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47–119—PDF 2007

S. HRG. 110–733

ENERGY EFFICIENCY: CAN TAX INCENTIVES

REDUCE CONSUMPTION?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES,

AND INFRASTRUCTURE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 24, 2007

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE

JEFF BINGAMAN, New Mexico, Chairman

KENT CONRAD, North Dakota

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

ORRIN G. HATCH, Utah

JIM BUNNING, Kentucky

TRENT LOTT, Mississippi

MIKE CRAPO, Idaho

(II)
C O N T E N T S

OPENING STATEMENT

Page

Bingaman, Hon. Jeff, a U.S. Senator from New Mexico, chairman, Subcommittee on Energy, Natural Resources, and Infrastructure, Committee

on Finance ............................................................................................................ 1

WITNESSES

Callahan, Kateri, president, Alliance to Save Energy, Washington, DC ............ 2

Thorn, Stuart, president, Southwire Company, Carrollton, GA .......................... 4

Casten, Sean, president, Recycled Energy Development, Westmont, IL ............ 6

Delurey, Dan, executive director, Demand Response and Advance Metering

Coalition, Washington, DC .................................................................................. 8

Edwards, Chris, director, tax policy studies, Cato Institute, Washington, DC .. 10

Smith, Doug, Ph.D., president, NanoPore, Albuquerque, NM ............................. 12

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bingaman, Hon. Jeff:

Opening statement ........................................................................................... 1

Callahan, Kateri:

Testimony .......................................................................................................... 2

Prepared statement .......................................................................................... 25

Casten, Sean:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 32

Delurey, Dan:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 37

Edwards, Chris:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 48

Smith, Doug, Ph.D.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 55

Thorn, Stuart:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 59

COMMUNICATIONS

American Council for an Energy-Efficient Economy (ACEEE) ............................ 71

CURRENT Group, LLC ........................................................................................... 77

Edison Electric Institute (EEI) ............................................................................... 81

Natural Resources Defense Council (NRDC) ......................................................... 87

(III)

(1)

ENERGY EFFICIENCY: CAN TAX INCENTIVES

REDUCE CONSUMPTION?

THURSDAY, MAY 24, 2007

U.S. SENATE, SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 2 p.m., in room

SD–215, Dirksen Senate Office Building, Hon. Jeff Bingaman

(chairman of the subcommittee) presiding.

Present: Senator Cantwell.

OPENING STATEMENT OF HON. JEFF BINGAMAN, A U.S. SENATOR FROM NEW MEXICO, CHAIRMAN, SUBCOMMITTEE ON

ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE,

COMMITTEE ON FINANCE

Senator BINGAMAN. Well, it is 2 o’clock. Why don’t we go ahead

and start? I am informed that Senator Thomas is not able to be

here at today’s hearing. There will be some others who come.

But we are going to have a little bit of a disjointed schedule because we have a vote scheduled at 2:15, and so about 2:20 I am

going to have to recess the hearing and go over and vote and come

back. So, we will have about a 10- or 15-minute recess at that time,

and maybe wind up with some other Senators here when we return. But let me go ahead and make a few comments and just start

and allow folks to testify.

This is a hearing of the Finance Committee Subcommittee on Energy, Natural Resources, and Infrastructure. We look forward to today’s testimony on the issue of energy efficiency.

One of the most achievable and important goals of energy policy

today is to improve the efficiency and productivity of our energy

use. This involves closely examining how we are using energy in

our industries, in our homes, the way we heat and cool buildings,

the appliances and lighting we use, and the technologies we employ

to maximize the benefit of the energy that we are using. I think

this is knowledge which I am sure all of our witnesses are extremely familiar with.

Let me just indicate that our main focus today is on the tax provisions that are currently in law, or that perhaps should be in law,

to incentivize more efficient use of energy. Specifically, let me mention some of those tax incentives. There’s an Energy Efficiency

Home Credit. This is section 45(l). It is for contractors who build

energy-efficient homes. It is scheduled to expire at the end of 2008.
2

There is an Energy-Efficient Appliance Credit, section 45(m), for

manufacturers of energy-efficient appliances. It is available for appliances manufactured in this calendar year, 2007.

There is a Commercial Builder Efficiency Credit, section 179(d),

for commercial builders who incorporate energy-saving technologies

into their commercial buildings. It will expire at the end of 2008.

There is a Non-Business Energy Property Credit, section 25(c),

for individuals who purchase exterior doors, windows, insulation,

heat pumps, furnaces, central air conditioners, water heaters, as

well as qualified manufactured housing. It will expire the end of

this year, 2007.

And there is a Residential Energy Efficiency Property Credit for

individuals who purchase solar water heaters, solar electricity

equipment, and fuel cell property.

I am hoping that part of the testimony today will be on how effective any of these provisions are, what we could be doing that

could be more effective, which of these provisions are ineffective,

and which need to be changed.

So our hope is that the Finance Committee will be able to put

together energy legislation, energy-related tax legislation, sometime in the near future, and we need to understand these issues

much better than we do today.

We have a great group of witnesses here. Let me just introduce

the entire group here, and then we will just call on you in the order

I introduce you.

Kateri Callahan is here, who is the president of the Alliance to

Save Energy, a great organization I used to be associated with here

in Washington, DC, and we thank her for being here. Stuart Thorn,

the president of Southwire Company, from Carrolton, GA, thank

you for being here. Sean Casten is president of Recycled Energy

Development in Westmont, IL; then we have Dan Delurey, who is

the executive director of the Demand Response and Advance Metering Coalition here in Washington. Chris Edwards, the director of

tax policy studies at the Cato Institute, thank you for being here.

And Doug Smith is the president of NanoPore in Albuquerque and

a friend of mine for many years.

So let me start with Kateri. Why don’t you go ahead and give us

your views? If you can give us about 5 minutes of the most important points we ought to understand, then we will include your entire statement in the record.

STATEMENT OF KATERI CALLAHAN, PRESIDENT,

ALLIANCE TO SAVE ENERGY, WASHINGTON, DC

Ms. CALLAHAN. Great. Thank you, Senator. I really appreciate

you having me here today, and we have appreciated, for many,

many years, your leadership at the Alliance to Save Energy.

We appreciate the opportunity to be here today to talk about how

the Federal tax code can be used to reduce energy waste in the

U.S. As you know, Senator, energy efficiency has proven over the

past 30 years to be our Nation’s greatest energy resource, and that

is thanks in large measure to effective public policies that include

tax incentives, standards, mandates, and effective building codes.

As a result of all of that, we now are using 40 percent less energy

than we otherwise would if we had not taken those steps. We
3

would need 40 percent more energy to power today’s economy than

we are currently using. So, a lot has been done, and we think that

there is still much, much more that can be done. If we use this effective tool kit of public policy, we can deliver more into the future.

Tax incentives are a critical element of comprehensive energy efficiency policy that we think is best effectuated if there are four

key elements including tax incentives.

The first element is to support research and development of new

energy efficiency technologies. Second is the tax incentives which

allow for early adoption in the marketplace and help to create markets for advanced products and technologies. Third is public education to spur widespread commercialization. And, finally, the

standards and codes that set the efficiency floor.

Tax incentives, we think, are the best mechanism for spurring

initial markets because they address the price premiums that are

typically attendant to new technology that enters the market at

very low volumes. Tax incentives also are an important hook for

educating the public about the benefits of energy efficiency.

As the committee considers these potential options, we think it

is very important to make sure that the incentives are in place long

enough for the technologies to become embedded or accepted in the

marketplace. They also need to be reserved for only the most advanced technologies and products and they need to keep pace with

a rapidly evolving and changing marketplace.

EPAct 2005 included a set of very important tax incentives, as

you mentioned, for efficient homes, commercial buildings, appliances, and vehicles. And while these incentives have the potential

to be market-transforming, they are not in place long enough, we

do not believe, to accomplish this goal.

So we think that they need more time to work and that, particularly in the buildings sector, that you are going to have to look at

multiple years in order to make the kind of market transformation

we would like to see.

The Alliance supports the tax provisions that are included in the

EXTEND Act, the Energy Efficiencies Act of 2007, which is cosponsored by you, Senators Snowe, Feinstein, and others.

The EXTEND Act seeks both to restore the time duration and

the monetary levels of those energy efficiency tax incentives that

were included when EPAct was originally approved by the Senate,

and then subsequently they were changed. It also, in some instances, seeks to improve and expand upon those incentives.

The potential savings, Senator, that would come from the EXTEND Act, we think, are very important and should not be overlooked. Over the period of time between 2006 and 2020, those incentives, which we believe will be modest in cost to the government, are projected to reduce U.S. natural gas use by an amount

equivalent to what is used by the States of California and New

York; it would reduce peak electric demand by an amount equivalent to what is generated by 52 300-megawatt plants; it would save

American businesses and consumers $93 billion in avoided energy

costs; it also would avoid CO2 emissions equivalent to taking about

142 million cars off the road for a year. So, it is a pretty large return, we think, for a relatively modest investment by the government.
4

Given the time constraints, I am only going to discuss the new

incentives in the EXTEND Act, not the extensions of EPAct incentives.

First, the greatest immediate potential for energy savings is to

improve our existing homes. The EXTEND Act would establish a

new performance-based credit for whole-home retrofits, from about

$800 up to $4,000 for a zero-energy-use home.

Because the new credit is going to require inspection and certification, there are also credits to build the infrastructure that will

assure that there are trained people and the infrastructure in place

to be able to provide those services.

The Alliance also supports a number of additional incentives that

are not included in the EXTEND Act. We support tax incentives for

super-efficient refrigerators, clothes washers, and dishwashers.

These were negotiated as part of the standards that are in your energy efficiency bill. We think that those standards will work best

in combination with these tax incentives for the manufacturers. We

also support negotiated tax incentives for the purchase of efficient

electric motors.

Second, we support an extension of the hybrid and advanced diesel vehicle credits that are in EPAct, as well as lifting the volume

cap that is now imposed on the manufacturers.

Third, we support a modified version of the 10-percent investment tax credit for combined heat and power systems that are

under 50 megawatts, and a credit, as I said, for the efficient motors.

So, in conclusion, the Alliance believes that the tax code is an important policy tool for driving energy efficiency in the U.S., and

when it is combined with these appliance standards, equipment

and vehicle standards, efficient building codes, and research and

development, that the result will be immediate assistance to Americans who are dealing right now with spiraling energy costs, an

ever less-secure energy future, and the dire environmental consequences that are stemming from our production and use of energy.

Thank you, Senator.

Senator BINGAMAN. Thank you very much. I appreciate your testimony.

[The prepared statement of Ms. Callahan appears in the appendix.]

Senator BINGAMAN. Mr. Thorn, go right ahead.

STATEMENT OF STUART THORN, PRESIDENT,

SOUTHWIRE COMPANY, CARROLLTON, GA

Mr. THORN. Mr. Chairman, I am Stuart Thorn. I am president

and CEO of Southwire Company, which is headquartered in Carrollton, GA. Incidentally, last night we just won Georgia Family

Business of the Year Award for the State.

Senator BINGAMAN. Congratulations.

Mr. THORN. Thank you. I am also a member of NEMA’s board

of governors. NEMA is the leading trade association in the United

States, advancing the interests of 430 electrical manufacturers of

a wide range of electro-industry products.
5

While a vast array of energy efficient technologies exists, their

use in the marketplace is limited, and tax incentives would help

the market transform to a wider use of these technologies.

We appreciate this opportunity to testify on energy efficiency tax

incentives that would complement S. 1321, the Energy Savings Act

of 2007, which was just recently favorably reported out of the Senate Committee on Energy and Natural Resources.

NEMA believes that legislative action on tax incentives in the

commercial, industrial, and utility sectors will materially enhance

our Nation’s productivities in years to come.

Specifically, we are urging the adoption of four recommendations.

Our first recommendation is that Congress enact extensions to the

commercial building tax deduction, EPAct 2005, section 1331, to

provide a reasonable time horizon for potential builders and investors to avail themselves of the incentives.

Our experience in working with the energy efficiency industry indicates that this current incentive has been instrumental in increasing the energy efficiency of lighting retrofits in existing buildings.

However, the current expiration date makes the effective periods

of such short duration that it effectively precludes the use of the

incentive for new buildings. Therefore, the duration of the provision

should be extended to 2014 so investments, especially in new buildings, will occur.

In addition, the provision is currently interpreted by IRS as unlikely to be used for retrofits other than lighting, or for government-owned buildings, or to encourage on-site renewable electric

generation, which were all intended by Congress in EPAct 2005.

Therefore, the policy provisions that would self-implement these

applications are needed.

Our second recommendation relates to motors used in the industrial sector. NEMA has worked with the American Council for an

Energy Efficient Economy, ACEEE, over recent months to develop

a new tax incentive proposal to accelerate adoption of premium, efficient electric motors.

Electric motors consume 65 to 70 percent of the electrical energy

used in commercial and industrial motor-driven systems like

pumps, fans, and compressors. The NEMA-ACEEE proposal provides for a tax credit for the purchase of qualified energy efficient

motors that meet or exceed certain energy efficiency standards. The

tax credit would expire on the effective date of proposed new Federal energy efficiency standards for these motors.

Our third recommendation relates to the electrical utility sector.

We are proposing to accelerate depreciation schedules for certain

more efficient electric transmission, distribution, and metering

equipment that would be placed in service by electric utilities. This

would promote transformation of the Nation’s electric grid into a

more energy-efficient and reliable platform.

The EPAct 2005 tax incentives included a tax life reduction for

transmission assets used at 69 kV or more from 20 to 15 years;

however, lower-voltage transmission and distribution were not addressed in EPAct 2005.

From the perspective of the utility customer, most outages are

related to distribution problems. We support broadening the same
6

tax life reduction for lower-voltage transmission as well as distribution assets which will increase system reliability, reduce congestion

charges, and increase energy efficiency in the grid.

Advanced metering is a technology that enables energy savings

and peak-load reduction. Since advanced metering is largely an information technology product, the tax life here should be reduced

from 20 to 5 years, which is more in line with the technology life.

Finally, our fourth recommendation relates to outdoor lighting.

The American Society of Heating, Refrigeration, and Air Conditioning Engineers’ (ASHRAE) 2001 standard referenced in EPAct

2005’s commercial buildings tax deduction did not include most

outdoor lighting applications.

However, ASHRAE’s more recent 2004 standard includes these

applications, making an outdoor lighting tax provision practical

and appropriate. The affected equipment would be required to

achieve lighting efficiency 30 percent better than ASHRAE 90.1,

2004, which would be an equivalent energy savings basis as the

EPAct 2005 provision of 50 percent better than ASHRAE 2001 for

indoor systems.

Thank you very much.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Mr. Thorn appears in the appendix.]

Senator BINGAMAN. Mr. Casten, why don’t you go ahead? Then,

after you finish your testimony, I am going to run and vote and we

will take a short recess.

Go ahead.

STATEMENT OF SEAN CASTEN, PRESIDENT,

RECYCLED ENERGY DEVELOPMENT, WESTMONT, IL

Mr. CASTEN. First, I would like to provide just a brief background on our company. Recycled Energy Development is dedicated

to the profitable reduction of greenhouse gas emissions. We accomplish that goal by recycling waste energy from industrial facilities

into high-value electric power.

Our projects are fuel-free. They save substantial money relative

to the grid. We have identified $350 billion worth of market opportunity, comprising roughly 200 gigawatts of power.

The triple win presented by those in terms of lower energy costs

for society, lower energy costs for hosts, and lower emissions, are

all largely blocked by State and Federal regulations that provide

differential incentives to the dirtiest and most expensive power

sources.

Let me provide a little bit of background on that. Our principals

at RED have 30 years of experience deploying these projects. Collectively, we have installed 250 projects, comprising about $2 billion worth of total capacity, a little over 10,000 megawatts of combined thermal and electric capacity. The least efficient of the

projects we have done was 60-percent efficient; the most efficient

were effectively infinite, since they recovered waste fuel.

The relevant point I would make there is that $2 billion is very

small relative to a $350 billion opportunity, and that took us 30

years. The reason for that delay is that those projects were all deployed in the face of substantial regulatory head winds.
7

A few examples. Many utilities have punitive interconnect and

stand-by rates that subsidize utilities at the expense of their customers. We provide capital guarantees to the individual who wants

to build an inefficient central plant connected by miles of transmission, but no equivalent protections for the person who wants to

build a more efficient plant closer to the load, which means that

the individual who wants to deploy the more efficient lower-cost

technology must put up all their capital at risk.

Perhaps most significantly, there are a host of societal benefits

that come from deploying efficient generation close to the load: deferred transmission and distribution, voltage stabilization, reliability, and emissions reduction, to name just a few.

Without exception, none of those values are associated with any

kind of financial payment. I am a firm believer, certainly in my

own business, that you get what you reward, and we are not rewarded for doing the right thing.

I do not raise these issues to suggest that the finance committee

has the wherewithal to address all these issues, but I think you

can take a few modest steps to level the playing field.

One, I would second Ms. Callahan’s suggestion that you support

the investment tax credit which has been introduced by Representatives Terry and Inslee in the House. I know that you sponsored

this legislation in the Senate a few sessions ago and it did not pass.

It passed the House and the Senate in 2005 but did not make

it through committee due to some inaccuracies in the scoring. It

has been re-scored and come in at a much more modest number

which is more accurate, and I would encourage you to adopt that

legislation in the Senate.

The second piece is to encourage efficient electricity and heat

production at biofuel facilities. I know you have had a passion for

efficiency throughout much of your career and an interest in

biofuels, and this is a chance to link the two. We currently, in this

country, have a massive construction of ethanol plants. In my business, we think of them as ‘‘thermal loads.’’

Those thermal loads present a unique opportunity to install very

high-efficiency power plants at every one of those facilities, but

there is a problem with respect to the fact that the corn belt and

the coal belt largely overlap.

When the Clean Air Interstate Rule and Clean Air Mercury

Rules and recent Supreme Court decisions hit, we are projecting

that the price of power in coal-intensive States is going to go

through the roof. However, that does not allow us to deploy capital

now in places where the price of power is artificially low by virtue

of grandfathered coal plants that are not yet compliant with those

standards.

We have drafted legislation, which I would be happy to provide

to you and your staff, that would provide a production tax credit

to bridge the gap and ensure that we get high-efficiency power

plants installed in the parts of the country that are going to be

most heavily hit by the price shocks that will follow CAIR and

CAMR compliance.

I can provide details of that legislation, but at a broad level the

impact would be to benefit rural communities, bolster the grid,

lower power costs, reduce energy consumption, and, most interest-
8

ingly, end the debate about whether or not ethanol is net positive

or net negative, because a perfectly thermally balanced Cogen

plant at an ethanol facility would displace as much or more fossil

fuel upstream from much dirtier power plants as all the fuel that

went into the ethanol up to that point.

I would close with my observation at the start, that you get what

you reward. If we reward the right things in society, we will get

the right behavior. Certainly my company, and I am sure our competitors, stand prepared to deploy significant private sector capital

into this space, provided we get the rules right.

Thank you for your time.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Mr. Casten appears in the appendix.]

Senator BINGAMAN. Why don’t we go ahead and recess here for

10 or 15 minutes. We will then proceed with Mr. Delurey’s testimony. Thank you.

[Whereupon, at 2:23 p.m. the hearing was recessed, reconvening

at 2:35 p.m.]

Senator BINGAMAN. Why don’t we start up again? Sorry for that

interruption. I am glad Senator Cantwell is here with us for this

second part of this hearing.

Why don’t we go ahead with you, Mr. Delurey? Thanks for being

here.

STATEMENT OF DAN DELUREY, EXECUTIVE DIRECTOR, DEMAND RESPONSE AND ADVANCE METERING COALITION,

WASHINGTON, DC

Mr. DELUREY. Thank you, Mr. Chairman. My name is Dan

Delurey, and I serve as executive director of the Demand Response

and Advance Metering Coalition, otherwise known as DRAM.

DRAM is the trade association for companies that specialize in providing technologies and services in the area of demand response

and the smart grid.

Demand response is the term that refers to the business and policy area whereby electricity customers reduce their peak electricity

use in response to price signals and other incentives.

Demand response addresses the fact that, in order to have a

smart grid, we need to have smart rates, smart prices, and smart

technologies that provide both customers and utilities with new options for how to manage electricity. That is unfortunately not what

we have today.

Under our present system, the vast majority of customers, and

almost all residential customers, pay no more for electricity on the

hottest summer afternoon when the electricity system is strained

and the cost to produce electricity is extremely high than they do

in the middle of the night on a spring or fall day.

That is obviously not a smart system, especially when having

only a percentage of those customers modify their peak use could

prevent liability problems and lower prices for all customers on the

system.

In the context of the smart grid, there really cannot be a smart

grid without demand response and smart technologies; it is how

the smart grid touches the customer, and it is the foundation upon

which the smart grid will be constructed.
9

In order to employ demand response, it is necessary for two

things to happen. First, customers must be provided with timedifferentiated price options and/or other incentives to reward them

for modifying their on-peak usage. That is largely a job that the

States have to tackle, admittedly.

Second, technology must be in place that allows electricity usage

to be measured in time intervals instead of the present system

where usage is measured cumulatively and all kilowatt hours are

treated equally. That information has to then be communicated to

utilities, customers, and other parties in a timely fashion.

Federal support for these technologies, in ways similar to that

which has been provided to energy efficiency, renewable energy,

and other areas for many years, will go a long way towards making

the smart grid a reality.

I will have some specific recommendations on what Congress can

do in just a moment, but, first, I would like to touch briefly upon

the benefits of demand response and smart grid technologies. There

are a number of benefits that occur in a number of different areas.

My written testimony covers all of those.

What I would like to highlight at the moment is one area of benefits that is only now being realized, and that is environmental

benefits.

With a clear consensus in place that energy efficiency is one of

the cornerstones of any climate change strategy, it is important to

realize what advanced metering and a smart grid can do to enhance efficiency.

It is true that a meter, in and of itself, does not save any energy,

but that does not mean that a smart meter is not a green meter.

Smart meters enable customers to be provided with timely and accessible information that research shows will make them a better

manager of their electricity usage overall.

Research shows that more informed customers reduce their consumption just based on getting informational feedback, even if they

decide not to go on time-based pricing. Indeed, it is my opinion that

advanced metering systems are the platform for the next great era

of energy efficiency, one where efficiency becomes part of the customer’s daily life and activity and one where efficiency is finally institutionalized and made sustainable.

A smart meter is green in a different way. As the Nation moves

towards systems where carbon reductions are monetized, measurement and verification of those reductions will be increasingly important. Smart metering systems will meet that need.

It is also becoming recognized that demand response can help

make renewable energy resources more viable by helping to balance renewable resources in certain regions where those resources

do not provide power during the peak period of the day.

Also, in terms of emissions other than CO2, it should be noted

that the Ozone Transport Commission in the northeast U.S. is

looking at how demand response can help address NOx and SOx

attainment challenges on peak demand days. Indeed, it may be

that demand response and its enabling technologies will increasingly be seen as dynamic emissions management tools.

Let me now make four recommendations for consideration by this

subcommittee. One, accelerate the depreciation schedule for smart
10

metering systems to bring such systems in line with the tax treatment of other high-technology hardware and software-based systems, as was noted by Mr. Thorn earlier.

Two, institute an investment tax credit to stimulate the capital

investment needed to modernize the electricity system and create

a smart grid.

Three, create a reduction tax credit that would be based on electricity savings that have been specifically verified using smart metering and other smart grid technologies. The objective would be to

support the growth of demand response in a manner similar to the

way that the Federal production tax credit has helped the renewable energy industry grow and mature over the past decade.

Fourth, institute a Federal system benefits charge on electricity

that raises funds that could be used to support smart grid investments. The model would be the many State system benefits

charges that are in place which raise funds for expenditures on energy efficiency and renewable energy.

In closing, let me emphasize one important thing. Much of the

discussion about the smart grid is conducted in the future tense,

and much of the talk is on developing better technologies in the future. All those who want the smart grid to develop must recognize

that it is not necessary to wait for the future.

Yes, better technologies will come along. Meters and other demand response technologies are now high-tech items that will continue to evolve and improve. But these technologies are available

now, and they provide all of the benefits now that my testimony

describes.

If consumers and businesses waited to buy their first computer

or cell phone until the best technology came along, they would likely have gone for years without those things and in the meantime

have foregone the obvious benefits of using the existing technology.

The barrier to demand response in the smart grid is not more

R&D. What is needed is a national commitment to make policy

changes that accelerate the deployment of these technologies. The

smart grid is definitely within reach, and it is more achievable

than most think if the right amount of support and commitment

is devoted to it.

Thank you very much.

Senator BINGAMAN. Thank you very much.

[The prepared statement of Mr. Delurey appears in the appendix.]

Senator BINGAMAN. Mr. Edwards, go right ahead.

STATEMENT OF CHRIS EDWARDS, DIRECTOR, TAX POLICY

STUDIES, CATO INSTITUTE, WASHINGTON, DC

Mr. EDWARDS. Thank you, Mr. Chairman and Senator Cantwell,

for having the hearing today on energy efficiency and the tax code.

Additional tax incentives such as tax credits probably could reduce U.S. energy consumption modestly, as we have heard today.

However, narrow incentives complicate the tax code, create distortions that reduce overall growth, and open the door, I think, to

more widespread social engineering through the tax system. So, I

am a bit of a skunk at the picnic today, and I do not favor new

tax incentives for energy policy.
11

However, Congress should reform tax provisions that create barriers to new investment in energy production and conservation by

reforming current depreciation rules, as some of the previous panelists suggested. Current depreciation rules are unfavorable compared to those in other countries for energy technology.

I am the tax wonk here at the table, and my main concern is rising tax complexity. The number of tax expenditures or loopholes

has increased from 121 to 161 since 1996; the number of tax loopholes just for energy has jumped from 11 to 23 just in the last 10

years.

There are a lot of problems with this increasing amount of tax

loopholes in the Federal tax code. Tax loopholes amount to Congress trying to micromanage the economy. Leading up to the bipartisan Tax Reform Act of 1986, Majority Leader Dick Gephardt said,

‘‘The Ways and Means Committee and the Senate Finance Committee are being put in the business of trying to plan the American

economy. I confess, I am not qualified to act as a central planner,

and I do not know anyone on either committee who is.’’

Loopholes create high compliance and paperwork costs, and they

cause frequent tax administration errors by taxpayers and the IRS.

I think new tax incentives for energy would exacerbate these problems with the tax code.

Proponents of energy tax incentives often argue that energy deserves special attention because energy policies could fix so-called

externalities in energy markets. But I think that idea of externalities opens up a Pandora’s Box.

There are an endless number of theoretical externalities out

there in the economy and in society that, in principle, government

could try to fix. I mean, there are lots of very big problems in society today, such as obesity, which is a serious and growing problem,

and it creates negative externalities in health care markets. Congress could, in theory, create a tax credit to do something about

that problem.

Gun ownership. Folks who support gun ownership argue that, if

more households owned guns, that would reduce overall crime

rates, which is a positive externality, so in theory Congress could

create a tax credit for gun ownership.

I do not advocate any of these ideas. I think there is a real slippery slope here if Congress gets into the idea of trying to fix every

externality in the economy through the tax code.

So what should Congress do? Well, I think the first thing Congress can do is certainly to recognize, as I am sure most Senators

do, that competitive markets are a friend of energy efficiency. Businesses have powerful incentives to make more efficient products

and to reduce energy consumption.

The lure of profits forces a relentless effort by businesses to cut

costs: labor costs, fuel costs, heating costs, lighting costs. Lower energy costs mean higher profits, and that is why business is interested in it.

The amount of energy consumed for each unit of GDP, the socalled energy intensity, has fallen just about in half since 1970,

and much—perhaps most—of that improvement is just due to natural competitive forces in the economy.
12

For example, there were large improvements in household appliance efficiency prior to Federal standards going into effect in 1990.

The big increases in appliance efficiency that occurred from the

early 1970s to around 1990 or so were a market response to rising

electricity prices.

That said, Congress can make changes to the tax code to improve

energy efficiency, principally by reducing the tax code’s bias

against capital investment. The income tax discourages long-term

investment.

To fix that bias, I think Congress should consider more favorable

depreciation rules, as some of the previous panelists have said, optimally moving towards capital expensing. That would remove barriers to all types of investment in energy production, in alternative

fuels, and in conservation. Now, the 2005 Energy Act took some

steps in that direction, but I think more can be done.

There was a very interesting report released a couple of weeks

ago by Ernst & Young that compared U.S. depreciation rules for

energy production and conservation technologies to 11 other major

countries.

The study found that the U.S. has less favorable depreciation

rules than most other countries for investments in oil refining, electricity production, pollution control equipment, and even electricity

smart meters, as we just heard about.

Nine of the 11 other countries examined by Ernst & Young had

more favorable rules for electricity generation; 7 of the 11 had better rules for oil refining assets; 9 of 11 other countries had better

depreciation rules for pollution control; and 10 of 11 other countries

had better rules for electricity smart meters.

So I think Congress should consider improving depreciation rules

for energy investments, or more broadly considering at least partial

capital expensing across the board as we had in place back in 2003

and 2004.

That would promote not just better, more efficient investment in

energy assets, but replacement of all types of older assets with

new, more energy efficient assets across the board. That would be

very good for conservation and energy efficiency.

Thanks a lot for holding the hearings. I look forward to any questions you may have.

Senator BINGAMAN. Thank you very much for your testimony.

[The prepared statement of Mr. Edwards appears in the appendix.]

Senator BINGAMAN. Doug Smith, we are glad to have you here.

Go right ahead.

STATEMENT OF DOUG SMITH, Ph.D., PRESIDENT,

NANOPORE, ALBUQUERQUE, NM

Dr. SMITH. Thank you, Mr. Chairman.

NanoPore has been in the business of trying to develop advanced

thermal insulation for the last 13 years, and probably one of the

least sexy things in this room, I will have to say, is thermal insulation. People never see it, hear it, or want to talk about it. But it

is also one of the quickest ways that we can improve our actual energy efficiency, and I will go through a few examples of that.
13

But as background, we sell insulation which is roughly 10 times

better than the current thermal insulation for a number of applications, from shipping drugs around to keep them cold, to hiking

boots for when you are out hunting. But rarely do our customers

ever buy insulation for energy savings.

The question is, why is that? If we make insulation that is 7

times better than foam and 12 times better than fiberglass, why do

people not want to save energy? I think we found over the years,

when I got all my gray hair, that there are really four reasons.

One is, advanced thermal insulation is just sort of like solar energy and wind generation is. It is a new industry, with new suppliers who need some market certainty to help boost production

levels to reduce our costs.

Another thing, which I am actually agreeing on with the Cato Institute here, is that people investing in thermal insulation, it is a

capital investment that they have to depreciate over years, yet

what they are saving is energy, which they can write off directly

that year. So, our own tax code actually argues against retrofitting,

let us say, a refrigerated transport truck with advanced insulation.

Just as we have heard before, there is a public relations issue

with energy efficiency, where people really do not think about energy conservation with better insulation. And probably what is

worse is, most customers who are paying for the insulation are not

the ones who end up saving in the energy savings. I will go

through a couple of examples of that.

A lot of people say market forces should drive the adoption of

new technology and energy efficiency, like insulation. My favorite

example to the question that I always ask everyone in this room

is, everyone has a hot water heater in their home. You can go out

and buy one of these fiberglass blankets to put on that hot water

heater from Lowe’s or Home Depot for $20, and you actually even

get a tax credit on it, but very few people do, even though, if you

have an electric hot water heater, that investment will pay off in

roughly 4 or 5 months, depending upon your cost of electricity,

which is certainly better than my investment in the stock market,

I will say.

So it is a question of scale of investment. When you talk about

20 million hot water heaters, does it make sense to have a tax

credit to incentivize people to do that, or should we really focus on

where you can get large blocks of energy savings with relatively

small industries? That is where we have been really working, and

I will give a few examples.

One is refrigerated trucking. Everyone sees large refrigerated

trucks hauling frozen food and vegetables around this country.

There are roughly 200,000 of those trailers on the roads in our

country and they use approximately 2,000 gallons of diesel, each,

per year.

Just a quarter inch of this kind of insulation tacked on the inside

reduces that by over 1,000 gallons of diesel. So if you have 200,000

times 1,000 gallons of diesel per year, that is a tremendous energy

savings, with the resulting reduction in pollution.

The trouble is, why does an operator not want to invest that

$5,000 to $10,000 he would have to do for that trailer? It is really
14

two. One, he cannot depreciate it. As a matter of fact, the depreciation schedule for insulation is longer than the lifetime of his trailer.

The second issue is, really, he does not reap any benefit from reducing the environmental impact of that 1,000 gallons of diesel he

is burning. So, that is a big barrier to them investing.

Another one is cold storage. Now, cold storage is something no

one ever thinks about, probably, but everything from a McDonald’s,

with its walk-in freezers, all the way up to large, large cold storage

units for storing lettuce and so forth, use a tremendous amount of

energy.

Actually, we had not realized how big it was. It is roughly 6 billion cubic feet, which is one of those numbers which is meaningless, so I converted it into football fields, something everybody understands. It is roughly 30,000 football fields of cold storage. Think

of a giant refrigerator. It uses a tremendous amount of energy.

And remember, most of these were built back in the days when

electricity was cheap. They are typically not rebuilt again. Just retrofitting those with a quarter inch of insulation would save almost

2,000 megawatts of generation capacity, that is seven coal-fired

power plants, for example. A tremendous amount.

It is much more focused, too. It is not going after every household

in the country and trying to get them to put their hot water heater

blanket on, it is going after the 20 largest operators and getting

them to do it.

Beverage machines are another perfect example. Vending machines. Everybody sees all the Coke machines. I saw them out here.

I was disappointed that most of them were not Energy Star rated,

I will have to say. But most vending machines are not actually

owned by the people using them, they are owned by the beverage

companies. They are typically loaned to you.

So, they have no incentive to put good insulation or any other energy savings mechanism in there because you are going to end up

paying the electric bill. That is a perfect example where, often the

person paying for the insulation and the person reaping the energy

benefit, are not connected.

I could go on, and on, and on, but I will stop there. Thank you

for your time.

Senator BINGAMAN. Thank you for your time and for your excellent testimony.

[The prepared statement of Dr. Smith appears in the appendix.]

Senator BINGAMAN. Thank you all for being here and for your excellent testimony.

Let me ask a few questions, then call on Senator Cantwell for

her questions.

Let me take an idea that you talked about a little bit, Mr.

Delurey, in your testimony and relate it to what Doug Smith is

talking about. You talked about a reduction tax credit, where you

said the credit would only be granted when reductions are measured and verified using demand response technologies, of course.

In each of these cases, if we were to allow quicker depreciation,

do we just do that across the board for any retrofitting that involves insulation or do we require that there be some kind of demonstration that the retrofitting is actually resulting in an energy

savings?
15

I guess I do not know how specific we ought to be getting. Obviously, Mr. Edwards makes a good point about how complicated we

made the tax code and how we are being urged to make it even

more complicated.

Mr. Delurey, did you have a thought on that?

Mr. DELUREY. Well, I think changing the depreciation schedule

is probably the first thing that should be done. But in the case of

our proposal for a reduction tax credit, it is recognizing the fact

that there are now technologies that allow a more precise measurement and verification that a reduction actually took place.

Historically, a lot of the incentives provided in the area of energy

efficiency and so on have been based on a pro forma estimate that

those savings would occur. In the case of the new technologies, you

can actually verify exactly when and how much occurred, and it is

almost the inverse of a power plant, if you will, as in the production tax credit.

Senator BINGAMAN. But are you building in an administrative

complexity here? You have to verify the energy savings in order to

be eligible for the tax credit. I mean, there are a lot of problems

in filling out a tax return already besides having to be able to demonstrate to the IRS an energy savings.

Mr. DELUREY. The data would be available and you could tie it

in. This is not something that would likely happen outside of utilities being involved and the regional system operators being involved which are running these types of demand response programs to modify peak usage.

Senator BINGAMAN. All right.

Mr. DELUREY. So the data would be there. You could look and

see how many kilowatt hours were reduced on peak, so you could

then monetize that as an incentive.

Senator BINGAMAN. Mr. Casten, did you have a thought on this?

Mr. CASTEN. I do not have a response on that.

Senator BINGAMAN. All right. Let me ask you, Mr. Edwards. If

we were to just dramatically reduce the time for depreciating these

kinds of investments in insulation that Doug Smith is talking

about, does that comply with your view of an appropriate change

in the tax code, and would that be an effective way to encourage

energy efficiency?

Mr. EDWARDS. Yes. I was surprised to learn that apparently the

asset life of insulation is longer than the trucks, which does seem

kind of remarkable. The recent study that I mentioned about how

U.S. depreciation rates are out of line with foreign countries is one

of a number of studies that I have seen over recent years that

argue that U.S. depreciation rates are out of line with what is in

place in other countries. I like expensing even more than accelerated depreciation because it is simple, it does not complexify the

tax code.

There was a new study out a couple of weeks ago from the National Bureau of Economic Research looking at the 2003 and 2004

so-called bonus depreciation tax reductions that showed a substantial increase in investment in exactly the type of assets that got the

bonus depreciation. It is the assets now that have longer lives, 10

to 20 years, that would get the most benefit, and that’s where you

would see the largest increase in investment.
16

Senator BINGAMAN. All right.

I guess I am just trying to get it straight in my mind. I understand shortening the depreciation time for insulation. That is pretty straightforward. I guess, Mr. Delurey, you are recommending

the same thing for smart metering technology.

Mr. DELUREY. That is correct. Currently, those are depreciated

anywhere from 20 to 30 years.

Senator BINGAMAN. Yes. And what are the other items that we

ought to be doing? Combined heat and power?

Mr. DELUREY. Distribution, cable, and equipment.

Senator BINGAMAN. All right. So we would put a list of things together, all of which add up to increased efficiency, and all of which

currently have long depreciation lifetimes or schedules.

Mr. THORN. Outdoor lighting, also.

Senator BINGAMAN. Outdoor lighting. All right.

Let me call on Senator Cantwell for her questions.

Senator CANTWELL. Thank you, Mr. Chairman.

I would like to follow up, Mr. Delurey, about your question in regards to the reduction tax credit, because isn’t part of the challenge

here in modernizing the grid, which in an era of distributed generation has great efficiencies for us, and then being able to move

the power around efficiently? Isn’t the reduction tax credit not

partly the fact that we need to get the benefits of infrastructure investment and get the utilities to make that infrastructure investment?

Mr. DELUREY. Exactly. It would drive the investment. The accelerated depreciation would go a long way towards getting new technologies like smart meters in place. But then you have to put those

smart meters to work in trying to do demand response and shift

the usage, and that is where a reduction tax credit, being a dynamic type of incentive, would do a lot towards improving the business case to put those kind of programs in place.

Senator CANTWELL. And do we not have this challenge here? Because I am sure we are going to, in this committee as we move

through with larger energy packages and packages specifically focused on the finance of incentives of an energy package, have this

discussion, as Mr. Edwards is saying, where you cannot do everything, nor should you try, but at the same time we want to have

the generation of power and the reduction of demand to be on

equal footing so that we are not constantly looking at new generation as the only source.

Mr. DELUREY. That is correct. Right.

Senator CANTWELL. But if we want to get to the point of reduction as the same as being a fuel source, we have to figure out how

we are going to get the infrastructure investment accomplished.

Mr. DELUREY. Right. The idea of the smart grid is that it would

be a dynamic organism, if you will, that would have the demand

side of the equation and the supply side of the equation both being

deployed so that you optimize the entire system.

Right now, as with other things like efficiency and renewables

that have been provided support to be able to ramp up quickly and

develop faster than they otherwise would, that is what we ought

to be talking about in terms of smart grid investments.
17

Senator CANTWELL. And how do you see this playing out for the

consumer?

Mr. DELUREY. The consumer wins in a lot of different ways.

There are a lot of different benefits in a lot of different places, and

that is all in my written testimony. But consumers who participate

directly in demand response, they save directly by shifting their

usage around and having direct savings.

But the real power of this is that everybody saves. When only a

small percentage of customers modify their peak usage, it depresses the demand and leads to lower wholesale prices, which everyone pays, so everyone wins.

Senator CANTWELL. We have had different studies and analyses.

Are you putting a number on what you think these savings might

be? I have heard as high as double-digit savings out of the current

supply.

Mr. DELUREY. On a per-customer basis?

Senator CANTWELL. No, no, no. Just in general, that you could

out of the current supply with smart grid technology. I am talking

in the broadest sense. I think part of the challenge is, everybody

thinks we are talking just about smart metering. We are talking

about an infrastructure overhaul.

Mr. DELUREY. Yes. That is right. We are talking about other

things as well. There are ranges of estimates in terms of what the

benefits might be, on the order of $5 to $10 billion a year if enough

customers were provided with the technologies and became part of

the system via demand response.

In EPAct 2005, the Department of Energy was actually asked to

estimate the nationwide potential on this. They came back with a

report to Congress that cited other estimates. They said they did

not have the time, in the 6-month window, to do the proper analysis, but the savings are potentially huge and they go to all customers. It is not just to those who participate.

Senator CANTWELL. I think I may be remembering a pilot project

that is going on in our State with the Pacific Northwest Labs, and

I think they are seeing 10 percent or maybe better.

Mr. DELUREY. Yes. There is research that shows that customers

just getting the information of what a smart meter can provide, for

example, even if they do not do the prices, will reduce their consumption by, on the order of 11 percent just because they are more

in tune with their electricity usage. They are able to monitor what

they do, and that is important to them.

Senator CANTWELL. So do you think that this is on a level playing field with the production tax credits? Or how should we think

about this?

Mr. DELUREY. It is, unfortunately, not on a level playing field

with anything. There are no incentives, really, in the tax code for

demand response and smart grid. It has not received the lift, if you

will, that other preferred areas have over the years. So, it certainly

would be a good candidate for that right now.

Senator CANTWELL. Right. And obviously I am a fan of that. But

I am saying, from a return for investment, if they were both in

place, are there other factors that might even give the reduction

side a boost, given the fact that you are using current energy

sources more efficiently.
18

Mr. DELUREY. Right.

Senator CANTWELL. That has to be easier.

Mr. DELUREY. That is right.

Senator CANTWELL. And more cost-effective. It certainly has to be

more cost-effective than production overall.

Mr. DELUREY. That is right. And it also gets to those other benefits: you are reducing emissions, you are avoiding power plants, you

are mitigating market power, you are increasing reliability. It has

a whole host of benefits, some of them easy to quantify, some of

them difficult.

Senator CANTWELL. If I could, Mr. Chairman—I know my time

has expired—ask Mr. Casten a question about the Combined Heat

and Power Credit. I know that I am interested in this credit for

thermal energy and how we drive that in the concept of helping

with already-established facilities in driving down costs by having

their—I do not know, what do you want to call it?—waste power

better efficiently used by some of these tools.

Mr. CASTEN. May I assume that this is in reference to the bill

that you have drafted up with the existing thermal energy credits?

Senator CANTWELL. Yes.

Mr. CASTEN. If I could comment a bit on that specific bill, then

take it wherever you would like to take it. First of all, I think that

the draft language you have proposed does a couple of things really, really well.

Number one, the intent is clearly to level the playing field and

provide the right incentives. I would actually extend Mr. Delurey’s

comments a bit to go one step further upstream, that our intent

should not simply be to reduce electricity usage, but to reduce the

usage of fuel to generate that electricity.

That is simply a boundary definition. It is entirely consistent.

But increasing generation efficiency is as valuable in reducing fuel

use as increasing the efficiency of appliances.

I like the fact that your bill includes thermal electric credits. I

am, frankly, rather intrigued by your zero carbon rules, although

I would love to chat with you offline about exactly how those definitions are developed.

Having said that, I have some concerns that are primarily driven

with trying to think about how I would fit the technologies that I

know how to deploy into that bill. If you will allow me to pontificate for a moment, it seems that in the ideal world, apropos of

some of the earlier comments, competitive markets would work.

They really do not work in the energy sector, in large degree because it is the biggest industry in the country at about $400 billion,

and it is subject to cost plus pricing, which is a good incentive to

drive up your costs. The ideal regulatory environment would provide greater rewards to those who reduce carbon emissions more

quickly.

Senator CANTWELL. And you have a specific example of how you

could do that?

Mr. CASTEN. Well, clearly that would work within a cap-andtrade context. My concern with some of the provisions in your bill

is that there are pieces for thermal, there are pieces for zero carbon. I can think of a lot of very cost-effective ways to reduce carbon
19

emissions and drive up efficiency that would fall through the

cracks.

What I personally like about the Inslee bill is that it simply sets

a high efficiency test and then says, we have defined success as

high efficiency, you get there however you want. I think that that

is more efficient from a policy perspective, and I do not think it is

at all inconsistent with what you have proposed.

Senator CANTWELL. All right.

Anybody else on that point? [No response.] If not, Mr. Chairman,

thank you.

Senator BINGAMAN. Yes. Thank you very much.

Let me just also ask Mr. Casten, you talked about how combined

heat and power should be included in biofuel facilities, new ethanol

plants, as I understand it. Could you elaborate a little bit on what

you think could be done there and how we ought to proceed?

Mr. CASTEN. Sure. This really reflects from conversations we

have in commercial development with some ethanol plants in California right now. An ethanol plant, in the jargon of our industry,

is ‘‘thermal long.’’ Most of its energy is thermal energy. Proportionately, it uses relatively little electric power.

What we would do if we were king is to design a thermally balanced power plant at every ethanol facility in the country. If you

assume for sake of argument that the typical ethanol plant going

up nowadays is about a 50 million gallon plant, the thermal demand at that facility is perfectly suited to install a 45- to 50-megawatt combined heat and power plant that is perfectly balanced to

the thermal load, about 80 percent fuel-efficient, and that would

provide the 5 megawatts, approximately, of load in an ethanol

plant and export the remaining 45 to the grid.

The sheer scale of ethanol plant construction makes this—if you

just think about adding up all the ethanol plants—a massive reduction in energy use. I can quantify that offline for you if you would

like. Here’s what is interesting about doing that. One is that, in my

approximate example, the amount of fossil fuel you displaced from

the grid is about equal to 135 megawatts of fossil fuel. I am using

megawatts as the unit, not because it is electric power, but it

makes the math more simple. That is roughly equivalent to the

total fossil energy currently going into the ethanol plant in the

plant and on the farm.

So you basically net those plants to zero if you do that. Now the

question arises as to why we are not doing that. If I am going to

install that plant in the coal belt where the wholesale cost of power

is perhaps $40 or $50 a megawatt hour, I simply cannot make that

work, in spite of the high efficiency of the plant, if I am buying $8

gas.

More significantly, the overall project economics are contingent

on having to get a fair price from the utility for the exported 45

megawatts, and there have been some historic issues there that I

will not go into now but I suspect you are familiar with. What we

have proposed is a modest production tax credit that would basically bring that up to a point of 1.5 cents a kilowatt hour, $15 a

megawatt hour, that would basically tip that balance to make it

possible to start deploying these plants.
20

Senator BINGAMAN. And this is a production tax credit on the

production of the electricity that is going into the grid?

Mr. CASTEN. Yes. And only applicable for plants that pass a fairly stringent efficiency test.

Senator BINGAMAN. And it would be just limited to ethanol

plants the way you are thinking of it, or is there——

Mr. CASTEN. You know, candidly, I think from a policy perspective it would be nice to apply it everywhere. There is a nice logic

to ethanol plants because of the politics of biofuels, and because

those are the thermal-intensive plants that people are building

nowadays. But there is no reason it would have to be limited in

that regard.

Senator BINGAMAN. All right. Have you written all this up?

Mr. CASTEN. We have, and we can provide you with that.

Senator BINGAMAN. Yes. We would be interested in seeing it. I

think it is an interesting set of suggestions.

Mr. CASTEN. All right.

Senator BINGAMAN. All right. Let me think if there are more

things that I can get into here.

On these ‘‘regulatory head winds’’ that you are running into, are

there any of those that the Federal Government can realistically

resolve or is this all State regulatory head winds that the Federal

Government basically has to sit back and watch?

Mr. CASTEN. How much time do you have? [Laughter.]

Senator BINGAMAN. Give me the really short version.

Mr. CASTEN. The honest-to-goodness truth is that there is 100-

plus years of regulation, some of which is State, some of which is

Federal, some of which is municipal, and it is a rather difficult

onion to unpeel. It is a particularly difficult onion to unpeel without going into issues of competitive markets and deregulation debates, which shift with political winds.

There is a bill that Representative Boucher has recently introduced in the House—subtitled DNE; I do not have my memory

right now, but I can get you a copy of the bill—that tackles some

really neat pieces of that, specifically a provision that would allow

anybody to build a private wire to connect two facilities. Think

about the ethanol example. I have 45 megawatts of excess capacity

and I only have one path to market, through a single company’s

wires.

If I had the ability to sell power to my neighbor, who would also

like cheap power—which is a felony offense in 50 States right

now—if I had that ability, you would unleash a sea of innovation

and investment and lower the costs for everybody simply by virtue

of the powers of competition.

There are some other provisions in that bill with respect to making sure that there is a fair price paid for power that is a locationspecific price. I raise those as two examples. Not as the whole

story, but as two partial answers to your question.

Senator BINGAMAN. All right.

Mr. Delurey?

Mr. DELUREY. On your question about the States, the fact is, the

States have the ball—much of the ball, anyway—with respect to

the smart grid and demand response. What they do not have is

really enough capacity to do much with that ball. This was proven,
21

I think, with the provisions in EPAct 2005 that required that each

State conduct an investigation on time-based pricing and advanced

metering, and it created the new purpose standard for them to consider.

This is a new area. Your average state utility commission needs

a lot of assistance to be able to handle a new area like this, and

I am not sure that that has been provided over the time since

EPAct was enacted. That is the type of thing that the Congress

could do in probably a couple of different ways, to try to provide

more technical assistance and other types of support to the States

to be able to allow them to do their job.

Senator BINGAMAN. Let me just finish with this. The policy options we have talked about here—tax incentives, shortened depreciation, direct regulation. Let me ask you, Doug. Which of these, if

any, will solve the problem of the vending machines?

Dr. SMITH. Actually, with the vending machines, it will not. That

is the basic problem there, where you have someone who is making

the capital investment who gets the credit, whether it is accelerated depreciation or investment tax credit, and he does not really

get the benefit then of what Mr. Edwards is going to save in his

electric bill.

So, unfortunately, in some of these applications, just tax credits

may not do it, or accelerated depreciation. Now, it will bring down

the cost of insulation to him, so PepsiCo or Coke America would

have more incentive to, let us say, build better insulation into a

vending machine. But that is still one of the issues, I think, a lot

of these——

Senator BINGAMAN. Do any of you have a genius idea as to how

you use a public policy tool to incentivize someone who is going to

provide a vending machine, for which they do not pay the electric

bill, to make the vending machine more fuel efficient? Kateri?

Ms. CALLAHAN. Well, at least with the Federal Government you

could require that any vending machines that are placed in government facilities are Energy Star labeled.

Senator BINGAMAN. Right.

Ms. CALLAHAN. So you make that. You have the power of a huge

Federal purse. That could be very helpful. I think other State governments and municipalities could do the same thing.

Senator BINGAMAN. Right.

Yes, Mr. Edwards?

Mr. EDWARDS. I actually do not see why, if Congress was a business purchasing, they have a couple of different vendors offering

Coke machines, it seems to me the company offering the most efficient machine, the business could offer a better price and they split

the difference on the energy advantage. So, I actually do not see

any market failure there with that particular example.

Senator BINGAMAN. All right. For the ones that the government

is purchasing, is that what you are saying?

Mr. EDWARDS. If Congress was a private business.

Senator BINGAMAN. Right.

Mr. EDWARDS. I mean, the private business would want to reduce

costs. They would go to a vendor where they could get a more efficient machine and they would be willing to pay a little more to that

vendor.
22

Senator BINGAMAN. But as I understand it, these vending machines are not sold, they are just located in the facility.

Mr. EDWARDS. I mean, they would pay a little more to rent the

machine, it seems to me.

Senator BINGAMAN. I see. I see. I do not know that they charge

any rent. I think they just make up the money on the Cokes they

sell, so they are sitting around here soaking up power and nobody

is paying attention. All right.

Dr. SMITH. Mr. Chairman, could I just add one thing?

Senator BINGAMAN. Certainly.

Dr. SMITH. On the Energy Star, that is one of the issues which

comes back to bureaucracy of policy. If you look at the Energy Star

vending machines, their regulations are on energy per 24 hours, so

how they have actually improved their energy efficiency is they actually let the vending machine heat up at night when no one is

using it, and then cool down during the day, so it is the exact opposite of what you want from an efficiency viewpoint.

Senator BINGAMAN. Right.

Mr. DELUREY. But again, an example. I did not talk about the

smart appliances, but that really is the future, where appliances

and other devices can respond to a price signal. So it is not just

about being——

Senator BINGAMAN. So you think if we had properly priced electricity, there would be an incentive for—the problem again is,

though, the people who are making the vending machines do not

pay the electric bill. But whoever is paying the electric bill would

have an incentive to see that the vending machine cools off during

the day when people want cold Cokes, and warms up at night when

nobody cares.

Mr. EDWARDS. Could I offer a bit of a skeptical comment? I am

curious to hear what Mr. Delurey would say. With electricity generation, the peak power, as he discusses, is far more expensive

than the base load. It does surprise me that it would not be in a

utility’s own interest to use smart meters because of the big incentive to get that peak load down to save the high marginal cost.

Mr. DELUREY. Part of the answer is that it is a major capital investment to turn over your metering fleet. As FERC noted in a report done pursuant to EPAct, there is only 6 percent penetration

right now of smart meters out there, so you are talking about,

again, a major capital investment and, in some cases, a business

case that requires a lot of benefits to be pulled together to be able

to justify it.

Ms. CALLAHAN. Can I add to that? The notion, and you have

heard this in hearings before, of decoupling the revenues from the

sales is just critical.

Senator BINGAMAN. Right.

Ms. CALLAHAN. So when you look at the regulatory head winds

that folks are facing and what the Federal Government can do,

your bill, the energy efficiency bill, directs States to consider looking at rate structures that reward investment in energy efficiency

or that do not reward investment in new electricity.

But I think you can do more than that, and I think that if the

Congress could consider that and look at ways to help the States

or direct the States to value efficiency the way that they do other
23

resources, it will go a long way to helping investment in all these

areas.

Senator BINGAMAN. Mr. Casten, did you want to make a point?

Mr. CASTEN. I would second the comments about decoupling. I

would add that there is a group in Vermont, the Regulatory Assistance Project, that has a wonderful model of how to do that right,

essentially recognizing that decoupling removes a negative incentive, but it does not create a positive incentive, so you need to get

those two aligned. I would urge you to look at their work.

I wanted to just quickly comment on Mr. Edwards’s point, and

it goes to what you have heard me say many times here. A regulated investor-owned utility has no incentive to save those costs because the costs are pass-throughs.

Senator BINGAMAN. Right. They get a rate of return on whatever

their capital is.

Mr. CASTEN. That is the elephant in the room that needs to be

addressed.

Senator BINGAMAN. Right.

Well, this has been very useful. We appreciate your being here

and appreciate the good testimony. We will try to take it to heart

as we proceed with legislation. Thank you.

[Whereupon, at 3:21 p.m., the hearing was concluded.]

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