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20–471 PDF 2005

ENERGY DEMAND IN THE 21ST CENTURY: ARE

CONGRESS AND THE EXECUTIVE BRANCH

MEETING THE CHALLENGE?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 16, 2005

Serial No. 109–12

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, Professional Staff Member

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 16, 2005 ............................................................................ 1

Statement of:

Caruso, Guy, Administrator, Energy Information Administration, U.S.

Department of Energy .................................................................................. 43

Portney, Paul, president, Resources for the Future ...................................... 88

Wells, Jim, Director, Natural Resources and Environment, U.S. Government Accountability Office ........................................................................... 3

Letters, statements, etc., submitted for the record by:

Caruso, Guy, Administrator, Energy Information Administration, U.S.

Department of Energy, prepared statement of ........................................... 46

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, followup questions and responses ............................................. 109

Portney, Paul, president, Resources for the Future, prepared statement

of ..................................................................................................................... 92

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 86

Wells, Jim, Director, Natural Resources and Environment, U.S. Government Accountability Office, prepared statement of .................................... 6

(1)

ENERGY DEMAND IN THE 21ST CENTURY:

ARE CONGRESS AND THE EXECUTIVE

BRANCH MEETING THE CHALLENGE?

WEDNESDAY, MARCH 16, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2203, Rayburn House Office Building, Hon. Darrell Issa (chairman

of the subcommittee) presiding.

Present: Representatives Issa, Westmoreland, Watson, Higgins.

Staff present: Larry Brady, staff director; Sarah D’Orsie, full

committee deputy clerk; Dave Solan, Ph.D. and Steve Solan, professional staff members; Krista Boyd and Alexandra Teitz, minority

counsels; Richard Butcher, minority professional staff member; and

Jean Gosa, minority assistant clerk.

Mr. ISSA. Well, my script, of course, says ‘‘a quorum being

present.’’ We will waive a quorum being present. I will make an

opening statement, and presumably Ranking Member Watson will

be here by the time I get through.

I would like to apologize for being late. We are marking up for

the eighth time the same bankruptcy bill, and some people had

said it four times, five times, six times. But if you have not said

it eight times, there is no point in waiving.

Energy drives and ensures our Nation’s security. It determines

our quality of life. The current volatility in fuel prices and supplies

has raised real questions as to whether the current energy policy

framework has failed the U.S. consumers.

U.S. oil demand is soaring, as is Chinese oil demand. Local domestic supplies are dwindling, forcing the United States to rely 60

percent on imported oil.

U.S. energy demand continues to increase. The U.S. Department

of Energy has projected the total energy consumption from 2003 to

2025 will increase by 36 percent. Petroleum demand will increase

by 39 percent, and national gas demand will increase by 40 percent. Overall, energy consumption will increase by more than 45

percent.

Growing U.S. energy demand must be viewed in the context of

international demand for energy. The United States is now competing for a world commodity that will see dramatically increased

rates of demand; demand from China and India will continue to

exert pressure in the world’s energy markets.

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World demand for crude oil typically grows annually at about 1

million barrels a day. In 2004, it grew 2.7 million barrels a day.

This begins to approach the total world production capacity. Electricity demand in the developing world is also increasing rapidly.

In 2003, Chinese electricity consumption increased by 15.3 percent.

How the United States meets its growing demand and ensures

its domestic supply of energy will require a full range of energy resources from proven sources like oil, coal, natural gas and nuclear

to more renewables and development of new technologies like the

recent hydrogen incentives.

This hearing today is intended to focus on the key issues confronting the United States. The subcommittee will attempt to determine whether Congress is asking the right questions, and

whether the Federal Government’s agencies are taking the right

actions to meet this growing demand, and to ensure our domestic

supplies.

How does the domestic supply situation and the increasing international demand for energy effect the United States? How can the

United States continue to meet its domestic demand for energy,

while ensuring the future reliability, affordability, and sustainability of the energy supply?

What factors contribute to the current volatility in the fuel

prices? Are Federal Government agencies taking the right actions

to meet the U.S. requirement in the 21st century? What issues or

policies should Congress be looking at, as a way of meeting the energy challenge in the future?

We look forward to hearing from our three witnesses today, as

this is the first hearing on these important issues. I am still not

seeing the ranking member. I would be pleased to introduce Mr.

Jim Wells, Director of Natural Resources and Environment at the

U.S. Government Accountability Office. I have said ‘‘GAO’’ for so

many years that saying it the long way is always difficult.

He has over 35 years of Government-related experience in energy, natural resources, and environmental issues. Thank you for

being here today, Mr. Wells.

Also with us is Mr. Guy Caruso, Administrator of the Energy Information Administration at the U.S. Department of Energy. Mr.

Caruso has over 30 years of energy experience, with particular emphasis on issues related to energy markets, policy, and security.

Thank you for being here today, Mr. Caruso.

Dr. Paul Portney is president of Resources for the Future, an

independent research and education organization, and I assume

this is a think tank, specializing in natural resources and the environment. Thank you for being here, Dr. Portney.

We are now in that unique position that I am delighted to see

you, but we have to be patient.

Counsel advises that we can go forward. If each of you would

raise your right hand for the oath. Also, anyone else who expects

to advise or potentially speak, would you also rise to take the oath.

[Witnesses sworn.]

Mr. ISSA. The witnesses have all affirmed to the oath. As a result, Mr. Wells, you are first up, and I look forward to hearing your

testimony.

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STATEMENT OF JIM WELLS, DIRECTOR, NATURAL RESOURCES

AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY

OFFICE

Mr. WELLS. Thank you, Mr. Chairman, and ‘‘GAO’’ works. I will

know when to respond.

We are pleased to be here today. It is an understatement to say

that energy is important. To say it is critical, and we cannot live

without it is perhaps more accurate. It is almost a daunting challenge, Mr. Chairman, to sit and talk energy to someone who lives

in California, because you know what it means to you, living in the

State of California, with some of the problems you have experienced.

Before I summarize our GAO work, I want to set the stage. The

United States has built a strong energy delivery system, and our

consumers have a standard of living, second to none. We drive the

car or the truck that we want. Maybe we do complain about high

gasoline prices. The lights almost always come on when we flip the

switch.

We have a vast pipeline and transmission infrastructure. Energy

markets are working, and energy is considered by many standards

to be reasonably cheap. Having said that, we did lose power for 50

million people in the 2003 blackout. The power was returned in 3

days to most people. The gasoline price volatility of today is certainly raising questions, and our financial markets are speculating

on where and how much the next barrel of oil will cost.

These events clearly are pointing to an energy system that is

showing signs of strain and instability. While we have a robust energy system today, the topic of your hearing, Mr. Chairman, can we

maintain it and can we meet the needs of the 21st century, is timely. I want to start my testimony and I want to finish with timely.

GAO is accepting the challenge to explain U.S. energy in 120 minutes. I know it is a challenge.

Mr. ISSA. Mr. Wells.

Mr. WELLS. Yes.

Mr. ISSA. Not only is it a challenge, since we have to vote in 15

minutes, you really do have 10 minutes. [Laughter.]

Mr. WELLS. OK; we are a Nation that accounts for 5 percent of

the world’s population, yet we consume 25 percent of the energy

used worldwide. In 2003, each man, woman, and child consumed

in energy the equivalent of 790 billion gallons of gasoline, or roughly 2,800 gallons per person. As EIA will testify to today, this demand is looking like it is going to increase another 25 or 30 percent, or even higher. I will let Guy talk to that.

To meet this consumption, we have old 20th century policy solutions in place. We have increased our production by increasing

drilling for oil and gas. We have increased output from our nuclear

power plants, and we have achieved small increases in traditional

renewable energy sources, such as wind power.

We have tried to use more fuel efficient cars and the fuels that

we put in them. However, supplying this energy is a joint effort of

mostly private companies, with some direct involvement by creating the VPA and TVA in delivering electricity. Our energy suppliers today are mostly multi-national corporations with worldwide

shareholders.

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Most of the fuel is sold at prices that are determined by competitive markets excluding, of course, the Enron deals that we learned

about. The Federal Government has intervened by providing billions of dollars in tax credits, tax incentives, direct subsidies, and

regulatory advice, supposedly to guide and steer the marketplace

for social good.

Despite these facts, Mr. Chairman, imports of fuel are rising at

alarming rates. Over the last 20 years, our net imports of energy

has more than doubled, reaching 32 percent of our total consumption.

Furthermore, gasoline, as you know, is rising above $2 a gallon.

Refinery capacity is clearly not keeping pace with the demand.

Electricity transmission constraints, which you are well aware in

California, have periodically limited the flow of electricity in parts

of the country. The international turmoil in the Middle East, Russia, and Venezuela, affects our energy security.

Looking into the future, there are daunting challenges that lie

ahead. As you hear today from EIA, the U.S. energy demand could

increase significantly over the next 20 years. While we must focus

our own domestic needs as a developed country today, we cannot

lose sight of the fact that energy is being demanded globally across

the world, especially in the developing countries, as you mentioned,

like China and India.

Clearly, we must all buy energy from this global market place.

We must all, in a sense, go to the same spigot. If world supplies

do not keep pace with the world demand, energy prices will continue to rise sharply.

So where does that leave us for today’s hearing? It is clear that

the reliable mainstay of the 20th century: cheap oil, gasoline, plentiful natural gas, and large amounts of electricity from coal, seems

less guaranteed in the 21st century.

Mr. ISSA. Mr. Wells, I have been advised that they want me to

run to the vote. I apologize for the nature of this. We will allow

you to continue. We will stop the clock. I will be back in about 15

to 25 minutes, depending on how fast they roll the next votes.

I appreciate your indulgence. You guys are pros. You have been

through our tendency to be anything but considerate to our guests.

So I appreciate that, and I will be back absolutely at a dead run,

as soon as the last vote is over.

Mr. WELLS. Thank you.

[Recess.]

Mr. ISSA. As promised, we are back within 15 minutes, and the

ranking member is on her way.

Mr. WELLS. Thank you, Mr. Chairman, and I will make this even

shorter. We offer, in our testimony to you today, three broad cutting observations to help frame the congressional efforts to develop

policies with the Federal Government. That was your charter to us.

First, we would encourage you regarding demand, the amount of

energy that needs to be supplied is not fate, but choice. Consumers

can play an important role, a bigger role than what they currently

play today, in using energy wisely, if they are given the choice, and

we help educate them on how to reduce future demand.

The second thought that we would like to suggest is that all fuel

sources share some form of problems, whether it be environmental

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or economic constraints. This fuel is too dirty, or that technology

costs too much to be competitive.

The future choices will require compromises and tradeoffs. Consequently, we will need to use all the sources that we have available to us, if we want to make ends meet, with some offsetting benefits and costs. The demand projections numbers are just so large,

it is going to be very difficult to meet that demand, unless all

sources are being considered.

The third cost-cutting issue that we would suggest be looked at,

with whatever Federal policies are chosen and with the political

will and the balance that needs to be achieved, is having the Federal Government take some leadership role, perhaps stronger than

it has today and in the past, and providing clear and consistent signals to the energy markets, and energy markets will be extremely

important.

Then the consumers and the suppliers and the investment community will know how to buy the new products that we are going

to need, and how to invest in that future infrastructure. If we need

power plants, how do they come up with the $400 million to put

in a new power plant? They will need some leadership from the

Federal Government to provide consistency to make that happen.

We will also need new technology. Clearly, there is no one magic

source out there that is going to get us there. But clearly, as we

look at research, looking at new technology, it will certainly help

us get over that hump.

In conclusion, I think I want to go back to what I said earlier

in my statement, that the old 20th century energy solutions may

not be able to carry us into the 21st century. What we have today

may not be good enough for tomorrow.

Energy is much more global and competitive than it was in the

old days. I said in the beginning of the hearing that your hearings,

Mr. Chairman, are very timely. The good thing is that we are

thinking about what to do now. We are not in a crisis.

It has been proven, over and over again, that we can make better

decisions when we are not in a crisis like we were back in the early

1970’s. To meet the 21st century challenge, the demand will be

that we need all energy sources that we have available to us. It is

clear what the American consumers have asked us to provide. They

want secure, affordable, reliable, and environmentally sound energy.

My written statement that we submitted for the record, as requested, offers a series of questions that would be available to you

that may assist this committee as it seeks answers in future hearings when you talk to the industry and when you talk to the Federal Government agencies and the players. I would be happy to answer any questions that you have; thank you.

[The prepared statement of Mr. Wells follows.]

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Mr. ISSA. Thank you, Mr. Wells, and your entire statement and

all of the other statements will be placed in the record. Mr. Caruso,

please?

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. CARUSO. Thank you, Mr. Chairman, it is a pleasure to be

here to present the Energy Information Administration’s outlook

for energy markets, both for the short and the medium term.

All of EIA’s outlooks are policy-neutral and rely on the existing

policy’s rules and regulations. So in a way, what I am going to be

sharing with you today is, this is where we see the United States

and global energy markets headed, if we stay on the path we are

on.

I know that is the purpose of your subcommittee and your committee, to look at whether or not there are ways to change this

path and what are the correct paths. I certainly applaud your interest in that.

As we sit here this afternoon, the price of crude oil on the New York Mercantile Exchange exceeded $56 a barrel. How did we get

to this point? It is mainly because the fundamentals of the global

oil market are extremely tightly balanced.

As mentioned earlier, world demand grew at 2.7 million barrels

a day last year. We see it growing at more than 2 million barrels

a day this year and next. With this kind of demand growth, it is

stretching the ability to produce, store, refine, and transport oil to

the limit.

So there are no longer any cushions in the market to provide

pressure relief valves when there are unexpected changes in either

supply or demand. So small changes can lead to large price spikes.

We think our short-term outlook reflects that fact. We are now projecting, on average, $49 crude this year, and not declining much

next year.

Over the longer term, we see very strong growth in United

States and global energy demand. In the United States, we have

about a third increase in our demand for energy projected to 2025,

and domestic supplies will not keep up with demand.

Therefore, our net import position will grow from 28 percent of

net imports of energy. This 28 percent will grow to 38 percent in

2025. That includes both oil and natural gas.

We are using energy more efficiently. We are getting more energy per unit of GDP. But clearly, we can do better in that, and

we expect that as we look out at the next 20 years, energy efficiency will continue and technology will improve. But clearly, there

is room for doing even more.

One of the issues with respect to changing our demand is that

an increasing share of our energy demand is in the transportation

sector, which is much less flexible than the industrial sector or

even the electric power sector.

That is why, when one looks at the outlook for petroleum over

the next 20 years, our import dependency will grow even more dramatically the total energy, going from 57 percent net import dependency in 2003 to almost 70 percent by 2025. That is because

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our demand for oil is projected to grow by 8 million barrels a day,

from about 201⁄2 million today to about 28 million barrels a day.

Our domestic supply has been and will continue to be at a flat

to declining path. Therefore, imports, and particularly those from

the Persian Gulf countries, will rise dramatically. Now this outlook

assumes that the high prices of oil that we are experiencing today

and have been over the last year will actually come down to $25

to $30 in real terms.

Nevertheless, we recognize the great uncertainty with that referenced assumption. We have done several cases where we have assumed higher prices than those that are in our long-term outlook,

which was published in February. As I mentioned, transportation

will account for about 70 percent of that petroleum demand over

the next 20 years.

The other area within our energy economy that reflects this increasing dependence on imports is natural gas. We expect the demand for natural gas to grow from about 22 trillion cubic feet last

year to about 31 trillion cubic feet in 2025.

Once again, domestic supply will not grow nearly enough to meet

that kind of a demand growth. So we will be relying on imports of

gas, not only from Canada, which is our main supplier today, but

increasingly on liquified natural gas [LNG], which will be coming

from as far afield as Katar and Russia, as well as our traditional

suppliers of Algeria, Trinidad, and Tobago.

So natural gas imports, as a share of total supply, will go from

15 percent to about 28 percent. So, again, that same pattern that

we have seen in oil will be replicated in natural gas, if our projections are accurate.

On the global market, the most rapid growth will be for developing countries. As has already been mentioned, China and India are

growing very strongly. Last year, China grew at almost 20 percent,

in terms of its oil demand. India is growing, as well.

We think those countries will lead to growth in global energy demand over the next 20 years; not only for oil, but for natural gas,

as they attempt to use more gas in electric power generation. Of

course, coal will still dominate the energy economies of China and

India, because they have indigenous supplies, and they use it to

generate much of their electricity.

When one looks at this kind of demand for oil that we are projecting, 120 million barrels a day in our global outlook, we are

often asked, will resources be sufficient to meet that kind of demand? I think the answer is, yes, the resources are there; but it

represents a significant investment challenge for not only international oil companies, but national oil companies; and whether or

not the proper investment incentives and the governance would be

there from these countries, as I have I mentioned.

Clearly, we do recognize that prices of both oil and natural gas

have been volatile in recent years. We expect that volatility to continue, because of the tightness in the fundamentals of supply and

demand.

Although we do not project volatility in our models, clearly, what

we do project is the tightness in the infrastructure to produce and

refine oil, and to produce and consume natural gas. Given that

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tightness, clearly, the expectations are that the volatility will be

with us.

In conclusion, the economic growth that we have seen will lead

to even higher energy demand. Fossil fuels are expected to remain

the dominant sources of energy. Therefore, the United States,

China, and India will become increasingly dependent on imports of

both oil and natural gas.

So the questions that you have asked, I think, are the right ones.

Clearly, as your hearings proceed, we would be pleased to provide

any additional information that you may find useful. Mr. Chairman

and members of the committee, thank you very much.

[The prepared statement of Mr. Caruso follows:]

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Mr. ISSA. Thank you, Mr. Caruso; we have been joined by Mr.

Brian Higgins of New York and the ranking member, Diane Watson of California. Diane, do you want to do an opening statement

now, or do the final testimony and then do your opening statement

and questions?

Ms. WATSON. Well, it is going to be short, so I will just do it now.

Thank you so much, Mr. Chairman. I am sorry I was late. I was

taking care of a little business on the floor.

Mr. ISSA. And very well, I am sure.

Ms. WATSON. I appreciate your help. This is the beginning of several days of hearings on the energy policy, and I am sure that was

stated by our Chair.

Energy is almost like food and water in the American lifestyle.

It keeps us warm in the winter. It gets us to and from work. It

cooks our meals and it lights our way. We use it to record the

memories of our children, to play our music, and to entertain us.

In short, we have a desperate need for it.

It has become one of those commodities that we almost take for

granted. Yet, we should not take it for granted, for many reasons.

The generation and the delivery of energy is a serious challenge;

a challenge of engineering, a challenge of planning, and even a

challenge that evokes the most serious aspects of our foreign policy.

Energy costs represent a large and growing household expense to

all Americans, and energy is a key factor in the environmental

challenges we face in modern America. These issues are important

to the American people, and when they stare at the gas pump,

amazed at the price of gasoline, that hits people in their pocketbooks.

When their lights go out, because of deferred maintenance or

even market abuses, our constituents are deeply and rightfully unhappy. When they learn that the money that they send overseas

for energy imports is popping up in some despotic regimes, believe

me, Americans care. When they learn that the sea level is rising

and the water supplies are threatened, people then become very,

very worried.

This was really brought home to the people in the State of California a few years ago, when big energy companies were allowed

to run amuck. By now, many of you have heard the tape recordings

of the Enron power traders laughing at how they were taking advantage of the elderly in California.

Well, it is not just Enron, and it was not just the elderly. We still

have not put all the pieces back together, and California may never

be compensated for the billions of dollars in overcharges that we

suffered. But we must try to make things right and make sure that

it never happens again.

These issues are important to the American people. They are important to Californians. They expect us to find solutions to them,

and that is our job. I am glad that Chairman Issa has convened

a hearing to help us do just that.

In the past, we have seen an ideological approach to energy that

has resulted in a stalemate. It produced a bill that did not address

our Nation’s challenges, but just gave away new and larger subsidies to the big energy companies.

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So in opposing this approach, and fortunately, the Senate refused

to pass it, I hope we can together find new approaches. In this Congress, we have a chance to start again. We can build a bi-partisan

consensus on energy policy, and steer our country through the challenges that we all face. We know it can be done.

The National Commission on Energy Policy brought together

business, labor, Republicans, Democrats, and developed an approach that they agreed could work. We can do the same, and I

truly hope we decide to do so. Again, Mr. Chairman, thank you for

this opportunity.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. ISSA. Thank you, Ms. Watson.

Brian, is it all right to have yours just put in the record? OK,

it will be placed in the record, and I appreciate that.

Dr. Portney, I appreciate your patience. We look forward to hearing your testimony, also. Again, your full statement will be put in

the record. So summarize as best as you would like to.

STATEMENT OF PAUL PORTNEY, PRESIDENT, RESOURCES

FOR THE FUTURE

Mr. PORTNEY. Terrific, I will try to be as admirably brief as my

co-panelists have been here. They have set a real example for me.

First of all, I appreciate you and your fellow subcommittee members having me here today. I want to commend you all for holding

hearings sort of on more general questions of whether Congress is

asking the right questions and focused on the right issues in the

energy debate.

Most of the time, in my time in Washington, when I have testified, it is over a particular piece of legislation. It is not often when

I have had the opportunity to come up and sort of speak to a bigger

picture issue. I commend you for asking a more generic set of questions here than views on a particular piece of legislation.

I want to make clear, as I did in my prepared testimony, that

my comments today are my own and should not be construed as

the views of Resources for Future. I will say also what an honor

it is to testify on such a distinguished panel with Jim Wells and

Guy Caruso.

You have asked all of us a pretty big set of questions here. Is

Congress focused on the right issues? Is the executive branch taking the right set of actions?

There are a lot of ways one could attack this; probably as many

ways as there are energy forms. I have chosen to focus on three

issues, and I will confine my remarks today to the three issues that

I have talked about, the first of which has to do with U.S. oil consumption. Both Jim and Guy Caruso have spoken to this.

Let me be even more sparing than they have been in terms of

statistics. But I want to remind you that imports of oil in the

United States now account for nearly 60 percent of total consumption.

We are sending $600 million each day to other countries in oil

payments. That runs to about $200 billion a year in an annual

total; 20 percent of which goes directly to the Persian Gulf, where

at least some governments bear the United States ill will.

That $200 billion is a lot of money. You all remember former

Senator Dirkson saying, ‘‘A billion here, a billion there; pretty soon

you are talking about real money.’’ Well, this is $10 billion here,

$10 billion there. That is $200 billion total, and that is a significant

outflow of dollars from the United States.

That $200 billion per year, at an annual rate, is about a third

of the trade deficit; and a trade deficit of the size that we have

now, of course, puts downward pressure on the dollar. It makes imports more expensive, and it could force interest rates up dramatically, if the foreign governments that have all of these dollars decide not to reinvest them in U.S. securities. So it is a significant

economic problem.

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I am not given to alarmist statements related to energy and the

environment, but this is just simply a problem that we have to deal

with. There is no question about that.

In addition to the amount of money that is flowing out of the

United States because of oil imports, our overall level of oil consumption makes us particularly susceptible to oil price shocks. As

I note in my prepared remarks, each of the last four recessions

have been preceded by a run-up in oil prices.

While it would be too simplistic to say that was the only cause

of the recession, there is no question about the fact that run-ups

in oil prices act as taxes, slow down the rate of economic activity,

and do not make recessions any better. So we need to pay attention

to our oil consumption for that reason.

Another reason we need to pay attention to oil consumption is

that every gallon of gasoline burned releases carbon dioxide into

the atmosphere. Again, I will emphasize that I do not consider myself a Chicken Little on environmental issues, but this climate

change problem is something that I think we have to continue to

pay attention to.

Part of dealing with this problem lies in the electric utility sector

and in the industrial sector. But part of it has to do with household

consumption of gasoline.

There are only two ways that I know of to reduce the amount of

gasoline that we are consuming. One is through better fuel efficiency in automobiles, as a result of Government mandates, such

as the CAFE program.

I have testified before Congress on a number of occasions about

CAFE, and I have said each time, and I will say again, that this

is one way that you can improve automotive fuel economy.

I do not think it is the best way. I think a better way to do it

is by increasing the Federal excise tax on gasoline or through a

carbon tax. But I understand that this is not the most politically

popular way to do this. Either through CAFE or through increases

in the price of gasoline, that creates an incentive for people to buy

smaller cars and pay more attention to how much they drive the

cars they have.

Through some combination of these things, or one or the other,

we just simply have to do something about this problem. I hope

that you and your colleagues here will begin to take this even more

seriously than you have in the past.

The second issue to which I want to speak has to do with natural

gas. As Guy Caruso mentioned, currently, we are importing about

15 percent of it. But it will not be long before that is 20 percent

and then 25 percent, and possibly even 30 percent.

Obviously, prices have risen because of the imbalance between

supply and demand. Congress has taken steps to facilitate the construction of a pipeline that would bring natural gas from Alaska to

the United States, although it still remains to be seen when or

whether that pipeline will be built.

But I think one of the important things that Congress needs to

pay attention to is the possibility that some number of years down

the line, and this is something that both Jim and Guy might want

to speak to, we will see a cartel of countries that produce natural

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gas that will not look unlike the OPEC cartel with which we deal

in the petroleum market now.

I do not know if they will be an organization of natural gas exporting countries or not. But the potential is certainly there, and

as Guy has indicated, we will begin to depend more and more for

our natural gas supplies on imports of liquids. If one looks at

where our natural gas supplies are located around the world, the

pattern looks suspiciously familiar to where petroleum is located.

If we are concerned about the sources of the petroleum that we

import, we ought to be concerned somewhere down the line that we

will be uncomfortably dependent on imports of natural gas, which

plays a critical role in chemical and other industrial production, as

well a very useful role in the United States in home heating and

for other purposes.

Congress ought to begin to think now about what we can do to

increase supplies in the United States and engage in conservation

measures that would dampen demand, so that we are not facing

two worldwide energy cartels that have the potential to squeeze us.

The third issue I will speak to is something that I think Congress probably pays some attention to. Frankly, it is much less sexy

than the problems associated with petroleum and natural gas. It

actually is an organizational issue.

When I talk to people, either in Washington or outside of Washington, about energy policy, people who follow it closely, they say,

well, we cannot understand why the Department of Energy does

not do more to solve the country’s energy problems.

What I try to point out to them is that the Department of Energy

has precious few levers to influence the types of fuels that we use,

the conditions under which these fuels are used, etc.

If one looks at the budget of the Department of Energy, it is

about $23 billion or $24 billion. By my calculations, about $20 billion of that, almost the whole enchilada so to speak, goes to weapons productions, waste clean-up associated with previous weapons

productions, or basic science, a lot of which does not have very

much to do with energy at all.

Who is it that does influence energy policy in the United States?

Well, it is the Nuclear Regulatory Commission, the Federal Energy

Regulatory Commission, the Minerals Management Service, the

National Highway Traffic Safety Administration that writes fuel

economy standards for light duty trucks, which comprise more than

half of the new vehicles sold. More than any other agency, of

course, the Environmental Protection Agency which, through

standards that pertain to power plants and refineries and fuel requirements, really is the agency that drives energy policy in the

United States.

That is fine, but we ought to pay attention to the fact that the

laws that empower the EPA, that have given us air quality benefits

and water quality benefits that are of no doubt great importance,

do not direct the Environmental Protection Agency in issuing these

standards to also pay attention to the impacts of these regulations

on supplies of fuels and regional balances or imbalances.

So at the very least, I think we need stronger coordination within

the executive branch of the activities of these five agencies and, inVerDate 11-MAY-2000 09:29 May 25, 2005 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 D:\DOCS\20471.TXT HGOVREF1 PsN: HGOVREF1
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deed, other Federal agencies, which have a huge impact on the energy that we use and the way we use it.

The final thing I will say is, by way of mentioning some odds and

ends here, from my standpoint, an ideal energy policy would be one

that would eliminate the subsidies to all energy forms, whether nuclear, renewable, fossil fuels, etc.

That would then also internalize all of the environmental

externalities, the adverse effects associated with pollution, not only

from fossil fuels, but from nuclear, because you have to deal with

spent waste and with renewables, because wind power has some

adverse effects on wildlife and visual dis-amenities, etc. That would

completely level the playing field and we could take it from there.

Now I was born at night, but not last night. So I know the

chances of that happening are fairly slim. But in a sense, that

would be an ideal energy policy, from my standpoint.

The other thing I would say is that because you and Congress

are struggling, not only with energy problems, but also with a

budget deficit and a trade deficit, an approach like that would help

on both counts, a carbon tax or something like that, and would

begin to produce on the order of, say, $75 billion a year in new revenues by the year 2020, depending on the level at which it was set.

That would not only create incentives to shift to cleaner fuels in

the United States, but it would reduce our dependence on imported

natural gas and on petroleum. It would create an incentive to move

toward the hydrogen economy that President Bush, I think, has

wisely committed some billions of dollars toward.

So as you think about the energy policy, you also ought to be

thinking about solutions to energy problems that might also help

us with the trade deficit and with the budget deficit. Because I

think there are solutions out there like that. With that, I will stop,

and thank you again for having me.

[The prepared statement of Mr. Portney follows:]

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Mr. ISSA. Thank you, Doctor; we have also now been joined by

the gentleman from Georgia, Mr. Westmoreland. If you would put

your opening statement into the record, and then you can summarize your opening statement and your questions as we go through.

With that, I would like to recognize the ranking member for the

first round of questions.

Ms. WATSON. I want to thank all the panelists. I think you have

described the issue quite well. I keep going back in my mind to climate change. We saw the effects of it in Los Angeles, where we had

a record rainfall. We almost broke the record, 33 inches. That is

more than we get in 6 years.

Our electricity went off. We had floods. We had potholes, and so

on. It all goes back to energy. So I want to ask the three of you,

and I think Dr. Portney has already touched on some of this. But

what do you think we can do about taking climate change into consideration and its relativity to energy sources, and our need for energy in the future?

I understand that now we are competing with the Chinese for oil.

Everyone is driving a car. When I first went there, they were on

bicycles or walking. So how are you relating the climate change to

the sources of fuel, and what can we do? I know that is a big question, but try your best.

Mr. CARUSO. Well, the one thing I can say about the greenhouse

gas emissions is, if you look out over the 20 year forecast that I

have presented the highlights of this afternoon, a significant

amount of the CO2 emissions over the next 20 years will be coming

from the developing Asian countries of China, India and elsewhere.

So because so much of their electricity is generated by coal,

whatever we choose to do on an international basis, because I do

not think we can look at this just from our own domestic perspective, we do need to bring in a broader array of countries to deal

with this.

So I think that is the thing that just jumps out at you, when you

look at the projections in our model; that there is so much growth

in greenhouse gas emissions coming from developing Asian countries, that we need to do this on as broad a collaborative basis as

possible.

Mr. WELLS. I think I would start and respond domestically to

pick up a little bit on what Paul was saying. We, as an audit agency, have an opportunity to look at the actions that are being taken

by Federal agencies. For instance, I will go to EPA. We have ongoing work and PASS work looking at, for instance, mercury emissions from the power plants.

What we are finding when we look at and ask questions about

how EPA is designing and coming up with their rulemaking, we

challenge some of their methodologies and some of their economic

analysis that are being used as being missing items.

One of the things that we tend to notice, it is not only in mercury

emissions, but we have noticed it in the gasoline marketplace,

where EPA has a responsibility to approve and grant the permission for localities to use special fuels.

What we are seeing is that the total analysis being done are

missing things that involve energy impacts. So our recommendation to much of the Federal Government would be to, when you

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make these rules, you need to consider, from a climate change

standpoint, all the factors and the consequences that are derived

from those factors. For gasoline, they were missing factors in terms

of the impact to the energy market, as well as mercury emissions.

Ms. WATSON. Thank you; Dr. Portney.

Mr. PORTNEY. Thank you very much; I guess, in my view, there

are three pieces to dealing with this climate change problem. One

is, as Guy Caruso said, I think we need to re-negotiate an international agreement that would eventually at least begin to bring

the developing countries in. Because as he pointed out, it will not

be too long before CO2 emissions from the developing world account

for more than half of the total, between developed countries and

developing countries.

I will also say though that I do think it makes sense for the

United States and the other developed countries to go first in beginning to reduce greenhouse gas emissions, since the stock of carbon dioxide in the atmosphere is mostly ours. I do not think it is

inappropriate that we take the first steps.

In terms of how we go about reducing greenhouse gas emissions,

I think there are two parts to this puzzle. One is to invest in new

technologies. The hydrogen initiative is one part of this, but I think

we need to invest more in energy efficiency and in renewables. Hydrogen, as I say, is an important component to that.

The third leg of the stool is the one that is politically more

unpalatable. But the way you get people to consume less carbonintensive fuels is to increase the price. That means electricity that

derives from coal. It means higher prices for petroleum and higher

prices for natural gas. I think we have to do that very, very gradually, and that will not be politically popular. I understand that.

But if we do that in such a way, through a carbon tax, for instance, that is at least spending off revenues and reducing the deficit and dampening the trade deficit, then I think people will understand that we are at least getting something else for that sacrifice,

in addition to investing in a better environment.

Ms. WATSON. If I have another minute, Mr. Chairman, global

warming is something that has been looked at most often. I think

that we have not really put enough research into looking at the impact.

We can see the net results, and we have to really change them.

You can comment on this statement I am making, or not. I think

what we really have to do is do much more in depth research as

to all the factors causing this and the results, and we have to

chance the demand, and I think you alluded to it.

That means educating our people, starting in school, on how to

conserve, and looking for alternative technologies and so on. Those

that are politically unpopular are the ones that we really need to

get on top of.

I am so sure that our Chair is going to look into it and have our

committee hold additional hearings. You have already started. I

want to commend you for that, because I see a really serious problem for the United States. But you did mention that we needed to

look globally and have an alliance as we tackle the climate

changes. I think that is the only way that our hearings are going

to be meaningful, if we end up doing that.

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So if you would like to comment, fine; but I wanted to make that

statement, Mr. Chair.

Mr. ISSA. Well, thank you, and in keeping with our bi-partisan

efforts that you and I, as Californians, are committed to, we will

be looking at those issues to the full extent of the committee’s jurisdiction.

I do very much believe that your points are valid; that we have

to take where we have come from to where we are going, and do

it to that next step. To that extent, I am not going to ask a round

of questions, yet. But I just want to put a little point into the

record, which I think sets the principle of where we have been and

where we are, and Ms. Watson says it very well, where we need

to go.

Since 1970, the U.S. aggregate emissions of the six pollutants

recognized in the Clean Air Act has been cut by 48 percent. At the

same time, the U.S. GDP increased by 164 percent.

Energy consumption increased by only 42 percent, meaning more

money per BTU, so to speak. We have increased fuel consumption,

as I said, by 42 percent. But vehicular travel has increased by 155

percent. If you think the Chinese are driving; boy, are we driving.

It is exactly that trend, that we have to do the good part of it;

cut emissions by another 48 percent. But we also have to do a

much better job of using our fuel per GDP dollar more wisely. With

your indulgence, to my ranking member, I now call on Vice Chair

Westmoreland, please, for 5 minutes.

Mr. WESTMORELAND. Thank you, Mr. Chairman, and I want to

thank you for having these hearings. When I was at home last

week and had a couple of Social Security meetings, all that people

wanted to talk about was the price of gasoline. So I think these are

very timely hearings.

Let me start out by asking you, I know that there are different

formulas of gasoline that burn in different parts of the country, due

to the Clean Air Act. Do any of you know how many types of reformulated gas are being used across the country today? Are they just

used during certain times of the year, in certain parts of the country? What is the total number of reformulated fuels that we actually have?

Mr. WELLS. Congressman, the Government Accountability Office

has some ongoing work looking at the status of reformulated fuels

in use in the country. We hope to have that worked out in several

months. But the numbers are in the ballpark of starting at a number around a dozen fuels that are special fuels.

If you were to look at the seasonality of the fuels, you get into

the neighborhood of a 30 range. I am talking about winter gasoline,

summer gasoline. If you were to talk in terms of the multiple

grades of octane, you are over 100.

The upcoming work that GAO will be publishing will address

how difficult it has been for the industry to deal with these special

formulations. It is not that the special formulations are bad. I

mean, they are being driven by the Clean Air Act rules and requirements. But they do have price consequences, and they have

cost and benefits, and that is in the ballpark range of what we are

seeing in the gasoline marketplace.

Mr. WESTMORELAND. Could I have a followup question, please?

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Mr. ISSA. Of course.

Mr. WESTMORELAND. Has there been a cost benefit analysis of

what it costs us to do this reformulating of gasoline, compared to

how clean it is actually making our air; and what is the end gain

on clean air? I mean, I think if I asked in this room who all wants

to have clean air, I think we would all raise our hands.

But I guess my question to the panel is, how clean is clean?

Where are we trying to go with this, and how much further do you

think that we are from being there? What price is it going to cost

us, and is it going to cause us to have to develop more formulas

of gas?

Mr. WELLS. The quality of the type of studies you are asking, do

they exist, are hard to find, particularly if you want to try to do

a cost/benefit and if you try to include health impacts.

We hope to have a compilation of everything that exists. I think

they will fall short of the answer that the American public is probably asking for. Perhaps some of the other panelists are aware of

some of these studies.

Mr. PORTNEY. If I could, very briefly, you have asked, I think, a

very interesting and important question. In other words, I will rephrase it as, how many different recipes for gasoline are there?

The reason we began to get a proliferation of recipes that makes

sense, is that we do not want to have one size fits all. In others

words, we needed a type of gasoline that was low in certain additives to deal with the Denver problem. So you do not necessarily

want to make everybody in the country use the same type of gasoline because you have a problem in one city.

But I do think that what has happened is, we have almost gotten

to the point where we have now designer blends for almost every

part of the country. The difficulty that it creates is that if a refinery that produces one of those designer blends goes down, you cannot easily ship gasoline from an adjacent city or State.

So while the basic motive of trying to tailor the gasoline to the

local conditions originally, I think, made sense, I think we have

probably gotten to a point now where it probably makes sense,

from an overall national standpoint, to have fewer blends, so that

if we have shortages in one area, we can ship gasoline from California or Nevada or something, and not be in a position where they

go, well, I am sorry, that is not the recipe we use here. It think

that is what you are driving at, and I think we have a problem on

that count now.

Mr. WESTMORELAND. I have just one further question, and this

will be my last one. I know that in some situations in Georgia, we

had some pipeline issues of getting a certain amount of gasoline in

the pipeline. They were actually having to lower it into tankers.

We were just putting a lot more trucks on the road than was necessary. If we had only been using one single formulation of gas, you

know, trying to save on the one hand was costing us dearly on the

other hand.

Mr. CARUSO. I have a couple comments. I agree with both of my

colleagues. Clearly, the infrastructure problem that we have in this

country, particularly on oil, is related to the point you have made.

That is, it has increased the inflexibility to deal with unexpected

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changes in supply or demand, which is exactly the point you are

making about the pipeline.

But one thing to remember is, Georgia, for example, has the lowest priced gasoline in the country and California has the highest.

Part of it is because of the different emission standards. Specifications in California were compared with Georgia. So that is another

very sensitive issue. I agree with Paul, we need to do something

to improve the flexibility to deal with unexpected changes. By there

would be, of course, a cost to it.

Mr. WESTMORELAND. Well, is there an answer to it? Do you all

have an answer of what that might be, that this committee could

look at, so we could start working toward something?

Mr. WELLS. I would suggest that there may be an issue to look

at the proliferation of these specials fuels; and where in the Federal Government, and perhaps at the Environmental Protection

level, that are granting approval for these special fuels, what type

of approval process they use; what criteria do they use; and are

they, in fact, factoring in the various infrastructure needs and consequences of approving these special fuels?

I mentioned 12, 30, 100 different fuels. If we continue to allow

approvals for these multiple fuels, we are talking about multiplying

the price impact and the infrastructure consequences of trying to

deliver those fuels.

So one needs to look at, you know, are we perhaps better off regionalizing some of these special blends, as opposed to allowing

every city in the country to design their own fuel?

The best example I can give is Kansas City. Right down the middle, you have a Missouri blend and you have a Kansas blend, and

it is the same city. A truck has to roll through the city to the other

side of the city to deliver. That is an inefficient way to deliver gasoline products.

Mr. ISSA. Thank you; Mr. Higgins, do you have any questions?

Mr. HIGGINS. Thank you, I am new to the committee and new to

Congress. But obviously, I have a strong interest in energy issues,

particularly coming from New York State.

One of the problems I think we have in New York State is particularly high energy costs, which undermines our economic development efforts, particularly in a globalized economy.

My understanding was that deregulation of energy was to provide more competition, which would result in a cost-cutting stimulus. But in New York State, our problem is, I believe, a situation

where our demand is approximately 31,000 megawatts a day and

the supply is about 35,000 megawatts on any given day.

I think this creates a situation where there is not enough supply

to create the cost cutting stimulus that should come from competition. As you may know, the price for electricity each day is determined by this reverse auction type of scheme, which is administered by the independent system operator.

So in trying to address the Nation’s energy demand moving forward, and particularly with respect to New York State, can you

offer any insight as to the particular problems in New York State,

beyond which I have described, relative to creating the cost cutting

influence that should come from competition?

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Ms. WELLS. Let me start. The decision you are talking about was

the decision the country made to restructure the electricity industry, and to restructure it in the wholesale marketplace to achieve

benefits that hopefully would be derived from lower prices from the

electricity, by bringing in private marketeer to deliver energy and

take energy out of the realm of being delivered locally, but across

the Nation.

The situation we are now in is, unfortunately, we are sort of halfway into it. There is sort of a hybrid that exists. Many of the States

went for restructuring and worked, in terms of starting that process. Some of the States chose not to start with restructuring, and

have continued to deliver electricity the old way.

So I think FERC has its hands full right now, trying to oversee

a marketplace that we are sort of in the middle of this design to

go for restructuring electricity. So the verdict is still out, in terms

of the benefits and costs and what can be derived from a true restructured marketplace.

I think this gets back to what we are talking about, in terms of

where we need to be in the future, in terms of a partnership.

Truly, it is going to take more than FERC. It is going to take

more than the country and the Federal Government saying, we are

going to restructure, because we have to bring in the local communities and the individual States, and we have to figure out a way

to make delivery of electricity in the best efficient possible way.

We are just not there, yet. I think the country is struggling a little bit in the electricity delivery marketplace.

Mr. HIGGINS. Could I ask one more question, then? This is more

localized to the western New York area. There are two hydro-electric plants in New York State, which produce about 10 percent of

the State’s electricity supply.

With the Federal Energy Regulatory Commission, I am particularly concerned about the Niagara Power Project in western New

York. It generates about 2.4 million kilowatts of power.

The Federal Energy Regulatory Commission issued to the New

York Power Authority a license to own and operate that plant for

50 years in the year 1957. It was part of the Niagara Redevelopment Act, which was an act of Congress.

That license is set to expire to in 2007. That resource, hydro-electricity, could have a profound impact on the economy of western

New York, if the power was taken from the New York Power Authority and put into job-creating businesses in that area.

I am just wondering, what specifically do you understand the

role of the Federal Energy Regulatory Commission to be, relative

to the mandating of where that power is allocated?

Mr. WELLS. I am not familiar with that at all.

Mr. HIGGINS. OK, thanks.

Ms. WELLS. I am sorry.

Mr. HIGGINS. That is not a problem.

Mr. ISSA. OK, we have time for a second round; Mr. Westmoreland.

Mr. WESTMORELAND. I am going to ask all three of these at one

time. Getting back to the reformulated gas, what percentage of the

gas price would you say is caused by the different formulas, No. 1;

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and what effect on price do you think we could expect if we came

to a conclusion to regionalize or cut down on the otique gases.

Mr. WELLS. Otique.

Mr. WESTMORELAND. Yes, I mean, in the supply and demand

part of it, is there more demand for some of these different types

of gases in different cities than it is capable for these refineries to

try to refine and still keep the supply going to other parts that they

are responsible for supplying the fuel to?

Mr. ISSA. If I could help perhaps, with the gentleman’s approval,

with the refinery question a little bit more? I might suggest that

you simply look at California, where every air quality board is allowed to independently and has independently made decisions leading to the greatest single number of boutiques of similar cities. It

is just a suggestion to look at what I believe is described as the

worst case in any one State.

Mr. WESTMORELAND. Right.

Mr. WELLS. Mr. Congressman, I have some constraints in that

the information that is available to us, as we have ongoing study,

is not published, yet. It is not final. I can tell you that there is a

price differential that is being added because of these blends.

Our GAO report, when released, will talk to a range. That range

will be from single digit pennies to double digit pennies per gallon.

There is a consequence of doing special blends; and yes, there are

refinery capacity issues in terms of price impact, in terms of the

quantity that is being requested versus the quantity that can be

delivered on a consistent basis on any given day.

Therefore, we talk to the consumer and give an explanation of

the price volatility and why the pump is jumping 5 cents up 1 day,

10 cents up the next day, 5 cents down the next day. It does cause

price volatility. It is a problem that someone is going to need to

take a look at, in terms of, there are some efficiencies.

You know, I think that is the direction that the committee and

the Congress and the people that are regulating boutique fuels

need to be aware of when they approve future boutique fuels.

Mr. WESTMORELAND. How long have you been working on this report?

Mr. WELLS. The actual audit work is completed. The report draft

is being put together now. We are probably 30 days away from it

being publicly released. That work belongs to the clients in the

Congress that asked for that work. So that is why I am a little

cagey with the actual numbers.

Mr. ISSA. Is that the Energy and Commerce Committee?

Mr. WELLS. I believe it is over on the Senate side that we are

doing that work.

Mr. WESTMORELAND. But how long have you actually been working on this report?

Mr. WELLS. We have about 4 months worth of audit work done

in that area.

Mr. WESTMORELAND. OK, but this has been going on for a lot

longer than 4 months.

Mr. WELLS. Oh, absolutely.

Mr. WESTMORELAND. I mean, why did we just decide all of a sudden that it was time to do a report on it?

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Mr. WELLS. We work for the Congress, and the client came to us

and asked for an investigation audit of this issue, and we agreed

to accept that study. We are just about wrapping up that study and

hope to have it published within the next 30 to 45 days.

Mr. WESTMORELAND. Thank you.

Mr. ISSA. Thank you, and I will do some additional questions,

and then if you have any more, that would be just great.

Regarding the role of coal, here in the Congress, we speak in

flowery terms like, clean coal. Cleaning up coal does not sound as

good as clean coal. So I think we speak in less exact terms than

the reality that it is a dirty fuel, that we are making ever cleaner.

But at best, coal is only going to be as clean as, in a perfect world,

natural gas, I suppose, is today.

Having said that, and with the recognition that as we burn fossil

fuels, ultimately, we have a carbon monoxide and carbon dioxide

component coming out of any of our processes for burning fossil

fuels.

I would leave this to each of you, but I think particularly for Mr.

Caruso, where do you see nuclear/other zero emission fuels, you

know, like solar, wind, and we speak of those a lot, but they are

relatively small parts of the equation.

But where do you see nuclear, particularly in light of the prediction that there will not be a new nuclear facility coming on line,

at least until 2025? By that time, every single nuclear power plant

on line today, if it is still on line, will be on multiple extensions.

So how would you view nuclear, in the component of those fuels

that you mentioned that we had to do all of?

Mr. CARUSO. Yes, nuclear is about 20 percent of our electricity

generation, as we speak. We, in our long-term outlook, do not expect, or the model does not project, any new nuclear power plants

being added to the fleet. But at the same time, we assume all existing plants are relicensed and continue operating through the 2025

timeframe.

There will be some improvements in efficiency and upgrading, so

that the actual amount of electricity generated by nuclear power

would increase. It will lose market share under our projections,

mainly to natural gas. The coal, we expect, would stay about the

same, 50 or 51 percent.

The reason we are projecting no new nuclear power plants is that

the capital cost of building a new nuclear power plant is higher

than either combined cycled natural gas plants or pulverized coal.

So when the model searches out where the next new electric power

plant will be built and what fuel it will use, it chooses the less costly, in terms of capital costs, plant. That is how we come up with

this.

Our best estimate of what it would take to build a new nuclear

power plant, since we have not built one from scratch for more

than 30 years, is about $1,900 per kilowatt. Now coal and natural

gas can be built much cheaper than that. But, of course, there is

a fuel component to it. But still, both coal and natural gas, at this

time, the existing technologies are more efficient.

Now we have been criticized by the Nuclear Energy Institute and

nuclear vendors that our cost estimates are too high and that they

can do better.

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So what we have done is run two other cases in this year’s out- look. One is using a $1,450 capital cost; and the lower one is what

you would call the advanced technology case. Then we have taken

the vendor cost estimates from Westinghouse and others, which are

around $1,100.

If you use those assumptions, $1,450 or $1,100, you do get some

new nuclear power plants built in this country, particularly in the

period between 2015 and 2025. At $1,100, you get a substantial

amount of new nuclear power plants. So this is a matter of the economics and technology, in our view.

Mr. ISSA. Let me have one followup question here. It is one that

I do not expect you to be able to easily answer today; but if you

could followup, if that can be done without specific authorization.

If one were to take nuclear as a category, and the U.S. Government were to absorb all extraordinary liability questions and all extraordinary lawsuit questions in the citing; basically, we defend all

the claims that come, every time you want to build a nuclear plant,

and we take the extraordinary risk of insurance completely for zero

cost to the vendor, leaving the remainder of the costs there, what

would be the per kilowatt, from the industry, that they believe they

would deliver for?

I would like it, if possible, in two bases; one, with fuel prices in

the estimate, and then based on the fact that next generation nuclear can literally burn weapons, plutonium, which we have an excess of that we have been trying to get rid of, literally 10,000 years

worth of fuel that, at some point, we are not going to want to keep

sitting post-silo, and then at a zero cost.

If you could give us your best estimates of that, so that at least

when we are having these discussions, and I agree with you, Mr.

Caruso, they do not pencil out today, but taking out particularly

those extraordinary costs that come when someone says, I want to

build a nuclear versus alternate, where we would end up?

Then, as somebody who wants to see, if you will, the swords

turned into plow shears and the burning of plutonium, once and for

all, and getting rid of as much of the weapons stockpiles as we can,

that analysis, both of those are personally important to me, and I

would like to know the cost benefit on them.

With that, I do not want to monopolize the questions. Are there

any last rounds of questions?

[The information referred to follows:]

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Mr. WESTMORELAND. I do have a closing statement.

Mr. ISSA. OK, then with your indulgence, we will have the closing statement, please.

Mr. WESTMORELAND. Well, I would just like to thank you again,

Mr. Chairman, for doing this. I know I am a freshman, but I understand in the last two Congresses, there has been two or three

attempts to get an energy bill passed.

I think, from all the testimony today, it is quite evident that we

need an energy bill. It is something that we need to have as a road

map to where we have to go with our energy policy, and also be

able to put some of these guidelines in that we have talked about

today.

So I hope that this committee will encourage the Energy Committee to pass that along. Because I think that is something that

is very critical right now; not only to our economy, but to our national security, that we have a good energy policy in tact and on

the laws of this land. So that is all I really had to say, Mr. Chairman; thank you.

Mr. ISSA. With that, I would like to thank our panel for their testimony and obviously for your candid answers. I would also like to

thank the majority and minority staff, because without them, this

would not have happened. They have done a great deal of work

here for all of us.

Without objection, we will hold open the record for 2 weeks from

this date, so that anyone can make submissions, including from the

witnesses and from the members of the committee. If that will not

be sufficient for any questions, please let my staff know and we

will extend that date. With that, I thank you once again, and this

hearing is adjourned.

[Whereupon, at 3:50 p.m., the subcommittee was adjourned.]

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