressional mandate that FERC is the lead agency for

NEPA reviews relating to projects seeking authority pursuant to section 3 or section

7 of the NGA would send a powerful signal. In addition, FERC should be given clear

authority to establish an administrative schedule for the NEPA review and associated permitting decisions by all of the relevant federal and state authorities. This

would ensure a single, coordinated and comprehensive approach for reviewing a proposed natural gas project, rather than the current duplicative and multi-layered reviews that present a tempting target for the opponents of natural gas infrastructure

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development, add unnecessarily to the time required to obtain all necessary authorizations to construct such projects, and increase the likelihood that such other permitting agencies will impose conditions at odds with the authorization contained in

the FERC certificate of public convenience and necessity.

It is worth clarifying what this proposal is not. This proposal does not usurp or

change federal and/or state agencies’ existing authority over the substantive issues

now entrusted to them. It would merely require that a relevant federal or state

agency exercise its authority within a reasonable timeframe, and do so in a cooperative fashion with FERC and other agencies. In short, states would retain their existing, federally-delegated authority under such statutes as the CZMA and the CWA.

2) Use the FERC Administrative Record as the Exclusive Record for all Subsequent

Appeals or Reviews.

This proposal complements the preceding proposal and addresses two, related

problems. First, as noted, other agencies at times have ‘‘sat-out’’ the FERC NEPA

review and then subsequently conducted their own proceedings to administer their

respective permitting authorities. Second, in connection with such proceedings,

these agencies develop a separate administrative record.

The current, fragmented process is administratively inefficient, because it duplicates a task that could be performed more efficiently and consistently through one

NEPA review. Multiple records add to the time required for obtaining all of the authorizations required to construct the pipeline and increase the likelihood that the

permitting agency will base its decision on a record that is inconsistent with that

assembled as part of the FERC process. One example of such needless duplication

is the administrative appeal process under the CZMA, pursuant to which the Department of Commerce has chosen to create de novo a new administrative record

when reviewing appeals from consistency determinations made by state agencies.

Substantively, the current process increases the likelihood of an inconsistent result

on the merits. This process also is susceptible to manipulation by natural gas infrastructure opponents, who may choose to ‘‘sandbag’’ the FERC process and then

‘‘pour it on’’ in a state or local forum that they perceive to be more sympathetic to

their views.

Two benefits would be achieved by requiring that the record developed during the

FERC NEPA process be used as the record for all subsequent administrative appeals and judicial review from actions by agencies issuing permits in connection

with a FERC-approved natural gas project. First, this would expedite the processing

of such permits and any subsequent appellate reviews. Second, this would create a

powerful incentive for such permitting agencies (as well as various stakeholder

groups) to participate meaningfully in the FERC NEPA process in order to ensure

that their views were reflected fully in the single record developed in connection

with the proposed pipeline project.

3) Expedited Judicial Review of Matters Related to FERC-Approved Natural Gas

Projects, in which Unreasonable Delay or Conditioning of Permits is Alleged.

This proposal complements the preceding two proposals by addressing judicial review. Should a federal or state permitting agency acting pursuant to federal law either fail to act within a reasonable timeframe or else attach unreasonable conditions

to a permit that has the effect of frustrating a FERC-approved project, there must

be a clear process for timely judicial review.

The proposed amendment would authorize expedited review by the U.S. Court of

Appeals for the D.C. Circuit in these circumstances. Should the court determine

that the permitting agency was unreasonable in its denial of a permit, its conditioning of a permit or its failure to act on a permit application, the court would be

able to authorize the construction and operation of the pipeline as approved by the

FERC and determine that all applicable federal statutory requirements had been

met.

4) Federal Forum for Challenging State Tax Policies that Discriminate Against Interstate Natural Gas Pipelines.

Federal law currently protects interstate rail carrier, motor carrier, and air carrier transportation property from state property taxes that unreasonably burden

and discriminate against interstate commerce. Pipelines are the only mode of interstate transportation that does not enjoy this protection under federal law.

Under federal law, a state may not assess rail transportation property (49 U.S.C.

§ 11501), motor carrier transportation property (49 U.S.C. § 14502), or air carrier

transportation property (49 U.S.C. § 40116) at a value that has a higher ratio to the

true market value of the property than the ratio that the assessed value of other

commercial and industrial property in the same assessment jurisdiction has to the

true market value of the other property. A state also may not levy an ad valorem

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property tax on the transportation property at a tax rate that exceeds the tax rate

applicable to commercial and industrial property in the same assessment jurisdiction.

The benefit of federal protection can be easily demonstrated by observing its effect

in Ohio. Currently, the tangible personal property of railroads, motor carriers, air

carriers and water transportation is assessed at 25 percent of true value. The tangible personal property of natural gas pipelines is assessed at 88 percent of true

value. This represents an assessment 352 percent greater than other modes of

transportation.

With federal protection similar to that enjoyed by other modes of transportation,

interstate natural gas pipelines would be authorized to bring an action challenging

such discrimination in federal court. A showing of competition would not be required. The proof required would be that other commercial and industrial taxpayers

are assessed at a lower rate.

This matter is within the jurisdiction of the Judiciary Committee, and legislation

addressing state tax discrimination directed against pipelines (H.R. 4726) was introduced in the previous Congress by Representative John Carter. The pipeline industry has been advocating the equalization of state tax policies regarding interstate

pipelines for almost 20 years. We ask that Congress bring fair resolution to this

issue by including Rep. Carter’s proposal in comprehensive energy legislation.

LIQUEFIED NATURAL GAS

The tight natural gas supply situation has caused a reemergence of liquefied natural gas (LNG) as a viable supply alternative. Access to LNG on the world market

can serve as a ‘‘safety valve’’ on high domestic natural gas prices. U.S. natural gas

prices are, at the moment, some of the highest in the world, and new LNG imports

could mitigate some of this. A significantly increased role for LNG as part of the

natural gas supply mix is an inescapable reality for the United States, even if we

can increase North American supply by moderate levels. This is why INGAA supports the expansion of LNG import capacity.

Despite the importance of LNG, however, it should not be mistaken as a ‘‘cure

all’’ that alone will solve the nation’s natural gas supply problem. Our current natural gas supply challenges will not be solved only by expanding production in the

Rocky Mountain region or the Outer Continental Shelf, or only by building an Alaska natural gas pipeline, or only by importing more LNG. In order to meet anticipated demand, the United States will have to adopt a portfolio approach that takes

advantage of all these options.

The most significant immediate challenge facing the LNG industry is public perception regarding safety and security. Fear of the unknown appears to be the greatest hurdle, followed closely by the various misconceptions about LNG. Such misconceptions are difficult to overcome. All of us—industry, regulators, the Executive

Branch and the Congress—have a role to play in educating the public, so that we

can make informed decisions about constructing needed energy infrastructure.

Are there risks associated with LNG? Of course there are. Still, just as with any

activity, this must be placed in perspective. LNG has a long and outstanding safety

record. The robust worldwide trade in LNG that takes place every day is proof that

LNG can be handled safely and securely. And here in the United States, FERC and

the Coast Guard, working with the Department of Transportation’s Pipeline and

Hazardous Materials Safety Administration, can mitigate risk to an even greater extent through their safety/security regulations and enforcement. We need your help,

and your leadership, in getting that message out to the public.

Another challenge for new LNG terminal expansion is the regulatory process for

both terminal construction and any subsequent economic regulation. FERC has done

an exemplary job on both of these fronts, but further guidance and statutory clarification from Congress will increase FERC’s effectiveness in this area. INGAA’s legislative recommendations include the following:

LNG LEGISLATIVE RECOMMENDATIONS

1) Clarification of Natural Gas Act Section 3 Authority for the Siting of Natural Gas

Import Facilities.

Over the last year, some have questioned whether FERC has the statutory authority to site LNG import terminals. Section 3 of the Natural Gas Act states that:

‘‘no person shall export any natural gas from the United States to a foreign country

or import any natural gas from a foreign country without first having secured an

order from the Commission [FERC] authorizing it to do so.’’

INGAA believes that FERC has gotten it right on both the law and the policy with

regard to LNG import terminal siting authority. The federal appellate courts have

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interpreted the NGA to provide FERC with the authority to site an LNG import facility and to attach the necessary conditions to its determination. If siting of these

LNG facilities were left to states only, they would almost certainly be subject to inconsistent regulation. Additionally, if these facilities were subject to traditional public utility regulation or other burdens they likely would not be constructed at all.

The nation as a whole would suffer if the ability to enhance the capacity to import

this critical source of supplemental natural gas supply were frustrated. FERC jurisdiction is important to ensuring that the larger, national public interest is served,

rather than just local, parochial interests.

Some have suggested that a clarification of this authority would usurp states

rights and/or create new powers for FERC. INGAA believes that, in exercising exclusive jurisdiction over the siting of LNG import facilities, FERC is acting within the

bounds of the authority already conferred by the Congress under section 3 of the

NGA. Still, to the extent that it would ‘‘clear the air’’ and permit worthy LNG

projects to proceed without what may be perceived to be a cloud over jurisdiction,

such an amendment would be good public policy.

Let us be clear about the role of state agencies under this process. States currently have significant permitting authority delegated to them under federal statutes such as the CZMA and the CWA. INGAA does not propose that this authority

be removed. We ask only that there be a single, coordinated review process that includes all of the relevant stakeholder agencies, and that once permitting reviews

and decisions have been completed, the FERC be given the final say as to a terminal’s approval and/or siting.

2) Codification of FERC ‘‘Hackberry’’ Policy for the Regulatory Treatment of LNG

Terminals.

In 2002, FERC issued the ‘‘Hackberry’’ decision in which it waived the longstanding policy that LNG facilities must be subject to the same open access policies

that apply to interstate natural gas pipelines. This order responded to the assertions

by a number of LNG terminal developers that ‘‘open-access’’ and ‘‘open-season’’ regulation would be an impediment to financing and developing new LNG terminals.

Statutory codification of this policy would send the signal to developers, and the financial community, that these regulatory changes will remain in place over the lifetime of an LNG project, and thus help to encourage additional terminal development. In addition, the policy should be extended to both proposed terminals, and

capacity expansions at existing terminals. The discussion draft addresses this issue

in Section 320.

CONCLUSION

Mr. Chairman, INGAA appreciates the opportunity to share its views on the aspects of comprehensive energy legislation that directly and uniquely affect the interstate natural gas pipeline industry. After years of debate and negotiation, the need

for legislation to address national energy policy has never been greater. The natural

gas supply and infrastructure situation, in particular, is crying out for policy solutions. We hope that in the weeks ahead we will be able to work with you in enacting

an effective energy bill. Thank you.

Mr. HALL. Thank you, Mr. Santa. We are going to have a vote,

shortly, but I am going to get underway with my questions. We will

probably stay here while the others go to vote and try to keep the

continuity going if we can. I will start out, Mr. Cavaney. Some people have claimed that oil companies and gasoline refineries knew

about the potential issue of groundwater contamination with

MTBE and that the government was not informed about them. I

guess the question is, is this true? And what is your position on

that?

Mr. CAVANEY. Mr. Chairman, that is not correct. If you look back

at the public record, API reported for the first time in a 1983 study

cited the potential for this to occur. EPA also produced several reports during the 1980’s that cites the same thing, as did several

other national organizations. Most important among these is EPA

had a blue ribbon panel on oxygenates, and in their final report

that they put out, they clearly identified the potential to expect

more contamination as a result of the adoption of RFG and the use

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of MTBE in there. So it was very well understood by everyone that

MTBE was going to have to be used in large volumes. The industry

had used MTBE before, but for a very different purpose and very

small volumes. So the combination of large volumes and this evidence out there of the contamination problem was why the industry proposed going to this 2-percent oxygenate mandate, because of

what we knew was going to happen.

Mr. HALL. This will be to Mr. Olson. You state on page 7 of your

testimony: ‘‘the NRDC does not support an ethanol mandate.’’ Why

is that?

Mr. OLSON. We believe that there should be encourage for biomass-based, renewable fuels. We feel that, certainly, biomass-based

ethanol has enormous potential to encourage renewable fuels, but

we don’t think that an ethanol mandate necessarily is a good idea.

Mr. HALL. Mr. Dinneen.

Mr. DINNEEN. I was hoping you’d come to me.

Mr. HALL. You mentioned that you hope that the committee

would consider an accelerated schedule for the RFS; you also mentioned that you hope Congress will seek to maximize the volume

of ethanol in the RFS. And the question is do you mean that you

are looking for an RFS with a number greater than 5 billion gallons on an accelerated schedule?

Mr. DINNEEN. When we were debating what the number for an

RFS should be 4 years ago, when our industry was barely producing 2 billion gallons, 5 billion looked like an awful big number,

and one that would drive significant economic development across

rural America. Congress’s failure to act to get the energy bill done

over the past several years, leaving current law in place, with

States phasing out the use of MTBE, has left our industry in the

position of having to build far more ethanol capacity than we would

have otherwise, so as not to allow refiners to be short ethanol supply or oxygenate supply. We did that. And I think the fact that

were able to expand as rapidly as we did should not be penalized

by having a schedule out there that doesn’t reflect the new reality.

Now having said all that, Mr. Chairman, a 5-billion gallon RFS

would certainly be a step in the right direction. It would push this

country down the path of reducing our dependence on imported oil

and creating more sustainable energy for our future. Do I think

that the number should be larger? Yeah, I do. But this is a process;

I recognize that.

Mr. HALL. Larger than 5 billion?

Mr. DINNEEN. Certainly our track record would demonstrate we

can produce more than 5 billion gallons, if asked, and I think that

where our energy situation is today, I hope that Congress asks us

because we will be able to——

Mr. HALL. The current price is $3.2 billion. And you expect that

to escalate over what period of time?

Mr. DINNEEN. I am sorry, Mr. Chairman.

Mr. HALL. What period of time do you expect the increase of the

present $3.2 billion——

Mr. DINNEEN. Well, as I noted in my testimony, there is 750 million gallons of production capacity that is under construction today

that will be online in next year. That will bring the industry’s total

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production capacity to some 4.4 billion gallons by the end of this

year. By 2012, certainly, we can produce more.

Mr. HALL. My time has expired. I recognize Ranking Member

Boucher, the gentleman from Virginia for 5 minutes.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. And

I want to say a word of welcome to our witnesses today. We did

not have opening statements in view of the fact that this is a continuation hearing on the one which we had last week, but I do

want to thank all of you very much for taking your time to share

your views with us this morning.

Mr. Olson, let me begin with you. I have observed your written

statement very carefully, and I did not see something in your statement that, frankly, I expected to see, and that was the same objection that you posed 2 years ago to the provision in the conference

agreement that would give the FERC the authority to site transmission lines on private land.

2 years ago at this time, we were considering a provision that

would give the FERC back-stop authority to site not only on private lands, but public lands as well, and the conference agreement

removed the part respecting siting authority on public lands. That

would remain within the discretion of the Federal Land Management Agency. But the conference agreement does constitute a

major change in the way the powerlines are sited today, because

with respect to private lands, no longer would the States be in total

control of decisionmaking, and the State’s authority to apply environmental requirements and assess the effect of a powerline on a

variety of State-related values would then not be the final determiner of whether or not the powerline is cited. I, personally, think

that our hearing record is devoid of clear examples of need. I have

seen no example where the State has acted inappropriately with

respect to considering powerline siting.

Now, that is my personal view. Obviously, the majority view was

to the contrary, because the conference agreement states as I have

suggested. But I had expected to see your written statement at

least reaffirm your earlier opposition to this provision of authority

to the FERC. Would you care to comment?

Mr. OLSON. I would be happy to submit. We have got a statement on this very issue that we can submit to the record.

Mr. BOUCHER. Well, what is your statement?

Mr. OLSON. I don’t believe that our position has changed.

Mr. BOUCHER. All right. So it is the same. Thank you. Happy to

hear that. Mr. Norlander, let me ask a couple questions of you, if

I may. Do you believe that the market-manipulation provisions

that are contained in the conference agreement are adequate? I

would note that the conference agreement bars round-trip training,

but it doesn’t address the broader fraudulent and manipulative

practices that can be engaged in, and I am wondering if you are

of the view that we ought to be a little more comprehensive in our

approach and consider things beyond round-trip trading?

Mr. NORLANDER. Yes, I think that if the statute is going to establish a market-rate regimen, then the regulator ought to be able to

regulate the market and the participants, and there should be a

larger bar on manipulation. I would point out that the bill would

increase criminal penalties and so forth for a manipulation act. I

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think that would mean, certainly, that with stiffer penalties and

potential criminal prosecution, that anyone involved in that type of

activity might be advised not to talk; and so therefore, there may

also be a need to look further at recordkeeping and documentation

requirements.

Mr. BOUCHER. A number of us on this side of the committee in

the last Congress put forward a separate item of legislation that

would essentially outlaw any ‘‘fraudulent, manipulative or deceptive practice that would be in contravention of the rules of the

FERC, where the rules are designed to prevent market abuse.’’

Would you endorse such an approach? I mean is that the right language? Or you do have another formulation.

Mr. NORLANDER. I think that is certainly in the right direction.

I think the problem comes, also, perhaps the larger problem, of

what is the remedy when it occurs, and I think that is a very difficult issue.

Mr. BOUCHER. All right. Another question, then. Do you believe

that the FERC has current authority to order retroactive refunds

with respect to transactions that involve market-based rates back

to the date when the FERC find that unjust and reasonable rates

were first imposed?

Mr. NORLANDER. Personally, I think they should. I think it is a

matter of controversy right now.

Mr. BOUCHER. Because we have a provision in the legislation

that clearly delineates the authority of the FERC to order refunds

back to that time?

Mr. NORLANDER. This is a huge, multi-billion issue. I think it

should be addressed.

Mr. BOUCHER. How should we address it?

Mr. NORLANDER. I think the benchmark should be that this is a

statute meant to protect consumers. The existing protection is that

no rate will be charged that is not just and reasonable. All rate

changes have to be filed 60 days in advance, subject to FERC review and intervention by people who might think it is not a good

idea. Once that rate takes effect, then that is the law, and it can’t

be changed, except in the public interest, which is a very difficult

thing to do. This bill would allow a market-based rate that has

never been filed, has never been seen by anybody other than the

people who signed it, to have contract sanctity.

Mr. BOUCHER. But in view of all of that, wouldn’t it be a good

idea to say that the—if the FERC finds that the market-based rate

was not just and not reasonable, that a refund be ordered back to

the time the rate was first imposed?

Mr. NORLANDER. I certainly think that would be in the interest

of consumers.

Mr. BOUCHER. Thank you, Mr. Norlander.

Mr. NORLANDER. Thank you.

Mr. BOUCHER. Thank you, Mr. Chairman.

Mr. HALL. The Chair recognizes the Chairman of Energy and

Commerce, Mr. Barton, a gentleman from Texas, for as much time

as he consumes.

Chairman BARTON. Well, thank you, Mr. Chairman. I am going

to try to stay within the 5 minutes that everybody else has to.

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My question is not so much a question as it is a general statement, and I may be off a little bit on some of the numbers I am

going to use, but I don’t think I am off a lot. Energy demand in

this country is still rising between 1 and 2 percent a year across

the board, whether it is electricity or natural gas or gasoline. We

are the world’s largest consumer of energy. We are still a significant producer of energy, but our production is declining as a percent of our needs. If you look at gasoline demand, we produce about

6 to 8 million barrels of oil a day. We use about 12 million barrels

of oil to convert it to gasoline every day. In total, we are using

around 20 million barrels of oil a day, and we are only producing

6 to 8, so we need to do something on energy, and it needs to be

a combination of conservation and research, but some of it should

be production oriented. Now, the discussion draft that has been put

out for review for this subcommittee and full committee is basically

the conference report that came out of the House and Senate negotiations last year, which is basically a distillation of the conference

report that came out of the House and Senate 2 Congresses ago,

that was never voted on. It is not a perfect bill, but it is a very

good start. Now, the votes are there to move that bill to the floor

tomorrow. We can move it out of this subcommittee this afternoon;

we can meet with the full committee next week and have it on the

floor and pass it. That is a fact. That is a fact. But if we do that,

we are going to have a bill that we get almost all of the Republicans on in the House and almost all of the Republicans on in the

Senate, and some Democrats in the House, some that are sitting

on this dais and some Democrats in the Senate, and I would much

rather have a bill that we get 275 to 300 votes in the house and

60 to 70 votes in the Senate, that is a bipartisan bill. Most of you

have testified before this subcommittee or full committee several

times in the last 2 to 3 years. I would hope that we could agree

that we want a bill and try to find ways to come together and not

keep throwing the same rocks at the same issues. To those of you

that represent the environmental groups, I am very proud that you

are here. It would be nice if you decided to try to be constructive

and positive. It can’t be too much fun throwing the same rocks

every year and not getting anything done. It would be a lot better

to come inside the fence and sit down; you might find out that myself, Mr. Hall, and others on our side are not the devils that you

think we are. I am amazed when I am quoted as I am trying to

gut the Clean Air Act or rape and pillage the environment. Nothing

could be further from the truth. But if that helps raise dollars for

various environmental groups, so be it. I am okay with that. I am

not going to ask real specific questions, other than to state that we

have a real chance to take a bill that has been worked on for years

and years and years, to improve it because of new things that have

come up, and there are some new things that have come up, mark

it up in committee, mark it up on the floor, get the Senate to do

something, and then go to conference and have a bill that everybody can be a part of. You know what? That is what I want to do.

We need to do something, and this discussion draft, which is a distillation of what we have worked on for years and years and years,

is, by itself, worthy of being voted on if we can’t reach any kind

of an agreement.

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Now, let me say something about MTBE because that seems to

be one of the issues that we are going to have to address. I am very

interested in finding a compromise on MTBE, but it continues to

puzzle me that people seem to think that MTBE is the only thing

that leaks out of these underground storage tanks, and somehow

MTBE is something that is able to transport itself. It is in gasoline.

If the tank leaks, everything in the gasoline is going to leak. If I

have a dog that I don’t do anything to control, and the dog goes

over in my neighbor’s yard and bites my neighbor’s son or daughter

on the bottom, I should be held accountable that I didn’t do anything to control my dog, not just go ahead and shoot the dog and

say, you can never have a dog again. If we want to find a way to

compensate States that have serious leakage problems, I am all for

that. If we want to set up some sort of a trust fund that, when you

have a legitimate claim, and you can show there has been contamination, I am all for that. What I am not for is just saying MTBE

is something that is bad, and so we shouldn’t even allow it, period,

and it should be banned, and anybody that ever manufactured it

or thought about manufacturing it is going to be held liable forever

and ever. That is just not acceptable. So Mr. Chairman, I want to

thank you for holding this hearing, and I want to tell everybody in

this room: this is the year to work together to get a comprehensive

energy bill where everybody wins and everybody gives some, but

we put a bill on the President’s desk that can get the 300 votes in

the House and the 60 or 70 votes in the Senate. That is a very doable deal; there are no show-stoppers. But if we can’t do it that

way, we will move a bill and do the traditional tug-of-war, which

unfortunately has created the stalemate the last 2 Congresses.

Thank you, Mr. Chairman.

Mr. SHIMKUS [presiding]. Thank you, Mr. Chairman. And now, I

would like to recognize my colleague from Texas, Mr. Gonzalez, for

5 minutes.

Mr. GONZALEZ. Thank you very much. My question—and I am

hoping everyone is listening to what the Chairman is trying to tell

everyone, because I really believe there can be a compromise. My

question will go to Mr. Olson, and then I will have a question for

Mr. Slaughter, because it is about MTBE.

I guess the troublesome aspect of this is I know that there is a

problem; however, if you have a product that is manufactured, that

is sanctioned and certified by the EPA, pursuant to applicable law,

and then the use of it somehow contaminates and cases damages,

it is really hard under most common-law, statutory, regulatory, administrative theories of responsible behavior, to tie it into the manufacturer.

I guess the most troublesome aspect of what you have indicated

was it will only be the mom-and-pop convenience stores and such.

If they were the ones that were negligent, ill-advised, or whatever,

they won’t have any deep pocket. But that has never driven legal

thought or theory in this country. I know it is convenient—we always look for deep pockets and see if we can get the nexus—but

this is a really a stretch. And generally, you know, I often oppose

what comes under guise of tort reform and such, but when it

comes—this is absolute. This is beyond strict liability, and I failed

to see that. So I would like for you to clarify the statement that—

429

you know, if we don’t have this kind of liability, then we won’t have

anyone that will have the financial means to address the damages

and the remedial expenses. But is that the whole logic of your

thought and that is we should incur liability, simply because you

have the ability to address the problem that has been created by

someone else’s negligence?

Mr. OLSON. Well, the short answer is no. The major case that addressed this issue, which was the Tahoe case, and I would like submit to the record the special verdict that came out in that case. It

is only about 4 or 5 pages long. What they found was that several

of the members of the petroleum industry acted with malice in not

disclosing, in not warning, in failing to address the issue and provide that information to the public and to the folks in the chain of

commerce.

So it is not just an issue of who has a deep pocket; it is also a

finding and I think this is being repeated across the country that

the industry acted in a manner that was inappropriate. In this

case, they found the industry acted with malice in not disclosing

those risks that they knew about and weren’t being fully disclosed

to rest of the public. So I think that was the basis of it, and this

ought to be left up to the courts to decide, rather than Congress

stepping up and saying ‘‘we are just going to resolve this once and

for all.’’ We think it ought to be up to the courts to decide, and you

know, Democrats and Republicans at the State level and at the

local level are addressing this very difficult issue, and many Republicans, as well as Democrats, decided they will go forward with

this litigation on behalf of local water supplies that are contaminated because of the problem.

Mr. GONZALEZ. The problem that we have, of course—and I understand it varies from State to State and what has happened in

California, Connecticut, New York and so on. But if you have this

patchwork and piece-meal approach, then we don’t have a national

energy policy that is going to make any sense, if we allow the essential part or provision of it to be frustrated by interpretation of

a particular liability law. So again, I appreciate what you are saying, but I think what Chairman Barton is saying—well, let us address the concern that you have. How do we remediate? How do we

address the damage and such? And Mr. Slaughter, the remaining

time I have, I would just address to you, would you like to respond

to anything that Mr. Olson may have said or any—or the statement that Mr. Barton had or my question?

Mr. SLAUGHTER. Well, thanks, Mr. Gonzalez. What I would say:

the South Lake Tahoe case was not a final judgment case. It didn’t

go to a final judgment; it was settled, and is not precedent. That

was a partial finding in that case. But 96 percent of the underground storage tank spills are cleaned up and paid for by private

funds, and through responsible parties, State insurance funds, and

private insurance—96 percent. And the MTBE situation is no different from any other UST underground storage tank situation.

Ninety-six percent will be paid for by responsible parties. Four percent, where responsible parties cannot be located, will be paid for

through the underground storage tank fund that was set up by

Congress in 1986, specifically for purposes like that. That is only

4 percent, Mr. Gonzalez.

430

I mean the important thing here is to say there is problem; responsible parties, where they are determined, are cleaning up that

problem. There is a vast amount of remediation work going as we

speak. So we have got people here who are trying to inflate a situation and set up a liability situation that, as you rightly point out,

is based only upon the fact that some parties obeyed the law and

helped make the Clean Air Act Amendment for a formulated gas

program actually work.

Mr. GONZALEZ. Thank you very much.

Mr. SHIMKUS. The gentleman’s time is expired. The Chair recognizes a gentleman from Pennsylvania, Mr. Murphy, for 5 minutes.

Mr. MURPHY. Thank you, Mr. Chairman. As the—I—we have a

vote. I am going to just ask one question and ask a couple of people

to respond to that, quickly. But it seems, now, we cannot talk

about our energy issues without looking at them as international

issues, and certainly—one of them being natural gas, is one that

has reached around the world—just as we now look back after

World War II—economically, Germany and Japan were big winners

of World War II—now it is, with the cold war, Russia will be a big

winner when it comes to a natural gas production and liquefied

natural gasses. I want to look at some—I want to ask some questions about how we can solve this because I also see that coal has

important mix in this. We have lot of plants that are coal fired; we

have a lot of plants that are coal-fired that don’t—have sufficient

scrubbers on them now, and that is a concern. And yet while Washington, inside the beltway, continues to deliberate on the perfect

bill, we are continuing to produce pollutants, we are continuing to

become more dependent on foreign sources of oil and natural gas,

and we are not solving the problem; but echoing Mr. Barton’s comments here, we certainly have found ways for organizations to continue to criticize Members of Congress.

I want to ask a couple of questions on the issue about natural

gas. As we are—and some of the comments made, I think Mr.

Fuller made, about the—and certainly others made, we have plenty

of natural gas in this country. We just can’t get to it. But I want

to ask, in turn, some environmentally sensitive issues here, too, because I believe that all of you also have children and grandchildren

and want—you want them to breathe clean air and have clean

water and grow up in that sort of environment.

In the other countries that are producing more natural gas and

shipping it over here, are their substantive difference in how they

handle environmental issues in their drilling exploration and refining of some their substances that are different from our process. I

am somehow wondering why is the United States always seen as

the bad guy if we want to get our gas out of the ground, but we

would let anything else happen around the world.

Mr. CAVANEY. I would be pleased to comment. American Petroleum Institute, API, writes, through the ASTM process, the worldwide standards for oil and gas and is recognized as being at the

leading edge. We are the ones that pioneered work in the Arctic

and—as a result of what happened in Alaska. We are the ones that

were pioneers in the deep water area and so forth.

So to answer your question the other way, it is our technology,

and it is many of the companies who operate here, some of them

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being foreign counties, companies that end up going abroad and

pioneering the work that we do here. So the standards here are

certainly, by no measure, any less than they are elsewhere. As a

matter of fact, most people who travel abroad would tell you that

you can come here, and you’ll find some of the hardest.

Now, will there be exceptions? Of course there will be, but they

tend to be things in isolation and not typically the larger companies making the larger investments, nor the really responsible companies that operate in their neighbors and in their communities

and have to live with all of their neighbors all of the time.

Mr. MURPHY. Any other comments on that, natural gas, Mr.

Fuller?

Mr. FULLER. I think what I would like to add to that is that I

think one of the big differences is in most of the foreign countries

where fossil fuels are being developed, there is a strong interest in

those countries to develop those fuels, and so they move them forward. We have become a country that tends to make these issues

one of adversarial conflict. We are going to fight over all of the

choices that we have to make, and we have very elaborate procedures to get there.

I think, substantively, our controls are going to be better than

anyplace else in the world, but I think getting to the final decision

has been our biggest challenge and continues to be our biggest

challenge.

Mr. MURPHY. Any other comments on that? Well, thank you.

Thank you, Mr. Chairman.

Mr. SHIMKUS. The gentleman yields back his time. We are going

to recess in place for 10 minutes. Chairman Hall is on his way

back. We have votes. Ranking Member Boucher have—and I have

about 2 minutes to get back over to the floor and vote, so if you

would, rest in place, as we said in the military, and we will pick

it up as soon as the chairman gets back.

[Brief recess.]

Mr. HALL. I thank you for your patience and recognize the

gentlelady from California, Ms. Capps, for 5 minutes.

Ms. CAPPS. And I thank Mr. Chairman; I thank you for recognizing me. Mr. Olson, I would like to get clearly on the record some

of things you referred to or mentioned in your opening—your testimony. If I understand it correct, the oil companies knew in the

mid-1980’s that MTBE would contaminate groundwater. Is that

correct.

Mr. OLSON. That is right.

Ms. CAPPS. Would you elaborate a little bit on that? What is the

documentation for that?

Mr. OLSON. Well, there are quite a few documents in my testimony and links to some of them. One of them that I think is particularly interesting was a 1987 memo from ARCO, which detailed

their attack on a Maine study that was done that showed that was

some contamination and they say ‘‘Since the paper was presented

last November, we have been working with API, the newly formed

MTBE committee, and on our view to access the potential impact

of this paper on State policymakers and to contain the potential

damage from the paper.’’

432

Ms. CAPPS. Thank you. Now, using industry data, it appears that

in 1986, the industry was adding 54,000 gallons of MTBE per day

to gasoline. Is this correct?

Mr. OLSON. That is right.

Ms. CAPPS. And just to confirm that is about right, I have a letter here from Mr. Cavaney that he sent to Representative Henry

Waxman, dated June 21, 2000, in which he stated that oil refiners

added 72,800 gallons of MTBE to gasoline per day in 1989. Are you

aware of that letter as well?

Mr. OLSON. Yes, I am aware of that letter.

Ms. CAPPS. And so Mr. Olson, the industry argument that MTBE

was added to gasoline because of a mandate by the Clean Air Act

Amendments of 1990 simply could not be true. Correct?

Mr. OLSON. Right.

Ms. CAPPS. But because by 1998 the industry was putting tens

of thousands of gallons of MTBE in the Nation’s gasoline supply

every day, so even if we had never changed the Clean Air Act,

there would be millions of gasoline—of MTB—gallons of MTBE already being put into gasoline, so there is no—really no reason to

believe that oil companies would have stopped using MTBE. Is that

correct?

Mr. OLSON. I think that is right.

Ms. CAPPS. And did the industry representatives tell people that

MTBE was dangerous? Did they oppose the Clean Air Act Amendment of 1990 on the basis that it would increase the use of MTBE

and threaten groundwater supplies across the country? I mean

they knew, didn’t they, that there was a danger to groundwater

from MTBE?

Mr. OLSON. They did know; that came out in the litigation. And

they did not oppose the Clean Air Act Amendment requirements.

Ms. CAPPS. Did they warn people that MTBE could contaminate

groundwater at that time, in 1990?

Mr. OLSON. Yes.

Ms. CAPPS. Were they—what were they telling people in 1990?

Mr. OLSON. Well, they were really not being forthright with the

facts about how risky MTBE was.

Ms. CAPPS. So the argument that the Clean Air Act mandated

the use of MTBE is simply not accurate. It had been in use before

that time.

Mr. OLSON. It had been in use before then.

Ms. CAPPS. And in fact, a California jury had found that the oil

companies had acted—and this is a quote—‘‘with malice—’’

Mr. OLSON. That is correct.

Ms. CAPPS. [continuing] in introducing a product that they knew

was dangerous.

Mr. OLSON. That is correct.

Ms. CAPPS. And then, in your view, is there any reason why this

enormous amount of liability, estimated at around $29 billion,

should be transferred from the oil companies to our drinking water

systems, and hence, to the consumers of drinking water?

Mr. OLSON. The liability should be on the oil companies that

knew this was a problem.

Ms. CAPPS. And finally, how widespread is MTBE contamination

in groundwater supplies?

433

Mr. OLSON. Well, it is extremely widespread. I’ve put a map from

the U.S. geological survey in my testimony that shows it is a national problem.

Ms. CAPPS. And so in 36 States, at least that we know of, there

is—there are literally hundreds of communities that have been affected by this contamination.

Mr. OLSON. Correct.

Ms. CAPPS. Now, I want to turn to some more specific health

issues. As a nurse—and I have been a public health nurse for many

years—I am concerned about the potential health effects of MTBE

in our drinking water supplies. And I am—wanted—I want—I

know that testimony by that GAO before Congress stated that,

while available data did not fully determine risk, MTBE should be

regarded as a potential carcinogenic risk to humans. So we know

that MTBE causes cancer in animals. Is it possible that it could

cause cancer in humans as well?

Mr. OLSON. Yes, and in fact, we have quoted, in our testimony,

which to that effect from EPA and GAO and others have found

that.

Ms. CAPPS. And with MTBE contamination growing and the latency potency period for cancer being upwards of 20 years, why

should we let, again, the oil companies immunize themselves from

this large potential public health problem? Is there any public

health or public end that would be served by granting them this

kind of immunity?

Mr. OLSON. We absolutely disagree with the immunity. We think

no end would be served except for to save them money.

Ms. CAPPS. Thank you very much, and I yield back.

Mr. HALL. Thank you. A gentleman from Kentucky, Mr.

Whitfield, for 5 minutes.

Mr. WHITFIELD. Mr. Chairman, thank you, and I certainly want

to thank the panel for their testimonies today, as we strive to formulate an energy bill once again. I actually was not going to talk

about this, but the testimony of Mr. Hamilton—which I appreciate

your testimony very much. But you touched on Kyoto, and when

I think about Kyoto, I think about global warming, and when I

think about global warming I think about a lot of things; cold being

one of them. But the reason I want to raise this issue is that as

we continue to deal with very complicated, complex issues like

global warming, I think it is imperative that we try to—and I am

not referring to you, Mr. Hamilton, because your testimony was

very good. But I think the scientific community—it is imperative

that they be accurate and talk about science when they talk about

these issues.

And I raise this issue because recently one of the members of the

Intergovernmental Panel on Climate Change—which, as you know,

every 5 years files an assessment report of a lot of environmental

issues around the world, and as a part of that, we have scientists

from around the world that have various responsibilities for that

report. And in October 2004, one of the lead authors, Dr.

Trenberth, attended a seminar at Harvard University. He had a

number of other participants in the Intergovernmental Panel on

Climate Change with him, and they made some pretty conclusive

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cently was a direct result of global warming. And as a result of

their press release, or their press conference, news stories ran all

over the country, including here in Washington, D.C., about the impact that global warming was having in causing more and more

hurricanes.

And then, as a result of that, a gentleman named Christopher

Landsea, who was the person responsible for the scientific evidence

on hurricanes and global warming’s impact on hurricanes and participated in the report in 1995 and participated in the report in

2002, has sent a letter of resignation, saying that he did not want

to participate with the Intergovernmental Panel on Climate

Change anymore. And he made this comment: ‘‘the differing conclusions and robust debates are certainly crucial to progress in climate

science; however this case’’—talking about the hurricane thing—‘‘is

not an honest scientific discussion conducted at a meeting of climate researchers. Instead, a scientist with an important role in the

IPCC represented himself as a lead author for the IPCC, has used

that position to propagate to the media and the general public his

own opinion that the busy 2004 hurricane season was caused by

global warming, which is in direct opposition to research written in

the field and is counter to conclusion in the studies at that time.’’

And then, he goes on to say, ‘‘I personally cannot, in good faith,

continue to contribute to process that I view as both motivated by

preconceived agendas and being scientifically unsound.’’ And I just

point that out because I think that there is a lot of this going on.

It seems like when we talk about science today, there is a lot of

politicalization of that science on both sides.

But I do think it is imperative as we try to come to solutions to

very difficult problems that we start holding people’s feet to the fire

on science. And I am glad to see that Michael Crighton has recently come out with a book about the state of fear in which he

talks about press releases trying to scare people on scientific evidence relating to global issues. This Professor Lomborg recently

wrote a book on the skeptical environmentalist, and he questioned

the models being used by the IPCC and others in looking at global

warming. And then you have Greg Easterbrook, who was an environmental writer for the New York Times, who wrote a book, One

Moment on the Earth, and he was also questioning the models

used.

So I think if we are going to come up with the best decisions, we

do have to have sound science on all sides, and I hope that as we

continue our debate on the energy bill as well as environmental

issues, that we can keep that in mind. And with that, Mr. Chairman, I guess I don’t have a question, but my statement is over.

Mr. HAMILTON. May I comment?

Mr. HALL. Well, your question was did you note. Right?

Mr. HAMILTON. May I make a brief comment?

Mr. HALL. Not at this time. The Chair recognizes Ms. Solis, a

gentlelady from California.

Ms. SOLIS. Thank you, Mr. Chairman. I am quite amazed, to be

honest, that we are not able to have some of these very serious discussions in our respective subcommittees with respect to the LUST

program and—as well as MTBE. There are a lot of issues here that

are being talked about that I really believe the public and constituVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00442 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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ents that I represent really want to hear more about. I am very

concerned that we don’t have representation from our local governmental entities as well as some of our water purveyors and attorneys general that I know, just a few years ago, submitted letters

to this committee, outlining their concerns regarding this type of

legislation, that somehow would disregard and provide for folks to

get away with not having to clean up many of the contaminants

that are now affecting many of the wells. For example, in my own

district, we have over 100 wells that we know are polluted, and

they are not exclusively polluted by MTBE, but by perchlorate and

other additives that have just tended to leak into our groundwater.

I am very concerned that the small mom-and-pop gasoline owners

and people—even the water purveyors are having to somehow pick

up the tab for a lot of the damage that I believe is being done by

many of the larger refineries.

I guess my question is: how do we begin to really provide remedy

for the people that—the consumers and people that some of us represent? California, unfortunately, has been plagued by this issue

for many, many years, and I think has really done a good job in

the last years by setting some good standards, and other States

have done likewise. Is it going to the States to move the opinion

of this committee in this legislature? My concerns are that the bill

that will be voted on—won’t have my support—doesn’t even address the issue of the LUST program and the fact that there are

provisions that were kept out of it. So while people were talking

about ‘‘there is a consensus and this has been talked about for

many years and everyone is in agreement or most of the panelists

here are in agreement with the bill as it is,’’ there is a lot of issues

that have not been addressed.

I would like to ask Mr. Olson if there are some individuals and

groups that are not represented here and another perspective that

has not been addressed here. And then, second, regarding those

provisions in LUST that I talked about, if he could, please elaborate about what that would mean to the health and welfare of our

constituents.

Mr. OLSON. Well, I would appreciate to put in the record a statement that has been made by opposing anti-MTBE provision in the

bill, a liability waiver from the National League of Cities, the U.S.

Conference of Mayors, the National Association of Counties, the

National Association of Towns and Townships, and so on, and so

on, including a lot of State and local officials who are very concerned about this provision. So there are many out in the community that are very concerned about this at the local level because

of enormous costs that are being put on them as a result of this.

With respect to the underground storage tank provisions, we feel

strongly that we need several provisions for underground storage

tanks improvements. One is secondary containment, both for pipes

and for tanks; red-flagging of those tanks that are not operational

or that have problems; preserving polluter pays requirements; and

assuring operator training as well as routine inspections every year

to perhaps every 2 years. So we think that all of that really should

be part of this kind of package if we are actually going to address

the widespread problem of leaking tanks.

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Ms. SOLIS. Thank you. One of my questions is also, Mr. Cavaney,

regarding something you said earlier in your statement about that

fact that there will funds to provide cleanup through the LUST

program. But can you give me what is your interpretation of who

is responsible for that cleanup?

Mr. CAVANEY. Well, the LUST fund is administered, and through

the process, if this bill passes, there is language that would allow

people that have a concern with MTBE and they can’t identify a

responsible party or an insurance agent or some other way to get

their money instated to cover that remediation, that they can ask

the fund. Now, the fund currently has, I believe, a little over $2

billion in balance, and it receives an authorization for additional

funding under this bill, I believe, of 5 years at $200 million per

year to cover the funds.

One thing I would like to also point out is there is a lot of talk

about this thing blossoming and getting bigger and bigger. There

are some other facts here that fly in the face of that. The first of

these is that what we have seen is the EPA, in their current data,

shows that the new underground storage tank releases have actually decreased by 60 percent since the base-year of 1998 to 2000.

Concurrent with that is the amount of MTBE produced and in storage has also been reduced about 50 percent over the same period.

And let me cite California, your State. Back in the late 1990’s,

there was an estimate that there would be about $1.6 billion of

funds needed in order to remediate MTBE in the State. Just recently, the California Energy Commission——

Ms. SOLIS. I guess—if I could just interrupt you. My concern is

in your opinion, who is liable for that cleanup? Is it the gasoline

station owner or is it, you know, the individuals that produce the

product?

Mr. OLSON. People who have handled and distributed the product

would have responsibility, and that would be for the claimants to

go ahead and impose whoever they would want to identify.

Ms. SOLIS. But we are talking about mom-and-pop.

Mr. OLSON. It can be anybody.

Ms. SOLIS. That is typically who it is, though, right? I mean that

is typically who will be responsible.

Mr. OLSON. I am not sure. I do not know. I know we have a number of cases where our companies and our industry is cited, so it

can include all of them as well. But the point I was trying to make

is that the issue is now identified as significantly being reduced in

States like California, in terms of potential remediation dollars.

Ms. SOLIS. Thank you.

Mr. HALL. Thank you. All right. Mr. Burgess, would you yield to

Mr. Hamilton? I think he has a statement he wanted to make just

a moment ago.

Mr. HAMILTON. Oh, thank you very much, Mr. Chairman. I was

just going to say that IPCC and the efforts that are being made on

climate science right now are thousands and thousands of people

and that the research that is happening is really a massive effort.

In any effort of that size, you may get some instances where people

go over a rhetorical line or something like that. But I think that

when you look at the largest mass of research, it comes up with

437

some pretty disturbing conclusions about what is not only potentially going to happen, but has already started to happen.

Mr. WHITFIELD. If the person responsible for the research ultimately says there is no scientific evidence whatsoever and yet the

lead author at a press conference emphatically stated that global

warming was causing more hurricanes.

Mr. HAMILTON. Well, my understanding——

Mr. HALL. Okay. We will go back to regular order now, if we

might. Mr. Burgess, recognize you for 5 minutes.

Mr. BURGESS. Well, thank you Mr. Chairman. I appreciate being

part of this hearing today. I am new on the committee, and I

haven’t heard all of the arguments for the last—how many years

have you been working on this, Mr. Chairman? 6? 10? I mean it

has been awhile, and it is pretty clear to me that—I think we all

have enough talking points in our satchels that we could continue

this argument, certainly, through the conclusion of my natural lifetime. But I agree with the Chairman; I think there is a unique opportunity before us this year to get a bill done, and I would like

to see that happen. And to that end, even—and Mr. Chairman, I

would ask unanimous consent to make this available in the record.

This is a——

Mr. HALL. Without objection.

Mr. BURGESS. [continuing] an editorial from the Fort Worth Star

Telegram, January 24, 2005. Now, the Star Telegram is from Fort

Worth, Texas. That is the largest city in my district, in North

Texas. It is also a jurisdiction that is shared by the Chairman. The

Star Telegram is not always a fan of things that happen in this

committee, and it is not always a fan of things like drilling in the

Alaskan National Wildlife Refuge; but they came out on January

24 with their editorial statement that it is time to break the logjam

and that it may be time to give on proposals such as drilling in the

Alaskan National Wildlife Refuge. They argue that increasing the

CAFE standards ought to be a part of this compromise.

I disagree with that. I think we are better off following market

forces. I am a happy driver of the Prius automobile. I held out for

the Ford Escape hybrid as long as I possibly could, and it wasn’t

happening, so I am getting my 50 miles to the gallon and quite

happy with that.

And in fact, Mr. Chairman, if I may, you know, I actually feel

morally superior to other people on the road. And I think there is

even a name for that now in the psychologic literature. It is called

Prius envy. The point I would make——

Mr. HALL. Your time is about up.

Mr. BURGESS. The point I would make is that I do believe it is

time to stop the talk and get to some action, but I can’t resist, just

like everyone else—now, Mr. Dinneen, you talked about the use of

ethanol and a reduction of greenhouse gasses as a result of that.

I am not really as smart in organic chemistry as I should be, but

detail for me, if you would, what are the products of the oxygenation/combustion of ethanol with 2 carbon fragment?

Mr. DINNEEN. Well, you just got beyond my area of expertise as

well.

Mr. BURGESS. Would it not be carbon dioxide and water, just to

simply things?

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Mr. DINNEEN. In the production of ethanol, you are growing

crops, whether it is corn or wheat or sorghum or switchgrass that

is taking carbon dioxide out of the air. When that fuel is then

burned in a vehicle, carbon dioxide is then emitted, just like it

would any other vehicle or any other fuel, but it is a closed cycle.

Mr. BURGESS. If I may, with the exception of that fuel that is expended in the growth of those crops, which is also a part of that

cycle as well—I am not sure how many gallons of petroleum it

takes to make a gallon of ethanol in the farming cycle, and again,

I wouldn’t presuppose to have that knowledge, but I don’t think it

is entirely free from the carbon standpoint.

Mr. DINNEEN. Well, it is not, but the studies that have been done

on it show that there is a significant gain in energy when you consider the energy it takes to grow the grain, harvest it, bring it to

the ethanol plant, and then process that grain into ethanol. I noted

in my testimony that the latest USDA study demonstrates that the

entire process yield 167 percent more energy than it takes to

produce all of that. And I would be glad, Mr. Chairman, if it is allowed, to introduce the report from USDA on that issue because it

is an important point.

Mr. BURGESS. And I would agree with that. It sounds like you

are about as efficient as my Prius, so I will accept that. Mr. Olson,

if I could ask you a question about the testimony you gave on

MTBE and its carcinogenesis. Now, you said in high doses as I recall your testimony. Is that the correct phraseology? Do I have that

right?

Mr. OLSON. What I said was that in high doses, it causes cancer

in animals, and both EPA and many others have concluded that

suggests that it may present a risk to humans at high doses.

Mr. BURGESS. Is MTBE on that famous list of cancer-causing

agents?

Mr. OLSON. Well, I am not sure which list you are talking about.

Mr. BURGESS. Okay. The—what——

Mr. OLSON. There are a lot of lists.

Mr. BURGESS. Which types of cancer have been implicated as

being caused by MTBE?

Mr. OLSON. Well, it depends on which study. I would be happy

to submit for the record the EPA’s statement that goes through all

of the studies, the specific animal studies. I have got that with me,

so I can certainly submit it to you.

Mr. BURGESS. Yes.

Mr. HALL. Without objection, it is in the record.

[The statement appears at the end of the hearing.]

Mr. BURGESS. And—but at the present time, there are no studies

causing—drawing a direct, point-to-point line between MTBE and

cancer in humans?

Mr. OLSON. I don’t know of any epidemiological studies of humans, but of course, it is kind of too late at that point. People have

already been exposed for 10 or more years and have gotten cancer.

The idea is to try to avoid that, to avoid people being exposed and

then getting cancer later.

Mr. BURGESS. But in the—what do we have already? A 10-year

timeline that MTBE has been in gasoline? Going back——

Mr. OLSON. More than that, yeah.

439

Mr. BURGESS. [continuing] and evaluating that data, at present,

we don’t have that——

Mr. OLSON. I am not aware of any epidemiological study——

Mr. BURGESS. Okay.

Mr. OLSON. [continuing] that has been done. There may have

been one, but I am just not aware of it.

Mr. BURGESS. All right. Very well. Mr. Cavaney, just the time

that if I have left, you started to make a comment about the—

about what was happening with the $1.6 billion fund that was

available for California was—that was the estimated cost was, in

fact, all that amount?

Mr. CAVANEY. The was the State’s estimated cost for the cleanup

to remediate MTBE back in the late 1990’s.

Mr. BURGESS. And was all of that used? Did it indeed cost that

much or did——

Mr. CAVANEY. No, not at all. As I said, as they have gone forward, they found that the remediation costs and the extent of contamination is significant less, and that is why the California Energy Commission put out at reestimate. $200 million is what they

have now forecast.

Mr. BURGESS. Okay. Thank you.

Mr. HALL. Thank you, Dr. Burgess. The Chair recognizes Mr.

Allen, a gentleman from Maine, for 5 minutes.

Mr. ALLEN. Thank you, Mr. Chairman, and thank you for agreeing to place additional materials in the record with unanimous consent. I wanted to specify a number of particular documents to be

placed in the record.

First, I understand that a number of groups representing important perspectives have asked to testify regarding the MTBE liability waiver. These groups include the U.S. Conference of Mayors,

the American Waterworks Association, and the Association on Municipal Water Agencies. I ask that these organizations’ letters,

which state their opposition to the MTBE liability waiver and

would seek to testify before this committee, be included in the

record of the hearing.

Mr. HALL. Is the gentleman aware of the fact that we have already accepted those, and they are in record?

Mr. ALLEN. I am not.

Mr. HALL. We will put them in there a second time if you like.

Mr. ALLEN. No, no, don’t put them in a second. I—let me—well,

before I go too far, let me make sure that a statement by David

Baron on the bump-up provisions——

Mr. HALL. Yes.

Mr. ALLEN. Has that been——

Mr. HALL. It is in.

Mr. ALLEN. It is in? Okay. Thank you. I don’t need to do that.

I appreciate it. I wanted to align myself with Mr. Burgess as a superior person, I guess, since I, too, own a Prius. This is a bipartisan

thing.

Mr. BURGESS. Bipartisan superiority.

Mr. ALLEN. Bipartisan superiority. But the point I wanted to

make—this is probably for another time; I do have a question that

is relevant to this committee. But I am very concerned that—I

waited, too. I wanted the Ford Escape. I wanted to buy an AmerVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00447 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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ican vehicle, and they couldn’t do it, and eventually, they had to

essentially buy the Toyota technology. I think it is a serious problem for our competitiveness in this country that we are so far behind Toyota and Honda in developing—and frankly, the Germans

with diesel—in developing more efficient fuel vehicles, and it seems

to me a major problem.

I also wanted to say that one of the problems I have with this

piece of legislation is that it doesn’t bend the demand curve down.

The hard, cold truth is that—as I understand it, is that global oil

production in the last 20 years increased by 20 percent, but global

demand in the next 20 years is expected to increase by 50 percent.

And we sit here in the United States with 25 percent—consuming

25 percent of the world’s fossil fuels with 2.1 percent of the reserves. And I just believe that we can’t have a balanced energy bill

unless it does something to bend that future demand curve down,

and I do think it is one of the disadvantages of the particular legislation so far.

MTPBE has been a major issue in the State of Maine. I think

our State, and maybe California, were the first to really find it had

contaminated a number of different wells. And so the waiver provision, the liability waiver provision, is a big deal in Maine; it is a

big deal in New Hampshire and number of other states.

So I wanted just to clear up a technical point. Mr. Cavaney and

Mr. Slaughter, in both of your written testimony, your organizations take the position that MTBE was mandated by the Federal

Government and approved by the Environmental Protection Agency

as a result of the passage of the Clean Air Act Amendments of

1990. Is that correct?

Mr. SLAUGHTER. Yes.

Mr. ALLEN. According to the EPA’s own rulemaking in this subject, it categorically states—it was amended in 1994. This is

40CFR, section 7921, subparagraph G, regarding additive registration procedures: ‘‘that a fuel additive may not state in any way,

shape, or form that the registration of a fuel additive constitutes

endorsement, certification, or approval of that additive by any

agency of the United States.’’ Indeed, it is my understand that the

law as well as the EPA was neutral on what oxygenate to use

under the Act and that it left the decision to the industry. If I could

ask you both to comment on both of those points. No. 1, the provision and the rule, itself, are you aware of that? And second, whether or not I am correct in understanding that basically it left the decision on the type oxygenate to the industry.

Mr. SLAUGHTER. If I may, Mr. Allen, on the second point, which

I think we can dispose of right away. The legislative history of the

Clean Air Amendments of 1990 and this particular provision are

replete with references to the fact that MTBE would be the major

oxygenative choice used to satisfy this requirement. Typically, Congress does not pick one particular substance and mandate it; it

uses more generic language. But the fact is the EPA and the legislators who were working on the bill at the time fully knew and intended that MTBE would be the major choice, and as it turned out,

MTBE was used for 87 percent of the oxygenates under the RFG

program. And on the second point, EPA had certified and approved

MTBE for use in gasoline as an additive in the mid-1980’s, and

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EPA reaffirmed that position several times, even in the regulation

you are talking about. In 1991 and 1994 when they basically put

forth the models for compliance with the Clean Air Act Amendments and RFG program, they stated that MTBE would be the oxygenate most widely used, and as a matter of fact, they based the

standards, themselves, on use of MTBE with corrections that would

have to be used if another oxygenate were being relied on. So there

is complete knowledge here, at the very least, that an officially approved oxygenate would be the major source of oxygen in this program, and it is hard to get any closer to outright mandating than

that particular series of events.

Mr. ALLEN. Mr. Cavaney?

Mr. CAVANEY. EPA approval doesn’t necessarily endorse a particular oxygenate, but the approval and the registration means that

it was shown that MTBE didn’t effect emission-control compounds

or substantially change gasoline, so it is a de facto approval that

MTBE is acceptable for use.

Mr. ALLEN. Do you disagree with the Exxon-Mobile case in the

9th Circuit that—which the Court ruled that the Clean Air Act

does not mandate a recipe or a so-called government gas? Do you

know that case?

Mr. SLAUGHTER. Yes, we would disagree with that finding. As I

pointed out in my testimony, I mean I actually lobbied the issue

in 1990 for an oil company. We posed the mandatory provision for

oxygenate; we wanted performance standards for the gasoline. The

industry advertised, and we usually don’t do that. We advertised

against this provision because we were concerned about this type

of prescription as opposed to performance standards, which would

have made a lot more sense.

And just one thing that was mentioned earlier: I mean it was

talked about the MTBE was used earlier than the RFG program.

It was used because lead was banned in gasoline in the late 1970’s,

and in order to supply enough octane to the fuel, you had to come

up with something else to supply octane. MTBE was used, but in

relatively small percentage, maybe 1 percent, Mr. Allen. And when

you go to the RFG program, 11 percent of the volume of RFG was

MTBE because of this 2 percent requirement. So you are seeing it

is a significant jump in the amount of that material that is going

to be placed in commerce in the United States. The industry recommended strongly to Congress that they not mandate that.

Mr. CAVANEY. And the point we have said all along is we and

EPA and much of the public literature recognized this problem

back in the late 1980’s before this was done, and they went forward

with it anyhow, so that is the part that concerns us, is that there

is not a conspiracy here. People are trying to rewrite history a little

bit here to make the case for why all of these suits ought to be permitted.

Mr. ALLEN. Thank you both. Thank you.

Mr. SULLIVAN [presiding]. I guess I will recognize myself. I don’t

really have any questions. I just—I am glad people are here. I

think an energy policy is extremely important for this country, and

I hope we get it done. When I was running for Congress people

talked about that; I am from Oklahoma, and it is very important,

not only from a national security perspective, but also from jobs

442

and economic development. I think an energy policy passed in this

country today would create thousands of jobs across America,

which is very important.

And I want to see the MTBE thing get straightened out. I think

it is—you know, the government did mandate that that occur and

that people use that, and I think we ought to be sensible as we go

forward in getting that straightened out.

But I am glad you are here. I look forward to working with you.

I am new to the committee. I did not know I would be chairman

this quickly, but I like it. And that is all I have got. Thank you.

Mr. GREEN. Mr. Chairman?

Mr. SULLIVAN. Yes, sir. Gentleman from Texas, Mr. Green?

Mr. GREEN. Thank you, Mr. Chairman. Following up on Mr. Allen’s questions, but before I do that, I think when Congressman

Allen leaves, you and I could probably draft a pretty good energy

bill, Mr. Chairman, that we could get out of this subcommittee and

get onto the floor. I just have a few amendments to our last energy

bill that I think would expand our opportunity for production. But

following up on the MTBE concerns—and I want to focus on

MTBE, because you know—I represent a district that made that

because people said that is that what it is going to do, and it has

cleaned up our air in Houston and a number of other communities.

And we all want a full a tank of gas, and we don’t want it—and

we don’t want to taste it or smell it, but in all honesty, there has

to be some way we can deal with it.

Mr. Slaughter, on some of the air benefits from MTBE: MTBE

is cleaner burning and reduces smog more than regular gasoline—

we learned that—but it is more water-soluble than regular gasoline. Is that right?

Mr. SLAUGHTER. That is correct.

Mr. GREEN. And if we lose our ability to use MTBE, we will have

even smoggier air than we are—we would otherwise, especially in

smog-problem places like California and the East Coast and in

Houston. Is that correct?

Mr. SLAUGHTER. MTBE was proven, Mr. Green, to be a very effect gasoline blend-stock, and it basically contributed significantly

to the reduction of smog-causing agents and also air toxins and

really was a major contributor to the success of the reformulated

gasoline program in many states.

Mr. GREEN. And again, I noticed it has improved ours because,

Mr. Chairman, even this morning in the Washington Post, Houston

was not on the top 10 of the asthma problems in the country, and

so considering the problems we have on a regular basis, I consider

that a win.

Not only do only do we have the ozone and the asthma, visibility

problems, the smog, but toxic air compounds as well. And can you

expand on your testimony that states that the California Air Resources Board had a study that shows volatile organic compounds

will increase in California’s air without MTBE?

Mr. SLAUGHTER. There are concerns about what is called the permeation effect, that ethanol, the only other available oxygenate,

has when MTBE is replaced with ethanol. As you know, Mr. Green,

we still have a 2-percent oxygenation requirement for RFG, which

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means that where MTBE is banned, you have a de facto ethanol

mandate.

Ethanol is a product that our members, many of our members,

sell. We are very high on ethanol. It is a good gasoline blendstock,

and there will be significant need for it. However, it does have

some environmental properties that make it difficult to use in certain areas, and some of those problems, we think, are appearing in

California, and that is basically why we think that the Congress’s

policy should be evenhanded vis-a ́-vis MTBE and ethanol.

Mr. GREEN. Okay. And I guess that problem—we have talked

about this on our subcommittee and the full committee: we have

an underground storage tank program, LUST, that was paid into

for years. And if we could address the problems in California or the

New England States or even in East Texas—because I know Chairman Ralph Hall had a concern about it a couple of years ago because of a pipeline break—and they would actually that funding to

cleanup the problems, I think we could deal with it. Again, I appreciate your testimony.

Mr. Santa, from—sometimes the energy—they—as described as

the past and present versus the future, and it seems strange for—

where I come from in Texas we get criticized for just trying to drill

our way out of a problem, and I don’t know if that is fair because

I think we also—I also support major investments in our future of

our energy economy, whether it is hydrocarbons or 50 years from

now, something else. But I think a lot of critics of today’s energy

economy have misconceptions about what tomorrow’s may be as

well.

Many environmentalists look forward to a hydrogen economy,

and could you tell us what fuels we are going to be able to use to

power these hydrogen fuel cells?

Mr. SANTA. Well, Mr. Green, I am not an expert on hydrogen;

however, I do know that currently one way to get hydrogen is to

refine or process natural gas. As we know, we currently have got

some challenges on the natural gas price and supply situation, and

obviously, relying upon gas to create hydrogen would put even

more pressure on the gas resource base and the price situation, so

I think it does really point to the notion that if the Nation is going

to make a transition to hydrogen, there needs to be some significant research and development into other ways that it can be commercially produced.

Mr. GREEN. Other than using natural gas, which we would have

to now. And so even you opposed drilling in Anwar or MTBE or

other oil industry issues, you still see the need for natural gas and

other infrastructure in order to have the hydrogen economy in the

future, without—you know, even if we do the research, we may be

able to find something.

If we have a hydrogen economy and do not allow natural gas production, for example, in the Eastern Gulf or the Outer Continental

Shelf, we will certainly need LNG, and I know that is—Mr. Chairman, that is one of the amendments I had liked that wasn’t in that

last energy bill—to make sure—although it is heresy for a Texan

to say we need to import natural gas. But I think we need to provide a streamlining effect, and Congressman Tierney and I have

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legislation on that—in additional to the Alaskan gas. Is that correct?

Mr. SANTA. Yes, sir. I mean, I think the position that INGA has

taken, and I think other natural gas industry trade associations, is

that this is not a situation of its LNG or Alaskan gas or LNG or

Rockies production, that, in fact, we need to take advantages of all

places where we can get the resource, both domestic and imported.

Mr. GREEN. We need all of the above?

Mr. SANTA. That is correct.

Mr. GREEN. LNG, Alaska, and more exploration, for example in

the Eastern Gulf and everywhere else. Thank you, Mr. Chairman,

unless someone else on the panel has any responses to the questions. I know you all sit there for a long time, and as you can tell,

Members of Congress can’t do that.

Mr. DINNEEN. Congressman, I just have a brief comment on your

dialog with Mr. Slaughter, my good friend, about the air quality

impacts of taking MTBE out of gasoline. One of the benefits of the

bill that Chairman Barton has put together is that it includes a

very strong anti-backsliding provisions that we believe will assure

that the emissions benefits of RFG are preserved.

Mr. GREEN. And I appreciate that because that is one of our concerns. In fact, when I was first was on the committee and—Congressman Waxman and I talked about, that we would have no

backsliding or——

Mr. SLAUGHTER. Mr. Green, if I could just mention, there, on the

subject of MTBE. Material has been put in the record that attempts to characterize the South Lake Tahoe situation, and I have

a couple of documents for the record that address several of the

legal issues that are raised in those papers. I would just like to balance that from our perspective and get that material into the

record if we could.

Mr. GREEN. If you submit it, Mr. Chairman, I would——

Mr. SULLIVAN. I will accept.

Mr. GREEN. [continuing] love to insert that information in our

record. Thank you.

Mr. SULLIVAN. Without objection—gentleman is excused. I would

like to recognize myself for 5 minutes to ask some questions. Mr.

Cavaney, I would like to ask you do any of the provision in the discussion draft absolve any of your members companies of the obligation to do environmental cleanup of MTBE or to restore areas impacted by releases of MTBE into the environment?

Mr. CAVANEY. They do not. They all remain in force, and if we

do negligence, trespass, or any other violation of current law, we

can be held for wrongdoing, and then ultimately damages. The

issue is just defective product under product-liability law, which

says it is sort of like a free pass because what, in essence, it says

in a finding in court is if it is a defective product, the plaintiff

doesn’t have to prove wrongdoing. They can automatically go to punitive damages and start to settle at that point, so everything else

remains in force. If we have something wrong, you know, we are

liable, and we will pay, and in many cases, you know, we are cleaning up before anything even gets to a court.

Mr. SULLIVAN. Okay. I have got a couple others if you don’t

mind. Is there any change in the obligation or liability to clean up

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any groundwater effected by gasoline, regardless of whether it contained oxygenates, under the Resource Conservation and Recover

Act, the Federal Clean Water Act, and States’ Clean Water Acts?

Mr. CAVANEY. No, there is not. It remains in force.

Mr. SULLIVAN. Thank you. I would like to recognize Mr. Waxman

from California for 5 minutes.

Mr. WAXMAN. Thank you very much, Mr. Chairman. I want to

apologize to this panel that I have had conflicts in my schedule, so

I haven’t been here to hear your testimony, but I will certainly

have a chance to review it.

Mr. Cavaney, I am little perplexed by your testimony today. You

stated that Congress mandated the use of MTBE. You implied, but

didn’t state clearly, that if hadn’t been for the Clean Air Act

Amendments of 1990, oil companies wouldn’t have used MTBE in

the fuel supply, and I want to make the record clear on this point.

MTBE was used prior to the 1990 Amendments, wasn’t it?

Mr. CAVANEY. Yes, Mr. Waxman, it was used in relatively small

amounts to replace the lead in order to put enough octane in gasoline so it could go forward. The Clean Air Act Amendments significantly increased it, and that was the thing that the industry was

concerned about. We opposed the idea of mandating it because of

the concerns that were well known, publicly, that you run the risk

of having a groundwater-contamination remediation problem.

Mr. WAXMAN. I don’t believe that that was known by anybody

outside of the oil industry. There was nothing in the Congressional

hearing record, nor did those of us who were involved in the 1990

Amendments have that information given to us. What we asked

was that a certain standard be met from fuels. MTBE was only 1

of the ways that that standard could be met.

Mr. CAVANEY. It was the practical way. The other choice was, at

that time, a fledgling industry, which was ethanol, was the other

way to approach it; there was no way that you could meet the

deadline and get the volumes together in order to do that, and that

is why there is a number of the sponsors on the Senate who made

mention of the fact that they would be using MTBE here.

And I might go to the other point: EPA’s Blue Ribbon Panel on

Oxygenates, in their final report, actually identified this problem,

and that was well distributed and known in the public record.

Mr. WAXMAN. I beg to differ with you on that. But I want to submit for the record, Mr. Chairman, correspondence that Mr.

Cavaney and I have had on this questions. And Mr. Chairman, I

ask unanimous consent to put the correspondence in the record.

Mr. HALL. Is it in? I don’t know if Mr. Waxman is going to want

to put it in if it is already in.

Mr. WAXMAN. Well, if it is in, then there is no need to put it in.

If it is not in, I would ask—request that it could be put it.

Mr. HALL. Without objection.

In your letter to me dated June 21, 2000, Mr. Cavaney, you provide data that shows the oil industry was ramping up its use of

MTBE prior to the 1990 amendments. From 1986 to 1990, the oil

industry was increasing its use of MTBE on average by more than

2.6 million barrels per year. Each year, more and more MTBE was

entering the fuel supply, yet Congress had not enacted the Clean

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Air Act or even considered the reformulated gasoline requirement

that eventually became law.

By the time the Clean Air Act was enacted, the oil industry was

using 84,000 to 100,000 barrels of MTBE every day in the United

States. That means that each year, between 30 and 37 million barrels of MTBE were being sold into commerce. And now the oil industry is saying Congress made us do it. I don’t believe that is the

case, and I don’t think that argument holds up.

Nor is it the case that the industry only used tiny amounts of

MTBE before 1990 Amendments. According to Mr. Cavaney’s letter, prior to passage of the 1990 Amendments, the oil industry was

using some 40 percent of the amount of MTBE that would ultimately be used in 1998. And we will have our differences, but that

is part of the record of the letter I am going to put into the record

of this hearing.

Mr. CAVANEY. Yes. I might say, on the increase in volumes, typically—much is happening right now with the ethanol, where you

have seen MTBE banned in a number of states. The industry and

companies go out in advance because they have to fine-tune refineries, get sources of supply identified; and you have to start in the

beginning. You just can’t stop and start overnight, so naturally,

there are going to be companies who are going to be making major

capital improvements, and they will use that opportunity, then, to

adjust to what is obviously going to be the new world.

Mr. WAXMAN. Well, this legislation before us gives a pass to the

MTBE industry and defines it as a—not a defective product. I

think that is very controversial and a poor idea. I just want to ask

any of the witnesses: according to the Department of Energy’s Energy Information Administration, if Congress enacts the H.R. 6

conference report, the need for imported oil and petroleum products

will increase by 85 percent over 20 years. Will any of you tell me

whether you think it is a good idea to enact a comprehensive energy policy that will allow our needs for foreign oil to so dramatically increase in the coming decades? Anybody want to jump in on

that? Mr. Olson?

Mr. OLSON. Yes. Our view is that that is exactly the wrong direct

and that we ought to be enacting legislation that would require

much more energy efficiency and a switch toward renewables and

that this is not a forward-looking approach.

Mr. WAXMAN. Mr. Cavaney, do you want to respond to that question? And then, I am sure my time has expired.

Mr. CAVANEY. Mr. Waxman, when you look at the energy business, it is a very long-lived business in the sense that change occurs slowly over time, as you bring in alternative fuels, as you

bring in other sources of supply, wind energy and the like. And

then, you have to also look at population growth, because it is very

much tied to that, so it would only hold true that over a period of

time, it is going to increase to some degree. I think, also, that same

study has—one can best look at identified improvements in energy

efficiency and like. But clearly, some technologies could come along,

things like the Prius and other things, which might change that.

But it should not surprise anyone that, you know, that there is

continued increases until alternative sources are able to come in be

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price competitive and provide the kind of service and reliability

that you get from oil and natural gas.

Mr. HALL. I thank you, Mr. Waxman. That is the end of these

testimonies. I want to thank you for your patience and for the time

you have given us, and we are going to seat the second panel. And

for the second panel, don’t be dismayed by the lack of bodies up

here because you are really testifying for the record, and the staff,

the people that do most of the work, are here. And Mr. Shimkus

is the Vice Chairman of the Committee, and he is going to start

out; I am going to go vote. Thank you very much to all of you.

Thank you.

Mr. SHIMKUS [presiding]. We are about ready to start. As we let

the final people get out the door and take their seats, we are in

the process of having our—actually, our last vote of today, so we—

I imagine we will have members rotate back here for the second

panel. I will—the way I will do is I will introduce one of the panelists first. I will do his introduction; do your 5 minute opening statement—your full testimony is in the record—and then, I will do the

next introduction. Instead of going though the whole panel, I will

do it one at a time, so everybody—we just have to stage for—who

we are visiting with. So welcome, and we appreciate your time and

effort that it took to get here.

I would like to, first, introduce Mr. John Kane, who is the Senior

Vice President for Government Affairs for the Nuclear Energy Institute. Prior to joining NEI, Mr. Kane was Managing Director of

the Federal Relations at the American Council of Life Insurance.

I don’t want Mr. Markey to have any segue into that. Earlier, he

was a career naval officer, serving on 6 aircraft carries and 4 aviation squadrons, whose last assignment was Director of Navy Liaison, U.S. House of Representatives. I won’t hold that against you.

Mr. Kane has a bachelor degree in Naval engineering from the

United States Naval Academy. I will hold that against you, being

a West Pointer—as well as a master’s degree in systems management, international relations, and national securities strategic

studies.

So Mr. Kane, welcome. You have 5 minutes. The floor is yours.

Mr. KANE. Thank you, Mr. Chairman.

Mr. SHIMKUS. Naval Academy: that is what I would expect. Well,

the inference you are making handled that concept, but——

Mr. KANE. We need nuclear-powered microphones here.

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STATEMENTS OF JOHN E. KANE, SENIOR VICE PRESIDENT,

GOVERNMENT AFFAIRS, NUCLEAR ENERGY INSTITUTE;

NAVIN NAYAK, ENVIRONMENTAL ADVOCATE, U.S. PUBLIC INTEREST RESEARCH GROUP; JAMES H. HANCOCK, JR., CHAIR,

LEGISLATIVE AFFAIRS COMMITTEE, NATIONAL HYDROPOWER ASSOCIATION; ANDREW FAHLUND, VICE PRESIDENT

FOR RESTORATION AND PROTECTION OF AMERICAN RIVERS; JOHN E. SHELK, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, NATIONAL MINING ASSOCIATION; ALAN

NOGEE, DIRECTOR, CLEAN ENERGY PROGRAM, UNION OF

CONCERNED SCIENTISTS; AND RHONE RESCH, PRESIDENT,

SOLAR ENERGY INDUSTRIES ASSOCIATION

Mr. KANE. Thank you very much for the chance to be with you

today. I am John Kane from the Nuclear Energy Institute. The

NEI represents over 270 members, which includes every U.S. utility that owns and operates a nuclear power plant, and we also represent every company that is involved in helping forge the next

generation of safe, clean nuclear plants.

What our members do is essential for America’s prosperity and

security. Today, our Nation’s 103 reactors produce electricity to

power 1 of every 5 U.S. homes and business. We do it cleanly, reliably, and economically. We are less expensive than coal, natural

gas, or oil.

America needs 25 percent more electricity today than it did a

decade ago. We don’t have any more nuclear power plants now

than we did then, but nuclear still produces the same 20 percent

of America’s electricity supply, and that is because we dramatically

improved our capacity and output.

Many factors have contributed to this nuclear energy renaissance, but the 1992 Energy Policy Act set the stage, and this committee crafted it. You had the wisdom to include a new Federallicensing process for new nuclear power plants, and it is a good

one. Companies are testing that today, and it will pave the way for

new reactors in the United States. And we need those reactors because we will need in America 50 percent more electricity by the

year 2025. We will also need emission-free electricity to balance our

environmental concerns. Nuclear energy currently provides 70 percent of that emission-free electricity generation in the United

States today.

How do we meet the need the future? It is time for Congress to

provide an updated National Energy policy. We have to chart a

path forward for diverse energy next, that both reduces our dependence on foreign sources and protects the environment. H.R. 6

in the 108th Congress did that. We supported it then; we support

a similar approach this year.

What specific steps in the new legislation can help support a renaissance in nuclear power? First—there are 3. The first include

provision for nuclear and other energy sources to meet the challenges of adding base-load power plants, new transmission capability, and infrastructure investment. Second, support investment

options that help share the cost and business risk of building new,

next-generation nuclear power plants. And finally, appropriate

funding and oversight keeps the Yucca Mountain program on track.

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57 sections in H.R. 6 related to nuclear energy. The only section

we believe that should be removed is section 661, which deals with

security. Those requirements have been met, and that section

should be removed. We particularly applaud the previous conference report for supporting new nuclear plants.

There are several combinations of tools and techniques that will

stimulate construction in the United States, and we believe that

companies can best achieve these results by pursuing a combination of options. These would include investment tax credits, production tax credits, and accelerated depreciation. Specifically, we ask

this committee to look at a loan-guarantee mechanism for a limited

number of advance plants along with a mix of these tax incentives.

The exact combination will vary from company to company and

project to project. The companies placing orders from new plants

need a variety of options to move forward, and we don’t see this

Federal investment and partnering continuing forever.

The first few plants of any series of new capital-intensive baseload power plants will need support. Then, once the capital costs

are steadied out, we believe that after that is done that it will be

seen that these are economically competitive and viable, and companies and investors will finance the follow-on plants without any

assistance.

Finally, nuclear energy’s contribution to our future depends on

effective management of the used fuel problem. There are several

steps the committee can take to help us on this issue. And that is

to expedite the EPA’s determination of the radiation-protection

standard for Yucca Mountain so that delays in the program are

limited. And second, reclassify the Nuclear Waste Fund receipts

from electricity consumers to ensure that receipts are used for their

intended purpose, the disposal of spent fuel.

Mr. Barton, the chairman of the committee today, indicated in

his statement this morning that he intended to introduce legislation and work through this committee to solve that problem, and

we strongly support and applaud that. Mr. Chairman, we are seeing widespread support for nuclear energy. Eighty percent of Americans that we see in polls support it, and we know why: because

it is clean, safe, reliable, and cost effective. It is the only emissionfree source that we can readily expand to meet our Nation’s growing energy needs.

Our industry can play an even greater role in meeting this Nation’s need while protecting our environment, but to do so, we need

your help. We need to pass a comprehensive energy bill that enables us to continue providing Americans with clean, reliable, affordable electricity, stimulate investments in new nuclear plants,

and keep the Yucca Mountain program on track. Thank you very

much.

[The prepared statement of John E. Kane follows:]

PREPARED STATEMENT OF JOHN E. KANE, SENIOR VICE PRESIDENT, NUCLEAR

ENERGY INSTITUTE

Mr. Chairman and members of the committee, I appreciate your tireless efforts

to craft comprehensive energy legislation and the opportunity to provide the nuclear

energy industry’s perspective on this important work.

In his State of the Union speech on February 2, 2005, President Bush was emphatic that the passage of comprehensive energy bill by the Congress is long overVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00457 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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due. He stated that it is imperative that we enact legislation that will ensure we

have the energy we need to support our expanding economy now and in the future,

‘‘including safe, clean nuclear energy.’’

Our economy and high standard of living depend on low-cost, reliable and safe

electricity generation. We encourage Congress to take the final steps now to enact

comprehensive energy legislation that benefits all Americans.

Nuclear power is a critical part of our nation’s electricity supply. America’s 103

reactors cleanly and reliably produce electricity to power one of every five U.S.

homes and businesses.

The nuclear energy industry fully supported the H.R. 6 conference report of the

108th Congress that you and your members shaped over the past two years. We understand that this is the starting point for your deliberations in this new Congress,

and we applaud your leadership in getting a bill through the House expeditiously.

There are three key steps that this committee can take to ensure nuclear power

remains a critical part of a diverse electricity portfolio that provides future generations with clean, reliable and affordable electricity.

The three steps are:

• pass comprehensive energy legislation that contains the necessary provisions for

nuclear energy and other vital electricity sources to meet the challenges of adding baseload power plants, new transmission capability and other infrastructure

• support investment options to share the cost of the business risk of building the

first few next-generation nuclear power plants

• consider several issues for action in this or subsequent legislation important to

the long-term viability of nuclear energy, including the nation’s used fuel repository at Yucca Mountain.

The industry backed H.R. 6, because it helped provide the framework for nuclear

energy’s future in the United States. We strongly support similar legislation in this

Congress.

COMPREHENSIVE ENERGY BILL WOULD HELP ENSURE NUCLEAR ENERGY’S ROLE

In the legislative arena, the nuclear industry’s first priority is the passage of comprehensive energy legislation that includes the following nuclear energy-related provisions:

• financial incentives to promote investment in new nuclear facilities

• long-term reauthorization of the Price-Anderson Act

• funding authorization for key research and development programs

• provisions that support a stable regulatory environment essential to nuclear safety and security

• uranium market sales provisions

• creation of an assistant secretary of energy for nuclear energy at the Department

of Energy

• funding authorization for educational and training programs.

GOVERNMENT-INDUSTRY PARTNERSHIPS SUPPORT NEW-PLANT INITIATIVES

America’s electricity demand is expected to increase by 50 percent over the next

20 years, according projections from the Energy Information Administration. Nuclear power is the only emission-free energy source that can be readily expanded

to meet this demand.

The Detroit News recognized the need for new nuclear plants this week in an editorial titled ‘‘Put Nuclear Option Back on the Table.’’ In the Feb. 14 editorial, the

News said, ‘‘as natural gas prices continue to escalate and the nation remains handcuffed by the countries that control the lion’s share of the world’s oil, it’s time to

seriously consider nuclear power again.’’

The industry has taken enormous strides during the past few years to explore alternatives for new nuclear plants. Investment in new nuclear generation is a key

priority for the industry. We believe that it is wise energy policy to support publicprivate partnerships in jumpstarting the construction of new nuclear plants.

The H.R. 6 conference report included several important tax provisions supporting

investment in new nuclear facilities; the industry would welcome the same provisions in the bill you are currently crafting. However, we realize that the jurisdiction

for these measures lies with the tax-writing committees.

We would urge that you examine the inclusion of such measures as an investment

tax credit, accelerated depreciation, production tax credits (similar to those detailed

in Section 45), or a combination of these investments tailored to the needs of those

interested in building new plants. We ask you to consider how these measures may

augment a company’s strategy to build new nuclear plants, in view of varying comVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00458 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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petitive structures within energy companies’ states, geographic areas or service territories.

There is, however, one investment area within the committee’s jurisdiction: the

loan guarantee. We recommend that you consider fashioning a limited loan guarantee structure to aid companies interested in pursuing new nuclear plants. As with

other investment incentives, a loan guarantee would be available for a very limited

number of new, advanced plants.1We understand that there are concerns among

some House members relating to the possibility of default with respect to loan guarantees. However, the industry believes that the record of performance of today’s nuclear power plants (including records for production and efficiency in three of the

past four years) underscores the fact that nuclear energy is competitive today and

will remain so in the future. The industry intends to build new plants that will be

highly efficient and profitable.

We believe that companies can achieve the best results by pursuing a combination

of options, including loan guarantees, investment tax credits, production tax credits

and accelerated depreciation. The specific combination of financing tools and techniques will vary from company to company, and from project to project. But companies need a variety of options to move forward toward placing new plant orders.

Dr. Ivan Maldonado, an associate professor of mechanical, industrial and nuclear

engineering at the University of Cincinnati, wrote Jan. 30 in The Cincinnati

Enquirer that ‘‘Congress should include the tax incentive in a comprehensive energy

bill that’s awaiting final action.’’ Maldonado wrote that a tax credit (similar to credits for renewables) ‘‘would block our backsliding into even greater oil dependency,

provide needed electricity capacity, and help slow and eventually reverse the buildup of greenhouse gases.’’

The financing challenges for the industry apply to the first few plants in any series of new capital-intensive baseload power plants. As first-of-a-kind capital costs

decline, and as investors gain confidence that the licensing process works as intended, companies can finance subsequent plants without federal investment.

Equally important have been changes made to the licensing process in general,

which remove bureaucratic, counterproductive hurdles and replace them with common-sense objective criteria. Energy companies are demonstrating and testing the

new licensing processes to ensure that they can be completed in a disciplined manner with full public participation and to ensure no unnecessary delays in the licensing process.

PRICE-ANDERSON ACT RENEWAL

A necessary part of the framework that would enable companies to pursue new

plant projects is the renewal of the Price-Anderson Act. H.R. 6 called for an indefinite extension of the Price-Anderson Act; this comprehensive bill should include the

same provision.

The portion of the Price-Anderson Act that covers commercial nuclear reactors expired on Dec. 31, 2003. Coverage for Department of Energy contractors has been

temporarily extended through Dec. 31, 2006. However, the law provided a

‘‘grandfathering’’ provision that continues the coverage for the current plants until

reauthorization. However, no new plants will be covered until Congress reauthorizes

the act.

The industry provides more than $10 billion of no-fault insurance protection in

the unlikely event of a nuclear reactor incident. The nation’s electric utilities—not

the public or the federal government—pay for this insurance.

The federal government has never paid a penny under Price-Anderson for commercial reactor licensees. To the contrary, the federal government has received $21

million in indemnity fees from utilities. In addition, the act has served as a model

for legislation in other areas, ranging from vaccine compensation and medical malpractice to chemical waste cleanup.

More than $200 million has been paid in claims and costs of litigation since the

Price-Anderson Act went into effect, all of it by the insurance pools. Of this amount,

approximately $71 million has been paid in claims and costs of litigation related to

the 1979 accident at Three Mile Island.

This protection consists of two levels. The primary level provides liability insurance coverage of $300 million. If this amount is not sufficient to cover claims arising

from an accident, the second level—secondary financial protection—applies. For the

second level, each nuclear plant must pay a retrospective premium, equal to its proportionate share of the excess loss, up to a maximum of $100.6 million per reactor

per accident. This includes a $95.8 million premium and a 5 percent surcharge that

may be applied, if needed, to legal costs.

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NUCLEAR ENERGY RESEARCH AND DEVELOPMENT

The nuclear energy industry was especially pleased with the far-reaching nature

of the provisions in H.R. 6 focused on research and development of new nuclear

power systems. The industry expects to begin building new nuclear plants and further improving the performance of nuclear power plants throughout the next two

decades.

New technologies that will emerge during that time frame will improve efficiency

and safety. Based on projections for the growth of electricity demand, we will require greater electricity production in all sectors, and nuclear energy must play an

integral role in our future national energy portfolio.

Previous legislation authorized funding for the following nuclear energy research

programs, including:

• the Nuclear Energy Research Initiative, which is focused on future reactors

• the Nuclear Energy Plant Optimization program, aimed at increasing efficiency

of existing reactors

• Nuclear Power 2010, DOE’s initiative to begin work on new reactors by the end

of the decade

• the Generation IV Nuclear Energy Systems initiative, which supports work on advanced reactor designs

• Nuclear Hydrogen Initiative, for research into reactor designs for large-scale hydrogen production

• Nuclear Infrastructure Support, which focuses on maintaining, upgrading and

modifying existing nuclear facilities, as well as building new facilities.

The conference report established funding for an advanced nuclear fuel recycling

program, aimed at developing proliferation-resistant nuclear fuel recycling and

transmutation technologies. It also proposed research focusing on materials science

for advanced fission reactors and the DOE fusion program. The industry believes

all of these programs are important to our nation’s energy future and supports their

inclusion in comprehensive energy legislation.

STABLE REGULATORY ENVIRONMENT ESSENTIAL TO NUCLEAR SAFETY AND SECURITY

As the industry plans an increasingly important role in meeting our electricity

generation needs, it is essential that we streamline regulatory processes so they are

responsive and safe as possible. A stable regulatory environment also builds confidence within the financial community—a necessary condition for companies seeking financing for new plant projects.

With almost 3,000 reactor-years of experience, nuclear energy’s safety performance over the past 10 years is virtually unparalleled in American industry. If we

look at reactor performance and lost-time accident rates, nuclear plants are among

the safest places to work in the entire industrial sector. We want to extend this

safety record under a stable, predictable regulatory process.

We thank this committee for its role in helping bring safety-focused regulations

to NRC reactor oversight. By applying these same principles, we can achieve a fair

and predictable licensing process for new plants and the repository at Yucca Mountain.

Regulation for today’s reactors has experienced a sea change over the past five

years. First thought to be too complicated, safety-focused, performance-based regulatory concepts are now commonplace in the Nuclear Regulatory Commission revised reactor oversight process.

Today, three-quarters of U.S. reactors are in the NRC green category, the top

level of regulatory performance. Meanwhile, there are relatively few ‘‘white’’ inspection findings and performance indicators—the next level of increased regulatory attention—across all plants.

That’s an excellent level of safety performance, and one we need to maintain if

we want the same safety-focused regulatory concepts applied to new reactors. Stability and objective measures of performance in regulation have been instrumental

in achieving this record.

The H.R. 6 conference report contained a number of provisions related to safety

and security in the regulatory regimes. The industry found these provisions generally workable. However, we believe Section 661 should be eliminated from the new

bill, since that action has been completed to the satisfaction of the Nuclear Regulatory Commission.

URANIUM FUEL MARKET PROVISIONS

As the need for more nuclear energy arises, the industry must prepare to meet

that demand, including ensuring that there is a stable supply of reactor fuel at a

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fair price. There are several important sections in H.R. 6 that would make the market more stable and competitive. In addition, there is a provision to create more

competition in the enrichment market. This is good public policy and should remain

in a comprehensive energy bill.

NEW ASSISTANT SECRETARY OF ENERGY FOR NUCLEAR

The industry also supports the provision that would create an assistant secretary

of energy for nuclear issues. The performance record and output of the current fleet

has shown that nuclear energy must remain a part of America’s the future electricity generation. Elevating this position at the Department of Energy from the director to assistant secretary level is an overdue recognition of the position of nuclear

power in our nation’s energy future.

PERSONNEL AND TRAINING

The industry supports provisions included in previously proposed legislation that

fund educational efforts for the energy industry in the personnel and training section. These initiatives also endorsed partnerships with educational institutions that

serve traditionally underrepresented groups in energy-related scientific and technical careers, such as historically black colleges and universities, Hispanic-serving

institutions and tribal colleges. The industry strongly supports such efforts.

INDUSTRY CALLS FOR SUSTAINED PROGRESS AT YUCCA MOUNTAIN

The industry has concerns regarding Yucca Mountain, an issue not addressed in

the H.R. 6 conference report. However, there are important policy issues related to

Yucca Mountain that must be resolved by Congress in the first session of the 109th

Congress, and one issue that merits consideration during formulation of a comprehensive energy bill.

The federal government has made significant progress on the Yucca Mountain

project over the past several years. However, the government must ensure that this

important project stays on track so that it is completed in a timely and cost-effective

manner.

This committee can support this important national initiative by considering the

following actions:

• expedite the determination of the radiation protection standard for Yucca Mountain to limit program delays

• reclassify the Nuclear Waste Fund to ensure that consumers’ money specifically

paid into a trust fund for the construction of the Yucca Mountain Project is

available to DOE when needed.

A 2004 federal court ruling determined that the Environmental Protection Agency

must re-evaluate its 10,000-year radiation standard for Yucca Mountain. As a result, some have expressed concerns that resolving the radiation standard may delay

the Yucca Mountain project longer than necessary. The industry believes that Congress must exercise close oversight of steps to resolve the radiation protection standard and take those actions that may be necessary to assure the process is not unduly delayed.

The industry believes that the Committee should direct the EPA to establish the

standard in an expeditious manner or institutionalize the standard as a matter of

policy that applies to all hazardous material, including radioactive material.

As the Yucca Mountain repository moves toward full-scale development, the funding requirements for the project will increase significantly. Congress must reform

the funding process for Yucca Mountain so that DOE can move forward to complete

this project.

Congress established the federal Nuclear Waste Fund in 1982. It is funded by

electricity customers to pay for the disposal of used nuclear fuel from commercial

power plants. The fund should be used for this purpose, and income into the fund

should be available when needed by DOE, subject to congressional oversight.

Electricity consumers have paid more than $24 billion in fees to the Nuclear

Waste Fund, which is growing by about $1 billion per year. The fund, if used as

intended, will pay for disposal of used nuclear fuel from the nation’s commercial reactors. The current budgetary process takes consumer money from the Nuclear

Waste Fund and uses it in other, unrelated areas. Congress should reform this process to ensure that this money is used for its expressed purpose: the Yucca Mountain

program.

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CONCLUSION: NUCLEAR ENERGY IS VITAL TO AMERICA’S ENERGY FUTURE

Nuclear energy supplies clean, reliable, affordable and safe electricity and is the

only emission-free source that can be readily expanded to meet our nation’s growing

energy needs. For these reasons, there is widespread support for nuclear power remaining an essential part of our diverse energy mix. The industry believes passage

of comprehensive energy legislation that addresses the future of nuclear energy, including support for new plants and Yucca Mountain, is critical to this effort.

Electricity produced by America’s nuclear power plants over the past 50 years has

played a key role in the growth and prosperity of our country. Nuclear energy is

America’s second-largest electricity source, and increased production from today’s reactors alone has met one-quarter of the nation’s electricity demand growth over the

last decade.

Now, nuclear power is poised to play an even greater role in America’s energy future. Energy companies are partnering with the federal government to explore possibilities for construction of next-generation nuclear plants, just as the government

joined industry to make the first commercial plants a reality 50 years ago.

During the past decade, electricity production at America’s nuclear power plants

has increased dramatically even though no new plants have been built. Between

1994 and 2004, nuclear plant production increased by the equivalent of 18 additional 1,000-megawatt plants operating at 90 percent capacity—primarily from increased efficiency. In the past four years, the NRC has approved 2,300 megawatts

in power uprates, with another 1,100 megawatts in uprates under review. In addition to building new nuclear plants, energy companies will continue to seek ways

to safely increase the capacity of today’s reactors.

Nuclear power has a relatively small environmental impact compared to other energy sources. One of the most important environmental advantages is that nuclear

power plants produce no harmful air emissions in the process of producing electricity. Nuclear power plants produce electricity that otherwise would be supplied

by oil-, gas- or coal-fired generating capacity, and thus prevent the emissions associated with that fossil-fueled capacity. As a result, U.S. nuclear plants prevented the

discharge of an estimated 700 million metric tons of carbon dioxide into the atmosphere in 2004. This amount equals the carbon dioxide released from nearly all U.S.

passenger cars combined.

Nuclear energy also is essential for a strong and vibrant economy. Compared to

other fuel sources, uranium fuel for nuclear plants is abundant—readily available

from stable sources—and affordable. Nuclear energy’s significant role in the energy

sector relieves pricing pressure on natural gas and other fuel sources used to generate electricity, and could take the pressure off the high costs of natural gas.

More must be done to ensure that nuclear power can help meet our nation’s growing energy demand and balance our energy portfolio over the next half century,

while protecting our air quality.

The industry strongly urges Congress to pass comprehensive energy legislation

that recognizes the benefits that nuclear energy provides today and helps pave the

way for an expanded role in America’s energy future.

Thank you for the opportunity to testify before this Committee.

Mr. SIMKUS. Thank you. Now, I would like to turn to Mr. Navin

Nayak, Environmental Advocate with U.S. PIR, has authored numerous fact sheets and report for U.S. PIR. Before joining their

staff in 2003, Navin worked with the World Wildlife Fund in Canada and received his master’s degree in environmental studies from

New York University in 2000 and his bachelor’s of science from

McGill University in 1997. Your full testimony is submitted for the

record. You have 5 minutes, and welcome.

STATEMENT OF NAVIN NAYAK

Mr. NAYAK. Thank you very much. Again, as you mentioned, I

am with the U.S. Public Interest Research Group; we are the national advocacy office for the State PIRGs. The State PIRGs are

State-based advocacy groups that work on environmental, good government and consumer issues. We appreciate the opportunity to

speak today, and we hope and expect that our view and the view

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of other citizen groups will be considered as Congress moves forward and this committee moves forward with energy legislation.

Before I get to the nuclear provisions, I would like to just speak

briefly about the kind of energy bill that we would like to see. I

think we agree, as I am sure all Members of Congress do, with the

President’s desire for a reliable supply of affordable, environmentally responsible energy. The primary goals of any energy policy should be to make our Nation more secure and less dependent

on foreign energy to reduce the energy costs to all consumers and

to minimize the harmful public health impacts and environmental

impacts of energy production and consumption. I believe that we

are all united on those goals.

Unfortunately, the energy bill that the President supports, that

the Congress tried to pass last year, which was twice-rejected by

the Senate, which is very similar to the one currently introduced

as a discussion draft, would fail on all accounts. According to the

Department of Energy’s own analysis by the Energy Information

Administration, under the energy bill, the U.S. would increase its

imports of foreign oil by 85 percent. Far from making us more secure and independent, the energy bill would make us less secure

and more dependent on foreign sources of energy than we are

today.

Furthermore, the EIA concluded the energy bill would have no

change in production, consumption, or prices. When the Department of Energy’s own analysis concludes that the energy bill will

not help consumers or reduce our Nation’s dependence on foreign

oil, it is time for Congress to reverse course and move toward an

energy policy that makes us genuinely safe and more secure.

The 3 things I would highlight, very quickly, in terms of an energy policy: we would like to see, as I mentioned, energy policy

should reduce our dependence on foreign oil. The National Commission on Energy Policy, which included representatives from Exelon,

from labor and from an environmental group, recommended that

we reduce our dependence by 3 to 5 million barrels per day by

2025. That would reduce our dependence by 15 percent.

Another component should be substantially increasing our investment in renewable energy. The oil, gas, coal, and nuclear industries have received $500 billion in Federal subsidies over the

last 50 years, whereas renewables have received about 25 billion.

Eighteen States have passed renewable energy standards which

would substantially increase their investment in renewable energy.

We have released a report today, which coincides with many other

reports, showing that investing in renewable energy would create

jobs, save consumers money, reduce our dependence on natural gas,

and provide substantial environmental benefits.

And the last component, very quickly, is to address the concern

around global warming. Today, as the Kyoto Protocol takes effect,

137 other countries are moving forward, and we have not.

I will spend the remainder of my testimony talking about our

concerns on the nuclear provisions. Nuclear power is not safe. It is

not economical. It is not reliable, and it is not necessary. All aspects of the nuclear fuel cycle pose a risk to humans and the environment, and nuclear power generates long-lived radioactive

wastes for which there is no safe solution.

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With 103 reactors, the U.S. produces nearly twice as much nuclear waste as any other country, creating the largest nuclear

waste disposal problem in the world. And no country in the world

has yet found a permanent solution to this problem. We have not

built a plant, as Mr. Kane referenced, in nearly 30 years, and the

energy bill would very well be the most consorted effort to a nuclear relapse.

The 2 things I would highlight: since the mid-1970’s, the U.S.

has kept a very strong policy of separating commercial reactors

from the creation of plutonium. And for the last 2 decades, we have

had a policy against reprocessing waste from commercial reactors.

The advanced fuel cycle recycling program, which is funded substantially in the energy bill, specifically reverses this decade-long

U.S. policy against reprocessing commercial waste. For security,

economic, and environmental reasons, we urge Congress to end

funding for that program.

And then, my second point I will raise is around the economics.

Nuclear power would, quite simply, would not exist in this country

if were not for the enormous subsidies paid for by rate payers and

taxpayers. From over $70 billion in research and development subsidies to a special taxpayer-backed insurance policy, known as

Price Anderson, to unjustified electricity rates, nuclear power has

received a substantial portion of Federal subsidies. The energy bill

extends existing subsidies and creates new ones, including, and I

will just highlight a few, as much as $6 billion tax credit, and this

would be in addition to the high cost that the energy bill already

had. The estimation last year was that the energy bill would cost

$26 billion in tax credits. That did not include that $6 billion tax

credit that would have taken effect if the energy had passed and

the nuclear power plants were built. In addition to that, a $1 billion subsidy to build a reactor in Idaho, as well as an extension for

another 20 years of the Price Anderson Act, which substantially reduces the costs of industry in the fact that they do not have to go

on the private market to obtain insurance.

In conclusion, I would just like to say that we do need to address

the serious energy problem facing this country. From reducing

costs to reducing our dependence on foreign oil to reducing the public health and environmental impacts. We cannot continue to the

same things we have done for 50 years and expect different results,

nor can we ignore this problem and pass an unstable energy future

onto our children. Congress needs to address our energy problems

and move us to a genuinely safe and secure energy future. And

again, I appreciate the opportunity to speak to you today.

[The prepared statement of Navin Nayak follows:]

PREPARED STATEMENT OF NAVIN NAYAK, ENVIRONMENTAL ADVOCATE, U.S. PUBLIC

INTEREST RESEARCH GROUP

Good morning, my name is Navin Nayak and I’m an Environmental Advocate

with the U.S. Public Interest Research Group, or U.S. PIRG. U.S. PIRG is the national office for the State PIRGs, which are environmental, good government and

consumer advocacy groups active around the country. The State PIRGs have more

than 300,000 members across the country. I appreciate the opportunity to speak before the Committee and to present our views on the energy bill before Congress. We

hope and expect that our views, and the views of other citizen groups, will be reflected in the final bill.

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1http://www.eia.doe.gov/oiaf/servicerpt/pceb/pdf/sroiaf(2004)02.pdf

The state PIRGs have a long history of working for a clean affordable and safe

energy future.

Our goal is to reduce America’s dependence on fossil fuels and nuclear power by

increasing our production of clean renewable energy and the efficiency of our energy

system.

We agree, as I’m sure all Members of Congress do, with the President’s desire for

a ‘‘reliable supply of affordable, environmentally responsible energy.’’ The primary

goals of energy policy should be to make our nation more secure and less dependent

on foreign energy, to reduce the energy costs on all consumers—residences, commercial, industrial—and to minimize the harmful public health and environmental impacts of energy production and consumption. I believe that we are all united in

wanting to achieve these goals.

Unfortunately, the energy bill that the President supports, and Congress tried to

pass last year (H.R.6), which is similar to the 2005 Energy Policy Act recently introduced in the House, would fail on all counts. According to the Department of Energy’s analytical agency—the Energy Information Administration (EIA)—under the energy bill the U.S. would increase its imports of foreign oil by 85 percent.1 Far from

making us more secure or more independent, the energy bill would make us less

secure and more dependent on foreign sources of energy than we are today. Furthermore, the EIA concluded that under the energy bill ‘‘changes to production, consumption and prices [would be] negligible.’’ In addition to increasing America’s dependence on foreign oil, the energy bill would provide no relief to consumers and

businesses. From an economic and consumer perspective, the Department of Energy’s analysis concludes that the energy bill would be completely ineffectual.

When the Department of Energy’s own analysis concludes that the energy bill will

not help consumers or reduce our dependence on oil, it is time for Congress to reverse course and move towards an energy policy that will make us genuinely safe

and secure.

AN ENERGY POLICY THAT WORKS

Fortunately, there is no shortage of solutions and policies that can meet the goals

of a good energy policy. I would like to highlight just 3 provisions that should be

integral to an energy policy that moves America forward—all of which are lacking

in the current energy bill.

1) Reduced Dependence on Oil

According to the EIA, the United States consumed 19.61 million barrels of petroleum per day in 2002. This is projected to grow to 28.3 million barrels per day by

2025 if we do not take action. Moreover, the U.S. only possesses 3 percent of all

known oil reserves in the world, and the EIA predicts that after peaking in 2008,

domestic crude oil production will decrease to 5.93 million barrels per day in 2010.

Congress must deal with the country’s oil deficit by reducing America’s dependence

on oil; we cannot ignore this problem and pass an unstable energy future on to our

children. Simply calling for increased drilling on public and private lands would do

nothing more than delay the inevitable need to reduce our dependence on oil.

The National Commission on Energy Policy, which included representatives from

industry, labor and an environmental group, recommended that we set a national

goal of reducing our dependence on oil by 3-5 million barrels per day by 2025. This

would cut America’s oil dependence by nearly 15 percent of projected levels in 2025.

The National Academy of Sciences concluded that it is economically feasible to double the efficiency of our vehicles in the next 10 years using existing technology; this

would allow cars to get 40 mpg and would reduce America’s dependence on oil by

4 million barrels per day by 2020. The energy bill before Congress would move us

in the opposite direction, increasing U.S. imports of oil by 85 percent. If Congress

is sincere about making this country more secure and safe, it must include a provision that will set a strong enforceable standard for reducing America’s dependence

on oil.

2) Renewable Energy Standard

According to the Energy Information Administration, the U.S. has the technical

potential to generate four times our total current electricity use from renewable energy. Currently, only 2 percent of our electricity comes from sources such as wind,

solar, geothermal and biomass, and more than 90 percent of the country’s electricity

comes from polluting and dangerous sources of energy such as nuclear, coal, oil and

gas. Investing in renewable energy would avoid the negative public health and enviVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00465 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
458

2 Intergovernmental Panel on Climate Change, IPCC Third Assessment Report—Climate

Change 2001: Summary for Policy Makers, 2001. 3 Intergovernmental Panel on Climate Change, IPCC Third Assessment Report—Climate

Change 2001: Summary for Policy Makers, 2001; and World Meteorological Organization, United

Nations, WMO Statement on the Status of the Global Climate in 2004: Global Temperature in

2004 Fourth Warmest (press release), 15 December 2004, downloaded from www.wmo.ch/indexen.html, 5 January 2005. 4World Meteorological Organization, United Nations, WMO Statement on the Status of the

Global Climate in 2004: Global Temperature in 2004 Fourth Warmest (press release), 15 December 2004, downloaded from www.wmo.ch/index-en.html, 5 January 2005. 5 Intergovernmental Panel on Climate Change, IPCC Third Assessment Report—Climate

Change 2001: Summary for Policy Makers, 2001.

ronmental impacts associated with burning fossil fuels and generating nuclear

power.

Several reports, including an analysis by EIA, have concluded that producing 20

percent of the nation’s electricity by 2020 is an affordable and achievable goal.

Moreover, numerous economic analyses—including one released by U.S. PIRG today

entitled Redirecting America’s Energy: The Economic and Consumer Benefits of

Clean Energy Policies—demonstrate that investing in renewable energy would create hundreds of thousands of new jobs, reduce demand for natural gas saving consumers billions of dollars, and alleviate the public health and environmental impacts of burning fossil fuels. In fact, we found that passing a renewable energy

standard and investing in renewable energy and energy efficiency would create

twice as many jobs and save consumers more than twice as much on natural gas

and electricity than the energy bill.

The best way to increase electricity generation from clean renewable energy is to

pass a renewable energy standard (often called a renewable portfolio standard) requiring that a fixed percentage of our electricity come from renewable energy by a

certain date. In the absence of federal action, several states across the country have

moved forward by passing renewable energy standards. In November, the voters in

Colorado supported an initiative to increase Colorado’s production of renewable energy to 10 percent by 2015. Seventeen other states have already passed renewable

energy standards including Texas, Hawaii, New Mexico, New York. If America is

going to reduce its dependence on fossil fuels and nuclear power, and move towards

a safe and clean energy future, the energy bill should, at the very least, include a

national renewable energy standard of 10 percent by 2015, similar to the one that

has passed the Senate.

3) Global Warming

Today, February 16, 2005, will be remembered as the day the rest of the world

moved forward to protect their citizens from the threat of global warming. One hundred and thirty seven countries signed the Kyoto Protocol, which comes into effect

today. The United States, however, has ignored the international scientific and political consensus that global warming is a serious current and future problem that

requires immediate action.

Human activities over the last century—particularly the burning of fossil fuels—

have changed the composition of the atmosphere in ways that threaten to dramatically alter the global climate in the years to come. Global warming is caused by the

greenhouse effect, a natural phenomenon in which gases in the Earth’s atmosphere,

including water vapor and carbon dioxide, trap heat from the sun near the planet’s

surface. Without a natural greenhouse effect, temperatures on Earth would be too

cold for life to survive.

Over the last century, however, the chemical makeup of the Earth’s atmosphere

has been changing, largely as a result of humans burning fossil fuels, which releases

large amounts of carbon dioxide and other greenhouse gases into the atmosphere.

Since the industrial revolution, atmospheric concentrations of CO2 have increased

by 31 percent.2 Concentrations of other greenhouse gases have increased as well.

These atmospheric changes have intensified the greenhouse effect, allowing less

of the sun’s heat to escape the Earth’s atmosphere. Global average temperatures increased during the 20th century by more than 0.6° C (1° F), with the rate of change

for the period since 1976 roughly three times that for the past 100 years as a

whole.3 According to the United Nations’ World Meteorological Organization, 2004

was the fourth hottest year ever recorded, and the 1990s were the warmest decade

since measurements began in 1861.4 If current trends continue, temperatures could

rise by an additional 1.4° C to 5.8° C from 1990 to 2100.5

The consequences of the increase in global temperatures will vary from place to

place because the Earth’s climate is extraordinarily complex. According to the

United Nations’ Intergovernmental Panel on Climate Change, the most authoriVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00466 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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6 Intergovernmental Panel on Climate Change, IPCC Third Assessment Report—Climate

Change 2001: Summary for Policy Makers, 2001. 7 EPA, Global Warming—Impacts, Western Mountains (fact sheet), downloaded from http://yosemite.epa.gov/oar/globalwarming.nsf/content/

ImpactsMountainsWesternMountains.html#changingeco, 5 January 2005. 8World Meteorological Organization, United Nations, WMO Statement on the Status of the

Global Climate in 2004: Global Temperature in 2004 Fourth Warmest (press release), 15 December 2004, downloaded from www.wmo.ch/index-en.html, 5 January 2005. 9Thomas R. Knutson & Robert E. Tuleya, ‘‘Impact of CO2-Induced Warming on Simulated

Hurricane Intensity and Precipitation: Sensitivity to the Choice of Climate Model and Convective Parameterization,’’ Journal of Climate, 17 (18), 3477-3495, 15 September 2004. 10Peter A. Stott, D. A. Stone, & M. R. Allen, ‘‘Human Contribution to the European Heatwave

of 2003,’’ Nature, 432, 2 December 2004; and Christoph Schar and Gerd Jendritzky, ‘‘Hot News

from Summer 2003,’’ Nature, 432, 2 December 2004. 11The Arctic Council, Impacts of a Warming Arctic: Arctic Climate Impact Assessment, 2004,

8. 12The Arctic Council, Impacts of a Warming Arctic: Arctic Climate Impact Assessment, 2004,

10.13The Arctic Council, Impacts of a Warming Arctic: Arctic Climate Impact Assessment, 2004,

9.

tative source on global warming, among the changes that could occur include sea

level rise of up to three feet by 2100; heat waves; drought; increasingly intense tropical storms; loss of plant and animal species; decreased crop yields; decreased water

availability; and the spread of infectious diseases.6

The first signs of global warming are already evident in the U.S. and worldwide.

For instance, in Montana’s Glacier National Park, the largest glaciers are only

about one-third the size they were in 1850, and many small mountain glaciers have

disappeared completely. The area of the park covered by glaciers declined by 73 percent from 1850 to 1993, and scientists estimate that the park’s glaciers will disappear entirely by 2030. Meanwhile, average summer temperatures in the park

have increased by about 1.8° F since 1900.7

Along the Atlantic coast, nine hurricanes struck the U.S. in 2004, causing exten- sive damage estimated at more than $43 billion.8 According to the National Oceanic

and Atmospheric Administration, the intensity of hurricanes increases as levels of

atmospheric carbon dioxide increase.9 Across the Atlantic, a landmark study recently found that human influences on the climate system more than doubled the

risk of a heat wave like the one that killed 22,000 to 35,000 Europeans in 2003.10

Rapid climate changes in the Arctic ‘‘provide an early indication of the environmental and societal significance of global warming,’’ according a major 2004 international report commissioned by the U.S. and seven other nations with Arctic territory.11 The already extensive melting of glaciers and sea ice, thawing of permafrost,

and shifts in ocean and atmospheric conditions will have profound effects on native

communities, wildlife, and local economies. For instance, the average extent of seaice cover in the summer has declined by 15 to 20 percent in the last 30 years.

Among other impacts, the reduction in sea ice ‘‘will drastically shrink marine habitat for polar bears, ice-inhabiting seals, and some seabirds, pushing some species

to extinction.’’ 12 The report concludes that some continued warming is inevitable

given the buildup of carbon dioxide but says that the ‘‘speed and amount’’ of warming can be minimized by substantially reducing future emissions.13

Instead of applying the country’s technological know-how to address the challenges of global warming, Congress has chosen to ignore the threat, calling for more

research on a problem that is already clearly defined and relying entirely on voluntary industry initiatives to merely reduce the rate of increase in global warming

emissions. Moreover, Congress is pushing an energy policy that would do nothing

to cap emissions of global warming pollution and would in fact increase our dependence on the fossil fuels responsible for the problem. We urge Congress to include

a mandatory cap on carbon emissions similar to the Gilchrest-Olver proposal introduced in the House.

To make America more secure and move us toward energy independence, Congress must include these three critical provisions in any comprehensive energy legislation. These provisions are certainly not an exhaustive list; for example, we should

also increase energy efficiency standards and incentives for appliances, homes and

buildings, and create mandatory reliability standards for the electricity grid. Reducing America’s dependence on oil, substantially increasing our production of clean renewable energy, and addressing the threat of global warming should be the necessary pillars upon which any energy bill is built.

The energy bill currently before this Committee and which Congress rejected last

year would include none of these positive steps forward. In fact, the energy bill includes several harmful provisions that will weaken landmark environmental laws

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14http://newenergyfuture.com/newenergy.asp?id2=11128 15OECD Nuclear Energy Agency report ‘‘Chernobyl Ten Years On, Radiological and Health

Impact’’, November 1995. 16Public Citizen website http://www.citizen.org/Press/pr-cmep84.htm 17 Union of Concerned Scientists, Nuclear Plant Safety: Will the Luck Run Out? December 15,

1998

such as the Clean Air Act and the Safe Drinking Water Act, force states, counties

and municipalities to shoulder the expensive clean-up costs surrounding MTBE contamination of drinking water, and provide billions of dollars in subsidies for the

coal, nuclear, oil and gas industries.

Our organization has expressed our concerns on these issues at length in other

places 14; I will focus the remainder of my testimony on the nuclear provisions in

the energy bill.

NUCLEAR POWER

Nuclear power is not safe, not reliable, not economical, and not necessary. All aspects of the nuclear fuel cycle pose a risk to humans and the environment. Nuclear

power generates long-lived radioactive wastes for which there is no safe solution.

Nuclear power should be phased out as soon as possible and should not be encouraged as a future energy source.

NUCLEAR POWER IS NOT SAFE OR CLEAN

In light of growing public concern about air pollution and global warming, the nuclear power industry has undertaken a slick advertising campaign to market itself

as a safe and clean energy source. Nuclear power is in fact one of the most dangerous and polluting energy sources. Nuclear waste is one of the most dangerous

substances created by humans; unshielded, nuclear waste delivers a lethal dose of

radiation within seconds. This waste remains dangerous for at least a quarter of a

million years (based on the decay of Pu-239). According to the Department of Energy, 95% of the radioactive waste (by radioactivity) in this country has been generated by commercial nuclear reactors. With 103 reactors, the U.S. produces nearly

twice as much nuclear waste as any other country—creating the largest nuclear

waste disposal problem in the world. No country in the world has a permanent solution to this problem.

The current proposal to develop Yucca Mountain as a repository remains marred

in serious legal problems. For example a recent federal district court ruled that the

Environmental Protection Agency did not adhere to the National Academy of

Science’s guidelines that the site be safe throughout the full period of risk. We urge

Congress to ensure that scientific integrity is maintained for this project and that

the National Academy of Science’s guideline is not ignored.

In addition to the public health and environmental concerns accompanying the development of Yucca Mountain, the site will not be able to contain the full amount

of nuclear waste generated. In fact, by 2011 the nuclear reactors in the U.S. are

projected to have produced 63,000 MT of nuclear waste—the projected capacity of

Yucca Mountain. With existing plants already licensed to continue operating—and

producing waste—beyond 2011, it is unclear how the federal government will dispose of the excess waste. The federal government should cease building any more

nuclear power plants which will only generate severe disposal problems for future

generations. In light of the extensive array of energy alternatives available, it is

completely unacceptable that the federal government would support generating

thousands of tons of deadly radioactive waste to power our homes and turn on our

computers.

NUCLEAR POWER PLANTS THREATEN NEARBY COMMUNITIES

Nuclear power plants are very complex and contain enormous amounts of potential energy in the fuel at the core of the reactor. The most tragic example of the

dangers posed by this technology is the 1986 accident at the Chernobyl reactor in

the Ukraine. The explosion and core meltdown at Chernobyl released radiation that

generated a plume encompassing the entire Northern Hemisphere 15. Here in the

U.S., in addition to the partial core meltdown at Three Mile Island in 1979, which

forced the evacuation of nearly one hundred fifty thousand people, there have been

four other nuclear accidents in the U.S. involving at least partial core meltdown.16

The potential consequences of a serious accident are staggering. A 1982 study by

the Sandia National Laboratories found that a serious accident at a U.S. nuclear

reactor could cause hundreds to thousands of deaths in the near term.17

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18 Union of Concerned Scientists, ‘‘Aging Nuclear Plants and License Renewal,’’ Issue Brief,

May 22, 2001 19 Nuclear Regulatory Commission Inspector General Interviews on Davis-Besse http://

www.ucsusa.org/clean—energy/nuclear—safety/page.cfm?pageID=1123 20 Report to Congress on Advanced Fuel Cycle Initiative: The Future Path for Advanced Spent

Fuel Treatment and Transmutation Research, DOE, January 2003, p. II-6.

We are concerned that utility deregulation and new ownership of reactors may increase risks of accidents because of increased pressure to run the plants closer to

the margin. This risk is heightened by the fact that the 103 operating reactors

around the country are deteriorating with age more quickly than expected. Even

Vice President Cheney acknowledged the aging problem on the television show

‘‘Hardball’’ (March 21, 2001): ‘‘[T]oday nuclear power—produces 20 percent of our

electricity, but that’s going to go down over time—because some of these plants are

wearing out.’’ Despite industry’s claims that nuclear power is ‘‘safe,’’ at least ten existing reactors have experiencing aging-related shutdowns since January 2000.18

The events at the Davis-Besse reactor in Ohio highlight the seriousness of the problem regarding the safety of nuclear reactors.

In November of 2001, the Nuclear Regulatory Commission (NRC) allowed

FirstEnergy, the owner of the Davis-Besse plant in Ohio to ignore warning signs,

then delay a shutdown for three months. Inspectors found a six-inch hole in the reactor cover that had only millimeters left until it breached the cover. According to

interviews with NRC personnel, the agency backed down from issuing a safety-related shutdown order after FirstEnergy argued vigorously against a shutdown at

that time because they didn’t want bad publicity nor a drop in their financial ratings. At least one NRC employee felt that the company withheld important information about evidence of serious corrosion.19 The NRC’s decision to let the plant operate and rake in profits a few months longer even with evidence of serious problems

jeopardized the health and safety of the surrounding communities. First Energy is

currently under a grand jury investigation related to the events at Davis-Besse.

Events such as these underscore the severe security risk posed by nuclear power

plants.

CONGRESS SHOULD OPPOSE PROGRAMS, WHICH INCREASE THE THREAT OF NUCLEAR

PROLIFERATION

Plutonium, an element that can only be produced in nuclear reactors, is the material of choice for nuclear weapons. All reactors produce it, but it must be separated

from highly radioactive irradiated fuel before it can be used in weapons. This separation process is known as ‘‘reprocessing.’’ For at least two decades, the United

States has had a policy against reprocessing waste from commercial nuclear reactors

and not allowing plutonium to be used as fuel in nuclear reactors to prevent the

proliferation of weapons-usable material.

The Advanced Fuel Recycling Program specifically reverses the decades-long U.S.

policy against reprocessing commercial nuclear waste. It advocates reprocessing

commercial nuclear fuel and using several types of reactors to allegedly reduce the

volume and toxicity of the waste.

A January 2003 report, entitled ‘‘Report to Congress on Advanced Fuel Cycle Initiative: The Future Path for Advanced Spent Fuel Treatment and Transmutation

Research,’’ admits that this costly program will not obviate the need for a geologic

repository. Further it contradicts itself with regard to nuclear non-proliferation.

First, it claims that the program can ‘‘destroy’’ plutonium thus reducing the risks

of this material falling into the wrong hands.20 On the same page, however, it touts

the potential for a commercial nuclear fuel cycle based on the plutonium separated

from existing irradiated fuel—a program that would dramatically increase the risk

of weapons materials falling into the wrong hands by putting separated plutonium

into commercial nuclear reactors. We urge Congress to end funding for the advanced

fuel cycle initiative.

NUCLEAR POWER IS NOT ECONOMICAL

Nuclear power would not exist in this country today if it were not for enormous

subsidies paid for by ratepayers and taxpayers. Originally touted as being ‘‘too

cheap to meter,’’ nuclear power has proven to be too expensive to afford. The nuclear

industry has received the vast majority of energy research and development funding, a special taxpayer-backed insurance policy known as the Price Anderson Act,

unjustified electric rates from state regulators, enormous and unwarranted bailouts

in state deregulation plans, and ultimately a taxpayer-funded nuclear waste dump.

The industry has not been able to build a new plant in thirty years because private

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21http://www.nuclear.gov/home/bc/businesscase.html

investors believe that nuclear power is a risky and uneconomical investment. Even

after fifty years of constant federal support, the nuclear industry is incapable of

building new plants on its own, and since private investors have shown disinterest,

the industry is now asking taxpayers for new handouts.

DOE commissioned a report by Scully Capital called ‘‘Business Case for New Nuclear Power Plants,’’ 21 which concludes that existing taxpayer backed insurance

(known as the Price Anderson Act), federal research and development funds and ultimately federally-funded nuclear waste program are not enough to make these new

reactors cost-competitive. Instead it recommends a mind-boggling suite of new subsidies including: a federal energy credit program, low interest loans, power purchase

agreements (at up to 50% more than market rates), emissions credits and additional

insurance. This report estimates that the federal government would have to spend

at least $1.5 to 2.75 billion in subsidies to bring down the capital costs of five new

nuclear plants. This estimate does not include any additional subsidies for nuclear

waste disposal, siting and permitting the new plants. The energy bill extends existing subsidies and creates new ones for the nuclear industry. I outline below of few

of the most unjustified and costly subsidies below:

CONGRESS SHOULD REMOVE THE $6 BILLION TAX GIVEAWAY

One of the primary obstacles to building new nuclear power plants in the U.S.

is the large upfront capital cost of plants. With investors uninterested in bearing

the financial risk, the federal energy bill uses taxpayer dollars to assist the industry. Specifically, the energy bill provides the nuclear industry with a production tax

credit of 1.8 cents per kilowatt-hour. Under the proposal, a 1000 megawatt (MW)

nuclear power plant could claim an annual credit of up to $125 million over an eight

year period for a total of $1 billion in federal support. The proposal allows for us

to six 1000 MW plants to claim the credit, costing taxpayers as much as $6 billion.

The Committee should strip this costly giveaway from the energy bill, particularly

within the current budget climate.

CONGRESS SHOULD REMOVE THE $1 BILLION GIVEAWAY FOR THE IDAHO REACTOR

In addition to the $6 billion tax credit, Subtitle C-Advanced Reactor Hydrogen Cogeneration Project—provides $1.1 billion to build a nuclear reactor at the Idaho National Engineering and Environmental Laboratory that would attempt to co-general

hydrogen. Specifically, the provision provides $500 million for construction and $635

million plus such sums as are necessary to research, develop and design the new

plant. The federal government can actually fund two teams for one year to develop

a proposal for building the reactor. Furthermore, the provision does not even require

that the plant achieve its intended goal of producing electricity from nuclear power

and hydrogen. ‘‘The overall project, which may involve demonstration of selected

project objectives in a partner nation, must demonstrate both electricity and hydrogen production.’’ It makes little sense from a policy perspective to tie the promise

of hydrogen as a clean energy source to the most dangerous and historically most

expensive energy source. We urge Congress to remove this over-priced boondoggle.

CONGRESS SHOULD NOT EXTEND PRICE ANDERSON ACT.

We oppose extension of the Price Anderson Act, which is an unwarranted taxpayer subsidy to the nuclear industry. This law, passed in 1957 and amended several times since, provides taxpayer-funded insurance for the nuclear industry in the

event of an accident. In case of an accident at a nuclear power plant, the industry

gets a guarantee of limited liability while the public gets no guarantee of full compensation. Instead of having to purchase insurance on the private market—as other

countries have required the industry to do—the nuclear industry in the U.S. is provided a cap on their liability. This confers a substantial annual subsidy to the nuclear industry in terms of foregone insurance premiums, as well as reduced payments in the case of a serious accident. The Price-Anderson Act also provides blanket indemnity to Department of Energy contractors, even in cases of intentional

misconduct and gross negligence. Price Anderson was passed as a temporary measure that was supposed to be phased out once the industry established sufficient confidence in the safety of its product. However, 50 years later the industry is still requesting that Congress extend Price Anderson. Existing plants are already covered

under the law; yet the industry is requesting an extension to cover new plants. If

the industry is confident in the safety of nuclear power they should be willing to

fully insure their product instead of asking for federal assistance.

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22http://www.nuclear.gov/nerac/ntdroadmapvolume1.pdf

CONGRESS SHOULD OPPOSE NUCLEAR RESEARCH AND DEVELOPMENT FUNDING.

According to the Congressional Research Service, the federal government provided the nuclear industry with more than $70 billion in research and development subsidies or nearly 60 percent of all federal energy research and development funding

between 1948-98. We are extremely disappointed that the subcommittee draft legislation includes authorization of nearly $2 billion in commercial nuclear research and

development subsidies. The Department of Energy’s own studies show that new reactors developed through taxpayer-funded programs such as Generation IV and Nuclear Power 2010 are not cost-competitive.22 The nuclear power industry is not a

new or budding industry; after more than fifty years of research and development

support, it is time to get the industry off of the federal dole.

NUCLEAR POWER IS NOT NECESSARY

Nuclear power is not safe, not economic, and not necessary. Congress should do

everything it can to protect the health and safety of the public as well as taxpayers.

Nuclear power should be phased out as quickly as possible. By setting strong energy

efficiency standards for homes, buildings, and appliances, and by increasing investments in energy efficiency, we can reduce our electricity use in the U.S. by 28 percent by 2020, according to conservative estimates. Instead of increasing federal support for building additional nuclear power plants, we should pursue an aggressive

and affordable strategy to increase America’s production of renewable energy and

invest in energy efficiency.

CONCLUSION

America needs an energy policy that will make our nation more secure and less

dependent on foreign energy, reduce the energy costs on all consumers—residences,

commercial, industrial—and minimize the harmful public health and environmental

impacts of energy production and consumption. The energy bill before Congress

would fail on all these counts. It is time for Congress to abandon the failed energy

policies of the past century and redirect America’s energy toward a safe, secure and

affordable future.

Mr. SHIMKUS. And thank you. Our next panelist is Mr. James

Hancock, who is a partner in Balch and Bingham’s energy section

and Chair of the Legislative Affairs Committee on the National Hydropower Association. His practice is focused primarily on the licensing and re-licensing of hydroelectric power projects under Part

1 of the Federal Power Act, including license compliance and administration, relicensing, Clean Water Act compliance, water withdrawals and project joint uses, water rights, shoreline management

and environmental issues. He has also been involved in most legislative and regulatory initiatives affecting the hydropower industry

over the past 10 years. Mr. Hancock also advises clients on Federal

election law issues, including registration and administration of political action committees, lobbying registration and campaign finance.

STATEMENT OF JAMES H. HANCOCK, JR.

Mr. HANCOCK. Thank you. And good afternoon, Mr. Chairman.

On behalf of the National Hydropower Association, I greatly appreciate the opportunity to discuss the hydropower licensing reform

provision of the Energy Policy Act of 2005 and to encourage you to

adopt these important provisions this year.

As this committee knows, hydropower is one of the Nation’s most

valuable resources. It is low cost, domestic, renewable, and emits

no air pollution. Hydropower also plays a major role reducing carbon emissions, provides vast recreational opportunities, and improves electric grid reliability. Hydropower provides numerous benVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00471 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
464

efits every day to millions of Americans; yet despite its many benefits, hydro is an underutilized resource that is on the decline.

Why the decline? The primary cause is the convoluted hydropower licensing process, which is a product of the existing statutory

structure that grants various Federal agencies license conditioning

authority. The D.C. Circuit Court of Appeals recently referred to

this ‘‘as an unusual statutory configuration.’’ In short, hydropower

project owners, their electric customers, and the general public are

facing a deterioration of hydro’s benefits due to how the licensing

process today functions. Simply put, it fails to effectively balance

the Nation’s growing energy needs with its important environmental goals. Legislation, not administrative reform, is necessary

to truly repair the process in a way that balances the Nation’s energy needs with the need, and quite frankly, the industry’s desire

to adequately mitigate for hydropower’s environmental impacts.

Over half of the Nation’s hydropower capacity must receive a new

operating license from FERC by 2018. Many of those projects have

already or will soon begin the licensing process. Time is running

out for these projects to benefit from meaningful reforms. Congress

must act this session.

In a May 2000 report to Congress, FERC stated its preferred solution to the licensing problem. I quote ‘‘The most effective way to

reduce the cost and time of obtaining a hydropower license would

be for Congress to make legislative changes necessary to restore

the Commission’s position as the sole Federal decisional authority

for licensing conditions and processes.’’ While NHA agrees with

FERC in this respect, we believe there is an alternative solution,

and that is the solution found in the proposed legislation. The bill

would provide the balance, transparency, and accountability that is

missing from today’s process, while leaving intact the existing authorities of the Federal resource agencies. Let me say that again.

The bill preserves the Federal resource agencies existing authority

to issue conditions for hydropower projects. It would also preserve

the current role of States, tribes, environmental groups, and other

stakeholders who play an important and active role in the licensing

process, and the bill preserves the existing environmental threshold required by the Federal Power Act. Therefore, there is no environmental rollback, as some have claimed.

The hydro provisions of the proposed legislation do several

things, but I will focus on its primary feature. And that is this:

where a Federal resource agency has developed a licensed condition

that it determines is necessary to fulfill its resource goals. Under

Section 4E or 18 of the Federal Power Act, a licensed applicant to

propose an alternative to the agency’s condition. If the Agency secretary determines that the alternative condition meets existing

statutory requirements for environmental and resource protection

and costs less or has less of an impact on power generation than

the condition proposed by the agency, the Secretary must accept

the alternative condition. If, on the other hand, the Secretary determines that the alternative does not adequately meet Federal

Power Act resource standards, the alternative condition is rejected.

Let me be clear: the decisionmaking authority lies with the Federal

Resource Agency, not with FERC, and not the licensed applicant.

In addition, nothing in the bill prevents non-applicant stakeholders

465

from proposing alternatives of their own. In other words, every

stakeholder has an opportunity to participate in the alternative

condition process. Let me again make clear, because there has been

confusion, the bill does not in any way change or diminish the frequent and full participation by the public in the licensing process.

The hydro-licensing process will continue to serve as the most public and inclusive process for the licensing or permitting on any

source.

I want to again stress the urgency of this matter. Congress has

debated the issue for years. The result of that debate is hydro title

of the proposed legislation, which has a bipartisan history. By

adopting this title, Congress can better preserve the benefits of hydropower, while maintaining existing environmental protections.

I again thank you for inviting me to testify, and I am happy to

answer any questions.

[The prepared statement of James H. Hancock, Jr. follows:]

PREPARED STATEMENT OF JAMES H. HANCOCK, JR., FOR THE NATIONAL HYDROPOWER

ASSOCIATION

Good morning Mr. Chairman and members of the Committee. My name is Jim

Hancock. I am the Legislative Affairs Committee Chairman for the National Hydropower Association. I am also engaged in the private practice of law with Balch &

Bingham in Birmingham, Alabama, where I have worked on hydropower issues for

17 years.

NHA is the only national trade association committed exclusively to representing

the hydropower industry. Its 140-plus members are a diverse mix of investor-owned

utilities, public power companies, independent power producers, equipment suppliers, manufacturers, attorneys, and consultants. NHA represents over 60 percent

of FERC-licensed hydropower capacity, and has been based in Washington, DC since

1983. Its mission is to promote the nation’s largest renewable resource, and to ensure that it plays as strong a role as possible in the nation’s energy strategies.

On behalf of NHA, I greatly appreciate the opportunity to discuss with you the

hydropower provisions of the Energy Policy Act of 2005, and to encourage you to

adopt these provisions this year. In addition, since there has been a great deal of

inaccurate reporting and apparent misunderstanding about the hydropower licensing reform provisions, I want to clarify for you what they do, and do not do, in terms

of bringing much-needed reforms to the hydro licensing process. NHA strongly supports these provisions for the reasons discussed below. In addition, NHA offers a

few minor changes to the bill not related to licensing reform that NHA strongly encourages the Committee to adopt.

As this Committee knows, hydropower is one of the nation’s most valuable resources. According to the Energy Information Administration, hydropower accounts

for approximately seven percent (7%) of the nation’s electricity in terms of actual

generation (275,006,940,000 KwH) and about nine percent (9%) in terms of generating capacity. Hydropower accounts for 83% of the United States’ renewable energy

capacity and approximately 77% percent of actual renewable electricity generation.

Hydropower is low-cost, domestic, renewable, and emits no air pollution. Hydropower also plays a major role reducing carbon emissions, provides vast recreational

opportunities, and improves electric grid reliability. It can also provide substantial

water supply, flood control and navigation benefits. In short, hydropower possesses

attributes unmatched by any other source of energy and provides numerous benefits

every day to millions of Americans.

In fact, in its December 2004 report entitled, Ending the Energy Stalemate, the

bipartisan National Commission on Energy Policy commented that hydropower is an

‘‘important source of energy for industry and commerce in the United States’’ and

that ‘‘hydropower provides significant air quality and climate benefits relative to

other forms of power.’’

Despite its many benefits, the hydropower resource faces significant impediments

that jeopardize its ability to play an important role in our nation’s energy strategies.

Congress must address these issues. Here is what it can do in the 109th Congress

to ensure that hydropower plays a strong role in the nation’s energy future:

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1 Energy Information Administration has forecasted decreased hydroelectric capacity as ‘‘regulatory actions limit capacity at existing projects.’’ 2Wisconsin Power & Light Company v. Federal Energy Regulatory Commission, 363 F.3d 453

(D.C. Cir. 2004).

HYDROPOWER LICENSING REFORM

Hydropower is a resource on the decline 1, and the primary cause of this decline

is the convoluted hydropower licensing process, which is a product of the existing

statutory structure that grants various federal agencies license conditioning authority. The D.C. Circuit Court of Appeals recently referred to this as ‘‘an unusual statutory configuration.’’ 2

In short, hydropower project owners, their electric customers, and the general

public are facing a deterioration of hydropower’s important benefits due to how the

licensing process today functions. Simply put, it fails to effectively balance the nation’s growing energy needs with its important environmental goals.

Over half of the nation’s hydropower capacity—296 projects in 44 states with a

total capacity of over 30,000 MWs—must receive a new operating license from

FERC by the year 2018. Many of those projects have already or will soon begin the

licensing process. The time is running out for these projects to benefit from meaningful reforms to the licensing process.

Almost all hydropower stakeholders have long agreed that the licensing process

is broken. Recent administrative actions have been helpful. In particular, NHA is

optimistic that FERC’s new integrated licensing process will provide significant procedural improvements. In addition, the Department of the Interior is currently considering a proposed rule that would, among other things, provide an appeals process

for mandatory conditions developed by that agency. However, only legislative action

will truly repair the process in a way that balances the nation’s energy needs with

the need, and quite frankly the industry’s desire, to adequately address and mitigate for hydropower’s environmental impacts.

Since 1986, the Federal Power Act has required that FERC give ‘‘equal consideration’’ to a variety of factors when issuing hydro project licenses and relicenses. Specifically, Section 4(e) of the Act requires that FERC ‘‘in addition to the power and

development purposes for which the license is issued, shall give equal consideration

to the purposes of energy conservation, the protection, mitigation of damages to, and

enhancement of, fish and wildlife (including related spawning grounds and habitat),

the protection of recreational opportunities, and the preservation of other aspects of

environmental quality.’’ In short, FERC is to issue licenses that balance these various interests.

However, the authority granted certain Federal agencies under Section 4(e) and

Section 18 of the Federal Power Act makes this balancing act virtually impossible

in many circumstances. Section 4(e) requires that where part of a project will include federal lands, FERC must include in the license for that project such conditions as determined by the Secretary of the department that supervises the federal

lands to be ‘‘necessary for the adequate protection and utilization’’ of those lands.

Similarly, Section 18 requires FERC to include a fishway prescription in a license

at the direction of either the Secretary of Commerce or Interior.

Federal courts have interpreted this Section 4(e) and Section 18 authority as

being ‘‘mandatory,’’ meaning that FERC must accept these conditions or prescriptions and include them in the license without alteration. Thus, while FERC through

its rehearing process may create stronger licenses from a resource protection standpoint if stakeholders demonstrate that additional measures are necessary, FERC is

prohibited from modifying agency conditions it, or an applicant, deems excessive,

overly-costly or unsupported by the record in the license proceeding.

Unfortunately, these resource agencies do not have an obligation to consider the

impacts of their conditions on other aspects of the project such as power generation,

recreation, reliability, clean air, etc. Since FERC is powerless to change these mandatory conditions, it must attempt to create balanced licenses working around the

mandatory conditions dictated by the agencies.

The net result is that no one is looking at these mandatory conditions to see what

impact, if any, they have on the project’s other benefits. No one looks at the big picture of how hydropower fits into our national energy and environmental policy. No

one is able to take a full and broad look at all of the issues that arise in a licensing

proceeding and produce a license that brings benefits to all stakeholders. This lack

of perspective has weakened the hydropower resource and its consumers. Balance

must be restored.

In a May 2001 report to Congress, FERC stated its preferred solution to the licensing problem. I quote:

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3 ‘‘Report on Hydroelectric Licensing Policies, Procedures, and Regulations: Comprehensive Review and Recommendations Pursuant to Section 603 of the Energy Act of 2000’’; Federal Energy

Regulatory Commission Staff, May, 2001.

‘‘The most effective way to reduce the cost and time of obtaining a hydropower license would be for Congress to make legislative changes necessary to

restore the Commission’s position as the sole federal decisional authority for licensing conditions and processes.’’ 3

While NHA agrees with FERC in this respect, we believe there is an alternative,

more moderate solution—and that is the solution found in the Energy Policy Act of

2005. The bill would provide the balance, transparency and accountability that is

missing from today’s process while leaving intact the existing authorities of the federal resource agencies.

Let me say that again—the bill preserves the federal resource agencies’ existing

authority to issue conditions for hydropower projects. It would also preserve the current role of states, Tribes, environmental groups and other stakeholders who play

an important and active role in the licensing process. And, the bill preserves the

existing environmental threshold required by the Federal Power Act. Therefore,

there is no ‘‘environmental roll-back’’ as some have claimed.

The hydropower licensing reform provisions of the Energy Policy Act of 2005 do

several things, but I will focus on its primary feature. And that is this: where a federal resource agency has developed a license condition that it determines is necessary to fulfill its resource goals under Section 4(e) or Section 18 of the Federal

Power Act, the bill allows a license applicant to propose an alternative to the agency’s condition.

If the agency Secretary determines that the alternative condition meets existing

statutory requirements for environmental and resource protection, and costs less, or

has less of an impact on power generation than the condition proposed by the agency, the Secretary accepts the alternative condition.

If, on the other hand, the Secretary determines that the alternative does not adequately meet Federal Power Act resource standards, the alternative condition is rejected. Let me be clear, the decision-making authority lies with the federal resource

agency—not FERC and not the license applicant. In addition, nothing in the bill

prohibits non-applicant stakeholders from proposing alternatives of their own. The

bill expressly states so.

Let me again be clear on the public participation issue, because there has been

some confusion: the bill does not in any way change or diminish the frequent and

full participation by the public in the licensing process. The hydro licensing process

will continue to serve as the most public and inclusive process for the licensing or

permitting of any energy source.

The bill would also do several other things that will add balance, transparency

and accountability to the hydro licensing process. These other provisions include the

opportunity for an expedited agency trial-type hearing of disputed issues of material

fact and a non-binding dispute resolution process in certain limited circumstances.

It would also require that the agency document that it at least considered the effects

of its mandatory condition on energy supply, distribution, cost, and use, flood control, navigation, water supply, and air quality.

In terms of timing, while the bill may add a few months to the licensing process,

it will actually save years at the back end of the process by eliminating significant

contention, delay and litigation. By reducing the number of court appeals of license

conditions, this bill could help facilitate earlier implementation of environmental

mitigation and enhancement measures. What’s more, the primary goal of hydropower licensing reform is to improve the process, not shorten it. Licensing reform

is about creating a process that produces better results, and that is what the Energy

Policy Act of 2005 accomplishes.

The hydropower licensing reform debate has for years been a search for balance:

can the nation balance the benefits of hydropower with environmental protection

and mitigation? A growing number of members of Congress say ‘‘yes.’’ Congress has

debated hydro licensing reform for years. The result: responsible, bipartisan legislation in both the House and Senate for the past three congressional sessions.

I want to again stress the urgency of this matter. Without action, today’s hydropower licensing process will continue to erode the many benefits provided by the nation’s 2,000 non-federal hydropower projects at the expense of consumers and the

environment. With Congressional action, the nation’s hydropower resource and its

many power, environmental and societal benefits will be better preserved for future

generations. I urge Congress to adopt the hydropower licensing reform provisions

of the Energy Policy Act of 2005.

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4 Using a 40% capacity factor.

INCENTIVES FOR NEW HYDROPOWER DEVELOPMENT

While only three percent of the nation’s 75,000 dams produce electricity, hydropower is presently the largest renewable electricity source. According to data from

the Energy Information Administration and the Department of Energy, however,

hydropower is on the decline and underutilized. At best, hydropower’s contribution

to national energy supply will remain flat. Congress can, and should, reverse this

trend.

The Department of Energy estimates that as much as 21,000 megawatts of hydropower capacity sits unused at existing hydropower facilities and non-hydropower

dams. This hydropower capacity could be developed without building new dams or

impoundments. This is enough power for eight cities the size of Seattle or enough

power for the state of Virginia. It is enough yearly power for 6.9 million homes. 4

It would also result in the avoidance of 42 million metric tons of carbon emissions

each year.

Of the 21,000 MW identified by DOE, 4,300 MW of new hydropower could be

achieved by simply further developing our nation’s existing hydropower infrastructure through efficiency improvements and capacity additions. This is enough power

to meet the electricity needs of the states of New Hampshire and Vermont. Put another way, it is enough yearly power for 1.4 million homes.

Unfortunately, almost none of the nation’s potential hydropower capacity is being

developed. Bringing new hydro generation on-line is capital intensive, and the costs

are increasing. In addition, hydropower faces costly regulatory hurdles of new development not faced by other resources. While the costs clearly vary from project to

project, new hydro generation—depending on the type of upgrade—runs from $650

to $2,500 per kilowatt (Kw), sometimes more. Hydropower has similar disadvantages in today’s energy markets as other renewables and deserves similar policies

designed to encourage the development of renewable sources of power.

In its Report, the National Commission on Energy Policy recommended that Congress expand the renewable energy production tax credit to include ‘‘new hydropower generation.’’ During the 107th and 108th Congresses, members in both the

Senate and the House, on both sides of the aisle, introduced 15 bills that recognized

the hurdles to new hydropower development by providing incentives, including H.R.

6. The Energy Policy Act of 2005 also provides incentives for hydropower development—incentives which have been urged for years by Congressmen Shadegg and

Wynn.

Incentives work. Look at the recent growth of the wind energy industry, as well

as some of the other renewable energy industries. And, look at the last time there

was any significant growth in the hydropower industry. That was in the 1980s,

when Congress last provided incentives for hydropower development. Those incentives resulted in approximately 2,000 MWs of clean energy being placed on the electricity grid. It’s time to provide incentives again.

Considering the bipartisan support for upgrading existing hydropower facilities

and maximizing the power output of the nation’s existing hydropower and dam infrastructure, as well as the nation’s growing need for clean, domestic, reliable energy, it is time for Congress to ensure that hydropower’s potential capacity is fully

developed. The only way to do that is to adopt incentives for hydropower development. Without incentives, this valuable potential will continue to sit unused at a

time when it is most needed. NHA strongly urges Congress to include a role for hydropower in its renewable energy tax incentive package.

R&D APPROPRIATIONS FOR DOE’S HYDROPOWER PROGRAM

The Energy Policy Act of 2005 states that, ‘‘the Secretary of Energy shall conduct

a balanced set of programs of energy research, development, demonstration, and

commercial application to support Federal energy policy and programs by the Department. Such programs shall be focused on: (1) increasing the efficiency of all energy intensive sectors through conservation and improved technologies; (2) promoting diversity of energy supply; (3) decreasing the Nation’s dependence on foreign

energy supplies; (4) improving United States energy security; and (5) decreasing the

environmental impact of energy-related activities.’’

The DOE hydropower program, which mostly focuses on the Advanced Hydropower Turbine (AHT), accomplishes all of these goals. Unfortunately, the Administration does not see it this way, as it slashed the DOE hydropower budget by 90

percent for FY 2006 and it is calling to abolish the program at the end of 2006.

469

While NHA understands the Administration’s desire to reduce federal spending,

the decision to greatly slash, then end, the DOE hydropower program should be reconsidered. This program’s progress over the past decade in developing advanced

turbine technologies is about to yield significant results that will lead to more clean

and inexpensive hydropower while reducing impacts on fish. Once commercialized,

these technologies will pay for themselves countless times over while reducing conflict and legal disputes.

The DOE hydropower program, which received $4.8 million from Congress for FY

2005 after the Administration recommended $5 million, is a joint program between

DOE and the hydropower industry. It began approximately a decade ago with

matching funds from industry. Its general mission is to improve hydropower’s environmental performance and increase its contribution to national energy supply.

Among other things, the DOE hydropower program also focuses on improving

hydropower’s environmental performance, as well as assessing the potential of nonconventional, emerging hydropower technologies, such as kinetic hydropower, that

hold tremendous promise. While the DOE hydropower budget has historically accounted for less than two percent of the budget for renewable energy and efficiency

programs, it has produced results.

With regard to the program’s primary focus, the AHT is a turbine primarily designed to improve fish passage. In addition to improving fish passage, the new turbine will increase hydropower project efficiency and result in power output increases. In the fall of 2004, after receiving approval from FERC, Grant County PUD

in the state of Washington installed an AHT at its Wanapum Dam on the Columbia

River. Testing of the turbine will start this spring during juvenile salmon runs—

testing that will require analysis, and possible further testing, through 2007.

Grant’s success could pave the way for other projects with fish migration issues,

including federal projects. The Advanced Hydropower Turbine could practically

eliminate the downstream impact of dams from a fish passage standpoint—this is

potentially a significant turning point for the hydropower industry, both federal and

non-federal. Since the federal government is the largest user of hydropower resources, it stands to gain significantly from the successes of the DOE program.

In its report, the National Energy Commission recognized the need for the development of new hydropower technologies to address environmental issues (i.e., the

AHT) and expand power output. The Commission also encouraged the development

of non-conventional hydro technologies, such as micro-hydropower and tidal power.

These are areas on which the DOE program works.

Shutting down the DOE program sends the signal that the Department of Energy

should not examine issues related to hydropower, a resource on which the federal

government heavily depends for its own power production. It also sends a signal

that the government is not concerned about improving hydropower and addressing

its issues.

There is far too much important work to be accomplished to abandon the DOE

program now. Closing the program would mean that the years of hard work and

resources spent by the government and the industry would be for naught. Congress

must restore the program, increase its commitment to DOE’s hydropower program,

and ensure full funding for the AHT, as well as other hydropower research areas

within the Department.

Specifically, NHA recommends that the Committee amend the Energy Policy Act

of 2005 so that it include the following language on the hydropower program within

the R&D Title’s section on renewable energy:

‘‘Funding for the Department’s hydropower program shall be used for the Advanced Hydropower Turbine (AHT) program and related activities that will improve

the technical, societal and environmental benefits of hydropower. Funding shall also

support broadening the Department’s hydropower program to study other operational and environmental issues related to hydropower production, such as the potential integration of hydropower with other renewable energy technologies, and to

encourage the development of incremental hydropower. Funding shall also be made

available to assess, research, develop, and test emerging, non-traditional hydropower technologies, such as kinetic hydropower, that will enable the development

of new hydropower capacity. The Department shall disperse such money among

these program areas as appropriate.’’

NHA also recommends that the Committee include language in the R&D Title

stating that funding for the DOE hydropower program shall be set at $10,000,000

for each year from FY 2006-2010. Given the allocations the Energy Policy Act of

2005 requests for renewables R&D, NHA’s funding request for the DOE hydropower

program would amount to less than two percent of the overall renewable energy

budget—surely something Congress can afford.

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FEDERAL POWER PURCHASING REQUIREMENT

The Energy Policy Act of 2005 requires the Secretary of Energy to establish a program that would require the federal government to purchase a certain amount of

electricity from renewable resources beginning in 2007. After 2013, the federal government would be required to purchase on a yearly basis 7.5 percent of its electricity from renewable resources, which are defined in the bill.

While a certain type of hydropower is presently included in the definition of renewable resources under the Energy Policy Act of 2005, the definition is too narrow

in scope, and also unnecessarily descriptive. NHA encourages Congress to make the

following changes to the Federal Power Purchasing requirements of the bill:

Instead of the lengthy description of what hydropower resources are considered

renewable, Congress should simply modify the definition so that it states ‘‘incremental hydropower.’’ Incremental hydropower is a term that has been used for years

in various pieces of legislation. Incremental hydropower is simply new electricity at

existing hydropower facilities achieved through efficiency improvements or additions

of capacity.

In addition, NHA strongly encourages Congress to broaden the definition of renewable resources that so it allow for the inclusion of ‘‘new hydropower capacity at

existing non-hydropower dams; kinetic hydropower, micro-hydropower and low-head/

low-power hydropower.’’

By making the changes recommended above, Congress will ensure that it can best

meet the goals outlined in the Federal Power Purchasing requirement, as well as

better recognize hydropower as a renewable source of energy. It will also encourage

hydropower development at existing projects and non-hydro dams—development

which would undergo an extensive environmental screening process.

CLOSING

Hydropower has long played an important role in the nation’s energy history, but

it stands ready to play an even greater role in the future. To do so, Congress must

soon address the issues I discussed today. Otherwise, the hydropower resource will

continue to decline, and a large amount of clean, reliable, domestic, and secure energy capacity will sit unused at a time when it is most needed.

I again thank you for allowing me the opportunity to discuss the hydropower provisions of the Energy Policy Act of 2005. I am happy to answer any questions of

the Committee.

Mr. SHIMKUS. Thank you very much. And now I—the chair would

like to recognize Mr. Andrew Fahlund, Vice President for Protection and Restoration at America Rivers in 2004. Since 1997, he has

served as Chair of the Hydropower Reform Coalition. He is a member of the Board of Directors for the Low Impact Hydropower Institute, and he served on several government advisory groups and

participated in numerous policy forums and negotiations addressing dams in the United States. He previously worked as a water

conservation advocate in Colorado, a field archaeologist in the Pacific Northwest, and an instruction in human ecology and field archaeology—I can’t even pronounce these words—at Colorado College. Mr. Fahlund received his MS in natural resource policy from

the University of Michigan.

Welcome, and your opening statement is in the record. You have

5 minutes.

STATEMENT OF ANDREW FAHLUND

Mr. FAHLUND. Thank you very much, Mr. Chairman. Good afternoon, and thank you for inviting me to testify before you today. I

am with American Rivers, and we are a longstanding participant

in the arena of hydropower dam regulation. I am also Chair of the

Hydropower Reform Coalition, which is a consortium of 130 conservation, recreation, and homeowner groups from around the nation, whose common goal is ecological and recreational enhancements at hydropower damns.

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American Rivers and the members of the Hydropower Reform

Coalition opposed the hydropower title of the discussion draft and

urge other committee members to oppose it as well. We also urge

the committee to support an energy policy that brings about a

cleaner, safer, and more secure energy future for our Nation. We

are not anti-hydropower. We are pro-rivers, pro-communities, and

pro-Democratic process. Dams whose licenses expire today have

never been subject to modern environmental laws. Hydropower relicensing is a once-in-a-lifetime opportunity to bring a 19th century

technology and practice up to 21st century standards.

Since legislation was first introduced in 1997 in the Senate, some

in the hydropower industry have foretold of terrible consequences

without the passage of this legislation. None of their scary, hyperbolic predictions has come true. According to FERC, relicensing has

resulted in a per-project loss of only 1.6 percent of generation.

There is really no evidence of rate hikes. No one in the industry

has been able to point to a significant residential/consumer rate

hike as a direct result of relicensing. But to take an example of a

recent analysis of Idaho Power, which is heavily reliant on a single

hydropower project, Hells Canyon, even assuming that the most extensive fish-passage conditions are required, the study showed that

this would result in an estimated rate increase of only $1 per customer per month. Idaho Power would still have among the cheapest

power in the Nation.

And there have been far fewer delays since 1997. Chairman Patrick Wood instituted hearings on projects that are most delayed at

FERC, and the trend has gone down steadily. Since 2001, there

have been 135 license issues, with a capacity of more than 4,500

megawatts of power. And we have been involved—we being the Coalition and American Rivers—in about three-fourths of those.

Projects totaling 70 percent of the licensed electric capacity were

actually the result of settlements, that 70 percent resulting—of the

capacity resulting from settlement agreements.

Just this past year, American Rivers stood alongside members of

industry to celebrate agreements on 4 significant rivers in Oregon,

Tennessee, New York, and Maine. These settlements involved a variety of environmental protections and rural community development opportunities. They also resulted in the continued operation

of more than 1,900 megawatts of power. At best, this is a title—

this title is a case of fixing what isn’t broken, and at worst, it is

a case of breaking what is already fixed. This title takes us backwards, and in fact, had it been past back in 1997, many successful

settlements that we have celebrated through the Nation would not

have happened.

We have 3 main problems with the title. It prejudices other parties. The scales of justice hang level in this country for a reason,

and that is because equality is a bedrock value of the Nation. In

a legal environment, we grant equal right to everyone. This proposal grants industry a new right of administrative appeal and a

new right to offer alternative condition that the agency must accept, but fails to grant equivalent rights to anyone else. Under

every other part of the hydropower licensing process, if someone

wants to intervene, they enjoy the same rights as the dam owner,

including the right to appeal. There is nothing to distinguish this

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part of the licensing process from other parts that justify such a

drastically unequal process. Under this provision, utilities are

given a seat at the grown-up table, while Governors, tribal nations,

and interested citizens are supposed to be content sitting at the

kiddy table.

Members of Congress should show citizens the same respect and

trust they do the energy industry.

The title also adds red tape. Although it advances—it is advanced as a means of improving efficiency and timeliness, the title

creates 6 new administrative processes, including a trial-type hearing that the Department of the Interior estimates will take an average of 24 months to complete. It also requires agencies to analyze

11 new factors which FERC already analyzes in its own NEPA document. Furthermore, if this provision is enacted, projects already

well on their way to a final license will suddenly be subject to these

requirements, causing significant additional delay for those 80

projects already in the pipeline.

Finally, the door swings only one way in this process, toward reducing environmental requirements, but never swings toward

stronger ones. State, tribal, and community interests have no right

to challenge a decision that is not strict enough, under this provision, suggestion that we can go to FERC for such an opportunity

is to simply to ignore the law and ignore reality. The courts have

appropriately said that this is—remanded the licensing processes

that are main to the agencies. It is also impractical, and in our experience without precedent, that FERC would impose stronger conditions than an agency in this context.

So in conclusion, as we have said before, we have no objection

to an admissive appeals process for mandatory conditions. However, any process must be open and equal for everyone, efficient,

and simple, and maintain strong environmental standards. Thank

you very much.

[The prepared statement of Andrew Fahlund follows:]

PREPARED STATEMENT OF ANDREW FAHLUND, VICE PRESIDENT FOR PROTECTION AND

RESTORATION, AMERICAN RIVERS, CHAIR OF HYDROPOWER REFORM COALITION

I. INTRODUCTION

Good afternoon, Mr. Chairman, Congressman Hall, and members of the Subcommittee. I appreciate the opportunity to appear before you here today. My name

is Andrew Fahlund and I am the Vice President for Restoration and Protection at

American Rivers, the leader of a national river conservation movement, dedicated

to protecting and restoring the nation’s rivers. American Rivers has more than

45,000 members in every state across the country. As chair of the Hydropower Reform Coalition, I also speak for 130 national and local organizations dedicated to

improving rivers through the licensing of hydropower projects by the Federal Energy Regulatory Commission (FERC). Coalition members are active in more than 75

percent of the relicensing cases currently pending before FERC and have constructively contributed to numerous policy discussions concerning FERC regulated hydropower.

To start, I would like to express our grave concerns with the Energy Bill Discussion Draft (Discussion Draft) as a whole, which will harm the environment and do

nothing to reduce our nation’s dependence on foreign oil. We urge the Committee

to reject the current Committee Discussion Draft of the Energy Policy Act and work

toward a national energy policy that takes bold steps toward a cleaner, safer, and

more independent energy future.

More specifically, I am before you today to share the opinions of American Rivers

and the Hydropower Reform Coalition on the hydropower title of the Discussion

Draft. There are four basic messages in my testimony:

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1 U.S. General Accounting Office, Federal Energy Regulatory Commission: Charges for Hydropower Projects’ Use of Federal Lands Need to Be Reassessed, Washington, D.C., May 2003, GAO03-383, p. 5. 2Federal Energy Regulatory Commission Staff, Report on Hydroelectric Licensing: Policies,

Procedures, and Regulations. Comprehensive Review and Recommendations Pursuant to Section

603 of the Energy Act of 2000, Washington, D.C, May 2001.

1. Hydropower relicensing significantly improves environmental quality at almost no

cost to power generation.

2. Much has changed since hydropower legislation was introduced in 1997 and even

since the House passed H.R. 6 in 2003. Many of those changes have already

paid dividends and others still hold promise.

3. By creating an administrative appeals process available only to hydropower dam

owners, the Hydroelectric Title tilts the scales of justice in their favor and prejudices states, tribes, local landowners, irrigators, conservation groups, and

other interested members of the public who all have interests in how dams are

operated.

4. The new process proposed in the Hydroelectric Title of the Energy Policy Act will

increase regulatory complexity, decrease certainty, lengthen the timeline and

cost of licensing, and diminish environmental standards.

I would like to stress that hydropower relicensing is a natural resources issue and

not simply an energy issue, due to the enormous impacts dam operations have on

hundreds of species, thousands of river miles, and millions of dollars in recreational

opportunities for decades to come. Changes to dam operations that better conserve

natural resources have a negligible impact on energy generation, electric rates, and

industry viability.

I would also like to make it clear that American Rivers and members of the Hydropower Reform Coalition are NOT anti-hydropower. We simply wish to ensure

that dams are operated to protect and restore river resources using best available

technologies and best management practices. Coalition members including American

Rivers have been involved in the relicensing of more than 300 dams over the past

ten years supporting the continued operation of more than 9,000 MW of electricity.

By contrast, we have opposed the relicensing of fewer than 20 dams, which together

produce less than 100 MW of electricity.

While hydropower has provided significant benefits to society over the past 100

years, this has not come without a cost to our rivers. Dams harm the physical,

chemical, and biological function of rivers by disrupting flows, degrading water quality, and blocking passage of fish and other species. Although hydropower’s energy

source—water—is relatively renewable, the river ecosystems that dams affect are

not. The profound impacts of hydropower dams on river systems have been widely

documented in the scientific literature. For example, dams cut off free-flowing rivers, blocking not only fish and wildlife migration, but also the flow of nutrients and

sediments. By diverting water out of rivers for power generation, hydropower

projects often leave entire water channels dry. Simple changes in the operating procedures for these projects can significantly reduce these impacts without significantly reducing generation.

When the scores of hydroelectric licenses scheduled to expire over the next decade

were originally licensed decades ago, meeting environmental standards was not required and our understanding of complex ecological systems was in its infancy. For

decades, these projects have operated with minimal environmental controls leading

to significant and sometimes irreversible damage. Current relicensing represents

our first opportunity to review these dams, reservoirs, and turbines, and to place

environmental safeguards on them for the next 30 to 50 years that will improve our

rivers and protect fish and wildlife for our children and grandchildren.

Though damaging to rivers and ecosystems, hydropower represents an important

part of the nation’s energy mix, producing about 10% of total annual generation.

About half of that energy is generated by non-federal producers and regulated by

FERC. The licensees pay nothing for an essentially free and renewable fuel—river

water—and less than 2% of the fair market value for the use of federal lands.1 According to FERC, the relicensing of more than140 hydropower projects reduced generation an average of only 1.6% per project.2 Based upon the relative percentage of

hydropower in the nation’s overall energy mix, we estimate that relicensing requirements would result in a mere 0.025% reduction of the electric power generated annually in America.

The claim by utilities that measures to protect river ecosystems and water quality

will lead to substantial rate hikes for consumers are false. For example, the Hells

Canyon Complex of three dams on the mainstem of the Snake River, bordering between Idaho and Oregon, is one of the largest privately-owned hydropower projects

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3 Jon H. Goldstein, GTBEconomics. Financial Analysis if Idaho Power Company: Effect of Mitigation Costs on Company: Effect of Mitigation Costs on Company’s Financial Status and Electric

Rates, Chevy Chase, Maryland, August 12, 2004 4 Evans/McDonough Company, Inc. Opinion Research and Strategic Services, Hells Canyon

Dam Complex, Seattle, Washington, 2004. 5 Escondido Mutual Water Company et al. v. La Jolla Band of Mission Indians, et al., 466 U.S.

765, 777 (9th Cir. 1984) (citations omitted); Bangor Hydro v. FERC, 78 F.3d 659 (1st Cir. 1996);

American Rivers v. Federal Energy Regulatory Commission, 187 F.3d 1007, 1030 (9th Cir. 1999). 6 U.S. General Accounting Office, Federal Energy Regulatory Commission: Charges for Hydropower Projects’ Use of Federal Lands Need to Be Reassessed, Washington, D.C., May 2003, GAO03-383, p. 5.

in the country. This complex blocks access of Snake River Chinook salmon from 80%

of their historic spawning grounds. An economic analysis commissioned by the Nez

Perce Tribe found that measures to provide fish passage and improve water quality

in the river would lead to an average rate increase for residential customers of only

$1 a month, if the entire cost of these measures were passed along to consumers.3

In addition, a poll of customers in southern Idaho and western Oregon found widespread support for Idaho Power providing upstream and downstream fish passage

and a willingness to pay $1.50 per month for ensuring these conditions.4

II. RELICENSING—AN IMPORTANT BALANCING ACT

The relicensing process is necessarily complex. Because rivers are public resources

with many competing interests and significant environmental issues, the licensing

process for hydropower dams involves multiple stakeholders. Unlike most electricity

generating technologies, hydropower affects a wide range of interests. Because every

dam and every river is different, generic standards cannot be applied to each

project. Individual conditions suited to each project must be established.

The Federal Power Act (FPA), although commonly considered an energy statute,

also occupies an important role in environmental protection. The statute was

amended in 1986 to require the Commission to give ‘‘equal consideration’’ to power

(electricity generation) and non-power (fish and wildlife protection, recreation, etc.)

benefits of the river. However, this balancing requirement is not the sole environmental constraint placed on hydro projects. Back in 1920, Congress determined that

some basic environmental protections must be afforded at every dam. Under these

statutory requirements, expert federal and state resource managers establish basic

conditions that form a floor above which FERC then establishes license conditions

in the public interest.

Sometimes referred to as mandatory conditions, the statutory requirements assure that:

(1) Fish can be passed upstream and downstream of a dam (FPA Section 18);

(2) If a nonfederal dam is located on federally owned land, the purposes of the federal land are protected (FPA Section 4(e)); and

(3) The dam complies with state-developed water quality standards (Clean Water

Act, Section 401).

Section 18 of the Federal Power Act grants authority to the Secretaries of Commerce and the Interior to mandate the construction and operation of fish passage.

This authority has been upheld by the courts on a regular basis.5 Setting the requirement for fishways apart as a special consideration reflects the understanding

that fish are important to interstate and intrastate commerce and that they also

have substantial non-commercial value. It reflects a policy incorporated into the

laws governing dam-building from the earliest years of our nation. The privilege of

building a dam on a public waterway has long required the protection of those who

rely on affected fisheries, through the construction of safe and effective fish passage.

New science, technology, and appreciation for the value of healthy fisheries has

more recently prompted the construction of fish passage on many dams that were

originally constructed without it.

Section 4(e) grants authority to land management agencies to ensure that projects

on their lands meet current management goals and objectives. More than 400 FERC

regulated projects are located on Forest Service, Bureau of Land Management, and

tribal lands. These projects have impacts on water resources, recreation, fish and

wildlife, and cultural resources and also receive the benefit of cheap rent.6 In order

to adequately manage the lands entrusted to them and ensure that hydro projects

do not interfere with other uses of the land, federal land management agencies must

be able to constrain how these projects are operated.

The protection of water quality is a responsibility that has been delegated to the

states since the Clean Water Act was adopted 30 years ago. Section 401 ensures

that private hydro projects will not interfere with state standards, by requiring that

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7Federal Energy Regulatory Commission Staff.

8Federal Energy Regulatory Commission Staff., p. 38

9William Bettenberg, Deputy Director, Office of Policy Analysis, U.S. Department of Interior,

‘‘Statement before the Senate Committee on Energy and Natural Resources on S. 597, S. 388,

and S. 71 and Matters Related to the Hydropower Licensing Process,’’ Washington, D.C., July

19, 2001, p. 3. 10William Bettenberg.

each federally licensed project obtain a state certification that the project is consistent with state standards, including the designated uses for each water body. The

Supreme Court confirmed in PUD No. 1 of Jefferson County v. Washington Dep’t of

Ecology, 511 U.S. 700 (1994), that these standards include chemical, physical, and

biological parameters.

These laws establish the simple rule that hydroelectric projects must meet basic

environmental standards before operating on our rivers. Just as we should not allow

coal-fired plants to operate without modern emissions control devices, hydro plants

should not operate without use of best available technologies and practices. Nonetheless, these environmental conditions have been scapegoated as the cause of

delays in the relicensing process. This is not supported by the facts.

In May 2001, FERC issued a report to Congress reviewing ‘‘policies, procedures,

and regulations for the licensing of hydroelectric projects to determine how to reduce

the cost and time of obtaining a license.’’ 7 The report showed that Section 4(e) and

18 requirements of the FPA by federal resource agencies were not a major cause

for relicensing delays and that the timeframe for processing licenses incorporating

mandatory conditions was nearly identical to that of licenses without conditions.8

In fact, of the 157 new or existing projects licensed from 1995 through 2000, the

Department of the Interior only established mandatory conditions under Section 4(e)

for 9 projects, and the U.S. Fish and Wildlife Service or the National Oceanic and

Atmospheric Administration only established Section 18 fishway conditions for 32

projects.9 When these conditions are established, they are usually uncontested. Of

the 57 challenges brought by applicants for the 157 licenses, only 13 were directed

to Interior and NOAA conditions.10

III. IMPROVEMENTS TO THE RELICENSING PROCESS CAN WORK

For the last eight years, American Rivers and members of the Hydropower Reform Coalition have been working with industry, federal and state agencies, and the

Commission to make administrative improvements to the hydropower licensing

process. We have made steady progress in a number of areas including federal agency actions and procedures to ensure consistency, timeliness, and coordination.

Alternative Licensing Process

Since 1997 when hydropower legislation similar to that in the discussion draft

was introduced by Senator Larry Craig, FERC has undertaken two rulemaking efforts to streamline hydropower licensing. The first effort was the Alternative Licensing Process (ALP) established on October 29, 1997, and designed to promote collaboration and settlement in hydropower licensing. Since that time, dozens of projects

have used the Commission’s ALP rules, resulting in far less litigation and a marked

increase in settlements.

From 2001 through 2004, FERC issued 135 licenses. A total of 51 of those licenses

or 38% were settlement agreements. Interestingly, settlements accounted for 71% of

the total electrical capacity of licenses issued during that time, or 3,208 MW. During

that same period, the Commission oversaw the surrender of only 5 constructed

projects, most of which were due to age and disrepair.

The recent Tapoco Settlement in Tennessee and North Carolina among Alcoa Aluminum, conservation groups, communities and state and federal agencies will restore flows to two previously dewatered river reaches, including a nine-mile section

of the Cheoah River that has been virtually dry for more than 50 years. This will

help a diverse array of native aquatic species, including the endangered Appalachian Elktoe mussel and create flows for recreation including fishing and whitewater boating. The agreement will also preserve over 10,000 acres of pristine watershed and biologically diverse lands adjacent to the Great Smoky Mountains National Park and the Cherokee National Forest through a combination of conservation easements, land donation, and rights of first refusal to conservation interests.

To correct some of the stream system fragmentation caused by these dams and reservoirs, Alcoa will design and operate systems to transport four endangered fish species between disconnected tributaries and work with state and federal officials to

reintroduce these species throughout the region. The agreement also creates two

trust funds of $12 million over 50 years to finance restoration, and recreation

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11Federal Energy Regulatory Commission, ‘‘EPA to Oversee Hydroelectric Facility Dismantling As Part of Superfund Remediation Project,’’ Press Release, January 19, 2005 12 Commissioner Nora Brownell, Federal Energy Regulatory Commission, Testimony before

the Subcommittee on Energy and Air Quality, Committee on Energy and Commerce, House of

Representatives, Washington, D.C., March 5, 12, and 13, 2003.

projects in the Little Tennessee watershed. According to FERC, ‘‘the project will provide 380 megawatts of electricity generated from a renewable resource while protecting and enhancing fish, wildlife, recreation and aquatic resources near the

project.’’ 11 Last Congress, a component of this agreement was codified in legislation,

P.L. 108-343, sponsored by Congressman Duncan and Senator Alexander. The Hydroelectric Title of the Discussion Draft would have made this agreement highly unlikely.

Another success story is the Pelton-Round Butte Project owned and operated by

Portland General Electric and the Confederated Tribes of the Warm Springs on the

Deschutes Rivers. The settlement agreement, signed officially on July 13, 2004 will

lead to salmon and steelhead reaching the upper parts of the Deschutes River for

the first time in decades. In discussing the project Portland General Electric stated

that ‘‘The river sustains varied economies by generating electricity, irrigating agricultural land, providing a fish harvest for the Tribes and supporting recreation and

tourism. The Deschutes draws white water rafters and fishermen from all over the

region, while its reservoirs provide water skiing, shoreline camping and other recreation. Those benefits have come at a cost to the river, which the Pelton Round Butte

relicensing agreement will help offset.’’ The settlement is an important last step to

earning a new FERC license for the Pelton project. FERC must still accept the settlement and issue a new license.

In New England, major settlement agreements in Massachusetts, Vermont, and

New Hampshire have led to tremendous growth in rural economies. For example,

a series of dams along the Penobscot River in Maine with nonexistent or insufficient

fish passage facilities caused the populations of migratory fish species to plummet

to historically low populations. The river was home to the largest Atlantic salmon

run in the world. Under the Penobscot River Restoration Project and licensing

agreement, two dams will be decommissioned and removed, and state-of-the-art fish

passage will be provided at a third. These efforts will open more than 500 miles of

river habitat—historical spawning grounds for Atlantic salmon and other species—

significantly enhancing fishing, recreation and tourism opportunities. As part of the

licensing agreement, 90% of the power production capacity will be maintained in the

project by increasing production capabilities at other dams.

These and other settlement agreements have led to enormous improvements to

rivers, local economies, and have guaranteed the continued operation of cheap, emissions free hydropower. The one-sided provisions of the Discussion Draft would have

made this kind of collaboration almost impossible and significantly detracted from

the ability to achieve settlements. Instead, we would have been left with litigation,

litigation, and more litigation.

FERC’s New Rule

Effective October 23, 2003, after the Energy Policy Act passed out of the House

of Representatives, FERC established a new licensing process called the Integrated

Licensing Process (ILP) designed to establish a single ‘‘integrated’’ environmental

analysis. The proposal was the culmination of work by FERC staff and federal agencies as well as a parallel process initiated by hydropower licensees, conservation

groups, state agencies, and Indian tribes. The Commission estimates that the ILP

will reduce the average time it takes to complete the licensing process by 60%. Further, it estimates that the proposed process will reduce the cost of licensing for a

project under 5 megawatts by $150,000 and for a project greater than 5 megawatts

by $690,000.12

The highlights of the ILP are:

• increased assistance by Commission staff to potential applicants and stakeholders

during the development of license applications;

• greater coordination among the Commission and federal and state agencies with

mandatory conditioning authority;

• coordination of environmental analyses between the Commission and other stakeholders;

• public participation in the consultation process;

• clear and rational schedules and deadlines for all participants;

• development of a Commission-approved study plan, with dispute resolution of disagreements; and

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13 67 Fed. Reg. 77451 (Dec. 18, 2002). 14 64 Fed. Reg. 54602 (Sept. 9, 2004).

• creation of a new Commission Tribal Liaison, to be the point of contact for American Indians’ concerns regardless of the proceeding or issue.

Back in 1997, American Rivers and our conservation partners, along with the Departments of Agriculture, Commerce, and the Interior, all argued that it was premature to change the relicensing process until FERC’s ALP rule had a chance to

work. Eight years later, the success of that process has been borne out. We now

stand before Congress immediately following the publication of another FERC rule

on hydropower. We again urge Congress not to move forward with drastic proposals

until we see how well this new process works. FERC has demonstrated that administrative improvements can occur without amending the law and without jeopardizing public participation or environmental quality.

Mandatory Conditioning Agency Rulemaking

In 2003, the U.S. Forest Service undertook a rulemaking on the ‘‘Notice, Comment, and Appeal Procedures for Projects and Activities on National Forest System

Lands.’’ 13. New rules to amend 36 C.F.R. Part 215 eliminated the process for administrative appeal of various Forest Service actions, including Forest Service conditions for the protection and utilization of National Forest System lands in hydropower project licenses under the FPA, section 4(e). American Rivers and the Hydropower Reform Coalition generally opposed the rule change, arguing that administrative appeals were a valuable administrative tool, provided they were adequately

staffed and funded. Unfortunately, in an effort to streamline the agency, the Forest

Service did away with any administrative review of agency conditions.

The concept behind the one-sided appeals process available exclusively to licensees was publicly vetted in a proposed Department of the Interior rule 14 this past

fall. Ninety-nine percent of the 15,000 comments received, including those of eight

states and several tribes, opposed the one-sided appeals process. Newspaper editorials in the Washington Post, San Francisco Chronicle, and Atlanta Journal Constitution lambasted the idea of giving utilities an unfair advantage. Comments received by the agency, including those of American Rivers and the Hydropower Reform Coalition, rejected the concept that dam owners were entitled to an appeal

process closed to other stakeholders with a direct interest in the project, and called

upon the Department of the Interior to establish a process open to all stakeholders.

We await a response from the Department.

IV. CURRENT PROPOSALS WOULD BIAS THE PROCESS AND HARM THE ENVIRONMENT

American Rivers and the Hydropower Reform Coalition oppose the hydropower

language in the Energy Bill because it will increase regulatory complexity, decrease

certainty, lengthen the timeline of license issuance, provide unjust advantages to

hydropower dam owners, interfere with the full participation of states, tribes, homeowners, businesses, and other members of the interested public presently provided

under the Federal Power Act, and diminish environmental quality. It should be rejected. Rather than providing a simple fix to the industry’s complaint that decisions

by resources agencies should be subject to administrative appeal, the language in

the Committee discussion draft would undermine the entire resource agency process

by: 1) giving hydropower interests unfair advantages at the expense of tribes, states,

anglers, and other stakeholders; 2) creating unnecessary complexity; and 3) reducing

standards for environmental protection.

A. Title II would give hydro license applicants unprecedented power and access to

special processes to address their interests.

Currently, the Federal Power Act’s hydropower licensing provisions create an

open, equitable process in which the dam owner initiates the proceedings with its

intent to file an application, but thereafter, other interested stakeholders have the

same rights to participate all the way through administrative appeal to judicial review. See 18 C.F.R. §§380 and 385. The relicensing provisions of the Energy Policy

Act Discussion Draft would drastically alter this balance for projects involving fish

passage and public lands.

Section 231 of the discussion draft grants dam owners seeking a license for a hydropower dam the right to appeal an agency decision using a ‘‘trial-type hearing’’

on the record. Other parties are allowed to comment on these proceedings, but may

not initiate them. Providing such a hearing to the license applicant, presumably to

challenge conditions that are too onerous, but not granting other parties the chance

to challenge weak conditions, is simply unequal treatment under the law and bad

public policy. Industry argues that the public has multiple opportunities to have its

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15 ‘‘The public must retain control of the great waterways. It is essential that any permit to

obstruct them for reasons and on conditions that seem good at the moment should be subject

to revision when changed conditions demand.’’ President Teddy Roosevelt, 1908 16 69 Fed.Reg. 54603, col. 2 (Sept. 9, 2004).

views heard earlier in the licensing process. So does the license applicant. What

matters most is whether the opportunities are even-handed; we ask Congress to ensure that everyone has the same opportunities to be heard, as they have had

throughout the history of the Federal Power Act.

Section 231 also allows license applicants the exclusive right to compel the resource agencies to adopt alternative conditions from those issued by the agencies

under sections 4(e) and 18. In offering this new authority only to license applicants,

this legislation would again prejudice other parties involved in the licensing process—not just conservationists, but also state agencies, tribal interests, irrigators,

neighboring landowners and recreationists. Offering alternatives that must be included by the Secretary is an unnecessary infringement on the agency’s authority

and expertise, but granting this preferential treatment to hydropower interests is

patently unjust, unfair, and inconsistent with every other element of the Federal

Power Act. This provision also runs counter to the right of the public to participate

in the management of the nation’s rivers.15

B. The hydroelectric relicensing title would make a complex process more so.

At a time when everyone is working to streamline hydropower licensing, the Hydroelectric Title adds complexity through the addition of three new administrative

processes for each affected agency:

• Trial-type hearings for license applicants—This is an incredibly complex and costly proposal to administer and would enable dam owners to call witnesses and

cross-examine agency witnesses before an Administrative Law Judge. In its discussion of proposed rules to establish an appeals process for license applicants,

the Department of the Interior recently argued against imposing a trial-type

hearing, stating that it could prolong the current licensing process by up to two

years.16 FERC itself has largely abandoned this practice for its hydropower proceedings in favor of paper processes.

• Consideration of applicants’ alternative resource conditions—The license applicant

would be granted the opportunity to offer alternative conditions that the Secretary must accept provided the alternative meets certain standards. This process would require additional staff, steps, and analysis; and

• The Commission’s Dispute Resolution Service—If the dam owner continues to disagree with the agency, despite each of the steps above, the dam owner may seek

review by the Commission’s Office of Dispute Resolution, an office with no authority or experience to resolve differences in these cases.

Another new process would mandate that federal resource agencies consider eleven new factors in developing their environmental conditions. Consideration of these

factors places an enormous burden on the resource agencies. At present, the relevant state and federal agencies do not have sufficient staff or funding to meet these

proposed requirements for new, complex analyses clearly beyond the scope of their

resource protection responsibilities and well beyond their expertise. Many of the

new procedures and mandates placed on resource agencies are redundant with the

Commission’s role in relicensing. Currently, FERC is charged with considering a

range of factors when it issues a license under the FPA, with the cooperation and

input of federal agencies on issues where they add expertise—in this case fisheries

and land management.

Having the agencies undertake an additional evaluation would be not only be duplicative; it would also fundamentally realign the agencies’ role in the licensing

process, which is currently to establish necessary and appropriate environmental

protections—a floor of environmental protection—and to leave the balancing of

power development versus other factors beyond those basic protections to the Commission. For these reasons, American Rivers and the Hydropower Reform Coalition

strongly oppose these provisions.

Adding new responsibilities and procedures for resource agency staff will do little

to address timeliness or streamline complexity. A more useful and appropriate approach would be to enhance agency capability by ensuring that annual fees collected

by FERC from licensees for resource agency relicensing expenses under Section

1701(a) of the Energy Policy Act of 1992 be reimbursed directly back to those agencies, instead of going into the general Treasury. Today, these agencies are stretched

near the breaking point and must have additional resources to keep up with their

present level of involvement, much less this proposed increase in responsibility.

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17Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th Cir. 1994)

C. Title II would diminish environmental quality

The language of the hydropower relicensing title in the Discussion Draft eliminates the basic guarantee that alternative license conditions would provide equivalent protection to those proposed by the agencies, establishing a new standard that

invites administrative and judicial second-guessing of the protections for fisheries

and federal lands. In addition, it forces the resource agencies to give private costs

the same level of consideration as the protection of public resources.

The standard for section 18 alternative conditions is even more harmful. Rather

than requiring the installation of a fishway, this proposal would establish a standard that the alternative be ‘‘no less protective of the fish resources’’ than the fishway

originally proposed by the fishery agency. No one really knows what is meant by

‘‘fish resources.’’ This language could allow the substitution of hatcheries, habitat,

or even mitigation funds in lieu of fish passage, none of which will move fish past

the dam. Loss of spawning habitat and movement of fish into their historic range

cannot be mitigated by hatcheries or downstream habitat improvements. There are

many interests in moving fish past dams that go beyond the ‘‘protection of fish resources,’’ such as fishing access and treaty obligations.

VI. CONCLUSION

Being a good environmental steward is a legitimate cost of doing business. If a

project is already unprofitable because of market forces or because it is run poorly,

it should not be exempted from any environmental conditions. According to the

courts, ‘‘There can be no guarantee of profitability of water power projects under the

Federal Power Act; profitability is at risk from a number of variable factors, and

values other than profitability require appropriate consideration.’’ 17 We urge the

Committee not to make environmental protections the scapegoat for licensing marginal projects nor to allow utilities that have never mitigated for their environmental impacts to continue to benefit from a sweetheart deal at the public’s expense.

American Rivers and the Hydropower Reform Coalition believe that there should

be stricter environmental conditions at hydropower projects, while many in the industry believe that there should be fewer. Perhaps that is a signal that things are

working. Whichever position one believes, the Committee’s Discussion Draft of the

Energy Policy Act would only make the relicensing process more complex and litigious and would threaten public trust resources that already bear the brunt of relicensing delays. We urge the Committee to defer to the Commission’s new Integrated

Licensing Process to truly improve the hydro licensing process and to reject measures that undercut environmental protections and place the voice of license applicants over that of other parties.

We understand and appreciate the value of hydroelectric power. It is a valuable

source of emissions free energy and provides numerous other benefits including

being the cheapest source available. Unfortunately, its legacy of impacts to our nation’s rivers has been neglected too long. Now is the time to bring these dams up

to modern environmental standards, not to continue the status quo. For the reasons

outlined in my testimony, we urge the members of this Committee to oppose the

Hydroelectric Title of the discussion draft and to oppose this bill.

Mr. SHIMKUS. Thank you. And I want to personally applaud the

panel for really abiding by the 5 minutes. Everybody is right on

time, and this is very helpful, especially when there is a long panel.

I am saying that because I know who is coming up next, so I will

put him on notice. Mr. John Shelk, Senior Vice President, Government Affairs for the National Mining Association, previously served

as Counsel to the House Committee on Energy and Commerce,

where he worked on the Clean Air Act Amendments of 1990 and

what became the Energy Policy Act of 1992. He served as Senior

Advisor to the ranking Republican on the Energy and Commerce

Subcommittee on Fossil and Synthetic fuels for most of the 1980’s.

Prior to his present assignment, John was Director of Government

Affairs for Calpine Corporation. Other private sector positions have

included Vice President of the American Gaming Association, Assistant General Counsel of ITT Corporation, Federal Affairs CounVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00487 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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sel for the Hartford. John also practiced law in California for Gibson, Dunne, and Cruthcher. I am going to know everything about

you here in a minute. John is an honors graduate of Georgetown

University College of Arts and Sciences. He received his juris doctorate degree from Georgetown Law Center. Welcome. Again, as everything else—your full statement is in the record. You have 5

minutes. Thank you.

STATEMENT OF JOHN E. SHELK

Mr. SHELK. Thank you, Mr. Chairman. And most importantly, I

was born in the State of Illinois. I appreciate that link, but also

glad to be here on behalf of the National Mining Association. And

we are pleased to urge the committee, in what we hope will be a

bipartisan basis, to move swiftly and favorably on a comprehensive

energy bill this year, one that is certainly long in the making. NMA

represents producers of coal, the fuel that helps generate over onehalf of the Nation’s electricity. Our members also include minerals

and metals producers as well as equipment manufacturers, and so

as a result, we approach energy issues as both users and producers

of energy.

We commend Chairman Barton and Chairman Hall and the

members of the committee for moving forward early this year based

on the conference report in 2003. And the short title this year, we

think, say it all. The short title says ‘‘the Energy Policy Act of

2005,’’ and then it goes on to say ‘‘ensuring jobs for our future with

secure and reliable energy.’’ And we believe that the Nation’s abundant coal reserves should play a major role in accomplishing those

objectives of jobs and security, all while continuing to improve the

environment. As others have mentioned, the Energy Information

Administration projects the demand for electricity will increase 50

percent in just the next 20 years. Multi-billion dollar investments

must be made, starting today, to meet that increased demand.

Coal’s track record in power generation, as well as the potential

for new uses in gasification for chemicals and liquefaction for

transportation, are impressive and the reasons, we believe, are

straightforward. Coal is a domestic fuel; it is reliable; it is affordable; and it is increasingly clean. The EIA forecast confirms coal’s

significant price advantage over other fuels throughout the forecast

period, and there is no denying the fact that states with the highest percentage of coal-fuel power generation generally have the

lowest consumer electricity rates.

We are happy to report that that track record continues while

improving the environment. Since 1980, while the amount of coal

used to generate electrify has grown 75 percent, emissions from

coal-fuel power plants are 40 percent lower, and that improvement

will only accelerate and continue if this legislation is passed and

companion legislation, such as Clear Skies, is also acted upon.

At a time of heightened concern about foreign supplies, almost

all coal used in the United States is produced here. Coal production

has increased over the last 25 years. The EIA projections show that

the industry is capable of meeting increased demand, going forward, and as many of you know, certainly from Illinois and Ohio,

we have over 200 years of coal reserves.

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The Energy Policy Act of 2005 that is proposed for the committee, following bipartisan support for such provisions in the past,

should include, among others, 3 basic programs for coal. No. 1: a

5-year basic R and D program. No. 2: the Clean Coal Power Initiative. And No. 3: Chairman Barton’s Clean Air Coal Program. Basic

research is really geared toward continuous environmental improvement, and power generation in the bill requires an expansion

of the program so that basic research includes carbon capture and

sequestration.

As to the second initiative, the Clean Coal Power Initiative, the

bill would take technologies that are demonstrated and bring them

to commercial scale at both existing and new plants, and it really

builds upon the success of the existing public/private partnership,

which involves funds from industry along with funds from government, which has produced the low NOX burner technology used in

over three-fourths of all power plants, and measures that have

been developed to date to cut the cost of sulfur removal in half.

We appreciate the statements recently from a broad cross-section

of natural gas users, calling for greater use of coal to help us devise

a strategy to ease the persistent and costly natural gas crisis.

Under the 2 phases of the Clean Air Coal Program added in 2003,

there are joint public/private partnerships to reduce emissions of

SOX, NOX, and mercury, as well as new generation technologies for

the increased demand and the replacement of existing units, projected by EIA and others. And this program is complimentary to

the other 2, for it really takes the technologies that are demonstrated and commercialized and actually deploys them on a basis

that will help the economy and help energy security.

I would be remiss if I didn’t add that a part of the package that

is very important is the tax incentives that were in the bill last

time, and we appreciate the fact that this committee, on a bipartisan basis, has supported them, and that they are included in the

package in the discussion draft, and that is very, very important.

Now, let me also say we strongly recommend that the Congress

continue to facilitate a broad suite of technologies. We share the

view widely held within the coal-based generation stakeholder community that it would be a mistake to select any one technology over

any other.

In conclusion, Mr. Chairman, we know from past experience here

and in the 1990’s that energy legislation is never easy. But we also

know that the world had changed very, very dramatically since this

committee, under its capable leadership, produced comprehensive

energy legislation in 1992, which doesn’t seem that long ago, but

in fact, it is. The increasingly global world economy, which has only

become more global and more competitive in the time that the Congress has considered this version of the bill, demonstrates that

each and every day, we are competing more and more with China,

India, and others for resources. Conservation and efficiency, as well

as all the other fuels represented on these panels, should play

major roles in a comprehensive energy strategy. We suggest that

we also must make greater, wise, and increasingly cleaner of our

abundant, domestic coal reserves as a major part of that strategy,

and we appreciate the opportunity to testify today and to participate in the process going forward. Thank you.

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1Monthly Energy Review, January 2005, Section 9 ‘‘Energy Prices.’’ Energy Information Administration.

[The prepared statement of John E. Shelk follows:]

PREPARED STATEMENT OF JOHN E. SHELK, SENIOR VICE PRESIDENT, GOVERNMENT

AFFAIRS, NATIONAL MINING ASSOCIATION

Mr. Chairman, I am John Shelk, Senior Vice President for Government Affairs

of the National Mining Association (NMA). We commend you for holding this timely

and important hearing to underscore the urgent need for Congress to enact comprehensive energy legislation.

National energy legislation should include policies to encourage both greater domestic production and more efficient use of energy. The need for such legislation is

even more important today than when the Congress, led by this Committee, began

to develop an energy bill over four years ago. We applaud you for your perseverance

in pursuing comprehensive energy legislation, including the hard work that went

into fashioning the conference report for H.R. 6 in 2003. We welcome the opportunity to work with you and your colleagues as Congress develops legislation for

what we hope is prompt and favorable action in 2005.

NMA represents producers of over 80 percent of the coal mined in the United

States. Coal continues to be the reliable and affordable domestic fuel used to generate over 50 percent of the nation’s electricity. NMA members also include producers of uranium—the basis for 20 percent of U.S. electricity supply. NMA represents producers of metals and minerals for which energy is a major cost of doing

business. Finally, NMA includes manufacturers of processing equipment, mining

machinery and supplies, transporters, and engineering, consulting, and financial institutions serving the mining industry.

NMA’s statement today will first discuss the compelling need for comprehensive

energy policy legislation and the importance of coal in our nation’s energy mix. I

will then focus on the proposed legislation as it relates to coal and the development

of technologies that will ultimately lead to greater use of coal with near zero emissions. We greatly appreciate the bipartisan support for coal in the Committee as reflected in both the House-passed version of H.R. 6 in the 108th Congress and the

conference report mentioned earlier. Therefore, we welcome the release last week

of legislative language based on the H.R. 6 conference report as the framework for

these hearings. While our comments focus on the matters under this Committee’s

direct jurisdiction, we are grateful for your support for Clean Coal Technology tax

incentives and the production components that complement the program authorizations developed by this Committee.

ENERGY IN THE UNITED STATES AND THE NEED FOR A BALANCED ENERGY POLICY

Energy, whether it is from coal, oil, natural gas, uranium, or renewable sources,

is the common denominator that is imperative to sustain economic growth, improve

standards of living and simultaneously support an expanding population. The significant economic expansion that has occurred in the United States over the past

two decades, and the global competitiveness of U.S. industry, have been due in large

part to the availability of reliable and affordable energy, much in the form of electricity generally and in coal-fired electricity specifically. In the summer of 2000 this

U.S. advantage in world markets began to break down as too much energy demand

began chasing a relatively limited energy supply. As a result, prices of energy, especially of gasoline and natural gas, increased sharply. Spot shortages of electricity

occurred.

Although short term measures were taken to address electricity supply issues,

these were high cost solutions—mainly construction of peaking facilities using natural gas. This was a continuation of a decade old trend as almost all of the new

power plants constructed since the early 1990’s have been gas-fired. This caused an

over-reliance on one fuel that resulted in sharply higher prices for natural gas for

consumers, industry and for electric generators.

According to the Energy Information Administration (EIA) 1, the average cost of

natural gas to home consumers is 58 percent higher now than in 1999 (which was

just before energy prices began to increase sharply). The cost of natural gas to manufacturers is 98 percent higher today, causing many manufacturers to close U.S. operations in favor of moving to offshore locations with lower energy costs. This has

been particularly devastating to domestic chemical and fertilizer manufacturers and

hence farmers and others who depend on those products. High natural gas prices

have cost the United States over one million high paying manufacturing jobs that

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will not return to our country. Indeed, additional jobs will be lost without a national

energy policy that addresses the serious need to increase domestic energy supplies

and lower the real cost of energy to manufacturers.

There is no doubt that with our abundant domestic reserves, coal can play an

even bigger role in the electric generation market in the years to come, thus freeing

up supplies of natural gas for industry. Over time, there is also an increasing potential for greater coal gasification and coal liquefaction in the production of chemicals

and other forms of energy such as hydrogen.

EIA’s long range forecasts show that the trends experienced in the U.S. over the

last 20 years—economic growth, greater efficiency and a move to higher electricity

demand—are expected to continue over the next two decades. Real economic growth

is forecast to increase by an average 3.1 percent per year through 2025. Reflecting

greater efficiency, the use of energy will grow by a slower 1.4 percent per year on

average or by a total of 35.5 percent to 133 quadrillion Btu. Consumption of all

sources of energy will increase: petroleum by 39 percent, natural gas by 39 percent,

coal by 34 percent and renewable energy by 37 percent. And, the economy will become even more dependent upon electricity over the next 20 years—consumption of

electricity will increase by an average 1.8 percent per year, or by 45 percent over

the next two decades. If the past is a guide, this electricity forecast is conservative.

At the same time, production of energy in the United States is expected to increase by only 0.7% annually on average—meaning that imports will have to increase or other measures taken. Coal is the only domestic source of energy that is

expected to increase production sufficiently to meet demand. Imports of petroleum

and petroleum products are expected to increase at a 2.4 percent per year rate and

imports of natural gas are forecast to increase at a rapid 4.1 percent annual pace.

We are becoming more, not less, dependent on foreign sources of energy to meet our

energy needs. As energy demands increase globally, led by extraordinary economic

growth in China and other developing countries, the United States will face very

strong competition for foreign energy supplies. This alone is justification for a comprehensive national energy policy. A strategy that encourages expansion and use of

domestic energy supplies, as well as conservation and efficiency, is imperative if the

United States is to maintain an acceptable level of energy and economic security.

The lack of an energy policy has exacerbated the U.S. supply-demand imbalance.

The U.S. is fortunate to have a large domestic energy resource base and an established, although aging, energy delivery infrastructure. To meet future demands,

however, our energy policy must be redirected to one that encourages efficient, environmentally sound development of our nation’s vast resource base and the use of

technologically advanced methods to process, transport, and use that energy. Our

strategy must be grounded in market oriented policies that lead to adequate, diverse, and secure supplies. A responsible policy will promote new energy technologies, limit use of ‘‘command and control’’ regulation, and support use of incentives.

COAL’S CENTRAL ROLE IN THE U.S. ENERGY MIX—PRESENT AND FUTURE

Coal reserves, which are geographically distributed throughout the U.S., comprise

the greatest share of the nation’s overall energy resource base. The demonstrated

coal reserve is over 500 billion tons with economically recoverable reserves of over

275 billion tons. This is a reserve large enough to support coal demand for well over

200 years at current rates of use.

Of all our domestic energy resources, coal is the only source that has increased

production over the last 25 years (although natural gas production, after declining,

has returned to near 1980 levels). Coal production has increased from 830 million

tons in 1980 to 1.111 billion tons from mines in 26 states in 2004. By 2025, EIA

projects coal production of 1.488 billion tons. The coal industry contributes over

$175 billion annually to the economy through payrolls and purchases of goods and

services, while coal industry tax revenues add at least $2 billion annually to state

and local government treasuries. The industry directly and indirectly employs nearly 1 million people and the employment opportunities continue to grow in what have

become high-technology jobs in today’s modern mines.

Electricity generated from coal is used in all 50 states. Last year more than 1 billion tons of coal generated over 50 percent of all electricity used in the U.S. The

industrial market for coal (at approximately 32 million tons per year) and the domestic market for coking coal used in steel production (24-26 million tons per year)

are important, but small in comparison to the power generation market. The U.S.

also exports some coal, approximately 52 million tons in 2004.

The EIA forecast shows that by 2025, electricity use will increase by nearly 50

percent over today’s levels. Coal use for electricity will total at least 1.425 billion

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2 Existing net summer capacity for electricity generators and independent power producers on

January 1, 2004. This capacity does not include combined heat and power plants, or generating

capacity used for commercial and industrial uses only. Source: EIA, Electric Power Annual 2003. 3 Annual Energy Outlook, 2005.

tons in 2025, some 400 million tons, or 42 percent more than current levels. The

reasons are straightforward: coal is domestic, reliable, affordable, and increasingly

clean. Since 1980, while the amount of coal used to generate electricity has grown

75 percent, emissions from coal-fueled power plants are 40 percent lower than in

1980. New advanced clean coal technologies will enable this trend to accelerate, allowing greater use of coal with increased efficiency and lower emissions of the criteria pollutants (SO2, NOX, and PM) and mercury as well as lower emissions of carbon dioxide both overall and per unit of electricity generated. In sum, coal is indispensable in the U.S. energy mix and as such will provide a major part of our nation’s future requirements.

US URANIUM IS ALSO AN IMPORTANT PART OF THE US ENERGY MIX

While NMA was asked to speak primarily about coal, we would be remiss if we

did not point out that the United States uranium recovery industry is also essential

in the nation’s energy supply mix. Today, nearly 20 percent of America’s electricity

comes from nuclear power, which translates into the consumption of about 45 million pounds of uranium each year. However, the collapse in uranium prices since

1980 has produced a sharp decline in the viability of the U.S. uranium mining industry. America’s remaining uranium miners produce only about 3 million pounds—

or just 6 percent of nuclear utilities’ annual uranium requirement. The balance of

the uranium comes from rapidly declining inventories in the hands of the utilities,

the federal government, and foreign entities.

Historically, the U.S. was the world’s leading producer of uranium and still has

extensive proven reserves of natural uranium that offer the potential for secure

sources of future supply. Only a strong domestic uranium recovery industry can assure an adequate long-term supply to preclude threats of foreign supply disruptions

or price controls that could adversely affect the nation’s security. Therefore, the federal government must foster policies that ensure a strong and viable domestic uranium industry and remove barriers to domestic production of existing sources of

uranium. The proposed legislation will assist in this goal by authorizing uranium

research.

HOW ENERGY POLICY LEGISLATION SUPPORTS FUEL DIVERSITY

Following the model of H.R. 6 in the 108th Congress, the Energy Policy Act of

2005 should continue to have many provisions that, once enacted, will encourage

greater use of coal for electric generation with continuing improvements in the environment through further reduction of emissions associated with coal use. Ultimately, if the programs included in the bill are fully funded, the resulting suite of

advanced clean coal technologies that will be developed will mean that emissions

from coal fueled power could be near zero.

Without a doubt, the nation will continue to rely on the existing 876.3 GW 2 generating fleet (including 303 GW of coal-fueled capacity from over 1,000 coal fueled

power plants) to meet electricity demand. But that is not enough to satisfy the 50

percent increase in electricity that will be required by 2025. Between now and 2025,

at least 263 GW of new electric generating capacity must be built to meet new demand and to replace the capacity that will be retired in this period. As coal generation is expected to increase by nearly 50 percent, the nation must rely on both the

existing coal-fueled fleet and at least 100GW of new coal capacity that must be built

during this time.3

H.R. 6 included provisions that support the research, development and deployment programs that are necessary to ensure that advanced clean coal technologies

are available for use in this new fleet by having been commercially proven on a

timely basis. This research work should include projects to develop technologies to

capture and sequester carbon. Such technologies provide an option to address carbon-related concerns by actually reducing emissions without harming the U.S. economy, as would occur from unilateral emissions caps.

As in H.R. 6 from the 108th Congress and in the draft coal provisions of the Energy Policy Act of 2005, comprehensive energy legislation should include authorizations and program requirements for:

• A five year basic coal research and development program:

• The Clean Coal Power Initiative; and

• Chairman Barton’s cutting-edge Clean Air Coal Program.

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BASIC COAL RESEARCH AND DEVELOPMENT

The 2005 version of an energy bill should continue to authorize a $1.4 billion basic

coal research and development program centered on a suite of technologies to be

carried out by the Department of Energy. This basic research is important to advance coal generation and also to advance other uses of coal as over time coal can

be converted into liquid fuels and into hydrogen for fuel cells—among other new

uses.

The stated purpose of the program is to facilitate production and generation of

coal based power through innovations for existing plants, research to improve integrated gasification combined cycle plants, advanced combustion systems, turbines

for synthesis gas derived from coal, carbon capture and sequestration research, coal

derived transportation fuels and chemicals, solid fuels and feed stocks, advanced

coal-related research, advanced separation technologies and other technologies that

make the most and best use of our abundant domestic coal reserves.

The initial thrust of the program is electricity generation and continual improvement in the quality of our environment, which is as important as the availability

of affordable electricity. Technologies developed by DOE coal research programs

have already achieved commercial success, contributing to the sharp decline in emissions of criteria pollutants over the last three decades as the nation’s air quality

has greatly improved during that time period.

It is important to continue and expand these research programs, to develop coalbased generation technologies that further improve efficiency, environmental performance, and cost competitiveness beyond that of facilities in service or demonstrated to date. These technologies should include a coal based zero emissions

electricity and hydrogen project. Research to find ways to capture, sequester, and

dispose of carbon dioxide should be accelerated so that cost effective technologies are

available to do so. This program correctly encourages research on a suite of technologies, rather than have Congress picking technology winners and losers, as it

would not be prudent to focus and depend on only one technology pathway.

Importantly, this program also includes research on technologies that use coal in

non-traditional ways such as liquefaction. Over time, technology advancements will

allow cost effective conversion of coal to hydrogen and coal to oil. Development of

new technologies takes time and it is prudent to advance research now on technologies to use coal in different ways so that they are commercially available in future years.

THE CLEAN COAL POWER INITIATIVE

The Clean Coal Power Initiative (CCPI) is a $2 billion, 10 year program designed

to demonstrate commercial coal based applications of technologies for new and existing coal fired plants that will advance efficiency, environmental performance and

cost competitiveness beyond that of facilities that are in commercial service today.

It is a demonstration program to move a suite of technologies from bench scale to

demonstration on a commercial scale.

CCPI builds upon the DOE Clean Coal Technology program that has already had

a number of successes. For example, low NOX burner technology developed through

the program is now on 75 percent of U.S. coal fired power plants. The program has

also resulted in scrubber technology that has nearly halved capital and operating

costs for sulfur removal.

The CCPI provides funding for a necessary part of development—the demonstration of technologies at commercial scale. This step is a costly process and one that

cannot readily be undertaken by private industry alone. However, it is also important to stress that the CCPI program is a DOE—industry partnership. The legislation continues the practice of requiring a 50 percent private sector cost share.

The CCPI is in addition to completion of the important FutureGen project, a jointly funded industry-government partnership to construct a commercial scale integrated gasification combustion technology plant with carbon sequestration. We are

pleased that the proposed DOE budget for FY2006 continues FutureGen as a budget

priority.

THE CLEAN AIR COAL PROGRAM

This title from the H.R. 6 conference report provides a $2 billion authorization for

the Department of Energy to carry out a new clean coal technology deployment program to accelerate the use of technologies that have been demonstrated (they are

beyond the CCPI program) but not yet adopted for widespread commercial use. The

program is in two phases. In Phase One (FY2006 through FY2010) projects are authorized for a total of $500 million and must address the immediate needs of the

486

power industry to have a broad selection of pollution control equipment that can be

installed on existing power plants. This is an important program to help existing

units comply with the additional SO2, NOX, and mercury reductions that will be required either by regulation or through enactment of multi-emissions legislation such

as the proposed Clear Skies Act. Phase Two is an authorization of $1.5 billion over

FY2007 through FY2012 to promote new coal generation technologies to meet new

demand or replace existing capacity. Again, this is designed to move technologies

beyond the demonstration stage to actual commercialization; thus each of these programs is complementary to one another.

The Clean Air Coal Program will mitigate the financial risks associated with early

commercialization of new technologies. It is specifically designed to help utilities

meet both current and future obligations under the Clean Air Act through loans or

loan guarantees, but the total federal amount will be limited to 50 percent of the

cost of a given project. The funds will be available to those utilities installing pollution control technologies that meet efficiency and emissions reduction requirements

established by the Secretary of Energy.

This program will assist utilities with funding the multi-billion dollar capital expenditures that will be required over the next 10 years to reduce emissions. It will

facilitate the use of coal to ease the natural gas crisis even as emission requirements are ratcheted downward. In turn, this will free up natural gas for industrial

uses to benefit the economy by making our manufacturing base more competitive

and by preventing additional jobs from exiting the country.

MATTERS NOT TO INCLUDE IN A COMPREHENSIVE ENERGY BILL

Mr. Chairman, while our testimony focuses on the important coal-related provisions to include in a comprehensive energy bill, it is also important to stress what

matters should be left out if we are to make the most use of our abundant coal reserves. The Conferees on the part of the House have consistently acted on a bipartisan basis to reject proposals from the other body for an ill-advised Renewable Portfolio Standard (RPS) and for mandatory carbon-related provisions. Decisions about

an RPS are best left to the States for a variety of reasons, including differences in

regional energy resources as well as the impact on electricity costs. As noted earlier,

several of the research programs we support include carbon sequestration and other

technology-based approaches, including those that promote energy efficiency. We

continue to believe that is the right approach because it will be far more effective

than unilateral mandatory restrictions on U.S. carbon emissions.

CONCLUSION

Mr. Chairman, enactment of comprehensive energy legislation is not easy. Congress has not turned a comprehensive energy bill into law since 1992—well over a

decade ago. But, for all the reasons stated earlier, the hard work of the past several

Congresses must result in enactment this year of a balanced, comprehensive bill.

Our economy, energy security, and environment will all improve with timely enactment and implementation of comprehensive energy legislation.

Mr. Chairman, we have always been a ‘‘can-do’’ country in which technological advancement is among our major achievements. We have the domestic coal resources

to help power the country forward in the globally competitive times in which we

live. We must do so while continuing to meet the public’s environmental expectations. NMA’s energy producers and manufacturers look forward to working with you

to make us more competitive while continuing to improve the environment. Thank

you again for the opportunity to testify at today’s hearing.

Mr. SHIMKUS. Thank you. Next panelist is Mr. Alan Nogee, Director of Clean Energy Program, Union of Concerned Scientists. He

has testified on environmental issue and electricity restructuring

before legislatures and regulatory agencies in Massachusetts, Connecticut, Vermont, New Hampshire, New Jersey, and has assisted

organizations involving in the restructuring process in New England, New York, Pennsylvania, and at the Federal level; he has testified before us before. Mr. Nogee serves on the National Green

Power Board and on the Board of Directors of the Renewable Energy Policy Project. He has directed the Energy Program of the

Massachusetts Public Interest Research Group and worked as an

energy analyst with the Environmental Action Foundation in

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Washington D.C. and with State and regional energy organization

in Pennsylvania. He has published numerous articles and reports.

We are glad to have you. You have 5 minutes.

STATEMENT OF ALAN NOGEE

Mr. NOGEE. Mr. Chairman and members of the subcommittee,

thank you very much for this opportunity to appear today. America

needs a national energy policy that prioritizes cost effective energy

efficiency and renewable energy. We need a national renewable

electricity portfolio standard.

We wish that voluntary programs and incentives were sufficient,

but they are not. Few even remember that you tried that approach

in 1992 when you enacted the production tax credit along with a

goal of increasing renewable energy use by 75 percent. Despite

some recent progress in voluntary markets, three-fourths of renewable energy development today is occurring in the 18 States plus

the District of Columbia that have enacted renewable portfolio

standards, even though most of those standards are barely kicking

in. Those programs prove that renewable standards are effective,

affordable and popular. They also prove that State action is not

enough.

State standards will raise the national total of renewable technologies, in additional to our existing HydroBase, up to 40,000

megawatts by 2020; yet analyses by EIA and by my organization,

USC, show that a 10 percent national standard yielding 10,000

megawatts or even a 20 percent standard yielding 200,000

megawatts would bring enormous national benefits. A 20-percent

RPS would reduce the price of natural gas by up to 9 percent for

all consumers, including farmers struggling to pay fertilizer prices

and industrial customers who are moving tens of thousands of jobs

overseas to avoid high U.S. natural gas prices. That is why companies like Dow, Juan Santo, and others recently joined in a statement recommending a renewable or clean energy standard along

with other demand and supply measures to address natural gas

problems.

Even when gas prices were much lower in 2002, EIA found that

a 10 percent renewable standard would cost electricity customers

virtually nothing, 1 mil per kilowatt hour in 20/20, but would reduce total electricity and gas bills. With today’s gas prices, EIA’s

model shows that a 20 percent RPS would save $11 billion for electricity consumers and $14 billion for gas consumers. Using our cost

projections, the savings from a 20 percent RPS would double, to

$49 billion. A 20 percent renewable standard would also mean

150,000 to 157,000 net additional jobs, $16 billion in income to

farmers, and $5 in new property tax revenues for local communities. These benefits unfortunately will not be realized without a

national RPS. Instead, utilities will go on largely choosing gas and

coal plants, imposing higher costs on consumers, increasing our dependence on imported LNG, and adding to the cost of reducing

harmful air pollution.

A 20 percent renewable standard would reduce the project

growth in power plant carbon emissions by 59 percent. Even for

those who believe there is only a remote chance that all of those

climate scientists that work for the IPCC are right, I hope we can

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see that free insurance against that risk is a good bargain. With

a national RPS, every region will use more homegrown renewable

energy, and manufacturing jobs for renewables would be spread

throughout the country, including Rustbelt States like Ohio, Michigan, Illinois, Indiana, Pennsylvania, and southern States like

South Carolina, North Carolina, Tennessee, Alabama, Georgia, Virginia, and Florida.

No one likes mandates, but sometimes they are necessary. The

House voted for a renewables fuel mandate even though EIA shows

that it would be more expensive than a renewable electricity standard and even though the benefits of renewable electricity would be

much more widely dispersed. If you would like a renewable fuel

standard, as we would, without an MTBE liability waiver, you

should love a renewable electricity standard.

Finally, we appreciate your past support for the renewable production tax credit and urge you to support a long-term extension

for all renewables, including geothermal, to give stability to this

important market. The discussion draft of the Energy Policy Act

deems coal, oil, gas, and nuclear worthy of national policy support.

Renewable energy is still trying to break into a market skewed by

tens of billions of Federal subsidies for fossil and nuclear sources

over many decades. Please don’t leave the critical, national price

stability, national energy security, job-creating, clean energy benefits of renewable energy to volunteers. Thank you.

[The prepared statement of Alan Nogee follows:]

PREPARED STATEMENT OF ALAN NOGEE, DIRECTOR, CLEAN ENERGY PROGRAMS,

UNION OF CONCERNED SCIENTISTS

I. INTRODUCTION

The Union of Concerned Scientists (UCS) is a nonprofit organization of more than

60,000 citizens and scientists working for practical environmental solutions. For

more than two decades, UCS has combined rigorous analysis with committed advocacy to reduce the environmental impacts and risks of energy production and use.

Our Clean Energy Program focuses on encouraging the development of clean and

renewable energy resources, such as solar, wind, geothermal and bioenergy, and on

improving energy efficiency.

We favor the adoption of policies to increase the use of renewable energy resources in our nation’s electricity generation mix. Such policies are needed to meet

our future electricity needs, diversify our electricity supply, reduce the vulnerability

of our energy system, stabilize electricity prices, and protect the environment. Specifically, we endorse a renewable electricity standard, also known as a renewable

portfolio standard (RPS)—a market-based mechanism that requires utilities to

gradually increase the portion of electricity produced from renewable resources.

The United States is blessed by an abundance of renewable energy resources from

the sun, wind, and earth. The technical potential of good wind areas, covering only

6 percent of the lower 48 state land area, could theoretically supply more than one

and a third times the total current national demand for electricity. We have large

untapped geothermal and biomass (energy crops and plant waste) resources. Of

course, there are limits to how much of this potential can be used economically, because of competing land uses, competing costs from other energy sources, and limits

to the transmission system. The important question is how much it would cost to

supply a specific percentage of our electricity from renewable energy sources. As this

testimony will show, analyses by both UCS and EIA demonstrate we could generate

at least 20 percent of our electricity from renewable energy sources by 2020, in addition to our existing hydro resources, while reducing prices for both electricity and

gas customers.

In this testimony, I will review the evidence that shows that increasing renewable

energy will save money for consumers, improve energy and national security, create

jobs and income for American farmers and workers, improve the environment and

reduce financial risks for utilities. I will also address why an RPS, along with other

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policies, is necessary to achieve these benefits, and why continuing to rely only on

voluntary and state efforts will impose higher costs on families and businesses,

weaken energy security, and harm the environment for all Americans. Finally, I will

offer our recommendations and comments on specific sections of the discussion draft

as they pertain to renewable energy.

II. RENEWABLE ENERGY CAN REDUCE NATURAL GAS AND ELECTRICITY PRICES.

Energy is critical to our economy. Stephen Brown, director of energy economics

at the Dallas Federal Reserve Bank, notes that ‘‘nine of the 10 last recessions have

been preceded by sharply higher energy prices.’’

Today’s high natural gas prices, caused in part by a boom in natural gas power

plant construction, are causing economic harm. In the February 11, 2005 release on

the Short-Term Energy Outlook, the Energy Information Administration (EIA)

found that the average Henry Hub natural gas spot price was $6.32 per Mcf in January. EIA estimates spot prices at Henry Hub will average $5.45 per Mcf in 2005

and $5.77 in 2006. These natural gas prices today are more than double their 1990’s

levels.

Because natural gas accounts for about 90 percent of the costs of fertilizer, escalating prices have put farmers under a severe economic hardship. Some manufacturing facilities and industrial users that rely heavily on natural gas have already

had to reduce operation or move their factories overseas. On February 17, 2004, The

Wall Street Journal reported that the US petrochemical industry, which is heavily

dependent on natural gas for a primary feedstock as well as for fuel, has lost approximately 78,000 jobs to foreign plants where the natural gas is much cheaper.

Natural gas prices show no signs of returning to historic levels. EIA has raised

its forecast of long-term natural gas prices has increased for each of the last seven

years. Moreover, a recent Lawrence Berkeley Lab study has found that EIA’s gas

forecasts have been and continue to be at least 50 cents/mmBTU lower than market

forecasts, based on gas futures contracts.

Renewable energy can help reduce the demand for natural gas and lower gas

prices. On January 5, 2005, the Lawrence Berkeley National Laboratory (LBL) released a review of 13 studies and 20 specific analyses using different computer models and different assumptions. The analyses all confirmed that renewable energy

(and energy efficiency) can reduce gas demand and put downward pressure on natural gas prices and bills by displacing gas-fired electricity generation. They found

that the higher the level of renewable energy penetration, the more gas is saved,

and the more gas prices are reduced. The LBL study also shows how these results

are broadly consistent with economic theory, with results from other energy models,

and with limited empirical evidence. Many of the analyses LBL reviewed were conducted by EIA and by UCS.

Even in 2002, when gas prices and price projections were considerably lower than

they are today, an EIA analysis conducted at the request of Senator Frank Murkowski (R-AK) showed that a 10 percent renewable electricity standard like the one

that subsequently passed the Senate would have a negligible impact on electricity

prices. EIA found only a one mill (one tenth of one cent) per kWh increase in 2020

with a 10 percent RPS, and no impact in most years. When gas savings were considered, total electricity and gas bills were found to be as much as $13.2 billion lower

with the 10 percent RPS (2000 dollars, 8 percent discount rate).

In April 2004, with the assistance of the Tellus Institute, we ran NEMS with no

changes to the model, using all EIA assumptions. Because of the higher EIA gas

price projections, the results showed that even an RPS of 20 percent by 2020 would

reduce electricity and gas prices. Cumulative savings to electricity customers under

a 20 percent RPS totaled $11 billion (net present value) by 2025, with cumulative

savings to gas consumers of an additional $14 billion, for a $25 billion total savings

(Figure 2).

EIA uses very pessimistic projections of renewable energy technology costs. The

model also imposes artificial limits on renewable energy penetrations, and arbitrarily high costs at increasing levels of renewable penetration. We have therefore

tested the result of using cost projections closer to (but still somewhat more conservative than) those used by the national energy labs, and penetration limits and cost

estimates that based on utility studies and experience.

In our analysis, the consumer savings nearly doubled to $49 billion, with $35 billion in electricity savings, and $14 billion in gas savings (Figure 3).

The most important conclusion, however, is that whether you believe that EIA’s

pessimistic projections of renewable energy costs are more likely, or the national lab

projections, the analyses show that a 20 percent RPS would save both electricity

and natural gas consumers money in either case.

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A 10 percent renewable standard would save money too, but not as much. In our

analysis we found that with a 10 percent renewable standard by 2020, electricity

and gas consumers would save almost $20 billion, compared to $49 billion under the

20 percent standard. Residential consumers could save an estimated $5.8 billion on

their energy bills by the year 2025. Commercial and industrial customers would be

the biggest winners saving a total of $13.8 billion between them.

III. RENEWABLE ENERGY CAN IMPROVE ENERGY AND NATIONAL SECURITY.

In response to rising gas prices, and the declining productivity of North American

gas wells, imports of LNG are projected to increase by sixteen fold over the next

20 years. This trend—assuming that the LNG infrastructure can be expanded sufficiently—threatens to push America down the same troubled road of rising dependence on imported gas that we have followed for oil.

By reducing the demand for natural gas, renewable energy can reduce the pressure for increasing imports. Energy from the wind, sun, and heat of the earth are

America’s most abundant resources. They can never be depleted.

Renewable energy can increase energy and national security in other ways as

well. Lacking long fuel supply chains, renewable energy facilities are not vulnerable

to supply disruptions, and the price shocks they can cause. Because they do not use

volatile fuel or produce dangerous wastes, renewable energy facilities (except large

hydropower dams) do not present inviting targets for sabotage or attack.

IV. RENEWABLE ENERGY CAN CREATE JOBS AND INCOMES FOR AMERICAN FARMERS AND

WORKERS.

Renewable energy can help improve our national economy. Investments in indigenous renewable energy sources keep money circulating and creating jobs in regional

economies. Renewable energy can greatly benefit struggling rural economies, by providing new income for farmers and rural communities. It can also benefit manufacturing states, even those with less abundant renewable resources, by providing

them the opportunity manufacture and assemble components for renewable energy

facilities. And renewable energy can create enormous export opportunities, given the

growing commitment of the rest of the world to expand use of renewable energy.

With the assistance of consultant Marshall Goldberg, we ran the results of our

NEMS runs through the IMPLAN input-output model of the U.S. economy, and

found that a 20 percent RPS by 2020 would produce:

• More than 355,000 new jobs in manufacturing, construction, operation, maintenance, and other industries, nearly twice as many jobs as producing the same

amount of electricity from fossil fuels—a net increase of nearly 157,500 jobs by

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• An additional $8.2 billion in income and $10.2 billion in gross domestic product

in the United States’ economy.

• $72.6 billion in new capital investment

• $15 billion in payments to farmers and rural areas for producing biomass energy

• $5 billion in new property tax revenues for local communities

• $1.2 billion in wind power land lease payments to farmers, ranchers, and rural

landowners.

Renewable energy sources are available in every state. They are much more

broadly dispersed than our fossil fuel resources. Under a national renewable electricity standard, some states will obviously reap more benefits than others, but virtually every state should be able to increase its use of its own resources, build its

local economy, and be less dependent on importing energy from other states and

countries.

Recent analysis by the Renewable Energy Policy Project (REPP) found that the

economic benefits are not localized to the states that have the most renewable energy resources. REPP examined the capability of the manufacturing industries in

each state to supply components for wind and solar facilities. They found that the

top 20 states for wind component manufacturing would be California Ohio, Texas,

Michigan, Illinois, Indiana, Pennsylvania, Wisconsin, New York, South Carolina,

North Carolina, Tennessee, Alabama, Georgia, Virginia, Florida, Missouri, Massachusetts, Minnesota, and New Jersey. The top twenty states for solar manufacturing

would be California, Texas, Arizona, New York, Pennsylvania, Massachusetts, Illinois, Ohio, Oregon, Florida, North Carolina, New Jersey, Colorado, Washington, Virginia, Indiana, Michigan, Minnesota, New Mexico, and Missouri.

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V. RENEWABLE ENERGY CAN IMPROVE OUR ENVIRONMENT AND REDUCE FINANCIAL

RISKS TO UTILITIES.

Electricity use has a significant impact on the environment. Electricity accounts

for less than three percent of US economic activity. Yet, it accounts for more than

26 percent of smog-producing nitrogen oxide emissions, one-third of toxic mercury

emissions, some 40 percent of climate-changing carbon dioxide emissions, and 64

percent of acid rain-causing sulfur-dioxide emissions. Renewable energy can reduce

these emissions, thereby reducing the cost of hitting any emission caps.

Our analysis found that a 20 percent renewable electricity standard could reduce

the projected growth in power plant carbon dioxide emission by more than 50 percent by 2025. Because the 20 percent renewable standard would save money for

electricity and gas consumers, these are free (or negative cost) carbon reductions.

They represent free insurance against the risk that power plants—the largest source

of carbon emissions in the U.S. economy—may have to reduce those emissions someday.

Even most utility executives believe that they will have to implement carbon reductions eventually. Yet in response to the increase in natural gas prices, more than

100 new coal-fired power plants have been proposed. These plants will expose their

owners, power purchasers, and customers to the risk of future price increases that

could be avoided by investing in renewable energy instead. Indeed, under an economy-wide cap-and-trade approach, the carbon reductions from increasing renewable

energy will save money for every sector of the economy.

Whether you think that risk of climate change is great or small, increasing renewable energy can reduce the risk of responding to it. And renewable energy reduces

emissions of sulfur dioxide, nitrogen oxides, particulates, and mercury, reducing the

cost of complying with emission reduction requirements for these pollutants as well.

VI. WHY A RENEWABLE PORTFOLIO STANDARD?

If increasing renewable energy would save consumers money, why aren’t utilities

switching to renewables? In fact, a few are beginning to invest in wind energy as

a purely economic proposition. Others are financing renewable energy development

by allowing customers to volunteer to pay a little more for renewable energy. But

the reality is that about three-quarters of the renewable energy developed in recent

years, and projected to be developed in the next decade, is the result of state renewable electricity standards.

Renewable energy has made great strides in reducing costs, thanks to research

and development and growth in domestic and global capacity. The cost for wind and

solar electricity has come down by 80-90 percent over the past two decades. However, like all emerging technologies, renewable resources face commercialization barriers. They must compete at a disadvantage against the entrenched industries. They

lack infrastructure, and their costs are high because of a lack of economies of scale.

Renewable energy technologies face distortions in tax and spending policy. Studies

have established that federal and state tax and spending policies tend to favor fossil-fuel technologies over renewable energy. A 2003 study by the Renewable Energy

Policy Project showed that between 1943 and 1999, the nuclear industry received

over $145 billion in federal subsidies vs. $4.4 billion for solar energy and $1.3 billion

for wind energy. Another study by the non-partisan Congressional Joint Committee

on Taxation projected that the oil and gas industries would receive an estimated $11

billion in tax incentives for exploration and production activities between 1999 and

2003. In addition to these subsidies, conventional generating technologies enjoy a

lower tax burden. Fuel expenditures can be deducted from taxable income, but few

renewable technologies benefit from this deduction, since most do not use marketsupplied fuels. Income and property taxes are higher for renewable energy, which

require large capital investments but have low fuel and operating expenses.

Many of the benefits of renewable resources, such as reduced pollution and greater energy diversity, are not reflected in market prices, thus eliminating much of the

incentive for consumers to switch to these technologies. Other important market

barriers to renewable resources include: lack of information by customers, institutional barriers, the small size and high transaction costs of many renewable technologies, high financing costs, split incentives among those who make energy decisions and those who bear the costs, and high transmission costs.

Some have called for future support of renewable energy through ‘‘green marketing,’’ selling portfolios with a higher renewable energy content (and lower emissions) to customers who are willing to pay more for them. We strongly support green

marketing as a means to increase the use of renewable energy and reduce the environmental impacts of energy use. Surveys show that many customers are willing to

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pay more for renewable energy, and pilot programs have shown promising, but not

overwhelming results.

Green marketing is not a substitute for sound public policy, however. There are

many barriers to customers switching to green power, not the least of which is inertia. More than fifteen years after deregulation of long-distance telephone service,

half of telephone customers still had not switched suppliers, even though they could

get much lower prices by doing so. A 2003 study by the National Renewable Energy

Laboratory projects that in an optimistic scenario, green marketing could increase

the percentage of renewable energy in our electricity mix from about 2 percent today

to only about 3 percent in ten years.

With green electricity, the benefits of any individual customer’s choice accrue to

everyone, not the individual customer. Green customers gets the same undifferentiated electrons and breathe the same air as their neighbors choosing to buy power

from cheap, dirty coal plants, creating a strong incentive for people to be ‘‘free riders’’ rather than pay higher costs for renewable resources. People recognize this public benefits aspect of green power. While they consistently say they are willing to

pay more for electricity that is cleaner and includes more renewable energy, they

overwhelmingly prefer that everyone pay for these benefits to relying on volunteers.

A deliberative poll by Texas utilities found that 79 percent of participants favored

everyone paying a small amount to support renewable energy, versus 17 percent favoring relying only on green marketing.

Fortunately, 18 states plus the District of Columbia have enacted renewable portfolio standards. The RPS is a market-based mechanism that requires utilities to

gradually increase the portion of electricity produced from renewable resources such

as wind, biomass, geothermal, and solar energy. It is akin to building codes, or efficiency standards for buildings, appliances, or vehicles, and is designed to integrate

renewable resources into the marketplace in the most cost-effective fashion.

By using tradable ‘‘renewable energy credits’’ to achieve compliance at the lowest

cost, the RPS would function much like the Clean Air Act credit-trading system,

which permits lower-cost, market-based compliance with air pollution regulations.

Electricity suppliers can generate renewable electricity themselves, purchase renewable electricity and credits from generators, or buy credits in a secondary trading

market. This market-based approach creates competition among renewable generators, providing the greatest amount of clean power for the lowest price, and creates

an ongoing incentive to drive down costs.

The states have proven that renewable electricity standards are popular and can

be effective. We project that state RPS laws and regulations will provide support

for more than 25,550 megawatts (MW) of new renewable power by 2017—an increase of 192 percent over total 1997 US levels (excluding hydro). This represents

enough clean power to meet the electricity needs of 17.2 million typical homes. We

estimate that by 2017 these state RPS programs will also reduce carbon dioxide

emissions—the heat-trapping gas primarily responsible for global warming—by 65.2

million metric tons annually. This is equivalent to taking 9.7 million cars off the

road or planting more than 15.6 million acres of trees—areas approximately the size

of West Virginia.

As encouraging as these state developments have been, they are not enough to

capture renewable energy’s potential benefits to the national economy. Under a 10

percent RPS, we would have approximately 100,000 MW of non-hydro renewables.

Under a 20 percent RPS, we would have nearly 200,000 MW of non-hydro renewables—and save consumers money.

Many people forget that we have given voluntary measures and incentives more

than a fair try. The Energy Policy Act of 1992 called for increasing our renewable

energy supplies by 75 percent, and enacted the production tax credit. Unfortunately,

these measures have not been successful at stimulating more than very limited renewable energy development outside of states that have implemented renewable

portfolio standard. It is time for a national minimum standard, on which states and

volunteer efforts can continue to build.

Energy production creates national economic and environmental problems that

need national solutions. A national renewables standard would establish uniform

rules for the most efficient trading of renewable energy credits. This uniformity

would reduce renewable energy technology costs by creating economies of scale and

a national market for the most cost-effective resources.

The RPS enjoys widespread bipartisan political support. In 2002, 143 members of

the House, including 21 Republicans called for including a Renewable Portfolio

Standard in an energy bill. In a September, 2003 letter to the conferees, 53 Senators

supported including a strong RPS in the energy bill conference report. The U.S. Senate has twice passed a RPS and the majority of Senators on the energy bill conference supported the Bingaman RPS amendment.

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The RPS is the surest mechanism for securing the public benefits of renewable

energy sources and for reducing their cost to enable them to become more competitive. It is a market mechanism, setting a uniform standard and allowing companies

to determine the best way to meet it. The market picks the winning and losing technologies and projects, not administrators. The RPS will reduce renewable energy

costs by:

• Providing a revenue stream that will enable manufacturers and developers to obtain project financing at a reasonable cost and make investments in expanding

capacity to meet an expanding renewable energy market. • Allowing economies of scale in manufacturing, installation, operation and maintenance of renewable energy facilities. • Promoting vigorous competition among renewable energy developers and technologies to meet the standard at the lowest cost. • Inducing development of renewables in the regions of the country where they are

the most cost-effective, while avoiding expensive long-distance transmission, by

allowing national renewable energy credit trading. • Reducing transaction costs, by enabling suppliers to buy credits and avoid having

to negotiate many small contracts with individual renewable energy projects.

Some people have asked why hydropower is not eligible to earn renewable energy

credits in most RPS proposals. Hydro is that it is a mature resource and technology.

In most cases, it is already highly competitive. It will not benefit appreciably from

the cost-reduction mechanisms outlined above, and an RPS that included hydro

would likely produce small, if any, increases in hydro generation. Additionally, new

dams are unlikely to be built and are environmentally questionable. Nevertheless,

we have supported RPS’ that include incremental hydro generation from existing

dams. Now that a Low Impact Hydro Institute (LIHI) certification process with

broad stakeholder support is operating, we recommend that the definition of incremental hydro refer to incremental generation at LIHI-certified facilities.

Some people have also expressed concerns about the variable output of renewable

sources like solar and wind, and believe that an RPS would affect the reliability of

our energy system. However, the electric system is designed to handle unexpected

swings in energy supply and demand, such as significant changes in consumer demand or even the failure of a large power plant or transmission line. Solar energy

is also generally most plentiful when it is most needed—when air-conditioners are

causing high electricity demand. There are several areas in Europe, including parts

of Spain, Germany, and Denmark, where wind power already supplies over 20 percent of the electricity with no adverse effects on the reliability of the system. In addition, several important renewable energy sources, such as geothermal, biomass,

and landfill gas systems can operate around the clock. Studies by the EIA and the

Union of Concerned Scientists show these non-intermittent, dispatchable renewable

energy plants would generate about half of the nation’s non-hydro renewable energy

under a 10 percent RPS in 2020. Renewable energy can increase the reliability of

the overall system, by diversifying our resource base and using supplies that are

not vulnerable to periodic shortages or other supply interruptions.

A summary of studies presented at the European Wind Energy Conference in

June, 2003 indicate that the impacts and costs for large scale wind generation on

the power grid are relatively low at penetration rates that expected over the next

several years. For example, one 2003 study by PacifiCorp estimated that the additional costs of integrating 2000 MW of renewables—nearly 20 percent of its system

capacity—was between 0.5 and 0.6 cents per KWh. In fact, the PacifiCorp 2003 least

cost plan included 1400 MW of wind capacity.

VII. ADDITIONAL POLICIES ARE NEEDED.

A number of complementary policies should be enacted to reduce market barriers

to renewable energy development:

• Extending production tax credits of 1.8 cents per kWh and expanding them to

cover all clean, renewable resources (excluding hydropower)

• Adopting national net metering standards, allowing consumers who generate their

own electricity with renewable energy systems to feed surplus electricity back

to the grid and spin their meters backward, thus receiving retail prices for their

surplus power production

• Increasing spending on renewable energy research and development

The deployment of all these policy solutions will be required to truly level the

playing field for renewable energy. It is especially important that the Production

Tax Credit be extended for a period of at least five to ten years, to provide predictability and price stability in the renewables industry, and avoid the costly boombust cycles created by the recent history of short-term extensions.

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The PTC should be extended for all renewable energy technologies. The Administration’s recent budget assumed that the geothermal energy credit included in the

last extension would now be dropped. Geothermal can play an important near-term

role in reducing the demand for gas, especially in the Western states that have experienced significant price volatility in recent years.

Net metering is essential for customers who invest their own money in renewable

energy in their buildings get fairly compensated for excess electricity they produce.

Net metering is not sufficient to promote renewable energy development, but it is

essential to promote the use of clean, distributed resources like solar energy.

Additionally, we urge Congress to pass a suite of policies to improve energy efficiency, including both demand-side efficiency and supply-side efficiency, such as providing incentives for combined heat and power plants. The LBL study and many

others have found that energy efficiency is the least expensive way to reduce natural gas demand and natural gas prices.

VIII. COMMENTS ON THE PROVISIONS OF THE DISCUSSION DRAFT

In our view, the provisions of the Discussion Draft fail to provide the long-term

incentives to increase the deployment of renewable energy. We have outlined numerous studies that demonstrate that increasing the deployment of renewables will

yield substantial benefits to consumers, create jobs and help clear our air. Yet without any demand side incentive such as the Renewable Portfolio Standard that we

have outlined in our testimony, we fear this effort to increase the use of renewable

energy falls far short of the potential. For example, we believe that production tax

credits for renewables should be extended at least ten years and apply to as broad

a spectrum of renewables as possible.

Similarly, we are gratified by the net metering provisions in the Draft, but we

suggest that these provisions be mandatory—not merely suggested changes. We

have uniformity governing the use of such things as phones throughout the country.

We recommend similar uniformity apply to such things as solar panels and other

forms of distributed generation.

Finally, in our view, the level and variety of subsidies provided for oil, gas, ‘‘clean

coal’’ and nuclear energy appears grossly out of balance with the incentives for renewables, considering the costs and the benefits. We believe that studies demonstrate that the costs for renewable energy are low and the benefits are both long

term and substantial. We ask that the Committee consider dramatically increasing

the variety of demand-side incentives for renewables to present a more balanced energy policy.

IX. CONCLUSION

Survey after survey has shown that Americans want cleaner and renewable energy sources, and that they are willing to pay more for them. A survey conducted

in 2002 by Mellman Associates found that when presented with arguments for and

against a 20 percent RPS requirement, 70 percent of voters support an RPS, while

only 21 percent oppose it.

The combination of EIA and UCS studies demonstrate that with appropriate policies, renewable energy technologies can provide Americans with the clean and reliable electricity they desire, while also saving them money, contributing to our nation’s energy security and achieving significant reductions in harmful emissions.

The net metering and renewable energy production incentive provisions included

in the current draft bill before the committee are laudable and deserving of support.

But by themselves, these provisions will not get the job done. A strong, marketfriendly renewable energy standard is required to realize the full potential of America’s renewable energy resources.

For all of these reasons, we respectfully urge that as the Committee moves forward with its development of national energy legislation, you support inclusion of

a renewable portfolio standard.

Thank you.

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Mr. HALL. I thank you. Mr. Resch, President of the Solar Energy

Industries Association, Senior VP of the Natural Gas Supply Association, among other bits of background. Thank you; we will yield

5 minutes. I would appreciate you staying within that time, as

close as you can. Thank you.

STATEMENT OF RHONE RESCH

Mr. RESCH. Thank you very much, Mr. Chairman and members

of the subcommittee for giving me the opportunity to testify today.

It looks like I am the only industry rep who actually brought their

power plant with them to the hearing. This is a product made in

Michigan, supporting our troops in Afghanistan and Iraq, and put

on rooftops, really, throughout the world.

I would like to focus my comments today on 3 points. First, we

have a natural gas crisis in this country, and solar, a solid, reliable

technology, must be part of the solution. Second, solar is a domestic, reliable energy source, capable of improving our security while

creating thousands of new jobs. And finally, we must commit to

long-term policies that remove barriers and create incentives, or

this growing industry will move entirely overseas.

Before I start, I would like to point out that on this map here,

you can see the United States has the greatest solar resources of

any country in the world. From Texas to Maine, all 50 States have

the potential to use solar technologies. In fact, we have more solar

resources in the United States than all of the fossil fuel energy in

the United States combined.

I would like to address the natural gas situation first because I

have familiarity with the issue having worked in the industry for

the last 5 years. Natural gas is a critical part of our energy infrastructure, but we have the highest and most volatile prices in the

world. Compared to just 5 years ago, natural gas will cost American consumers an extra $100 billion this year. That is a significant

drag on our economy. My industry produces 3 technologies that can

offset natural gas demand. Nationwide, solar water heaters operate

directly at the point of use, reducing home natural gas demand by

as much as two-thirds. Concentrating solar power provides centralized bulk power during peak power-demand period, displacing the

need for natural gas peaking units, and foldable tanks, of PV, the

solar panels we think of, convert sunlight to electricity and directly

displace natural gas used for electricity.

What is critical to point out is that solar generates the most electricity from 10 a.m. to 5 p.m., the exact same time when utilities

experience peak loads and use inefficient natural gas-fired peaking

units to meet demand. The PV industry recently released the Road

Map back in October, and based on the recommendations in the

study, the PV industry alone can displace over 6 trillion cubic feet

of natural gas in the next 20 years. This is enough to eliminate our

need for new LNG within 10 years. This would save consumers in

excess of 64 billion over the course of those 20 years as well.

This brings me to my second point: solar creates domestic jobs.

Solar PV creates 32 jobs per megawatt, more than any other form

of energy. As of today, the industry is worth more than $7 billion

per year, globally, and we are growing at almost 40 percent. Companies like General Electric, Sharp, Sanyo, Shell, BP, and Kyocera

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are all manufacturing solar panels. The bad news is that the majority of this growth is occurring overseas. Japan and Germany in

particular recognize the economic value of developing the industry

and have enacted policies that create thriving markets. The U.S.,

once the unquestioned leader, manufactures less than 10 percent of

the market today. Japan and Germany, by the way, have the solar

equivalent potential of Ohio in that map—not taking anything

away from Ohio, Congressman.

The good news is that the U.S. can still choose to lead the mar- ket. The Road Map illustrates how we can generate more than $34

billion in new investments and more than 40,000 new American

jobs in the next 10 years. Of course, I should mention that as the

center of energy and electronic industries, Texas is in the position

to attract a significant portion of these new jobs. According to the

Bureau of Labor Statistics, the oil and gas industry has downsized

some 14,000 jobs in Texas over the past 10 years. The PV industry

could create over 5,500 new, hi-tech jobs in Texas alone in the next

10.

I would like to focus here on 2 major areas where we need to improve the energy bill. Interconnection standards: we need to level

the playing field for all energy technologies by enacting national

interconnection standards. In many states, solar, as well as fuel

cells and other distributed technologies, cannot participate in the

electricity market. The IEE, NARUC, FERC have developed a

streamlined process for connecting to the grid that addresses all of

the technical issues. I urge the committee to adopt the proposal

from Senator Cantwell and Representative Inslee which requires

states to adapt the IEE standards and the FERC procedures to

their own needs.

Of course, with or without barriers, Germany and Japan are cornering the market because they have created incentives, and U.S.

has not. Remember, in the United States today there are no Federal incentives to put solar on your home. Section 13.01 would

begin to address this with a 15-percent residential tax credit, but

we have 3 suggestions to make this credit more effectively. First,

a 1-year credit does as much harm as good, and even 3 years is

an uncertain basis on which to make $100 million investment decision. We urge the credits to be expanded to a minimum of 5 years.

Second, the credit should be sized to jump start the industry and

allow solar to be a competitive choice, nationwide, for all consumers. To do this, the credit should be $3 per watt for home systems and $2 for larger systems. To encourage the broadest and

most cost-effective market, business should also be allowed to use

this credit. And third, the credit should be—each year. A 5-percent

annual decline would spur continuous cost reductions, move customers into the market, and save the government money.

Titles 13.02, the production tax credit for concentration solar

power, is singled out for restriction, forbidding dual-use with section 48, the 10-percent business investment credit. If this dual restriction remains, the credit is effectively worthless. Developers will

not take advantage of the production tax credit, simply because

they will favor the investment credit; they are a capital-intensive

industry. If this credit is to result in any development of this resource, the restriction must be removed.

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You are crafting an energy bill for the 21st century. Your leadership can and must help move us past subsidizing 19th century

technologies and create markets for advanced domestic sources like

solar. The next 10 years are critical for worldwide solar power development, for our Nation’s energy security, and for our manufacturing growth. Again, if these policies are realized, the solar energy

industry will create more than 60,000 new U.S. jobs, over $32 billion in new investment in all 50 States over the next 10 years, and

that solar energy, as a market alternative to natural gas, will save

consumers $64 billion over the next 20 years.

This concludes my testimony. Thank you, and I look forward to

your questions.

[The prepared statement of Rhone Resch follows:]

PREPARED STATEMENT OF RHONE RESCH, PRESIDENT, SOLAR ENERGY INDUSTRIES

ASSOCIATION

Thank you, Mr. Chairman and members of the Committee, for giving me the opportunity to testify today. My name is Rhone Resch, and I am president of the Solar

Energy Industries Association (SEIA). SEIA is the national trade association of the

solar industry, representing all solar technologies and more than 20,000 employees

in all sectors from manufacturing to installation. We are located in Washington, but

work closely with state and regional chapters throughout the U.S.

CURRENT STATUS OF SOLAR ENERGY

The solar industry is comprised of three technologies, all of which are experiencing substantial global growth.

Photovoltaics (PV) are a domestically developed technology that uses silicon semiconductors to covert sunlight directly to electricity. PV cells are used both on and

off grid to provide high-value retail electricity. This industry has a 40% annual global growth rate, driven by booming markets in Japan and Germany. In 1996, the

global industry made 100 megawatts of panels—less than a billion dollars’ worth.

In 2004, almost 1100 megawatts came out of the factory doors, worth at least $6

billion. This growth has not gone unnoticed, and in the last few years some of the

worlds largest electronics and energy companies have entered into the PV industry,

including, among others GE, Sharp, Sanyo, Shell, BP, and Kyocera.

We also represent the solar water heating industry. Solar water heating uses panels that gather energy from the sun to heat the water in your hot water tank or

radiant heating system. Simple installations can reduce home natural gas usage by

up to 70%—even in freezing climates. Israel, for example, derives thousands of

megawatt-hours of energy from these rooftop devices.

Our largest-scale technology is Concentrating Solar Power (CSP) These Southwestern power plants consist of large focusing mirrors, which provide heat for steam

generators in a conventional power plant. Natural gas hybridization or thermal storage can make these into on-demand, dispatchable power plants. There are more

than 350 megawatts of this technology operating today, 100 plus of which were purchased by Florida Power and Light just two weeks ago.

These technologies all have their own attributes and virtues, but I would like to

take them as a whole, and focus my discussion today around three primary points:

1. We have a natural gas crisis and solar must be part of the solution

2. Solar energy is domestic, reliable and secure

3. The true value of solar energy is many times greater than its cost

NATURAL GAS DEMAND AND THE ROLE OF SOLAR ENERGY

All of you who opened up your January natural gas bill two weeks ago have felt

the impact of the natural gas crisis. Although the U.S. produces more natural gas

than any other country outside of Russia, we still have the highest and most volatile

prices in the world. The current nationwide average is $7.25/Mcf , with peak prices

exceeding $30/Mcf last month in New York and New England. We have seen two

back-to-back days in these markets where the price increased by more than 100%.

Natural gas is a critical part of our energy infrastructure and will remain so for

a long time, but these high prices and significant volatility are having a significant

economic impact on our country that we must address. Federal Reserve Board

Chairman Alan Greenspan has repeatedly cited high energy costs as a major drag

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on the economy. Compared to 5 years ago, natural gas is costing us an extra $100

billion per year.

No one technology can solve this problem—but solar is better suited than most

to displace natural gas demand and relieve some of the tightness in the market.

During peak load periods, utilities use natural gas-fired peaking or intermediate

plants to provide the additional electricity needed by consumers. Most of these

plants are very inefficient, requiring 3-4 times more natural gas per kWh than baseload plants. The peak load periods that require the use of these plants generally

occur from 10 AM until 5 PM, with the greatest usage coming on hot days. Solar

electricity generation directly correlates directly with this peak (see attachment 1).

This means that increased use of solar can directly displace one of the most inefficient uses of natural gas.

We recently unveiled a report entitled, ‘‘Our Solar Power Future: The U.S. Photovoltaic Industry Roadmap for 2030 and beyond’’. According to this report,

photovoltaics alone can displace over 6 trillion cubic feet of natural gas in the next

20 years—more than will be produced in the Gulf of Mexico this year. By way of

further context, increased use of photovoltaics could eliminate the equivalent of our

need for new imported LNG within 10 years (see attachment 2). Practically speaking, this is a small amount, but it will have a meaningful effect. Since so much of

the trading price depends on movements in this peaking spot market, the overall

impact could be significant—we estimate that removing this demand will save nearly $64 billion.

A SECURE, DEPENDABLE ENERGY SUPPLY

Lowering the rate of energy imports ties directly into our second benefit of solar

energy, which is to strengthen America’s energy security by providing energy that

is domestically controlled, affordable and reliable.

Let me first emphasize that solar energy is 100% domestic, and that the U.S. has

the best resources in the industrialized world. This continuous, free source comes

down nationwide, in every community and congressional district. A solar system in

New York generates 80% of the output of one in LA (see attachment 3)—and that

retail electricity would have a nearly equivalent value in that more expensive state.

Using only correctly oriented, unshaded, available roofs, we could produce 500,000

megawatts of solar energy without siting a single power plant.

Security also comes in the form of economic stability. Energy costs represent a

higher portion of our monthly expenses than ever before, and each month they continue to rise. Solar is a reliable source of electricity with no threat of interruption,

shortage, or price swings. Once a system is installed, there are no fuel costs and

minimal maintenance costs. You do not have to compete with coal or gas-fired

wholesale generation at 2 or 4 cents per kWh, but rather with the 10 or 14 cents

you pay at the meter. When you put a system in today, you know what your electric

bills will be in 2030—no matter what happens to OPEC, no matter how much LNG

capacity is built, no matter what happens to the grid, or to climate policy. This has

particular import for the growing percentage of our aging population living on fixed

incomes.

Finally, a reliable energy source is a secure energy source. Although utilities do

a great job maintaining transmission and distribution systems, problems do occur—

we experience expensive blackouts every year. By directly displacing peak demand,

solar reduces wear and tear on the grid, increases reliability, and decreases requirements for costly infrastructure. Sitting atop your roof, and providing electricity directly into your home, solar is a smart, distributed resource that does not increase

our vulnerability to attack or disaster at the limited number of crucial grid points.

Considering that power outages and disturbances cost the U.S. economy $119 billion

per year, there is a strong case for secure, dependable and distributed sources of

energy that bypass single large points of failure.

ECONOMIC BENEFITS OF SOLAR

As of today, the global PV industry is worth $6 billion a year, and growing at 40%

annually. Unfortunately, the vast majority of growth in this domestically invented

industry is now occurring overseas. Formerly the unquestioned leader in PV manufacturing, the U.S. lost its lead in 1997, and now represents only 10% of production.

Meanwhile, through the creation of strong incentives, Germany and Japan have cultivated thriving industries, supporting tens of thousands of quality jobs in engineering, manufacturing and construction. The good news is that the global market is

growing rapidly and with support from the federal government, the U.S. can still

create a solar market that dominates the rest of the world.

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If the U.S. were to experience the growth seen in recent years in Japan and Germany, or even in individual US states, the economic rewards would be great. Every

megawatt of solar installed currently supports approximately 32 jobs—24 in hightech manufacturing, and 8 in local design, installation and service—created right

where the systems are installed. Communities that choose solar—and most in the

US could—create jobs at home, rather than having their purchases create them elsewhere.

The Renewable Energy Policy Project recently released a study in which they

quantify the economic benefits of the PV Roadmap state-by-state. They looked at the

PV panel—the steel, glass, wires and silicon that make it up—and examined where

those parts could be manufactured and how many people each would employ. They

found that with appropriate policies, the U.S. industry would create more than

40,000 new jobs, in all 50 states, over the next 10 years—and 230,00 in the next

20 (see attachment 4).

The solar energy industry is growing rapidly, and the U.S. has a choice: Do we

seize this opportunity to secure tens of thousands of domestic jobs and send billions

of dollars to US factories, or do we sit on our hands while the Germans and Japanese exploit the next great high-tech industry?

THE CHALLENGE FOR THE U.S.

In the early 1980s, the U.S. built a commanding advantage in the solar industry

thanks to innovation and pioneering research. In the past eight years, we have lost

this edge. Today, the U.S. has a market share near 10%, down from 41% in 1997.

Installations in Germany increased by 170% in 2004, while U.S. installations increased by just 25%. Germany certainly does not come to mind as the country one

would go to for sunny weather. Yet the governments of Germany and Japan are

strongly committed to developing their commercial markets. There is a familiar historical parallel here with other high-tech industries—and we must consider that in

this case our energy security is at stake as well as our economic security.

If the U.S. is to share in this continuing boom, we must have a long-term, sustainable policy—one that promotes economic development, protects our environment,

and strengthens America’s energy security.

Remove Market Barriers

The first problem we need to solve is a procedural barrier that keeps solar energy

from accessing the electricity market. As it stands, it is effectively impossible in

many states to put a solar electric system on your house. The interconnection standards are either too vague or too much oriented to big, central station power plants.

A typical home solar system—approximately 2 kilowatts—produces the equivalent

of two microwaves oven’s worth of electricity at any one point in time. If you’re not

home to use it, it will feed back into the grid and be sold at retail price to the next

‘‘downstream’’ customer.

The IEEE and the UL have developed standards for how a homeowner can connect their solar systems while protecting other customers, the grid, and the workers

that support it. Many states—New Jersey, New York, California, the PJM, and

many others, have adapted those into a set of procedures that make sense. The National Association of Regulatory Utility Commissioners and the FERC have come

out with very similar models.

Nevertheless, there are still many utilities out there that will treat you as a major generator of electricity, charging you $10,000 to conduct a study about how your 2

kW will affect the grid. Some, more directly, will deny you a connection outright.

We have to comply with dozens of different standards nationwide. Solar prices—and

those of all distributed generation, from fuel cells to small wind turbines—are artificially inflated by this patchwork, which requires the industry to custom design, test

and certify a system for each new state or utility requirement. It is as if you needed

a 50-state adapter pack with each new telephone. This regulatory redundancy is

choking the industry, and we need a single, nationwide procedure.

We also face a problem of public awareness and trust that we could address at

very little cost. One of the best things the government could do to increase public

knowledge of, and trust in, quality solar devices, would be to open the Energy Star

performance and quality certification program to solar heating. For very little cost,

this would increase the public’s recognition of solar water heating and create visibility and distribution channels would not exist otherwise.

Of course, at the end of the day, Germany and Japan are cornering the market

because they have created incentives and the U.S. has not—remember, in the U.S.

today there are no federal incentives to build solar systems on your home. The current tax code gives a 10% credit for commercial solar, and HR6 as it stands would

create a 15% residential credit. When we saw that credit, it spurred us to examine

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the industry, to look at other models, and to see what would really be needed to

catch up to the rest of the world.

Create Tax Incentives that Jumpstart the Market

We found that there are several principles that must exist for market incentives

to result in self-sustaining markets and economic growth.

First, the incentive should be authorized for at least five years at a time, so that

companies can confidently make investments in expanded capacity. Credits that

turn on and off every year don’t do anyone any favors.

Second, the incentive should pay for half—or less—of a system, so that the customer has to make their money back through years of high-quality performance, and

has an incentive to purchase modern, warranteed, reputable equipment.

Third, the incentive should decline every year, and eventually expire. Our costs are

down by more than 95% since the late 90s, and we expect them to continue to drop

by 5% or more annually for the foreseeable future; the credit should encourage,

rather than obstruct, this progress. We also want to avoid long-term dependency,

so the incentive should be designed to expire. The other effect we’ve seen in other

nations that have successfully used this model is that a declining incentive moves

sales; people who were ‘‘on the fence’’ about their decision to purchase, go into the

market immediately, jumpstarting production volumes and further decreasing costs.

For photovoltaics, we are calling for a tax incentive of $3.00/Watt for systems

below 10 kW, and $2.00/Watt above that, decreasing at 5% per year. For solar hot

water, we would request a smaller incentive—$15.00 per thousand Btu/day performance rating, declining by $1 per year.

Finally, for concentrating solar power plants, which would not qualify for either

of these credits, we ask that they be allowed to use the wind production tax credit,

without additional restrictions.

We have calculated that these incentives would make solar the economic choice

for millions of Americans in every part of the country, even as it declined in value

from year to year. The US would once again become the global leader in the next

great high-tech industry—solar energy. To give you an idea of future growth:

• Ten years from now, the solar energy industry will create more than 60,000 new

US jobs, and over $34 billion in new investments, in all 50 states.

• Solar energy will displace 6.3 trillion cubic feet of natural gas over 20 years, saving consumers $64 billion.

• By 2025, solar will provide half of all new annual electricity generation.

• By 2030, installed solar output capacity will equal the equivalent of more than

40 nuclear power plants, supporting 260,000 high quality domestic jobs in manufacturing, engineering, and construction.

We face a decision point. The next 10 years are critical, for worldwide solar power

development, for our nation’s energy security, and for our manufacturing growth.

CONCLUSION: FULFILLING THE PRESIDENT’S PRIORITIES

In conclusion, I would note that the Administration has identified four priorities

for the US economy—security, opportunity, innovation, and ownership. I would submit that our technologies are uniquely suited to advance all of these objectives.

We contribute to security by reducing the degree to which we depend on foreign

governments to drive our economy.

We provide opportunity by generating thousands of jobs nationwide, in an industry that I am confident will be one of the world’s fastest growing for years to come.

We produce—and demand—innovation, by pushing performance in a 21st century

technology even as we scale up to meet today’s demands.

Almost uniquely, we provide ownership. With a solar system, you have the freedom to own your electricity, rather than renting it at whatever price a utility or

marketer sets.

I urge the committee to advance our national interest and our economic future

by advancing aggressive and carefully designed policies for the promotion of solar

energy. We are ready at any time to provide any assistance you may require.

This concludes my testimony. Thank you.

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Mr. HALL. All right. Thank you very much. Excuse me. I will

start with Mr. Kane, and then ask you a pretty simple one you can

bounce right out of the park. When do you think the next nuclear

plant might be built in the United States?

Mr. KANE. Well, Mr. Chairman, if we get a comprehensive energy

bill done this year and the menu of incentives and loan guarantees

to get us over the hurdle of building the first few advanced plants,

and then stop that partnership, goes into effect, I think we are

going to see companies moving forwards very aggressively, and

probably bringing a new plant or putting an order for a new plant

in before the end of this decade.

Mr. HALL. Could the——[inaudible]

Mr. KANE. No, sir, I don’t think there is legislation needed. The

current fleet of plants can, in fact, produce hydrogen, and that is

something that many of members are indeed looking at right now.

But I would like to say that the advanced plants that are in the

research and development section of the H.R. 6 conference report,

the generation 4 plants, the high-temperature gas reactors, would

be particularly well suited for making hydrogen, and I think the investment there, in the future, is really well place.

Mr. HALL. Some have indicated that they think it is questionable

as to whether the United States still has engineering or construction expertise to build new-generation nuclear plants. The fear is

that it has gone overseas. I guess the question is does the necessary skill/work force exist, still, to support that type construction

with proper backing?

Mr. KANE. Yes, sir, we think it is. The United States has been

a leader in nuclear energy technology for the last 50 years. We are

still the leader in the world. The rest of the world does look to the

United States for leadership in this technology.

Unfortunately, our manufacturing sector, over the last 25 years,

has declined to the point where many of our large, nuclear components are, in fact, made overseas. And we think, though, that if we,

in fact, do get on the pathway toward building advanced, new nuclear plants in the United States, we will see a revitalization, not

only in the building program for those plants, but also in the manufacturing sectors in this country that would support that. We have

work force challenges. I think all of our industries really do have

work force challenges in trying to get the proper skills and education sets that we need moving forward, but I think if we pass

this bill this year, it will send a very strong signal. And like the

movie Field of Dreams, ‘‘If you build it, they will come,’’ we believe

the work force will be there.

Mr. HALL. Do you ever get the feeling that the nuclear people

haven’t done just a terrific job at educating the young about the

use nuclear power and impress upon them that France lives off of

it, and England lives off of the nuke in the North Sea. I ask that

because I go to schools to speak to groups, and I am a great supporter of the nuclear thrust, even though I am from a fossil fuel

State, and I ask how many are in favor of nuclear power, and none

of them are, and I talk to the kids for 30 minutes from junior high

on, and tell them about the fact that if we do certain things and

solve our energy problems, and nuclear is a great part of that solution—if the signs that they hold up that say no nukes could say

505

no wars, and they lack that. Only the teachers are still miffed, but

it is—I just really think your industry ought to do more at that

lower level to educate those youngsters at some of the other thrusts

have done in the past because we need; we need it and have to

have it, and it has great support here in the bill, as you know.

Mr. KANE. Yes, sir, Mr. Chairman. I agree with you. We need to

do a better job, and I think over the next few years, you are going

to see a redoubling of our efforts in exactly that area.

Mr. HALL. Mr. Nayak, excuse me. You testified quite extensively

regarding the perceived threat of global warming, and yet you advocate phasing out nuclear energy, the world’s largest source of

carbon-free energy. Prominent environmentalists, including James

Lovelock—you know James Lovelock?

Mr. NAYAK. Absolutely.

Mr. HALL. And Patrick Moore have recently suggest that nuclear

power is needed to combat global warming. Why does your view

differ with Dr. Lovelock and Mr. Moore?

Mr. NAYAK. Well, I am—first of all, I am not necessarily going

to agree with every theory that Dr. Lovelock has.

Mr. HALL. Well, do you mind telling me what your disagreement

with him is?

Mr. NAYAK. Exactly. Ultimately, I think that we—what we believe, and what I think a lot of environmental groups believe, is investing in nuclear energy to solve our global warming problem is

just trading one problem for another. If you would allow me some

poetic justice, the analogy is the heroin addict taking up crack to

kick their heroin habit.

We have a nuclear waste problem that is a substantial environmental problem and public health problem in this country, and we

will have 103 reactors—we have currently have—by 2011, we will

have 63,000 metric tons of waste which we still have not figured

what to do with. Building additional reactors and extending current licenses will only extend that problem, creating a larger concern for the public. So—and the other thing I would add is that

they are not clean or completely fossil-fuel free the way that renewables are. You require a coal-fired power plant for uranium enrichment plants; you involve mining, which has substantial pollution

involved with it. It is not comparable to a renewable energy resource.

Mr. HALL. You know, I was campaigning one time, and the lady

just told me get off her porch and get off her property and threw

my card back at me, and I told her, well, I was going to mark her

down as doubtful. Would I mark you down as doubtful on the nuclear thrust? Your organization opposes Yucca Mountain and also

the advanced fuel recycling program; that has to reduce the

amount of radioactive waste that would require some permanent

disposal. What do you propose as the solution for the need for nuclear waste disposal? Why don’t we have to dispose of that, and

why aren’t we on the right route on it?

Mr. NAYAK. Well, I think that is an excellent question, and I feel

like that is the question that Congress and everyone should be asking themselves, and I think the first step is that we need to stop

producing more waste. We cannot continue to produce more waste

and continue to build more plants while we hope to find a solution

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somewhere down the road. This is ultimately an example of passing a solution on to the next generation or to the next 20 generations and something that they will have to deal with. That is part

of the problem, is we can’t advocate any solution, but at this time,

we would rather see the waste kept where it is, rather than—until

we can find a place it that seems more stable than Yucca Mountain.

Mr. HALL. Okay. I will mark you down——

Mr. NAYAK. Doubtful?

Mr. HALL. Yeah, right. Thank you. My time—Mr. Boucher?

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I also

want to say a word of welcome to this panel of witnesses. Mr.

Shelk, I was pleased to note your testimony in support of the tax

credits that are contained in the draft legislation, which were also

a part of last year’s conference agreement, that would encourage

electric utilities to use a new generation of clean coal technologies

and thereby use coal instead of natural gas in their new generating

facilities. Last week we had the Administrator of the Energy Information Administration before us. He testified that if those credits

are passed into law, an additional 20 gigawatts of new coal-fired

capacity would be added that will not be added in their absence.

So I think the message that we take from that is that these credits

really will work. I have a sense that it is going to be very important for those of us who support the credits to spread the message

that they will have a tremendous beneficial effect because there are

going to be renewed pressures to reduce the overall amount of tax

credit provided in the new energy bill, and we will be fortunate to

come out, frankly, with the level of credit provided last year. So a

word to the wise, for those who think this is a good way to relieve

the pressure on natural gas prices, to encourage a greater utilization of the most abundant energy resource we have, I think making

sure that we talk about this additional 20 gigawatts of capacity

that the credits would add, and we do so very broadly, would be

appropriate.

Let me just ask you, Mr. Shelk, if you have some examples of the

kinds of technologies that would be employed by electric utilities to

utilize coal and do so in an environmentally superior way? You

might want to start with integrated gasification combine cycle and

talk about that and some of the others.

Mr. SHELK. Thank you, Congressman Boucher. And you have

been a leader, as have other members of this committee, on a bipartisan basis in support of those tax incentives, which, as you

said, really are a core part of the overall strategy. The IGCC really

takes the best of both worlds in the sense of having domestic coal

reserves, 200 years plus, and actually, then gasifying the coal and

using the synthetic gas from that process in a combined cycled natural gas unit, which is the most efficient natural gas unit on the

market today; so it really marries the two. You deal with the supply problem of gas directly, but you have the advantage of the efficient technology.

That really is in part, and then taking it to the next level is really what the FutureGen Project is all about. I know the Secretary

of Energy was here last week before you. He spoke today before the

Science Committee. The budget reflects the importance of IGCC—

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or—and FutureGen takes the IGCC platform, goes the next step to

capturing carbon as well as producing hydrogen. As we

indicated——

Mr. BOUCHER. Well, let me just say FutureGen is well into the

future. We are talking about at least a decade out, and these tax

credits would become available immediately, so that is apart from

integrated gasification combine cycle. What other technologies are

out there, that would be eligible for them and actually could make

a difference in terms of expanding coal use.

Mr. SHELK. Wisely, the Congress has provided both IGCC incentives in the tax area and in the non-tax area as well as advance

pulverized coal and advanced fluidized bed technology. For example, I had an Illinois example when Congressman Shimkus was

here, but there are those proposing plants, for example in Southern

Illinois and Kentucky and in the Southwest, where you essentially

use new technologies that have been developed through the program like low NOX burners and other things, so the emissions are

literally a fraction. For example, in the case of the Illinois plant,

what is being proposed is a 1,500 megawatt energy campus, which

would be a major source of supply, would take Illinois coal that out

of the ground, uncontrolled, would have 9 pounds of sulfur per million BTU and take it down to less than one-fourth of 1 pound,

which is actually even less than what the Clear Skies rules would

require over the Clear Skies legislation—so the technology is out

there. As is always the case with IGCC or the others, there is that

risk of being the first out of the box, the financial risk and the

technical risk, which is why all of the programs in the legislation,

culminating with tax provisions, really help bridge that gap to get

this technology out there. It is no sense having the good work—to

develop it if it doesn’t later get deployed.

Mr. BOUCHER. Okay. Mr. Shelk, thank you very much. Mr.

Chairman, that is all I have.

Mr. HALL. Mr. Strickland, you and I agree that I ought to recognize Mr. Dingell for 5 minutes, being of sound mind, don’t we? The

venerable longtime Chairman of this committee is recognized for as

much time as he consumes.

Mr. DINGELL. Thany you for the courtesy. I will try and respect

the time limits of the committee.

First of all, to this distinguished panel, welcome. It is a pleasure

to see you here before us. Thank you for being here, especially you,

Mr. Shelk, who have served with distinction on the staff of this

committee. We are happy to see you back.

My questions are first for Mr. Fahlund. I understand your organization has been very active in hydroelectric relicensing proceeding before FERC. Can you tell us how many licensing proceedings American Rivers has participated in over the last 15 or 20

years?

Mr. FAHLUND. Directly or indirectly, well in excess of 200, sir.

Mr. DINGELL. Now, during that time, has the process become

more or less burdensome to all parties who participate in the relicensing proceeding?

Mr. FAHLUND. I think the process has become less burdensome.

Mr. DINGELL. Now, Mr. Fahlund, I understand that FERC introduced a streamline licensing procedure in 1997, known as the alVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00515 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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ternative licencing process or ALP. Did your organization support

the creation of the ALP?

Mr. FAHLUND. Yes, we did.

Mr. DINGELL. Now, Mr. Hancock, did the hydro industry support

the creation of ALP?

Mr. HANCOCK. Yes, we did, sir.

Mr. DINGELL. Now, Mr. Fahlund, has the ALP reduced the time

it takes to relicense a project?

Mr. FAHLUND. Yes, it has, sir.

Mr. DINGELL. Is that a significant reduction?

Mr. FAHLUND. If you include reduction in litigation, yes, sir.

Mr. DINGELL. Both in terms of time and litigation and the proceedings, themselves, is that right?

Mr. FAHLUND. Yes, sir.

Mr. DINGELL. Now, has the ALP led to less litigation between the

different parties to relicensing?

Mr. FAHLUND. Yes, sir.

Mr. DINGELL. And has ALP reduced costs?

Mr. FAHLUND. Yes, we believe it has.

Mr. DINGELL. Are you aware of any evidence that would support

these claims?

Mr. FAHLUND. There are several studies that exist, one by FERC,

one by EPRI, that say that collaboration and the processes that are

used in ALP do result in less cost and less time.

Mr. DINGELL. Would you assist the committee by making that—

by helping to identify those studies and perhaps submit to us the

information——

Mr. FAHLUND. We would be happy to submit that for the records,

sir.

Mr. DINGELL. Now, Mr. Hancock, does your testimony cite any

hard evidence which is contrary to claims you have heard Mr.

Fahlund make?

Mr. HANCOCK. Do we have evidence——

Mr. DINGELL. To the contrary. To what——

Mr. HANCOCK. [continuing] to the contrary?

Mr. DINGELL. [continuing] of he has just said.

Mr. HANCOCK. It is our experience that the process with the

ALP, and hopefully with the new integrated licensing process that

FERC has implemented, will assist on the process side. The bill

that we testified about today with the mandatory conditions deals,

with the agency condition—which is a separate process outside of

the FERC licensing process.

Mr. DINGELL. But the ALP and the other things which have been

going on in the agency have significant expedited and reduced the

costs of the process?

Mr. HANCOCK. The process costs, generally, yes.

Mr. DINGELL. Thank you. Now, I understand that FERC—this is

back to Mr. Fahlund—has instituted another administrative reform, known as the integrated licensing process, to which Mr. Hancock just referred. It is designed to foster board cooperation to decrease costs and to decrease processing time. Is that correct?

Mr. FAHLUND. Yes, it is, sir.

Mr. DINGELL. Now, Mr. Fahlund, your organization supported

the ILP process?

509

Mr. FAHLUND. We did, and we participated in its development.

Mr. DINGELL. Mr. Hancock, I believe your industry did so, also.

Did it not?

Mr. HANCOCK. We did as well.

Mr. DINGELL. Thank you, gentleman. So it is fair to say, then,

that FERC has undertaken 2 significant administrative actions

without amendments to the Federal Power Act, which are designed

to make the licensing process more collaborative, less costly, and

less time consuming while allowing the relevant parties to fully

participate. Is that a fair statement, Mr. Fahlund?

Mr. FAHLUND. Yes, it is.

Mr. DINGELL. Now, with regard to the Energy Policy Act of 2005,

under the energy bill under consideration, we would amend the

Federal Power Act to grant appeal rights to one party only; that

would be the utility. This would exclude other relevant parties,

some of which would be the State, the Indian tribes, conservationist, conservation organization, ordinary citizens, sportsman’s

groups, and I believe, State and local units of governments. Is that

correct?

Mr. FAHLUND. That’s correct.

Mr. DINGELL. Now, all of these groups have a vested interest in

the effects that hydropower has on rivers and fish and wildlife. Is

that correct?

Mr. FAHLUND. Extensive.

Mr. DINGELL. Mr. Fahlund, are you aware of any other practice

in FERC’s hydroelectric licensing process that affords certain parties procedural right, but denies them to other parties, as this legislation would?

Mr. FAHLUND. No.

Mr. DINGELL. Mr. Hancock, are you aware of any procedures at

FERC which would allow procedural rights to certain parties, but

deny those rights to other parties?

Mr. HANCOCK. I am not aware of any, but I would like to make

clear that the bill does not provide for an appeals process.

Mr. DINGELL. It does not?

Mr. HANCOCK. It does not, in our view, provide for any appeals

process.

Mr. DINGELL. That appears to be another problem that we must

address.

Now, Mr. Chairman, I want to thank you, and I want to thank

our panel. Mr. Hancock, Mr. Fahlund, you have been very helpful

to the committee. I thank you all. Mr. Chairman, for your courtesy

to me, thank you.

Mr. HALL. A gentleman from Ohio, 5 minutes.

Mr. STRICKLAND. I want to thank you, Mr. Chairman. Mr. Kane,

I am concerned that in the President’s budget, he includes language which terminates the cold standby of the Portsmouth gas diffusion facility in 2006. My understanding at the time that facility

was placed in cold standby, it was done so in the event that there

would be a significant interruption of fuel supply for our nuclear

reactors, and I am told that about 80 percent of that fuel is currently coming from sources outside the country, and I am also led

to believe that USEC, the United States Enrichment Corporation,

is not likely to have a functional facility—new facility operation,

510

perhaps until 2011 or well beyond that time. I am concerned about

what would happen if there was a significant disruption of fuel

supply. Is my concern, in your judgment, well founded, and what

would happen if, in fact, there was a significant interruption of fuel

from foreign sources.

Mr. KANE. All right. Mr. Strickland, as you know, the fuel that

we use in our commercial nuclear reactors, about one-half of which

comes from Russia is——

Mr. STRICKLAND. Russian.

Mr. KANE. [continuing] from down-winded warheads, the swords

to plowshares type of program. Now, we are concerned and really

want to make sure that we have a domestic capability so that there

is no interruption in the fuel supply, and we support USEC’s efforts in that regard. As you know, too, there is a national enrichment facility initiative in New Mexico that is beginning as well. We

think that both of those have great merit. We support the competition that that would represent and also the redundancy in keeping

the fuel supply secure.

Mr. STRICKLAND. Obviously, I have parochial interest in the

Portsmouth facility, and what is happening in New Mexico and the

fuel we are getting from Russia—I mean there have been disruptions with the Russian supply in the past. We hope our relationships with Russia will remain friendly and that will be no problem,

but when you have got an industry that supplies perhaps 20 percent of our Nation’s total electricity output and you are depending

upon foreign sources for—and if I am not correct, in my assumption, please correct me. But perhaps up to 80 percent of the fuel

that supplies the 20 percent of our electricity, don’t you think that

we need some back-up plan in case there is, for whatever reason,

a serious disruption in that fuel supply. My understanding is that

if the Portsmouth facility is taken off cold standby, then it will not

be possible in the future, if needed, to begin the processing of the

fuel supply at that plant once again. Is that—I mean is what I am

saying consistent with your understanding, and if not, would you

please help me understand where my thinking is faulty.

Mr. KANE. We have what appears a reliable fuel supply now that

comes from a variety of different sources, and one of them is domestic. It comes from the United States Enrichment Corporation.

We think that is important to keep that fuel supply intact. We get

a lot of our fuel, as we have talked about, from Russia, but a lot

of it comes from foreign enrichers as well. So it is a global marketplace. It is a competitive venue; but we feel that we need to have

a domestic producer that is viable and can play the kind of secure

role that you are talking about. We support that.

Mr. STRICKLAND. Well, I feel like we need domestic supply as

well, and I am—you know, Mr. Chairman, I am one of those Democrats that, you know, thinks we need nuclear power. But this is my

concern. If we do not have a domestic supply, if the fuel supply

from foreign sources would be seriously disrupted—hopefully, it

won’t be; probably, it won’t be; but it could be, and it may. And

why does this administration not choose to keep the Portsmouth facility on cold standby so that if we need to produce that fuel before

USEC has the capacity to do what we all want it to be able to do

at some point in the future—if it was important to keep the PortsVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00518 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
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mouth facility on cold standby in 2004 and 2005 and through 2006,

why is it not important to keep it on cold standby until we have

a domestic supply that we can count on without having to rely

upon the Russians? I personally think it is not a responsible decision on the part of the administration to take this gamble, and I

am just puzzled that a decision has been made to cease cold standby in 2006 and thereby put us in a position where we could be very

vulnerable. I hope it doesn’t happen, but I would hate for us to be

meeting in this committee, there to be a disruption of the fuel supply from Russia—20 percent of our electricity depends upon nuclear power, 80 percent of that fuel coming from foreign sources—

and we don’t have the fuel we need. It just seems irresponsible.

And thank you for the time and chance to vent. I appreciate your

answers, sir.

Mr. KANE. Sir.

Mr. HALL. Thank you. I can’t say that there is not affable warning in the record. And to all of you gentlemen, we thank you. And

the fact that no one—that there are not a lot of members here—

your testimony is for the record, and everybody gets a copy, and everybody will be studying it, and all of you have something to give

in conjunction with the energy bill. And all of you want to solve the

same thing; that’s reliance on foreign energy. So we are not all in

the same vehicle, but we are going in, I think, the same direction,

and I really thank you for your testimony. I am not going to have

a bunch of other questions I want to ask, but if I need to, I will

write to them and ask unanimous consent to use that mail thrust.

With that, thank you once again. I thank you very, very much. We

are adjourned.

Mr. MARKEY. Mr. Chairman? Is it possible, Mr. Chairman, in the

magnificence of your generous heart that I could as——

Mr. HALL. Just as soon as Mr. Boucher leaves, I’ll ask you—no,

it is not possible because he has to be here to have——

Mr. MARKEY. Just 5 minutes——

Mr. HALL. Do you all—do you men mind him asking a few questions? Let me ask somebody over here. What about—is that okay

with you all? Does anybody here object to it? Okay? All right. Markey, you are running the Congress now, just get after it.

Mr. MARKEY. You can leave now if you want. Mr. Kane, my——

Mr. KANE. Yes, sir.

Mr. MARKEY. In your testimony, you state that the provision of

H.R. 6 that would require the NRC to conduct a rulemaking to devise—to revise the design bases threat security regulations and require the establishment of a force-on-force exercise program should

be eliminated because the activities have already occurred. Is it not

true the Commission undertook some security orders to revise the

design bases threat, but has yet to conduct a public rulemaking?

Mr. KANE. What happened was they made an order, an interim

compensatory measures order, and it required the industry to be in

compliance last year with the new design bases threat, which is—

which was on October 29, and all of the units were found to be in

compliance with that.

Mr. MARKEY. Well, right after the attacks of September 11, the

nuclear industry began to assert that there was no clarity in what

it responsibilities were in the area of nuclear reactor security. SpeVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00519 Fmt 6601 Sfmt 6602 99906 HCOM1 PsN: HCOM1
512

cifically, the industry claimed to be unclear as to what its role was

in protecting the reactors against attack versus what the government’s role was. The provision that you suggest be eliminated from

the energy bill also requires the President to determine what those

respective roles are. Do you believe that this determination has already been made? If so, please elaborate.

Mr. KANE. Yes. We have been working closely with the Nuclear

Regulatory Commission and with the Department of Homeland Security and are going about, now, determining through a system of

councils. There is a Nuclear Coordinating Council, as there is with

other segments of the critical infrastructure, that we are working

with now to determine exactly what those interrelationships and

an integrated response would be. But we are—we feel we have met,

and the NRC agrees, that we have met the design bases threat

piece that was in section 661 of the bill.

Mr. MARKEY. All right. Well, the Commission recently decided to

allow the Nuclear Energy Institute to hire Wachenhut Corporation

to serve as the adversary force at nuclear reactor even though

Wachenhut forces currently guard about one-half of the Nation’s

operating reactors and even though there have been numerous reports of Wachenhut cheating or failing at force-on-force exercises at

nuclear facilities. Just today, the Department of Energy Inspector

General reported that Wachenhut personnel brought personal firearms onto the Nevada test site, against regulation. As you can

guess, I don’t think that the industry should be allowed to test

itself, and none of the reported safeguards that are in place to mitigate the obvious self—obvious conflicts of interest are sufficient,

but that hasn’t addressed the obvious question of why the NEI

hired a company with such an abysmal record of incompetence,

cheating, and rule violations. Can you please describe the process

by which the NEI made its decision to hire Wachenhut instead of

another company, given the fact that Wachenhut is the guard for

one-half the plants? How can a company test itself with regard to

the security of the facilities that it already has a contract to protect?

Mr. KANE. All right. Part of the process in selecting the force-onforce adversary part was we want to see the best possible and the

most professional adversary force put together that we possibly

can. I would use an analogy from Navy flying, a top gun for example. Navy pilots fly the adversary aircraft and mimic who the

would-be opponents would be, and they do a heck of a good job.

And what we are trying to do here is to be sure that we have the

very best adversary force.

Mr. MARKEY. I understand that, but the difference here is that

Wachenhut makes money from guarding nuclear power plants

today. So to have Wachenhut, then, do a test to whether or not—

given the fact that is a corporation and it has to report to its shareholders, is it the same as having one group of Navy public servants

test another group of Navy public servants, each in terms of their

competency. It is just a completely different—in other words,

Wachenhut’s primary obligation is to their shareholders. In there—

in the actual formation of their corporation, it says their principal

duty is to their shareholders.

Mr. KANE. Right, but——

513

Mr. MARKEY. So if that is the case, and they short-change on

safety, how can another part of Wachenhut bring them to account

for something that is at the core of what their responsibilities are?

Mr. KANE. Right. I would say that these force-on-force security

exercises are designed by the NRC, overseen and graded by the

NRC, and the Wachenhut force-on-force—the adversary group provides what we think is probably the best adversary force that we

can put together.

Mr. MARKEY. All right. I think it is an inherent conflict of interest. I think that is a huge mistake to have Wachenhut do the job,

given their own track record. They need people overseeing them,

and they need an independent group to be doing. I think it is a

huge public safety risk that has been run in allowing that to happen, and I just hope that the public safety, in the long run, doesn’t

pay the price, given the deficiencies that exist in Wachenhut, generally. And I would say, Mr. Chairman, given your generosity and

time, that—in conclusion, that the NRC has never done a public

rulemaking on security. It has met secretly with the NEI and its

members, but it has never done a rulemaking. I’ve read the secret

orders. I find them wholly inadequate, and I think the NRC’s failure to do a public rulemaking led to a product that is entirely deficient and which fails to protect against a terrorist attack on nuclear plants. I think that the hiring of Wachenhut to do the tests

on the force-on-force security at nuclear power plants is just an example of the inadequacy of NRC oversight over this issue. It, once

again, demonstrates just too-cozy a relationship with the nuclear

industry that pays too much attention to the bottom line of the nuclear industry companies and not enough to the public safety and

security issues. And I just wanted to put that on the record, Mr.

Chairman, because we do know that Al Qaeda continues to place

nuclear issues at the very top of their terrorist target list, and I

think it is wrong for the NRC not to have yet gone through a public, formal rulemaking.

Mr. HALL. The record will reflect will opinions, and the record

will reflect that we do not all agree with you. Will you yield back

your time, Mr. Markey?

Mr. MARKEY. I will say that that Chairman—I will just—but just

to point out, thought, that the Chairman has already voted for me

3 times in this committee to force a formal rulemaking by the Nuclear Regulatory Commission on these issues, and I appreciate your

support.

Mr. HALL. 3 times in 24 years is not bad, is it?

Mr. MARKEY. Even a blind squirrel uncovers an acorn once in

awhile.

Mr. HALL. I respect Mr. Markey; we just don’t always agree. But

I think we help one another. I think my being against him helps

him in Massachusetts, and him being against me helps me in

Texas.

Seriously, I am not going to take a lot of time thanking you

again. I am afraid somebody else will come in, but good luck to you.

And we are, Mr. Markey, adjourned.

[Whereupon, at 3:02 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

514

RESPONSE FOR THE RECORD BY ANDREW FAHLUND, VICE PRESIDENT FOR CONSERVA- TION AND RESTORATION, AMERICAN RIVERS, CHAIR OF HYDROPOWER REFORM COA- LITION

Question 1. At one point in your testimony you state that environmental conditions were ignored for the last 50 years of hydro licensing and then you state that

mandatory conditions have been part of the Federal Power Act since 1920. Please

explain these statements.

Response: My testimony made it clear that while the authority of the Secretaries

of the Interior, Commerce, and Agriculture pursuant to Sections 4(e) and 18 have

been part of the Federal Power Act since the earliest years of the statute, society’s

understanding of the environmental impacts of hydropower dams has grown. As

with all science, ecology and engineering have improved dramatically over the past

50 years and can better evaluate and address environmental impacts of hydropower

dams. The values that society places on environmental benefits and services have

also evolved tremendously since the last time most expiring licenses were evaluated.

Additionally, these values are reflected in several more recent laws that influence

how sections 4(e) and 18 are implemented today in relicensing. The National Environmental Policy Act (NEPA) was passed in 1969. It requires federal agencies, including FERC, to prepare an environmental assessment or environmental impact

statement describing the likely impact of various alternatives for a proposed federal

action. NEPA includes a significant opportunity for agencies and the public to evaluate the consequences of these alternatives and enables public comment. The Clean

Water Act was passed in 1972. Under Section 401 of the Clean Water Act, state

water quality programs must be allowed to certify that federal actions involving the

award of licenses will not violate applicable state water quality requirements. The

Endangered Species Act was passed in 1973. That law requires that FERC consult

with the Department of the Interior or Commerce if any listed species or their critical habitat, or any species proposed for listing, may be affected by the project. The

1986 amendments to the Federal Power Act enhanced environmental considerations

even further to explicitly include fish and wildlife protections.

Over the last two decades, new laws and new science have contributed to the resource agencies developing a better understanding of their legal authorities, and the

courts have added further clarification. Finally, recreational, environmental, cultural, and other values associated with rivers have placed new demands on resource

agencies, different from what they experienced 50 years ago.

Question 2. You reference the Tapoco settlement as a model for settlements—the

Committee was happy to mark up that bill last year with bipartisan support and

the president has signed it. Why would the bill make that settlement unlikely?

Response: The bill would grant license applicants a ‘‘super-status’’ in the licensing

process. License applicants alone would be allowed to challenge issues of material

fact through so-called ‘‘trial-type hearings’’ and would also be able to offer alternative conditions that the mandatory conditioning agencies must accept. Because no

other party, including states, tribes, citizen groups, or local landowners are granted

these same rights, hydropower proceedings would commence with federal mandatory

conditioning agencies treating the license applicant with far greater deference than

the interests of others. Because other parties would have no firm recourse to challenge the agencies, they would be relegated to a status lower than licensees, one

in which their concerns could be ignored. While some licensees might still seek collaborative settlement agreements, many licensees would see their best avenue to a

resolution as contesting the resource agencies at every turn. In the case of the Tapoco settlement, to which we were a party, the equal status of all parties helped

ensure a settlement to which all parties could agree. Moreover, the additional burdens of costly and duplicative review embodied in the bill would also deter agencies

from even establishing mandatory conditions in the first place, especially in light

of their limited budgets and staffing.

Question 3. How can FERC balance environmental concerns with other considerations, such as economic and power generation concerns, when the environmental

conditions are mandatory and cannot be changed by FERC? Why shouldn’t these

other agencies consider other factors (such as power generation, etc.) when developing mandatory conditions? Otherwise, it seems that environmental considerations

are the ‘‘first among equals’’ when FERC must make its evaluation for license renewal.

Response: Rivers cross many jurisdictional boundaries and are typically managed

in a complex system of federalism. The resources in question under sections 4(e) and

18, migratory fish and federal reservations, are managed by agencies that have responsibility for them at each stage, and must have corresponding authority. When

Congress passed the Federal Power Act, it expressly recognized that while FERC

515

has the ultimate responsibility to issue licenses for hydropower dams, those other

agencies should retain authority over migratory fish and federal reservations. Requirements under the Clean Water Act that grant similar authority to the States

to maintain water quality standards further this approach of providing authority to

the agencies responsible for each aspect of river management. Upon amending the

Federal Power Act in 1986, Congress required FERC to give equal consideration to

power and non-power values and to issue licenses that are best adapted to a comprehensive plan of a waterway, but retained the authority for section 4(e) and 18

conditions established in 1920.

These mandatory conditions therefore are a ‘‘floor’’ of environmental protection

above which the Federal Power Act requires FERC to balance the public interest

and consider imposing additional requirements. To suggest that minimal environmental standards cause a project to be uneconomic is akin to blaming dam safety

requirements or regional power rates as the culprit. Minimal environmental conditions are merely one cost among many that may lead a project’s expenses to exceed

its revenues, just as regional power rates, dam safety requirements, and basic management costs factor into such a calculation.

Question 4. You state that the bill will not bring current hydro projects up to today’s environmental standards. What specific parts of the bill prevent the imposition of environmental conditions at projects?

Response: Subtitle C, Part I, Sections 231 and 33 establish processes that grant

license applicants a ‘‘super status’’ in the licensing process and saddle resource

agencies with redundant and costly additional procedures without giving them the

necessary resources to undertake them. These processes will result in weaker environmental conditions. See my answers to questions 2, 3, and 5.

Question 5. Your testimony states that current proposals in Title II would bias

the process and reduce standards for environmental protection. However, the federal

resource agencies’ existing authority to issue conditions for hydropower projects, as

well as the current role of states, tribes, environmental groups and other stakeholders, is all preserved. Is this true?

Response: By establishing several new authorities and processes, available only

to the license applicant, Title II biases the process in their favor and away from

state resource agencies, treaty-holding tribes, citizen groups, and landowners. The

rights of other parties, although preserved, are left weakened when the licensee consistently gets the last word before the mandatory conditioning agencies. By virtue

of this disparity in authority, agencies will view the interests of the license applicant as their primary concern and will develop conditions that favor these interests

over that of other stakeholders. Requiring agencies to consider public interest values

equally with the private costs of the licensee will only further exacerbate this problem.

RESPONSE FOR THE RECORD BY NAVIN NAYAK, ENVIRONMENTAL ADVOCATE, U.S.

PUBLIC INTEREST RESEARCH GROUP

Question 1. Are the problems you cite with FirstEnergy problems with nuclear

technology or just that company and its management at that time?

Response: The problems at FirstEnergy underscore the risks associated with nuclear energy. Any mistake or problem in the nuclear industry carries much greater

consequences than in other energy sectors, as demonstrated by the long-term health

and environmental impacts of Chernobyl. The problems at FirstEnergy also highlight the failures of the Nuclear Regulatory Commission to adequately oversee the

nuclear industry and protect the public from the risks of nuclear power.

Question 2. If we eliminate nuclear power from the mix of energy sources, what

do we replace it with? Don’t renewables such as biomass also produce greenhouse

gases?

Response: The question highlights Congress’ inability to think outside of our current energy paradigm. The fact that the U.S. produces 20 percent of its electricity

from nuclear power is not an accident; it is the result of conscience decisions by Congress to subsidize and promote the industry. If the federal government had not provided more than $70 billion in taxpayer funded subsidies, limited liability in the

case of a serious accident, and a taxpayer funded repository the nuclear industry

would not exist in this country as it does today. As a case in point, the nuclear industry is utterly incapable of building new plants in this country without significant

federal support—as much (and likely more) than $1 billion per plant.

Instead of continuing to subsidize the same conventional and dirty energy industries that dominant our energy production today, it is time for Congress to consider

alternatives to our current energy mix.

516

1 Nadel, S., MonisShipley, A., and Elliott, R.N. American Council for an Energy-Efficient Economy, The Technical Economic, and Achievable Potential for Energy Efficiency in the United

States: A Meta-Analysis of Recent Studies, 2004.

First, it is important to highlight that energy production is NOT and end in itself.

It costs consumers and businesses money to consume energy, and energy production

has serious environmental and public health consequences. Therefore, our first priority should be to increase the efficiency with which we use energy—without compromising our current standard of living. By investing in energy efficient appliances,

buildings, and homes, conservative estimates suggest that we can reduce energy use

by as much as 28 percent by 2020.1

Second, the Energy Information Administration’s analysis concludes that the U.S.

has the technical potential to generate four times our total current electricity use

from renewables. Unfortunately, we only obtain less than 3 percent of our electricity

from renewables.

Over the past 50 years, the federal government has provided more than $500 billion in subsidies to the oil, gas, coal, and nuclear industries. If we provided the same

kind financial commitment to energy efficiency and renewable energy, we could minimize or eliminate the need for nuclear power and other polluting energy sources.

Question 3. You mention Chernobyl as an example of nuclear power’s potential

danger to our communities. Are there any operating commercial nuclear reactors in

the U.S. producing power today of a similar design to Chernobyl?

Response: Presently, there are no other reactors of a similar design operating in

the U.S. However, that does not imply that nuclear power—as it currently functions

in the U.S.—is not a threat to Americans. Several accidents, like the partial meltdown at Three Mile Island, and the near accident at Davis-Besse, underscore the

severe threat posed by nuclear power in this country. These concerns do not include

the grave threats posed by transporting and storing nuclear waste for the next

300,000 years, but are limited to the simple threat of operating nuclear power

plants in this country.

In the post-9/11 world, the threats related to operating nuclear power plants are

only enhanced, given that we know that terrorists were surveying nuclear power

plants as possible sites of attack.

Question 4. You claim that the Price-Anderson Act is an ‘‘unwarranted taxpayer

subsidy’’ and that it is ‘‘taxpayer-funded insurance for the nuclear industry in the

event of an accident.’’ Can you tell me how much taxpayer money has been spent

to date and how much would be spent in the event of an accident?

Response: The clean-up costs related to the Chernobyl accident cost $358 billion.

It is estimated that an serious accident in the U.S. would cost on average $110 billion and as much as $560 billion. In the event of a severe nuclear accident in the

U.S., the nuclear industry is only liable up to $10.1 billion—or less than 1⁄10 of the

total clean-up cost. Beyond the $10.1 billion provided by the industry, the federal

government would have two choices: either refuse to compensate victims for the accident or use taxpayer dollars to do so. Either way, the public is treated unfairly,

while the nuclear industry is not held responsible for their actions.

Thankfully, since there has not been an accident exceeding the industry’s limited

liability, taxpayers have not yet had to pay to compensate the industry.

NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION

The Honorable RALPH HALL

Chairman

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

United States House of Representatives

2125 Rayburn House Office Building

Washington, D.C. 20515-6115

DEAR CHAIRMAN HALL: On behalf of the National Petrochemical & Refiners Association (NPRA), thank you for giving me the opportunity to respond to the questions

you have submitted on behalf of yourself, Congressman Dingell, and Congresswoman Solis. I also appreciated the opportunity to present NPRA’s views at your

February 16, 2005 hearing, Energy Policy Act of 2005: Ensuring jobs for Our Future

with secure and Reliable Energy.

NPRA looks forward to working with the Committee in the hope that our recommendations will become an integral part of comprehensive energy legislation. If

517

you have any questions or concerns regarding this submission, please do not hesitate to contact me.

Sincerely,

BOB SLAUGHTER

President

QUESTIONS FROM HONORABLE RALPH M. HALL:

Question 1. It is my understanding that the water industry supports legislation

that would provide broad liability protection if the water provided by suppliers met

applicable state and federal standards. Is that correct, and if so can you describe

that legislation and the nature of the water industry’s support?

Answer 1. Your understanding is correct. The Drinking Water Standards Preservation Act (H.R. 306) is designed to offer broad protection against liability claims

advanced against water systems that otherwise deliver water meeting applicable

governmental standards. See H.R. 306, Drinking Water Standards Preservation Act

of 2003, 108th Cong. (2003). The premise of the bill is that regulatory agencies have

established adequate safeguards for water quality based upon their expert judgment. The legislation broadly supports a ‘‘conflicts preemption’’ theory advanced in

the Supreme Court case of Geier v. American Honda. The legislation the water

groups support even finds that drinking water quality is ‘‘not appropriate for individual juries deciding individual cases in the separate States, but rather is fundamentally a scientific issue to be resolved by appropriate Federal and State agencies . . .’’ See H.R. 306.

In the same spirit as H.R. 306, MTBE manufacturers and refiners note that

MTBE was explicitly approved for use in satisfaction of a federal regulatory standard, the two-percent oxygen standard, by the same federal agency tasked with

water-quality regulatory authority. However, the liability protection provision in the

energy bill is a considerably more narrow provision than water systems ask for

themselves. In fact, the energy bill provision contains a savings clause that protects

many other causes of action, prohibiting only defective product claims (including

failure to warn).

Reporting on this support, one trade publication states, ‘‘The American Water

Works Association (AWWA) is backing a proposed law that would shield water utilities from lawsuits if they are in compliance with federal and state regulations.’’ See

WaterTech.Online, Water utilities would be protected from lawsuits in new legislation, April 23, 2003, located at http://waternet.com/News.asp?mode=

4&NlID=39946.

Question 2. Has MTBE been classified as a human carcinogen? Can it be classified

as a human carcinogen? Could you provide evidence for the record?

Answer 2. MTBE is one of the most widely studied chemicals in commerce, including pharmaceuticals. The overwhelming majority of scientific evaluations—government and independent health organizations—have failed to find sufficiently compelling reasons to classify MTBE as a possible cancer-causing agent for humans.

• The U.S. Department of Health and Human Services found that there is not sufficient evidence to list MTBE in its annual Report on Carcinogens. See U.S. Department of Health and Human Services, Public Health Service, National Toxicology Program, Report on Carcinogens, Tenth Edition, app. C (December 2002),

located at http://ntp-server.niehs.nih.gov.

• The European Union Risk Assessment on MTBE found that ‘‘[i]n view of the lacking or limited relevance of the findings for man, and the low potency demonstrated in animal studies, human cancer risk is presumed to be low.’’ See European Union Risk Assessment on MTBE, Tert-Butyl Methyl Ether Summary

Risk Assessment Report, (2002), located at http://www.calgasoline.com/MTB—

0011.PDF.

• The World Health Organization’s International Agency for Research on Cancer

concluded that there is inadequate human evidence, and limited animal evidence, for the carcinogenicity of MTBE, leading to overall classification of

MTBE as ‘‘not classifiable as to its carcinogenicity to humans.’’ See World

Health Organization, International Agency for Research on Cancer, Methyl tertButyl Ether, Vol 73, 339 (1999), located at http://www-cie.iarc.fr/htdocs/monographs/vol73/73-13.html.

• The World Health Organization references rodent data, stating its inconclusiveness should, ‘‘prohibit their use for human carcinogenic risk assessment.’’ Moreover, the World Health Organization stated that ‘‘[t]he weight of evidence suggests that MTBE is not genotoxic. A large number of studies using in vitro and

in vivo mammalian and non-mammalian systems have been conducted to assess

the mutagenicity of MTBE, almost all of which have produced negative results.’’

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1This summary reflects conclusions drawn from review of records in the docket for the Office

of Toxic Substances MTBE testing consent order and from the docket for the 1988 technical

standards rulemaking for underground storage tanks, and of statements made by EPA in regulatory preambles. 2Memorandum from Frank D. Kover, Chief, Chemical Screening Branch to Michael B. Cook,

Director, Office of Drinking Water and Marian Milay, Director, Office of Groundwater Protection

(May 23, 1986) (on file with TSCA Docket No. OPTS-42098, fiche No. 514447). 3 Nineteenth Report of the Interagency Testing Committee to the Administrator; Receipt and

Request for Comments regarding Priority List of Chemicals, 51 Fed. Reg. 41,417, 41,426 (Nov.

14, 1986). Established under TSCA Section 4(e), the ITC recommends chemicals for priority consideration in EPA’s chemical testing program.

In its report, the ITC acknowledged that MTBE had been found in groundwater in North

Carolina, but attributed that particular contamination to spills during transfer of gasoline from

seagoing tankers to onshore storage facilities. Id. at 41,425. More generally, the report concluded that ‘‘Despite its relatively high water solubility, MTBE is expected to partition largely

to air . . . any MTBE present in surface water will have a half-life of about 9 hours before

volatizing... most of the MTBE released to the environment will be released directly to air during transfer operations[, and]... MTBE [will have] little tendency for significant partitioning to

soils, sediments, or biota.’’ Id. At the same time, the report also stated that ‘‘Persistence in

ground water following spills is unknown, but it may persist for long periods if volatilization

is prevented, since MTBE is not likely to be readily biodegraded or otherwise transformed in

ground water.’’ Id. 4OPTS, December 17, 1986 Focus Meeting Presentation on Methly-tert-butyl-ether (MTBE)

and Minutes of same meeting (on file with TSCA Docket No. OPTS-42098, fiche No. 514462). 5 Id.

6See Letter from Elizabeth Anderson, OTS to Teresa Zibura, Maine Department of Human

Services (December 22, 1986) (on file with TSCA Docket No. OPTS-42098, fiche No. 514472);

Letter from Teresa Zibura to Elizabeth Anderson (January 12, 1987) (on file with TSCA Docket

No. OPTS-42098, fiche No. 514475).

See Rolling Revision of the WHO Guidelines for Drinking-Water Quality, Summary Statement (January 2005) (Draft), located at http://www.who.int/

waterlsanitationlhealth/dwq/chemicals/en/mtbe1staddsum.pdf • The U.S. Environmental Protection Agency has not classified MTBE as a human

carcinogen. See Environmental Protection Agency, MTBE Fact Sheet #1, 3 (January 1998) located at http://www.epa.gov/swerust1/mtbe/mtbefs1.pdf. See also

Environmental Protection Agency, Assessment of Potential Health Risks of Gasoline Oxygenate with Methyl Tertiary Butly Ether (MTBE), 28 (November 1993),

located at http://www.epa.gov/swerust1/mtbe/mtbe1193.pdf. • Finally, the Agency for Toxic Substances and Disease Registry states that ‘‘[t]here

is no evidence that MTBE causes cancer in humans.’’ See Agency for Toxic Substances and Disease Registry, Methyl tert-butyl ether (MTBE) ToxFaq, (September 1997), located at http://www.atsdr.cdc.gov/tfacts91.html.

Question 3. Opponents of the MTBE limited liability provision have discussed the

extent of knowledge of potential water quality problems prior to the adoption of the

two-percent oxygenate standard. What evidence exists that the U.S. Environmental

Protection Agency had extensive knowledge of potential water quality problems

prior to EPA’s approval of the use of MTBE in satisfaction of the federal mandate?

Answer 3. EPA’s actions in the 1980s show that multiple offices in EPA had concerns regarding groundwater detections of MTBE prior to the adoption of the 1990

Clean Air Act amendments.1

By the end of 1986, multiple offices of EPA were aware of evidence of contamination of groundwater from MTBE. The Office of Toxic Substances (OTS) knew of examples of contamination by October 1985 and shared this information with the Offices of Drinking Water and of Groundwater Protection by May 1986.2 In October

1986, in accordance with its mandate to make recommendations for chemical testing, the Interagency Testing Committee (ITC), recommended chemical testing for

MTBE.3 In response, OTS held a public meeting in December 1986 to discuss the

ITC’s recommendations and the development of a consent order, in accordance with

the Toxic Substances Control Act (TSCA), for industry to generate responsive data

on MTBE. Various representatives of EPA attended this meeting, including staff

from OTS and the Office of Air and Radiation (OAR).4

At this public meeting, OTS staff stated that the Agency needed more information

on the presence and persistence of MTBE in groundwater. They explained that existing OTS research raised concerns regarding alleged MTBE groundwater issues

and noted about 30% of the 700,000 underground storage tanks (USTs) for petroleum products were leaking.5

By the beginning of 1987, OTS apparently knew of MTBE groundwater concerns

only in Maine and North Carolina, and was seeking further information from State

authorities.6 OTS was also aware of a paper by Peter Garrett of the Maine Department of Environmental Protection, entitled ‘‘Oxygenates as Ground Water ContamiVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00526 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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7See, e.g., Record of meeting between Rich Troast and Beth Anderson, EPA and Jim Conrad,

Petroleum Marketers Association of Canada (January 28, 1987) (on file with TSCA Docket No.

OPTS-42098, fiche No. 514463). 8See January 28, 1987 Troast, Anderson and Conrad telecommunication, supra, n. 7; April

20, 1987 Nixon telecommunication, supra, n.7. 9Telephone communication between Herb Brass, EPA interagency liaison in Cincinnati, Ohio,

and Elizabeth Anderson, OTS (February 6, 1987) (on file with TSCA Docket No. OPTS-42098,

fiche No. 514621); Telephone communication between Dennis McQuillan, Groundwater and Hazardous Waste Bureau, New Mexico Environmental Improvement Division, and Elizabeth Anderson (February 9, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514623); Telephone

communication between Leslie McGeorge, New Jersey EPA, and Elizabeth Anderson (February

11, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514626); Telephone communication between John Ruggero, an intra-agency contact, and Elizabeth Anderson (February 20,

1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514630) (discussing Pennsylvania/

Delaware); Telephone communication between Ray Barg, NJ EPA safe drinking water office,

and Elizabeth Anderson (March 2, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No.

514644); Telephone communication between Ray Barg, NJ drinking water office, and Elizabeth

Anderson (March 3, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514646); Letter

from Ray Barg to Elizabeth Anderson (March 3, 1987) (on file with TSCA Docket No. OPTS42098, fiche No. 514430). 10See Telephone communication between Peter Garrett and Elizabeth Anderson (March 4,

1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514648). 11See Minutes of April 21, 1987 Public Meeting (on file with TSCA Docket No. OPTS-42098,

fiche No. 514465) 12 Id. 13See Telephone communication between Elizabeth Anderson and David Bottoroff, Alcohol

Week (October 1, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514742); see also

Draft Memorandum from P.V. Shah to Elizabeth Anderson regarding Phrmacokinetic/Metabolism Test Rule for MTBE (October 1, 1987) (on file with TSCA Docket No. OPTS-42098, fiche

No. 514456) (stating that the purpose of the study is to ‘‘Ascertain whether the pharmacokinetics and metabolism of test compound is similar after oral, dermal and inhalation administration.’’). 14See Underground Storage Tanks; Technical Requirements; Proposed Rule, 52 Fed. Reg.

12,662, 12,665-66 (April 17, 1987). 15See Telephone communication between Elizabeth Anderson and Dennis McQuillan (July 31,

1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514711); Letter from Karen Martin,

Massachusetts Department of Environmental Quality Engineering, Office of Research and

Standards, to Jacqueline Favilla, TSCA Public Information System (September 1, 1987) (on file

with TSCA Docket No. OPTS-42098, fiche No. 514417); Letter from Theresa Zibura, Maine Department of Health, Public Health Laboratory, to Arnie Edelman, TSCA Assistance Office (September 3, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514589); Letter from Dennis McQuillan to Elizabeth Anderson (September 11, 1987) (on file with TSCA Docket No.

OPTS-42098, fiche No. 514431); Letter from Antoinette S. Mason, Connecticut Department of

Health Services, to Arnie Edelman (September 14, 1987) (on file with TSCA Docket No. OPTS42098, fiche No. 514407); Memorandum from Jim Boydston, Oregon Drinking Water Program,

to Arnie Edelman (September 22, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No.

514594); Letter from Naomi Davidson, Connecticut Department of Environmental Protection, to

Arnie Edelman (September 17, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No.

514408); Letter from Jeffrey S. Smith, New Hampshire Department of Health and Human Services, Division of Public Health Services, to EPA (September 18, 1987) (on file with TSCA Docket

No. OPTS-42098, fiche No. 514429).

By July 1987, OTS had information indicating that the threshold for MTBE contamination

to have taste and odor impacts might be as low as a few parts per billion. See Telephone Communication between Beth Anderson, EPA, and Dennis McQuillan, New Mexico Groundwater &

Continued

nants,’’ which discussed MTBE specifically. Indeed, OTS even recommended such information to competitor lobbyists seeking to undermine MTBE.7 OTS appears to

have circulated Garrett’s to interested parties and referred such parties to him.8

OTS communicated with authorities in Ohio, New Mexico, New Jersey and the

Delaware/Pennsylvania area in early 1987.9 By the Spring, OTS had received additional substantive data from New Jersey, in particular, and had found some further

references in journals to instances of MTBE in groundwater.10

In April 1987, OTS presented its tentative MTBE testing decisions at a public

meeting.11 Specifically, OTS proposed performing oral, dermal and inhalation pharmacokinetic studies,12 which it intended to use to extrapolate oral/drinking water

doses from the various inhalation studies to be performed under the consent order.13

Meanwhile, on April 17, 1987, EPA published its proposed requirements for underground storage tanks (USTs). While the proposal did not discuss MTBE, it noted

that ‘‘the nation may be facing a pervasive threat to its ground-water from leaking

UST systems.’’ 14

By the Fall of 1987, OTS had received substantially more evidence of MTBE

groundwater detections through communications with authorities in New Mexico,

Massachusetts, Maine, Oregon, Connecticut, and New Hampshire.15 OTS also conVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00527 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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Hazardous Waste Bureau (July 31, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No.

514711). 16See List of meeting attendees for August 5, 1987 Senate staff briefing (on file with TSCA

Docket No. OPTS-42098, fiche No. 514469); Telephone communication between Elizabeth Anderson and Michael Shelnitz, Connecticut Department of Health and Human Services (November

18, 1997) (on file with TSCA Docket No. OPTS-42098, fiche No. 514756). 17Telephone communication between Elizabeth Anderson and George Domingues (December

14, 1987) (on file with TSCA Docket No. OPTS-42098, fiche No. 514760). 18Drinking Water; Substitution of Contaminants and Drinking Water Priority List of Additional Substances which May Require Regulation under the Safe Drinking Water Act, 53 Fed.

Reg. 1892 (January 22, 1988). 19 Id. at 1901. 20Testing Consent Order on Methyl Tert-Butyl Ether and Response to the Interagency Testing

Committee, 53 Fed. Reg. 10,391, 10,392 (March 31, 1998). 21 Id. 22 EPA OUST, Cleanup of Releases from Petroleum USTs: Selected Technologies, EPA/530/

UST-88/001, 10, 81-82 (April 1988). 23See id. at 85 (noting discovery of MTBE drinking water contamination in 2 communities). 24 Underground Storage Tanks; Technical Requirements and State Program Approval; Final

Rules, 53 Fed. Reg. 37082, (Sept. 23, 1988).

tinued to coordinate with other EPA offices regarding MTBE, including the Office

of Drinking Water (ODW) and OAR—for example, referring interested parties to

ODW for further information on groundwater issues.16

The record also indicates that by late 1987 the Office of Water had become more

concerned about MTBE in ground water. (As noted above, it was already aware by

May 1986 that some contamination was occurring.) It appears, in fact, that the Office of Water may have had greater concerns regarding MTBE in groundwater than

did OTS.17

In light of the Office of Water’s concerns about groundwater issues, on January

22, 1988, EPA announced its decision to list MTBE on its Drinking Water Priority

List of substances that may require regulation under the Safe Drinking Water Act.18

The notice stated that MTBE had been detected in ‘‘a number of groundwaters,

probably as a result of leaking underground storage tanks, disposal facilities, or

spills.’’ 19

Two months later, in March 1988, OTS announced the MTBE testing consent

order. The preamble to the order, once again, reflects the concerns OTS had regarding MTBE contamination of groundwater:

EPA has an additional concern about MTBE contamination of ground water.

Although only a few cases of ground water contamination are currently documented, the rapid growth in production, transport, and use of MTBE will probably contribute to an increase in incidents of contamination.20

The preamble goes on to discuss MTBE contamination in Maine, New Jersey and

New Hampshire.21

The next month, the Office of Underground Storage Tanks (OUST) also expressed

concerns regarding MTBE groundwater contamination. OUST published a study in

April 1988 on clean-up of UST releases. This report reflects OUST’s awareness that:

MTBE was already in use in 10% of all gasoline and had become one of the top 50

chemicals in production because of its use as an octane enhancer due to phase-out

of leaded gasoline; 22 and that MTBE contamination of groundwater had occurred

due to UST leakage.23 Five months later, in September 1988, EPA published its

final UST rules establishing technical requirements for USTs.24

In short, prior to 1990 various offices of EPA, including OTS, OUST, OAR and

the Office of Water were in communication and were aware of instances of groundwater contamination by MTBE. In addition, they were aware of the potential for

wide-spread MTBE groundwater concerns because over a quarter million USTs nationwide were leaking. Further, EPA’s concerns about MTBE in groundwater were

clearly in the public domain several years before passage of the Clean Air Act in

1990.

Even in light of substantial information in its possession on water quality issues,

EPA’s concern for air quality and the implementation of the reformulated gasoline

program nevertheless underscored its judgment to subsequently approve MTBE as

an oxygenate authorized for use under the federal RFG program. The EPA was a

fully informed decision maker when it authorized MTBE’s use in response to the

1990 oxygenate requirements.

Question 4. Opponents note that MTBE was used in the gasoline pool prior to the

adoption of the two-percent standard. Why was MTBE used at that time? At what

levels was MTBE used prior to the adoption of the Clean Air Act Amendments of

1990? What was the environmental impact of this early use?

521

25 Application for Methyl Tertiary Butyl Ether, Decision of the Administrator, 44 Fed. Reg.

12,242 (Mar. 6, 1979) (‘‘ARCO’’ waiver for up to 7% by volume MTBE); see also Fuels and Fuel

Additives; Waiver Decision, 53 Fed. Reg. 33,846 (Sept. 1, 1988) (‘‘Sun’’ waiver for up to 15% by

volume MTBE). 26 42 U.S.C. § 7545(m)(1). 27 Id. § 7545(k)(10)(D). 28 Id. 29 Id. § 7545(k)(2)(B). EPA may waive this 2.0% standard, in whole or in part, but only if it

determines that ‘‘compliance with such requirement would prevent or interfere with the attainment of the area of a primary or secondary ambient air quality standard.’’ 42 U.S.C.

§ 7545(k)(2)(B).

30 Id. § 7545(k)(5). 31 Id. § 7545(k)(6). 32See Methyl Tertiary Butyl Ether (MTBE); Advance Notice of Intent to Initiate Rulemaking

Under the Toxic Substances Control Act to Eliminate or Limit the Use of MTBE as a Fuel Additive in Gasoline; Advance Notice of Proposed Rulemaking, 65 Fed. Reg. 16, 094, 16, 095 (Mar.

24, 2000). 33See EPA, Oxygenate Type Analysis 1995 RFG Survey Data (Feb. 26, 1996) available at

http://www.epa.gov/otaq/consumer/fuels/mtbe/oxy-type.pdf (last visited July 1, 2004). 34On S. 1576 Before the Senate Comm. on Environment and Public Works, 106th Cong. (1998)

(statement of Margo Oge, Dir. Off. of Mobile Sources, Office of Air and Radiation, U.S. EPA)

available at http://www.epa.gov/otaq/regs/fuels/congress/sep1698.pdf (last visited Dec. 16, 2004).

Answer 4. EPA issued a compulsory federal standard in 1973 that called for a

phase down of lead in gasoline. Since 1979, EPA has authorized the use of MTBE

as an octane-enhancing additive in fuels in furtherance of the federal mandate to

remove lead from the gasoline pool.25 MTBE was used increasingly throughout the

1980’s to satisfy this requirement.

The next significant development relating to the use of MTBE occurred as a result

of the Clean Air Act Amendments of 1990. The Amendments added two programs

designed to significantly reduce carbon monoxide and ozone: the Oxyfuels 26 and reformulated gasoline (RFG) programs.27 The Oxyfuels program required certain carbon monoxide nonattainment areas to use 2.7 percent oxygen by weight during the

period of time when such areas are prone to high ambient levels of carbon monoxide. The Oxyfuels program is also known as the Wintertime Oxygen requirement.

Through the RFG program, Congress directed the EPA Administrator to promulgate regulations establishing requirements for cleaner burning fuel to be used in the

nation’s smoggiest cities. RFG ‘‘covered areas’’ included the nation’s nine largest

metropolitan areas with the most severe summertime ozone levels. In addition, any

ozone nonattainment area reclassified as ‘‘Severe’’ would also become a covered area

subject to the RFG mandate.28 Congress directed that the oxygen content of RFG

in such covered areas ‘‘equal or exceed 2.0 percent by weight... except as otherwise

required by this chapter.’’ 29

Congress also prohibited the sale, beginning January 1, 1995, of any conventional

gasoline in any RFG covered area.30 In addition, Congress provided that, upon application by the Governor of a State, EPA could extend that same prohibition to ‘‘any

area in the State classified . . . as a Marginal, Moderate, Serious, or Severe

Area . . . .’’ 31 These are referred to as ‘‘opt-in areas.’’

Following the passage of the 1990 Amendments, as Congress had predicted when

it considered the oxygenate standard on the floor, MTBE use became widespread.

In 2000, EPA determined that MTBE was the ‘‘primary oxygenate used by refiners

to meet [the RFG] requirement.’’ 32 Survey data published by EPA for the period

1995-1997 supported this conclusion, indicating that, in 19 RFG areas, MTBE accounted for more than 95% of the oxygen content used to meet the RFG requirements.33 The success of the RFG program in improving air quality was widely recognized. In Congressional testimony in 1998, EPA opposed any change in the CAA oxygenate and RFG provisions, underscoring that the RFG program was achieving

‘‘substantial benefits—in reducing ozone precursors and toxics’’ and that ‘‘oxygenates

provide a valuable tool to refiners in meeting the emission reduction requirements.’’ 34

MTBE was in use prior to 1990, and some groundwater detections were known

to EPA (see answer to Question Three above). However, the substantial uptick in

use of MTBE associated with the federal mandate in the 1990 Amendments accounted for MTBE detections at levels cited in recent litigation. According to a U.S.

Geological Survey report examining hundreds of sites over a 12-state region, while

the overall level of MTBE detections of concern is still extremely low, even these

low levels of detections are correlated with the implementation of the federally-mandated two-percent oxygen standard:

Only 0.8 percent of the randomly selected CWSs [community water systems]

with MTBE data reported concentrations that equaled or exceeded the 20-ı`g/L

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35 U.S. Department of the Interior, U.S. Geological Survey, Occurrence and Distribution of

MTBE and Other VOCs in Drinking Water in the Northeast and Mid-Atlantic Regions of the

United States, Water-Resources Investigations Report 00-4228 (2001) at 59.

lower limit of the USEPA’s DWA for MTBE; 2 percent of the CWSs reported

MTBE concentrations at or above the California 5-ı`g/L taste and odor threshold.

The probability of MTBE detections at or above 1.0ı`g/L in drinking water was

five times more likely (p<0.0001) to occur in those areas of the Northeast and

Mid-Atlantic regions where it is used in substantial amounts under the

oxygenated and reformulated fuels program.35

In conclusion, despite some historic MTBE usage associated with an earlier federal mandate to phase down lead in gasoline, only the 1990 mandates precipitated

levels of detection that underlie current concerns.

Question 5. Can you tell the Subcommittee what effect regulatory compliance has

had on the level of detections of MTBE? What efforts are used to address MTBE

water-quality issues where they occur?

Answer 5. In recent years, the states have implemented Phase II underground

storage tank compliance programs. At the same time, data has shown MTBE detection levels have been on a constant decline. The vast majority of detections are well

below the taste and odor thresholds established by EPA’s Consumer Advisory for

MTBE. In fact, the Chairman of the EPA Blue Ribbon Panel on Oxygenates testified

that, ‘‘the results of [water sampling] confirm that MTBE is detected in a relatively

small number of water sources of those tested, and if those where it is tested, relatively few have levels above existing or proposed levels of concern.’’ The New Jersey Department of Environmental Protection likewise reported that data from 400

of the state’s public community drinking water supplies found no instance where

MTBE approached New Jersey’s drinking water standard for MTBE. The report concluded: ‘‘MTBE contamination is not currently a public health concern in New Jersey public drinking water supplies.’’

A further discussion of the underground storage tank (UST) regulatory program

may place these issues in perspective:

Preventing leaks is the best way to avoid MTBE impacts. Tougher federal

and state regulations and enforcement have led to significant reductions in petroleum tank releases.

• Leak detection and prevention are major elements of the UST regulations implementing the 1984—RCRA amendments.

• The regulations set stringent requirements for USTs for proper installation,

corrosion protection, spill protection, release detection, notification and recordkeeping.

• Not only the tank itself, but also underground piping associated with the tank

is—generally subject to these regulations.

• Above-ground tanks are covered if at least 10% of the tank or its pipes is underground.

• In 2003 there were 60% fewer releases from all new tanks than the historic annual average. In FY04, the number of releases dropped to 7,800 from 12,000

in FY03.

• In FY04 the national compliance rate for release prevention was 77% and for leak

detection was 72%.

• Many states have adopted regulations more stringent than the federal regulations.

Cleanup of petroleum tank sites and groundwater, through targeted federal and State efforts, has increased under the UST program and under

the Brownfields program.

• EPA and the States have made significant progress in tank site cleanup.

• 1.5 million tanks have been closed.

• EPA estimates that over the life of the program, States have spent over $11

billion from LUST funds to cleanup more than 300,00 sites.

• From 1988 to 2003, cleanup has been initiated at 92% of all confirmed tank

releases and cleanup has been completed at 70% of all confirmed petroleum—

tank releases.

• Additional petroleum-related cleanup is funded through the Brownfields program.

• The 2002 Brownfields law requires that 25% of funds be targeted to petroleum site assessment and cleanup.

• The President’s FY 06 Budget provides $210 million for the Brownfields program, an increase of $47 million over FY 05 funding.

523

As is evident, UST implementation is proceeding under the current legal and regulatory structure. MTBE detection levels have been stabilized and declining.

Question 6. During the hearing the members of the Subcommittee heard testimony regarding jury findings in the South Tahoe Public Utility District case. Could

you provide information that places these findings in the appropriate context?

Answer 6. The South Tahoe Public Utility District case is frequently cited by opponents of limited liability protection. However, the case must be placed in context.

First, the South Tahoe settlement is of no value as precedent, in California or anywhere else. California has a multi-stage complex torts system. In the first stage, the

jury made a finding that found merit in the ‘‘design defect’’ theory. This controversial finding did not become the judgment of the court, because the case was settled.

If favorable terms for settlement could not have been reached, the jury’s finding

would have been challenged, and likely set aside as inconsistent with California law

and precedent. The jury findings cannot be cited as precedent in other legal proceedings. In truth, there has never been a judgment of a court of competent jurisdiction in favor of the ‘‘design defect’’ theory for MTBE.

A. The Court never entered a judgment and a judgment would be necessary to even

argue the case had any precedential effect.

B. The jury only reached a verdict on one of three phases of the trial and all phases

needed to be complete to a judgment.

1. The trial judge could have and likely would have overturned or modified the

jury findings.

2. Had the defendants not settled, the case would have certainly been appealed

and likely overturned.

C. Even had a judgment on defective product been entered by the trial court and

affirmed on appeal, it would have had no precedential value with regard to the

design defect issue to most, if not all, litigants in future cases.

D. The fact that the South Tahoe jury reached a decision so contrary to the one

reached by federal regulatory agencies and legislative bodies demonstrates the

pressing need to correct the problem that will likely result from continued litigation on this issue. To not do so would implicitly result in industry being unable to reasonably rely on the conclusions, findings and mandates of the federal

government.

E. Many other courts have considered the exact same issues presented to the Court

in the South Tahoe case and concluded expressly and unequivocally that the

issues presented to the jury in South Tahoe were not appropriate for jury consideration because the issues were pre-empted by the Clean Air Act and its implementation. To not give liability protection, would essentially be contrary and

‘‘overturn’’ these decisions.

Similar types of federal preemption arguments were raised by oil companies,

with varying degrees of success, in other lawsuits. In a class action filed against

Chevron and Gulf, a New Jersey federal judge found the strict liability claims

to be federally preempted, as the Clean Air Act required the use of an oxygenate and ‘‘MTBE was an oxygenate that Congress contemplated would be used

frequently.’’ Holten v. Chevron U.S.A., No. 00-4703 (AET) (D.N.J., July 8, 2001).

Second, the jury in South Tahoe itself made inconsistent findings. The jury made

findings that MTBE producers could not use certain defenses because companies

using MTBE were not ‘‘sophisticated users.’’ On the other hand, the same jury found

that those same companies were liable because they did possess the requisite knowledge of MTBE’s effects. In short, both conclusions can’t be true at the same time,

and the findings would have been overturned by either the judge or an appellate

court.

In a real sense, the South Tahoe case proves ‘‘defective product’’ theories—the

only theories covered in the limited liability provision currently under consideration

by Congress—are not needed. The South Tahoe jury also found that negligence theories obtained for those entities actually handling and storing the gasoline. Therefore, the South Tahoe case could have proceeded even without the design defect authority.

Very significant settlements were reached with companies who had leaking sites

or releases for which they were responsible. So, an unquantifiable amount of the

settlements was attributable to ‘‘release conduct’’ as opposed to manufacturer conduct. An MTBE limited liability provision would not jeopardize such results. That

is, those who cause a release will always be liable to remediate and pay damages

for harm they cause. The immunity does not change this law or result.

Complex ‘‘defective product’’ case could even delay relief. Allowing a contamination case to be sidetracked and morphed into a products-liability case does nothing

to advance the remediation of the groundwater because industry will appeal the

products liability findings, causing substantial delay in resolution of these cases. If

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anything the products liability claims frustrate the goal of groundwater remediation

because of the inevitable appeals.

Further, regulatory agency oversight (federal, state and local) is frustrated by the

products liability claims because these agencies lose control of the remedy process.

These agencies are supposed to be in control of remedy design. When products liability claims are permitted, the plaintiff’s motive becomes recovery of a large money

judgment rather than a judgment mandating a remedy to be performed by the party

who released the gasoline. This is a total perversion of the process intended by legislatures and Congress when they empowered regulatory agencies to protect groundwater and drinking water. The best example of this is the City of Santa Monica

case, and to some degree the Tahoe case.

The other disastrous consequence is the double hit to those parties who have to

expend resources to respond to regulatory agency mandates (designed to remediate

groundwater), and who have to pay to settle products liability claims. Recipients of

the products liability settlements are not required to spend these settlement dollars

to remediate the groundwater, yet the party who paid the price of contaminating

the groundwater (who may also face a products liability claim) still faces the regulatory liability to remediate it.

In short, despite numerous other cases, no jury has every found or been allowed

to reach the question of design defect given the hand the federal government played

in the design of the fuel in question. This lone jury finding proves the susceptibility

of juries to being mislead in areas where emotions run high and is precisely why

limited liability relief is needed.

Question 7. On the issue of boutique fuels, would repeal of the oxygenate requirement help alleviate the boutique fuels phenomenon?

Answer 7. The phenomenon of boutique fuels essentially arose out of a desire of

certain nonattainment areas to achieve the air quality benefits of cleaner fuels while

avoiding the cost or distribution patterns associated with reformulated gasoline’s

oxygenation requirement. Therefore, repeal of the two-percent oxygen requirement

should address the root cause of the boutique fuels issue. As a result, NPRA supports removal of the two-percent oxygen requirement but remains unconvinced that

further legislation targeted specifically at limiting boutique fuels is necessary or appropriate.

Legislation aimed at boutique-fuel limitations beyond repeal of the two-percent

oxygen requirement may create unintended consequences that could undermine innovation or cost-control in fuels production. Local areas have different air quality

needs that may require varied solutions. In some circumstances, local fuels reduce

or avoid inefficient investment costs for refiners and can lower overall costs to consumers. Further changes in fuel specifications in the 2004-2010 time frame (when

Tier II gasoline sulfur, highway and non-road diesel regulations, air toxics regulations, national ambient air quality standards and other stationary source requirements become effective) could add even greater uncertainty to transportation fuels

market, however well-intentioned those changes might be.

QUESTIONS FROM HONORABLE JOHN D. DINGELL AND HONORABLE HILDA L. SOLIS

Question 1. In an interview on E&ETV news broadcast on Wednesday, February

16, 2005, you stated that the conference report on H.R. 6 ‘‘makes $800 million available for expedited cleanup of MTBE.’’

The conference report authorized $605 million a year for five years for various requirements in the Leaking Underground Storage Tank (LUST) program of which

$200 million annually was authorized for MTBE cleanup. An authorization, however, is very different than an appropriation and it makes no money actually available for cleanup.

Answer 1. In response to Question 1, we are aware of the observations you make,

however we would make the following observations:

As of September 2003, the LUST fund had accumulated approximately $2.1 billion

in funds. Each year, Congress sees fit to appropriate approximately $70 million to

operate the LUST program. EPA allocates about 80% to States for their cleanup

programs, and about 20% to administer the program and conduct cleanups in Indian

country.

Through the program funding, EPA and the States have made significant progress

in tank site cleanup. EPA estimates that over the life of the program, States have

spent over $11 billion from LUST funds to cleanup more than 300,000 sites. 1.5 million tanks have been closed. From 1988 to 2003, cleanup has been completed at 70%

of all confirmed petroleum—tank releases and—cleanup has been initiated at 92%

of all confirmed tank releases. In 2003 there were 60% fewer releases from all new

tanks than the historic annual average. Of all tank releases, about 70% are petroVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00532 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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leum-related tanks. EPA and the States are implementing measures to achieve faster site cleanup. Continued full funding of the UST program will ensure continued

success in cleaning up sites.

Additional petroleum-related cleanup is funded through the Brownfields program. The President’s FY 06 Budget provides $210 million for the Brownfields program,

an increase of $47 million over FY 05 funding. Was Congress to adopt that increase

in Brownfields funding, funding for petroleum-related cleanup would correspondingly increase by 25%.

With regard to the action taken in the H.R. 6 Conference Report, the authorization of funds targeted for MTBE clean-up is as you described. While we are aware

that authorization does not guarantee appropriation, the adoption of the Conference

Report sends an unmistakable signal of Congressional support for a significant targeting of resources at MTBE clean up. Without adoption of comprehensive energy

legislation, this funding increase will go unauthorized, and a critical step in assigning resources to alleged MTBE problems will be missed.

Question 2. The Leaking Underground Storage Tank (LUST) Trust Fund is financed by a 0.1 cent per gallon tax on motor fuels that will expire after March 31,

2005. Does the National Petrochemical and Refiners Association support the extension of this tax on motor fuels and, if so, for how long a period of time?

Answer 2. It is our understanding that the tax upon which the leaking underground storage tank (LUST) fund is based was extended by the House of Representatives under suspension on March 16, 2005. The following day, the Senate approved

the bill (H.R. 1270) under unanimous consent. NPRA has endorsed comprehensive

energy legislation that includes significant authorization of LUST funds to address

MTBE clean-ups.

Question 3. In the news interview on February 16, 2005, you also stated that the

‘‘whole system of responsible parties take care of 95 percent of these costs’’ referring

to the costs of cleaning up sites contaminated by leaking tanks. At the Subcommittee hearing on February 16, 2005, you testified that ‘‘96 percent will be paid

for by responsible parties.’’

Answer 3. In response to Question 3, we are aware of the observations you make,

however we would make the following observations:

The notion underlying the interviews you cite deals with the appropriate mechanism to address so called ‘‘orphan sites,’’ where no solvent party will take responsibility for cleanup. EPA estimates that these sites account for only 4% of the total

UST sites, meaning that 96% of sites are otherwise addressed under the UST system.

The UST program, like many other environmental programs, is based on a working relationship between the federal government and States. 32 states have been

granted authority to regulate USTs in lieu of the federal program.

All 50 States have entered into a cooperative agreement with EPA, incorporating

the federal legal requirements for establishing a State LUST program and establishing a channel for the State to receive LUST funds. States may use LUST program funds to hire staff for cleanup efforts, undertake emergency cleanup efforts,

and perform cleanup of abandoned UST sites.

In expending LUST funds for corrective action or enforcement, States must recover those costs from owners and operators of tanks. SWDA § 9003(h)(6). This ensures that LUST funds are reserved for cleaning up sites where no solvent party

liable for the cleanup can be found. The program is devised to prevent depletion of

the nationally funded LUST account where liability resides with private parties.

Under RCRA regulations, petroleum tank owners and operators must demonstrate they are financially capable of cleaning up any releases that may occur. 40

C.F.R. 280.93. This requirement guarantees ready access to funding to take corrective action and prevent or address environmental impacts in the event of a tank release or similar event.

Congress has not imposed on States any one method of implementing the financial responsibility requirement. SWDA § 9003(d). States have developed a wide

range of successful strategies to assist tank owners in meeting this requirement.

Some States require tank owners to have private insurance. Other States (as many

as 47 at one point) have established a State assurance fund, which assures that

cleanup will be fully funded. In some states, the assurance fund operates somewhat

like private insurance, providing tank owners with the financial backing necessary

to fund corrective action, sometimes with a deductible assessed to the tank owner

responsible for the tank release.

There is wide variation in how States manage, derive revenue for, oversee and

enforce their funds. Most typically, fund revenue is derived from tank fees assessed

on tank owners, a tax on fuels, or a combination of the two. Over the life of any

State fund, a State may make legislative and regulatory improvements to the operVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00533 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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ation of the fund. Many States are now engaged in program revisions. Some States

have decided to replace the assurance fund with some other mechanism that satisfies federal requirements and also meets the needs of the particular State.

State assurance funds have proved very useful in guaranteeing the availability of

resources to clean up sites and prevent or mitigate environmental harm. States

have widely different measures to finance corrective action and have recorded widely different experiences with those measures. Over the course of the UST program,

EPA and others have compared State programs and analyzed the overall success of

the UST program. States have reported a wide range of efforts, some very successful

and others wanting for improvement. EPA’s Office of Underground Storage Tanks

is in the process of surveying States to assess the experience of the States with assurance funds. EPA expects to conduct the survey in Spring 2005 with results reported in Fall 2005.

Some States routinely build sunset provisions into their programs, as a tool to ensure that the legislature or the implementing agency has the opportunity to review

a program and affirmatively decide whether to amend it, replace it or continue it.

Often the governing State body decides, upon sunset of an existing program, to replace it with a more effective program that has been tested with success in a different state or in a different State agency. Perhaps equally as often, a State determines that revisions are appropriate and then acts to make those revisions. A sunset provision may also reflect the deliberate decision by the State to operate a program temporarily, until a more effective approach can be developed and deployed.

State approaches vary and it is impossible to know, without studying the specific

State example and fully understanding the immediate circumstances in the State,

why a State may be sunsetting a program or what subsequent action it may take

regarding the program. It is equally impossible to extrapolate any governing principle from the fact alone that some State programs include a sunset provision.

THE HONORABLE JOHN D. DINGELL:

You have raised a number of questions regarding the status of permitting for new

refinery construction in Arizona. As a preliminary matter, we would offer the following observations regarding the timeline:

1. Maricopa Refining Company (MRC) was issued an ‘‘Installation Permit’’ for a

50,000 BPD refinery by the ADEQ on January 16, 1992.

2. MRC (under the name of Arizona Clean Fuels-ACF) continued development of its

refinery project in the early and mid-nineties. A significant financial investor

left the project. The project was re-scoped as to refinery capacity and feedstock.

The above permit was allowed to lapse and a new permit for a larger facility

was submitted to ADEQ on December 23, 1999.

3. The ADEQ hired an outside contractor to prepare the permit. This contractor

worked with ACF, ACF’s contractor and the ADEQ to perform the BACT reviews, etc. required by the Clean Air Act. In September 2002, the above parties

agreed that the information required to perform all of the permit reviews was

complete and the ADEQ confirmed this on September 4, 2002.

4. During the summer of 2003, the EPA and ADEQ declared an expansion of the

ozone non-attainment area in Maricopa County that included the site of the proposed refinery. ACF advised the ADEQ that it was considering alternate sites

for the refinery outside Maricopa County.

5. On October 30, 2003, the ADEQ issued a proposed Draft Air Permit to the company only, for the refinery based on the December 1999 application and the

Maricopa County site. This permit was not formally issued pending decision by

ACF on location.

6. In October 2003, ACF advised the ADEQ that the company was proposing a new

site for the refinery in Yuma County and the information required to revise the

permit for the new location was submitted during the November 2003 to March

2004 period. This information was consolidated into a ‘‘new permit application’’

document that was submitted to ADEQ on June 28, 2004. The refinery facility

was identical to that proposed in 1999 so the BACT analysis remained valid.

Revisions required for the new site consisted primarily of new air emission impact modeling

7. The ADEQ issued the Draft Air Permit on September 14, 2004. Public meetings

and hearings were held during October and November 2004 with the public notice period closing on January 10, 2005.

8. The permit is currently in review by the EPA with a formal response required

by March 18, 2005

As a general matter, the refining industry has successfully gone through a major

effort over the past decade to respond to changes in product fuel quality mandated

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by Clean Fuels requirements. During this time, the industry has met the growing

domestic demand for petroleum products by limited capacity expansions of existing

refineries, and by imports. No new refineries have been built in the U.S. in over

twenty years and product imports have reached over 2 million barrels per day. Economic growth in other countries has reduced the availability of products to U.S. consumers and increased competition for imports. Recent petroleum product prices have

reached and sustained record highs, driven by a growing shortfall in supply. There

are a number of reasons that this shortfall is a major concern for the U.S., most

of which have been documented in abundance recently in the press. It is perhaps

sufficient to state that shortfalls create economic hardship and slow the economy.

It is also a strategic issue for the U.S. to grow imports and increase the threat of

shortages and embargos.

One of the major solutions to this growing shortfall is to provide additional domestic refining capacity.

The problems and impediments preventing the growth and investment for new refining capacity in the U.S. are significant. Despite this, a new refinery project, the

Arizona Clean Fuels (ACF) project, has been proposed and will be completing engineering design consistent with the final Air Permit expected to be issued later this

year. This project will be used below to highlight specific costs and permitting requirements.

New Refinery Construction Considerations

There are four general areas of consideration that drive the feasibility and timing

of new refining projects:

1. Overall Project economics driven by product values, feedstock costs, and operating

costs,

2. Technology choices driven by crude slate, target product mix, legislated and target product quality requirements (and projected changes)—a lengthy process of

project development, engineering and construction,

3. Public Acceptance—significant reluctance in most areas of the U.S. to allow a new

refinery ‘‘in my back yard’’. Public communication and hearings processes are

lengthy and often confrontational,

4. Permitting processes for environmental permits, access permits, construction permits and zoning, etc.—driven by federal, state, and local legislation and zoning.

Refining Economics

Historical refining margins in the U.S. have, on average and in general, not been

adequate to support new refinery construction. Returns on Capital Employed have

been in the 5% to 7% range. Capacity expansions and modifications have been economic due to leverage on base infrastructure and facility investments.

Refinery sales transactions over the past ten years have, on average, been at

about 25% of the cost of new-build facilities. Condition of the plants, local markets,

and a company’s perspective on future cash flows drive the valuation process. These

facilities often require significant additional investment to ensure reliable operation

and compliance with regulatory requirements.

Refineries are by their nature very costly facilities. The proposed ACF refinery

which will produce about 150,000 barrels per day of gasoline, diesel, and jet fuel

products, will cost over $2 billion with an additional $500 million required for crude

oil and product pipelines. Rapidly growing demand for petroleum products in the

southwestern U.S. makes this project economic.

Technology Choices

The refining industry is not traditionally viewed as ‘‘high tech’’. However, the

need for high quality products and significant flexibility to process wide ranges of

crude oils, and the need to implement state-of-the-art environmental controls, has

led to the development of very sophisticated processes. There are several process

licensors and choices for each type of facility that a refiner needs. Also, due to the

high cost of each process facility, extensive studies and comparisons are required to

match a refiner’s products and processing objectives.

One area where the industry has led in major technology developments is in the

‘‘Best Available Control Technology’’ for emissions as defined in and required by the

Clean Air Act. Every refinery modification and new process unit has required the

development and application of specific control technology.

The development of the Arizona Clean Fuels project included an extensive analysis of emission sources and inclusion of the Best Available Control Technology.

This will be the first refinery where all sources will be addressed at the same time

in this manner.

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Public Acceptance

A major hurdle to the construction of a new oil refinery is to overcome the historic

public perceptions of oil refineries and to obtain public acceptance. Generally, the

public has a ‘‘not in my back yard’’ attitude to oil refineries. Certainly, refineries

of the past have, to some extent, earned this reaction from the public. Modern facilities have overcome the shortcomings of these previous refineries. The refining industry has developed and implemented emissions controls, operating practices, and

outreach programs to address the concerns of both government agencies and the

public. Certainly these programs and projects have increased costs, but have been

viewed by the industry as necessary.

Refineries have significant benefit to the public by generation of both direct and

indirect jobs and economic activity. Local communities can benefit significantly from

the operation of a refinery.

A new refinery, such as the Arizona Clean Fuels project, with the control and

monitoring required by current regulations will have minimal impact on the surrounding environment. The proposed locations in Yuma County, Arizona, are remote

from population concentrations. The project has gained support from local politicians and business leaders.

Permitting Processes

Certainly the most-often noted issue in new refinery construction is that of the

extensive permitting that is required. Generally, permits are required from multiple

agencies at the federal, state and local levels. Also permits are required not only

for the refinery but also for pipeline and utility services to and from the site. The

permitting processes are lengthy and costly. Project developers are also not in control of the pace and timing of permit review and issue and this uncertainty can lead

to project delays and cost escalation.

The most extensive and important permit is often the ‘‘Air Permit’’ that is usually

issued by the relevant state agency and outlines all requirements for compliance to

the Clean Air Act and New Source Performance Standards with emission levels, reporting and Best Available Control Technology requirements. The extensive scope

of this permit requires detailed air modeling, technical review of all facilities, and

agreement on the Best Available Control Technology. For example, the Arizona

Clean Fuels permit application was submitted to the Arizona Department of Environmental Quality on December 22, 1999, and a Draft Permit issued on October 10,

2003—a time period of almost four years. In response to the declaration of large portions of Maricopa County as a ‘‘Non-Attainment Zone’’ for federal Ozone standards

in the summer of 2003, the proposed refinery was moved to a site in Yuma County

and a revision to this Draft Permit is still pending. Following its proposal, reviews,

public hearings, and final permit drafting will take several months.

Fortunately, some other federal and state agencies review and comment on the

permit and project coincident with the preparation of the Air Permit. For example

the EPA, the U.S. Forest Service and the National Park Service will be consulted

by ADEQ. However, all of these agencies have seen increased demands on their time

and reviews don’t always meet the expected timeframes thereby extending the permitting schedule. In the western United States, for example, EPA Region IX encompasses the most dramatic growth seen anywhere in the country. However, large

projects that would support and provide jobs for that growing population can be held

up for years by the air permitting process alone. This Regional EPA office has a limited number of technical staff members who must review and approve the air permits for every project in California, Nevada, Arizona, Hawaii, and Guam. Similarly,

the National Park Service, Bureau of Land Management, and U.S. Forest Service

must compete for the services of only a few federal staff members who have the

technical expertise and responsibility to review all proposed major source air permits for projects across the entire western half of the country. This coupled with

the lack of regulated or recommended timing requirements for permit issue leads

to significant delays. Finally, although industry recognizes the statutory requirement for these agencies to ensure compliance with all regulations, there often appears to be more attention paid to the concerns of a small minority of constituents

rather than a balanced review.

Although the Air Permit is one of the most important permits for any project,

there are many other rigorous permits that must be obtained for both refinery and

pipeline projects from a multitude of agencies. For example:

• NEPA Compliance from a controlling agency such as the Bureau of Land Management

• Land Use Permits from controlling agencies and jurisdictions

• National Historic Preservation Act Compliance

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• Access permits from Bureau of Land Management, U.S. Army Corps of Engineers,

and State Land Commissions as well as private land owners.

• Military Agency approvals if military facilities involved.

A listing of permits required by the Arizona Clean Fuels refinery and pipeline

projects shows about thirty permits required excluding local zoning, access and construction permits. The majority of these permits are not initiated until the Air Permit is issued, since it finalizes the basis for the project. The timing of these can be

extensive and is estimated to be about eighteen to twenty-four months. Although design engineering can be done in parallel to these permitting activities, no significant

construction can begin until they are in place. Construction of a large refinery such

as ACF proposes takes about three years. This sequential process results in long

lead times for project development and completion.

Indisputably, the refining industry in the U.S. has not constructed a new grass

roots refinery for over twenty years. Refining economics have generally not supported new refinery costs and the industry has focused on expansions of existing refineries. Major investments in Clean Fuels production and regulatory programs

have also absorbed much of the industry capital. The total capital cost of an economically-sized facility of about 150,000 barrels per day is approaching $3 billion.

The complexity of the refining processes and technology choices results in lengthy

project development times which can be one to two years. Following this project definition, corporate strategic decisions, public reviews, local government discussions,

and multi-level permitting process typically take four to five years before a final ‘‘godecision’’ can be made. Engineering and construction on a significant project is a

major undertaking and takes three to four years. Total project time from inception

to startup is in the order of ten years.

The massive investments required for development of a new refinery project coupled with uncertainty on timing and final approval of permits, issues of public acceptance and market uncertainty in the future, have deterred the refining industry

from new projects.

Some efficiencies may be possible in the overall development timing. Internal corporate engineering and construction efficiencies may reduce overall project timing.

Reducing the number of agencies involved in major project permitting through the

‘‘lead agency’’ approach and ensuring internal accountability for permit issue timing

could reduce time and workload on all agencies involved.

CONSUMER ENERGY COUNCIL OF AMERICA

WASHINGTON, DC

March 22, 2005

The Honorable RALPH M. HALL

Chairman

House Energy and Air Quality Subcommittee

Energy and Commerce Committee

U.S. House of Representatives

Washington, DC 20515

DEAR MR. CHAIRMAN: The Consumer Energy Council of America (CECA) sincerely

appreciates the opportunity to comment on the Energy Policy Act of 2005 per your

letter of March 4, 2005.

The Consumer Energy Council of America develops, promotes, and communicates

practical solutions that ensure reliable, affordable, and environmentally responsible

energy for the nation’s consumers. CECA acts as a bridge among the energy industry, government, and the public interest sector. CECA works to build consensus on

energy policies with a focus on the bottom-line costs and benefits to consumers.

Founded in 1973, CECA is a leading national resource of information, analysis and

technical expertise on the social and economic impact of energy policies.

In November, 2003 CECA launched its Transmission Infrastructure Forum in

which over 60 transmission experts gathered to deliberate on transmission issues

of critical importance to consumers. The Transmission Infrastructure Forum concluded its consensus process in January, 2005 and issued a report, Keeping the

Power Flowing: Ensuring a Strong Transmission System to Support Consumer

Needs for Cost-Effectiveness, Security and Reliability. Included in that report are

several public policy recommendations that urge Congress, FERC, the states and

the electric industry to act so that consumers will be assured of a robust electric

power system to meet their demands in the years to come. The answers provided

here represent the consensus of the members of the CECA Forum and are not representations of the specific viewpoints of any individual participant in the CECA

Transmission Infrastructure Forum.

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Attached are the CECA Forum’s responses to your questions. I would be happy

to discuss any further issues with you.

Sincerely,

MARGARET A. WELSH

Senior Vice President

Attachments

RESPONSE TO QUESTIONS FROM CHAIRMAN RALPH M. HALL

Question 1. What specific policies should Congress include in the Energy Policy

Act of 2005 that are not in it now? Why?

Response: The Consumer Energy Council of America’s Transmission Infrastructure Forum (CECA Forum), whose recommendations were released in January 2005,

supports many of the provisions of Title XII of the Energy Policy Act of 2005. There

are a few issues which the CECA Forum addressed that are not included in the bill

and, as such, the CECA Forum recommends that the following policies be considered for inclusion in any final legislation:

Consumer Education: The CECA Forum recommends that the Federal Energy

Regulatory Commission (FERC), the U.S. Department of Energy (DOE), and state

decision makers should undertake efforts to educate policymakers and the public,

including local and municipal officials and electric consumers generally, about the

critical role that the transmission system plays in ensuring that consumers are supplied with reliable power at the lowest cost. Congress may want to consider adding

language to the Energy Policy Act of 2005 that grants additional funds to DOE and/

or FERC to accomplish this important goal. CECA’s research demonstrates that effective public participation early in the planning process enhances public acceptance

of infrastructure projects, resulting in positive decisions and often avoiding litigation

and delays that can lead to higher costs for consumers.

Consumer Input into the Regional Transmission Process: The CECA Forum

recommends that FERC, state utility regulators, and the entities responsible for

transmission planning should require that regional transmission planning processes

provide consumers with an opportunity to participate in the early stages and

throughout the transmission planning process so that their input will be most effective. Congress may want to consider adding language to the Energy Policy Act of

2005 that grants additional funds to states to ensure adequate funding of state consumer advocate offices to help accomplish this goal.

National Security: The CECA Forum recommends that the U.S. Department of

Homeland Security (DHS) and DOE, in conjunction with regional transmission planning entities, expedite and coordinate ongoing efforts to include national security or

physical and cyber-security considerations in their planning for transmission. Congress may want to consider adding language to the Energy Policy Act of 2005 that

provides funding to DHS and DOE to accomplish this goal.

National Power Survey: The CECA Forum recommends that DOE, in coordination with regional planning entities and other experts, undertake a periodic (e.g.

every 10 years) National Power Survey—similar to those conducted in the past—

to facilitate regional transmission planning processes that form the basis for developing future transmission plans and policies to meet consumers’ electricity needs.

Congress may want to consider revising the language in the Energy Policy Act of

2005 regarding DOE reporting requirements to include this objective and ensure

that funds are available to accomplish the Survey.

Question 2. What specific policies in the Energy Policy Act of 2005 should be deleted? Why?

Response: The CECA Forum recommends that Congress delete the language in

the Energy Policy Act of 2005 calling for ‘‘participant funding’’ as the mandated national cost allocation mechanism and further recommends that no other specific cost

allocation methodology be included in legislation.

The CECA Forum recommends that it is within the purview of FERC under its

existing authority and state utility regulators to establish clearly defined rules for

allocating costs in order to facilitate investment in both reliability upgrades and economic upgrades where the long term benefits to consumers have been demonstrated.

The CECA Forum believes that any cost allocation process established by FERC and

the states should 1.) Recognize regional differences; 2.) Take into account that beneficiaries change over time; and 3.) Ensure that existing consumers are not allocated

unreasonable costs where the industry structure is changing (i.e. a region is moving

from a regulated market to an organized market with a Regional Transmission Organization [RTO]).

Question 3. What specific policies should be modified in the Energy Policy Act of

2005? How should they be modified?

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Response: The CECA Forum supports language that provides the North American

Electric Reliability Council (NERC) or a similar independent ‘‘Electric Reliability

Organization’’ (ERO) the authority to set and enforce mandatory reliability standards, including the ability to impose monetary or other meaningful penalties for violations of such reliability criteria as stipulated in the Energy Policy Act of 2005.

However, the CECA Forum recommends Congress should go further in strengthening such reliability standards by providing NERC or the ERO with the authority

to publish via appropriate media all instances of non-compliance with mandatory reliability standards. The CECA Forum believes that publication of the violations and

the monetary penalties levied to the violator for such non-compliance will further

encourage compliance with the standards.

The CECA Forum believes that it is urgent that Congress establish a new ERO

and recommends that if Congress does not pass the Energy Policy Act of 2005 this

year, it is imperative that stand-alone legislation be passed that give NERC the authority or establishes the ERO with the requisite authority needed so that consumers can be assured the nation’s transmission system remains reliable.

The CECA Forum recommends that the Energy Policy Act of 2005 be amended

by modifying the language which assesses dues, fees, or other charges to end users

to fund the ERO. To ensure the independence and effectiveness of the ERO, the

CECA Forum recommends that the ERO be funded by all users of the bulk power

system on a fair and equitable basis. The CECA Forum further recommends that

the legislation should include language stipulating that the reasonableness of such

costs should be reviewed by FERC through a transparent process that involves public participation.

Question 4. The CECA report ‘‘Keeping the Power Flowing’’ makes numerous recommendations for FERC action. Of these, which recommendations do you believe require direction from Congress for FERC to achieve them?

Response: When the members of the CECA Forum developed the recommendations for FERC action, it was with the understanding that the recommended actions

could be accomplished with existing FERC authority under the Federal Power Act.

However, as noted below in response to Question #6, the CECA Forum recommends

that Congress clarify the role of FERC with regard to its jurisdiction on transmission planning and siting.

Question 5. Does CECA have any specific recommendations to improve transmission security? Please describe them.

Response: National security implications are a great concern for consumers. The

CECA Forum concluded that the transmission system is operating at the limits of

its technical abilities and, as such, may at times be less able to respond to a national security threat. The CECA Forum recognizes that robust regional transmission planning is critical to ensuring the nation’s security. Regional transmission

planning should take into account the need to invest in the system to ensure its

ability to be able to respond flexibly to changing circumstances and changing consumer demands on the system. For example, the CECA Forum recognizes the need

to invest in such areas as improving inventories of transformers and other critical

equipment (i.e. maintaining adequate inventories of transformer equipment at readily available locations), investment in improved system monitoring systems (i.e.

SCADA system elements), adding technologies to the transmission system that enable the grid to be operated reliably closer to its technical limits, and possibly by

increasing system transfer capability. Additionally, changes in practice with respect

to the availability of system data may be required to help protect against possible

cyber attack

Further, consumers are dependent on an array of interdependent infrastructure

services that rely on electric power delivery. If the transmission system fails due

to natural or terrorist attack, the infrastructure services consumers depend upon

would be compromised, possibly for extended periods of time. The CECA Forum

therefore believes that coordination of information among the various infrastructure

systems that rely on electricity is needed.

Question 6. Please describe the jurisdictional issues between Federal and state

regulators that must be resolved (mentioned in the CECA report), and how would

you propose they be resolved?

Response: The members of the CECA Transmission Infrastructure Forum found

that investment in the U.S. transmission system has been on an overall national

downward trend (though some regions and some individual companies are increasing their efforts to provide investment in the system). This overall downward trend

has resulted from a number of factors, including the uncertainty about what the

regulatory ‘‘rules of the road’’ will be for investors going forward.

Therefore, the CECA Forum recommends that: (1) FERC be given oversight authority to enforce reliability standards established and implemented by NERC or

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the new ERO either through comprehensive energy legislation or through standalone reliability legislation, as discussed in CECA’s answer to Question #3; (2) With

regard to transmission planning, regional planning processes should address both

reliability upgrades and economic upgrades where the long term benefits to consumers have been demonstrated; (3) In recognition of the unique characteristics of

each region of the nation, Congress should not mandate FERC to require the establishment of RTOs, but allow FERC the flexibility to work in cooperation with the

states to identify and implement the institutional structures appropriate to each region; (4); and Under its existing authority, FERC should work with state utility regulators to clearly define cost recovery and cost allocation policies at both the wholesale and retail level.

While there are different views among the CECA Forum’s members on the further

specifics of FERC’s role with regard to transmission planning and siting, there is

general agreement that a reduction in regulatory uncertainty would remove a critical barrier to transmission investment and would benefit consumers.

Question 7. What clear cost allocation and recovery policies would you propose?

Why? Are the policies for the Congress to enact or FERC to implement, or both?

Response: The CECA Forum does not believe Congress should mandate national

cost recovery or cost allocation policies. Rather, we recommend that cost recovery

mechanisms and methodologies be within the purview of FERC under its existing

authority and the states and, where appropriate, in cooperation with the RTOs. The

CECA Forum recommends that any cost recovery methodology employed or mandated by FERC or the states should be based on a durable regulatory framework

so investors in transmission are provided a reasonable opportunity to recover prudently incurred costs and expenditures associates with owning, operating and maintaining the transmission system. Such a framework is designed to produce clear

benefits for consumers, while ensuring just and reasonable rates for consumers. The

members of the CECA Transmission Infrastructure Forum spent a great deal of

time deliberating cost issues, but purposely did not formulate consensus around any

one specific cost recovery or cost allocation methodology in recognition of regional

market and industry structure differences.

Question 8. The Energy Policy Act of 2005 includes a provision for Federal backstop authority for transmission siting through FERC. Should this authority also include a requirement for FERC to consider new or advanced technologies?

Response: The CECA Forum does not take a position on amendments to Section

216 of the Federal Power Act to grant FERC backstop siting authority for siting

transmission facilities if the state fails to act or lacks authority. The CECA Forum

does recommend that the Energy Policy Act of 2005 include legislative language

that directs federal land management agencies to simplify, clarify and set strict time

limits for the siting process for transmission facilities on federal lands.

The CECA Forum recommends that Congress have as a key element of the Energy Policy Act of 2005 the long-term commitment to fund research, development,

demonstration and deployment (RDD&D) of advanced transmission and related

technologies. The CECA Forum’s recommendations with regard to transmission

RDD&D are not prescriptive as to whether such funding should be coupled with

other requirements in the legislation.

The CECA Forum further recommends that if Congress affects energy policy

through the use of tax credits and subsidies for the advancement of various technologies, it should make available such credits or subsides to all for-profit and notfor-profit entities on a comparable basis.

Question 9. The CECA report ‘‘Keeping the Power Flowing’’ recommends greater

public/private cooperation to develop and deploy advanced transmission technologies. Would you recommend a program similar to the Clean Air Coal Program

(Title IV) to promote these technologies?

Response: The CECA Forum examined the many transmission-related advanced

technologies that can reduce stress on the grid and enhance the performance of the

transmission system if deployed within the next decade. The study included a review of technologies that, if implemented, will enable increased system throughput,

allow operation of the system to perform closer to its technical limits, reduce load

at critical times, permit more reliable operation of aged equipment and reduce

transmission design and construction costs.

For the promise of advanced technologies to deliver benefits to consumers, the

CECA Forum recommends that Congress make a long term commitment to adequately fund RDD&D of advanced transmission and related technologies and to

work with the private sector on jointly funding these initiatives. The CECA Forum,

therefore, would support a strong provision in the Energy Policy Act of 2005 that

encourages RDD&D of transmission technologies and we would be privileged to

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work with you and your staff on the specific legislative language that addresses this

issue.

FOLLOW UP QUESTIONS FROM THE HONORABLE RALPH M. HALL TO JOHN KANE, NUCLEAR ENERGY INSTITUTE

Question 1. Can existing (or new) nuclear facilities also be used to cleanly make

hydrogen during off-peak hours? Is legislation needed to accomplish this? What is

needed?

Answer: Existing and new nuclear power facilities can be used to produce hydrogen through the well understood process of electrolysis. This can be accomplished

by using proven and commercially available technology. Such technology is currently

the subject of extensive research and development and is rapidly becoming more affordable and efficient. Moreover, nuclear plant operators have extensive experience

in handling and using large quantities of hydrogen because it is routinely used in

plant operations.

In essence, a company could initiate production by acquiring a commercial

electrolyzer, compressor, storage and dispenser system. This system would have a

very small footprint and could be supplemented by additional units if production requirements increased. The resultant product stream would be pure hydrogen and

pure oxygen. Unlike hydrogen produced from fossil fuels, hydrogen produced with

nuclear electricity does not need purification. Because electrolyzers function best

when run on a continuous basis, it is most efficient to do so. That being said, electricity requirements for hydrogen production on a limited scale are such that continuous operation would not pose a burden on electricity production. It should be noted,

however, that efforts to produce large quantities of hydrogen involves an inherent

trade-off in electricity production. Electricity diverted to hydrogen production will

not be available for grid applications and therefore decisions to do so need to be balanced against electricity price and demand.

Advanced Generation IV nuclear plants, once fielded, will be able to reach increased hydrogen production efficiencies. This will be possible through high temperature electrolysis or the thermo-chemical water splitting cycle. If the transition

to a hydrogen economy is realized, hydrogen specific production reactors may need

to be considered.

We believe that legislation will most likely be needed to facilitate a licensing process that will allow a company to collocate a full scale hydrogen cogeneration facility

at or near a nuclear plant. We would like to work with the Committee in providing

language to ensure that this type of facility can be effectively and efficiently developed.

Question 2. Some perceive a conflict of interest in the selection of Wackenhut Corporation to provide the adversary force for the force-on-force tests of nuclear power

plant security. Please explain why the integrity of those tests will not be undermined.

Answer: The nuclear industry strongly believes that the integrity of the force-onforce tests will not be undermined by the selection of Wackenhut Corporation to provide the adversarial force used in those tests. The constant oversight by the Nuclear

Regulatory Commission of the force-on-force exercises assures that this portion of

the security programs in place at nuclear power plants will accomplish its purpose—

to identify what steps, if any, nuclear power plant security forces can take to improve their ability to repel attackers. The NRC is responsible for reviewing the initial industry programs developed to meet the agency’s requirements, for overseeing

the day-to-day implementation of the program and for taking enforcement actions

as necessary to ensure all requirements are met.

Perhaps most importantly, the adversary force does not evaluate the exercise—

only the NRC does. In fact, the NRC assesses the performance of the adversary

force in addition to the plant’s defensive response. If the adversary forces do not

measure up to the NRC exacting standards, the agency will require Wackenhut to

replace individuals on the team.

The NRC also oversees the way that the adversary teams are selected and

trained. The NRC has established a new performance-based standard specifically for

this program. Regardless of whether the adversary forces themselves consist of personnel from Wackenhut or any other entity, they have to perform to standards set

by the NRC. The adversary team members will be thoroughly trained and must

meet physical fitness requirements and demonstrate weapons proficiency standards,

including expertise in the use of state-of-the-art MILES laser based weaponry.

Members of the two adversary teams must commit for at least two years, but serve

no more than three.

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The parties participating in this program for Wackenhut are U.S. citizens with

NRC safeguards clearances. All participants, both in program management and participants in the exercises, must sign non-disclosure agreements for which they are

subject to termination if they fail to comply. Employees recruited from nuclear

power plant sites will not participate in force-on-force exercises at their own plant.

Also, team leaders who may have assessed security at plants in previous positions

will not be team leaders for the force-on-force drills at those plants. Who can better

test the abilities or our defenses than the people who understand the capabilities

and tactics of the guard force? And, those personnel have vested interest in being

put to the test so they can fix any deficiency before it becomes real.

Our nation’s nuclear power plants are already the most secure commerciallyowned sites in our nation. Since the events of September 11th, we have increased

our security officer force from 5,000 to over 8,000 professionals. The already strong

security at our plants has been increased by additional physical barriers, upgraded

plant access and intruder detection technology, expanded perimeters and increased

background checks on our employees. The industry has invested over $1.2 billion in

these improvements. We recognize that a strong, NRC-supervised program to test

these defenses is in our best interests as well as the nation’s best interests.

Question 3. You testify that a limited number of loan guarantees would be needed

to build the next generation of nuclear plants. To what level would a new plant loan

need to be guaranteed? 100%? How many plants would need to be built before loan

guarantees would not be needed? Do you think concerns about loan defaults are

warranted? If not, why not? You stated that companies will need a combination of

financing tools and tax incentives. Why isn’t it possible to provide one generic solution industry-wide?

General Answer: Federal loan guarantees are one of the forms of federal investment stimulus judged necessary to encourage private sector investment in new nuclear power plants. It is not the only such investment stimulus necessary.

We believe that the private sector and the federal government must work together

to develop an integrated package of financial incentives to stimulate construction of

new nuclear power plants. Any such package must address a number of factors, including the licensing/regulatory risks; the investment risks; and the issues that

make it difficult for companies to undertake capital-intensive projects such as, earnings dilution during construction with no accretion to earnings during the first years

of operation and a lengthy period for recovery of capital investment under existing

tax depreciation rules.

Such a cooperative industry/government financing program is a necessary and appropriate investment in U.S. energy security.

It is also clear that no single set of financial incentives works equally well for all

companies because of differences in company-specific business attributes or differences in regulatory status. Specifically, some companies may build new nuclear

plants as unregulated merchant plants, where others may build them as regulated

rate-base projects. As a result, federal government policy to stimulate investment

in new nuclear power plants should provide a broad-based set of incentives, acceptable to the financial community, allowing companies to select the ones that best suit

their particular business conditions and requirements.

Construction of the first several new nuclear plants represents a unique set of

risks to the ‘‘first movers’’ that will build them. Given the delays and resulting cost

overruns experienced by some of the plants built and licensed in the 1980s and

1990s, industry and the financial community remain concerned about regulatory

and licensing risks. Specifically, these would be delays and increased costs during

construction or in achieving commercial operation caused by unnecessary delays at

NRC or unfounded court intervention in NRC decisions. To mitigate these risks and

ensure access to debt and equity capital, companies considering construction of the

first several new nuclear plants (and the investors providing the debt and equity

capital) will require financial incentives to achieve financing on reasonable terms.

The financing challenges apply largely to the first few plants in any series of new

nuclear reactors. As investors gain confidence that the licensing process operates as

intended and does not represent a source of unpredictable risk, follow-on plants can

be financed more conventionally, without the support necessary for the first few

projects.

The tools and techniques necessary to stimulate investment in the next nuclear

power plants in the United States will vary depending on project structure (single

entity or consortium), and on the regulatory environment in which the project is

built (rate-based or unregulated merchant plant). Companies able to develop new

nuclear power projects in regulated states may have additional flexibility and options that would facilitate financing and that are not available for unregulated, merchant projects.

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1 In this context, ‘‘non-recourse’’ simply means that creditors would not have access to the

sponsoring companies’ assets beyond the assets of the project itself. This is often referred to as

‘‘off balance sheet’’ financing.

Since there is no single, simple incentive that will stimulate construction of the

first in a series of new nuclear power plants in the United States, the federal government should authorize a limited set of incentives to stimulate investment in U.S.

energy security. The investment stimulus should be subject to an overall dollar cap,

and should allow companies the flexibility to use any combination of the following

financial incentives:

1. Production tax credits

2. Federal loan guarantees

3. Accelerated depreciation

4. Construction investment tax credits

A number of companies likely to build new nuclear power plants prefer the taxrelated incentives, and do not believe loan guarantees and other forms of federal

credit authority provide them the necessary financing benefit, or represent a feasible financing approach. On the other hand, some companies expect that loan guarantees will enable them to finance the first new nuclear plants as highly leveraged

(i.e., 80 percent debt), non-recourse projects.1 Since it is impossible to predict at this

time which companies will be ‘‘first movers,’’ it is important to preserve both approaches.

Specific Answers

Question. To what level would a new plant need to be guaranteed? 100%?

Answer: A 100% guarantee of total project cost would not be necessary. The nuclear industry believes that a federal loan guarantee for up to 80 percent of total

project cost (as provided for the Alaskan natural gas pipeline in the military construction bill by the 108th Congress) would be sufficient. This would reduce the cost

of debt financing, and reduce the first project’s weighted average cost of capital,

thereby improving the economic competitiveness of the first project. Absent the loan

guarantee, debt and equity investors would demand significantly higher returns on

their investment to compensate them for the licensing risks associated with the first

few new nuclear projects, which could compromise the project’s economic competitiveness.

As noted above, however, federal loan guarantees are the financial incentive typically preferred by companies operating in restructured, deregulated electricity markets. Companies operating in regulated markets tend to prefer other forms of federal investment stimulus, such as tax-related incentives.

Question. How many plants would need to be built before loan guarantees would

not be needed?

Answer: Financing challenges apply largely to the first plants in any series of new

nuclear reactors. As investors gain confidence that the licensing process operates as

intended and does not represent a source of unpredictable risk, follow-on plants can

be financed more conventionally, without the support necessary for the first few

projects. Industry expects that loan guarantees or other forms of federal investment

stimulus will be necessary for the first four to six units of any new nuclear reactor

design.

Question. Do you think concerns about loan defaults are warranted? If not, why

not?

Answer: Concerns about companies defaulting on loan guarantees are not warranted. The companies interested in building new nuclear power plants are not considering these investments in order to fail: They intend these projects to succeed,

and they will not proceed with a decision to move forward without being convinced

that they have a high level of confidence in cost and schedule to build. The federal

investment stimulus—whether a loan guarantee or tax-related incentives—is designed solely to offset the risks of building the first several new nuclear plants and

to protect companies from the risk of licensing delays or court challenges over which

they have no control.

Question You stated that companies will need a combination of financing tools and

tax incentives. Why isn’t it possible to provide one generic solution industry-wide?

Answer: The tools and techniques necessary to stimulate investment in the next

nuclear power plants in the United States will vary depending on project structure

(single entity or consortium), and on the regulatory environment in which the

project is built (rate-based or unregulated merchant plant).

Because of these variations, there is no single, simple incentive that will stimulate

construction of the next new nuclear power plants in the United States. The federal

government should, therefore, authorize a portfolio of incentives to stimulate investVerDate 11-MAY-2000 12:09 May 23, 2005 Jkt 000000 PO 00000 Frm 00543 Fmt 6601 Sfmt 6621 99906 HCOM1 PsN: HCOM1
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ment in U.S. energy security. The investment stimulus should be subject to an overall dollar cap, and should allow companies the flexibility to use a combination of

loan guarantees or tax-related investment incentives.

Question 4. You state that there are several provisions in the bill that would make

the nuclear fuel market more stable and competitive. Do you support the establishment of a strategic uranium reserve? Would you support requiring the Department

of Energy to sell limited quantities of its surplus uranium into the market?

Answer: The industry has always thought a strategic uranium reserve would be

a way to hedge against a disruption in supply that would create an emergency. The

industry needs predictable, stable markets with assurance that nuclear fuel would

be delivered when called upon. The strategic uranium reserve would only be used

if a reactor would fail to return from a refueling outage due to lack of fuel, which

was not as a result of the lack of planning and or payment/cost for nuclear fuel.

The Department of Energy should have the flexibility to sell quantities of uranium into the market. However, the sales cannot result in adverse impact on the

market. Therefore, the uranium sales provisions, as established in last year’s energy

bill should remain in this year’s bill. In addition, DOE should be required to establish clear, transparent procedures for sales into the market, including timing of the

sales.

Question 5. Do you recommend that Congress take action now with regard to the

radiation standard at Yucca Mountain? What action should be taken now, if any?

What do you mean by institutionalizing the repository radiation standard as a matter of policy that applies to all hazardous waste?

Answer: As you know, the Court of Appeals decision identified that its decision

could be addressed either by promulgating a new standard through the rulemaking

process or through legislation as was done for the Waste Isolation Pilot Project. We

would also note that 10,000 years is the standard for radiation regulation established by the International Atomic Energy Agency and, in the United States, by regulation for other hazardous materials. We understand that EPA is developing a revised draft regulation which may be available this summer. However, we are concerned that this process, including potential legal challenges, could be lengthy and

delay the program, at significant cost to ratepayers and taxpayers, with no resulting

benefit in appropriate protection of public health, safety and the environment.

Therefore, we believe it is important for the Congress to provide close oversight of

this process and consider legislative action to assure that our overall policy objectives are realized.

Question 6. Your fellow panelist, Mr. Nayak, characterizes the Price Anderson Act

as a ‘‘special taxpayer-backed insurance policy.’’ Are taxpayers required to subsidize

coverage for nuclear plants?

Answer: Taxpayers do not subsidize coverage for nuclear plants. Each nuclear

plant is required to maintain $300 million of direct insurance coverage for an ‘‘extraordinary nuclear occurrence’’ as determined by the Nuclear Regulatory Commission.

If an occurrence causes harm in excess of the $300 million, every plant in the current fleet is required to provide retroactive payments of up to $100.6 million. This

amounts to $10.46 billion of retrospective coverage for every occurrence. If the

amount of harm exceeds this total of $10.46 billion coverage, then Congress is required by the law to determine who would pay the additional amount.

Price-Anderson provides the largest amount of privately paid-for collective coverage of any industry in the nation or the world. It is no fault in nature and the

liability will be determined in one court, ensuring that payments will be received

in the most expeditious manner.

For further information, we would like to submit for the record the attached NEI

Fact Sheet, ‘‘Price-Anderson Act Provides Effective Nuclear Insurance at No Cost to

the Public.’’

Question 7. You mentioned the need for a ‘‘stable, predictable regulatory process.’’

In what ways do you currently believe it to be unpredictable? What could be done

to improve it?

Answer:

Regulation of Security

NRC imposed a new Design Basis Threat on power reactor licensees through the

issuance of an Order in April 2003. All licensees were in compliance with the Order

on or before the required implementation date of October 29, 2004. After issuing the

order, the NRC issued guidance to clarify the Order requirements in August of 2003.

NRC revised the guidance eight times through May of 2004. The process is not predictable when it takes a year and eight revisions of a guidance document to finally

understand what the original Order required.

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Also, the April Order stated that the new Design Basis Threat was the maximum

against which a private security force should be expected to protect, under current

law. However, the NRC staff gives a threat briefing to the Commissioners every six

months. One such briefing will occur in April and we understand consideration will

be given to increasing the adversary weaponry. It is not a predictable process when

the licensee is told that the threat is at the maximum and yet the agency is considering a change to the threat. The nuclear industry needs the DBT to remain stable

to allow time for training security officers on new strategies to respond to the new

DBT issued in April.

If the NRC believes the threat environment necessitates an increase in the DBT,

the federal government must take action to mitigate the threat. The Chairman of

the NRC is on record as saying nuclear plants have done just about all that can

be expected of the private sector. We agree. NRC should not assume they are the

only part of the Federal government that is providing protection of the nation’s nuclear power plants.

Another example of how the process is not predictable is the issuance of

advisories. NRC will use this tool to advise licensees of a particular interpretation

of a security requirement or recommend actions licensees should take in response

to a concern NRC may have in a specific area of security. Although they are just

advisories, the NRC has expectations that licensees will implement the recommendation or adopt the interpretation.

One solution to improving the situation is for NRC to engage the industry upfront before issuing new guidance or advisories. Early engagement provides the opportunity to understand the problem and identify unintended consequences.

Reactor Oversight Process and 10 CFR 50 Regulations

The NRC revised Reactor Oversight Process, which began in 2000, and uses a

risk-informed significance determination process to evaluate inspection findings.

The inspection process primarily assesses licensee compliance with the current regulations and technical specifications, which are still largely deterministic and not

risk-informed. Thus, there is a gap between the oversight process and the regulations that needs to be closed to achieve a common safety focus. This gap also leads

to inefficiencies in the ROP as it diverts both NRC and licensee resources to matters

of low safety significance.

The NRC must move beyond policy exhortations to codify realistic conservatism

based on insights from probabilistic risk assessments and 40 years of operating experience. The agency should accelerate its efforts to make the regulations themselves more safety-focused. A step forward was taken in November 2004 with the

issuance of 10 CFR 50.69, which will allow a more safety-focused scope of equipment

subject to the NRC’s special treatment requirements. The NRC needs to move forward with it revision to 10 CFR 50.46, which will improve the safety focus of NRC’s

technical requirements in the regulations.

New Plant Licensing

In the area of new plant licensing, the implementation process for the Part 52

process is still under development. As with any new process, there have been unexpected implementation problems. Until the complete Part 52 licensing process has

been exercised and adjustments made from the pilot activities, there will be continuing uncertainty over the viability of the new process.

Examples:

Adjustments and lessons learned from the first three design certifications are

being incorporated into a revision to 10 CFR Part 52. This revision has been delayed

until mid-2006 because the NRC is unable to reconcile public comments. The delay

introduces uncertainty into the process as companies begin to make decisions on

whether to proceed with the development of a combined construction permit and operating license application.

The Early Site Permit process is experiencing the same ‘‘teething’’ problems as the

design certification process did 10 years ago. Three pilot applications are under review. Implementation issues include:

• Substantial and unexpected variation in the estimated seismic ground motion estimates when exercising the new seismic ground motion methodology. This variability in the licensing and design bases will continue for the life of the plant.

This has major financial implications, raising a high potential for major modifications during the operating life of 40 or more years.

• Uncertainty over the degree of finality accorded to environmental issues in a combined licensing proceeding that were reviewed and resolved in an early site permit review. It is uncertain at this time whether a major portion of the work

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and review performed at the early site permit stage would have to be repeated

at the combined licensing stage.

• Emergency Preparedness development and the degree of finality accorded to

emergency preparedness in a combined licensing proceeding that were reviewed

and approved at the time of an early site permit. The industry and the NRC

are still working on this issue and are exploring alternative approaches.

Until these issues are resolved there is uncertainty over the financial value of

seeking an early site permit.

On the combined construction permit and operating license, the industry and the

NRC are working towards resolution of over 25 generic implementation issues ranging from format and content of an application to the implementation process for supporting a Commission determination on loading fuel. While progress is being made,

there will be continuing uncertainty over the combined licensing process until these

issues are resolved and the first new nuclear power plant are built and start generating electricity.

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